CONDUCTUS INC, 424B4, 1996-06-26

CONDUCTUS INC
424B4, 1996-06-26
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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Filed pursuant to Rule 424(b)(4)
Registration No. 333-03815
PROSPECTUS
1,000,000 SHARES

[CONDUCTUS LOGO]

COMMON STOCK

All of the shares of Common Stock offered hereby are being sold by
Conductus, Inc. (the "Company"). The Common Stock is quoted on the Nasdaq
National Market under the symbol "CDTS." On June 25, 1996, the last reported
sale price for the Common Stock, as reported on the Nasdaq National Market, was
$11.75 per share. See "Price Range of Common Stock and Dividend Policy."

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING 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.

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UNDERWRITING PROCEEDS TO
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................ $11.00 $.66 $10.34
Total (3)................................ $11,000,000 $660,000 $10,340,000
</TABLE>

(1) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SEE "UNDERWRITING."

(2) BEFORE DEDUCTION OF EXPENSES ESTIMATED TO BE $400,000, PAYABLE BY THE
COMPANY.

(3) THE COMPANY HAS GRANTED TO THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP
TO A MAXIMUM OF 150,000 ADDITIONAL SHARES OF COMMON STOCK TO COVER
OVER-ALLOTMENTS, IF ANY. IF SUCH OPTION IS EXERCISED IN FULL, THE TOTAL
"PRICE TO PUBLIC," "UNDERWRITING DISCOUNT" AND "PROCEEDS TO COMPANY" WILL BE
$12,650,000, $759,000 AND $11,891,000, RESPECTIVELY. SEE "UNDERWRITING."

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

The shares of Common Stock are offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to their right to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in Boston, Massachusetts, on
or about July 1, 1996.

TUCKER ANTHONY PENNSYLVANIA MERCHANT GROUP LTD
INCORPORATED

THE DATE OF THIS PROSPECTUS IS JUNE 26, 1996

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COMMUNICATIONS
Conductus designs and The filters are incorporated Conductus filter subsystems
fabricates compact into integrated subsystems are designed for use in
superconducting that include a self- cellular and PCS base
communications filters contained cryogenic stations such as the station
(prototypes shown). refrigerator (prototype depicted above which was
shown). manufactured by a third
party unrelated to
Conductus.

"Filter" "Filter Subsystem" "Cellular base station"

HEALTHCARE
Conductus designs and The receiver coils are Conductus probes are
fabricates superconducting incorporated into integrated designed for use in NMR
receiver coils for nuclear probe subsystems that spectrometers and MRI
magnetic resonance include a cryogenic scanners such as the system
instruments (prototype refrigerator (probe body depicted above which was
shown). shown). manufactured by a third
party unrelated to
Conductus.

"NMR Spectroscopy coil" "Probe Subsystem" "NMR spectrometer"

INSTRUMENTATION
Conductus designs and The sensors are combined Conductus sensor subsystems
fabricates superconducting with specialized control are designed for
magnetic sensors. electronics and analysis applications in geophysics,
software. medicine and non-destructive
testing and can be
incorporated into systems
manufactured by third
parties such as the system
depicted above.

"SQUID Sensor" "IMAG system" "console"
</TABLE>

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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN
ADDITION, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS) MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE
10B-6A UNDER THE EXCHANGE ACT. SEE "UNDERWRITING."

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PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE FINANCIAL STATEMENTS AND NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE DISCUSSION IN THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS MAY
DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"BUSINESS."

THE COMPANY

Conductus, Inc. ("Conductus" or the "Company") develops, manufactures and
markets electronic components and subsystems based on superconductors. The
unique properties of superconductors provide the basis for electronic products
with significant potential performance advantages over products based on
competing materials such as copper and semiconductors. Depending on the
application, these advantages include enhanced sensitivity, efficiency, speed
and operating frequency, as well as reduced power consumption, size, weight and
cost. Conductus is currently focusing significant development, manufacturing and
marketing efforts on applications for superconductors in the areas of
communications, healthcare and instrumentation.

Superconductors are materials that have the ability to transport electrical
energy with little or no loss when cooled below a "critical" temperature. Since
its founding in 1987, the Company has focused its product development efforts on
high-temperature superconducting ("HTS") materials discovered in the 1980s that
can be cooled more conveniently and economically than earlier-known
superconducting materials. Based upon publicly available information, Conductus
believes that its technologies are more advanced than those of other companies
or research laboratories. Conductus combines advanced HTS technology with
expertise in electronic device and component design, analog and digital
electronic engineering, cryogenic packaging, mechanical engineering and system
integration. Conductus believes that systems containing superconductive
electronic technology, if successfully commercialized, will offer performance
that is unavailable from competing technology, will reduce the costs of
performing desired functions, or, in many cases, will do both.

In the communications market, Conductus is developing filter subsystems for
cellular and personal communication services ("PCS") base stations. These
superconducting filter subsystems could provide significant benefits in base
station performance and reduce the size of the filter components. The Company is
developing and testing prototype integrated subsystems that are designed to be
easily integrated into new base stations or to allow cost-effective retrofitting
of existing base stations. Laboratory and initial field tests of Conductus'
cellular filter subsystems conducted by industry representatives have
demonstrated performance improvements over conventional technology, including
enhanced base station receiver range. Conductus expects to make its first
shipments of cellular filter subsystems in late 1996. For the PCS market,
Conductus is developing an integrated filter subsystem under a joint development
agreement with Lucent Technologies, Inc. ("Lucent"). The first field test of the
initial prototype of the receiver portion of the Conductus subsystem has been
conducted by Lucent. The Company believes that providing its technology at the
subsystem level to selected OEM systems manufacturers such as Lucent will allow
it to most rapidly and efficiently expand both its product line and its customer
base.

In the healthcare market, Conductus is developing and testing prototype
superconductive receiver subsystems for several types of magnetic resonance
instruments. Conductus is developing a family of probe subsystems for nuclear
magnetic resonance ("NMR") spectroscopy systems for Varian Associates
("Varian"), a leading manufacturer of these systems. In March 1996, Conductus
began manufacturing and selling two NMR probe types through Varian. The Company
anticipates that it will introduce a third NMR probe type for commercial sale by
the end of 1996. Conductus also is developing receiver subsystems for magnetic
resonance imaging ("MRI") scanners under a joint development agreement with
Siemens AG ("Siemens").

In the instrumentation market, Conductus currently manufactures and sells
superconducting sensors called Superconducting Quantum Interference Devices
("SQUIDs"), which can be used in electronic instruments to detect and precisely
locate extremely weak magnetic signals. Conductus is also marketing and
developing a variety of electronic components and instruments based upon SQUID
technology.

Conductus has leveraged its resources by developing superconductive products
in collaboration with corporate partners that are market and technology leaders,
research laboratories and government agencies. Since its inception, the Company
has received approximately $25.5 million in external funding for research and
development, primarily from agencies of the U.S. government, and currently has
approximately $3.4 million in contracts and grants and $7.8 million in awards
for future research and development.

Conductus was incorporated in Delaware in 1987. Its principal offices are
located at 969 W. Maude Avenue, Sunnyvale, California 94086, and its telephone
number is (408) 523-9950.

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RISK FACTORS

In addition to the other information contained in this Prospectus, the
discussion of risk factors on pages 6 to 12 of this Prospectus should be
considered carefully in evaluating an investment in the Common Stock. The risks
of investing in the Common Stock include the following factors: Early Stage of
the Superconductive Electronics Market; Accumulated Deficit and Anticipated
Future Losses; Uncertainty of Financial Results; Quarterly Fluctuations; High
Degree of Dependence Upon Other Complementary Technologies; Reliance on Limited-
or Sole-Source Suppliers; Dependence on Incorporation of Potential Products in
Third Party Systems; Extensive Reliance on Collaborative Relationships; Rapid
Technological Change; Intense Competition; Competing Technologies; Uncertainty
of Patents and Proprietary Rights; Risk of Litigation; Dependence on Licensed
Technology; Substantial Future Capital Needs; Limited Commercial Manufacturing
Capability; Need to Develop Infrastructure to Support Commercialization; Limited
Outlets for Certain Products; High Degree of Dependence Upon Government
Contracts; Highly Regulated Potential Product Applications; Environmental
Regulations; Attraction and Retention of Key Employees; Volatility of Stock
Price; Effect of Certain Charter Provisions; Antitakover Effects of Restated
Certificate of Incorporation and Bylaw Provisions and of Delaware Law; Shares
Eligible for Future Sale; Registration Rights; Absence of Dividends; Dilution;
and Broad Discretion of Management to Allocate Offering Proceeds.

THE OFFERING

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<CAPTION>
<S> <C>
Common Stock offered by the Company............... 1,000,000 shares
Common Stock to be outstanding after the
Offering......................................... 6,732,989 shares (1)
Use of proceeds................................... For general corporate purposes, including working
capital, acquisition of manufacturing equipment,
product development and repayment of indebtedness.
See "Use of Proceeds."
Nasdaq National Market Symbol..................... CDTS
</TABLE>

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

(1) Based on the number of shares outstanding as of March 31, 1996. Excludes
1,157,026 shares of Common Stock issuable upon exercise of outstanding
options as of March 31, 1996 with a weighted average exercise price of $5.04
per share, and 21,177 shares of Common Stock that may be issuable under the
Company's Employee Stock Purchase Plan upon the expiration of the current
purchase period. See "Management -- 1992 Stock Option/Stock Issuance Plan,"
"-- Employee Stock Purchase Plan" and Note 13 of Notes to Financial
Statements.

4
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Shares used in computing per share
amounts................................... 5,706 5,397 5,543 5,323 2,940 1,680 1,753
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
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MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED (3)
--------- ---------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................................................... $ 3,074 $ 13,014
Total assets............................................................................. 8,937 18,877
Long-term debt, net of current portion................................................... 1,258 1,258
Total stockholders' equity............................................................... 4,469 14,409
</TABLE>

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

(1) Excluding results of operations for Tristan Technologies, Inc. ("Tristan")
prior to its acquisition by Conductus on May 28, 1993.

(2) See Note 2 of Notes to Financial Statements.

(3) Adjusted to reflect the sale of 1,000,000 shares of Common Stock offered by
the Company hereby at a public offering price of $11.00 per share, and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Description of Capital Stock."

---------------------
Conductus owns the United States registered trademarks "CONDUCTUS," the
Conductus logo, "Mr. SQUID" and "iMAG," and claims the rights to the trademark
"xMAG."
-------------------

EXCEPT AS OTHERWISE NOTED HEREIN, INFORMATION IN THIS PROSPECTUS (I) ASSUMES
NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION AND (II) DOES NOT REFLECT
THE EXERCISE OF OPTIONS OR WARRANTS AFTER MARCH 31, 1996.

5
<PAGE>
RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
INVESTORS SHOULD CONSIDER THE FOLLOWING RISK FACTORS INHERENT IN AND AFFECTING
THE BUSINESS OF THE COMPANY. THE DISCUSSION IN THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED BELOW AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS."

EARLY STAGE OF THE SUPERCONDUCTIVE ELECTRONICS MARKET. Conductus was
founded in September 1987 and to date has been engaged principally in research
and development activities. Although Conductus has introduced a number of
superconductive electronic products, most of Conductus' revenues to date have
been derived from research and development contracts. See "Risk Factors -- High
Degree of Dependence upon Government Contracts." The superconductive electronics
market is new, with limited product commercialization to date. There can be no
assurance that Conductus will successfully introduce any products currently
under development, that Conductus will be able to manufacture adequate
quantities of any products it introduces at commercially acceptable costs or on
a timely basis or that any such products will offer sufficient price/performance
advantages to achieve market acceptance. The Company's failure to successfully
develop, manufacture and commercialize products that offer sufficient
price/performance advantages to achieve significant market acceptance on a
timely and cost-effective basis would have a material adverse effect on the
Company's business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

ACCUMULATED DEFICIT AND ANTICIPATED FUTURE LOSSES; UNCERTAINTY OF FINANCIAL
RESULTS. As of March 31, 1996, the Company had accumulated net losses of
approximately $25.6 million. Conductus expects to incur substantial additional
losses at least during 1996 as it expands operations. Continued development of
the Company's products may require the commitment of substantial resources to
research and development, establishment of additional pilot and commercial-scale
fabrication processes and facilities and development of enhanced quality
control, marketing, sales and administrative capabilities. In order to achieve
profitability, Conductus, on its own or with collaborative partners, must
successfully develop, manufacture, introduce and market its potential products.
There can be no assurance that the Company will ever be able to achieve
profitable operations or, if profitability is achieved, that it can be
sustained.

QUARTERLY FLUCTUATIONS. The Company's operating results have varied
substantially on a quarterly basis and such fluctuations are expected to
continue and perhaps increase in future periods as the Company seeks to
commercialize its products. Factors that may affect the Company's operating
results include the timing of government funding awards, the timing and market
acceptance of new products or technological advances by the Company and its
competitors, the timing of significant orders from and shipments to customers,
changes in pricing policies by the Company and its competitors, the mix of
distribution channels through which the Company's products are sold, the
accuracy of resellers' forecasts of end user demand, regulatory changes, the
ability of the Company and its subcontractors to obtain sufficient supplies of
limited- or sole-source components for the Company's products and general
economic conditions both domestically and internationally. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

HIGH DEGREE OF DEPENDENCE UPON OTHER COMPLEMENTARY TECHNOLOGIES. Commercial
uses of superconductive products will depend generally on the commercial
availability of a number of other technologies such as specialized mechanical
refrigeration systems, cryogenically-cooled semiconductor technology and large-
area compatible wafer substrates, some of which are in the development stage.
Conductus currently does not intend to devote significant effort or resources to
developing these technologies, and is dependent on the development activities of
third parties in these areas. There can be no assurance that these technologies
will be successfully developed and commercialized, or that they will achieve
market acceptance.

RELIANCE ON LIMITED- OR SOLE-SOURCE SUPPLIERS. Certain components of
Conductus' subsystems, including cryocoolers, are currently obtained from a
single source or a limited number of suppliers. The inability of

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the Company to develop alternative sources, if required, an inability to meet
demand, a prolonged interruption in supply or a significant increase in price of
one or more components would have a material adverse effect on the Company's
business, operating results and financial condition.

DEPENDENCE ON INCORPORATION OF POTENTIAL PRODUCTS IN THIRD PARTY
SYSTEMS. Many of Conductus' potential products, if successfully developed, are
likely to be used as components or subsystems in systems manufactured and sold
by third party systems manufacturers. There can be no assurance that these third
parties will elect to incorporate superconductive electronic products in these
systems or, if they do, that related system requirements, such as data
processing software and hardware capabilities, can or will be successfully
developed. Failure of third parties to successfully commercialize complementary
technologies or to incorporate the Company's products into their systems would
have a material adverse effect on Conductus' business, operating results and
financial condition.

EXTENSIVE RELIANCE ON COLLABORATIVE RELATIONSHIPS. Conductus has
established and continues to seek to establish collaborative arrangements with
corporate partners, government agencies and public and private research
institutions to develop, manufacture and market superconductive electronic
products. Conductus' success will depend in large part on the development of
successful collaborative arrangements with third parties, their strategic
interest in the potential products under development and their willingness to
purchase any such products. There can be no assurance that Conductus will be
able to enter into collaborative arrangements on commercially reasonable terms,
that these arrangements, if established, will result in successful programs to
develop, manufacture or market superconductive electronic products or, if these
programs are successful, that Conductus' collaborative partners will not seek to
manufacture jointly developed products themselves or obtain them from
alternative sources. In addition, these programs may require Conductus to share
control over its development, manufacturing and marketing programs and
relinquish rights to its technology, may be subject to unilateral termination by
the Company's collaborative partners and may restrict Conductus' ability to
engage in certain areas of product development, manufacturing and marketing. See
"-- High Degree of Dependence Upon Government Contracts" and "Business --
Strategic Alliances and Development Agreements."

RAPID TECHNOLOGICAL CHANGE. The field of superconductivity is characterized
by rapidly advancing technology. The future success of the Company will depend
in large part upon its ability to keep pace with advancing superconductive
technology, including superconducting materials and processes, and industry
standards. The Company has focused its development efforts to date principally
on yttrium barium copper oxide ("YBCO"). There can be no assurance that YBCO
will ultimately prove commercially competitive against other currently known
materials or materials that may be discovered in the future. The Company will
have to continue to develop and integrate advances in technology for the
fabrication of electronic circuits and devices and manufacture of commercial
quantities of its products. The Company will also need to continue to develop
and integrate advances in complementary technologies. There can be no assurance
that the Company's development efforts will not be rendered obsolete by research
efforts and technological advances made by others or that materials other than
those currently used by Conductus will not prove more advantageous for the
commercialization of superconductive electronic products.

INTENSE COMPETITION. The market for electronic products is intensely
competitive. Although the market for superconductive electronics currently is
small and in the early stages of development, Conductus believes this market
will become intensely competitive if products with significant market potential
are successfully developed. A number of large American, Japanese and European
companies, many of which have substantially greater financial resources,
research and development staffs and manufacturing and marketing capabilities
than the Company, are engaged in programs to develop and commercialize
superconductive electronic technology and products. A number of smaller
companies are also engaged in various aspects of the development and
commercialization of superconductive electronic products. Furthermore, academic
institutions, governmental agencies and other public and private research
organizations are engaged in development programs that may lead to competitive
arrangements for commercializing superconductive electronic products. In
addition, if the superconductor industry develops further, new competitors with
significantly greater resources are likely to enter the field. Conductus'
ability to compete successfully will require it to develop and maintain
technologically advanced products, attract and retain highly qualified

7
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personnel, obtain patent or other protection for its technology and products and
manufacture and market its products, either on its own or with third parties.
The Company's inability to compete successfully would have a material adverse
effect on the Company's business, operating results and financial condition. See
"Business -- Competition."

COMPETING TECHNOLOGIES. The Company's planned products, if successfully
developed, will compete directly with other existing and subsequently developed
products which use competing technologies. In wireless communications
applications, there are a number of competing approaches and technologies to
increase the capacity and improve the quality of wireless networks. These
approaches include increasing the number of base stations, increasing tower
heights, locating filters and amplifiers at the top of antennas and using
advanced antenna technology. In healthcare imaging and analysis applications,
alternative approaches and technologies in magnetic resonance instruments
include using more powerful magnets, and improving receiver sensitivity by
refrigerating conventional copper receiver coils. In magnetic sensing instrument
applications, alternative approaches and technologies may be available to
perform functions addressable by magnetic sensing technology. Improvements in
existing alternative approaches or the development and introduction of competing
approaches or technologies to the Company's potential products could have a
material adverse effect on the Company's business, operating results and
financial condition. Failure of the Company's potential products to compete
successfully with products using competing technologies would have a material
adverse effect on the Company's business, operating results and financial
condition.

UNCERTAINTY OF PATENTS AND PROPRIETARY RIGHTS; RISK OF
LITIGATION. Conductus has received 17 U.S. patents and one related foreign
patent with unexpired terms ranging from 13 to 18 years and has 18 patent
applications pending before the U.S. Patent and Trademark Office. One of those
patents, for an MRI coil, is currently involved in an interference proceeding
before the U.S. Patent and Trademark Office. See "Business -- Legal
Proceedings." International counterparts of several of these issued patents or
pending applications have been filed under the Patent Cooperation Treaty with a
number of applications currently in various countries worldwide. The Company
will continue to file other U.S. and key international patent applications as
part of its business strategy. There can be no assurance, however, that its
pending applications will result in issued patents, that the validity of its
issued patents will not be subject to challenge or that third parties will not
be able to design around the patented aspects of the Company's products. The
Company also relies upon trade secrets, unpatented know-how, continuing
technological innovation, employee and third-party non-disclosure agreements and
the pursuit of licensing opportunities in order to develop and enhance its
competitive position. The Company's efforts to protect its proprietary rights
may not be successful, however, in preventing their misappropriation or ensuring
that these rights will provide the Company with a competitive advantage.
Additionally, certain of the issued patents and patent applications are jointly
owned by the Company and third parties. Any party has the right to license
rights under such patents and applications, which could result in Conductus not
having exclusive control over such inventions.

The Company believes that, since the discovery of high-temperature
superconductors ("HTS") in 1986, several thousand patent applications have been
filed worldwide and over a thousand patents have been granted in the U.S.
relating to superconductivity. There are interference proceedings pending
regarding rights to inventions claimed in some of the applications. Accordingly,
the patent positions of companies using HTS technology, including Conductus, are
uncertain and involve both complex legal and factual questions. Consequently,
there is significant risk that others, including competitors of the Company,
have obtained or will obtain patents relating to the Company's planned products
or technology.

A patent issue of particular importance to the Company relates to copper
oxides or "cuprates," that are used to make HTS products, including the YBCO
compound which is currently the basis for the Company's business and products.
Conductus has neither obtained any issued patents nor has it filed any patent
applications covering the composition of any cuprates or other HTS materials.
However, several U.S. and foreign patent applications filed by IBM, AT&T, the
University of Houston, the Naval Research Laboratory and others are pending
regarding the composition of YBCO and related HTS. See "Business -- Background
- -- Conductus' Approach." The Company understands that several of such U.S.
applications are the subject of an interference proceeding currently pending in
the U.S. Patent and Trademark Office (Interference No. 101,981). Additionally,
E. I. du Pont de Nemours & Co. ("DuPont") has notified Conductus that it

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is the exclusive licensee of patents issued in Israel, Sweden, Taiwan and the
United Kingdom covering the composition of YBCO and a method for using YBCO in
superconducting applications. DuPont has stated that it is interested in
sublicensing such patents to Conductus, and would consider sublicensing to
Conductus, as they issue, any other foreign and U.S. patent applications
licensed to DuPont by the University of Houston. The Company anticipates that it
will be required to obtain a license to use YBCO from one or more of these
parties in order to continue to develop and sell products based on YBCO.

There can be no assurance that the Company would be able to obtain licenses
to patents covering YBCO compositions, when issued, or to any other patents
applicable to the Company's business on commercially reasonable terms. In such
an event, the Company could be required to expend significant resources to
develop non-infringing technology alternatives or to obtain licenses to the
technology that the Company infringes or would infringe. There can be no
assurance that the Company would be able to successfully design around these
third party patents or to obtain licenses to technology that it may require.
Furthermore, there can be no assurance that the Company will not be obligated to
defend itself at substantial cost against allegations of infringement of third
party patents. An adverse outcome in such a suit could subject the Company to
significant liabilities to third parties, or require the Company to cease using
such technology. In addition, aside from the merits of a claim, the cost of
defending any such suit would constitute a major financial burden for the
Company that would have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Patents, Proprietary
Technology and Trademarks."

DEPENDENCE ON LICENSED TECHNOLOGY. Successful marketing of a material
portion of Conductus' products depends in part on nonexclusive licenses obtained
from various licensors. There can be no assurance that such licenses will not be
terminated by licensors or that Conductus will be able to develop alternate
products that do not require these or other licenses.

SUBSTANTIAL FUTURE CAPITAL NEEDS. The Company to date has received limited
revenues from product sales. The development of the Company's planned products
will require a commitment of substantial additional funds. Conductus anticipates
that its existing available cash, together with the estimated net proceeds from
this offering, should be adequate to fund the Company's operations through at
least the end of 1998. The Company's future capital requirements will depend on
many factors, including continued progress in its research and development
programs, the magnitude of these programs, the time and costs involved in
obtaining any required regulatory approvals, the costs involved in preparing,
filing, prosecuting, maintaining and enforcing patents, successful completion of
technological, manufacturing and market requirements, changes in existing
research relationships, the availability of funding under government contracts,
the ability of the Company to establish collaborative arrangements and the cost
of manufacturing scale-up and the amount and timing of future revenues. If
adequate funds are not available, the Company may be required to delay,
scale-back or eliminate one or more of its research and development programs or
obtain funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies or
potential products that the Company would not otherwise relinquish. There can be
no assurance that additional financing will be available on acceptable terms or
at all, if and when required. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

LIMITED COMMERCIAL MANUFACTURING CAPABILITY. Conductus has established a
limited production facility. To date, Conductus has focused primarily on the
development of its fabrication processes and the production of limited
quantities of superconducting thin films and components. Although Conductus'
processing technology is derived principally from semiconductor manufacturing
technology, the fabrication of HTS components entails additional difficulties
because of specific properties unique to HTS materials. There can be no
assurance that Conductus can develop enhanced processing technology necessary to
develop more advanced superconducting devices and circuits, that the Company
will be able to attain commercial yields in the future, that the Company will
not suffer recurring yield problems caused by mask defects, impurities in
materials and other factors or that the Company can expand its processing,
production control, assembly, testing and quality assurance capabilities to
produce existing or planned superconductive

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<PAGE>
electronic products in adequate commercial quantities. The Company's failure to
develop an adequate manufacturing capacity would have a material adverse effect
on the Company's business, operating results and financial condition. See
"Business -- Manufacturing."

NEED TO DEVELOP INFRASTRUCTURE TO SUPPORT COMMERCIALIZATION. Conductus has
very limited experience in commercial sales, marketing and distribution.
Expanded sales, marketing and customer service capabilities are also needed.
There can be no assurance that it will be able to establish adequate sales,
marketing and distribution capabilities or be successful in gaining market
acceptance for any of its potential products.

LIMITED OUTLETS FOR CERTAIN PRODUCTS. The market for NMR systems is highly
concentrated, with estimates that approximately 85% of the worldwide market is
divided between Varian Associates ("Varian") and Bruker Instruments. There can
be no assurance that Varian will be successful in marketing the NMR probes or
systems containing Conductus probe subsystems, that Varian will continue to
market the probes or systems or that the Company will be able to market the
probes or systems through other channels should distribution through Varian
prove unsuccessful. See "Business -- Strategic Alliances and Development
Agreements."

