SUPERCONDUCTOR TECHNOLOGIES INC, 424B4, 1996-11-22

SUPERCONDUCTOR TECHNOLOGIES INC
424B4, 1996-11-22
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

Previous: PREFERRED INCOME MANAGEMENT FUND INC, SC 13D/A, 1996-11-22

Next: ITT HARTFORD LIFE & ANNUITY INSURANCE CO SEPARATE ACCOUNT ON, 497, 1996-11-22

<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-10569

1,500,000 SHARES

LOGO
COMMON STOCK

All of the 1,500,000 shares of Common Stock offered hereby are being sold
by Superconductor Technologies Inc. (the "Company"). The Common Stock is quoted
on the Nasdaq National Market under the symbol "SCON." On November 21, 1996, the
last reported sales price for the Common Stock was $4.625 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" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.

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.

<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------
Per Share............................... $3.75 $0.30 $3.45
- ------------------------------------------------------------------------------------------------
Total(3)................................ $5,625,000 $450,000 $5,175,000
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>

(1) Does not include a non-accountable expense allowance payable to the
Underwriter or the value of a warrant to be issued to the Underwriter to
purchase up to 150,000 shares of Common Stock. The Company has agreed to
indemnify the Underwriter against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting estimated expenses of $500,000, including the Underwriter's
non-accountable expense allowance, payable by the Company.

(3) The Company and a stockholder of the Company (the "Selling Stockholder")
have granted the Underwriter 45-day options to purchase up to 100,000 and
125,000 additional shares of Common Stock, respectively, solely to cover
over-allotments, if any. The Company will not receive any proceeds from the
sale of Common Stock by the Selling Stockholder. See "Principal
Stockholders" and "Underwriting." If the Underwriter exercises these options
in full, the total Price to Public, Underwriting Discount, Proceeds to
Company and proceeds to the Selling Stockholder will be $6,468,750,
$517,500, $5,520,000 and $431,250, respectively.

The shares of Common Stock are offered by the Underwriter named herein,
subject to receipt and acceptance by it and subject to its right to reject any
order in whole or in part. It is expected that certificates representing the
shares will be ready for delivery at the offices of Van Kasper & Company, San
Francisco, California, on or about November 27, 1996.

VAN KASPER & COMPANY

NOVEMBER 22, 1996
<PAGE> 2

[ARTWORK]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER 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 TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. SEE "UNDERWRITING."

2
<PAGE> 3

PROSPECTUS SUMMARY

This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), that involve risks and uncertainties. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under "Risk
Factors" and elsewhere in this Prospectus. The following summary is qualified in
its entirety by the more detailed information and the financial statements and
notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted
herein, all information in this Prospectus assumes no exercise of the
Underwriter's over-allotment options or the warrant to be issued to the
Underwriter to purchase up to 150,000 shares of Common Stock. See
"Underwriting."

THE COMPANY

Superconductor Technologies Inc. ("STI" or the "Company") designs,
develops, manufactures and markets electronic components and systems that
incorporate high temperature superconductor ("HTS") materials and related
cryogenics. Superconductors are materials that have the ability to conduct
electrical energy with little or no resistance when cooled to "critical"
temperatures. STI believes that the growing worldwide wireless communications
market offers the most viable commercialization opportunities for its HTS
products. To capitalize on these opportunities, the Company has developed its
SuperFilter(TM) products, which combine specialized HTS filters with a
proprietary cryogenic cooler and, in many cases, a low-noise amplifier ("LNA")
in a highly compact system. The SuperFilter(TM) products, when incorporated into
wireless base stations, offer significant advantages over conventional filter
products for wireless communications applications, including reduced size,
increased range and reduced interference.

The worldwide wireless communications market has experienced significant
growth during the past decade, and this rapid growth is expected to continue in
the foreseeable future. Industry sources estimate that the number of installed
base stations worldwide will grow from approximately 50,000 at the end of 1995
to approximately 185,000 by the end of 1999. The Company markets its
SuperFilter(TM) systems to original equipment manufacturers ("OEMs") and
wireless communications service providers for inclusion in base stations, which
are the basic building blocks of wireless communications systems. Base stations
house the complex electronic equipment required to receive and transmit radio
waves for multiple real-time voice and data communications. Base station
equipment generally includes an antenna and a series of transmitters, receivers,
receiver filters and network interface electronics.

The Company's SuperFilter(TM) systems are protocol independent, and are
currently undergoing evaluation and testing by leading OEMs using a variety of
wireless protocols, including, among others, cellular, Personal Communications
Services ("PCS") and Global Systems for Mobile communications ("GSM"). In May
1996, the Company delivered a complete SuperFilter(TM) system to Motorola,
Inc.'s Cellular Infrastructure Group ("Motorola"), a major OEM of wireless
communications base stations. In July 1996, this SuperFilter(TM) system
successfully completed Motorola's accelerated life testing, a critical factor in
the successful commercialization of STI's SuperFilter(TM) products. Motorola has
since ordered additional SuperFilter(TM) units for field testing and is
currently evaluating the SuperFilter(TM) system for possible integration in
certain of Motorola's base station products.

STI has developed a proprietary cryogenic cooler which, in addition to
being integrated into its SuperFilter(TM) systems, can be used to increase the
processing speeds of workstations and other high-speed computers. The Company
believes that the successful commercialization of its cryogenic cooler in the
high-speed computing market will enable it to achieve economies of scale
associated with volume production, thereby decreasing the unit costs for the
Company's entire commercial product line. In May 1996, the Company entered into
a joint venture with Alantac Technologies (S) Pte Ltd ("Alantac"), a precision
machining house in Singapore, for the volume production of its cryogenic
coolers.

Since its formation in 1987, the Company has received approximately $35
million in revenues from government research and development contracts, through
which it has developed much of the technology used in its commercial products.
STI continues to pursue government contracts, primarily to fund its research and
development efforts, but also to address potential wireless communications
product opportunities in the government sector.

3
<PAGE> 4

STI's objective is to leverage the experience and expertise of its
management and employee base, its significant investment in research and
development, and its licenses and intellectual property into a position of
commercial market leadership for HTS systems. The Company's integrated approach
to product development incorporates its combined expertise in the areas of HTS
materials, radio frequency ("RF") circuitry and cryogenic cooling and packaging.
Key elements of the Company's strategy are to (i) capitalize on the growing
worldwide wireless communications market by providing a technologically advanced
filter system, (ii) market to leading base station manufacturers and service
providers, (iii) provide a complete, integrated solution to address specific
customer needs within the Company's target markets, (iv) position for volume
production through development of large scale production capabilities, (v)
pursue complementary markets for its products, such as the high-speed computing
market for its cryogenic cooler, and (vi) maintain technological leadership by
continuing to invest substantial resources in research and development and
further pursuing government contracts.

The Company was incorporated in Delaware in May 1987. The Company's
facilities and executive offices are located at 460 Ward Drive, Suite F, Santa
Barbara, California 93111-2310, and its telephone number is (805) 683-7646.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company........... 1,500,000 shares
Common Stock to be outstanding after the
offering.................................... 7,570,348 shares(1)
Use of proceeds............................... To fund the purchase of capital equipment and the
further development of commercial products, and
for working capital and other general corporate
purposes
Nasdaq National Market symbol................. SCON
</TABLE>

- ---------------
(1) Based on shares outstanding as of October 26, 1996. Excludes (i) 1,386,425
shares of Common Stock issuable upon exercise of options outstanding as of
October 26, 1996, of which options to purchase 402,672 shares were
exercisable as of October 26, 1996, (ii) 463,733 shares of Common Stock
reserved for future issuance under the Company's stock plans and (iii)
165,197 shares of Common Stock issuable upon exercise of warrants
outstanding as of October 26, 1996. See "Management -- Employee and Director
Benefit Plans," "Description of Capital Stock" and Note 8 of Notes to
Financial Statements.

4
<PAGE> 5

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

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, ---------------------------------
----------------------------------------- SEPTEMBER 30, SEPTEMBER 28,
1993 1994 1995 1995 1996
------------- ------------- ------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues:
Government contract
revenues............... $ 4,334 $ 4,979 $ 7,310 $ 5,199 $ 5,053
Commercial product
revenues............... 280 450 300 189 128
Sublicense royalties...... 388 75 -- -- --
------- ------- ------- ------- -------
Total net revenues..... 5,002 5,504 7,610 5,388 5,181
Loss from operations........ (2,326) (3,539) (3,072) (2,621) (3,188)
Net loss.................... $ (2,138) $ (3,259) $(2,819) $(2,503) $(3,129)
Net loss per share.......... $ (0.42) $ (0.55) $ (0.47) $ (0.42) $ (0.51)
Weighted average number of
shares outstanding........ 5,032 5,971 6,026 6,020 6,077
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 28, 1996
-------------------------
AS
ACTUAL ADJUSTED(1)
------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments................. $ 1,882 $ 6,557
Working capital...................................................... 2,904 7,579
Total assets......................................................... 8,928 13,603
Long-term debt....................................................... 172 172
Total stockholders' equity........................................... 7,016 11,691
</TABLE>

- ---------------
(1) Adjusted to reflect the sale of 1,500,000 shares of Common Stock offered
hereby after deducting the underwriting discount and estimated offering
expenses payable by the Company. See "Capitalization."

5
<PAGE> 6

RISK FACTORS

In evaluating the Company's business, prospective investors should consider
carefully the following risk factors in addition to the other information set
forth in this Prospectus.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements other than statements of historical fact included in this Prospectus,
including, without limitation, the statements under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Business"
regarding: the Company's ability to design, develop, manufacture and market
products, including, without limitation, its SuperFilter(TM) systems and
cryogenic coolers; the ability of the Company's products to achieve anticipated
benefits; the Company's ability to achieve product commercialization; the
anticipated growth of its target markets; its ability to achieve profitability;
and other matters are forward-looking statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable at this time, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from the Company's expectations ("Cautionary Statements") are
set forth in these "Risk Factors," as well as elsewhere in this Prospectus. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.

ACCUMULATED DEFICIT AND ANTICIPATED FUTURE LOSSES

The Company was incorporated in May 1987, and since that time has been
principally engaged in research and development activities relating to advanced
electronics products that incorporate HTS materials. The Company has recently
shifted its focus to the commercialization of its HTS and cold computing
products, while continuing to pursue product development activities. The Company
has incurred net losses each year since its inception and, as of September 28,
1996, had an accumulated deficit of $23.2 million. The Company expects to
continue to incur significant operating losses over the next several quarters as
it continues to devote significant financial resources to the commercialization
of wireless and cold computing products, the expansion of Company operations and
product development activities. Although the Company anticipates reaching
break-even or profitability by the second quarter of 1998, the success of the
Company in this regard is dependent upon the Company's successful
commercialization of its HTS filter systems for the worldwide wireless
communications market, and there can be no assurance that the Company will
successfully commercialize such products and reach break-even or profitability
by the second quarter of 1998, or ever. As a result, the amount of net losses
that will continue to be generated and the time required for the Company to
reach profitability are uncertain. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

EARLY STAGE OF THE COMMERCIAL SUPERCONDUCTOR PRODUCTS MARKET; MARKET ACCEPTANCE
AND RELIABILITY

The commercial superconductor products market has experienced limited
product commercialization to date. Moreover, since inception, the Company has
been principally engaged in research and development activities and has only
limited experience in the commercialization of its products. The Company's
ability to grow will depend on its ability to successfully transition its
expertise in HTS filter and cryogenics technologies and applications to
commercial markets, including the wireless communications and high-speed
computing markets. The Company's success in this regard will depend upon a
number of factors, including successful product testing by its potential
customers, the success of the Company's sales and marketing efforts into markets
not previously addressed by the Company, the ability of the Company's products
to achieve its anticipated benefits, its ability to attract and retain qualified
personnel, successful and rapid scale-up of the Company's manufacturing
capacity, the establishment of satisfactory manufacturing relationships for the
outsourcing of product components, reduction of manufacturing expenses in order
to price products competitively and continued product development to meet
customer demands. Moreover, the Company's commercial customers establish
demanding specifications for performance and reliability. While the Company's
products and components have passed certain product performance and reliability
testing by its

6
<PAGE> 7

customers to date, there can be no assurance that its products will continue to
pass customer reliability testing and performance requirements in the future. If
such problems occur, the Company could experience increased costs, delays,
reductions or cancellations of orders and shipments, and product returns and
discounts. There can be no assurance that the Company will be able to produce
its products in volume or that any of the Company's products will achieve market
acceptance. If the Company is unable to manufacture and market its products for
its target markets successfully, its business, results of operations and
financial condition will be materially and adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

SUBSTANTIAL FUTURE CAPITAL NEEDS

The Company to date has received limited revenues from product sales. The
full implementation of the Company's product commercialization strategy will
require a commitment of substantial additional funds in excess of the estimated
proceeds of this offering. The Company anticipates that its existing cash and
cash equivalents, short-term investments, revenues from operations and the
estimated net proceeds from this offering should be adequate to fund development
and implementation of the Company's planned product commercialization strategy
for at least the next twelve months. However, the Company's future capital
requirements will depend on many factors, including the amount and timing of
future revenues, the receipt of commercial orders, the completion of a
manufacturing ramp-up at acceptable costs, continued progress in research and
development programs, the costs involved in preparing, filing, prosecuting,
maintaining and enforcing patents and other proprietary rights, and the
availability of funding under government contracts. There can be no assurance
that any necessary additional financing will be available when required by the
Company for product commercialization on acceptable terms or at all. If adequate
funds are not available, the Company may be required to change, delay, reduce or
eliminate its planned product commercialization strategy or take other actions
to raise funds, such as licensing or selling some or all of its proprietary
technologies, which could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

DEPENDENCE ON SALES TO OEMS

Most of the Company's products, including those developed for wireless
communications base stations and government applications, are intended for use
as components or subsystems in systems manufactured and sold by third party
OEMs. Therefore, to gain market acceptance, the Company must demonstrate that
its products will provide advantages to such OEMs, including a decrease in
system size, an increase in range extension and a reduction in interference.
There can be no assurance that upon acceptance, the Company's products will be
able to achieve any of these advantages. Moreover, even if the Company is able
to demonstrate such advantages, there can be no assurance that OEMs will elect
to incorporate the Company's products into their systems or, if they do, that
related system and manufacturing requirements can or will be met. Furthermore,
there can be no assurance that an OEM's systems will be commercially accepted.
For example, the Company delivered a complete SuperFilter(TM) system to Motorola
for possible integration into certain Motorola base station products, which unit
successfully underwent extensive accelerated life testing at Motorola's
facilities. Motorola has ordered additional units for field trials and testing,
and following such trials and testing, if successful, the Company intends to
seek a volume order from Motorola. However, there can be no assurance that the
Motorola relationship will ultimately lead to volume orders for the Company's
SuperFilter(TM) products. Failure of third party OEMs, including Motorola, to
incorporate the Company's products into their systems or failure of such OEM's
systems to achieve market acceptance would have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business -- Wireless Communications -- Wireless Communications Customers" and
"Government Contracts."