HIGH DEGREE OF DEPENDENCE UPON GOVERNMENT CONTRACTS. A significant portion
of the Company's revenues has been derived from contracts with agencies of the
U.S. government. The Company's revenue from government-related contracts
represented approximately 85%, 77%, 82% and 78% of total revenue for the quarter
ended March 31, 1996 and for fiscal 1995, 1994 and 1993, respectively. The
Company's contracts involving the U.S. government are or may be subject to
various risks, including: unilateral termination for the convenience of the
government; reduction or modification in the event of changes in the
government's requirements or budgetary constraints; increased or unexpected
costs causing losses or reduced profits under fixed-price contracts or
unallowable costs under cost reimbursement contracts; risks of potential
disclosure of Conductus' confidential information to third parties; the failure
or inability of the prime contractor to perform its prime contract in
circumstances where Conductus is a subcontractor; the failure of the government
to exercise options provided for in the contracts; the government's
nonexclusive, royalty-free license to use technology developed pursuant to the
contracts by or on behalf of the government in certain circumstances; and
exercise of "march-in" rights by the government. March-in rights refer to the
right of the U.S. government or government agency to require the Company to
license to third parties patented technology developed under contracts funded by
the government if the contractor fails to continue to develop the technology.
The programs in which Conductus participates in many cases extend for several
years, but are normally funded on an annual basis. There can be no assurance
that the U.S. government will continue its commitment to programs to which the
Company's development projects are applicable, particularly in light of recent
legislative initiatives to reduce the funding of various U.S. government
agencies and programs, or that the Company can compete successfully to obtain
funding pursuant to such programs. Conductus does not anticipate that government
contract revenues will grow at historical rates in the future and there can be
no assurance that revenues from government contracts will continue at historic
levels. A reduction in, or discontinuance of, such commitment or of the
Company's participation in such programs would have a material adverse effect on
the Company's business, operating results and financial condition. See "Business
- -- Research and Development -- Government Contracts."

HIGHLY REGULATED POTENTIAL PRODUCT APPLICATIONS. Some of the Company's
potential products may be used as subsystems in medical devices, such as MRI and
NMR devices, which are subject to extensive governmental regulation in the U.S.
by the Food and Drug Administration ("FDA") and other government agencies.
Regulation of medical devices outside the U.S. varies widely from country to
country. The clearance and approval process for both the FDA and foreign
regulatory authorities can be costly and time consuming and the Company will be
largely dependent upon the efforts of manufacturers of instruments that utilize
the Company's subsystems to obtain necessary approvals. There can be no
assurance that any buyers of the Company's subsystems will be able to obtain any
necessary governmental approvals, or otherwise comply with applicable government
regulations.

In addition, in some states, a certificate of need ("CON") or similar
regulatory approval is required prior to acquisition of medical equipment or
introduction of a new service by hospitals or healthcare

10
<PAGE>
providers. CON regulations limiting the number of new MRI machines or limiting
the acquisition of magnetoencephalography devices could adversely impact
commercialization of those products, whether or not they incorporate
superconducting products supplied by the Company.

In the communications area, the operation of cellular and PCS base stations
is regulated in the United States by the Federal Communications Commission
("FCC"). Base stations and equipment marketed for use therein must meet specific
technical standards. The Company's ability to sell its HTS filter subsystems
will depend upon the ability of base station equipment manufacturers and of
cellular base station operators to obtain and retain the necessary FCC approvals
and licenses. Any failure or delay of base station manufacturers or operators in
obtaining necessary approvals could have a material adverse effect on the
Company's business, operating results and financial condition.

ENVIRONMENTAL REGULATIONS. The Company is subject to a number of federal,
state and local governmental regulations related to the use, storage, discharge
and disposal of toxic, volatile or otherwise hazardous chemicals used in its
business. Any failure to comply with present or future regulations could result
in fines being imposed on the Company and the suspension of production or a
cessation of operations. In addition, such regulations could restrict the
Company's ability to expand or could require the Company to acquire costly
equipment or to incur other significant expenses to comply with environmental
regulations or to clean up prior discharges.

ATTRACTION AND RETENTION OF KEY EMPLOYEES. The Company is highly dependent
upon the efforts of its senior management and technical team, as well as the
contributions of its Scientific Advisory Board. The loss of the services of one
or more members of the senior management and technical team or Scientific
Advisory Board could impede the achievement of product development and
commercialization objectives. Due to the specialized technical nature of the
Company's business, the Company is also highly dependent upon its ability to
attract and retain qualified technical and key management personnel. Moreover,
the Company is targeting its products towards markets, such as communications,
healthcare and instrumentation, that require substantial industry knowledge and
expertise. The Company currently has limited expertise in these areas and it is
essential to attract qualified personnel with expertise in manufacturing,
marketing, sales and support in each of its targeted markets. There is intense
competition for qualified personnel in the areas of the Company's activities and
there can be no assurance that the Company will be able to continue to attract
and retain qualified personnel necessary for the development of its business.
See "Business -- Employees."

VOLATILITY OF STOCK PRICE. There has been significant volatility in the
market price of securities of technology companies, particularly those that,
like the Company, are still engaged primarily in product development activities.
See "Price Range of Common Stock and Dividend Policy." Factors such as
technology and product announcements by the Company or its competitors, disputes
relating to patents and proprietary rights and variations in quarterly operating
results may have a significant impact on the market price of the Common Stock.
In addition, the securities markets have experienced volatility which is often
unrelated to the operating performance of particular companies. In the past,
following periods of volatility in the market price of a company's securities,
securities class action lawsuits have been instituted against a company. If
brought, such litigation could have a material adverse effect on the Company's
business, results of operations and financial condition.

EFFECT OF CERTAIN CHARTER PROVISIONS; ANTITAKEOVER EFFECTS OF RESTATED
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS AND OF DELAWARE LAW. The
Board of Directors has the authority to issue up to 1,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of 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 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. The Company
has no present plans to issue shares of Preferred Stock. Further, certain
provisions of the Company's Restated Certificate of Incorporation and Bylaws and
of Delaware corporate law could delay or make more difficult a merger, tender
offer or proxy contest involving the Company. Among other things, the

11
<PAGE>
Company's Restated Certificate of Incorporation does not permit stockholders to
act by written consent. See "Description of Capital Stock -- Preferred Stock"
and "-- Antitakeover Effects of Provisions of the Restated Certificate of
Incorporation and Bylaws and of Delaware Law."

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales of a
substantial number of shares of Common Stock in the public market following this
offering could adversely affect the market price for the Company's Common Stock.
The number of shares of Common Stock available for sale in the public market is
limited by restrictions under the Securities Act of 1933, as amended (the
"Securities Act"), and lock-up agreements under which certain holders of such
shares have agreed not to sell or otherwise dispose of any of their shares for a
period of 90 days after the effective date of this offering without the prior
written consent of Tucker Anthony Incorporated. However, Tucker Anthony
Incorporated may, in its sole discretion and at any time without notice, release
all or any portion of the securities subject to lock-up agreements. As a result
of these restrictions, based on shares outstanding as of March 31, 1996,
5,308,123 shares of Common Stock will be freely tradable without restriction or
further registration under the Securities Act, unless purchased by "affiliates"
of the Company, as that term is defined in Rule 144 under the Securities Act,
including the 1,000,000 shares of Common Stock offered hereby, 1,500,000 shares
registered pursuant to the Company's initial public offering and 2,808,123
shares that have either been registered on Form S-8 or are restricted securities
that can be sold pursuant to Rule 144(k) or Rule 701 under the Securities Act. A
total of 1,424,866 shares are held by persons who may be deemed affiliates of
the Company and will be eligible for sale on the date of this Prospectus subject
to the restrictions of Rule 144 ("Affiliate Shares"). All of the Affiliate
Shares will be subject to lock-up arrangements. Furthermore, holders of
approximately 2,017,000 shares of Common Stock and warrants to purchase 33,534
shares of Common Stock will be entitled to certain registration rights with
respect to such shares. If such holders, by exercising their registration
rights, cause a large number of shares to be registered and sold in the public
market, the sale of such shares could have a material adverse effect on the
market price for the Company's Common Stock and would have a material adverse
effect the Company's ability to raise additional capital when or if required.
See "Shares Eligible for Future Sale" and "Description of Capital Stock --
Registration Rights."

ABSENCE OF DIVIDENDS. The Company has never paid cash dividends and does
not anticipate paying cash dividends on the Common Stock in the foreseeable
future. See "Price Range of Common Stock and Dividend Policy."

DILUTION. The public offering price will be substantially higher than the
book value per share of the currently outstanding Common Stock. Investors
purchasing shares in this offering will therefore suffer immediate and
substantial dilution. See "Dilution." In addition, the exercise of any of the
currently outstanding warrants or stock options would likely result in a
dilution of the value of the Common Stock. Moreover, the Company may at any time
in the future sell additional securities and/or rights to purchase such
securities, grant additional warrants, stock options or other forms of
equity-based incentive compensation to the Company's management and/or employees
to attract and retain such personnel or in connection with the obtaining of
non-equity financing, such as debt or leasing arrangements accompanied by
warrants to purchase equity securities of the Company. Any of these actions
would have a dilutive effect upon the holders of the Common Stock.

BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS. The Company
anticipates that the proceeds of this offering will be used for working capital
required to support expansion of its operations, new manufacturing equipment and
general corporate purposes. The amounts identified for the foregoing uses under
"Use of Proceeds" in this Prospectus are estimates and the amounts actually
expended for each such purpose and the timing of such expenditures may vary
depending upon numerous factors. The Company's management will have broad
discretion in determining the amount and timing of expenditures and in
allocating the net proceeds of this offering. Such discretion will be
particularly broad with respect to the 40% or $3,940,000 of the proceeds
available for use for working capital and general corporate purposes. There can
be no assurance that the Company will allocate the net proceeds of this offering
in a manner that achieves a positive rate of return on such net proceeds. See
"Use of Proceeds."

12
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered hereby are estimated to be $9,940,000, at a public offering
price of $11.00 per share and after deducting the underwriting discount and
estimated offering expenses.

The Company anticipates that a significant portion of the net proceeds will
be used for working capital required to support expansion of its operations
including increases in inventory and receivables, improvements in facilities and
expansion of manufacturing. The Company currently expects to use less than
$500,000 for facilities improvements and $2,500,000 on new manufacturing
equipment during the next 24 months. The Company also expects to use a portion
of the net proceeds to repay all amounts outstanding under its bank line of
credit, which the Company anticipates may total approximately $500,000
immediately prior to the closing. As of March 31, 1996, there were no borrowings
under this credit facility which provides for borrowing up to the lesser of
$2,000,000 or 75% of eligible receivables, bears interest at prime plus 0.50%
and expires in February 1997. The Company also anticipates using approximately
$2,500,000 of the net proceeds for the development of its superconducting
products. The Company anticipates that the balance of the net proceeds of
$3,940,000 (40% of net proceeds) will be added to working capital and used for
general corporate purposes, including research and development and expansion of
the manufacturing, sales and marketing infrastructure. Management will have
broad discretion in the application of the net proceeds. The Company may
consider using the net proceeds for the acquisition of complementary businesses,
products or technologies. However, the Company currently has no specific plans
with respect to any such acquisition. Pending such uses, the Company intends to
invest the net proceeds in short-term, investment-grade, interest-bearing
securities. See "Risk Factors -- Broad Discretion of Management to Allocate
Offering Proceeds."

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Common Stock of the Company commenced trading on the Nasdaq National
Market under the trading symbol "CDTS" on August 5, 1993. The following table
presents quarterly information on the high and low closing sales prices for
shares of the Company's Common Stock for the periods indicated as reported on
the Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
------- --------
<S> <C> <C>
1994
First Quarter............................................................... $10 5/8 $ 5
Second Quarter.............................................................. 7 1/2 2 5/8
Third Quarter............................................................... 5 3/4 3 1/4
Fourth Quarter.............................................................. 5 1/4 4

1995
First Quarter............................................................... 7 4 1/2
Second Quarter.............................................................. 8 6
Third Quarter............................................................... 7 5 3/4
Fourth Quarter.............................................................. 7 1/2 5 3/16

1996
First Quarter............................................................... 15 6 1/2
Second Quarter (through June 25, 1996)...................................... 16 1/2 9 3/4
</TABLE>

On June 25, 1996, the last sales price of the Common Stock, as reported on
the Nasdaq National Market, was $11.75 per share. There were 111 holders of
record of the Company's Common Stock as of May 10, 1996.

The Company has not paid any cash dividends on its capital stock since its
inception, and does not expect to pay cash dividends on its Common Stock in the
foreseeable future. The Company is restricted under its bank financing agreement
from paying any cash dividends but may pay stock dividends.

13
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company as of March
31, 1996, and as adjusted for the sale of 1,000,000 shares of Common Stock
offered by the Company hereby and the application of the estimated net proceeds
therefrom, at a public offering price of $11.00 per share:

<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------
ACTUAL AS ADJUSTED
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Long-term debt, net of current portion (1)........................................ $ 1,258,228 $ 1,258,228
-------------- --------------
Stockholders' equity:
Preferred stock, $0.0001 par value:
Authorized: 1,000,000 shares;
No shares issued and outstanding.............................................. -- --

Common stock, $0.000l par value:
Authorized: 11,000,000 shares;
Issued: 5,905,363, actual; 6,905,363, as adjusted (2)
Outstanding: 5,732,989, actual; 6,732,989, as adjusted (2).................... 574 674

Additional paid-in capital...................................................... 30,069,797 40,009,697
Unrealized gain on investments, net............................................. 319 319
Accumulated deficit............................................................. (25,601,960) (25,601,960)
-------------- --------------
Total stockholders' equity.................................................. 4,468,730 14,408,730
-------------- --------------

Total capitalization........................................................ $ 5,726,958 $ 15,666,958
-------------- --------------
-------------- --------------
</TABLE>

- ------------------------
(1) See Note 10 of Notes to Financial Statements.

(2) Based on the number of shares outstanding as of March 31, 1996. Excludes
1,157,026 shares of Common Stock issuable upon exercise of outstanding
options as of March 31, 1996, with a weighted average exercise price of
$5.04 per share, and 21,177 shares of Common Stock that may be issuable
under the Company's Employee Stock Purchase Plan upon the expiration of the
current purchase period. See "Management -- 1992 Stock Option/Stock Issuance
Plan," "-- Employee Stock Purchase Plan" and Note 13 of Notes to Financial
Statements.

14
<PAGE>
DILUTION

As of March 31, 1996, the Company had a net tangible book value of
$4,430,000, or approximately $0.77 per share of outstanding Common Stock. "Net
tangible book value" represents the amount of total tangible assets less total
liabilities. Without taking into account any other changes in the net tangible
book value after March 31, 1996, other than to give effect to the receipt by the
Company of the net proceeds from the sale of the shares of Common Stock offered
by the Company hereby at a public offering price of $11.00 per share, the pro
forma net tangible book value of the Company as of March 31, 1996 would have
been $14,370,000, or $2.13 per share. This represents an immediate increase in
net tangible book value of $1.36 per share to existing stockholders and an
immediate dilution in net tangible book value of $8.87 per share to purchasers
of Common Stock in the offering ("New Investors"). Dilution is determined by
subtracting net tangible book value per share after the offering from the amount
of cash paid by a New Investor for a share of Common Stock. New Investors
participating in this offering will incur immediate, substantial dilution. This
is illustrated in the following table:

<TABLE>
<S> <C> <C>
Assumed public offering price per share...................................... $ 11.00

Net tangible book value per share before the offering.................... $ 0.77

Increase per share attributable to New Investors......................... 1.36
---------

Pro forma net tangible book value per share after the offering............... 2.13
---------

Dilution per share to New Investors.......................................... $ 8.87
---------
---------
</TABLE>

The following table summarizes on a pro forma basis as of March 31, 1996,
the difference between the existing stockholders and the New Investors (at a
public offering price of $11.00 per share) with respect to the number of shares
of Common Stock purchased from the Company, the total consideration paid and the
average price per share paid:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)........................ 5,732,989 85.1% $ 30,070,371 73.2% $ 5.25
New Investors.................................... 1,000,000 14.9 11,000,000 26.8 $ 11.00
---------- ----- ------------- -----
Total.......................................... 6,732,989 100.0% $ 41,070,371 100.0%
---------- ----- ------------- -----
---------- ----- ------------- -----
</TABLE>

- ------------------------
(1) Total consideration paid by existing stockholders is net of issuance costs
and treasury stock.

The foregoing computations are based on the number of shares outstanding as
of March 31, 1996 and exclude 1,157,026 shares of Common Stock issuable upon
exercise of outstanding options and warrants as of March 31, 1996 with a
weighted average exercise price of $5.04 per share. To the extent options or
warrants are exercised, there will be further dilution to the New Investors. See
"Management -- 1992 Stock Option/ Stock Issuance Plan" and Note 13 of Notes to
Financial Statements.

15
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following selected financial data should be read in conjunction with the
Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The statement of operations data for the
years ended December 31, 1995, 1994 and 1993, and the balance sheet data at
December 31, 1995 and 1994 are derived from, and are qualified by reference to,
the audited financial statements elsewhere in this Prospectus. The statement of
operations data for the years ended December 31, 1992 and 1991 and the balance
sheet data at December 31, 1992 and 1991 are derived from audited financial
statements not included herein. The statement of operations data for the
quarters ended March 31, 1996 and 1995 and the balance sheet data at March 31,
1996 are derived from unaudited financial statements that include, in the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the information set forth
therein. The results of operations for the three months ended March 31, 1996 or
any other period are not necessarily indicative of future results.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1996 1995 1995 1994 1993(2) 1992(2) 1991(2)
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Contract.............................. $ 2,214 $ 1,644 $ 8,148 $ 7,048 $ 5,070 $ 2,233 $ 740
Product sales......................... 397 369 2,434 1,588 1,409 438 158
--------- --------- --------- --------- --------- --------- ---------
Total revenues...................... 2,611 2,013 10,582 8,636 6,479 2,671 898
--------- --------- --------- --------- --------- --------- ---------
Costs and Expenses:
Cost of product sales................. 256 166 1,430 975 1,175 295 70
Research and development.............. 2,743 2,578 9,819 9,202 7,080 3,903 3,381
Selling, general and administrative... 1,007 827 3,756 3,336 1,589 1,605 737
Nonrecurring charge related to
purchased technology................. -- -- -- -- 705 -- --
--------- --------- --------- --------- --------- --------- ---------
Total costs and expenses............ 4,006 3,571 15,005 13,513 10,549 5,803 4,188
--------- --------- --------- --------- --------- --------- ---------
Loss from operations.............. (1,395) (1,558) (4,423) (4,876) (4,070) (3,132) (3,290)
--------- --------- --------- --------- --------- --------- ---------
Net loss................................ $ (1,379) $ (1,570) $ (4,422) $ (4,544) $ (4,122) $ (3,215) $ (3,130)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net loss per common share (1)........... $ (0.24) $ (0.29) $ (0.80) $ (0.85) $ (1.40) $ (1.91) $ (1.79)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Shares used in computing per share
amounts (1)............................ 5,706 5,397 5,543 5,323 2,940 1,680 1,753
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1995 1994 1993(2) 1992 1991
MARCH 31, --------- --------- --------- --------- ---------
1996
-------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................ $ 3,074 $ 4,287 $ 7,076 $ 12,438 $ (1,332) $ 1,783
Total assets................................... 8,937 10,128 12,541 16,233 3,250 5,054
Long-term debt, net of current portion......... 1,258 1,146 533 180 252 735
Total stockholders' equity..................... 4,469 5,814 9,529 14,057 46 3,235
</TABLE>

- ------------------------
(1) See Note 2 of Notes to Financial Statements.

(2) Excluding results of operations for Tristan Technologies, Inc. prior to its
acquisition by Conductus on May 28, 1993.

16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SECTION AND OTHER PARTS OF THIS PROSPECTUS CONTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
AND THE TIMING OF CERTAIN EVENTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW AND IN "RISK FACTORS" AND "BUSINESS."

OVERVIEW

Conductus develops, manufactures and markets electronic components and
systems based on superconductors for applications in the communications,
healthcare and instrumentation markets. In May 1993, Conductus acquired Tristan
Technologies, Inc. ("Tristan"), a San Diego, California-based company founded in
1991, that designed, manufactured and sold large-scale magnetic sensing systems
and instrumentation. In June 1994, Tristan became the Conductus Instrument &
Systems Division. As of March 31, 1996, Conductus had accumulated losses of
approximately $25,602,000 and expects to incur additional losses at least during
1996 due to the Company's planned expansion of operations. Conductus, alone or
with collaborative partners, must successfully develop, manufacture, introduce
and market its potential products in order to achieve profitability. Conductus
does not expect to recognize meaningful product sales until it successfully
develops and commercializes superconductive components, systems and subsystems
that address significant market needs. See "Risk Factors."

RESULTS OF OPERATIONS

QUARTERS ENDED MARCH 31, 1996 AND 1995

The Company's total revenues increased to $2,611,000 for the first quarter
of 1996, a 30% increase over the $2,013,000 for the same period in 1995. Total
revenues consisted primarily of contract revenue and, to a lesser extent,
product sales. Revenues under U.S. government research and development contracts
increased to $2,214,000 in the period from $1,644,000 in the same period in the
prior year and represented 85% and 82% of total revenue for the periods,
respectively. The increase in contract revenues was primarily due to higher
levels of government funded research and development activity in the three
months ended March 31, 1996, compared with the three months ended March 31,
1995. At March 31, 1996, Conductus had approximately $3,364,000 in contracts and
grants and $7,760,000 in awards for future research and development. The
recognition of revenue and receipt of payment pursuant to these contracts and
awards are subject to numerous risks.

Revenues from sales of large-scale superconducting magnetic systems, SQUIDs,
HTS thin films and other products increased to $397,000 in the first quarter of
1996, an 8% increase over the $369,000 of product sales in same period in the
prior year. The increase in the first quarter of 1996 is primarily related to
increased sales of magnetic sensing systems and instruments. Revenues in the
three months ended March 31, 1996 were lower than revenues in the three months
ended December 31, 1995 due primarily to the impact of delays in shipment of two
large magnetic sensing systems in the first three months of 1996. The
large-scale magnetic sensing systems have large unit prices and are sold in low
volumes, and thus significant fluctuations in sales of these systems may occur
between quarters. Conductus does not expect to recognize significant product
sales until it successfully develops and commercializes superconductive
components and systems addressing significant markets.

Cost of products increased to $256,000 for the first quarter of 1996, a 54%
increase over the $166,000 for the same period in 1995. The increase in cost of
products was directly related to increased product sales. Gross margins
decreased to 36% in the first quarter of 1996 from an unusually high gross
margin of 55% in

17
<PAGE>
the comparable period for the prior year. The reduction reflects changes in
commercial product mix between the two quarters. Large systems margins may vary
based on options included and may have downward impacts on overall margins.
Costs of contract revenues are included in research and development expenses.

Research and development expenses increased to $2,743,000 in the first
quarter of 1996, a 6% increase over the $2,578,000 for the same period in 1995.
The increase is directly related to the development of commercial products,
particularly in both the cellular and PCS communications markets. The contract
cost portion increased ratably from period to period. The Company expects to
continue to incur significant research and development expenses as it seeks to
develop additional products.

Selling, general and administrative expenses increased to $1,007,000 for the
first quarter of 1996 from $827,000 for the same quarter in 1995. These costs
increased in 1996 compared to the prior quarter due to increased sales costs
associated with the representative network for magnetic sensing and instrument
products and the increasing size of the Company's operations. Headcount
increased to 105 at March 31, 1996 from 102 at March 31, 1995. To the extent the
Company increases sales of commercial products, there will be additional sales
and marketing costs over those incurred in the first quarter of 1996.

Interest income was $27,000 in the first quarter of 1996 compared to $80,000
during the same quarter in 1995. The primary reason for the decrease was a lower
amount of cash and investments which was partly offset by higher interest rates.
Interest charges increased on the Company's debt financing to approximately
$36,000 in the first quarter of 1996 compared to $24,000 for the same quarter in
1995, due to higher outstanding debt balances incurred to purchase capital
equipment.

As a result of incurring losses, the Company has not incurred any income tax
liability. The Company has established a valuation allowance against its
deferred tax assets and reviews this allowance on a periodic basis. At such time
that the Company believes that it is more likely than not that the deferred tax
asset will be realized, the valuation allowance will be reduced.

YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

The results of operations of the Company for the year ended December 31,
1993 do not include the results of operations of Tristan prior to its
acquisition by Conductus on May 28, 1993.

Total revenues increased to $10,582,000 in 1995 from $8,636,000 in 1994 and
$6,479,000 in 1993. Total revenues consist primarily of contract revenue and, to
a lesser extent, product sales. Revenues for 1993 do not include revenues of
Tristan before May 28, 1993, which were $602,000 for the period. Revenues under
U.S. government research and development contracts increased to $8,148,000 in
1995 from $7,048,000 in 1994 and $5,070,000 in 1993 and represented 77%, 82% and
78% of total revenue in 1995, 1994 and 1993, respectively. The increase in
contract revenues during 1995 and 1994 was largely attributable to the addition
of several new multi-year government contracts. The decrease in contract
revenues as a percentage of total revenues in 1995 compared with 1994 was due to
increasing product sales. Revenues under these new contracts are expected to
offset planned declines in revenues from contracts approaching the end of their
terms. The Company had $3,930,000 and $2,353,000 in contracts and grants and
$9,228,000 and $4,838,000 in awards from U.S. government agencies as of December
31, 1995 and 1994, respectively. Conductus does not anticipate that government
contract revenues will grow at historical rates in the future. The recognition
of revenue and receipt of payment pursuant to these contracts and awards are
subject to numerous risks. See Note 12 of Notes to Financial Statements.

Revenue from sales of large-scale superconductive magnetic sensing systems,
SQUIDs, HTS thin films and other products increased to $2,434,000 in 1995 from
$1,588,000 in 1994 and $1,409,000 in 1993, primarily due to an increase in sales
of magnetic sensing systems and instruments introduced late in 1994 and in 1995.
The large-scale magnetic sensing systems have large unit prices and are sold in
low volumes, and thus, the timing of individual sales and shipments of these
systems could result in significant period to period fluctuations in revenues,
such as the fluctuation which resulted from the delay in shipment of two
magnetic sensing systems in the first quarter of 1996. Product sales for 1993 do
not include $602,000 realized by Tristan from sales of superconducting magnetic
systems before May 28, 1993.

18
<PAGE>
Cost of product sales were $1,430,000, $975,000 and $1,175,000 for 1995,
1994 and 1993, respectively. Gross margins were 41%, 39% and 17% for 1995, 1994
and 1993, respectively. Gross margins increased in 1995 and 1994 over 1993
primarily due to lower margins in 1993 on initial system products which included
startup costs. Startup costs on the introduction of new products also affected
margins in 1995 but, due to broader product lines, the effect was not as
substantial.

The Company's research and development expenses, including cost of contract
revenues, increased to $9,819,000 in 1995 from $9,201,000 in 1994 and $7,080,000
in 1993, representing 65%, 68% and 67%, of total operating expenses in the
respective years. The increases in 1995 and 1994 reflected the increase in the
Company's overall research and development activities, and emphasis on efforts
in communications and healthcare. Research and development includes both
externally and internally funded projects. Externally funded research and
development programs, primarily under contracts with agencies of the U.S.
government, accounted for approximately $9,176,000 of research and development
expenses in 1995, $8,717,000 in 1994 and $6,500,000 in 1993, reflecting
increased government contract and research activity throughout the period.
Current levels of expenditures are expected to continue for development of
commercial products, particularly in the communication and healthcare areas. Net
expenses do not include a non-recurring charge of $705,000 resulting from the
acquisition of Tristan in 1993. The Company expects to continue to incur
significant research and development expenses and these expenses are likely to
increase as it seeks to develop additional products.

Selling, general and administrative expenses increased to approximately
$3,756,000 in 1995 from $3,336,000 in 1994 and $1,589,000 in 1993 or 25%, 25%
and 15%, respectively, of total operating expenses in 1995, 1994 and 1993. These
costs increased in 1995 and 1994 compared to 1993 due to the increased size of
the Company as a result of the acquisition of Tristan, significant headcount
additions and increasing sales and marketing activities. Total headcount has
increased to 99 at December 31, 1995 from 96 at December 31, 1994 and 66 at
December 31, 1993. Increases in 1995 over 1994 also include the selling costs
associated with expanding the Company's representative network of independent
distributors of magnetic sensing and instrumentation products. Included in 1994
expenses is a non-recurring charge of approximately $230,000 for severance and
recruitment expenses associated with management changes and additions.
Additionally, the Company expects sales and marketing expenses to continue to
increase as it begins to market commercial products.

The Company's total operating expenses increased to $15,005,000 in 1995 from
$13,513,000 in 1994 and $10,549,000 in 1993. Operating expenses for 1993 include
a non-recurring charge of $705,000 associated with purchased technology from the
acquisition of Tristan.

Losses from operations were $4,423,000, $4,876,000 and $4,070,000 for 1995,
1994 and 1993, respectively. Excluding the non-recurring charge of $705,000
resulting from the acquisition of Tristan, the loss from operations for 1993
would have been $3,365,000. The decreasing loss in 1995 compared to 1994 was
primarily related to planned increases in revenues offset by headcount and
contract costs as the Company moved toward developing and commercializing
products.

Interest income from cash equivalents and investments were $249,000 in 1995,
$344,000 in 1994 and $166,000 in 1993. The primary reasons for the changes
between years were changes in levels of cash equivalents and investments, as
approximately $13 million was received in the Company's initial public offering
in August 1993, and thereafter there have been reductions to support operations
through 1994 and 1995.

Interest charges were $156,000, $56,000 and $176,000 in 1995, 1994 and 1993,
respectively. Interest charges related to the Company's equipment term loan
financing which commenced in September 1994 were reflected for the entire year
compared to a minimal amount in 1994. The decrease in interest charges from 1993
to 1994 was primarily due to the maturing of portions of the three equipment
lease lines. As of year end, only two lease line obligations remain at a reduced
level due to maturities. Additionally, in 1993 the Company incurred interest
charges of $86,000 related to its bridge loan financing.

19
<PAGE>
As a result of incurring losses, the Company has not incurred any income tax
liability. The Company has established a valuation allowance against its
deferred tax assets and reviews this allowance on a periodic basis. At such time
that the Company believes that it is more likely than not that the deferred tax
asset will be realized, the valuation allowance will be reduced.

Conductus does not believe that inflation has had a material effect on its
financial condition or results of operations during the past three fiscal years.
However, there can be no assurance that the Company's business will not be
affected by inflation in the future.

During March 1995, the Financial Accounting Standards Board ("FASB")issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 will become
effective for the Company's year ending December 31, 1996. The Company has
studied the implications of SFAS 121 and, based on its initial evaluation, does
not expect it to have a material impact on the Company's financial condition or
results of operations.

During October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") which established a fair value based
method of accounting for stock-based compensation plans and requires additional
disclosures for those companies who elect not to adopt the new method of
accounting. The Company will continue to account for employee purchase rights
and stock options under APB Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS 123 disclosures will be effective for the Company's year ending
December 31, 1996.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 1996, the Company's aggregate cash, cash equivalents and
short-term and long-term investments totaled $2,110,000 compared to $3,153,000
as of December 31, 1995 and $7,538,000 as of December 31, 1994. The Company has
financed its operations since inception primarily through $13,251,000 in net
proceeds from its initial public offering of Common Stock in August 1993,
$14,645,000 raised in private financings, $25,529,000 from U.S. government
contracts, $4,823,000 in aggregate borrowings under three equipment lease lines
of credit and equipment term loan and $3,183,000 in interest income.

Net cash used in operations was $4,625,000, $3,578,000 and $2,795,000 for
1995, 1994 and 1993, respectively. The increase in net cash used in operations
in 1995 over the prior years was due primarily to increased size of the
Company's operations including headcount and other related costs, which was
partially offset by increased revenues. A significant portion of the increase is
related to increased receivables on government contracts and prepaid expenses
and other current assets, offset to some extent by increased accounts payables.
The prior year was also affected by the non-recurring charge for purchased
technology of $705,000.

Net cash used in operations was $1,061,000 for the first quarter period of
1996. The net cash used in operating activities in the first quarter of 1996 was
primarily due to operating losses and to a lesser extent increases in inventory
which were partially offset by reductions in accounts receivables and prepaid
expenses and other current assets and other related costs. Increases in
inventory were due to an increase in inventory related to new NMR products and
sensor products and a delay in the first quarter in shipment of two large
magnetic sensing systems. The Company anticipates that its accounts receivable
from revenues under U.S. government contracts and product sales, as well as
inventories, may increase during 1996. Any such increases will result in the use
of additional cash in operating activities.

During 1995 and 1994, net cash of $2,670,000 and $1,743,000 was provided by
investing activities from the reduction in investments partially offset by
purchases of property and equipment. During 1993, net cash of $10,458,000 was
used in investing activities from funding received on the initial public
offering. Purchases of property and equipment in 1995 were $1,568,000, an
increase of $342,000 over the prior year primarily reflecting expenditures to
expand the Company's facilities in 1995 which approximated $681,000 and
increased equipment needs for research and development and operations.

Net cash from investing activities was $1,129,000 for the first quarter of
1996. Net cash was provided by net reductions in short-term investments,
partially offset by purchases of property and equipment.

20
<PAGE>
Net cash from financing activities was $1,722,000, $269,000 and $14,933,000
in 1995, 1994 and 1993, respectively. Net cash provided by financing activities
in 1995 and 1994 was primarily due to borrowings under the Company's equipment
term loan offset by principal payments under capital lease obligations and
proceeds from issuance of shares under the 1994 Employee Stock Purchase Plan.
Net cash provided by financing activities in 1993 was primarily due to the
Company's initial public offering in August 1993, its private placement in June
1993, and bridge loan financings which were converted into equity in the private
placement, offset by principal payments under capital lease obligations,
equipment term loan and debt assumed in the Tristan acquisition.

Net cash from financing activities was $241,000 for the first quarter of
1996, primarily due to borrowings under the Company's equipment term loan offset
by principal payments under capital lease obligations.

Conductus anticipates that its existing available cash, its line of credit
of $2,000,000 and term loan facility for fixed assets of $1,000,000 should be
adequate to fund the Company's operations through at least the end of 1996. See
Note 10 of Notes to Financial Statements and "Use of Proceeds." There can be no
assurance that additional funding, if required, will be available on acceptable
terms or at all.

The actual amount of the Company's future capital requirements will depend
on many factors, including continued progress in its research and development
programs, the magnitude of these programs, the time and costs involved in
obtaining any required regulatory approvals, the costs involved in preparing,
filing, prosecuting, maintaining and enforcing patents, successful completion of
technological, manufacturing and marketing requirements, changes in existing
research relationships, the availability of funding under government contracts,
the ability of the Company to establish collaborative arrangements and the cost
of manufacturing scale-up and the amount of future revenues. The development of
the Company's potential products will require a commitment of substantial funds
to conduct further research and development and testing of its potential
products, to establish commercial-scale manufacturing and to market any
resulting products. The Company expects to use significant amounts of cash for
capital equipment and to support operations until sufficient product revenues
are generated. There can be no assurance that the U.S. government will continue
its commitment to programs to which the Company's development projects are
applicable, particularly in light of recent legislative initiatives to reduce
the funding of various U.S. government agencies and programs, or that the
Company can compete successfully to obtain funding pursuant to such programs.
Conductus does not anticipate that government contract revenues will grow at
historical rates in the future and there can be no assurance that revenues from
government contracts will continue at historic levels. A reduction in, or
discontinuance of, such commitment or of the Company's participation in such
programs would have a material adverse effect on the Company's business,
operating results and financial condition.

21
<PAGE>
BUSINESS

THE BUSINESS SECTION AND OTHER PARTS OF THIS PROSPECTUS CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS AND TIMING OF CERTAIN EVENTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTS THAT COULD CAUSE SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND IN "RISK
FACTORS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."

Conductus develops, manufactures and markets electronic components and
subsystems based on superconductors. The unique properties of superconductors
provide the basis for electronic products with significant potential performance
advantages over products based on competing materials such as copper and
semiconductors. Depending on the application, these advantages include enhanced
sensitivity, efficiency, speed and operating frequency as well as reduced power
consumption, size, weight and cost.

Conductus is currently focusing significant development efforts on
applications for superconductors in communications, healthcare and
instrumentation. In the communications market, Conductus is developing filter
subsystems for cellular and personal communication services ("PCS") base
stations. These superconducting filter subsystems could provide significant
benefits in base station performance and reduce the size of the filter
components. In the healthcare market, Conductus is developing and testing
prototype superconductive receiver subsystems for several types of magnetic
resonance instruments, including nuclear magnetic resonance ("NMR")
spectrometers and magnetic resonance imaging ("MRI") scanners. The Company
currently manufactures and sells a limited number of superconducting receiver
probe subsystems for NMR spectrometers. In the instrumentation market, Conductus
currently manufactures and sells superconducting sensors called Superconducting
Quantum Interference Devices ("SQUIDs"), which can be used to build electronic
instruments that detect and precisely locate extremely weak magnetic signals.
Conductus is also marketing and developing a variety of electronic components
and instruments based on SQUID technology.

BACKGROUND

SUPERCONDUCTORS

Superconductors are materials that have the ability to transport electrical
energy with little or no loss when cooled to a "critical" temperature. The
intrinsic properties of superconductors are unique in nature and offer potential
performance benefits to electrical and electronic systems. These include
low-loss signal transmission, extreme magnetic sensitivity and efficient
high-speed switching. When electrical currents flow through ordinary materials,
they encounter resistance which consumes energy by converting electrical energy
into heat energy. Depending on whether direct or alternating current is applied,
superconductors have the ability to transport electrical current with no
resistance at all or with only a tiny fraction (typically less than one percent)
of what is found in the best conventional conductors. This property is extremely
beneficial in electronic components whose increased efficiency leads to enhanced
signal strength, improved signal resolution and reduced component size and
weight. Other intrinsic properties of superconductors enable the fabrication of
unique electronic devices, including high-speed electronic switches and ultra-
sensitive magnetic sensors.

From 1911, when superconductivity was first discovered, until 1986, the
critical temperatures for all known superconductors did not exceed 23 K
(-418 DEG. F). As a result, superconductivity was not widely used in commercial
applications because of the high cost and complexities associated with reaching
and maintaining such low temperatures. In 1986, a new class of superconducting
materials, referred to as high-temperature superconductors ("HTS"), was
discovered having critical temperatures above 77 K (-320 DEG. F), the boiling
point of liquid nitrogen. These high critical temperatures allow HTS materials
to be cooled to a superconducting state using liquid nitrogen, which is
inexpensive and relatively easy to use, or using relatively simple mechanical
refrigerators. Conductus believes that this ability to obtain the benefits of
superconducting technology at more easily achieved temperatures enables much
broader commercial applications.

22
<PAGE>
CONDUCTUS' APPROACH

Conductus develops, manufactures and markets superconductive electronic
devices and components using thin-film technology based upon the material
yttrium barium copper oxide ("YBCO"), which the Company has judged to be best
suited for electronic applications. Conductus combines what it believes to be
the world's most advanced YBCO thin-film technology with expertise in electronic
device and component design, analog and digital electronic engineering,
cryogenic packaging, mechanical engineering and system integration. Conductus
believes that systems containing superconductive electronic technology will
offer performance that is unavailable from competing technology, will reduce the
costs of performing desired functions, or, in many cases, do both.

CHOICE OF MATERIAL. Although a number of high-temperature superconductors
have been identified, Conductus has focused upon the development of YBCO for
electronic applications. See "Risk Factors -- Uncertainty of Patents and
Proprietary Rights; Risk of Litigation." YBCO is the only HTS material for which
there has been both significant development and successful demonstration of
multilayer technology, i.e., the use of multiple thin-film materials deposited
one upon another. Conductus believes that such multilayer structures are
important for many electronic components and devices, where they can be used for
better film quality and stability and enhanced device functionality. Conductus
has developed several proprietary processes for producing YBCO and other
thin-film materials as well as for fabricating superconducting components and
devices. These processes include thin-film growth, photolithography, etching and
other standard procedures used in the manufacture of electronic devices.

THIN-FILM EXPERTISE. Conductus produces superconducting components using a
thin-film fabrication approach. The Company's superconductive circuits and
components are fabricated on the surface of wafers using vapor-phase thin-film
growth and standard circuit processing steps similar to those used to
manufacture semiconductor devices. Furthermore, the fabrication of HTS
components and circuits entails specialized processes, which are the subject of
Conductus' patents or proprietary know-how, in order for HTS materials such as
YBCO to exhibit desirable superconducting properties. Conductus, in many
instances, has performed pioneering work in materials, processes and structures
based on thin-film superconductive technology, and has developed processes it
believes are capable of routinely producing a variety of high quality films in
quantity for several applications, including multiple layer thin-film materials
suitable for more complex devices and components. Compared to "thick-film"
approaches and ceramic fabrication techniques, the Company believes that the
thin-film approach is more versatile and provides more compact components and
that the superconducting properties of the materials produced in this way are
superior.

FOCUS ON COMPLETE SOLUTIONS. Conductus believes that superconductive
component technology can best be provided to customers in the form of integrated
subsystems that incorporate the components, additional electronic circuits and
devices, and the self-contained refrigeration equipment and packaging required
to maintain the reduced temperatures necessary to sustain superconductivity. For
this reason, in addition to its thin-film expertise, Conductus has also
established significant expertise and know-how in areas that it believes are
necessary for the commercial development of superconductive technology,
including electronic device and component design, analog and digital electronic
engineering, cryogenic packaging (including cryoelectronics, thermal management,
vacuum engineering and cryocoolers), mechanical engineering and system
integration. Conductus seeks to make the presence of superconductive and
cryogenic components an entirely internal feature of its products that requires
no special expertise or skill on the part of the user. By skillful integration
of the refrigeration system into its communications filter subsystem, for
example, and by selection of a refrigeration approach with proven durability,
Conductus believes that its products can be easily accommodated and well
accepted by end users. Similarly, the Company's NMR probe is designed to be
readily installed into existing NMR systems in essentially the same manner as
conventional probes. The Company believes that providing its technology at the
subsystem level to system manufacturers in specific markets will allow it to
rapidly and efficiently expand both its product line and its customer base.

23
<PAGE>
SIGNIFICANT COMPANY MILESTONES. Since establishing its laboratory
facilities in 1989, Conductus has made significant and continuous progress in
establishing the enabling technologies for its target applications. The table
below sets forth significant milestones in the development and commercialization
of Conductus' technology:

DEVELOPMENT AND COMMERCIALIZATION MILESTONES

HTS THIN-FILM
TECHNOLOGY COMMUNICATIONS HEALTHCARE INSTRUMENTATION
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Pre-1991 Developed multilayer
HTS technology.

1991 Sold first single- and Demonstrated low Made world's first
multilayer HTS films. phase-noise YBCO YBCO integrated SQUID
Developed biepitaxial resonator. magnetometer.
junctions for use in
HTS SQUID manufacture.

1992 Demonstrated YBCO film Demonstrated HTS Demonstrated HTS MRI Introduced Mr.
with state-of-the-art microwave delay lines. receiver coil. SQUID-Registered Trademark-
low surface resistance HTS SQUID
on MgO substrate. magnetometer.

1993 Demonstrated hybrid Demonstrated HTS Began development of Acquired Tristan.
semiconductor- microwave subsystem. NMR probe subsystem.
superconductor
structure on a single
substrate.

1994 Fabricated Delivered HTS Signed joint Introduced
single-sided 4" YBCO microwave subsystem development agreement iMAG-Registered Trademark-
wafers. for Navy satellite with Varian on HTS NMR high performance HTS
mission. spectrometer probes. and LTS SQUID systems.

1995 Established Fabricated 19-pole HTS Realized first Introduced xMag-TM-
coevaporation cellular filter on 3" revenues from sales of magnetic measurement
deposition process. substrate. NMR probe to Varian. system.

Demonstrated Announced program with
integrated HTS Stanford University to
cellular filter develop MRI for
subsystem at industry mammography.
trade shows and to
potential OEMs.

1996 Began production of Performed first field Signed joint
single- and tests of prototype HTS development agreement
double-sided wafers by filter subsystem for with Siemens for low-
coevaporation. rural cellular market. field HTS MRI
subsystem.

Signed joint Introduced first
development agreement commercial HTS NMR
with Lucent to develop probe product.
HTS filter subsystem
for PCS market.

Performed initial
laboratory and field
tests of prototype HTS
filter subsystem for
PCS market.
</TABLE>

24
<PAGE>
BUSINESS AND DEVELOPMENT STRATEGY

Conductus' strategy for developing, manufacturing and marketing
superconductive electronics products includes the following key elements:

MAINTAIN TECHNOLOGY LEADERSHIP. Conductus has devoted significant resources
to developing proprietary HTS thin-film manufacturing and process technologies.
Based on publicly available information, the Company believes that its
technologies are more advanced than those of other companies or research
laboratories. The Company has successfully developed and marketed products
including single- and multilayer YBCO films, superconducting NMR spectroscopy
probes and SQUID sensors and systems. Conductus has utilized its technology
skills to develop filters, low-noise amplifiers, radio-frequency receivers and
other devices. Conductus has also established significant expertise and know-how
in areas essential to product commercialization, including electronic device and
component design, analog and digital electronic engineering, cryogenic
packaging, mechanical engineering and system integration. Conductus has received
17 U.S. patents and one related foreign patent and has 18 patent applications
pending in the U.S. and related patents pending in other countries relating to
various aspects of its technologies.

Since its inception, Conductus has maintained a Scientific Advisory Board
composed of experts in superconducting materials, devices and science. This
group continues to contribute to the activities and knowledge base of the
Company.

COMMERCIALIZE PRODUCTS WITH SIGNIFICANT MARKET POTENTIAL. Conductus
believes that the largest potential near-term markets for superconductor-based
products exist in wireless communications and healthcare applications and is
actively developing HTS component-based subsystems for these markets. See table
on page 26. In the cellular market, Conductus has completed laboratory and
initial field tests of its low-noise receiver filter subsystems for base
stations and expects to commence commercial sales in late 1996. In the emerging
PCS market, Conductus is developing integrated transceiver subsystems
incorporating HTS transmit and receive filters, cryocooled low-noise amplifiers
and refrigeration equipment. In the healthcare market, Conductus has developed
and currently sells several types of probe subsystems for NMR spectrometers on
an OEM basis to Varian. In addition, the Company plans to develop other
spectrometer probe types during 1996 as well as demonstrate prototype receiver
coil subsystems for MRI machines in late 1996.

LEVERAGE STRATEGIC ALLIANCES. Conductus' strategy is to enter into
collaborative arrangements with market leaders in its target markets in order to
allow the Company to focus primarily on the development of superconductive
components and subsystems for use in products that address these markets.
Conductus has entered into joint development agreements with Lucent
Technologies, Inc. in PCS communications, Varian Associates in NMR spectroscopy
and Siemens AG in MRI. It has also entered into agreements whose primary focus
is technology development for a range of applications, including agreements with
TRW, Inc. ("TRW") and Northrop-Grumman Corporation (originally with Westinghouse
Electric Corporation) for development of digital electronics technology; and the
High-temperature Superconductor Thin-film Manufacturing Alliance ("HTMA") for
development of commercial, thin-film HTS manufacturing processes. Additionally,
Conductus has funded its development programs and enhanced its development and
manufacturing resources by establishing collaborative arrangements with
corporate partners, government agencies and public and private research
institutions. Since 1991, a significant portion of the Company's research and
development program has been funded by U.S. government agencies in the form of
grants and contract awards. See "Risk Factors -- Extensive Reliance on
Collaborative Relationships," "-- High Degree of Dependence Upon Government
Contracts" and "Business -- Strategic Alliances and Development Agreements."

PROVIDE COMPLETE SOLUTIONS. Conductus believes that superconductive
component technology can best be provided to customers in the form of integrated
subsystems that incorporate the components, additional electronic circuits and
devices, and the self-contained refrigeration equipment and packaging required
to maintain the operating temperatures necessary for the superconductive
components. Conductus seeks to make the presence of superconductive and
cryogenic components an entirely internal feature of its products

25
<PAGE>
that requires no special expertise or skill on the part of the user. The Company
believes that providing its technology at the subsystem level to system
manufacturers in specific markets will allow it to most rapidly and efficiently
expand both its product line and its customer base.

DEVELOP COMMERCIAL INFRASTRUCTURE. Conductus is building the manufacturing,
sales and marketing infrastructure it believes is necessary to support the
commercialization of its products in target markets. This includes development
of thin-film deposition techniques suitable for volume manufacture, acquisition
and build-out of manufacturing and assembly areas, hiring of employees with
significant marketing experience in key product areas and expansion of its sales
team. The Company's sales and marketing strategy is to use manufacturers'
representatives supplemented by a small direct sales organization for sales of
its laboratory instrument products and to rely primarily on OEMs for its
subsystem products for the communications, healthcare and instrumentation
markets.

26
<PAGE>
The following table sets forth the key target markets for which Conductus is
developing superconductive products and the development status of those products
as of May 1996.

TARGET MARKETS AND COMMERCIALIZATION STATUS

CONDUCTUS POTENTIAL TARGET
MARKET PRODUCT PRODUCT BENEFITS MARKET PARTNER CURRENT STATUS
- ----------------- ------------------ -------------------- ------------------ --------------- --------------------
<S> <C> <C> <C> <C> <C>
Communications Cellular receiver Increased range for Rural segment of Completed laboratory
filter subsystem existing and new installed base of and initial field
rural base stations. cellular base tests. Additional
station market and field tests ongoing.
new network build Anticipate
out. commercial sales in
late 1996.

PCS transceiver Increased range, Forecasted build Lucent Developed initial
filter subsystem higher call out of PCS prototype filter
capacity, reduced base stations. subsystems and
interference, higher completed initial
quality connections, field test.
reduced size. Anticipate
commercial sales in
late 1997 or early
1998.

Healthcare NMR probe Allows use of New NMR Varian First production
subsystem smaller samples or spectrometers; units of probe
higher throughput. installed base of subsystems
Allows analysis of machines. delivered. Commenced
more complex commercial shipments
compounds. Achieves in 1996. Developing
performance of prototypes of
high-end system with additional probes.
lower-cost
equipment.

MRI receiver Better images, New low-field MRI Siemens Developing prototype
subsystem for low- faster scan time, scanners; subsystems in 1996.
field scanners increased throughput installed base of Planning RSNA trade
in lower-cost MRI machines. show demonstration
systems. in December 1996.
Instrumentation Laboratory Highly sensitive Research Continuing
instruments measurement of laboratories. commercial sales of
magnetic properties HTS and LTS
of materials. First products.
HTS magnetic sensing
products available
to researchers.

SQUID sensors Allows measurement New markets in Kanazawa Providing components
and front-end and location of medicine, Institute of for KIT and research
electronics extremely small geophysics and Technology customers.
magnetic signals. non- destructive ("KIT")
testing.

Geometrics Developing
subsystems for use
in geophysical
instruments.
</TABLE>

27
<PAGE>
CONDUCTUS' TARGET APPLICATIONS

The unique properties of superconductors provide the basis for electronic
products with significant potential performance advantages over products based
on competing materials such as copper and semiconductors. Conductus is currently
focusing significant development efforts on products for applications in the
communications, healthcare and instrumentation markets for which it believes
there is the greatest near-term market potential. Conductus is also developing
additional technology for longer-term applications such as high-speed circuits
for the communications market and NMR microscopes for the healthcare market.
Conductus' products are designed to be used as components or subsystems in
systems manufactured by third party systems manufacturers in the communications,
healthcare and instrumentation markets. The following discussion identifies the
broader market for the applications of Conductus' potential customers and then
specifies the Conductus solution targeted to those applications.

COMMUNICATIONS

Cellular and PCS communications systems use radio frequency signals to
establish communications between customers using portable or mobile telephones
and base stations operated by service providers. Cellular telephone networks are
divided into specific coverage areas called cells, each of which has a base
station for sending and receiving voice and other communications within the
cell. The base station contains electronic equipment required to send and
receive radio signals. In setting up a base station, the service provider seeks
to install equipment with sufficient sensitivity within the frequency band
assigned to it to handle communications with the lowest power handsets over its
entire geographical area and with sufficient selectivity to avoid interfering
signals from adjacent frequency bands. Filters within these base stations select
frequencies within the operators' assigned bands and reject unwanted
frequencies. Amplifiers boost the strength of signals coming in and out of the
base station. The operator's assigned frequency range is then allocated using
one of several schemes to provide telephone service to multiple subscribers. The
capacity of the system depends upon the number of effective channels, that is,
channels whose signal quality is sufficient to satisfy customer demands for
clear communications.