LIMITED MANUFACTURING EXPERIENCE

To date, the Company has sold products only in limited quantities,
primarily for use in the development and demonstration of prototypes and for
laboratory and field testing. The Company's current manufacturing facilities are
pilot and pre-production scale only and are not sufficient for volume
production. There can be no

7
<PAGE> 8

assurance that the Company will be successful in overcoming the technological,
engineering and management challenges associated with the production of
commercial quantities of HTS or cold computing products at acceptable costs and
on a timely basis. The Company could incur significant ramp-up costs and
unforeseen expenses and delays in connection with attempts to manufacture
commercial quantities of HTS and cold computing products, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. When and if the Company receives volume orders for its
products, it expects to outsource the manufacturing of certain hardware
components. There can be no assurance that the Company will be able to identify
manufacturers that will meet the Company's requirements as to quality,
reliability, timeliness and cost-effectiveness. Any such failure will limit the
Company's ability to satisfy customer orders and would have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Business -- Manufacturing."

HIGH DEGREE OF DEPENDENCE ON GOVERNMENT CONTRACTS

Virtually all of the Company's government contracts are terminable at any
time at the option of the government. Although the Company historically has
complied with applicable government regulations and contract provisions, there
can be no assurance as to such compliance in the future. Noncompliance with
government procurement regulations or contract provisions could result in
termination of government contracts, substantial monetary fines or damages,
suspension or debarment from doing business with the government and possibly
civil or criminal liability. During the term of any suspension or debarment by a
government agency, the Company could be prohibited from competing for or being
awarded any contract by any government agency. The termination of the Company's
significant government contracts, the imposition of fines, damages, suspension
or debarment, or the adoption of new or modified procurement regulations or
practices could have a material adverse effect on the Company's business,
results of operations and financial condition.

Inventions conceived or actually reduced to practice under a government
contract generally result in the government obtaining a royalty-free, paid-up,
non-exclusive license to practice the invention. Similarly, technologies
developed in whole or in part at government expense generally result in the
government obtaining unlimited rights to use, duplicate or disclose technical
data produced under the contract. There can be no assurance that such licenses
and rights will not result in a loss by the Company of potential revenues or the
disclosure of any of the Company's proprietary information, either of which
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business -- Government Contracts."

INTENSE COMPETITION

The markets for the Company's products are intensely competitive. The
Company faces competition in various aspects of its technology and product
development and in each of the markets targeted by the Company. The Company's
current and potential competitors include conventional RF filter manufacturers
and both established and newly emerging companies developing similar or
competing HTS technologies. In addition, the Company currently supplies
components and licenses technology to large companies and industry leaders that
may decide to manufacture or design their own HTS components instead of
purchasing them, or

8
<PAGE> 9

licensing the technology, from the Company. The Company expects increased
competition both from existing competitors and a number of companies that may
enter the wireless communications or high-speed computing markets.

In the wireless communications market, the Company competes primarily with
Conductus, Inc., Illinois Superconductor Corp. and Superconducting Core
Technologies, Inc. with respect to its HTS filter systems. In addition, the
Company competes with IBM, DuPont, Matsushita and Amtel, a Japanese consortium,
among others, with respect to its HTS materials. The Company is not currently
aware of another company that is targeting the cold computing market with a
compact, low cost cryogenic cooler; however, there can be no assurance that
there is no other company designing or developing cryogenic cooling technology
similar to or in direct competition with the Company's products. In the
government sector, the Company competes with universities, national laboratories
and both large and small companies for research and development contracts.

The Company believes that it competes on the basis of technological
sophistication, product performance, reliability, quality, cost-effectiveness
and product availability. Many of the Company's current and potential
competitors have significantly greater financial, technical, manufacturing and
marketing resources than the Company. The Company's ability to effectively
compete will require it to successfully manufacture and market its current
products at a sufficiently low cost to achieve commercial acceptance, develop
and maintain technologically advanced products, attract and retain highly
qualified personnel and obtain patent or other protection for its technology and
products. There can be no assurance that the Company will be able to compete
successfully in the future. See "Business -- Competition."

DEPENDENCE ON KEY PERSONNEL

The Company is highly dependent upon the efforts of its senior management.
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 personnel, primarily in the areas of wireless communications and cold
computing. The loss of the services of one or more members of the senior
management or technical teams could impede STI's ability to achieve its product
development and commercialization objectives. 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" and "Management."

LIMITED MARKETING AND SALES CAPABILITIES

The Company has only recently focused substantial resources on its
marketing and sales efforts aimed at the commercial wireless communications
market and other markets. In order for the Company to successfully commercialize
products in its targeted markets, it must develop appropriate marketing, sales,
technical, customer service and distribution capabilities, or it must enter into
agreements with third parties to provide such services. There can be no
assurance that the Company's efforts in developing its marketing and sales
capabilities, including customer service and distribution, will be successful.
Furthermore, there can be no assurance that such third party agreements can be
obtained upon acceptable terms. Failure to develop such capabilities or obtain
such third party agreements could have a material adverse effect on the
acceptance of the Company's products in the commercial markets and, as a result,
on the Company's business, results of operations and financial condition. See
"Business -- Marketing and Sales."

UNCERTAINTY OF PATENTS AND PROPRIETARY RIGHTS

The Company relies on a combination of patent, trademark, trade secret and
copyright law and internal procedures and nondisclosure agreements to protect
its intellectual property. There can be no assurance that the Company's
intellectual property rights can be successfully asserted in the future or will
not be invalidated, circumvented or challenged. In addition, the laws of certain
foreign countries in which the Company's products may be produced or sold do not
protect the Company's intellectual property rights to the same extent as the
laws of the United States. The failure of the Company to protect its proprietary
information could have a material adverse effect on the Company's business,
results of operations and financial condition.

9
<PAGE> 10

The Company has an exclusive, worldwide license, in all fields of use, to
formulations covered by patents held by the University of Arkansas covering
thallium barium calcium copper oxide ("TBCCO"), the material upon which the
Company primarily relies for its HTS products and product development. There can
be no assurance that the validity of these patents will not be subject to
challenge. In addition, other parties may have developed similar materials
utilizing TBCCO formulations and may design around the patented aspects of this
material. Under the terms of its exclusive license, the Company has agreed to
assume litigation expenses for infringement actions, subject to a right of
setoff against future royalty obligations. If the Company is required to incur
significant expenses under this agreement, the Company's results of operations
and financial condition could be materially and adversely affected. In addition,
the Company has granted each of DuPont and Superconducting Core Technologies,
Inc. and its affiliates a non-exclusive worldwide sublicense under its license
with the University of Arkansas to develop and market TBCCO materials and
superconducting technologies. There can be no assurance that these sublicenses
will not adversely affect the Company's business, results of operations and
financial condition.

The Company believes that a number of patent applications are pending that
cover the composition of yttrium barium copper oxide ("YBCO"), including
applications filed by IBM, AT&T and other large potential competitors of the
Company. YBCO is an HTS material upon which the Company also relies, although to
a lesser extent than TBCCO. The Company understands that such applications are
the subject of interference proceedings currently pending in the U.S. Patent and
Trademark Office. The Company is not involved in these proceedings. In addition,
the Company has been issued patents for specific compounds that it uses. The
Company believes that a number of international patents may be pending regarding
other specific YBCO compounds. There is a substantial risk that one or more
third parties will be granted patents covering YBCO and that the Company's use
of these materials may require a license. As with other patents, there can be no
assurance that the Company will be able to obtain licenses to any such patents
for YBCO or other materials or that such licenses would be available on
commercially reasonable terms. The Company's efforts to develop products based
on YBCO would be substantially impaired by its failure to obtain any such
license for YBCO, and such failure could have a material adverse effect on the
Company's business, results of operations and financial condition.

The Company owns or has rights under a number of patents and pending patent
applications related to the processing of TBCCO and YBCO. There can be no
assurance that the patent applications filed by the Company will result in
patents being issued, that any patents held or issued will afford meaningful
protection against competitors with similar technology, or that any such patents
will not be challenged by third parties. Since U.S. patent applications are
maintained in secrecy until the patents are issued, and since publications of
discoveries in the scientific or patent literature tend to lag behind actual
discoveries by several months, the Company cannot be certain that it was the
first creator of inventions covered by issued patents or pending patent
applications or that it was the first to file patent applications for such
inventions. Moreover, there can be no assurance that other parties will not
independently develop similar technologies, duplicate the Company's technologies
or, if patents are issued to the Company or rights licensed by the Company,
design around the patented aspects of any technologies developed or licensed by
the Company. The Company may have to participate in interference proceedings
declared by the U.S. Patent and Trademark Office to determine the priority of
inventions, which could result in substantial costs to the Company. Litigation
may also be necessary to enforce any patents held by or issued to the Company or
to determine the scope and validity of others' proprietary rights, which could
result in substantial costs to the Company.

The rapid rate of inventions and discoveries in the superconductivity field
has raised many patent issues which are not resolved at this time. The claims in
the granted patents often overlap and there are disputes involving rights to
inventions claimed in pending patent applications. As a result, the patent
situation in the HTS field is unusually complex. It is likely that there will be
patents held by third parties relating to the Company's products or technology.
Therefore, the Company may need to acquire licenses to, design around or
successfully contest the validity or enforceability of such patents. The extent
to which the Company may be able to acquire necessary licenses is not known. It
is also possible that because of the number and scope of patents pending or
issued, the Company may be required to obtain multiple licenses in order to use
a single material. If the Company is required to obtain multiple licenses, the
cost to the Company of HTS materials

10
<PAGE> 11

will increase. Furthermore, there can be no assurance that such licenses would
be available on commercially reasonable terms or at all. The likelihood of
successfully contesting the validity or enforceability of such patents is also
uncertain; and, in any event, the Company could incur substantial costs in
defending the validity or scope of its patents or challenging the patents of
others. See "Business -- Intellectual Property."

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 superconductor technology, including
superconducting materials and processes and industry standards. The Company has
focused its development efforts on TBCCO and, to a lesser extent, YBCO. There
can be no assurance that either TBCCO or YBCO will ultimately prove commercially
competitive against other currently known materials or materials that may be
discovered in the future. The Company intends to continue to develop and
integrate advances in wireless filter and cryogenic cooling technologies in the
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 the Company will not prove
more advantageous for the commercialization of HTS products. See "-- Intense
Competition" and "-- Uncertainty of Patents and Proprietary Rights" and
"Business -- Intellectual Property" and "-- Competition."

MATERIALS RISKS

To date, the Company has principally focused its development efforts on
TBCCO. Although TBCCO has one of the highest critical temperatures of any HTS
material verified by the scientific community to date, other HTS materials are
currently known to have advantages over TBCCO with respect to certain
applications. There can be no assurance that TBCCO will ultimately prove
commercially competitive against YBCO or against other currently known
materials. Moreover, there is no assurance that other materials will not be
discovered with higher critical temperatures or other superior qualities or that
the Company will be able to obtain the rights to any such superior material.

The Company currently purchases substrates for growth of HTS thin films
from two primary suppliers because of the quality of the substrate provided by
such suppliers. While the Company is aware of alternative sources for its
substrates, the establishment of relationships with additional or replacement
suppliers could be time consuming and result in a supply interruption which
would have a material adverse effect on the Company's ability to manufacture its
products in commercial quantities and, correspondingly, upon its business,
results of operations and financial condition. See "Business -- Manufacturing."

FLUCTUATIONS IN PERIODIC RESULTS

Although the Company has been devoting substantial resources to generating
revenues from commercial markets, the Company's revenues have historically
consisted and are expected over the next several quarters to consist primarily
of government research and development contract revenues. Such revenues have
fluctuated from period to period, which the Company believes is attributable
principally to government development contract budgeting and funding patterns.
The government procurement process is lengthy and may involve competing budget
considerations, making the timing of the Company's receipt of government
contracts or orders and the resulting revenue difficult to predict. Furthermore,
as the Company attempts to achieve commercialization of its HTS and cold
computing products in its target markets, it could encounter seasonality or
other currently unforeseen factors causing additional variability in its
financial and operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

GOVERNMENT REGULATION

Although the Company believes that its wireless communications products
themselves would not be subject to licensing by, or approval requirements of,
the Federal Communications Commission (the "FCC"),

11
<PAGE> 12

the operation of domestic wireless communication base stations is subject to FCC
licensing, and the receiver equipment into which the Company's products would be
incorporated is subject to FCC approval. Base stations and equipment marketed
for use therein must meet specified technical standards. The Company's ability
to sell its HTS filter systems will depend on the ability of wireless base
station equipment manufacturers and marketers and of service providers to obtain
and retain the necessary FCC approvals and licenses. In order to be acceptable
to base station equipment manufacturers and marketers, and to service providers,
the characteristics, quality and reliability of the Company's products must meet
the FCC's technical standards. Any failure to meet such standards or delays by
base station equipment manufacturers, marketers or service providers in
obtaining the necessary approvals or licenses could have a material adverse
effect on the Company's business, results of operations and financial condition.

BUSINESS INTERRUPTIONS AND DEPENDENCE ON A SINGLE U.S. FACILITY

The Company's primary operations, including engineering, manufacturing,
customer service, distribution and general administration, are housed in a
single facility in Santa Barbara, California. Any material disruption in the
Company's operations, whether due to fire, natural disaster or otherwise, could
have a material adverse effect on the Company's business, results of operations
and financial condition. See "Business -- Manufacturing" and "-- Properties."

HAZARDOUS MATERIALS; ENVIRONMENTAL REGULATIONS

The Company uses certain hazardous materials in its research, development
and manufacturing operations. As a result, the Company is subject to stringent
federal, state and local regulations governing the storage, use and disposal of
such materials. It is possible that current or future laws and regulations could
require the Company to make substantial expenditures for preventive or remedial
action, reduction of chemical exposure, or waste treatment or disposal. There
can be no assurance that the operations, business or assets of the Company will
not be materially and adversely affected by the interpretation and enforcement
of current or future environmental laws and regulations. In addition, although
the Company believes that its safety procedures for handling and disposing of
such materials comply with the standards prescribed by state and federal
regulations, nevertheless there is the risk of accidental contamination or
injury from these materials. To date, the Company has not incurred substantial
expenditures for preventive action with respect to hazardous materials or for
remedial action with respect to any hazardous materials accident. If such an
accident occurred, the Company could be held liable for any resulting damages.
Furthermore, the use and disposal of hazardous materials involves the risk that
the Company could be required to incur substantial expenditures for such
preventive or remedial actions. The liability in the event of an accident or the
costs of such actions could exceed the Company's resources or otherwise have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business -- Environmental Issues."