Cellular base stations currently face a number of operating problems. These
include signal interference caused by multiple communications channels, poor
signal quality resulting from lower-power, handheld telephones and strained
capacity due to the growing demand for cellular service. The advent of PCS
technology will place additional demands on the performance of wireless base
stations and upon the size of the hardware therein. Power losses resulting from
the use of components made from conventional conductors have limited the ability
of the industry to address these problems. Conductus believes that
superconductive filters used in conjunction with cryogenically-cooled amplifiers
have the potential to offer solutions to several operating problems in cellular
base stations as well as to provide solutions to anticipated problems in
forthcoming PCS base stations.

CELLULAR MARKET. According to Federal Communications Commission and
industry reports, there are more than 22,000 installed cellular base stations in
the United States. Of the U.S. installed base, Conductus estimates approximately
2,000-3,000 are located in a rural environment. The present cellular
communications network, operating at frequencies near 850 MHz, was established
at a time when the typical cellular telephone was a mobile unit capable of
transmitting up to 3 watts of radio frequency power and the total number of
subscribers was relatively low. Today, portable handsets that transmit only 0.6
watts are increasingly replacing higher-power mobile telephones, thereby
decreasing the effective receiving range of existing base stations. As a result,
in rural areas where base stations are widely separated, current cellular
customers can experience dropped calls due to "dead zones" in coverage. At the
same time, the increasing demand for cellular service in urban areas has led to
the utilization by service providers of a greater number of channels within
their allotted frequency bands, thereby increasing the incidence of
interference.

In rural areas, where the primary problem is base station range, solutions
that increase the strength of the received signal or decrease the system noise
level can provide enhanced reception, and thus reduce the occurrence of dead
zones. One solution, which entails significant costs, is to increase the number
of base stations and thereby reduce the required range for each station. Another
solution, which is potentially more

28
<PAGE>
economical, is to enhance the signal reception and noise filtering capabilities
of existing base stations. Approaches to enhance the performance of existing
base stations include increasing the height of towers or locating filters and
amplifiers at the tops of towers to reduce the loss of electrical energy as the
signals travel through cables from the antenna to the receiver. Each of these
solutions has shortcomings with respect to such issues as cost, servicing
logistics and ultimate performance. Accordingly, rural systems operators could
significantly benefit from a system that provides greatly improved filtering and
very low noise amplification at reasonable cost.

In urban areas, the high density of cellular users creates problems of
interference and system capacity. In every area, there are two cellular service
providers, each allotted their own operating band within the frequency spectrum.
Near the edges of each provider's operating frequency range, the performance of
cellular systems can be hampered by interference from the competing carrier and
from a variety of other signal sources. Carriers can attempt to avoid this
interference by not using channels at the edges of their operating bands,
however this diminishes system capacity. Interference is also addressed by using
highly selective filters in the base station receiver. The ideal filter would
filter out all signals outside the targeted operating band without reducing
signal strength inside the band. Filters are made more selective by adding
additional resonators or "poles" to the filter. However, in filters made of
conventional materials, adding additional poles introduces more energy loss and
thereby reduces the strength of the desired signals. For this reason,
conventional filters generally do not incorporate more than eight or nine poles,
thus achieving only a certain level of selectivity. With superconducting
materials, which exhibit extremely low energy loss, filters can be fabricated
with a higher number of poles, thereby increasing filter selectivity.

PCS MARKET. PCS is a newer urban-based communication system designed to
provide wireless telephone service utilizing radio frequency signals in a
frequency band near 2 GHz. This all-digital system will be designed to handle
both voice and data transmissions, including features such as Internet access.
Although it utilizes the same basic building blocks as a cellular system, the
higher operating frequency of PCS compared with the cellular network limits the
range of its signal transmission. Because of this limited range of signal
transmission, based on information from third party sources Conductus estimates
that the forthcoming PCS buildout will result in more than 70,000 new installed
base stations throughout the U.S. by the end of the year 2005.

The projected large number and primarily urban location of PCS base stations
drive the needs for equipment cost and size reduction. However, signal losses in
base station components such as filters, antennas and cables are exacerbated by
higher frequency operation. Conventional receiver components limit sensitivity
and therefore base station range. Conventional filters tend to be physically
large and proposed PCS base station architectures call for the use of multiple
filters in each station. Collectively, these issues present a difficult set of
requirements for the designers of forthcoming PCS base station equipment.

CONDUCTUS' SOLUTIONS. Conductus believes that the performance of cellular
base stations and PCS base stations could be improved significantly by using HTS
components in both their receivers and their transmitters. Communication filters
made using thin-film superconductor technology have the potential to provide
extraordinary frequency selectivity while maintaining excellent efficiency
because of their inherent low insertion losses. On the receiver side, the use of
superconducting filters along with cryogenically-cooled low-noise amplifiers has
the potential to lower the noise figure of the receiver and thereby increase its
sensitivity. Increased sensitivity translates into increased range for the base
station which could be utilized to improve the performance of existing stations
or to allow fewer base stations to serve a new geographic area. In addition, HTS
filters with enhanced selectivity over conventional designs could significantly
reduce signal interference in base station receivers with minimal signal loss.

In the cellular market, Conductus is focusing on development of low-noise
receiver subsystems for rural base stations that incorporate HTS filters,
cryocooled low-noise amplifiers and refrigeration equipment into a rack-mounted
package. Initial laboratory and field tests have demonstrated the ability of the
subsystem to increase receiver sensitivity, thereby increasing the range of base
stations as well as their overall performance. See table on p. 27, Target
Markets and Commercialization Status. As a result, by using these filter
systems, cellular service providers in rural environments may require fewer base
stations in order to serve a

29
<PAGE>
given geographic area. Initial field tests with these filter systems completed
in early 1996 show range expansions of 20% to 60%. Conductus expects that the
subsystem will undergo increasingly rigorous testing during 1996, leading to
potential deliveries of the first commercial units for retrofit use in rural
base stations in late 1996. While the Company has demonstrated functionality in
its prototype units, additional engineering will be required to complete the
development of commercial communications subsystems. See "Risk Factors -- Early
Stage of the Superconductive Electronics Market" and "-- Limited Commercial
Manufacturing Capability."

Base stations avoid the transmission of unwanted and interfering distortion
signals by the use of costly ultra-linear (extremely low distortion) amplifiers
in their transmitters. For the PCS market, Conductus believes that low-loss
superconducting transmit filters offer the potential to "clean up" the output of
lower-quality amplifiers by removing unwanted signals at a lower overall cost to
the base station operator. Conductus' work on transmit filters has been a part
of the activities of the Consortium for Superconductor Electronics wireless
program, which primarily involves Conductus, American Telephone and Telegraph
Company, MIT Lincoln Laboratories and CTI-Cryogenics, a division of Helix
Technology Corporation.

Conductus is developing an integrated transceiver subsystem for PCS base
stations consisting of HTS receiver filters, cryogenically-cooled low-noise
amplifiers and HTS transmit filters that potentially may provide increased
range, increased call capacity, reduced interference between bands, improved
call quality and reduced size compared to subsystems using conventional
technology. Additionally, the HTS components utilized in the subsystem have
permitted the inclusion of as many as 19 poles, compared to eight or nine in
conventional filters, which results in significant selectivity enhancements.
Conductus intends to work with PCS system manufacturers, such as Lucent, with
the goal of designing superconductive filter subsystems into new PCS base
stations. The first field test of Conductus' initial prototype of the receiver
portion of the system has been conducted with Lucent. Conductus expects to
conduct additional tests of increasingly complex prototypes with Lucent
throughout 1996 and 1997 and does not anticipate first commercial sales before
late 1997 or early 1998.

FUTURE APPLICATIONS. Pursuant to government-sponsored research and
development programs, Conductus is exploring the application of superconductive
electronic technology to problems in high-speed, high-bandwidth communications
switching. The high-speed, low-power properties of Josephson junctions, which
are active switching devices made from superconductors, could be applied to
communications systems to significantly improve data transmission rates and
reduce system power requirements and costs. These devices are several times
faster than the fastest semiconductor transistor and consume thousands of times
less power. Josephson junction circuit technology is in the early stages of
development, and significant additional advancements will be required before
superconductive products incorporating this technology could become available.
See "Risk Factors -- Early Stage of the Superconductive Electronics Market" --
"Dependence On Incorporation of Potential Products in Third Party Systems" and
"-- Intense Competition."

HEALTHCARE

Instruments based on NMR technology determine the structure and properties
of chemical and biological materials by measuring the response of such materials
to electromagnetic fields. In these instruments, a powerful magnetic field
magnetizes atoms in the sample being studied, radio-frequency pulses cause the
atoms to emit characteristic signals and sensitive radio-frequency receivers are
used to detect these signals. Existing magnetic resonance instruments contain
radio-frequency receivers that use specialized copper coils to sense the signals
from the object being studied. The principal applications of NMR are in
spectrometers, which are used for analyzing the composition and structure of
complex chemical compounds, and in MRI scanners, which are used to provide
detailed images of the human body without invasive procedures or exposure to
harmful radiation, such as x-rays.

For both of these instruments, the signal-to-noise ratio ultimately
determines the sensitivity of the instrument. A higher signal-to-noise ratio
results in better data quality and a reduction in the amount of time required to
obtain the data. There are two basic approaches to increasing the
signal-to-noise ratio of the

30
<PAGE>
instruments: increasing the signal or field strength by using a more powerful
magnet, or increasing the sensitivity by reducing inherent noise levels in the
receiver. Increasing field strength can be prohibitively expensive. On the other
hand, significant gains in receiver sensitivity are difficult to achieve using
conventional technology. HTS technology offers three potential benefits for
these healthcare imaging and analysis instruments: much greater instrument
sensitivity, much faster data acquisition time and, in the case of NMR
spectroscopy systems, the ability to study smaller amounts of costly samples.

NMR SPECTROMETERS. NMR spectroscopy is a well-established technique for
chemical analysis that enables the user to determine the structures of even very
complex proteins and large molecules such as those used in the development of
pharmaceuticals. A conventional NMR spectrometer includes a superconducting
magnet to supply a powerful magnetic field and a copper or other conventional
metal receiver coil to detect the signals from the sample.

With conventional NMR technology, major increases in sensitivity can only be
obtained with disproportionate increases in cost associated with providing
increasingly powerful magnets. Some large magnet systems cost as much as $1
million. One alternative to increasing the field strength is to increase the
sensitivity of the receiver. However, conventional coil design is at a fairly
mature stage and significant further improvements in sensitivity from
modification of current receiver technology are unlikely. Another alternative is
to reduce the temperature of conventional receiver components to near absolute
zero, in order to reduce resistance and decrease noise, but the refrigeration
necessary to reach the required temperatures would be costlier and more
elaborate than is needed for HTS probes. Such cold conventional metal receivers
have not been made commercially available.

CONDUCTUS' SOLUTION. Conductus has shown that the use of HTS receiver coils
in spectrometers dramatically improves the sensitivity of the instrument.
Compared to existing receivers based on specialized copper coils, Conductus'
low-loss superconducting receiver coils significantly enhance probe performance
by improving the signal-to-noise ratio, which leads to either improved chemical
sensitivity or faster chemical measurements. As a result, users can examine less
sample material and still obtain the same or more information than is possible
using conventional technology. For this application, Conductus' probe technology
has demonstrated up to a four fold signal-to-noise ratio improvement over
conventional probes enabling up to a four fold reduction in sample size for the
same analysis time or up to a 16-fold increase in sample throughput. Conductus
is currently working with Varian to develop a family of low-loss superconductor
receiver coils for use as probes in NMR spectrometers to meet the demand for
high sensitivity analysis. Conductus introduced its first NMR probe products in
March 1996, pursuant to an OEM arrangement with Varian. See table p. 27, Target
Markets and Commercialization Status. Currently, Conductus is manufacturing and
selling through Varian two NMR probe types, each of which is available in two
frequencies. The Company anticipates introducing a third NMR probe type for
commercial sale by the end of 1996. See "Risk Factors -- Limited Outlets for
Certain Products", "-- Competing Technologies", "-- Extensive Reliance on
Collaborative Relationships" and "-- Highly Regulated Product Applications."

MRI. Magnetic resonance imaging is an important diagnostic medical
technique that provides detailed images of internal organs and structures within
the body without invasive procedures or exposure to harmful radiation. Important
applications include imaging soft tissues, diagnosing certain brain and spinal
cord disorders and diagnosing joint and muscle injuries. The cost of MRI
machines is significant, with prices often over $1 million. More recently,
"low-field" and "mid-field" MRI machines have become available. These machines
have the advantage of being less confining to the patient and are less
expensive, but provide significantly poorer images than high-field machines.
Government and healthcare provider cost containment initiatives are discouraging
the use of larger magnets for MRI. As cost controls have become more pervasive,
the majority of new installations have been of less costly, lower-field
machines.

CONDUCTUS' SOLUTION. Conductus has shown that the use of HTS receiver coils
can significantly improve the signal-to-noise ratio in low-field MRI machines,
potentially allowing them to produce an image similar in quality to that of the
more expensive machines. The development of higher-performance low-field
machines may lead to the use of MRI in a wider range of diagnostic imaging
applications, such as routine screening for breast cancer. In January 1996,
Conductus entered into a non-exclusive agreement with Siemens to develop

31
<PAGE>
HTS receiver coil subsystems for a Siemens' low-field MRI machine. The Company
has also received support from the Naval Research Laboratory and the Department
of Defense Advanced Research Projects Agency to develop superconducting
technology for MRI breast cancer screening in collaboration with researchers
from Stanford University.

FUTURE APPLICATIONS. HTS receiver technology can be used in NMR
microscopes, which are essentially high-resolution MRI machines for examining
small objects in high detail. Biological specimens such as pathology samples,
which are currently sliced, stained and examined with optical microscopes, could
be placed whole in the imager and a complete three-dimensional data set could be
constructed. The pathologist could have the computer slice the image in any
plane, which is not possible using the current techniques, even with computer
assistance, because of the dramatic and variable shrinkage of the samples.
Presently, NMR microscopy is only a research tool because the use of copper
receiver coils can require data collection times of one to two days to obtain an
acceptable image. The enhancement in signal-to-noise ratio provided by HTS and
cryoelectronic technologies could reduce this data collection time to a matter
of minutes. Conductus is developing receiver subsystems for this application in
collaboration with Duke University under government contract funding from the
National Institutes of Health. See "Risk Factors -- Early Stage of the
Superconductive Electronics Market."

INSTRUMENTATION

Superconductive magnetic sensors known as SQUIDs are used in electronic
instruments to detect signals thousands of times smaller than can be detected by
conventional magnetometers. With appropriate control electronics, SQUIDs can
discern magnetic signals one hundred billion times smaller than the earth's
magnetic field. A number of different types of instruments, including
specialized laboratory equipment, non-destructive test equipment, geophysical
surveying instruments and advanced medical diagnostic instruments, can
potentially utilize magnetic sensors to detect and locate magnetic signals of
interest.

Magnetic sensors are used in some circumstances to locate oil and other
mineral deposits. In this application, SQUID technology offers the advantage of
portability by virtue of the small size of its sensors compared to bulky
conventional copper coils used as magnetometers. SQUID sensors can also be used
to detect electrical currents as well as any intrinsic magnetism in materials.
As a result, they can potentially be used in a variety of instruments to inspect
and analyze materials and structures on the basis of magnetic signatures that
cannot be effectively measured using competing technologies. These instruments
can measure materials that are hidden or submerged, such as mines or storage
drums; detect flaws in metallic structures, such as components of buildings,
nuclear power plants or airplanes, without physically invading or contacting the
structure; and measure electrical currents in, for example, semiconductor
integrated circuits.

SQUID sensors can also detect electrical impulses in the heart without the
use of electrodes or other contacts to the patient required by conventional
EKGs, using a technique called magnetocardiography ("MCG"). Conductus believes
that MCG potentially may require far less time and effort from medical personnel
than electrocardiography and therefore reduce the cost of obtaining cardiac
diagnostic information. For example, MCG could become a significant diagnostic
tool for disorders caused by cardiac arrhythmias (i.e., irregular heart beats).

Improving the sensitivity of magnetic sensor technology in general, as well
as providing HTS versions of SQUID sensors in particular, has the potential to
significantly improve the performance of several existing instruments as well as
enable magnetic sensing technology to be used for important new applications.

CONDUCTUS' SOLUTION. Conductus currently manufactures and sells SQUIDs and
laboratory instruments based on SQUIDs and is developing additional SQUID
sensors, electronics and complete sensing subsystems for customers in the
geophysical, non-destructive evaluation and medical markets. See table p. 27,
Target Markets and Commercialization Status. Conductus' standard products
include magnetic sensing components sold under the tradenames "iMAG" and "Mr.
SQUID" and a complete magnetometer system sold under the tradename "xMAG." List
prices for complete iMAG systems generally range from $7,000 to

32
<PAGE>
over $40,000 depending on the configuration. Mr. SQUID has a list price of
approximately $2,000. List prices for complete xMAG systems generally range from
$87,000 to over $140,000 depending on the configuration.

Conductus has also built and sold limited numbers of custom multichannel
low-temperature superconducting ("LTS") SQUID systems for non-destructive test
applications. While Conductus manufactures some of its instrumentation products
using well-established LTS materials, the Company believes that the cost and
operating difficulties associated with using liquid helium or other complex
refrigeration techniques required to cool LTS materials have limited their
commercial potential. Conductus believes that the portability and relative ease
of use inherent in HTS SQUID technology greatly enhances its utility in multiple
applications.

While historically the Company's sales have been primarily to laboratory
customers, Conductus believes that the greatest opportunities for growth for its
magnetic sensing products will be with OEM customers for specific applications.
Currently, Conductus is developing HTS geophysical systems under government
contracts from two different agencies and is working with Geometrics, Inc., a
manufacturer of geophysical surveying equipment, to develop and market
commercial instruments for these applications. Conductus is also working with
researchers at Kanazawa Institute of Technology in Japan to develop SQUID-based
instruments for seismic studies. Conductus has also sold sensors, electronics
and cryogenic vessels to customers developing biomedical applications of SQUIDs.
See "Risk Factors -- Early Stage of the Superconductive Electronics Market", "--
Dependence on Licensed Technology" and "-- Highly Regulated Product
Applications."

The field of superconductivity is characterized by rapidly advancing
technology. The future success of the Company will depend in large part upon its
ability to keep pace with advancing superconductive technology, including
superconducting materials and processes, and industry standards. The Company has
focused its development efforts to date principally on yttrium barium copper
oxide ("YBCO"). There can be no assurance that YBCO will ultimately prove
commercially competitive against other currently known materials or materials
that may be discovered in the future. The Company will have to continue to
develop and integrate advances in technology for the fabrication of electronic
circuits and devices and manufacture of commercial quantities of its products.
The Company will also need to continue to develop and integrate advances in
complementary technologies. There can be no assurance that the Company's
development efforts will not be rendered obsolete by research efforts and
technological advances made by others or that materials other than those
currently used by Conductus will not prove more advantageous for the
commercialization of superconductive electronic products. In addition, many of
Conductus' potential products, if successfully developed, are likely to be used
as components or subsystems in systems manufactured and sold by third party
systems manufacturers. There can be no assurance that these third parties will
elect to incorporate superconductive electronic products in these systems or, if
they do, that related system requirements, such as data processing software and
hardware capabilities, can or will be successfully developed. Failure of third
parties to successfully commercialize complementary technologies or to
incorporate the Company's products into their systems would have a material
adverse effect on Conductus' business, operating results and financial
condition.

STRATEGIC ALLIANCES AND DEVELOPMENT AGREEMENTS

Conductus is party to a number of collaborative arrangements with
corporations and research institutions with respect to the research, development
and marketing of certain of its potential products. Conductus evaluates, on an
ongoing basis, potential collaborative relationships and intends to continue to
pursue such relationships. The Company's future success will depend
significantly on its collaborative arrangements with third parties. There can be
no assurance that these arrangements will result in commercially successful
products. See "Risk Factors -- Extensive Reliance on Collaborative
Relationships," and "-- Limited Outlets for Certain Products."

LUCENT TECHNOLOGIES, INC. Conductus and Lucent entered into a joint
development and licensing agreement in April 1996, under which Conductus is
developing a superconductive transceiver filter subsystem for the PCS market.
Both Conductus and Lucent are to provide technical support to the program.
Initial

33
<PAGE>
tests of a prototype of the receiver portion of the subsystem were conducted in
April 1996. Each party will retain rights to the intellectual property it
develops under the program, subject to certain nonexclusive licensing rights of
the other party, and jointly developed intellectual property will be jointly
owned.

VARIAN ASSOCIATES. Conductus and Varian entered into a joint development
and licensing agreement in 1994, under which they jointly developed a
superconducting probe for NMR instruments for high-resolution spectroscopy. Both
Conductus and Varian provided technical support to the program, and each retains
rights to intellectual property it developed under the program, subject to
certain nonexclusive licensing rights of the other party. The program resulted
in the commercial introduction, in March 1996, of probes incorporating HTS
receiver subsystems manufactured by the Company and sold by Varian. Conductus
and Varian currently are negotiating a sales agreement under which Varian will
likely have a period of exclusivity from the date of commercial introduction.
Conductus and Varian continue to cooperate in the development of additional
probes for NMR spectroscopy.

SIEMENS AG. Conductus is developing a general-purpose superconducting MRI
receiver coil for a Siemens' low-field MRI system under a joint development
agreement effective December 1, 1995. Under that agreement, Conductus will
design a coil and test it on Siemens' instruments, while Siemens will assist
Conductus by providing information and access to instrumentation. All
intellectual property rights will remain with the party developing the
intellectual property, and jointly developed property will be jointly owned.

CTI-CRYOGENICS. Conductus and CTI-Cryogenics, a division of Helix
Technology Corporation, entered into a collaboration agreement in September
1995, under which CTI will work with Conductus to design interfaces between CTI
cryocoolers and Conductus subsystems.

HIGH-TEMPERATURE SUPERCONDUCTOR THIN-FILM MANUFACTURING ALLIANCE. Conductus
is a principal member of the HTMA, which was formed in November 1995 to develop
cost-effective manufacturing methods for YBCO thin-films for radio-frequency
applications, establish industry standards and provide second-sourcing and
technology transfer among the companies under a program currently funded in part
by the Department of Defense Advanced Research Projects Agency ("DARPA").
Superconductor Technologies, Inc. ("STI") is the other principal member of the
HTMA. Other members include Stanford University and the Georgia Research
Corporation, Focused Research, Microelectronic Control and Sensing Incorporated,
IBIS and BDM Federal. Under the HTMA, each party will have certain access to the
technology of the other parties that is developed under the program.

KANAZAWA INSTITUTE OF TECHNOLOGY. In September 1995, Conductus entered into
an OEM agreement with Kanazawa Institute of Technology ("KIT") under which
Conductus is to be KIT's exclusive supplier, subject to certain conditions, of
LTS and HTS SQUIDs for use in instruments that it is developing. KIT intends
that its initial product will be for seismology. Conductus has received an
initial order for LTS SQUIDs under this agreement. The agreement contains no
minimum purchase requirement, and there can be no assurance that KIT will
successfully develop and market instruments using Conductus' SQUID products or,
if it does develop such products, that a significant market will exist for those
products. Futhermore, there can be no assurance that Conductus will be able to
meet KIT's design requirements, in which case KIT shall be free to use other
suppliers of SQUIDs.

GEOMETRICS. Conductus is working with Geometrics, Inc., a geophysical
instrumentation company, under two government contracts to develop SQUID-based
instruments for geophysical exploration. If successful, the project could lead
to the development of commercial geophysical instruments incorporating Conductus
SQUIDs and SQUID electronics.

RESEARCH AND DEVELOPMENT

GOVERNMENT CONTRACTS. The Company's research and development expenses in
the three months ended March 31, 1996, and fiscal years 1995, 1994 and 1993 were
approximately $2,743,000, $9,819,000, $9,201,000 and $7,080,000, respectively.
Externally funded research and development programs, primarily under contracts
with agencies of the U.S. government, accounted for approximately $2,855,000,
$9,176,000,

34
<PAGE>
$8,717,000 and $6,500,000 of these expenses in the three months ended March 31,
1996, and fiscal years 1995, 1994 and 1993, respectively. The Company's revenue
from government-related contracts represented approximately 85%, 77%, 82% and
78% of total revenue for the three months ended March 31, 1996 and fiscal years
1995, 1994 and 1993, respectively. Conductus believes that it will continue to
be heavily dependent on U.S. government contracts to fund a significant portion
of its research and development programs. The Company's strategy is to fund a
significant portion of its research and development, particularly for wireless
communications and digital electronics applications, through contracts with
agencies of the U.S. government. As of March 31, 1996, the Company had received
aggregate awards since its inception of approximately $36,652,000 from U.S.
government agencies, including approximately $25,529,000 recognized as revenue
by the Company through March 31, 1996, and approximately $7,760,000 in awards
for which it has not yet entered into research contracts. As of March 31, 1996,
Conductus had approximately $3,364,000 under existing U.S. government contracts
which provide that most of the research and development is to be performed in
the next 12 months. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations."

As shown in the examples below, these contract programs and others enable
Conductus to develop its core technologies and support Conductus' business
areas.

GOVERNMENT-SUPPORTED RESEARCH AND DEVELOPMENT

SELECTED FUNDING AGENCIES

Defense Advanced Research Projects National Aeronautics and Naval Research Laboratory
Agency Space Administration
Department of Commerce National Institutes of Office of Naval Research
Health
Department of Energy United States Navy
</TABLE>

<TABLE>
<S> <C> <C> <C>
SELECTED AREAS OF RESEARCH AND DEVELOPMENT

TECHNOLOGIES COMMUNICATIONS HEALTHCARE INSTRUMENTATION
- --------------- ---------------- ----------------- ------------------
Thin films Transmit filters NMR spectroscopy SQUID technology
Multilayer Cellular
films receivers MRI SQUID amplifiers
Cryopackaging Switching NMR microscopy SQUID geophysical
</TABLE>

The Company's contracts involving the U.S. government are or may be subject
to numerous risks. These risks include: unilateral termination for the
convenience of the government; reduction or modification in the event of changes
in the government's requirements or budgetary constraints; increased or
unexpected costs causing losses or reduced profits under fixed-price contracts
or unallowable costs under cost reimbursement contracts; risks of potential
disclosure of Conductus' confidential information to third parties; the failure
or inability of the prime contractor to perform its prime contract in
circumstances where Conductus is a sub-contractor; the failure of the government
to exercise options provided for in the contracts; the government's
nonexclusive, royalty-free license to use technology developed pursuant to the
contracts by or on behalf of the government in certain circumstances; and
exercise of "march-in" rights by the government. March-in rights refer to the
right of the U.S. government or government agency to require the Company to
license patented technology developed under contracts funded by the government
if the contractor fails to continue to develop the technology. In addition,
there can be no assurance that the U.S. government will continue its commitment
to programs to which the Company's development projects are applicable,
particularly in light of recent legislative initiatives to reduce the funding of
various U.S. government agencies and programs, or that the Company can compete
successfully to obtain funding pursuant to such programs. See "Risk Factors --
High Degree of Dependence Upon Government Contracts."