POSSIBLE VOLATILITY OF STOCK PRICE

There has been significant volatility in the market price of securities of
technology companies. 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 have had in the past, and
may continue to have in the future, 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 a period of volatility in the market price of
a company's securities, securities class action lawsuits have been instituted
against some companies. If brought, the costs of defending such litigation could
have a material adverse effect on the Company's business, results of operation
and financial condition. See "Price Range of Common Stock and Dividend Policy."

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 7,570,348
outstanding shares of Common Stock (7,670,348 shares if the Underwriter's
over-allotment options are exercised in full), of which the 1,500,000 shares
sold in this offering (1,600,000 shares if the Underwriter's over-allotment
options are exercised in full) and the 6,070,348 shares currently outstanding
will be freely tradeable without restriction or further

12
<PAGE> 13

registration under the Securities Act, except for those held by "affiliates" (as
defined in the Securities Act) of the Company, which will be subject to the
resale limitations of Rule 144 under the Securities Act. Furthermore, subject to
certain limitations, holders of warrants to purchase 315,197 shares of Common
Stock are entitled to registration rights with respect to such shares. The
Company has agreed not to sell or issue additional shares of Common Stock,
subject to certain limited exceptions, for 180 days after the date of this
Prospectus and the Company's executive officers and directors and the Selling
Stockholder have agreed not to sell or otherwise dispose of shares of Common
Stock for 180 days after the date of this Prospectus without the prior approval
of the Underwriter. Following this offering, sales of substantial amounts of
Common Stock in the public market pursuant to Rule 144 or otherwise, and the
potential of such sales, could adversely affect the prevailing market price of
the Common Stock and impair the Company's ability to raise additional capital
through the sale of equity securities. See "Shares Eligible for Future Sale" and
"Underwriting."

ANTI-TAKEOVER PROVISIONS

The Company's Certificate of Incorporation and Bylaws, each as amended to
date, contain provisions that could delay, deter or prevent a merger, tender
offer or other business combination or change in control involving the Company
that some or a majority of the stockholders might consider to be in their best
interests, including offers or attempted takeovers that might otherwise result
in such stockholders receiving a premium over the market price of the Common
Stock. See "Description of Capital Stock -- Preferred Stock" and "-- Certain
Anti-Takeover Matters."

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. 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. See "Dilution."

ABSENCE OF DIVIDENDS

The Company has not paid cash dividends and does not anticipate paying cash
dividends on the Common Stock in the foreseeable future. Furthermore, the
Company's equipment financing agreement prohibits it from paying cash dividends.
The Company intends to retain future earnings, if any, for use in its business.
See "Price Range of Common Stock and Dividend Policy."

13
<PAGE> 14

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,500,000 shares of
Common Stock being offered hereby, after deducting the underwriting discount and
estimated offering expenses payable by the Company, are estimated to be
approximately $4.7 million (approximately $5.0 million if the Underwriter's
over-allotment options are exercised in full). The Company expects to use the
net proceeds from the offering to fund the purchase of capital equipment
necessary to increase production volume, to fund the further development of
commercial products and for working capital and other general corporate
purposes. The Company may also consider using the net proceeds for the
acquisition of complementary products, technologies or businesses. However, the
Company currently has no specific plans with respect to any such acquisition.
Pending use of the net proceeds of the offering for the above purposes, the
Company intends to invest such funds in short-term, interest-bearing, investment
grade obligations.

In the event the Underwriter exercises the over-allotment option granted to
them by the Selling Stockholder, the Company will not receive any proceeds from
the sale of shares of Common Stock by the Selling Stockholder.

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

In connection with the Company's initial public offering, the Company's
Common Stock commenced trading on the Nasdaq National Market on March 9, 1993.
The Company's Common Stock is listed on the Nasdaq National Market under the
symbol "SCON." The following table sets forth for the periods indicated the high
and low sales prices for the Common Stock as reported on the Nasdaq National
Market.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1994
Quarter ended April 2, 1994.................................... $7.13 $ 5.13
Quarter ended July 2, 1994..................................... $9.50 $ 5.50
Quarter ended October 1, 1994.................................. $8.75 $ 5.75
Quarter ended December 31, 1994................................ $7.75 $ 5.88
FISCAL 1995
Quarter ended April 1, 1995.................................... $7.75 $ 5.25
Quarter ended July 1, 1995..................................... $6.88 $ 5.25
Quarter ended September 30, 1995............................... $7.13 $ 4.88
Quarter ended December 31, 1995................................ $6.13 $ 3.63
FISCAL 1996
Quarter ended March 30, 1996................................... $9.50 $ 4.00
Quarter ended June 30, 1996.................................... $8.75 $ 6.53
Quarter ended September 28, 1996............................... $8.34 $ 6.25
Quarter ending December 31, 1996 (through November 21, 1996)... $7.63 $ 4.38
</TABLE>

On November 21, 1996, the last sales price of the Common Stock as reported
on the Nasdaq National Market was $4.625 per share. As of November 21, 1996,
there were approximately 151 holders of record of the Common Stock.

The Company has not paid cash dividends on its capital stock and does not
expect to pay any dividends on the Common Stock in the foreseeable future.
Furthermore, the Company's equipment financing agreement prohibits it from
paying cash dividends. The Company intends to retain future earnings, if any,
for use in its business.

14
<PAGE> 15

CAPITALIZATION

The following table sets forth, as of September 28, 1996, the total
capitalization of the Company and the as adjusted capitalization of the Company
after giving effect to the sale by the Company of the 1,500,000 shares of Common
Stock offered hereby after deducting the underwriting discount and estimated
offering expenses payable by the Company. This table should be read in
conjunction with the Financial Statements and the Notes thereto included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 28, 1996
--------------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED, IN THOUSANDS)
<S> <C> <C>
Long-term debt (1)........................................ $ 172 $ 172
-------- --------
Stockholders' equity:
Preferred Stock, $0.001 par value; 2,000,000 shares
authorized, no shares issued and outstanding, actual
and as adjusted...................................... -- --
Common Stock, $0.001 par value; 15,000,000 shares
authorized, 6,065,348 shares issued and outstanding,
actual; 7,565,348 shares issued and outstanding, as
adjusted (2)......................................... 6 8
Capital in excess of par value............................ 30,180 34,853
Deficit accumulated during development stage.............. (23,170) (23,170)
-------- --------
Total stockholders' equity.............................. $ 7,016 $ 11,691
-------- --------
Total capitalization............................ $ 7,188 $ 11,863
======== ========
</TABLE>

- ---------------
(1) See Note 6 of Notes to Financial Statements.

(2) As of September 28, 1996, there were (i) options outstanding to purchase an
aggregate of 1,391,425 shares of Common Stock at a weighted average exercise
price of $5.73 per share, (ii) 463,733 shares reserved for grant of future
options under the Company's stock plans and (iii) warrants outstanding to
purchase 165,197 shares of Common Stock at a weighted average exercise price
of $11.19 per share. See "Management -- Employee and Director Benefit
Plans," "Description of Capital Stock" and Note 8 of Notes to Financial
Statements.

15
<PAGE> 16

DILUTION

The net tangible book value of the Company as of September 28, 1996 was
$4.8 million, or $0.79 per share, of Common Stock. Net tangible book value per
share is determined by dividing the net tangible book value of the Company
(total tangible assets less total liabilities) by the number of outstanding
shares of Common Stock at that date. After giving effect to the sale by the
Company of the 1,500,000 shares of Common Stock offered hereby, and after
deducting the underwriting discount and estimated offering expenses payable by
the Company, the Company's net tangible book value at September 28, 1996 would
have been $9.5 million or $1.25 per share. This represents an immediate increase
in net tangible book value to existing stockholders of $0.46 per share and an
immediate dilution to new investors of $2.50 per share. The following table
illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Public offering price per share............................................ $3.75
-----
Net tangible book value per share as of September 28, 1996............... $0.79
Increase in net tangible book value per share attributable to new
investors............................................................. 0.46
-----
Net tangible book value per share after this offering...................... 1.25
-----
Dilution per share to new investors........................................ $2.50
=====
</TABLE>

The following table sets forth on a pro forma basis as of September 28,
1996 the number of shares of Common Stock purchased from the Company, the total
consideration paid, and the average price per share paid by existing
stockholders and by the new investors (before deducting the underwriting
discount and estimated offering expenses payable by the Company).

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).............. 6,065,348 80% $30,186,000 84% $ 4.98
New investors......................... 1,500,000 20 5,625,000 16 3.75
--------- --- ----------- ---
Total....................... 7,565,348 100% $35,811,000 100%
========= === =========== ===
</TABLE>

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

The foregoing tables assume no exercise of stock options or warrants
outstanding at September 28, 1996. As of September 28, 1996, there were options
outstanding to purchase a total of 1,391,425 shares of Common Stock at a
weighted average exercise price of $5.73 per share, of which options to purchase
388,522 shares at a weighted average exercise price of $4.92 per share were
exercisable, and 463,733 shares reserved for grant of future options under the
Company's stock plans. In addition, as of September 28, 1996, there were
warrants outstanding to purchase 165,197 shares of Common Stock at a weighted
average exercise price of $11.19 per share. To the extent that any of these
options or warrants are exercised, there may be further dilution to new
investors. See "Capitalization," "Management -- Employee and Director Benefit
Plans," "Description of Capital Stock" and Note 8 of Notes to Financial
Statements.

16
<PAGE> 17

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 Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein. The statement of operations data for the years ended
December 31, 1993, 1994 and 1995, and the balance sheet data at December 31,
1994 and 1995 are derived from, and are qualified by reference to, the audited
financial statements included elsewhere in this Prospectus. The statement of
operations data for the years ended December 31, 1991 and 1992 and the balance
sheet data at December 31, 1991, 1992 and 1993 are derived from the Company's
audited financial statements that do not appear herein. The data for the nine
months ended September 30, 1995 and September 28, 1996 are derived from
unaudited financial statements also appearing elsewhere herein and which, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results of the
unaudited interim periods. The financial results for the nine months ended
September 28, 1996 are not necessarily indicative of the results to be expected
for any other interim period or the fiscal year. The historical results are not
necessarily indicative of the results of operations to be expected in the
future.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, -----------------------------
----------------------------------------------- SEPTEMBER 30, SEPTEMBER 28,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues:
Government contract
revenues............. $ 3,486 $ 3,717 $ 4,334 $ 4,979 $ 7,310 $ 5,199 $ 5,053
Commercial product
revenues............. 166 234 280 450 300 189 128
Sublicense royalties.... -- -- 388 75 -- -- --
------- ------- ------- ------- ------- ------- -------
Total net
revenues...... 3,652 3,951 5,002 5,504 7,610 5,388 5,181
------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Contract research and
development.......... 2,940 2,546 2,862 4,030 5,414 3,906 4,170
Other research and
development.......... 1,296 1,784 1,998 2,085 2,397 1,904 1,982
Selling, general and
administrative....... 1,530 2,274 2,468 2,928 2,871 2,199 2,217
------- ------- ------- ------- ------- ------- -------
5,766 6,604 7,328 9,043 10,682 8,009 8,369
------- ------- ------- ------- ------- ------- -------
Loss from operations...... (2,114) (2,653) (2,326) (3,539) (3,072) (2,621) (3,188)
Other income (expense),
net..................... (35) (164) 188 280 253 118 59
------- ------- ------- ------- ------- ------- -------
Net loss.................. $(2,149) $(2,817) $(2,138) $(3,259) $(2,819) $(2,503) $(3,129)
======= ======= ======= ======= ======= ======= =======
Net loss per share........ $ (0.68) $ (0.42) $ (0.55) $ (0.47) $ (0.42) $ (0.51)
Weighted average number of
shares outstanding...... 4,157 5,032 5,971 6,026 6,020 6,077
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1991 1992 1993 1994 1995
------- ------- ------- ------- ------- SEPTEMBER 28,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and
short-term investments....... $ 4,012 $ 431 $10,583 $ 7,930 $ 5,244 $ 1,882
Working capital................ 4,052 841 11,134 8,242 5,695 2,904
Total assets................... 8,107 7,360 16,616 14,613 11,678 8,928
Long-term debt................. 1,087 938 56 724 453 172
Total stockholders' equity..... 6,070 4,853 15,741 12,640 10,087 7,016
</TABLE>

17
<PAGE> 18

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" and other parts of this Prospectus contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed below and under the captions "Risk
Factors" and "Business."

OVERVIEW

STI designs, develops, manufactures and markets products that incorporate
HTS materials and related cryogenics. STI's objective is to leverage the
experience and expertise of its management and employee base, its significant
investment in research and development and its licenses and intellectual
property into a position of commercial market leadership for HTS systems.

The Company was founded in 1987, and has been principally engaged in
research and development activities related to advanced electronic products
incorporating HTS materials. The Company's revenues primarily have been derived
from government research and development contract revenues, and to a lesser
extent from sales of HTS products and sublicense royalties. The Company expects
that government contract revenues will continue to account for a substantial
portion of its revenues over the next several quarters. Government revenues have
historically fluctuated from period to period. This variability is attributable
to lengthy government contract budgeting and funding patterns, which makes the
timing of the Company's revenues difficult to predict. Government contracts may
be reduced or eliminated at the option of the government, and there can be no
assurance that the Company will receive all or any part of the funds under its
existing government contracts. See "Risk Factors -- High Degree of Dependence on
Government Contracts."

Total expenses consist primarily of government contract and other research
and development expenses, including labor, engineering, materials and overhead.
Over the past several years, the Company has invested substantial engineering
and marketing resources on the development of products for commercial
applications, including the acquisition of capital equipment, and expects to
continue to focus its resources on developing its commercial business. As a
result of its substantial investment in HTS, STI has developed its
SuperFilter(TM) products, which combine specialized HTS filters with a
proprietary cryogenic cooler and, in many cases, an LNA in a highly compact
system. The Company has already shipped both prototype and field test
SuperFilter(TM) units to customers. The Company has also identified other
markets for commercial applications of its cryogenic cooler technology, of which
the largest and fastest growing is the high-speed computing market. STI believes
that by accessing this market, it will be able to achieve economies of scale
associated with volume cooler production, thereby decreasing unit costs for the
Company's entire commercial product line. As commercial demand for its products
increases, the Company expects to outsource the manufacturing of many of the
hardware components of its systems, while retaining manufacturing responsibility
for its HTS thin-film filters. See "Risk Factors -- Limited Manufacturing
Experience."

STI has incurred cumulative losses of $23.2 million from inception to
September 28, 1996. The Company expects to continue to incur significant
operating losses over the next several quarters as it continues to devote
significant financial resources to the commercialization of its HTS filter
systems, the expansion of Company operations and other research and development
activities. The future profitability of the Company is dependent upon the
Company's successful commercialization of its filter systems for the wireless
communications market, of which there can be no assurance. Furthermore, as the
Company attempts to achieve commercialization of its products, it could
encounter seasonality or other currently unforeseen factors causing additional
variability in its results. See "Risk Factors -- Accumulated Deficit and
Anticipated Future Losses" and "-- Early Stage of the Commercial Superconductor
Products Market; Market Acceptance and Reliability" and "-- Fluctuations in
Periodic Results."

18
<PAGE> 19

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

Net revenues. Net revenues decreased by $207,000, or 4%, from $5.4 million
in the first nine months of 1995 to $5.2 million in the first nine months of
1996. The overall decrease was mainly due to a decrease in government contract
revenues of $146,000, or 3%, from $5.2 million for the first nine months of 1995
to $5.1 million for the first nine months of 1996 as a result of delays in
government funding in the first half of the year.

Commercial product revenues decreased by $61,000, or 32%, from $189,000 in
the first nine months of 1995 to $128,000 in the first nine months of 1996, due
primarily to the Company's decision to focus less on servicing external customer
needs for films and more on expanding the Company's efforts to develop products
for commercialization.

Contract research and development expenses. Contract research and
development expenses increased by $264,000, or 7%, from $3.9 million in the
first nine months of 1995 to $4.2 million in the first nine months of 1996. This
increase was due to an increase in contract overhead expenses as well as
expenses incurred with respect to a contract for which revenue is not assured.

Other research and development expenses. Other research and development
expenses increased by $78,000, or 4%, from $1.9 million in the first nine months
of 1995 to $2.0 million in the first nine months of 1996. This increase was
related to the expanded efforts toward commercialization in the areas of
wireless communications, cryocooling and high-speed computing.

Selling, general and administrative expenses. Selling, general and
administrative expenses were $2.2 million in the first nine months of 1995 and
1996.

Other income (expense), net. Interest income decreased by $129,000, or
53%, from $245,000 in the first nine months of 1995 to $116,000 in the first
nine months of 1996, due primarily to a decline in the interest-earning
investment balances during these periods as short-term investments were used to
fund operations. Interest expense decreased by $70,000, or 55%, from $127,000 in
the first nine months of 1995 to $57,000 in the first nine months of 1996. This
decrease was due to the reduction in the Company's long-term portion of note
payable and capitalized lease obligations.

FISCAL YEAR 1995 AS COMPARED WITH FISCAL YEAR 1994

Net revenues. Net revenues increased by $2.1 million, or 38%, from $5.5
million in fiscal 1994 to $7.6 million in fiscal 1995, due primarily to an
increase in government contract revenues.

Government contract revenues increased by $2.3 million, or 47%, from $5.0
million for fiscal year 1994 to $7.3 million for fiscal year 1995. Government
contract revenues constituted 90% of net revenues in fiscal 1994 and 96% of net
revenues in fiscal 1995. These increases are the result of the Company targeting
larger contracts involving the design and production of prototypes incorporating
the Company's HTS technology. Three major contracts that were awarded in 1994,
and continued to be funded in 1995, accounted for over 60% of the government
contract revenues in fiscal 1995. In fiscal 1995, the Company was also awarded a
significant government contract for RF and materials development. In addition,
during the third quarter of 1995, the Company entered into a consortium with
another superconducting company and various university and industrial
participants to further the development of HTS thin-film manufacturing
technology.

Commercial sales of the Company's HTS products decreased by $150,000, or
33%, from $450,000 in fiscal year 1994 to $300,000 in fiscal year 1995, as a
direct result of the Company's decision to focus on the internal use of thin
films instead of external sales.

19
<PAGE> 20

Sublicense royalties were $75,000 in fiscal year 1994. Because the Company
did not enter into any sublicense agreements with respect to its patents during
1995, it did not have any sublicense royalties in 1995.

Contract research and development. Contract research and development
expenses increased by $1.4 million, or 34%, from $4.0 million in fiscal 1994 to
$5.4 million in fiscal 1995. This increase in contract research and development
expenses is a result of increased contracting activities performed in connection
with government contract awards and to a lesser extent, to a cost sharing
contract for the design and delivery of a cellular HTS filter to commercial
customers.

Other research and development expenses. Other research and development
expenses increased by $312,000, or 15%, from $2.1 million in fiscal 1994 to $2.4
million in fiscal 1995, due primarily to the hiring of additional technical
personnel in order to accelerate the Company's commercial research and
development efforts in the fields of wireless communications, cryogenics and
high-speed computing.

Selling, general and administrative expenses. Selling, general and
administrative expenses were $2.9 million in fiscal 1994 and fiscal 1995.

Other income (expense), net. Despite a decrease in cash balances, interest
income increased by $29,000, or 9%, from $324,000 in fiscal 1994 to $353,000 in
fiscal 1995, due to higher interest rates in 1995. Interest expense increased by
$61,000, or 156%, from $39,000 in fiscal 1994 to $100,000 in fiscal 1995 as a
result of the Company entering into an equipment financing agreement during the
third fiscal quarter of 1994. See "-- Liquidity and Capital Resources."

FISCAL YEAR 1994 AS COMPARED WITH FISCAL YEAR 1993

Net Revenues. Net revenues increased by $502,000, or 10%, from $5.0
million in fiscal 1993 to $5.5 million in fiscal 1994, reflecting a 15% increase
in government contract and commercial revenues offset by a decrease in
sublicensing royalties.

Government contract revenues increased by $645,000, or 15%, from $4.3
million for fiscal year 1993 to $5.0 million during fiscal year 1994. Government
contract revenues constituted 87% of net revenues in fiscal 1993 and 90% of net
revenues in fiscal 1994. These increases were a result of the Company's
successful efforts to target larger contracts involving the design and
production of prototypes incorporating the Company's HTS technology. During
fiscal 1994, the Company obtained additional funding for work on a band reject
filter project and an HTS switch filter project and obtained new government
contracts for development work on cold computing workstations and cryogenic
coolers.

Commercial sales of the Company's HTS products increased by $170,000, or
61%, from $280,000 in fiscal year 1993 to $450,000 in fiscal year 1994 as a
result of the hiring of an additional commercial sales person, as well as the
Company's decision to more selectively focus its marketing efforts.

Sublicense royalties decreased by $313,000, or 81%, from $388,000 in fiscal
1993 to $75,000 in fiscal 1994. The 1993 amount reflects the initial
sublicensing fee paid by DuPont for the rights to use TBCCO materials.

Contract research and development expenses. Contract research and
development expenses increased by $1.2 million, or 41%, from $2.9 million in
fiscal 1993 to $4.0 million in fiscal 1994. This increase in contract research
and development expenses was a result of increased contracting activities
performed in connection with government contract awards and a cost sharing
contract to design and deliver a cellular filter to a commercial customer.

Other research and development expenses. Other research and development
expenses increased by $87,000, or 4%, from $2.0 million in fiscal 1993 to $2.1
million in fiscal 1994. This increase was due to the hiring of additional
technical personnel in order to accelerate the Company's commercial research and
development efforts in the fields of wireless communications, cryogenics and
high-speed computing.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $460,000, or 19%, from $2.5 million in
fiscal 1993 to $2.9 million in fiscal 1994. This increase was primarily

20
<PAGE> 21

due to costs associated with being a public company for the entire 12 months of
1994, including directors' and officers' insurance premiums, professional fees,
and public relations and printing expenses. This increase was also due to an
increase in salary expenses, as the Company hired a Vice President, Marketing
and Sales in May 1994 and an additional sales and marketing engineer in June
1994.

Other income (expense), net. Interest income decreased by $23,000, or 7%,
from $347,000 in fiscal 1993 to $324,000 in fiscal 1994. This decrease was
attributable to decreased investment-earning balances as investments were used
to fund operations. Interest expense decreased by $133,000, or 77%, from
$172,000 in fiscal 1993 to $39,000 in fiscal 1994. This decrease was a result of
a decrease in aggregate amounts outstanding under the Company's equipment lease
lines, as several substantial equipment lease lines were repaid in part with
proceeds of the Company's initial public offering in 1993.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1995 and September 28, 1996, the Company's cash and cash
equivalents totaled $2.4 million and $1.2 million, respectively, and short-term
investments totaled $2.8 million and $653,000, respectively. The Company
considers investments with original maturities of three months or less to be
cash equivalents. The decrease in cash and cash equivalents and short-term
investments is due primarily to the funding of operating losses and increasing
inventory levels.

The Company financed its operations from inception through September 28,
1996 primarily from net proceeds of $12.7 million raised in its initial public
offering, $15.0 million raised in private placements prior to the initial public
offering, $35.0 million in government development contract revenues and $2.1
million in product and license revenues. Operating activities used $1.4 million,
$2.2 million and $2.3 million of cash and cash equivalents in fiscal 1993, 1994
and 1995, respectively, and $3.0 million of cash and cash equivalents in the
first nine months of fiscal 1996. Investing activities used cash of $6.5 million
and $516,000 in fiscal 1993 and 1994, respectively, and provided cash of $2.3
million in fiscal 1995 and $2.0 million in the first nine months of fiscal 1996.
Financing activities provided cash of $12.0 million (primarily from the proceeds
of the initial public offering) and $869,000 in fiscal 1993 and 1994,
respectively, and used cash of $104,000 in fiscal 1995 and $206,000 in the first
nine months of fiscal 1996. In fiscal 1994 and 1995, the primary source of funds
were from the Company's equipment financing arrangements.

The Company's principal resource commitments at September 28, 1996
consisted of accounts payable and accrued expenses of $1,306,000, and
approximately $606,000 of obligations under equipment financing and lease
agreements.

In August 1994, the Company entered into an equipment financing agreement
which provided for borrowings of up to $1.5 million through the end of 1994 at
an annual interest rate of prime plus 1%. Borrowings under the financing
agreement are secured by substantially all the Company's assets, and are to be
repaid in 36 monthly installments which began in January 1995. During the third
quarter of 1995, the Company extended and amended its equipment financing
agreement to permit an additional $500,000 in borrowings through the end of
1995. As of September 28, 1996, borrowings of $567,000 were outstanding under
this agreement.

The Company invests available funds in short-term, investment grade
investments, including without limitation government obligations, corporate
commercial paper, certificates of deposit and money market funds. The Company
may also invest available funds in intermediate-term investment grade
securities.

To date, the Company has been principally engaged in research and
development activities, and has recently shifted its focus to commercialization
of its HTS and cold computing products. STI anticipates that its existing cash
and cash equivalents, short-term investments and revenues from operations should
be adequate to fund the Company's current level of operations for at least the
next 12 months. However, the full implementation of the Company's product
commercialization strategy will require a commitment of substantial additional
funds in excess of the estimated proceeds of this offering. There can be no
assurance that any necessary additional financing will be available when
required by the Company for product commercialization on acceptable terms or at
all. If adequate funds are not available, the Company may be

21
<PAGE> 22

required to change, delay, reduce or eliminate its product commercialization
strategy or take other actions to raise funds, such as licensing or selling some
or all of its proprietary technologies, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Risk Factors -- Substantial Future Capital Needs."

FINANCIAL ACCOUNTING STANDARDS

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 year ending December 31, 1996. The Company has studied the
implications of SFAS 121 and, based on its initial evaluation, did not 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 and director 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.

22
<PAGE> 23

BUSINESS

STI designs, develops, manufactures and markets electronic components and
systems that incorporate HTS materials and related cryogenics. Superconductors
are materials that have the ability to conduct electrical energy with little or
no resistance when cooled to "critical" temperatures. STI believes that the
growing worldwide wireless communications market offers the most viable
commercialization opportunities for its HTS products. To capitalize on these
opportunities the Company has developed its SuperFilter(TM) products, which
combine specialized HTS filters with a proprietary cryogenic cooler and, in many
cases, a low noise amplifier ("LNA") in a highly compact system. The
SuperFilter(TM) products, when incorporated into wireless base stations, offer
significant advantages over conventional filter products for wireless
communications applications, including reduced size, increased range and reduced
interference.

The SuperFilter(TM) systems are protocol independent, and are currently
undergoing evaluation and testing by leading OEMs using a variety of wireless
protocols, including, among others, cellular, PCS and GSM. In May 1996, the
Company delivered a complete SuperFilter(TM) system to Motorola, a major OEM of
wireless communications base stations. In July 1996, this SuperFilter(TM) system
successfully completed Motorola's accelerated life testing, a critical factor in
the successful commercialization of STI's SuperFilter(TM) products. Motorola has
since ordered additional SuperFilter(TM) units for field testing and is
currently evaluating the SuperFilter(TM) system for possible integration in
certain of Motorola's base station products.

STI has developed a proprietary cryogenic cooling technology which, in
addition to being integrated into its SuperFilter(TM) systems, can be used to
increase the processing speeds of workstations and other high-speed computers.
The Company believes that the successful commercialization of its cryogenic
cooler in the high-speed computing market will enable it to achieve economies of
scale associated with volume production, thereby decreasing the unit costs for
the Company's entire commercial product line. In May 1996, the Company entered
into a joint venture with Alantac, a precision machining house in Singapore, for
the volume production of its cryogenic coolers.

Since its formation in 1987, the Company has received approximately $35
million in revenue from government research and development contracts, through
which it has developed much of the technology used in its commercial products.
STI continues to secure government contracts, primarily to fund its research and
development efforts, but also to address potential wireless communications
product opportunities in the government sector.

STI'S STRATEGY

Capitalize on Growing Wireless Communications Market. STI believes that
the growing worldwide wireless communications market offers its most viable
commercialization opportunities. The Company believes its SuperFilter(TM)
products can decrease base station deployment costs for wireless communications
service providers, due to their smaller size and enhanced range as compared to
competing products. The use of SuperFilter(TM) products can also increase
revenues for service providers by reducing interference, which minimizes the
number of dropped calls.

Market to Leading Base Station Manufacturers and Service Providers. The
worldwide wireless communications market is dominated by a limited number of
large system manufacturers and service providers. The Company targets OEM
industry leaders because the Company believes such leaders are instrumental in
setting industry standards and represent the best opportunity for rapid, large
scale deployment of the Company's SuperFilter(TM) systems. STI targets large
service providers because they are the end users of the Company's products and
can also be influential in setting industry standards. Further, the Company
believes

23
<PAGE> 24

that its SuperFilter(TM) products will be attractive to service providers
deploying new base stations or facing the need to retrofit existing base
stations to address interference or range problems.

Provide a Complete, Integrated Solution. The Company provides the wireless
communications industry with a proprietary and integrated solution incorporating
HTS materials, RF circuitry and cryogenic cooling and packaging, the key
components of which have been designed, developed and manufactured in-house. STI
has designed and developed a proprietary computer simulation system for RF
circuitry design and prototype delivery. This results in extremely small, high
performance RF circuits that are then integrated into STI's standard platform.
The Company believes that this approach will allow it to quickly respond to
specific customer requirements. STI believes its standard platform is the
smallest and most energy-efficient HTS filter system in the industry, and
differentiates the Company's products from other competitive offerings.