35
<PAGE>
SCIENTIFIC ADVISORY BOARD. Since its founding, Conductus has engaged the
services of a Scientific Advisory Board composed of experts in superconducting
materials, devices and science who advise the Company concerning long-term
scientific planning, research and development. The members of the Scientific
Advisory Board provide research, investigation and consulting services to
Conductus in exchange for consulting fees. Seven members have had consulting
agreements with the Company since 1987 and have equity ownership in the Company
as a result of option grants.

The Scientific Advisory Board is chaired by Dr. John M. Rowell, who
previously served as the Chief Technical Officer of Conductus from 1988 until
August 1995. Dr. Rowell has been a leading figure in superconductive electronics
for over 30 years. The membership of the Scientific Advisory Board includes
Professor Malcolm R. Beasley, Stanford University; Dr. Leonard Cutler,
Hewlett-Packard Company; Dr. Robert C. Dynes, Chancellor of University of
California, San Diego; Professor John Clarke, University of California,
Berkeley; Professor Emeritus Theodore H. Geballe, Stanford University; Dr.
Robert H. Hammond, Stanford University; Professor Aharon Kapitulnik, Stanford
University; Professor Paul L. Richards, University of California, Berkeley; and
Professor Theodore Van Duzer, University of California, Berkeley. See "Risk
Factors -- Attraction and Retention of Key Employees."

PATENTS, PROPRIETARY TECHNOLOGY AND TRADEMARKS

Conductus has received 17 U.S. patents and one related foreign patent which
have unexpired terms ranging from 13 to 18 years and has 18 patent applications
pending before the U.S. Patent and Trademark Office. One of those patents, for
an MRI coil, is currently involved in an interference proceeding in the U.S.
Patent and Trademark Office. See "Legal Proceedings." International counterparts
of several of these pending applications or issued patents have been filed under
the Patent Cooperation Treaty with a number of applications currently pending in
various countries worldwide. These patents and patent applications cover
Conductus processes and products in many aspects of its business. The Company
will continue to file other U.S. and key international patent applications as
part of its business strategy to protect technology it considers important to
providing a competitive market advantage for its technologies. There can be no
assurance, however, that its applications will result in issued patents, that
the validity of its issued patents will not be subject to challenge or that
third parties will not be able to design around the patented aspects of the
Company's products. The Company also relies upon trade secrets, unpatented
know-how, continuing technological innovation, employee and third-party
nondisclosure agreements and the pursuit of licensing opportunities in order to
develop and maintain its competitive position. The Company's efforts to protect
its proprietary rights may not be successful, prevent their misappropriation or
ensure that these rights will provide the Company with a competitive advantage.
Additionally, certain of the issued patents and patent applications are jointly
owned by the Company and third parties. Any party has the right to license
rights under such patents and applications, which could result in Conductus not
having exclusive control over such inventions.

The Company believes that, since the discovery of HTS in 1986, several
thousand patent applications have been filed worldwide and over a thousand
patents have been granted in the U.S. relating to superconductivity. There are
interference proceedings pending regarding rights to inventions claimed in some
of the applications. Accordingly, the patent positions of companies using HTS
technology, including Conductus, are uncertain and involve both complex legal
and factual questions. Consequently, there is significant risk that others,
including competitors of the Company, have obtained or will obtain patents
relating to the Company's planned products or technology.

A patent issue of particular importance to the Company relates to copper
oxides or "cuprates," that are used to make HTS products, including YBCO.
Conductus has neither obtained any issued patents nor has it filed any patent
applications covering the composition of any cuprates or other HTS materials.
However, several U.S. and foreign patent applications, including applications
filed by IBM, AT&T, the University of Houston, the Naval Research Laboratory and
others, are pending that cover the composition of YBCO and related HTS. See
"Business -- Background -- Conductus' Approach." The Company understands that at
least several of such U.S. applications are the subject of an interference
proceeding currently pending in the U.S. Patent and Trademark Office
(Interference No. 101,981). Additionally, E. I. du Pont de Nemours & Co.

36
<PAGE>
("DuPont") has notified Conductus that it is the exclusive licensee of patents
issued in Israel, Sweden, Taiwan and the United Kingdom covering the composition
of YBCO and a method for using YBCO in superconducting applications. Dupont has
stated that it is interested in sublicensing such patents to Conductus, and
would consider sublicensing to Conductus, as they issue, any other foreign and
U.S. patent applications licensed to DuPont by the University of Houston. The
Company anticipates that it will be required to obtain a license to use YBCO
from one or more of these parties in order to continue to develop and sell
products based on YBCO.

There can be no assurance that the Company would able to obtain licenses to
patents covering YBCO compositions, when issued, or to any other patents
applicable to the Company's business on commercially reasonable terms. In such
an event, the Company could be required to expend significant resources to
develop non-infringing technology alternatives or to obtain licenses to the
technology that the Company infringes or would infringe. There can be no
assurance that the Company would be able to successfully design around these
third party patents or to obtain licenses to technology that it may require.
Furthermore, there can be no assurance that the Company will not be obligated to
defend itself at substantial cost against allegations of infringement of third
party patents. An adverse outcome in such a suit could subject the Company to
significant liabilities to third parties, or require the Company to cease using
such technology. In addition, aside from the merits of a claim, the cost of
defending any such suit would constitute a major financial burden for the
Company that would have a material adverse effect on its business, operating
results and financial condition. See "Risk Factors -- Uncertainty of Patents and
Proprietary Rights; Risk of Litigation."

Conductus has granted to various entities non-exclusive, royalty-bearing
licenses to certain of its proprietary technology for the manufacture and
distribution of various equipment, including rotating target holders, substrate
heaters and mutual inductance probes to be used in cryogenic measurement
systems. Through its strategic relationships, Conductus has received rights to
certain intellectual property developed by its partners, as well as commitments
from those partners to offer licenses to certain background technology.
Conductus cannot, however, be certain that such licenses will be on terms that
allow Conductus to compete effectively in the marketplace. See "Risk Factors --
Uncertainty of Patents and Proprietary Rights; Risk of Litigation."

Additionally, successful marketing of a material portion of Conductus'
products depends in part on nonexclusive licenses obtained from various
licensors. There can be no assurance that such licenses will not be terminated
by licensors or that Conductus will be able to develop alternate products that
do not require these or other licenses.

Conductus owns the United States registered trademarks "CONDUCTUS," the
Conductus logo, "Mr. SQUID" and "iMAG" and claims the rights to the trademark
"xMAG."

MANUFACTURING

Conductus has performed pioneering work in materials, processes and
structures based on thin-film superconducting technology, and has developed
processes it believes are capable of routinely producing a variety of
high-quality films for several applications, including multilayer thin-film
materials suitable for more complex devices and components. Conductus has
established a pilot production facility at its headquarters in Sunnyvale,
California to fabricate, test and assemble HTS and LTS thin films and
components. The Company fabricates two-, three- and four-inch wafers in two
cleanroom areas that consist, in the aggregate, of approximately 2,600 square
feet and that have ratings of subclass 1,000 and 10,000 (meaning there are fewer
than 1,000 or 10,000 particles larger than 0.5 microns per cubic foot of air).
See "Business -- Properties." Conductus combines what it believes to be the
world's most advanced YBCO thin-film technology with expertise in electronic and
device component design, analog and digital electronic engineering, cryogenic
packaging, mechanical engineering and system integration.

The primary materials and equipment used in Conductus' products include
substrates, YBCO and processing equipment. The Company procures its substrates
from several suppliers. The Company procures its YBCO source material from two
suppliers and believes that YBCO can be obtained from at least two

37
<PAGE>
other vendors. For certain processes, Conductus utilizes elemental metals
(yttrium, barium and copper) to produce YBCO. These substances are available
from numerous vendors. The Company's processing equipment is assembled from
off-the-shelf components which can be obtained from multiple sources.

Conductus believes that most of its products for the communications and
healthcare markets will be in the form of subsystems that incorporate
superconducting and cryoelectronic components with cryogenic refrigerators and
conventional electronic assemblies. Apart from the superconducting components
which are manufactured by Conductus, the Company anticipates that most other
components of its subsystems will be purchased as standard products from
commercial vendors or specially ordered from various suppliers. These include
cryogenic refrigerators, printed circuit boards, product cases and housings,
vacuum vessels and other components. Certain components of Conductus'
subsystems, including cryocoolers, are currently obtained from a single source
or a limited number of suppliers. Although the Company does not believe that it
is ultimately dependent upon any supplier of these components as a sole source
or limited source for any critical components, the inability of the Company to
develop alternative sources, if required, an inability to meet demand, a
prolonged interruption in supply or a significant increase in price of one or
more components would have a material adverse effect on the Company's business,
operating results and financial condition. See "Risk Factors -- High Degree of
Dependence Upon Other Complementary Technologies" and "-- Reliance on Limited-
or Sole-Source Suppliers."

Conductus is focusing on the development of its production processes and is
manufacturing limited quantities of superconducting components and prototypes at
its Sunnyvale, California facility. Apart from the production of superconducting
components, the Company's manufacturing activities generally will be limited to
cleaning, final assembly, vacuum bakeout and test procedures. Conductus is
producing these products in limited commercial quantities and is continuing to
expand its capabilities. See "Risk Factors -- Limited Commercial Manufacturing
Capability." At its Instrument and Systems Division in San Diego, California,
Conductus designs and manufactures large-scale superconductive magnetic sensing
systems using these superconductive components. This facility also designs and
manufactures electronic instruments and circuitry used in conjunction with
superconductive components.

COMPETITION

Although the market for superconductive electronics currently is small and
in the early stages of development, Conductus believes this market will become
intensely competitive if products with significant market potential are
successfully developed.

A number of large American, Japanese and European companies are engaged in
research and development programs that the Company believes could lead to the
development and/or commercialization of superconductive electronic products.
These include, among others: DuPont, IBM, TRW, and Northrop-Grumman Corporation
in the U.S.; and Fujitsu Ltd., Hitachi Ltd., NEC Corp. and Sumitomo Electric
Industries, Ltd. in Japan. The Company also believes that a number of smaller
companies are engaged in various aspects of the development and
commercialization of superconductive electronics products. These include, among
others, Biomagnetic Technology, Inc. and Quantum Design, Inc. in magnetic
sensing products; Hypres, Inc. in digital circuits; and Illinois Superconducting
Corp., Superconducting Core Technologies, Inc. and Superconductor Technologies
Inc. in wireless communications. Furthermore, academic institutions,
governmental agencies and other public and private research organizations are
engaged in development programs which may lead to competitive arrangements for
commercializing superconductive electronics products. In addition, if the
superconductor industry does develop further, new competitors with significantly
greater resources are likely to enter the field. Conductus' ability to compete
successfully will require it to develop and maintain technologically advanced
products, attract and retain highly qualified personnel, obtain patent or other
protection for its technology and products and manufacture and market its
products, either alone or with third parties. See "Risk Factors -- Intense
Competition."

The Company's existing collaborative arrangements permit, and future
arrangements also may permit, the Company and each partner to use the technology
developed under these arrangements. Accordingly, the Company may compete with
its partners for commercial sales of any products developed under these
arrangements.

38
<PAGE>
The Company's potential products, if successfully developed, may compete
directly with other existing and subsequently developed products using
competitive, conventional technologies. There can be no assurance that the
Company's products will have sufficient performance advantages over these other
products to attract significant commercial interest. These and related factors
may limit market acceptance of products incorporating superconductive
technology. See "Risk Factors -- Competing Technologies."

Conductus believes that the principal competitive factors in the market for
superconductive electronics will be the following: the ability to develop
commercial applications of superconductive technology; product performance,
including, where appropriate, speed, sensitivity, size and power dissipation;
price; product quality and reputation. Conductus believes that it is competitive
with respect to these factors. Nonetheless, because the market for
superconductive electronics is at an early stage, the relative competitive
position of the Company in the future is difficult to predict.

SALES AND MARKETING

Although Conductus has limited experience in sales, marketing and
distribution, it has been expanding its expertise and activities in these areas
in order to successfully commercialize its potential products. Conductus sells
its products through a combination of OEM relationships, direct sales and a
network of independent manufacturer's representatives and distributors. The
Company's sales and marketing strategy is to use manufacturers' representatives
and distributors for sales of its magnetic sensor-based and laboratory
instrument products and to rely primarily on OEMs for its subsystem products for
communications, healthcare and instrumentation. The Company has established a
domestic and international network of independent manufacturer's representatives
who have primary responsibility for selling magnetic sensing and laboratory
instrumentation products. As of March 31, 1996, 11 domestic and 8 foreign firms
were manufacturer's representatives and distributors, covering 41 states and 18
foreign countries including a majority of western Europe, Japan, Australia, New
Zealand and India. See "Risk Factors -- Need to Develop Infrastructure to
Support Commercialization."

The Company currently employs a sales and marketing staff of nine full-time
equivalents. These employees are actively engaged in direct marketing to OEM and
potential OEM customers, as well as in sales and marketing support. The Company
actively markets its products through advertisements in trade journals as well
as through demonstration of its technology and products at industry trade shows,
including trade shows related to telecommunications, NMR spectroscopy, MRI
imaging and magnetic sensing. The Company's employees have published the results
of their research at Conductus widely in trade and technical journals.
Additionally, Conductus' employees have frequently presented Conductus'
technology as invited speakers at conferences worldwide.

For the three months ended March 31, 1996 and fiscal years 1995, 1994 and
1993, commercial sales to one customer of $241,000, $1,172,000, $732,000 and
$816,000 were 9%, 11%, 8% and 13% of total revenues, respectively. This customer
acts primarily as a distributor of the Company's products, selling to end-users.

ENVIRONMENTAL MATTERS

The Company uses certain hazardous materials in its research and
manufacturing operations. As a result, Conductus is subject to federal, state
and local governmental regulations. Conductus believes that it has complied with
all regulations and has all permits necessary to conduct its business. See "Risk
Factors -- Environmental Regulations."

39
<PAGE>
PROPERTIES

The Company's principal facility, including its pilot production facility,
is located in two buildings providing approximately 40,000 square feet of
available space in Sunnyvale, California. In November 1994, the Company signed
new leases on both buildings which will expire in August 2000 and 2001,
respectively. The increase in space will facilitate expansion for manufacturing
and development efforts. Conductus also leases approximately 10,000 square feet
in San Diego, California under a lease expiring in 1998 for its Instrument and
Systems Division. The Company believes its existing facilities are adequate and
suitable for its current needs, and additional space can be obtained on
commercially reasonable terms as needed to expand the Company's operations.

LEGAL PROCEEDINGS

One Conductus patent covering technology related to certain magnetic
resonance probe coils is currently subject to an interference proceeding with a
competitor, Superconductor Technologies, Inc., before the Patent and Trademark
Office. Based on the Company's current product development plan, the Company
does not believe that an adverse resolution of the proceeding would have a
material adverse effect on its business operating results or financial
condition. The Company is not a party to any material litigation and is not
aware of any pending or threatened litigation against the Company that could
have a material adverse effect upon the Company's business, operating results or
financial condition. See "Risk Factors -- Uncertainty of Patents and Proprietary
Rights; Risk of Litigation."

EMPLOYEES

As of March 31, 1996, the Company had a total of 105 full-time equivalent
employees of which 46 hold advanced degrees. Of the total full-time employees,
65 were engaged in research and product development, 11 in manufacturing, nine
in sales and marketing, three in operations and 17 in administration and
finance. None of the Company's employees is represented by a labor union. The
Company has not experienced any work stoppages and considers its relations with
its employees to be good.

40
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The officers and directors of the company, and their ages, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- ---------------------------------------------
<S> <C> <C>
Charles E. Shalvoy........................... 48 President, Chief Executive Officer and
Director
Duncan J. MacMillan.......................... 51 Vice President, Marketing
Randy W. Simon, Ph.D......................... 42 Vice President, Technology Programs
William J. Tamblyn........................... 37 Vice President, Chief Financial Officer and
Secretary
John F. Shoch, Ph.D. (1)(2).................. 47 Chairman of the Board
Richard W. Anderson.......................... 58 Director
Martin Cooper................................ 67 Director
Robert J. Saldich............................ 63 Director
Anthony Sun (1).............................. 43 Director
</TABLE>

- ------------------------
(1) Member of Audit Committee

(2) Member of Compensation Committee

MR. SHALVOY joined the Company in June 1994 as President, Chief Executive
Officer and Director. From 1988 to 1994, he was President and Chief Operating
Officer of Therma-Wave, Inc., a manufacturer of semiconductor production
equipment. Prior to that he was employed by Aehr Test Systems, Emerson Electric
Corp. and Raychem Corporation in a variety of senior management positions. Mr.
Shalvoy holds a B.S. in Mechanical Engineering from the University of Notre Dame
and an M.B.A. from Stanford University.

MR. MACMILLAN joined the Company in October 1994 as Vice President of
Marketing. From 1984 to September 1994, he held various senior managerial
positions with Octel Communications Corporation, a manufacturer of voice
processing systems. Prior to that he was employed by Rolm Corporation in several
sales, product and general management positions. Mr. MacMillan holds a B.S. in
Mechanical Engineering from Stevens Institute and an M.B.A. from Stanford
University.

DR. SIMON joined the Company in October 1990 as Senior Scientist and served
as Director of Research and Development from March 1991 to January 1993 and as
Vice President, Marketing and Development from January 1993 to November 1994 and
Vice President, Technology Programs and Investor Relations from November 1994 to
November 1995 and Vice President, Technology Programs since November 1995. From
January 1985 to October 1990, he held a variety of scientific and managerial
positions at TRW, where he headed TRW's Superconductivity Research Department's
high-temperature superconductivity program and managed TRW's internal research
and development program on high-temperature superconductive electronics. Dr.
Simon holds a B.S. in Physics from Pomona College and an M.S. and a Ph.D. in
Physics from the University of California, Los Angeles.

MR. TAMBLYN joined the Company in March 1994 as Director of Finance and
Principal Accounting Officer and has served as a Vice President and Chief
Financial Officer since April 1994. From May 1993 through January 1994, Mr.
Tamblyn was Vice President of Finance and Chief Financial Officer of Ramtek
Corporation. From October 1988 to April 1993, he was employed by Coopers &
Lybrand in several management and accounting positions. Mr. Tamblyn holds a B.S.
in Business Administration -- Accounting from San Jose State University and is a
Certified Public Accountant.

41
<PAGE>
DR. SHOCH has served as Chairman of the Board of the Company since its
inception in 1987. As a founder of Conductus, Dr. Shoch served as President from
1987 to 1988. Since 1985, he has been a general partner of AMC Partners 84,
which is the general partner of Asset Management Associates 1984, a venture
capital investment fund and a principal stockholder of the Company. Mr. Shoch
also is a director of Remedy Corporation, a client/server software company, and
Red Brick Systems, Inc., a client/server database management software company.
Dr. Shoch holds a B.S. in political science and an M.S. and Ph.D. in computer
science from Stanford University.

MR. ANDERSON has served as director of the Company since February 1992.
Since 1985, he has served as the Vice President and General Manager of the
Microwave and Communications Group of Hewlett-Packard Company ("H-P"). Mr.
Anderson holds a B.S. in electrical engineering from Utah State University and
an M.S. in electrical engineering from Stanford University and attended the
Stanford Executive Program in 1982.

Mr. Anderson was nominated for election as a director by H-P pursuant to
Series B Preferred Stock Purchase Agreement between the Company and H-P. See
"Certain Transactions -- Relationship with H-P" for additional information about
the relationship between Conductus and H-P.

MR. COOPER has served as director of the Company since January 1995. Since
1992, Mr. Cooper has served as Chairman and Chief Executive Officer of
ArrayComm, Inc., a company he co-founded that manufactures intelligent antennas
for wireless applications. Since 1985, Mr. Cooper has served as the Chairman of
Dyna, Inc., a consulting firm. Previously he was co-founder, chairman, Chief
Executive Officer and President of Cellular Business Systems, Inc., a provider
of management information software to the cellular industry that was purchased
by Cincinnati Bell in 1983. Mr. Cooper worked for 29 years at Motorola Inc.,
where he started out as a Senior Development Engineer in 1954 and advanced to
Corporate Director of Research and Development in 1983. Mr. Cooper also is a
director of Spectrian Corporation, a manufacturer of amplification hardware for
communications systems. Mr. Cooper earned a B.S. and M.S. in electrical
engineering from the Illinois Institute of Technology.

MR. SALDICH has served as director of the Company since January 1996. Mr.
Saldich was the President and Chief Executive Officer of Raychem Corp. from
April 1990 until his recent retirement in October 1995. Mr. Saldich worked for
Raychem Corp. for 31 years, in various senior management positions. Mr. Saldich
also is a director of 3Com Corp., a manufacturer of computer networking
hardware. Mr. Saldich earned a B.S. in chemical engineering from Rice University
and an M.B.A. from Harvard University.

MR. SUN has served as director of the Company since its inception in 1987.
Mr. Sun has been at Venrock Associates, a venture capital firm, since 1979.
Previously, he was employed by H-P, TRW and Caere Corporation. He is a director
of Centura Software Corporation, a client/server software company, Cognex
Corporation, a computer systems company, Inference Corporation, a client/server
and internet help desk software company, Komag, Inc., a computer storage
component company, Photonics Corporation, a computer peripherals company,
StrataCom, Inc., a telecommunications company, and Worldtalk Communications
Corporation, a software application router company. He is also a director of
several private companies. Mr. Sun received S.B.E.E., S.M.E.E. and Engineer
degrees from the Massachusetts Institute of Technology, and an M.B.A. from
Harvard University.

42
<PAGE>
EXECUTIVE COMPENSATION

The following table provides a summary of the compensation earned by the
Company's Chief Executive Officer and each of its other three most highly
compensated executive officers as of the end of the Company's fiscal year whose
compensation was in excess of $100,000 for services rendered in all capacities
to the Company for the fiscal year ended December 31, 1995 (collectively, the
"Named Officers"). No executive officers who would have otherwise been
includable in such table on the basis of salary and bonus earned for the 1995
fiscal year have resigned or terminated employment during that fiscal year,
except for Henry Zauderer who resigned as Vice President, Technology and Product
Development effective September 30, 1995.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES
----------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY (1) BONUS OPTIONS (#) COMPENSATION
- -------------------------------------------- --------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Charles E. Shalvoy, President and CEO 1995 $ 175,011 $ 31,669 -- --
1994 94,925(2) 44,250 250,000 --
Duncan J. MacMillan, Vice President 1995 125,108 25,388 -- --
1994 25,723(3) 7,219 100,000 --
Randy W. Simon, Vice President 1995 105,704 21,612 8,000 --
1994 96,620 21,483 -- --
1993 95,262 25,000 11,250 --
William J. Tamblyn, Vice President 1995 99,750 25,220 40,000 --
1994 72,067(4) 21,945 10,000 --
Henry Zauderer, Vice President 1995 121,500(5) -- -- $ 13,500(5)
1994 -- -- 60,000 --
</TABLE>

- ------------------------
(1) Salary includes amounts deferred pursuant to the Company's 401(k) Plan.

(2) Includes salary from June 6, 1994 upon commencement of employment.

(3) Includes salary from October 1, 1994 upon commencement of employment.

(4) Includes salary from March 1, 1994 upon commencement of employment.

(5) Includes salary from January 1, 1995 until his resignation effective
September 30, 1995. All other compensation relates to Mr. Zauderer's
severance package.

43
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR

The following table contains information concerning the stock option grants
made to each of the Named Officers for the fiscal year ended December 31, 1995.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF STOCK
PERCENT OF TOTAL PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM (3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------------
NAME GRANTED (#)(1) FISCAL YEAR ($/SH) (2) DATE 5% 10%
- ----------------------------- --------------- ------------------ ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Charles E. Shalvoy........... -- -- -- -- -- --
Duncan J. MacMillan.......... -- -- -- -- -- --
Randy W. Simon............... 8,000 3.38% $ 4.9375 1/23/05 $ 24,841 $ 62,953
William J. Tamblyn........... 40,000 16.89% 4.9375 1/23/05 124,207 314,764
Henry Zauderer............... -- -- -- -- -- --
</TABLE>

- ------------------------
(1) The options granted to Dr. Simon and Mr. Tamblyn are immediately subject to
a right of repurchase in favor of the Company that lapses as follows: 20%
upon the completion of the first year of service measured from January 1,
1995 and an additional 1.67% upon the completion of each month of service
elapsed thereafter, until the option shall be fully vested upon the
completion of the fifth year of service from the vesting date. The options
were granted January 24, 1995, and began vesting on January 1, 1995.

(2) The exercise price may be paid in cash, in shares of Common Stock valued at
fair market value on the exercise date or through a cashless exercise
procedure involving a same-day sale of the purchased shares. The Company may
also finance the option exercise by loaning the optionee sufficient funds to
pay the exercise price for the purchased shares and the federal and state
income tax liability incurred by the optionee in connection with such
exercise. The Compensation Committee has the discretionary authority to
reprice outstanding options through the cancellation of those options and
the grant of replacement options with an exercise price equal to the lower
fair market value of the option shares on the regrant date.

(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There is no
assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the
10-year option term will be at the assumed 5% and 10% levels or at any other
defined level. Unless the market price of the Common Stock appreciates over
the option term, no value will be realized from the option grants made to
the executive officers.