Position for Volume Production. As the Company receives volume orders for
its products, it expects to retain manufacturing responsibility for the core of
its products, the HTS thin-film filters, while outsourcing the manufacturing of
many of the hardware components of its systems. Toward this end, the Company
recently formed a joint venture in Singapore to establish manufacturing lines
for its proprietary cryogenic cooler. The Company has developed a manufacturing
process for thin-film TBCCO materials, which the Company believes is scalable
for higher volume production. The Company believes that the combination of
internal thin film production and outsourcing of certain components will enhance
the Company's ability to meet customer demand as its HTS filter systems gain
market acceptance.

Pursue Complementary Markets. The Company pursues complementary markets to
support the commercialization of its wireless products. Specifically, the
Company markets its cryogenic cooler to end users in the high-speed computing
market. The Company believes that increased production volume of cryogenic
coolers will create economies of scale, thereby lowering the unit cost of the
Company's entire commercial product line. In addition, the Company continues to
pursue government contracts, primarily to fund its research and development
efforts, but also to address potential wireless communications product
opportunities in the government sector.

Maintain Technological Leadership. STI has been an innovator in designing
and developing products that address the needs of its target markets. The
Company believes its HTS materials, RF circuitry and cryogenics are among the
most advanced that are commercially available in the industry. STI intends to
maintain its technological leadership by continuing to invest resources in
research and development and by pursuing government funding for its product
development.

WIRELESS COMMUNICATIONS

The Company principally targets the worldwide wireless communications
market, which uses a variety of protocols including cellular, PCS and GSM. STI
primarily markets its SuperFilter(TM) products to OEMs and wireless
communications service providers for inclusion in base stations, which are the
basic building blocks of wireless communications systems. Base stations house
the complex electronic equipment required to receive and transmit radio waves
for multiple real-time voice and data communications. Base station equipment
generally includes an antenna and a series of transmitters, receivers, receiver
filters and network interface electronics. Base stations are manufactured by
OEMs and are sold to service providers that deliver wireless communications
services to the public.

WIRELESS COMMUNICATIONS MARKET

International Data Corporation Link ("IDC") and the Cellular
Telecommunications Industry Association estimate that the number of installed
wireless base stations worldwide will grow from approximately 50,000 at the end
of 1995 to approximately 185,000 by the end of 1999. The Company believes that
this rapid growth represents a significant market opportunity for the Company,
as each newly deployed base station must incorporate a wireless filter system.
In addition, as increasing levels of interference create a demand for higher
performance filters, the Company's products could be used by service providers
to retrofit existing base stations. Based on its analysis of industry data, the
Company estimates that the market for wireless filters for cellular and PCS
applications, including those for new and retrofitted base stations, will
increase from approximately $100 million in 1995 to approximately $950 million
by the end of 1999.

24
<PAGE> 25

The reasons for the anticipated rapid expansion of the base station market
are two-fold. First, the overall demand for wireless products is increasing both
in the United States and worldwide. As the cost of providing wireless
communications decreases and the number of service providers increases, consumer
access to wireless service will become more affordable and utilization will
increase. In addition, in areas without fully-implemented communications
systems, the cost of installing a wireless communications system is
significantly lower than the cost of installing a traditional landline
communications system. Accordingly, the Company believes that many developing
countries are seeking to establish a wireless infrastructure.

Second, a broader range of wireless communications services, such as
e-mail, faxing and internet access, is now being offered, further burdening the
already crowded wireless frequencies. To accommodate the expanding need for
wireless communications, the FCC has auctioned PCS frequencies (around the 2 GHz
frequency) domestically to wireless service providers, yielding over $17 billion
in license fees as of June 1996. Auction winners are under financial, regulatory
and competitive pressures to quickly deploy and operate wireless services in
these new frequencies. In general, service providers will be required to install
new base stations to service these new frequencies. In addition, the Company
estimates that as a result of the PCS frequency auctions, the number of licensed
wireless service providers in any given service area will increase from two to
five over the next several years, thereby increasing domestic demand for new
base stations.

WIRELESS COMMUNICATIONS CONSTRAINTS

The ability of wireless service providers to increase system utilization is
enhanced by their ability to increase base station coverage range, decrease
existing interference and minimize the physical size of base station components.
A wireless network consists of a number of adjoining cells that form a service
provider's geographic coverage area. Each cell has a base station, and the user
communicates through the closest base station on one of a limited number of RF
bands. The call is switched from base station to base station as the user moves
within the geographic area. Transmissions that pass through a base station are
filtered for unwanted signals to improve call clarity. The filtering process
improves the quality of the transmission being received and the range that the
base station can cover. Range is the distance at which a base station can
continue to pick up a wireless phone signal as the user travels away from the
physical base station site. Most base stations within the present cellular
communications network were deployed at a time when the typical cellular
telephone unit was designed to transmit up to three watts of RF power. Today,
smaller portable telephones that transmit only 0.6 watts of power are
increasingly replacing higher-power mobile units, thereby decreasing the
effective range of existing cellular base stations. In the PCS communications
arena, wireless communications systems operate at a higher frequency than
traditional cellular communications, which reduces the range of signal
transmission due to the limitations of conventional filtering technologies. In
urban settings, site location, site acquisition and special environmental
requirements can drive total costs up to $1 million per site. In addition, each
site may be subject to additional or unique regional and local regulatory
processes and citizen demands that can burden the deployment process. As a
result, decreasing the number of base stations that must be deployed can
significantly reduce the service provider's infrastructure costs.

The physical size of the base station can also be a significant issue for
service providers. Because a conventional filter system can account for
approximately 30% of the total base station size (excluding the antenna) and a
smaller base station requires less real estate per site, reducing the size of
the filter system can provide significant cost savings to service providers. In
addition, when new sites are not available, base station utilization must be
increased by retrofitting electronics for additional channels in the same
physical space. In such cases, reducing component size is a viable alternative.

Finally, interference due to the imperfect RF channel selectivity of
filtering components is also a significant issue. Interference, which occurs
when two radio waves of the same frequency interact with one another, can cause
dropped calls and cross talk. It also prevents a service provider from fully
utilizing the available RF spectrum, as some spectrum must be reserved to
protect against interference from another service provider's RF spectrum, which
in turn decreases the number of users a base station can process. Problems
caused by interference can be especially acute in urban areas, where caller
density is high. Because these symptoms of interference can dramatically degrade
service quality, a wireless filter system that reduces interference can provide
a meaningful advantage in this increasingly competitive market. See
"-- Competition."

25
<PAGE> 26

STI'S PRODUCT SOLUTION

The Company believes that its SuperFilter(TM) systems offer solutions to
some of the most pressing constraints facing the wireless communications
industry: range, size and interference. Each SuperFilter(TM) system is a
self-contained unit that can be retrofitted into existing base stations or
incorporated into new base stations regardless of the protocol used (including
Code Division Multiple Access ("CDMA"), Time Division Multiple Access and GSM,
among others), with little or no modifications to conventional design. The
benefits offered by the Company's SuperFilter(TM) products include the
following:

- Range Extension. The Company's SuperFilter(TM) systems incorporate an
LNA with an HTS filter, both of which are then cryogenically cooled. The
filters expand the receiving range of the base station by reducing the
electrical noise of the system, enabling each base station site to cover
a larger area. The Company believes that extending base station range
reduces the number of base stations that must be deployed in a given
service area, which can result in lower capital costs, more calls
completed per base station and higher revenue per base station.

- Decrease in System Size. The low resistance of HTS materials allows STI
to provide HTS filters that are one one-thousandth of the size of the
conventional filters most commonly used in base stations. A complete
SuperFilter(TM) system is approximately 70% to 90% smaller than a typical
conventional filter and can be incorporated easily into a standard 19
inch component rack mount. This significant reduction in physical size
makes valuable space available for other required electronic components,
enabling service providers to enhance the utilization of existing base
stations instead of deploying additional base stations. In addition,
reduced size can decrease deployment costs for new base stations, as less
real estate is required to support a base station. STI believes its
SuperFilter(TM) systems are the smallest filters currently available in
the industry.

- Reduction in Interference. STI has demonstrated that HTS thin-film
materials are attractive for wireless communications base station
applications because the near-perfect conductivity of the HTS filters
allows for greater control of RF signals. The Company believes that its
HTS filter systems can insulate a desired frequency against interference
from unwanted frequency transmissions more selectively than conventional
cavity filters, thereby reducing the number of dropped calls and the
amount of cross talk. While the exact number of dropped calls will vary
among base stations due to differences in call volume and geographic
location, a reduction in the number of dropped calls can increase
revenues to the service provider. STI believes that a decrease in
interference also can result in an increase in utilization of the service
provider's allocated frequency spectrum, which in turn can result in an
increase in the volume of calls processed.

- Tower Mounting and Low Power Consumption. The Company believes that as
PCS and cellular base stations are deployed, base station manufacturers
will prefer to install filtering and LNA capabilities at the top of the
station's antenna tower, because such mounting substantially reduces the
significant signal losses associated with tower-to-ground cabling. The
Company believes tower mounting is a key component of extending the range
of base stations, and the Company expects prototypes for the optional
tower-mount platform for its SuperFilter(TM)products to be available in
early 1997, although there can be no assurance in this regard. The
Company believes that an additional benefit to its HTS filter systems is
that these systems consume less energy than competing HTS systems,
because the power budget for some base stations can be as low as 1500
watts. A higher power budget requires high capacity back-up units,
resulting in undesirable increases in base station size. Currently, the
most energy-efficient competing HTS system consumes 600 watts or more of
power, while the Company's HTS system consumes only approximately 150
watts of power, comparable to that of a household light bulb.

WIRELESS COMMUNICATION CUSTOMERS

The Company markets its products to large OEMs and service providers
worldwide. When targeting a particular customer, the Company currently seeks
orders for prototype units, as well as units for conducting laboratory life and
field trial testing. Ultimately, the Company will seek multiple unit orders from
its

26
<PAGE> 27

customers. Product accelerated life testing provides proof of the reliability
and durability of the Company's product, while field trials verify the system's
capabilities when implemented into a live system in the field. This approach
allows the Company to build customer confidence in its technology, to provide
product reliability data and to build a foundation for volume orders. The
Company believes it has been successful with this approach and has established
relationships with major base station manufacturers and wireless communications
service providers, from which STI expects to seek volume orders.

In May 1996, the Company delivered a complete SuperFilter(TM) system for
cellular applications to Motorola. Production of the unit was the result of a
long-term effort between the two companies. Following delivery, the unit
successfully underwent extensive accelerated life testing at Motorola's
facilities, a critical factor in the successful commercialization of the
Company's product. As a result of this successful testing, Motorola and the
Company are currently examining the potential integration of the SuperFilter(TM)
systems into certain Motorola base station offerings. Motorola has ordered
additional units for field trials and testing, which tests are expected to take
several months to complete. Following successful field testing and the
incorporation of any product modifications that such testing may indicate are
necessary or desirable, the Company intends to seek a volume order from
Motorola. However, there can be no assurance that the Motorola relationship will
ultimately lead to volume orders for the Company's SuperFilter(TM) products.

In early August 1996, the Company delivered a PCS SuperFilter(TM) system to
be utilized in a CDMA environment to a base station manufacturer that is a
leader in wireless technology. In addition, in late 1995, the Company delivered
a system utilizing GSM technology to one of the world's top five base station
manufacturers. The GSM product was tested in the customer's laboratories, with
favorable results reported by the customer. Currently, the Company is in
discussions with both customers to explore potential HTS applications in their
base station offerings.

The Company has received orders from a major Asian telecommunications
company for two filter systems for testing in the PCS environment, which systems
are expected to be delivered during the fourth quarter of 1996, although there
can be no assurance in this regard. The Company is also in preliminary
discussions with several other OEMs and service providers for initial product
shipments and field trials.

HIGH-SPEED COMPUTING

In recent years, there has been a dramatic increase in demand for higher
speed computers, and this trend is expected to continue for the foreseeable
future. Workstations are the segment of the computing market focused on
processing-intensive uses, such as engineering and computer-aided design. IDC
expects sales of workstations with an average sales price of more than $15,000
to grow from 358,000 units in 1995 to over 575,000 units in 1998. As software
sophistication increases in response to user demand, higher performance
computers are needed to maintain processing times at acceptable levels. In some
cases, particularly in engineering applications, processing specific tasks can
take hours or days, making them inefficient without some form of high-speed
computing. In addition, existing application software requires increased
computing power to meet the higher computing demands associated with the growth
in number of users.

Temperature, among other factors, is a fundamental limit to electronic
system performance. The process that allows computers to run both at high speeds
and at low temperatures, known as "cold computing," addresses both performance
and thermal management needs. Because the high-end workstation market targeted
by the Company for its cold computing products is driven by demands for
increased processor speed, performance improvements from cooling are expected to
offset the cost of cryogenic coolers. The Company believes its cryogenic coolers
can be used to efficiently and cost-effectively improve the speed of existing
workstations.

STI'S COLD COMPUTING PRODUCT

The Company has developed a line of cold computing products known as
RACE(TM) (Radically Accelerated Cold Electronics). These cryogenic coolers have
demonstrated in excess of a 50% performance improvement when used in conjunction
with workstations at -55 degrees Celsius (218K) without any further
modifications to the complementary metal oxide semiconductor ("CMOS") central
processing unit ("CPU"). With a

27
<PAGE> 28

further decrease in temperature and minor modifications of the CPU, the Company
believes that workstation performance can be increased by 100% to 200%. By
utilizing the same proprietary technology used to cool its HTS systems, the
Company's cold computing products can capitalize on the Company's efforts in HTS
cooler development, and can provide additional commercial revenue for the
Company. The Company believes that the unit cost of its cooling subsystems will
decline as production volume increases.

COLD COMPUTING CUSTOMERS

The Company targets its cold computing marketing efforts toward
manufacturers and end users in the high-speed computer market. In February 1996,
the Company entered into a letter of intent with Commercial Data Servers, a
start-up computer company. The letter of intent provides for an initial purchase
order for test units, which may be followed by volume orders, although there can
be no assurance in this regard. The Company has been in discussions with several
other workstation manufacturers and anticipates additional cooler orders during
the first half of 1997.

GOVERNMENT CONTRACTS

Since inception, over 90% of the Company's net revenues have been from
research and development contract sales directly to the government or to
resellers to the government. Nearly all of such revenues were paid under
contracts between the Company and the DoD. The Company continues to pursue
government research and development contract awards to supplement its funding of
HTS wireless and cryogenic product development. STI extensively markets to
various government agencies to identify opportunities, and actively solicits
partners for product development proposals. Since 1988, the Company has
successfully obtained a number of non-classified government contracts for HTS
research, including one of the largest non-classified HTS awards from the DoD
Advanced Research Projects Agency ("DARPA") through the Office of Naval
Research, under DARPA's original superconductivity program. In addition to
actively soliciting government contracts, the Company participates in the Small
Business Innovative Research ("SBIR") program. Since its inception, the Company
has been awarded 30 Phase I SBIR contracts, each of which typically generates
from $50,000 to $100,000 of revenues for the Company. The Company has been
successful in converting eight of these Phase I contracts into Phase II
programs, each of which typically generates $500,000 to $1 million of revenues
for the Company. STI has several other Phase II proposals currently under
review, although there can be no assurance that the Company will be successful
in obtaining such contracts. Since the Company's inception, government contracts
have provided approximately $35 million of revenue to the Company. The Company
believes that it has successfully leveraged its technology developed under
government funded projects into commercial applications.