44
<PAGE>
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES

The following table sets forth information concerning option holdings at the
end of the 1995 fiscal year with respect to the Named Officers. No options or
SARs were exercised during the 1995 fiscal year, nor were any SARs outstanding
at the end of such fiscal year.

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR END (1)(2) FISCAL YEAR END (3)
------------------------------ ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Charles E. Shalvoy........................................ 250,000 -- $ 343,750 --
Duncan J. MacMillan....................................... 100,000 -- 231,250 --
Randy W. Simon............................................ 50,399 -- 280,758 --
William J. Tamblyn........................................ 50,000 -- 88,750 --
Henry Zauderer............................................ -- -- -- --
</TABLE>

- ------------------------
(1) Excludes options granted after the end of fiscal year 1995.

(2) Each option is immediately exercisable for all the option shares, but any
shares purchased under the option will be subject to repurchase by the
Company, at the original exercise price per share, upon the optionee's
cessation of service prior to vesting in such shares. As of December 31,
1995, the Company's repurchase right had lapsed with respect to the
following number of option shares: Mr. Shalvoy -- 69,998; Mr. MacMillan --
28,333; Dr. Simon -- 33,806; and Mr. Tamblyn -- 13,666.

(3) Calculated on the basis of the fair market value of the Common Stock on
December 31, 1995 of $6.87 per share, as reported on the Nasdaq National
Market, minus the exercise price.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

John F. Shoch, who became a member of the Compensation Committee of the
Board of Directors in May 1993, is a general partner of AMC Partners 84, which
is the general partner of Asset Management Associates 1984, the beneficial owner
of more than 5% of the Company's Common Stock. Dr. Shoch served as Chief
Executive Officer of the Company from September 1987 until October 1988.

For information concerning grants of options to certain non-employee members
of the Board of Directors, including Dr. Shoch and Mr. McKenna, see "Certain
Transactions -- Option Grants."

The Company has entered into separate indemnification agreements with its
directors and officers. These agreements require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors or officers and to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified.

EMPLOYMENT CONTRACTS

None of the Company's executive officers (other than Charles E. Shalvoy)
have employment agreements with the Company, and their employment may be
terminated at any time at the discretion of the Board. The Company entered into
an agreement with Mr. Shalvoy, the Company's President and Chief Executive
Officer, on May 3, 1994, which provides for accelerated vesting of his option
shares as if he remained employed for one additional year in the event that his
employment is terminated without cause following certain mergers, acquisitions
or sales of all or substantially all of the assets of the Company. Under the
1992 Stock Option/Stock Issuance Plan (the "1992 Plan"), upon the occurrence of
a merger, reverse merger or sale of all or substantially all of the assets of
the Company, outstanding options held by the Chief Executive Officer and the
Company's other executive officers will automatically accelerate and may be
exercised as fully vested shares, unless such options are assumed by the
successor corporation. In addition, the Compensation Committee has the authority
as Plan Administrator of the 1992 Plan to provide for the accelerated vesting of
the shares of Common Stock subject to outstanding options held by the Chief
Executive Officer and the Company's other executive officers, whether granted
under that plan or any

45
<PAGE>
predecessor plan, in the event that a Change in Control (as hereinafter defined)
occurs or in the event that their employment were to be terminated (whether
involuntarily or through a forced resignation) following a Change in Control. A
Change in Control is a hostile takeover of the Company effected through a
successful tender offer for more than 50% of the Company's outstanding Common
Stock or through a change in the majority of the Board as a result of one or
more contested elections for Board membership.

1992 STOCK OPTION/STOCK ISSUANCE PLAN

The Company's 1992 Stock Option/Stock Issuance Plan (the "1992 Plan") was
adopted by the Board of Directors on January 11, 1992, and approved by the
stockholders on April 25, 1992 as the successor to the 1987 Stock Option Plan
and 1989 Stock Option Plan ("Predecessor Plans"). The 1992 Plan has been amended
on numerous occasions, most recently in January 1996 to increase the number of
shares issuable under the 1992 Plan. The January 1996 amendment received
stockholder approval at the 1996 annual meeting in May 1996. A total of
1,880,000 shares of Common Stock have been authorized for issuance under the
1992 Plan. As of March 31, 1996, 310,784 shares had been issued under the 1992
Plan, options for 1,157,026 shares were outstanding (including options
incorporated from the Predecessor Plans) and 412,190 shares remained available
for future grant. Shares of Common Stock subject to outstanding options,
including options granted under the Predecessor Plans, which expire or terminate
prior to exercise will be available for future issuance under the 1992 Plan.

The 1992 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which key employees (including
officers) and independent consultants may, at the discretion of the Plan
Administrator, be granted options to purchase shares of Common Stock at an
exercise price per share not less than 85% of fair market value on the grant
date, (ii) the Stock Issuance Program under which such individuals may, in the
plan administrator's discretion, be issued shares of Common Stock directly,
through the purchase of such shares at a price per share not less than 85% of
fair market value per share at the time of issuance or as a fully-paid bonus for
services rendered the Company; and (iii) the Automatic Option Grant Program
under which option grants will automatically be made at periodic intervals to
eligible non-employee Board members to purchase shares of Common Stock at an
exercise price equal to 100% of the fair market value of the option shares on
the grant date.

The Discretionary Option Grant Program and the Stock Issuance Program are
administered by the Compensation Committee of the Board. The Compensation
Committee, as plan administrator, has complete discretion, subject to applicable
law, to determine which eligible individuals are to receive option grants or
stock issuances, the time or times when such option grants or stock issuances
are to be made, the number of shares subject to each such grant or issuance, the
status of any granted option as either an incentive stock or a non-statutory
stock option under the Federal tax laws, the vesting schedule to be in effect
for the option grant or stock issuance and the maximum term for which any
granted option is to remain outstanding. In no event, however, may any one
participant in the 1992 Plan acquire more than 240,000 shares of Common Stock
under the 1992 Plan, exclusive of any option grants or share issuances received
prior to January 1, 1994.

The exercise price for options granted under the 1992 Plan may be paid in
cash or in outstanding shares of Common Stock. Options may also be exercised on
a cashless basis through the same-day sale of the purchased shares. The
Compensation Committee may also permit the optionee to pay the exercise price
through a promissory note or installment payments over a period of years. The
amount financed may include any Federal or state income and employment taxes
incurred by reason of the option exercise.

Each option granted to an officer of the Company subject to the short-swing
profit restrictions of the Federal securities laws may include a special
cash-out right which provides that, upon the acquisition of 50% or more of the
Company's outstanding voting stock pursuant to a hostile tender offer, such
option, if outstanding for at least six months, will automatically be cancelled
in exchange for a cash distribution to the officer based upon the tender offer
price.

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<PAGE>
The Compensation Committee has the authority to effect, from time to time,
the cancellation of outstanding options under the 1992 Plan in return for the
grant of new options for the same or different number of option shares with an
exercise price per share based upon the fair market value of the Common Stock on
the new grant date.

In the event the Company is acquired by merger, consolidation or asset sale,
the shares of Common Stock subject to each option outstanding at the time under
the 1992 Plan will immediately vest in full, except to the extent the Company's
repurchase rights with respect to those shares are to be assigned to the
acquiring entity, and options will accelerate to the extent not assumed by the
acquiring entity. The Compensation Committee also has discretion to provide for
the acceleration of one or more outstanding options under the 1992 Plan
(including options incorporated from the Predecessor Plans) and the vesting of
shares subject to outstanding options upon the occurrence of certain hostile
tender offers. Such accelerated vesting may be conditioned upon the subsequent
termination of the affected optionee's service.

Under the automatic grant program, each individual serving as a non-employee
director on January 23, 1995, and each individual who first joins the Board as a
non-employee director on or after that date, will receive at that time an
automatic option grant for 15,000 shares of Common Stock. Each option will have
an exercise price equal to the fair market value of the Common Stock on the
automatic grant date and a maximum term of ten years, subject to earlier
termination following the optionee's cessation of Board service. The option will
be immediately exercisable for all of the shares but the shares will be subject
to repurchase at original cost. The repurchase right shall lapse and the
optionee vest in a series of annual and monthly installments over a five-year
period, beginning one year from the grant date. However, vesting of the shares
will automatically accelerate upon (i) an acquisition of the Company by merger,
consolidation, or asset sale, or (ii) a hostile takeover of the Company effected
by tender offer for more than 50% of the outstanding voting stock or proxy
contest for Board membership.

In the event that more than 50% of the Company's outstanding voting stock
were to be acquired pursuant to a hostile tender offer, each automatic option
grant which has been outstanding for at least six months may be surrendered to
the Company in return for a cash distribution from the Company based upon the
tender offer price per share of Common Stock at the time subject to the
surrendered option.

The Board may amend or modify the 1992 Plan at any time. The 1992 Plan will
terminate on January 10, 2002 unless sooner terminated by the Board.

EMPLOYEE STOCK PURCHASE PLAN

On August 1, 1994, the Company adopted an Employee Stock Purchase Plan (the
"Purchase Plan"). A total of 200,000 shares of Common Stock have been reserved
for issuance under the Purchase Plan. The Purchase Plan, which is intended to
qualify under Section 423 of the Internal Revenue Code, has been implemented
through a series of offering periods, each with a maximum duration of twelve
months, commencing on August 1, 1994, with purchases generally occurring at
six-month intervals. The Purchase Plan is administered by the Compensation
Committee of the Board. Employees are eligible to participate if they are
employed by the Company for at least 20 hours per week for more than 5 months
per calendar year and have been employed by the Company for at least ninety
days. The Purchase Plan permits eligible employees to purchase Common Stock
through payroll deductions, which may not exceed 10% of an employee's
compensation, nor more than 2,500 shares per participant on any purchase date.
The price of stock purchased under the Purchase Plan will be 85% of the lower of
the fair market value of the Common Stock at the beginning of the offering or on
the semi-annual purchase date. Employees may end their participation in the
offering at any time during the purchase period, and participation ends
automatically on termination of employment with the Company. Each outstanding
purchase right will be exercised immediately prior to a merger or consolidation
unless assumed by the acquiring corporation. The Board may amend or terminate
the Purchase Plan immediately after the close of any purchase period. However,
the Board may not, without stockholder approval, materially increase the number
of shares of Common Stock available for issuance or materially modify the
eligibility requirements for participation or the benefits available to
participants.

47
<PAGE>
401(K) PROFIT SHARING PLAN

Effective January 1, 1988, the Company adopted a retirement profit sharing
plan (the "401(k) Plan") that covers all employees of the Company in the U.S. An
employee may elect to defer, in the form of contributions to the 401(k) Plan, up
to 15% of the total compensation that would otherwise be paid to the employee,
currently not to exceed $9,500 per calendar year (adjusted for cost-of-living
increases). Employee contributions are invested in selected equity mutual funds
or a money market fund at the direction of the employee. The contributions are
fully vested and nonforfeitable at all times.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Restated Certificate of Incorporation limits the liability of
its directors for monetary damages arising from a breach of their fiduciary duty
as directors, except to the extent otherwise required by the Delaware General
Corporation Law. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission. The Company's
Bylaws provide that the Company shall indemnify its directors and officers to
the fullest extent permitted by Delaware law, including in circumstances in
which indemnification is otherwise discretionary under Delaware law. The Company
has also entered into indemnification agreements with its officers, directors
and certain employees containing provisions that may require the Company, among
other things, to indemnify such officers, directors and employees against
certain liabilities that may arise by reason of their status or service as
directors, officers or employees (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. The
Company believes that these provisions and agreements are necessary to attract
and retain qualified directors, executive officers and certain employees.

At present, there is no pending litigation or proceeding involving any
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 that might result in a claim for such indemnification.

CERTAIN TRANSACTIONS

RELATIONSHIP WITH H-P

In June 1993, the Company and H-P modified a previous Coordinated Research
Program Agreement (the "Prior H-P Agreement") by entering into a new five-year
agreement (the "Current H-P Agreement"), which agreement is subject to earlier
termination by H-P if H-P's ownership of the Company's stock falls below 7%.
Under the Prior H-P Agreement, H-P and Conductus were involved in several joint
development projects, including the development of a stable, low phase-noise
oscillator for microwave test and instrumentation applications using resonators
developed by Conductus, and the development of a variety of digital LTS circuits
for high-speed digital electronic applications. All rights to technology arising
out of joint development projects are owned jointly by H-P and Conductus. As a
result, both Conductus and H-P will be entitled to commercialize products
incorporating such technology.

Any royalties received by either H-P or Conductus for technology developed
under the Prior H-P Agreement will be divided equally between the two parties,
except that Conductus generally may not license third parties to make circuits
based on circuit designs made solely by H-P employees as part of a joint
development project or sell such circuits to third parties for incorporation
into products for resale. H-P is a party to certain cross-license arrangements
and may in the future enter into similar cross-licenses. Consequently, such
third parties may have non-exclusive rights in technology developed under
research projects under the Prior H-P Agreement. H-P also has the right,
beginning two years after information developed under the Prior H-P Agreement
and three years after other confidential information is disclosed to H-P, to
disclose such information to third parties or to the public (including
information disclosed to H-P by Conductus). Conductus has comparable license and
information disclosure rights.

48
<PAGE>
The Current H-P Agreement requires Conductus and H-P to exchange reviews and
assessments of Conductus' technical and applications developments, particularly
with respect to their potential application to H-P's product lines. H-P has the
right to appoint an H-P employee (the "H-P Member") as a member of the Company's
Scientific Advisory Board. H-P will jointly own with Conductus any invention by
the H-P Member acting pursuant to the H-P Agreement or using the Company's
confidential information.

Mr. Anderson, Vice President and General Manager of the Microwave and
Communication Group at H-P, was nominated for election as a director of the
Company by H-P pursuant to the Series B Preferred Stock Purchase Agreement
between the Company and H-P. See "Management -- Directors and Executive
Officers."

Between January 1990 and June 1993, Conductus and H-P entered into four
equipment lease lines, pursuant to which Conductus leased equipment and incurred
monthly payments in the aggregate of approximately $166,500, including principal
and interest. Three of the four lease lines expired in May 1993.

SELECTED PREVIOUS FINANCINGS

In October 1992 and January 1993, the Company raised an aggregate of
$2,000,000 to finance its operations through the issuance of $1,980,000
principal amount of convertible promissory notes bearing interest at 9% per
annum (the "Promissory Notes"), and warrants to purchase Series B Preferred
Stock that converted into warrants to purchase an aggregate of 33,460 shares of
Common Stock at the closing of the Company's initial public offering (the "IPO")
in August 1993. The warrants had an effective exercise price of $8.96 per share
of Common Stock. The Promissory Notes and warrants were issued to affiliates of
the following persons, each of which beneficially owned more than 5% of the
Company's Common Stock as of March 31, 1996:

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF COMMON
PRINCIPAL STOCK ISSUABLE UPON AMOUNT
AMOUNT AMOUNT OF EXERCISE OF OUTSTANDING
ENTITY ADVANCED NOTES WARRANTS UNDER NOTES
- ------------------------------------------------------- ---------- ---------- --------------------- -------------
<S> <C> <C> <C> <C>
Asset Management Associates 1984 ("Asset
Management").......................................... $ 339,000 $ 335,610 5,674 $ 0
Venrock Associates ("Venrock")......................... $ 339,000 $ 335,610 5,674 $ 0
</TABLE>

The expiration date of these warrants was extended by two years in August
1993 in exchange for the agreement of the warrant holders to enter into lock-up
agreements in connection with the IPO. The warrants expired in August 1995
without being exercised.

As a result of their respective positions as general partners or as general
partners of general partners of Asset Management and Venrock, Dr. Shoch and Mr.
Sun may be deemed to benefit to the extent that Common Stock held by such
stockholders increases in value as a result of this offering.

In June 1993, the Company sold 434,508 shares of Common Stock (including
Common Stock issuable upon conversion of Series B Preferred Stock), including
shares sold to the following persons, each of which beneficially owned more than
5% of the Company's Common Stock, at an effective price of $8.96 per share:

<TABLE>
<CAPTION>
NUMBER OF
SHARES OF PURCHASE
ENTITY COMMON STOCK PRICE CONSIDERATION
- ----------------------------------------- -------------- ------------ -----------------------------------------
<S> <C> <C> <C>
Hewlett-Packard.......................... 137,276 $ 1,230,000 $1,000,000 in cash and $230,000 in
equipment
Asset Management......................... 39,081 $ 350,174 Cancellation of promissory notes
Venrock.................................. 39,081 $ 350,174 Cancellation of promissory notes
</TABLE>

In August 1993, the Company issued 1,500,000 shares of its Common Stock to
the public at $10.00 per share pursuant to the IPO. In connection with the IPO,
the Company also effected the conversion of all of its shares of Series A
Preferred Stock and Series B Preferred Stock into Common Stock and all of the
warrants to purchase Series A Preferred Stock and Series B Preferred Stock into
warrants to purchase the Common Stock of the Company at a conversion rate of
.3125-for-one.

49
<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Restated Certificate of Incorporation limits the liability of
its directors for monetary damages arising from a breach of their fiduciary duty
as directors, except to the extent otherwise required by the Delaware General
Corporation Law. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission. The Company's
Bylaws provide that the Company shall indemnify its directors and officers to
the fullest extent permitted by Delaware law, including in circumstances in
which indemnification is otherwise discretionary under Delaware law. The Company
has also entered into indemnification agreements with its officers, directors
and certain employees containing provisions that 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, 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. See "Management --
Limitation of Liability and Indemnification Matters."

OPTION GRANTS

On January 23, 1995, the Company granted each of Dr. Shoch and Messrs.
Cooper, McKenna and Sun an option to purchase 15,000 shares of Common Stock at
an exercise price of $4.93 per share pursuant to the Automatic Option Grant
Program under the 1992 Plan. On January 25, 1996, the Company granted Mr.
Saldich an option to purchase 15,000 shares of Common Stock at an exercise price
of $6.50 per share pursuant to the same program. See "Management -- 1992 Stock
Option/Stock Issuance Plan."

On May 3, 1994, the Company granted Mr. Shalvoy options to purchase an
aggregate of 250,000 shares of Common Stock at an exercise price of $5.50 per
share, including 240,000 shares granted pursuant to the 1992 Plan, in connection
with Mr. Shalvoy joining the Company as President and Chief Executive Officer.
See "Management -- Directors and Executive Officers," and "-- Aggregate Option
Exercises and Fiscal Year-End Values."

50
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 31, 1996, and as adjusted to
reflect the sale of shares offered hereby, by (i) each person who is known by
the Company to own beneficially more than five percent of the Company's Common
Stock, (ii) each of the Company's current directors, (iii) each of the Named
Officers and (iv) all current officers and directors as a group.

<TABLE>
<CAPTION>
PERCENT OF TOTAL
SHARES --------------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (1)(2)(3) OFFERING OFFERING
- ----------------------------------------------------------------------------- --------------- ------------ ------------
<S> <C> <C> <C>
Hewlett-Packard Company ..................................................... 695,312 12.1% 10.3%
300 Hanover Street
Palo Alto, CA 94304
Vanguard Explorer Fund, Inc. (4) ............................................ 400,000 7.0 5.9
11 East Chase Street, Suite 9-E
Baltimore, MD 21202-0000
Asset Management Associates 1984 (5) ........................................ 351,581 6.1 5.2
2275 East Bayshore Road
Suite 150
Palo Alto, CA 94303
Venrock Associates and Venrock Associates II, L.P. (6) ...................... 351,581 6.1 5.2
755 Page Mill Road
Suite A230
Palo Alto, CA 94304
John F. Shoch (7)............................................................ 380,393 6.6 5.6
Anthony Sun (8).............................................................. 371,269 6.5 5.5
Richard W. Anderson (9)...................................................... -- -- --
Martin Cooper (10)........................................................... 15,000 * *
Robert J. Saldich (11)....................................................... 15,000 * *
Charles E. Shalvoy (12)...................................................... 260,895 4.4 3.7
Duncan J. MacMillan (13)..................................................... 102,665 1.8 1.5
Randy W. Simon (14).......................................................... 72,974 1.3 1.1
William J. Tamblyn (15)...................................................... 63,923 1.1 *
Henry Zauderer (16).......................................................... -- -- --
All directors and officers as a group
(9 persons) (17)............................................................ 1,282,419 20.4 17.6
</TABLE>

- ------------------------
* Less than 1%

(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock.

(2) Percentage of beneficial ownership is calculated assuming 5,732,989 shares
of Common Stock were outstanding on March 31, 1996. This percentage also
includes Common Stock of which such individual or entity has the right to
acquire beneficial ownership within sixty days of March 31, 1996, including
but not limited to the exercise of an option; however, such Common Stock
shall not be deemed outstanding for the purpose of computing the percentage
owned by any other individual or entity. Such calculation is required by
Rule 13d-3(1)(i) under the Securities Exchange Act of 1934, as amended. The
number of shares outstanding after this Offering includes the 1,000,000
shares of Common Stock being offered for sale by the Company in this
Offering.

(3) Assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting."

51
<PAGE>
(4) This information is based solely upon a Schedule 13G filed on February 2,
1996.

(5) Includes 351,581 shares held by Asset Management Associates 1984. Dr.
Shoch, a director of the Company, is a general partner of AMC Partners 84,
which is the general partner of Asset Management Associates 1984. Dr. Shoch
disclaims beneficial ownership of the shares held by Asset Management
Associates 1984, except to the extent of his pecuniary interest therein.
Messrs. Franklin P. Johnson, Jr. and Craig C. Taylor are the other general
partners of AMC Partners 84 and may be deemed beneficial owners of shares
owned by Asset Management Associates 1984.

(6) Includes 351,581 shares held by Venrock Associates and Venrock Associates
II, L.P. Mr. Sun, a director of the Company, is a general partner of Venrock
Associates and is affiliated with Venrock Associates II, L.P. Mr. Sun
disclaims beneficial ownership of the shares held by Venrock Associates and
Venrock Associates II, L.P., except to the extent of his pecuniary interest
therein. Messrs. Peter O. Crisp, Ted H. McCourtney, Jr., Anthony B. Evnin,
David R. Hathaway, Ray Rothrock, Patrick Latterell and Ms. Kimberly A.
Rummelsburg are the other general partners of Venrock Associates and may be
deemed beneficial owners of such shares held by Venrock Associates.

(7) Includes 6,000 shares held and 22,812 shares in the form of an immediately
exercisable option held by Dr. Shoch and 351,581 shares held by Asset
Management Associates 1984, as to which Dr. Shoch disclaims beneficial
ownership except to the extent of his pecuniary interest therein.

(8) Includes 19,688 shares in the form of an immediately exercisable option
held by Mr. Sun and 351,581 shares held by Venrock Associates and Venrock
Associates II, L.P., as to which Mr. Sun disclaims beneficial ownership
except to the extent of his pecuniary interest therein.

(9) Does not include shares held by H-P, of which Mr. Anderson is
Vice-President and General Manager of the Microwave and Communications
Group. Mr. Anderson disclaims beneficial ownership of the shares
beneficially owned by H-P.

(10) Includes 15,000 shares in the form of an immediately exercisable option
held by Mr. Cooper.

(11) Includes 15,000 shares in the form of an immediately exercisable option
held by Mr. Saldich.

(12) Includes 10,895 shares held and 250,000 shares in the form of immediately
exercisable options, of which 172,972 were, as of the date 60 days after
March 31, 1996, subject to a repurchase right in favor of the Company upon
termination of Mr. Shalvoy's employment with the Company that will lapse in
a series of installments so long as Mr. Shalvoy remains in the service of
the Company.

(13) Includes 2,655 held and 100,000 shares in the form of immediately
exercisable options, of which 68,334 were, as of the date 60 days after
March 31, 1996, subject to a repurchase right in favor of the Company upon
termination of Mr. MacMillan's employment with the Company that will lapse
in a series of installments so long as Mr. MacMillan remains in the service
of the Company.

(14) Includes 2,909 shares held, 9,565 shares subject to options exercisable
within 60 days of March 31, 1996 and 60,500 shares in the form of
immediately exercisable options, of which 34,701 were, as of the date 60
days after March 31, 1996, subject to a repurchase right in favor of the
Company upon termination of Dr. Simon's employment with the Company that
will lapse in a series of installments so long as Dr. Simon remains in the
service of the Company.

(15) Includes 3,923 shares held and 60,000 shares in the form of immediately
exercisable options, of which 44,668 were, as of the date 60 days after
March 31, 1996, subject to a repurchase right in favor of the Company upon
termination of Mr. Tamblyn's employment with the Company that will lapse in
a series of installments so long as Mr. Tamblyn remains in the service of
the Company.

(16) Mr. Zauderer commenced employment January 1, 1995 and resigned effective
September 30, 1995. No shares or options are owned or outstanding,
respectively, related to Mr. Zauderer at March 31, 1996.

(17) Includes 552,899 shares in the form of options exercisable at March 31,
1996. See Notes (7) through (15).

52
<PAGE>
DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 11,000,000 shares of
Common Stock, $0.0001 par value, and 1,000,000 shares of Preferred Stock,
$0.0001 par value.

COMMON STOCK

As of March 31, 1996, there were 5,732,989 shares of Common Stock
outstanding that were held of record. There will be 6,732,989 shares of Common
Stock outstanding (assuming no exercise of the Underwriters' over-allotment
option) after giving effect to the sale of the shares of Common Stock to the
public offered hereby.

The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Price Range of Common Stock and Dividend Policy." In the event of the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and nonassessable, and the shares of Common Stock to be issued upon
completion of this offering will be fully paid and nonassessable.

PREFERRED STOCK

The Board of Directors has the authority to issue the Preferred Stock in one
or more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without further vote or action by the stockholders. See " -- Antitakeover
Effects of Provisions of the Restated Certificate of Incorporation and Bylaws
and of Delaware Law -- Restated Certificate of Incorporation." At present, the
Company has no plans to issue any of the Preferred Stock.

ANTITAKEOVER EFFECTS OF PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION
AND BYLAWS AND OF DELAWARE LAW

RESTATED CERTIFICATE OF INCORPORATION

Under the Company's Restated Certificate of Incorporation, the Board of
Directors has the power to authorize the issuance of up to 1,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without further vote or
action by the stockholders. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, may have the effect of delaying, deferring or preventing a
change in control of the Company, may discourage bids for the Common Stock at a
premium over the market price of the Common Stock and may have an adverse effect
on the market price of and the voting and other rights of the holders of the
Common Stock. In addition, the Restated Certificate of Incorporation provides
that all stockholder actions must be effected at a duly called meeting and not
by a consent in writing. These provisions of the Restated Certificate of
Incorporation could discourage potential acquisition proposals and could delay
or prevent a change in control of the Company. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of the
Board of Directors and in the policies formulated by the Board of Directors and
to discourage certain types of transactions that may involve an actual or
threatened change of control of the Company. These provisions are designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal.
These provisions are also intended

53
<PAGE>
to discourage certain tactics that may be used in proxy fights. However, such
provisions could have the effect of discouraging others from making tender
offers for the Company's shares and, as a consequence, they also may inhibit
fluctuations in the market price of the Company's shares which could result from
actual or rumored takeover attempts. Such provisions also may have the effect of
preventing changes in the management of the Company. See "Risk Factors -- Effect
of Certain Charter Provisions; Antitakeover Effects of Restated Certificate of
Incorporation and Bylaw Provisions and of Delaware Law."

DELAWARE TAKEOVER STATUTE

The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.

Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.

REGISTRATION RIGHTS

Pursuant to the Second Amended and Restated Registration Rights Agreement
among the Company and certain stockholders (the "Registration Rights
Agreement"), holders of approximately 1,877,000 shares of Common Stock and any
shares of Common Stock issued as a dividend or other distribution with respect
to, in exchange for, or in replacement of, such approximately 1,877,000 shares
of Common Stock and 18,534 shares issuable upon exercise of a certain warrant
(collectively, the "Registrable Securities") will be entitled to certain rights
with respect to the registration of the Registrable Securities under the
Securities Act. Under the terms of the Registration Rights Agreement, if the
Company proposes to register any of its securities under the Securities Act for
its own account, holders of the Registrable Securities, as well as 139,813
shares of Common Stock held by seven consultants and 15,000 shares issuable upon
exercise of a certain warrant (collectively, the "Consultant Securities"), are
entitled to notice of such registration and are entitled to include their
Registrable Securities and/or Consultant Securities therein ("piggyback
registration"). Holders of the Registrable Securities and Consultant Securities
waived their rights under the Registration Rights Agreement to piggyback
registration in connection with this offering. Beginning four months after the
effective date of this offering and subject to certain dollar limitations, the
holders of Registrable Securities may also require the Company, on no more than
two occasions, to file a registration statement under the Securities Act with
respect to their Registrable Securities and the Company is required to use its
best efforts

54
<PAGE>
to effect such registration ("requested registration"). In addition, upon
qualification of the Company to file registration statements on Form S-3 under
the Securities Act and subject to certain dollar limitations, holders of
Registrable Securities are entitled to request the Company to effect
registrations of the Registrable Securities on Form S-3 ("S-3 registration").
The foregoing rights to registration are subject to certain limitations and
conditions, including the underwriters' right to limit the number of Registrable
Securities and Consultant Securities being registered pursuant to piggyback
registrations and the Company's right to delay requested and S-3 registration in
good faith. The Company is required to bear the expenses relating to requested
and piggyback registrations and the first two S-3 registrations, except for the
selling stockholders' pro rata portion of the underwriting discounts and
commissions.

The following entities which may be considered "affiliates" of the Company,
as that term is defined in the Securities Act, own a total of 1,398,474 shares
of Registrable Securities: H-P owns 695,312 shares, Asset Management Associates
1984 owns 351,581 shares and Venrock Associates together with Venrock Associates
II, L.P. own 351,581 shares of Registrable Securities. See "Principal
Stockholders."

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is The First National
Bank of Boston, Boston, Massachusetts. Its telephone number is (617) 575-2900.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have outstanding an
aggregate of 6,732,989 shares of Common Stock, based on shares outstanding as of
March 31, 1996 and assuming the issuance of the 1,000,000 shares of Common Stock
offered hereby and no exercise of the Underwriters' over-allotment option. Of
the total outstanding shares of Common Stock, 5,308,123 shares of Common Stock
will be freely tradable without restriction or further registration under the
Act, unless purchased by "affiliates" of the Company, as that term is defined in
Rule 144 under the Act, including the 1,000,000 shares of Common Stock offered
hereby, 1,500,000 shares registered pursuant to the Company's initial public
offering and 2,808,123 shares that have either been registered on Form S-8 or
are restricted securities that can be sold pursuant to Rule 144(k) or Rule 701
under the Act. The remaining 1,424,866 shares are held by persons who may be
deemed affiliates of the Company and will be eligible for sale on the date of
this Prospectus subject to the restrictions of Rule 144 ("Affiliate Shares").
All of the Affiliate Shares will be subject to the lock-up arrangements
described below.

Officers, directors and certain stockholders, holding in the aggregate
1,424,866 shares of Common Stock, have agreed not to offer, sell or otherwise
dispose of any such Common Stock for a period of 90 days after the date of this
Prospectus, without the prior consent of Tucker Anthony Incorporated, a
Representative of the Underwriters. See "Underwriting." The shares of Common
Stock subject to lock-up agreements include 1,424,866 shares that are
"restricted securities" and eligible for immediate resale after the 90-day
lock-up period as described below.

In general, under Rule 144 as currently in effect, an affiliate of the
Company or a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least two (2) years, including
the holding period of any prior owner except an affiliate, would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of one percent (1%) of the then outstanding shares of the Company's
Common Stock or the average weekly trading volume of the Company's Common Stock
on the Nasdaq National Market during the four (4) calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the affiliate of the Company at any time during the ninety
(90) days preceding a sale, and who has beneficially owned shares for at least
three (3) years (including any period of ownership of preceding non-affiliated
holders), would be entitled to sell such shares under Rule 144(k) without regard
to the volume limitations, manner of sale provisions, public information
requirements or notice requirements.

55
<PAGE>
UNDERWRITING

The Underwriters named below, acting through Tucker Anthony Incorporated and
Pennsylvania Merchant Group Ltd, as Representatives, have agreed, subject to the
terms and conditions of the Underwriting Agreement, to purchase from the
Company, and the Company has agreed to sell to the Underwriters, the respective
numbers of shares of Common Stock set forth opposite their names below:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ------------------------------------------------------------------------------------------- ----------
<S> <C>
Tucker Anthony Incorporated................................................................ 500,000
Pennsylvania Merchant Group Ltd............................................................ 500,000
----------
Total.................................................................................. 1,000,000
----------
----------
</TABLE>

The Underwriters will purchase all shares of Common Stock offered hereby,
other than over-allotment shares, if any of such shares are purchased. The
Underwriting Agreement provides that the obligations of the several Underwriters
are subject to conditions precedent specified therein. In the event of a default
by an Underwriter, the commitment set forth above of the non-defaulting
Underwriter may be increased or the Underwriting Agreement may be terminated.

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the offering price
set forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $0.32 per share. Such dealers may
reallow, a concession not in excess of $0.10 per share to certain other dealers.
After the public offering, the public offering price, concession and reallowance
to dealers may be changed by the Underwriters.

The Company has granted to the Underwriters an option, exercisable by the
Underwriters not later than 30 days after the effective date of this Prospectus,
to purchase up to 150,000 additional shares of Common Stock at the public
offering price, less the underwriting discount set forth on the cover page of
this Prospectus. The Underwriters may exercise such option, in whole or in part,
only to cover over-allotments made in connection with the sale of Common Stock
offered hereby. To the extent that the Underwriters exercise such option, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares of Common
Stock to be purchased by it shown in the above table bears to the total shown,
and the Company will be obligated, pursuant to the option, to sell such shares
to the Underwriters.

In connection with this offering, certain underwriters and selling group
members may engage in passive market making transactions in the Common Stock on
the Nasdaq National Market immediately prior to the commencement of sales in
this offering, in accordance with Rule 10b-6A under the Securities Exchange Act
of 1934, as amended ("Exchange Act"). Passive market making consists of
displaying bids on the Nasdaq National Market limited by the bid prices of
independent market makers and purchases limited by such prices and effected in
response to order flow. Net purchases by a passive market maker on each day are
limited to a specified percentage of the passive market maker's average daily
trading volume in the Common Stock during a specified period and must be
discontinued when such limit is reached. Passive market making may stabilize the
market price of the Common Stock at a level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act and to contribute to
certain payments that the Underwriters may be required to make.

The Company has agreed that during the 90-day period commencing on the date
hereof, the Company will not, without the prior written consent of Tucker
Anthony Incorporated, as Representative of the Underwriters, issue, offer, agree
to sell, sell, grant any option for the sale of, transfer or otherwise dispose
of any shares of Common Stock other than pursuant to currently outstanding
options, warrants or convertible securities (other than employee stock options
and Common Stock currently authorized under the Company's 1992 Stock
Option/Stock Issuance Plan and Employee Stock Purchase Plan). The Company's
officers, directors and certain stockholders have agreed that during the 90-day
period commencing on the date hereof

56
<PAGE>
they will not, without the prior written consent of Tucker Anthony Incorporated,
as Representative of the Underwriters, offer, pledge, contract to sell, sell,
grant any option for the sale of, transfer or otherwise dispose of any shares of
Common Stock other than gifts or transfers by will or intestacy to immediate
family members, shareholders of a corporate stockholder or partners of a
stockholder that is a partnership, provided that the transferee agrees to the
same limitations.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Palo
Alto, California. Certain matters relating to patents in connection with the
offering will be passed upon for the Company by Merchant, Gould, Smith, Edell,
Welter & Schmidt, P.A., Minneapolis, Minnesota. Certain legal matters in
connection with the offering will be passed upon for the Underwriters by Wilson
Sonsini Goodrich & Rosati, P.C., Palo Alto, California.

EXPERTS

The balance sheets of the Company as of December 31, 1995 and 1994 and the
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1995, included in this Prospectus
have been included herein in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.

The matters set forth under "Risk Factors -- Uncertainty of Patents and
Proprietary Rights; Risk of Litigation" and "Business -- Patents, Proprietary
Technology and Trademarks" have been included in this Prospectus in reliance
upon Merchant, Gould, Smith, Edell, Welter & Schmidt, P.A., Minneapolis,
Minnesota, as experts in patent matters, which firm will pass on certain legal
matters in connection with this offering. See "Legal Matters."

ADDITIONAL INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act, and in accordance therewith files reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). Reports, proxy statements and other information filed by the
Company 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 Commission's regional offices at 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and 75 Park Place, 14th Floor, New York, New York
10007. Copies of such materials can be obtained at prescribed rates from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549.

A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered by the Company has been filed with the Commission.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
thereto. A copy of the Registration Statement may be inspected by anyone without
charge at the Commission's principal office in Washington, D.C. and copies of
all or any part thereof may be obtained from the Public Reference Section of the
Commission, at the address set forth in the preceding paragraph, upon payment of
certain fees prescribed by the Commission.

57
<PAGE>
CONDUCTUS, INC.
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.................................................................... F-2
Balance Sheets....................................................................................... F-3
Statements of Operations............................................................................. F-4
Statements of Stockholders' Equity................................................................... F-5
Statements of Cash Flows............................................................................. F-6
Notes to Financial Statements........................................................................ F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Conductus, Inc.:

We have audited the accompanying balance sheets of Conductus, Inc. as of
December 31, 1995 and 1994, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. 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 Conductus, Inc. as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

San Jose, California
February 9, 1996, except as to Note 10
for which the date is March 8, 1996

F-2
<PAGE>
CONDUCTUS, INC.
BALANCE SHEETS
ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994
MARCH 31, -------------- --------------
1996
--------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 582,303 $ 272,410 $ 504,763
Short-term investments.............................................. 1,528,028 2,880,464 6,052,944
Accounts receivable (net of allowance for doubtful accounts of
$50,000 in 1996, 1995 and 1994, respectively)...................... 2,967,562 3,251,147 2,340,574
Inventories......................................................... 1,055,434 765,424 494,579
Prepaid expenses and other current assets........................... 151,155 285,404 162,410
-------------- -------------- --------------
Total current assets.............................................. 6,284,482 7,454,849 9,555,270
Property and equipment, net........................................... 2,555,893 2,550,042 1,768,599
Long-term investments................................................. -- -- 980,619
Other assets.......................................................... 96,912 123,340 236,991
-------------- -------------- --------------
Total assets...................................................... $ 8,937,287 $ 10,128,231 $ 12,541,479
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES
Current liabilities:
Current portion of long-term debt................................... $ 809,421 $ 687,736 $ 61,566
Accounts payable.................................................... 1,603,555 1,621,424 1,270,595
Other accrued liabilities........................................... 786,104 821,230 1,006,034
Obligations under capital leases, current portion................... 11,249 37,894 140,963
-------------- -------------- --------------
Total current liabilities......................................... 3,210,329 3,168,284 2,479,158
Long-term debt, net of current portion................................ 1,258,228 1,146,227 493,139
Obligations under capital leases, net of current portion.............. -- -- 40,271
-------------- -------------- --------------
Total liabilities................................................. 4,468,557 4,314,511 3,012,568
-------------- -------------- --------------
Commitments (Note 11)
STOCKHOLDERS' EQUITY
Preferred stock, $0.0001 par value:
Authorized: 1,000,000 shares
None issued or outstanding in 1996, 1995 or 1994..................... -- -- --
Common stock, $0.000l par value:
Authorized: 11,000,000 shares;
Issued: 5,905,363, 5,861,632 and 5,534,550
shares in 1996, 1995 and 1994, respectively
Outstanding: 5,732,989, 5,689,258 and 5,371,143 shares in 1996, 1995
and 1994, respectively............................................... 574 570 537
Additional paid-in capital............................................ 30,069,797 30,035,358 29,414,318
Unrealized gain (loss) on investments, net............................ 319 626 (84,762)
Accumulated deficit................................................... (25,601,960) (24,222,834) (19,801,182)
-------------- -------------- --------------
Total stockholders' equity........................................ 4,468,730 5,813,720 9,528,911
-------------- -------------- --------------
Total liabilities and stockholders' equity...................... $ 8,937,287 $ 10,128,231 $ 12,541,479
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-3
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------------------- -------------------------------------------
1996 1995 1995 1994 1993
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Contract.............................. $ 2,213,762 $ 1,643,486 $ 8,148,189 $ 7,048,529 $ 5,070,544
Product sales......................... 397,497 369,456 2,433,496 1,587,603 1,408,735
------------- ------------- ------------- ------------- -------------
Total revenues...................... 2,611,259 2,012,492 10,581,685 8,636,132 6,479,279
------------- ------------- ------------- ------------- -------------
Costs and expenses:
Cost of product sales................. 256,300 166,002 1,429,516 974,699 1,175,283
Research and development.............. 2,743,131 2,577,387 9,819,416 9,201,460 7,080,230
Selling, general and administrative... 1,006,518 827,281 3,755,653 3,336,346 1,588,565
Nonrecurring charge related to
purchased technology................. 705,000
------------- ------------- ------------- ------------- -------------
Total costs and expenses............ 4,005,949 3,570,670 15,004,585 13,512,505 10,549,078
------------- ------------- ------------- ------------- -------------
Loss from operations................ (1,394,690) (1,557,728) (4,422,900) (4,876,373) (4,069,799)
Interest income......................... 27,329 80,101 249,371 344,496 166,232
Other income (expense).................. 24,521 (68,799) (92,608) 43,737 (41,803)
Interest expense........................ (36,286) (24,032) (155,515) (55,816) (176,447)
------------- ------------- ------------- ------------- -------------
Net loss............................ $ (1,379,126) $ (1,570,458) $ (4,421,652) $ (4,543,956) $ (4,121,817)
------------- ------------- ------------- ------------- -------------
Net loss per common share............... $ (0.24) $ (0.29) $ (0.80) $ (0.85) $ (1.40)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Shares used in computing per share
amounts................................ 5,706,000 5,397,000 5,543,073 5,322,767 2,940,976
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
AND THE THREE MONTHS ENDED MARCH 31, 1996

<TABLE>
<CAPTION>
NOTES UNREALIZED
ADDITIONAL RECEIVABLE GAIN
PREFERRED COMMON PAID-IN FROM (LOSS) ON ACCUMULATED
STOCK STOCK CAPITAL STOCKHOLDERS INVESTMENTS DEFICIT TOTAL
--------- ------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1993............... $789 $ 53 $11,203,180 $(22,756) $(11,135,409) $ 45,857
Issuance of Series B preferred
warrants............................... 10,000 10,000
Issuance of 342,588 shares of common
stock in connection with Tristan
acquisition............................ 34 1,095,966 1,096,000
Issuance of 9,345 shares of common stock
to employees........................... 1 4,837 4,838
Compensation associated with stock
options granted........................ 48,011 48,011
Issuance of 230,570 shares of Series B
preferred stock for conversion of
promissory notes....................... 74 2,065,833 2,065,907
Issuance of 182,276 shares of Series B
preferred stock and 21,670 shares of
common stock........................... 58 2 1,657,129 1,657,189
Issuance of 1,500,000 shares of common
stock through initial public offering,
net of issuance costs and the
conversion of preferred stock into
2,877,840 shares of common stock....... (921) 438 13,251,527 13,251,044
Net loss................................ (4,121,817 ) (4,121,817)
--------- ------ ----------- ------------ ----------- ------------ -----------
Balances, December 31, 1993............. -- 528 29,336,483 (22,756) (15,257,226 ) 14,057,029
Issuance of 91,001 shares of common
stock to employees..................... 9 24,291 24,300
Repurchase of 531 shares of common stock
and repayment of notes receivable from
stockholders........................... (5,648) 22,756 17,108
Compensation associated with stock
options granted........................ 59,192 59,192
Unrealized loss on investments, net..... $(84,762) (84,762)
Net loss................................ (4,543,956 ) (4,543,956)
--------- ------ ----------- ------------ ----------- ------------ -----------
Balances, December 31, 1994............. -- 537 29,414,318 -- (84,762) (19,801,182 ) 9,528,911
Issuance of 224,762 shares of common
stock to employees..................... 23 133,386 133,409
Compensation associated with stock
options granted........................ 34,528 34,528
Issuance of 101,790 shares of common
stock to employees under the employee
stock purchase plan.................... 10 453,216 453,226
Repurchase of 8,967 shares of common
stock.................................. (90) (90)
Unrealized gain on investments, net..... 85,388 85,388
Net loss................................ (4,421,652 ) (4,421,652)
--------- ------ ----------- ------------ ----------- ------------ -----------
Balances, December 31, 1995............. -- 570 30,035,358 -- 626 (24,222,834 ) 5,813,720
Issuance of 43,731 shares of common
stock to employees and warrant
holders................................ 4 34,439 34,443
Unrealized loss on investments, net..... (307) (307)
Net loss................................ (1,379,126 ) (1,379,126)
--------- ------ ----------- ------------ ----------- ------------ -----------
Balances, March 31, 1996 (unaudited).... $-- $574 $30,069,797 $ -- $ 319 $(25,601,960) $ 4,468,730
--------- ------ ----------- ------------ ----------- ------------ -----------
--------- ------ ----------- ------------ ----------- ------------ -----------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5
<PAGE>
CONDUCTUS, INC.
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------------------- ------------------------------------------
1996 1995 1995 1994 1993
------------- ------------- ------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................... $ (1,379,126) $ (1,570,458) $ (4,421,652) $ (4,543,956) $ (4,121,817)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 245,592 271,816 901,340 948,132 1,030,472
Compensation associated with stock options
granted...................................... 34,528 59,192 48,011
Provision for excess and obsolete inventory... 20,000 61,000
Nonrecurring charge associated with purchased
technology................................... 705,000
Loss on disposal of equipment................. 15,473 16,879
Other noncash expenses, net................... 57,535 133,918
Decrease (increase) in:
Accounts receivable......................... 283,585 290,321 (910,573) (428,871) (575,782)
Inventory................................... (290,010) (174,030) (290,845) (342,499) (213,080)
Prepaid expenses and other current assets... 134,249 52,561 (122,994) (11,480) 211,675
Other assets................................ (2,260) (1,499) (1,099) (4,193) (56,195)
(Decrease) increase in:
Accounts payable and accrued liabilities.... (52,995) 313,306 166,025 611,413 26,339
------------- ------------- ------------- ------------- ------------
Net cash used in operating activities..... (1,060,965) (817,983) (4,625,270) (3,578,254) (2,794,580)
------------- ------------- ------------- ------------- ------------
Cash flows from investing activities:
Net cash received in acquisition.............. 54,497
Proceeds from sales of short-term
investments.................................. 4,132,703 17,626,192 40,473,743 42,875,034 35,988,476
Purchases of short-term investments........... (2,780,267) (16,851,948) (36,235,256) (39,906,358) (46,075,477)
Acquisition of property and equipment......... (252,258) (386,870) (1,568,033) (1,225,846) (425,276)
Proceeds from sales of assets................. 29,196
------------- ------------- ------------- ------------- ------------
Net cash provided by (used in) investing
activities............................... 1,129,374 387,374 2,670,454 1,742,830 (10,457,780)
------------- ------------- ------------- ------------- ------------
Cash flows from financing activities:
Proceeds from borrowings...................... 405,620 322,247 1,432,944 554,705 990,000
Proceeds from repayment of note receivable
from stockholder............................. 18,765
Net proceeds from issuance of:
Series B preferred stock.................... 1,427,189
Warrants to purchase Series B preferred
stock...................................... 10,000
Common stock................................ 34,443 32,066 586,635 24,300 13,255,882
Repurchase of common stock.................... (90)
Principal payments under capital lease
obligations.................................. (26,645) (39,507) (143,340) (329,148) (628,611)
Principals payments on long-term debt......... (171,934) (153,686) (121,035)
------------- ------------- ------------- ------------- ------------
Net cash provided by financing
activities............................... 241,484 314,806 1,722,463 268,622 14,933,425
------------- ------------- ------------- ------------- ------------
Net increase (decrease) in cash and cash
equivalents............................ 309,893 (115,803) (232,353) (1,566,802) 1,681,065
Cash and cash equivalents at beginning of
period......................................... 272,410 504,763 504,763 2,071,565 390,500
------------- ------------- ------------- ------------- ------------
Cash and cash equivalents at end of period...... $ 582,303 $ 388,960 $ 272,410 $ 504,763 $ 2,071,565
------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-6
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND AFTER MARCH 31, 1996 IS UNAUDITED)

1. FORMATION AND BUSINESS OF THE COMPANY:
The Company was formed to develop, manufacture and market superconductive
electronic devices, circuits and systems for sensor, communications, test and
instrumentation, and digital electronics applications. Effective June 28, 1994,
the Company dissolved its subsidiary, Tristan Technologies, Inc. ("Tristan")
acquired in May 1993 and the former Tristan operations have become the Company's
Instrument and Systems Division. At that date, the Company discontinued use of
"Consolidated" in the financial statements.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

FISCAL YEAR:

The Company uses a 52-53 week fiscal year ending on the last Friday of the
month. For convenience of presentation, the accompanying financial statements
have been shown as ending on December 31 of each applicable period.

USE OF ESTIMATES:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

CERTAIN RISKS AND CONCENTRATIONS:

The Company's superconducting products are concentrated in the electronic
component industry which is highly competitive and rapidly changing. Revenues
for the Company's products are concentrated with a relatively limited number of
customers and supplies for certain components are concentrated among a few
providers. The development of new technologies or commercialization of
superconductive products by any competitor could affect operating results
adversely.

CASH, CASH EQUIVALENTS AND INVESTMENTS:

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Investments,
which consist primarily of U.S. government obligations, corporate bonds and
commercial paper, are stated at fair market value. Management believes that the
financial institutions in which it maintains such deposits are financially sound
and, accordingly, minimal credit risk exists with respect to these deposits.
Additionally, cash and cash equivalents are held by two major banks.

Other financial instruments, principally accounts receivable and leases
payable, are considered to approximate fair value based upon comparable market
information available at respective balance sheet dates.

As of April 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and
Equity Securities" which requires a change in the method used to account for
certain investments. All investments at April 1, 1994 were deemed by management
to be available-for-sale and therefore are reported at fair market value with
net unrealized losses reported as a separate component of stockholders' equity.
Available-for-sale marketable securities with maturities less than one year from
the balance sheet date are classified as short-term and those with maturities
greater than one year from the balance sheet date are classified as long term.
Adoption of SFAS 115 did not have a material effect on the Company's financial
statements.

F-7
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND AFTER MARCH 31, 1996 IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVENTORIES:

Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Appropriate consideration is given to obsolescence,
excessive levels, deterioration and other factors in evaluating net realizable
value.

PROPERTY AND EQUIPMENT:

Property and equipment are recorded at cost, net of accumulated depreciation
and amortization.

Depreciation of property and equipment are computed using the straight-line
method over estimated useful lives of four to six years. Amortization of
leasehold improvements is computed using the straight-line method over the
shorter of the useful life of the assets and the related lease term.

REVENUE RECOGNITION:

Product revenues are recognized at the time of shipment.

RESEARCH AND DEVELOPMENT CONTRACTS:

The Company has entered into contracts to perform research and development
for the U.S. government. Revenues from these contracts are recognized utilizing
the percentage-of-completion method measured by the relationship of costs
incurred to total contract costs. Costs include direct engineering and
development costs and applicable overhead.

RESEARCH AND DEVELOPMENT:

Internally funded research and development expenditures are charged to
operations as incurred.

INCOME TAXES:

The Company utilizes the liability method of accounting for income taxes, as
set forth in Statement of Financial Accounting Standards ("SFAS No. 109"),
"Accounting for Income Taxes." Under the liability method, deferred taxes are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse.

UNAUDITED INTERIM FINANCIAL STATEMENTS:

The accompanying unaudited interim financial statements for the three months
ended March 31, 1996 and 1995 have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions to Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company, all
adjustments (consisting of only normal recurring accruals) considered necessary
to present fairly the financial position as of March 31, 1996 and the statements
of operations, stockholders' equity and cash flows for the three month periods
ended March 31, 1996 and 1995 have been included.

RECLASSIFICATIONS:

Certain amounts in the December 31, 1994 and 1993 financial statements have
been reclassified to conform to the presentation at December 31, 1995. The
reclassifications had no impact on previously reported net losses, total assets
or net cashflows.

COMPUTATION OF NET LOSS PER COMMON SHARE:

Net loss per common share is based upon the weighted average number of
common shares outstanding. Common equivalent shares have not been included in
the per share calculations as the effect would not be dilutive.