PRODUCTS DEVELOPED UNDER GOVERNMENT CONTRACTS

The Company's first complete system for the military aerospace
communications market is a proprietary switched filter bank ("SFB") system
developed in conjunction with Wright Laboratory at Wright-Patterson Air Force
Base ("WP-AFB") with funding from DARPA. The SFB has demonstrated an ability to
mitigate the problem of signal interference, which a DARPA representative has
stated is one of the most pressing and recurring problems in the use of
electronics in military aircraft. DARPA believes that resolving the interference
problem can increase aircraft and pilot survival rates. The Company's filter
bank system selectively filters unwanted communication signals that can cause
severe problems for radar warning receivers. The Company believes that its
filter bank system can also be adapted to mitigate similar problems on ships,
helicopters and tanks.

In addition to the SFB program and certain classified programs, the Company
is working with military communications equipment contractors on another
government wireless program. The focus of this program is to improve the
integrity of a digital communications link through the use of an HTS filter
system. Development of this technology is consistent with the Company's strategy
to commercialize its HTS products in the private wireless communications area.

28
<PAGE> 29

CURRENT GOVERNMENT R&D CONTRACTS

The Company is currently working with the government under 13 separate
research and development contracts. Two of the significant programs are:

HTS Thin-Film Manufacturing Alliance. The Company is involved in a
government sponsored consortium with another HTS company and a variety of
university and industrial participants. The consortium, called the HTS Thin-Film
Manufacturing Alliance, has received approval for funding totaling $5.6 million
from DARPA through July 1998, subject to annual renewal, resulting in revenues
of approximately $2.8 million for STI. Under the cost sharing provisions of the
alliance contract, the participating organizations are committed to match
research and development expenses; STI will allocate matching expenses of $2.8
million. The purpose of the consortium is to develop cost-effective
manufacturing technologies for HTS thin films for RF applications, establish
industry standards for substrates, films and testing, and provide
second-sourcing between the companies.

Technology Reinvestment Program. The Company has received a Technology
Reinvestment Program contract to refine and develop processes and designs for
HTS microwave systems to effect a transition from current research and
development to affordable, producible systems providing improvements in military
and commercial wireless systems capabilities. The contract is based on an
alliance of industry partners and is funded through WP-AFB. The alliance will
receive $5.1 million from WP-AFB, and will match an additional $8.3 million
through a government cost sharing arrangement. Over the term of the contract,
the Company will receive $2.8 million in revenues, and will allocate matching
research and development expenses of $4.5 million.

During the first nine months of 1996, the Company secured new government
contract awards for a total of $11.4 million. Because all of the Company's
government contracts are terminable by the contracting agency at its option,
award amounts should not be used as a measure of future revenues. See "Risk
Factors -- High Degree of Dependence on Government Contracts" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

STI'S TECHNOLOGY

SUPERCONDUCTING TECHNOLOGY

Superconductors are materials that have the ability to conduct electrical
energy with little or no resistance when cooled to "critical" temperatures. In
contrast, electric currents that flow through ordinary materials encounter
resistance that consumes energy when electrical energy is converted into heat.
Substantial improvements in the performance characteristics of electrical
systems can be made with superconductors, including reduced power loss, lower
heat generation and decreased electrical noise. As these properties have been
applied to radio and microwave frequency applications, new products, such as
wireless filters, have been developed that can be extremely small, highly
sensitive and highly frequency selective.

The discovery of superconductors was made in 1911. However, a fundamental
understanding of the phenomenon of superconductivity eluded physicists until J.
Robert Schrieffer (a director of the Company and Chairman of its Technical
Advisory Board), John Bardeen (co-inventor of the transistor) and Leon Cooper
proposed a theory explaining superconductivity, for which they were awarded the
Nobel Prize in Physics in 1972. Until 1986, all superconductor utilization was
done at extremely low temperatures below 23K (-250 degrees Celsius).
Superconductors were not widely used in commercial applications because of the
high cost and complexities associated with reaching and maintaining such low
temperatures. In 1986, high temperature superconductors with critical
temperatures greater than 30K (-243 degrees Celsius) were discovered. In early
1987, YBCO was discovered, which has a critical temperature of 93K (-180 degrees
Celsius). Shortly thereafter, TBCCO was discovered, which has a critical
temperature of 125K (-148 degrees Celsius). These discoveries were important
because these high temperature superconductors allowed for operating
temperatures higher than 77K (-196 degrees Celsius), or the point at which
nitrogen liquefies. These high critical temperatures allow superconductors to be
cooled using less expensive and more conventional refrigeration processes. STI
was formed following this discovery to develop and commercialize high
temperature superconductors.

29
<PAGE> 30

STI'S APPROACH

The Company has internally-developed its key technologies from a standard
set of technology platforms. The Company utilizes a proprietary manufacturing
process for HTS thin film production, the base material for the Company's
filtering products. An in-house design team develops the filters, which are
packaged into a vacuum-sealed container for thermal insulation. The filter
package is incorporated with the Company's cryogenic cooler, and then integrated
with the necessary control electronics into a complete system for simple
adaptation into new or existing wireless communications base stations. The
Company believes that its filter systems provide its targeted markets with the
smallest and most cost-effective products and that it is the only HTS company
that develops and manufactures all of these key components.

HTS Materials. A number of HTS materials have been discovered with
superconducting properties, but only a few have characteristics capable of
commercialization. The Company primarily utilizes TBCCO, which has one of the
highest known critical temperatures, allowing for reduced cooling needs in order
to achieve superconducting properties. The Company holds a worldwide exclusive
license, in all fields of use, to TBCCO formulations covered by patents held by
the University of Arkansas through a license agreement. The Company also
utilizes YBCO for some of its applications, including some manufacturing
processes for its RF components. Thin-film HTS is the base material used by STI
to produce RF components, such as wireless communications filters. The Company
has obtained ten patents for technologies related to thin film production. The
Company believes that the process technology it has developed produces
state-of-the-art HTS thin films of the highest quality.

RF Circuitry. The Company has devoted a significant portion of its
engineering resources to design and model the complex RF circuitry that is basic
to the Company's products. The Company's ten person engineering team is led by
Drs. Gregory Hey-Shipton and George Matthaei. In addition, Dr. J. Robert
Schrieffer, a Nobel laureate, is head of the Company's Technical Advisory Board.
The expertise of this highly qualified team has allowed the Company to design
and fabricate very precise individual components, such as RF signal filters. STI
has implemented computer simulation systems to design its products, and this RF
circuitry design has allowed the Company to produce extremely small,
high-performance circuits. Some of the Company's design and engineering
innovations have been patented; others are the subject of pending patent
applications. The Company believes that its RF engineering expertise provides
the Company with a competitive advantage.

Cryogenic Cooling Technology. The availability of a low cost, highly
reliable, compact cooling technology is critical to the successful
commercialization of the Company's HTS products. Although such technology had
been used successfully in military applications in the past, no such cryogenic
cooler was commercially available. As a result, the Company developed a low
cost, low power cooler designed to cool to 77K (-196 degrees Celsius) with
sufficient heat dissipation for its HTS applications, and has a target life of
over 40,000 hours. Its development was based in part on patents licensed by the
Company from Sunpower, Inc. under a cross-licensing arrangement. STI believes
that its internally-developed cryogenics allow it to offer a cooler that is both
compact and reliable enough to meet industry standards and provides the Company
with a significant competitive advantage. In high volume production, the Company
believes that unit costs for this cooler will be significantly less than
currently available cryogenic coolers. See "-- Manufacturing" and "-- Strategic
Relationships."

Cryogenic Packaging. Cooling to cryogenic temperatures requires proper
insulation and packaging. Any HTS or other cryogenically-cooled device must be
maintained at its optimal operating temperature, and its interaction with higher
temperature components must be controlled. The Company has developed several
thermal insulation technologies to satisfy this requirement.

MANUFACTURING

As the Company has commercialized its HTS and cryogenic products, it has
developed prototypes and established its manufacturing foundation. However, the
Company presently has no volume production capabilities. As the Company receives
volume orders for its products, it expects to outsource the manufacturing of
many of the hardware components of its systems, while retaining manufacturing
responsibility for its HTS thin-film filters. STI's manufacturing processes,
including thin film production, are performed in "clean

<PAGE> 31

rooms." Except for processing related to its proprietary thin films, the Company
utilizes technologies and equipment commonly used in the semiconductor industry.

The Company has demonstrated a proprietary manufacturing process for
thin-film TBCCO materials that the Company believes is scalable for high volume
production. The Company has established a pilot scale production operation,
which the Company uses to produce TBCCO thin films on wafers for wireless
electronics applications. The Company currently purchases wafers for growth of
HTS thin films from two primary outside suppliers because of the quality of
their products.

The RF circuitry utilized by STI is designed and modeled by internal
engineering resources. The Company has in-house capabilities to pattern the HTS
material and all other aspects of RF component production, including packaging
the filters. See "-- STI's Technology -- STI's Approach."

STI has in-house prototype capabilities to manufacture its cryogenic
coolers in limited quantities. However, the Company has formed Cryo-Asia Pte Ltd
("Cryo-Asia"), a joint venture with Alantac in Singapore, to achieve volume
production of its coolers. The Company anticipates that this production capacity
will be available by early 1997. See "Risk Factors -- Limited Manufacturing
Experience."

MARKETING AND SALES

The Company pursues a marketing strategy aimed at a select group of OEMs,
service providers, computer manufacturers, computer end users and government
agencies where long-term business relationships have been solidified over the
years. In addition, the Company demonstrates STI products at trade shows,
participates in industry conferences, utilizes selective advertising and
provides technical and application reports to recognized trade journals. Product
information in the form of brochures, data sheets, application notes, trade
journal reports, product photos and press releases are updated as necessary. The
Company has an in-house marketing staff with experience in marketing and sales,
in addition to nine sales representatives located domestically and
internationally. The Company's officers and directors are also involved in the
Company's marketing efforts. The Company currently markets its products to the
wireless communications and high-speed computing markets in North America,
Europe and Asia. The Company has direct distribution arrangements in Japan,
Korea, Scandinavia, the United Kingdom, Germany and certain regions of the
United States.

As the Company gains increased access to its targeted markets, it plans to
concurrently increase its in-house marketing staff. STI is currently developing
extensive product announcement strategies, including advertising and press
tours. See "Risk Factors -- Limited Marketing and Sales Capabilities."

STRATEGIC RELATIONSHIPS

The Company has established collaborative and strategic relationships with
the following companies:

Alantac. In May 1996, the Company and Alantac entered into an agreement
which established Cryo-Asia, a manufacturing joint venture. The joint venture is
owned 60% by the Company and 40% by Alantac. Cryo-Asia was established to
develop volume manufacturing of the Company's proprietary cryogenic cooler. The
Company anticipates that the joint venture will enhance cost reduction efforts
to further decrease the unit cost of its cooler. The Company plans to begin
production of the coolers in Singapore over the next several quarters. See
"-- Manufacturing."

Lockheed. In January 1988, Lockheed made a $4 million equity investment in
the Company and the parties entered into a 20-year agreement to exchange
technical information and know-how with the objective of accelerating the use of
HTS technology in Lockheed products. According to the terms of the Company's
agreement with Lockheed, each party is obligated to assist the other in the
transfer of HTS technology, with the inventing party retaining ownership of the
technology, or if the technology is jointly invented, then the technology will
be jointly owned. If products are developed by the Company in conjunction with
Lockheed or by Lockheed using the Company's technology, then the Company has the
first right to manufacture such products for Lockheed. If the Company cannot
meet quality and delivery schedules, the Company has agreed to grant Lockheed a
license to manufacture such products for a royalty.

31
<PAGE> 32

INTELLECTUAL PROPERTY

The Company regards elements of its manufacturing processes, product design
and fabrication equipment as proprietary and seeks to protect its rights in them
through a combination of patent, trademark, trade secret and copyright law and
internal procedures and non-disclosure agreements. The Company also seeks
licenses from third parties for HTS materials and processes used by the Company
which have been patented by other parties. The Company believes that its success
will depend, in part, on the protection of its proprietary information, patents
and the licensing of key technologies from third parties.

The Company has focused its development efforts on TBCCO materials and, to
a lesser extent, on YBCO materials. Several U.S. patents have been issued to the
University of Arkansas covering TBCCO, and the Company has an exclusive
worldwide license (including the right to sublicense) under these patents,
subject to the University of Arkansas' right to conduct research related to the
patents. The consideration for the license included $250,000 in cash, prepaid
royalties of $750,000 through April 1995 and an aggregate of 200,000 shares of
Common Stock. Commencing April 1995, the Company has been obligated to pay
royalties of 4% on sales of TBCCO-based products, subject to a $100,000 annual
minimum from and after April 1997, and royalties of 35% of sublicense revenues
received by the Company. In the event that the Company fails to pay minimum
annual royalties, the license automatically becomes non-exclusive. The license
terminates upon expiration of the right to claim damages for infringement of all
the patents covered. Under the terms of its exclusive license, the Company has
agreed to assume litigation expenses for infringement actions, subject to a
right of setoff against future royalty obligations.

In January 1993, as a part of its strategy to stimulate the development and
use of TBCCO and to create potential second sourcing foundry service to STI, the
Company granted DuPont a non-exclusive worldwide sublicense to develop processes
and market TBCCO thin films. DuPont paid the Company $388,000 as partial
consideration for the sublicense, a portion of which represents prepaid
royalties. Commencing in 1998, DuPont will pay royalties on sales of TBCCO thin
films or devices containing TBCCO thin films, subject to annual minimums. In the
event that the Company grants another sublicense to a third party on more
favorable terms, it will be obligated to extend those terms to DuPont. The term
of the sublicense is the same as the Company's license from the University of
Arkansas, but the sublicense is terminable by DuPont upon 30 days' notice to the
Company. In 1994, the Company granted a nonexclusive license for TBCCO to
Superconducting Core Technologies, Inc. on terms substantially similar to those
of the DuPont agreement. DuPont, Superconducting Core Technologies, Inc. and
their customers are current or potential competitors of the Company, and there
can be no assurance that these sublicenses will not adversely affect the
Company's business, results of operations and financial conditions.