F-8
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND AFTER MARCH 31, 1996 IS UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
RECENT PRONOUNCEMENTS:

During March 1995, the Financial Accounting Standards Board issued Statement
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." SFAS 121 will become effective for the
Company's year ending December 31, 1996. The Company has studied the
implications of SFAS 121 and, based on its initial evaluation, does not expect
it to have a material impact on the Company's financial condition or results of
operations.

During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation" which
established a fair value based method of accounting for stock-based compensation
plans and requires additional disclosures for those companies who elect not to
adopt the new method of accounting. The Company will continue to account for
employee purchase rights and stock options under APB Opinion No. 25, "Accounting
for Stock Issued to Employees." SFAS No. 123 disclosures will be effective for
fiscal years beginning after December 15, 1995.

3. SUPPLEMENTAL CASH FLOW DISCLOSURE:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
---------- ---------- ------------
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for interest......................................... $ 147,605 $ 58,816 $ 90,539
---------- ---------- ------------
---------- ---------- ------------
Supplemental schedule of noncash investing and funding activities:
Capital lease obligation incurred in connection with equipment leases.......... $ 205,053
------------
------------
Reclassification to long-term investment upon adoption of SFAS No. 115......... $ 980,619
----------
----------
Reclassification of investments to short-term investments based on maturity
date.......................................................................... $ 980,649
----------
----------
Unrealized gain (loss) on investments, net..................................... $ 85,388 $ (84,762)
---------- ----------
---------- ----------
Repurchase of common stock in exchange for note receivable..................... $ 5,648
----------
----------
Deferred compensation charge relating to stock option plan..................... $ 295,955
------------
------------
Equipment purchases included in accounts payable reclassed to capital leases... $ 87,899
------------
------------
Series B preferred stock issued in payment of notes payable and related accrued
interest...................................................................... $ 2,065,907
------------
------------
Series B preferred stock issued for equipment acquired......................... $ 230,000
------------
------------
Common stock issued in connection with the acquisition of Tristan.............. $ 1,096,000
------------
------------
Conversion of Series A preferred stock to common stock......................... $ 610
------------
------------
Conversion of Series B preferred stock to common stock......................... $ 311
------------
------------
Other noncash expenses:
Compensation associated with stock options granted............................. $ 34,528 $ 59,192 $ 48,011
Additions to principal for accrued interest earned on notes receivable from
stockholders.................................................................. (1,657)
Additions to principal for accrued interest charged on notes payable........... 85,907
---------- ---------- ------------
$ 34,528 $ 57,535 $ 133,918
---------- ---------- ------------
---------- ---------- ------------
</TABLE>

F-9
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND AFTER MARCH 31, 1996 IS UNAUDITED)

4. INVESTMENTS:
Investments are summarized below:

<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------------- --------------------------
MARKET MARKET
COST VALUE COST VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Debt securities:
Corporate bonds.................................... $ 3,526,598 $ 3,499,970
Preferred bonds.................................... $ 500,000 $ 500,000
U.S. government and related agency securities...... 795,897 796,902 1,990,069 1,931,935
Commercial paper................................... 1,499,909 1,499,530 1,399,074 1,399,074
Other.............................................. 40,904 40,904 125,672 125,672
Accrued interest................................... 43,128 43,128 76,912 76,912
------------ ------------ ------------ ------------
Subtotal......................................... 2,879,838 2,880,464 7,118,325 7,033,563
Unrealized gain (loss), net.......................... 626 (84,762)
------------ ------------ ------------ ------------
Total............................................ $ 2,880,464 $ 2,880,464 $ 7,033,563 $ 7,033,563
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>

At December 31, 1995, all scheduled maturities of investments are within one
year and unrealized gains for investments were $626. Additionally, investments
consisted of Preferred bonds, U.S. government obligations, and commercial paper
bearing interest between 4.0% to 6.0% per annum are due to mature between
January 1, 1996 and July 1996.

At December 31, 1994, scheduled maturities of investments within one year
were approximately $6,053,000 and for one year to five years were approximately
$981,000 and net unrealized losses on investments were $84,762. Additionally,
investments consisted of U.S. corporate bonds, U.S. government obligations, and
commercial paper bearing interest between 4.00% to 9.375% per annum, due to
mature between January 1995 and July 1996.

5. ACCOUNTS RECEIVABLE:
Accounts receivable, net, consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
U.S. government contracts:
Unbilled.................................................... $ 565,959 $ 411,206 $ 406,056
Billed...................................................... 1,895,894 2,036,294 1,601,884
Commercial.................................................... 505,709 803,647 332,634
------------ ------------ ------------
Total..................................................... $ 2,967,562 $ 3,251,147 $ 2,340,574
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

F-10
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND AFTER MARCH 31, 1996 IS UNAUDITED)

6. INVENTORIES:
Inventories, net of reserves at March 31, 1996 and December 31, 1995 and
1994 of $81,000, $81,000 and $61,000, respectively, consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------------
1996 1995 1994
------------ ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Raw materials.................................................... $ 370,513 $ 299,619 $ 170,762
Work in process.................................................. 634,466 431,882 304,559
Finished goods................................................... 50,455 33,923 19,258
------------ ---------- ----------
$ 1,055,434 $ 765,424 $ 494,579
------------ ---------- ----------
------------ ---------- ----------
</TABLE>

7. PROPERTY AND EQUIPMENT:
Property and equipment, including equipment acquired under capital leases
(see Note 9), consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
Equipment..................................................... $ 5,677,664 $ 5,494,288 $ 4,798,632
Leasehold improvements........................................ 1,500,516 1,489,856 992,472
Furniture and fixtures........................................ 355,542 368,164 184,835
Construction in process....................................... 188,506 191,664 --
------------ ------------ ------------
7,722,228 7,543,972 5,975,939
Less accumulated depreciation and amortization................ 5,166,335 4,993,930 4,207,340
------------ ------------ ------------
$ 2,555,893 $ 2,550,042 $ 1,768,599
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

8. OTHER ACCRUED LIABILITIES:
Other accrued liabilities consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------------
1996 1995 1994
----------- ---------- ------------
<S> <C> <C> <C>
(UNAUDITED)
Accrued consulting.............................................. $ 84,621 $ 74,772 $ 207,552
Accrued compensation............................................ 495,522 525,193 573,137
Accrued professional expenses................................... 57,688 84,962 122,797
Other accrued liabilities....................................... 148,273 136,303 102,548
----------- ---------- ------------
$ 786,104 $ 821,230 $ 1,006,034
----------- ---------- ------------
----------- ---------- ------------
</TABLE>

9. EQUIPMENT LEASE LINES OF CREDIT:
As of December 31, 1995, the Company has borrowings due under two equipment
lease lines of credit. No additional amounts were available as of December 1995.
The borrowings are collateralized by the related equipment. Lease payments under
the lines are based on the total delivered equipment cost multiplied by a
monthly rate factor of 2.5%.

F-11
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND AFTER MARCH 31, 1996 IS UNAUDITED)

9. EQUIPMENT LEASE LINES OF CREDIT: (CONTINUED)
Following is an analysis of equipment acquired under the lease lines of
credit:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Equipment..................................................................... $ 292,953 $ 756,327
Less accumulated amortization................................................. (267,588) (452,272)
----------- -----------
Net property acquired under capital leases.................................... $ 25,365 $ 304,055
----------- -----------
----------- -----------
</TABLE>

As of December 31, 1995, future minimum lease payments under capital leases
are as follows:

<TABLE>
<S> <C>
Total minimum lease payments for 1996.............................. $ 38,949
Less amount representing interest.................................. 1,055
---------
37,894
Less current portion............................................... 37,894
---------
$ --
---------
---------
</TABLE>

10. LONG-TERM DEBT AND OTHER BORROWINGS:
In March 1996, the Company added to its $2,000,000 equipment credit facility
with a financial institution to finance costs associated with the acquisition of
equipment by adding a second facility for $1,000,000. All borrowings under these
credit facilities are at the bank's prime rate plus 1.00% (9.50% at December 31,
1995) with interest paid monthly, and are collateralized by the related
equipment. Principal installments under the $2,000,000 facility commenced
September 1995 and mature over a thirty-six (36) month period as follows:
$687,736, $687,736 and $458,491 in 1996, 1997 and 1998, respectively. At
December 31, 1995, no additional amounts were available under the $2,000,000
credit facility. The $1,000,000 facility matures over a 34 month period. The
Company is restricted from paying cash dividends but may pay stock dividends.

The Company in March 1996 modified its line of credit facility with a bank
to expire February 28, 1997. The agreement provides for borrowings up to the
lesser of $2,000,000 or 75% of eligible receivables. Borrowings under the
agreement bear interest at the bank's prime rate plus 0.50% (9% at December 31,
1995) and are collateralized by accounts receivable, equipment and other assets
of the Company. At December 31, 1995, the Company has no borrowings under the
agreement and had $1,000,000 available under the line of credit. In connection
with this modification, on March 8, 1996, the Company issued the lender warrants
to acquire 15,000 shares of the Company's common stock at a price of $11.25 per
share. These warrants may be exercised by the holder at any time until the
expiration date, March 8, 2001.

The two equipment credit facilities and line of credit facility require that
the Company provide financial information to the lender, obtain approval of the
lender for any material disposition of the collateral except in the ordinary
course of business and meet certain financial ratios, minimum tangible net
worth, minimum cash and investments and other covenants.

Warrants to acquire 33,460 shares of common stock, at a price of $8.96 per
share, issued in connection with the issuance of convertible promissory notes in
1993 and 1992, expired in August 1995.

11. COMMITMENTS:
The Company leases its administrative, sales, marketing, manufacturing,
research and development facilities under noncancelable operating leases
expiring in February 1998 and August 2000 and 2001. Under the terms of the
leases, the Company is responsible for certain expenses and taxes.

F-12
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND AFTER MARCH 31, 1996 IS UNAUDITED)

11. COMMITMENTS: (CONTINUED)
Future minimum payments under these noncancelable leases are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR:
- ----------------------------------------------------------------
<S> <C>
1996............................................................ $ 394,917
1997............................................................ 396,951
1998............................................................ 338,810
1999............................................................ 327,114
2000............................................................ 279,114
Thereafter...................................................... 122,076
------------
$ 1,858,982
------------
------------
</TABLE>

Rent expense was $470,379, $456,459, $380,806, $115,067 and $102,823 for
December 31, 1995, 1994, 1993 and the three months ended March 31, 1996 and
1995, respectively.

12. RESEARCH AND DEVELOPMENT ARRANGEMENTS:

GOVERNMENT CONTRACTS:

The Company is party to a number of research and development contracts,
generally short-term in nature, with various agencies of the United States
government, which provided approximately $8,148,000, $7,049,000, $5,071,000,
$2,214,000 and $1,643,000 of revenues in the years ended December 31, 1995,
1994, 1993 and the three months ended March 31, 1996 and 1995, respectively.
Credit risk related to accounts receivable arising from such contracts is
considered minimal. For each of the three years ended December 31, 1995, 1994,
1993 and the three months ended March 31, 1996 and 1995 government related
contracts accounted for 77.0%, 81.6%, 78.3%, 84.8% and 81.7%, respectively, of
the Company's total revenues. Cost of contract revenue for the years ended
December 31, 1995, 1994 and 1993 and the three months ended March 31, 1996 and
1995 was $9,176,000, $8,717,000, $6,500,000, $2,855,000 and $1,902,000,
respectively.

DEVELOPMENT AND MARKETING AGREEMENT WITH VARIAN:

Conductus and Varian entered into a joint development and licensing
agreement in 1994, under which they jointly developed a superconducting probe
for NMR instruments for high-resolution spectroscopy. Both Conductus and Varian
provided technical support to the program, and each retains rights to
intellectual property it developed under the program, subject to certain
nonexclusive licensing rights of the other party.

Technology developed by one party under the Agreement is owned by that
party, subject to certain royalty-free non-exclusive rights of Varian and to a
reassignment right upon termination of the Agreement.

COORDINATED RESEARCH PROGRAM:

In May 1993, the Company and Hewlett-Packard Company ("H-P") modified a
previous Coordinated Research Program ("CRP") agreement by entering into a new
five-year agreement.

This agreement requires the Company and H-P to exchange reviews and
assessments of the Company's technical and applications developments,
particularly with respect to their potential application to H-P's products. H-P
has the right to appoint an H-P employee as a member of the Company's Scientific
Advisory Board, and the Company agreed to use its best efforts to cause a
nominee to be elected to the Board of Directors. Under this agreement, H-P will
not have rights to any of the Company's inventions, except that it will jointly
own with the Company any invention developed by the H-P Member pursuant to the
agreement or using the Company's confidential information. As a result, H-P and
the Company will each be entitled to

F-13
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND AFTER MARCH 31, 1996 IS UNAUDITED)

12. RESEARCH AND DEVELOPMENT ARRANGEMENTS: (CONTINUED)
commercialize products incorporating such inventions without the consent of or
an accounting to the other party, including through license and cross-license
arrangements with third parties. This agreement may be terminated by mutual
consent of the parties.

In connection with the agreement, the Company received $1,000,000 in cash
and $230,000 in equipment from H-P in exchange for issuing 439,286 shares of its
Series B preferred stock, which automatically converted into 137,276 shares of
common stock upon the close of the Company's initial public offering in August
1993.

CONSORTIUM FOR SUPERCONDUCTING ELECTRONICS:

The Company is a member of the Consortium for Superconducting Electronics
formed to conduct research and development programs leading to applications of
superconductive electronics. The Company is presently participating with other
members of the Consortium in two projects relating to the development of
superconductive wireless communications.

The Company has been granted a non-exclusive, royalty free license to all
intellectual property conceived or first actually reduced to practice in
connection with any work under a Consortium project in which the Company
participates while the Company is a member. The Company must pay a one-time
license fee for commercializing any invention covered by a "commercialized"
patent licensed to it by a university member or government laboratory member.
The fee is $50,000 or, in some cases, $25,000. (A patent is "commercialized"
when the Company's revenues from external sales of products covered by such
patent exceed $2,000,000). The Company may also be required to pay a license fee
for commercializing any invention covered by a "highly commercialized" patent
licensed to it by a university member, if the patent is owned solely or jointly
by a university or government laboratory member and if the patent is determined
to be a "basic" patent (i.e., a patent is "basic" if it represents a singular
contribution of profound commercial significance) under procedures established
by the Consortium. The initial fee may not exceed $1,000,000. In addition, a
second fee may be established after five years in accordance with such
procedures which may not exceed $5,000,000. (A patent is "highly commercialized"
if the Company's revenues from external sales of products covered by such patent
exceed $10,000,000).

ADVANCED TECHNOLOGY PROGRAM:

In August 1992, the Company, acting as administrator for and on behalf of a
joint venture formed to conduct research to develop a prototype hybrid
superconductor/semiconductor computer under the Department of Commerce Advanced
Technology Program, entered into a cost-sharing cooperative agreement with the
U.S. government. The U.S. government is expected to financially support the
project in one-year increments over a total five-year period. Under the terms of
the first-four years of the agreement, the U.S. government agreed to share costs
of the joint venture's research effort up to an aggregate of $5,959,596,
including subcontractor costs. The estimated cost of the total research efforts
in 1995, 1994 and 1993 were $3,719,572, $3,174,740 and $2,743,148, respectively.
Revenue of $1,920,020, $1,520,390 and $1,369,928 which represented the
government's cost-sharing portion of 42.60%, 48.30% and 49.94%, was recognized
under this contract for 1995, 1994 and 1993, respectively.

13. STOCKHOLDERS' EQUITY

CAPITAL STOCK:

In connection with obtaining the lease lines of credit (see Note 9), the
Company issued to the leasing companies warrants exercisable for the Company's
preferred stock, which converted to warrants for 32,894

F-14
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND AFTER MARCH 31, 1996 IS UNAUDITED)

13. STOCKHOLDERS' EQUITY (CONTINUED)
and 9,664 shares of common stock, at a price per share of $6.08 and $8.96,
respectively. As of March 31, 1996, warrants for 16,447 and 1,087 shares of
common stock remain exercisable, respectively. The warrants, which were
immediately exercisable, expire August 5, 1998.

1992 STOCK OPTION/STOCK ISSUANCE PLAN:

The Company's 1992 Stock Option/Stock Issuance Plan (the "Plan") serves as
the successor equity incentive program to the Company's 1987 and 1989 Stock
Option Plans (the "Predecessor Plans"). All outstanding stock options under the
Predecessor Plans will continue to be governed by the terms and conditions of
the Predecessor Plans and the specific instruments evidencing those options, but
no additional options will be granted under the Predecessor Plans.

A total of 1,580,000 shares of common stock are authorized for issuance
under the Plan as of December 31, 1995. Such authorized share reserve is
comprised of 7,812 shares originally approved under the Plan, the aggregate
outstanding shares under the Plan (approximately 689,912 shares) and an increase
of 882,276 shares under amendments to the Plan. The individuals eligible to
receive option grants or stock issuances pursuant to the Plan are limited to
employees (including officers and directors) and consultants of the Company or
any parent or subsidiary corporations. Each non-employee Board member who first
becomes a non-employee Board member at any time on or after January 23, 1995
shall automatically be granted at the time of such initial election or
appointment an option to purchase 15,000 shares of common stock.

The Plan is divided into two separate components: the option grant program
and the stock issuance program. Under the option grant program, eligible
individuals may be granted incentive stock options or nonstatutory options. The
exercise price of incentive stock options granted under the Plan must be at
least equal to the fair market value of the common stock of the Company on date
of grant. The exercise price of nonstatutory options granted under the Plan must
be not less than 85% of the fair market value of the common stock on date of
grant. The stock issuance program allows eligible individuals to effect
immediate purchases of the Company's common stock at fair market value or for
such consideration as the Compensation Committee deems advisable.

Options granted under the Plan may be immediately exercisable for all the
option shares, on either a vested or unvested basis, or may become exercisable
for fully vested shares in one or more installments over the participant's
period of service. Shares issued under the stock issuance program may either be
vested upon issuance or subject to a vesting schedule tied to the participant's
period of future service or to the attainment of designated performance goals.

No option may be granted with a term exceeding ten years. However, each such
option may be subject to earlier termination within a designated period
following the optionee's cessation of service with the Company.

In 1992, the Company recognized a compensation charge of $295,000, which is
being amortized to the statement of operations over the vesting period of the
related options as a result of a "deemed" fair market value in excess of the
exercise price of the options in connection with the initial public offering of
the Company's stock. As of December 31, 1995, $91,127 remains to be amortized.

F-15
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1995 AND AFTER MARCH 31, 1996 IS UNAUDITED)

13. STOCKHOLDERS' EQUITY (CONTINUED)
Activity under the Plan is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------
AVAILABLE PRICE
FOR GRANT SHARES PER SHARE AMOUNT
---------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Balances, January 1, 1993................................... 191,954 498,038 $ .16-.56 $ 189,910
Additional shares authorized.............................. 82,276
Granted................................................... (136,000) 136,000 $ .56-10.63 407,367
Exercised................................................. (9,345) $ .45-.56 (4,838)
Canceled.................................................. 4,319 (4,319) $ .45-.56 (2,137)
---------- ---------- ------------
Balances, December 31, 1993................................. 142,549 620,374 $ .16-10.63 590,302
Additional shares authorized.............................. 500,000
Granted................................................... (546,875) 546,875 $ 4.38-5.75 2,809,297
Exercised................................................. (91,001) $ .16-.88 (24,300)
Canceled.................................................. 56,093 (56,093) $ .45-10.63 (332,539)
---------- ---------- ------------
Balance, December 31, 1994.................................. 151,767 1,020,155 $ .16-5.75 3,042,760
Additional shares authorized.............................. 300,000
Granted................................................... (317,413) 317,413 $ 4.94-7.25 1,766,494
Exercised................................................. (170,701) $ .16-6.31 (105,407)
Canceled.................................................. 154,559 (154,559) $ .45-6.88 (628,182)
---------- ---------- ------------
Balance, December 31, 1995.................................. 288,913 1,012,308 $ .16-7.25 4,075,665
Granted................................................... (191,750) 191,750 $ 6.50-13.00 1,851,875
Exercised................................................. (32,005) $ .16-6.88 (33,931)
Canceled.................................................. 15,027 (15,027) $ .45-6.88 (67,087)
---------- ---------- ------------
Balance, March 31, 1996 (unaudited)......................... 112,190 1,157,026 $ .16-13.00 $ 5,826,522
---------- ---------- ------------
---------- ---------- ------------
</TABLE>

At December 31, 1995 and March 31, 1996, options to purchase 326,240 and
357,802 common shares were exercisable under the Plan, respectively.

In addition, the Company granted in 1994 an option for 10,000 shares at
$5.50 per share to the Chief Executive Officer.

In May 1996, the Company's stockholders approved an increase of 300,000
shares to be reserved for issuance under the 1992 Stock Option/Stock Issuance
Plan.

EMPLOYEE STOCK PURCHASE PLAN:

In July 1994, the Employee Stock Purchase Plan (the ESPP) was adopted by the
Company's Board of Directors and a total of 200,000 shares of common stock were
reserved for issuance thereunder. The purpose of the ESPP is to provide eligible
employees of the Company with a means of acquiring common stock of the Company
through payroll deductions. The purchase price of such stock under the ESPP
cannot be less than 85% of the lower of the fair market values on the specified
purchase date and the beginning of the offering period. During 1995 employees
purchased 101,790 shares for a total of approximately $453,226. At December 31,
1995, 98,210 shares were available for future grants under the Plan.

F-16
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1995 AND 1996 AND AFTER MARCH 31, 1996 IS UNAUDITED)

13. STOCKHOLDERS' EQUITY (CONTINUED) (CONTINUED)
COMMON STOCK RESERVED:

At December 31, 1995, the Company had reserved the following shares of
Common Stock:

<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Purchase Plan.......................................................................... 98,210
Warrants............................................................................... 42,558
Options................................................................................ 1,311,221
------------
1,451,989
------------
------------
</TABLE>

14. 401(K) PROFIT SHARING PLAN:
The Company has a 401(k) Profit Sharing Plan which covers substantially all
employees. Under the plan, employees are permitted to contribute up to 15% of
gross compensation not to exceed the annual 402(g) limitation for any plan year.
Discretionary contributions may be made by the Company irrespective of whether
it has net profits. No contributions were made by the Company during the years
1993 through 1995 or in the three months ended March 31, 1996 and 1995.

15. INCOME TAXES:
The components of deferred tax assets are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Property and equipment, principally due to differences in
depreciation.......................................................... $ 332,000 $ 286,000
Other accrued liabilities.............................................. 101,000 228,000
Capitalized research and development expense........................... 805,000 365,000
Net operating loss carryforward........................................ 6,157,000 5,925,000
Valuation allowance.................................................... (7,395,000) (6,804,000)
------------- -------------
Net deferred tax asset............................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>

Due to the uncertainty surrounding the realization of the favorable tax
attributes in future tax years, the Company has placed a valuation allowance
against its otherwise recognizable net deferred tax assets.

At December 31, 1995, the Company had approximately $22,000,000 and
$3,000,000 net operating loss carryforwards for federal and state income
purposes, respectively. These expire in the years 1996 through 2010. The
utilization of the Company's net operating loss carryforwards may be subject to
certain limitations upon certain changes in ownership, as defined.

16. BUSINESS SEGMENT AND MAJOR CUSTOMERS:
The Company was formed to operate in a single industry segment encompassing
the development, manufacture, and marketing of electronic components and systems
based on superconductors.

Commercial sales to one customer as a percentage of revenues were 11%
($1,172,000), 8% ($732,000), 13% ($816,000), 9% ($241,000) and 7% ($132,000) in
1995, 1994, 1993 and in the three months ended March 31, 1996 and 1995,
respectively. Amounts receivable from this customer were $408,000 and $147,000
at December 31, 1995 and 1994, respectively.

F-17
<PAGE>
CONDUCTUS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1996 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1995 AND 1996 AND AFTER MARCH 31, 1996 IS UNAUDITED)

16. BUSINESS SEGMENT AND MAJOR CUSTOMERS: (CONTINUED)
The Company's export revenues are all denominated in U.S. dollars and are
summarized as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
---------------------- ------------------------------------
1996 1995 1995 1994 1993
---------- ---------- ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Japan.................................... $ 241,000 $ 132,000 $ 1,172,000 $ 732,000 $ 816,000
Rest of the world........................ 79,000 55,000 256,000 265,000 27,000
---------- ---------- ------------ ---------- ----------
$ 320,000 $ 187,000 $ 1,428,000 $ 997,000 $ 843,000
---------- ---------- ------------ ---------- ----------
---------- ---------- ------------ ---------- ----------
</TABLE>

F-18
<PAGE>
[CONDUCTUS LOGO]

<TABLE>
<S> <C>
"PICTURE OF SPUTTER
SYSTEM" "CAD DESIGN"

"ELECTRONICS" "CRYOCOOLER"
</TABLE>

IN DEVELOPING ITS PRODUCTS, CONDUCTUS COMBINES ADVANCED SUPERCONDUCTIVE
THIN-FILM PROCESSING TECHNOLOGY WITH EXPERTISE IN ELECTRONIC DEVICE AND
COMPONENT DESIGN, ANALOG AND DIGITAL ELECTRONIC ENGINEERING, CRYOGENIC
PACKAGING, MECHANICAL ENGINEERING AND SYSTEM INTEGRATION.
<PAGE>
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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
Use of Proceeds................................ 13
Price Range of Common Stock and Dividend
Policy........................................ 13
Capitalization................................. 14
Dilution....................................... 15
Selected Financial Data........................ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 17
Business....................................... 22
Management..................................... 41
Certain Transactions........................... 48
Principal Stockholders......................... 51
Description of Capital Stock................... 53
Shares Eligible for Future Sale................ 55
Underwriting................................... 56
Legal Matters.................................. 57
Experts........................................ 57
Available Information.......................... 57
Index to Financial Statements.................. F-1
</TABLE>

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF.

1,000,000 SHARES

[CONDUCTUS LOGO]

COMMON STOCK

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

PROSPECTUS
---------------

June 26, 1996

TUCKER ANTHONY
INCORPORATED

PENNSYLVANIA MERCHANT GROUP LTD

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