The Company is also focusing development efforts on YBCO, although to a
lesser extent than TBCCO. YBCO is the other significant material that the
Company has used in the development of its products. The Company believes that a
number of patent applications are pending that cover the composition of YBCO,
including applications filed by IBM, AT&T and other large potential competitors
of the Company. STI believes that such applications are the subject of
interference proceedings currently pending in the U.S. Patent and Trademark
Office. The Company is not involved in those proceedings. In addition,
international patents have been issued for specific YBCO compounds. Therefore,
there is a substantial risk that one or more third parties will be granted
patents covering YBCO and that the Company's use of these materials may require
a license. As with other patents, the Company has no assurance that it will be
able to obtain licenses to any such patents for YBCO or that such licenses would
be available on commercially reasonable terms. The Company's efforts to develop
products based on YBCO would be substantially impaired by its failure to obtain
any such license for YBCO, and such failure could have a material adverse effect
on the Company's business, results of operations and financial condition.

As of September 28, 1996, the Company holds 13 patents, and three patents
have been allowed but have not yet issued. Nine of the Company's patents are for
technologies directed towards producing thin-film materials, including its
proprietary thin film process for TBCCO production. In addition, the Company
currently holds three issued and three allowed patents for circuit designs and
one patent covering cryogenics and packaging. As of September 28, 1996, the
Company has seven patents pending, including two related to materials, two
related to cryogenics, and three covering STI designs. As the Company has
developed prototype

32
<PAGE> 33

products, it has increased the number of design patents applied for in an effort
to protect all phases of product development.

See "Risk Factors -- Uncertainty of Patents and Proprietary Rights."

RESEARCH AND DEVELOPMENT

As part of STI's strategy to maintain its technological leadership, the
Company has focused its research and development activities on materials, RF
circuitry, cryogenics design and product application. At September 28, 1996, the
Company's research and development department consisted of 49 individuals,
including Drs. Hey-Shipton and Matthaei. The Company's contract research and
development expenses consist primarily of labor, engineering, material and
overhead costs incurred in connection with research and development activities.
For the fiscal years ended 1993, 1994 and 1995 and the nine months ended
September 28, 1996, contract research and development expenses were
approximately $2.9 million, $4.0 million, $5.4 million and $4.2 million,
respectively. The Company's revenues from government-related contracts provided
for approximately $4.3 million, $5.0 million, $7.3 million and $5.1 million,
respectively, during these same periods. This accounted for 87%, 90%, 96% and
98% of the Company's total revenues in the fiscal years ended 1993, 1994 and
1995 the nine months ended September 28, 1996, respectively.

Since the Company's inception, it has received approximately $35.0 million
of revenues from government contracts. The Company believes that it will
continue to rely heavily on government research and development awards to fund a
significant portion of its research and development activities. See "Risk
Factors -- High Degree of Dependence on Government Contracts" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

COMPETITION

The Company faces competition in various aspects of its technology and
product development, and in each of the markets targeted by the Company. The
Company's current and potential competitors include conventional RF filter
manufacturers and both established and newly emerging companies developing
similar or competing technologies. In addition, the Company currently supplies
components and licenses technology to large companies and industry leaders that
may decide to manufacture or design their own HTS components instead of
purchasing them, or licensing the technology, from the Company. The Company
expects increased competition both from existing competitors and a number of
companies that may enter the wireless communications or high-speed computing
markets.

In the wireless communications market, the Company competes primarily with
Conductus, Inc., Illinois Superconductor Corp. and Superconducting Core
Technologies, Inc. with respect to its HTS filter systems. In addition, the
Company competes with IBM, DuPont, Matsushita and Amtel, a Japanese consortium,
among others, with respect to its HTS materials. The Company is not currently
aware of another company that is targeting the cold computing market with a
compact and low cost cryogenic cooler; however, there can be no assurance that
there is no other company designing or developing cryogenic cooling technology
similar to or in direct competition with the Company's products. In the
government sector, the Company competes with universities, national laboratories
and both large and small companies for research and development contracts.

ENVIRONMENTAL ISSUES

33
<PAGE> 34

require the Company to make substantial expenditures for preventative or
remedial action, reduction of chemical exposure, or waste treatment or disposal.
In addition, although the Company believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed by
state and federal regulations, nevertheless there is the risk of accidental
contamination or injury from these materials. To date, the Company has not
incurred substantial expenditures for preventive action with respect to
hazardous materials or for remedial action with respect to any hazardous
materials accident, but the use and disposal of hazardous materials involves the
risk that the Company could incur substantial expenditures for such preventive
or remedial actions. If such an accident occurred, the Company could be held
liable for any resulting damages. The liability in the event of an accident or
the costs of such remedial actions could exceed the Company's resources or
otherwise have a material adverse effect on the Company's financial condition
and results of operations. See "Risk Factors -- Hazardous Materials;
Environmental Regulations."

PROPERTIES

The Company's operations, including its pilot scale manufacturing line, are
located in approximately 24,000 square feet of space in Santa Barbara,
California. The Company occupies 15,000 square feet of this space under a lease
which expires on December 31, 1999. The Company occupies the remaining 9,000
square feet of this space under a lease which expires on December 31, 1997. The
Company believes that such facilities are adequate to meet its needs for the
current level of operations. However, as STI implements its commercialization
strategy and begins volume production, the Company anticipates that it will
require significant additional manufacturing facilities. See "-- Manufacturing."

LEGAL PROCEEDINGS

There are currently no material lawsuits pending against the Company.

EMPLOYEES

As of September 28, 1996, the Company employed a total of 66 persons, 49 of
whom were employed in research and development. Seven of the Company's employees
have Ph.D.s and fifteen others hold advanced degrees in physics, materials
science, electrical engineering and related fields. The Company's employees are
not represented by a labor union, and the Company believes that its employee
relations are good.

34
<PAGE> 35

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company and their ages as of
October 26, 1996 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
Glenn E. Penisten......................... 64 Chairman of the Board of Directors
E. Ray Cotten............................. 65 Vice Chairman of the Board of Directors
Daniel C. Hu.............................. 52 President, Chief Executive Officer and
Director
Robert B. Hammond, Ph.D................... 48 Senior Vice President and Chief Technical
Officer
James G. Evans, Jr........................ 44 Vice President and Chief Financial Officer
James P. Simmons, Jr...................... 47 Vice President, Marketing and Sales
Gregory L. Hey-Shipton, Ph.D.............. 42 Vice President and General Manager,
Government Products Business Unit
Robert P. Caren, Ph.D. (1)(2)............. 63 Director
Charles Crocker (1)(2).................... 57 Director
Dennis Horowitz (1)(2).................... 50 Director
J. Robert Schrieffer, Ph.D. (1)(2)........ 65 Director
</TABLE>

- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.

Glenn E. Penisten has served as Chairman of the Board since May 1994. Mr.
Penisten is a founder of the Company and has served on its Board of Directors
since May 1987. He served as STI's Chief Executive Officer from August 1987 to
June 1988. He has been a General Partner of Alpha Partners, a venture capital
firm, since 1985. Mr. Penisten was Chairman of the American Electronics
Association in 1982, while he was Chairman of the Board of Directors and Chief
Executive Officer of American Microsystems Inc., a semiconductor company. Mr.
Penisten is a director of Bell Microproducts Inc., IKOS Systems, Inc., Network
Peripherals, Inc. and Pinnacle Systems. Mr. Penisten holds a B.S. in electrical
engineering from Oklahoma State University.

E. Ray Cotten joined the Board of Directors in July 1996 and since August
1996 has served as Vice Chairman of the Board. Since August 1994, he has served
as Chairman of the Board of Impulse Telecommunications Corporation, a wireless
communications consulting and engineering firm ("Impulse"). Prior to joining
Impulse, from December 1992 to August 1994, Mr. Cotten was President, Chief
Executive Officer and Chief Operating Officer of Scott Instruments Corporation,
a pioneer in voice recognition systems and from December 1990 to November 1992,
he was President and Chief Executive Officer of ACS Software Products Group, a
software company for the apparel industry. Prior to that, he also served as
Vice-Chairman and co-founder of NetAmerica, a digital networking company, held
vice-president positions at Microdynamics, Inc., a CAD/CAM company for the
apparel industry, Northern Telecom, Inc., a telecommunications company, Data
Transmission Corporation, a digital networking company, and Danray, a
communications switch manufacturing company, and spent nearly 10 years with
Texas Instruments, where he held various management positions. Mr. Cotten
received his B.A. in business from Oklahoma State University.

Daniel C. Hu has served as President, Chief Executive Officer and a member
of the Board of Directors of the Company since December 1992. He has been in the
semiconductor and electronics industry for 28 years, having served in a variety
of executive positions in business, manufacturing and research and development
operations. Prior to joining the Company, Mr. Hu served as President of Elite
Microelectronics Inc., a semiconductor company, from April 1991 to July 1992. He
has also held senior management positions at Lattice Semiconductor, Advanced
Micro Devices, Exel Microelectronics, Inc. and National Semiconductor Corp., and
technical management positions at Intel Corporation and Fairchild Semiconductor
Corporation, each of which is a semiconductor company. Mr. Hu holds several key
CMOS and bipolar patents, and he

35
<PAGE> 36

participated in the pioneering of semiconductor DRAM, SRAM, flash memories and
microprocessors. Mr. Hu received an M.S.E.E. from UCLA and a B.S.E.E. from the
University of Illinois.

Robert B. Hammond, Ph.D. has served as Senior Vice President and Chief
Technical Officer of the Company since December 1992, having served as Vice
President, Technology, and Chief Technical Officer since August 1990. From May
1991 to December 1991 and July 1992 to December 1992, he served as Acting Chief
Operating Officer of the Company, and from December 1987 to August 1990, he
served as Program Manager of the Company. Dr. Hammond also serves on STI's
Technical Advisory Board. For over ten years prior to joining the Company, he
was at Los Alamos National Laboratory, most recently as Deputy Group Leader of
Electronics Research and Development, a group that performs research,
development and pilot production of solid state electronics and optics. Dr.
Hammond received his Ph.D. and M.S. in applied physics and his B.S. in physics
from the California Institute of Technology.

James G. Evans, Jr. joined the Company in March 1995 as Vice President,
Chief Financial Officer and Secretary. Prior to joining the Company, from 1983
to 1995, Mr. Evans held several senior executive positions within finance and
operations at Applied Magnetics Corporation, a manufacturer of magnetic record
heads for hard disk drives ("Applied Magnetics"), most recently as Customer
Business Director and Financial Director of Thin-Film Products, where he was
responsible for the design, off-shore manufacturing, pricing, planning and
quality of the product for one-third of that company's customers. Before joining
Applied Magnetics, Mr. Evans was Director of Financial Planning for Tiger
International, a transportation company. Mr. Evans has an M.B.A. in Accounting
from the University of Southern California and a B.A. in Business Economics from
the University of California at Santa Barbara. Mr. Evans is a certified public
accountant.

James P. Simmons, Jr. joined the Company as Vice President, Marketing and
Sales in May 1994. Prior to joining the Company, from September 1990 to May
1994, Mr. Simmons was the Product Marketing and Applications Manager at
Therma-Wave, Inc., a semiconductor equipment company, where he was responsible
for all strategic and tactical marketing activities for a major product family.
Mr. Simmons has over 20 years of marketing management and production experience
within the high-technology industry and has held management positions with
Hewlett-Packard Company, as well as KLA Instruments Corp. and Nanometrics, Inc.,
both of which are semiconductor equipment companies. Mr. Simmons holds an M.B.A.
from the Harvard Business School and a B.S. in applied physics from the
California Institute of Technology.

Gregory L. Hey-Shipton, Ph.D., has served as Vice President and General
Manager of the Company's Government Products Business Unit since August 1994.
Dr. Hey-Shipton joined the Company as Engineering Manager in June 1991, and from
March 1992 to August 1994, he served as Vice President, Engineering. Prior to
joining the Company, from 1978 to 1991, he held various positions at
Watkins-Johnson Company, a large microwave product company, most recently
serving as Manager of its Subsystems Product Engineering Department. Dr.
Hey-Shipton holds a Ph.D. in microwave electronics from the University of Leeds
and a B.Sc. in physics and electronics from the University of Manchester.

Robert P. Caren, Ph.D., has served on both the Board of Directors and the
Technical Advisory Board of the Company since January 1988. From 1988 to 1995,
when he retired, Dr. Caren served as Corporate Vice President, Sciences and
Engineering, for Lockheed Martin Corporation. Dr. Caren is a fellow of the
American Institute of Aeronautics and Astronautics and the American Association
for the Advancement of Science. He is a member of the National Academy of
Engineering and past Chairman of the Research Division of the Defense
Preparedness Association. Dr. Caren received his Ph.D., M.S. and B.S. in physics
from Ohio State University.

Charles Crocker is a founder of the Company and served as its President
from May 1987 to August 1987, and has served on its Board of Directors since May
1987. Mr. Crocker has served as the President and Chief Executive Officer and
Chairman of the Board of BEI Electronics, Inc., a sensor and medical device
company, since 1974. He founded and has served as President of Crocker Capital,
a private venture capital company, since its inception in 1971. He is a director
of Kera Vision, Inc., Pope & Talbot, Inc. and Fiduciary Trust Company
International. Mr. Crocker holds an M.B.A. from the University of California,
Berkeley, and a B.S. from Stanford University.

36
<PAGE> 37

Dennis Horowitz has served on the Board of Directors of the Company since
June 1990. Since September 1994, Mr. Horowitz has served as Corporate Vice
President and President of the Americas, AMP Incorporated, an interconnection
device company. From October 1993 to August 1994, Mr. Horowitz served as
President and Chief Executive Officer of Philips Technologies, a Philips
Electronics North America company. From April 1990 to September 1993, Mr.
Horowitz served as President of Philips Components, Discrete Products Division.
From 1988 to 1990, he served as Division President of Magnavox CATV, and from
1980 to 1988 he was involved in the general administration of North American
Philips Corporation. Philips Components and Magnavox CATV are divisions of North
American Philips Corporation. Mr. Horowitz is a director of Aerovox Corporation.
Mr. Horowitz holds an M.B.A. and a B.A. in economics from St. John's University.

J. Robert Schrieffer, Ph.D. founded the Technical Advisory Board of the
Company in August 1987 and has served as its Chairman since that time. He has
also served on the Board of Directors of the Company since October 1988. He
received the Nobel Prize in Physics in 1972 for work in superconductivity
theory, and he has received many other professional honors including the
National Medal of Science. Dr. Schrieffer is currently the President of the
American Physical Society. He is also the University Eminent Scholar of the
State of Florida University System and has been the Chief Scientist of the
National High Magnetic Field Laboratory since January 1992. Dr. Schrieffer was
Chancellor's Professor of Physics and Director of the Institute for Theoretical
Physics at the University of California, Santa Barbara, from 1980 to 1991. Dr.
Schrieffer serves on a number of government and industrial committees and is a
Fellow of the Los Alamos National Laboratory, heading its Advanced Study Program
in High Temperature Superconductivity Theory from 1988 to 1993. Dr. Schrieffer
received his Ph.D. and M.S. in physics from the University of Illinois and his
B.S. in physics from the Massachusetts Institute of Technology.

All directors hold office until the next annual meeting of shareholders or
until their successors have been elected and qualified. Officers serve at the
discretion of the Company's Board of Directors (the "Board"). There are no
family relationships between any of the directors or executive officers of the
Company.

BOARD COMMITTEES

The Board currently has a Compensation Committee and an Audit Committee.
The Compensation Committee currently consists of Dr. Robert P. Caren, Charles
Crocker, Dennis Horowitz and Dr. J. Robert Schrieffer. The function of the
Compensation Committee is to review and approve salaries, bonuses and other
benefits payable to the Company's executive officers and to administer the
Company's Amended and Restated 1988 Stock Option Plan and 1992 Director Option
Plan. The Audit Committee currently consists of Dr. Robert P. Caren, Charles
Crocker, Dennis Horowitz and Dr. J. Robert Schrieffer. The functions of the
Audit Committee are to recommend selection of independent public accountants to
the Board, to review the scope and results of the year-end audit with management
and the independent auditors and to review the Company's accounting principles
and its system of internal accounting controls. The Board currently has no
nominating committee or other committee performing a similar function.

DIRECTOR COMPENSATION

Each nonemployee director of the Company is paid $1,000 for each Board
meeting attended. Nonemployee directors also participate in the Company's 1992
Director Option Plan, as amended. See "-- Employee and Director Benefit Plans."

DIRECTOR CONSULTING ARRANGEMENTS

The Company has entered into consulting arrangements with Dr. Schrieffer
and Dr. Caren pursuant to which such directors provide certain consulting
services for the Company in addition to their services as directors. Under Dr.
Schrieffer's consulting arrangement, he is paid $2,500 per month ($30,000 in
fiscal 1995) for consulting services. Under Dr. Caren's consulting arrangement,
which terminates in June 1997, he is paid $750 per day of services rendered and
was granted a stock option to purchase 4,000 shares of Common Stock.

37
<PAGE> 38

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No interlocking relationship exists between the Company's Board of
Directors and the compensation committee of any other company.

TECHNICAL ADVISORY BOARD

The Company has a Technical Advisory Board that consists of Dr. Schrieffer
and Dr. Hammond, as well as several members of academia, including Dr. Douglas
Scalapino of the University of California, Santa Barbara. The Technical Advisory
Board's function is to review the Company's technical direction and strategy,
and to consult with the Company generally on an ad hoc, as needed basis.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law provides
that directors of a company will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except for liability (i) for
any breach of their duty of loyalty to the company or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which the director
derived an improper personal benefit.

The Company's Bylaws provide that the Company shall indemnify its officers
and directors and may indemnify its employees and other agents to the fullest
extent permitted by law. The Company believes that indemnification under its
Bylaws covers at least negligence and gross negligence on the part of
indemnified parties. The Company's Bylaws also permit it to secure insurance on
behalf of any officer, director, employee or other agent for any liability
arising out of his or her actions in such capacity, regardless of whether the
Bylaws would permit indemnification.

The Company has entered into agreements to indemnify its directors and
officers, in addition to the indemnification provided for in the Company's
Bylaws. These agreements, among other things, indemnify the Company's directors
and officers for certain expenses (including attorneys' fees), judgments, fines
and settlement amounts incurred by any such person in any action or proceeding,
including any action by or in the right of the Company, arising out of such
person's services as a director or officer of the Company, any subsidiary of the
Company or any other company or enterprise to which the person provides services
at the request of the Company. The Company believes that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and officers. The Company also maintains director and officer liability
insurance.

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 which may result in a claim for such indemnification.

38
<PAGE> 39

EXECUTIVE COMPENSATION

The following table sets forth certain summary information regarding
compensation earned in each of the three years in the period ended December 31,
1995 by the Company's Chief Executive Officer and the three executive officers
other than the Chief Executive Officer whose total salary and bonus for fiscal
year 1995 exceeded $100,000 ("Named Executive Officers").

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION --------------
------------------------------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING COMPENSATION
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION($)(1) OPTIONS (#) ($)(2)
- ------------------------- ---- ---------- --------- ------------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Daniel C. Hu............. 1995 $ 180,857 -- -- -- $1,558
President and Chief 1994 166,291 -- -- -- 1,558
Executive Officer 1993 149,620 -- -- -- 400
Robert B. Hammond........ 1995 $ 141,921 -- -- -- $ 851
Senior Vice President 1994 134,244 -- -- 15,000 788
and Chief Technical 1993 120,094 -- -- 15,000 475
Officer
James P. Simmons, 1995 $ 121,233 -- 24,581 (4) 15,000 $ 419
Jr.(3)................. 1994 66,752 -- $ 45,000 407
Vice President
Marketing and Sales
Gregory L. Hey-Shipton... 1995 $ 112,395 -- 38,202 (4) 10,000 $ 383
Vice President and 1994 105,720 -- -- 10,000 369
General Manager, 1993 101,176 -- $ 7,500 322
Government Products
Business Unit
</TABLE>

- ---------------
(1) Excludes certain perquisites and other amounts that, with respect to any
executive officer, in the aggregate did not exceed the lesser of $50,000 or
10% of the total annual salary and bonus for such executive officer.
(2) Represents term life insurance premiums.
(3) Mr. Simmons joined the Company in 1994.
(4) Represents relocation expenses.

EMPLOYMENT AGREEMENT

In November 1992, the Company entered into an employment agreement with
Daniel Hu, pursuant to which he was appointed President and Chief Executive
Officer and elected a director of the Company, providing for an initial base
annual salary of $150,000. In addition, the agreement provided for the grant to
Mr. Hu of incentive stock options to purchase an aggregate of 240,293 shares of
Common Stock which would vest upon the attainment of certain milestones. On July
10, 1996 the agreement was modified as it pertained to Mr. Hu's vesting. Under
the modified agreement, Mr. Hu's incentive stock option will vest in full upon
the earlier to occur of (i) July 10, 1997 or (ii) the date the Company obtains
at least $8 million in additional equity capital. Upon the consummation of this
offering, these options will become exercisable in full. Furthermore, the
agreement provides that if Mr. Hu is terminated without cause, he will be paid a
salary continuance at his then current salary rate, plus benefits, until the
earlier of Mr. Hu's obtaining other employment or six months after termination.

39
<PAGE> 40

OPTION GRANTS DURING THE FISCAL YEAR ENDED DECEMBER 31, 1995

The following table sets forth certain information regarding the stock
options granted during the fiscal year ended December 31, 1995 to each of the
Named Executive Officers.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT
---------------------------------------------------- ASSUMED ANNUAL RATES
% OF TOTAL OF STOCK
NUMBER OF OPTIONS PRICE APPRECIATION
SECURITIES GRANTED TO FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(2)
OPTIONS IN FISCAL PRICE EXPIRATION --------------------
NAMED EXECUTIVE OFFICER GRANTED(#) YEAR(1) ($/SH) DATE 5%($) 10%($)
- --------------------------- --------- ---------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Daniel C. Hu............... -- -- -- -- -- --
Robert B. Hammond.......... -- -- -- -- -- --
James P. Simmons, Jr.(3)... 15,000 7.08% $ 6.25 5/10/05 $60,000 $149,000
Gregory L.
Hey-Shipton(3)........... 10,000 4.72% $ 5.88 8/10/05 $37,000 $ 94,000
</TABLE>

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

(1) The total number of shares subject to options granted to employees in fiscal
1995 was 211,750. This amount includes options granted to employee
directors, but excludes options granted to non-employee directors.
(2) The Potential Realizable Value is calculated based on the fair market value
on the date of grant, which is equal to the exercise price of options
granted in fiscal 1995, assuming that the stock appreciates in value from
the date of grant until the end of the option term at the annual rate
specified (5% and 10%). Potential Realizable Value is net of the option
exercise price. The assumed rates of appreciation are specified in rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of future stock price. Actual gains, if any,
resulting from stock option exercises and Common Stock holdings are
dependent on the future performance of the Common Stock and overall stock
market conditions, as well as the option holders' continued employment
through the exercise/vesting period. There can be no assurance that the
amounts reflected in this table will be achieved.
(3) Each option vests over a four-year period at the rate of 1/4th of the
shares subject to the option at the end of the first twelve months and
1/36th of the remaining shares subject to the option at the end of each
monthly period thereafter so long as such optionee's employment with the
Company has not terminated.

AGGREGATE OPTION EXERCISES IN 1995 AND 1995 FISCAL YEAR-END OPTION VALUES

The following table sets forth for each of the Named Executive Officers
certain information concerning the value of unexercisable stock options as of
December 31, 1995. Also reported are values for "in-the-money" options that
represent the positive spread between the respective exercise prices of
outstanding options and the fair market value of the Company's Common Stock as
of December 31, 1995. No options were exercised by any Named Executive Officer
during the fiscal year ended December 31, 1995.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
----------------------------- -----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) (#) ($) ($)
- --------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Daniel C. Hu........................... 96,117 144,176 N/A(1) N/A(1)
Robert B. Hammond...................... 37,812 22,500 $19,654(2) N/A(1)
James P. Simmons, Jr................... 17,813 42,187 N/A(1) N/A(1)
Gregory L. Hey-Shipton................. 22,188 21,562 $23,125(2) N/A(1)
</TABLE>

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

(1) The fair market value of the Company's Common Stock as of December 29, 1995
(the last market trading day in 1995) was $4.50, which did not exceed the
exercise price of any options held by such person.

(2) The fair market value of the unexercised in-the-money options is based on
the $4.50 closing price of the Company's Common Stock on December 29, 1995
(the last market trading day in 1995) minus the exercise price.

40
<PAGE> 41

EMPLOYEE AND DIRECTOR BENEFIT PLANS

Stock Option Plans. The Amended and Restated 1988 Stock Option Plan and
the 1992 Stock Option Plan (the "Option Plans") provide for the grant to
employees of incentive stock options ("ISOs") within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), and for the grant
to employees and consultants of nonstatutory stock options. As of October 26,
1996, (i) an aggregate of 2,213,176 shares have been reserved for issuance under
the Option Plans, of which 500,000 shares were approved by the Board in July
1996 and are subject to stockholder approval, (ii) 498,018 shares have been
issued pursuant to options exercised, (iii) options to acquire 1,293,050 shares
remain outstanding and (iv) 422,108 shares remain available for future grants.

The Option Plans are currently being administered by the Compensation
Committee of the Board, which committee is constituted to comply with Section
16(b) of the Securities Exchange Act of 1934, as amended, and all applicable
laws (the "Administrator"). The Administrator has the power to determine the
terms of any options granted, including the exercise price, the number of shares
subject to each option and the exercisability thereof, and the form of
consideration payable upon exercise.

Options granted under the Option Plans vest and become exercisable at such
time or times as is determined by the Administrator. Options granted to date
generally vest over three to four years, assuming continued employment, and
expire in five to ten years from the date of grant. Options granted under the
Option Plans are generally not transferable by the optionee other than by will
or the laws of descent and distribution, and each option is exercisable during
the lifetime of the optionee only by such optionee.

The exercise price of ISOs granted under the Option Plans must be at least
equal to the fair market value of the shares of Common Stock on the date of
grant. No ISOs may be granted to a participant that, when aggregated with all
the other ISOs granted to such participant, would have an aggregate fair market
value in excess of $100,000 becoming exercisable in any calendar year. The
exercise price of all nonstatutory stock options granted under the Option Plans
must be at least 85% of the fair market value of the Common Stock on the date of
grant. With respect to any participant who owns stock possessing more than 10%
of the voting power of all classes of the Company's outstanding capital stock,
the exercise price of any ISOs granted must be equal to at least 110% of the
fair market value of the shares of Common Stock on the grant date and the
maximum term of the option must not exceed five years. The terms of all other
options granted under the Option Plans may not exceed ten years.

In the event of a proposed dissolution or liquidation of the Company, all
outstanding options will terminate immediately prior to such transaction;
provided, however, that the Board may declare that any outstanding option will
terminate on a fixed date and give each optionee the right to exercise his or
her option in full or in part prior to such date, including for shares as to
which the option would not otherwise be exercisable. In the event of a merger of
the Company with or into another corporation or a sale of substantially all of
the Company's assets, each option may be assumed or an equivalent option
substituted by the successor corporation. In the event that the successor
corporation does not assume the option or substitute an equivalent option, the
Board will accelerate the exercisability of all outstanding options. Such
accelerated options will remain exercisable for 15 days, after which time they
shall terminate.

The Amended and Restated 1988 Stock Option Plan will terminate in October
1998, and the 1992 Stock Option Plan will terminate in December 2002. The Board
has the authority to amend or terminate the Option Plans; provided, however,
that no such action may adversely affect any outstanding option.

1992 Director Option Plan. The Company's 1992 Director Option Plan, as
amended (the "Director Plan"), provides for the grant of nonstatutory stock
options to non-employee directors of the Company. As of October 26, 1996, an
aggregate of 135,000 shares had been reserved for issuance under the Director
Plan, options to acquire 93,375 shares were outstanding and 41,625 shares were
available for future grant. The Director Plan is administered by the
Compensation Committee of the Board. Under the Director Plan, each new
nonemployee director who joins the Board is automatically granted a nonstatutory
option to purchase 15,000 shares of Common Stock on the date upon which such
person first becomes a director and an additional option to purchase 15,000
shares of Common Stock in the event such nonemployee director who

41
<PAGE> 42

has previously served in a representative capacity on behalf of a stockholder of
the Company ceases to serve in such representative capacity but continues to
serve as a nonemployee director at the request of the Board. Each such one-time
grant will vest and become exercisable as to 25% of the shares subject to such
option on each anniversary of its date of grant, based on the optionee's
continued service as a director. In addition, on June 1 of each year, each
non-employee director who has served as a director for at least six months as of
such date will automatically receive a nonstatutory option to purchase 3,000
shares of the Company's Common Stock. Each such annual option will vest and
become exercisable as to 50% of the shares subject to such option on each
anniversary of its date of grant, based on the optionee's continued service as a
director. The exercise price of each option granted under the Director Plan is
equal to the fair market value of the Common Stock on the date of grant.

Options granted under the Director Plan have a term of ten years, unless
terminated sooner upon termination of the optionee's status as a director or
otherwise pursuant to the terms of the Director Plan. Options are not
transferable by the optionee other than by will or the laws of descent or
distribution, and each option is exercisable during the lifetime of the director
only by such director.

In the event of a proposed dissolution or liquidation of the Company, all
outstanding options will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. The Board may, in its
sole discretion, declare that any option shall terminate as of a date fixed by
the Board and give each optionee the right to exercise his option as to all or
any part of the optioned stock, including shares as to which the option would
not otherwise be exercisable. In the event of a proposed sale of all or
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or parent or
subsidiary of the successor corporation. In the event the successor corporation
doesn't agree to assume the option or to substitute an equivalent option, the
Board shall in lieu of such assumption or substitution, provide to the optionee
the right to exercise the option as to all the stock subject to the option for a
period of 30 days from the date of notice of acceleration of exercisability,
including shares as to which the option would not otherwise be exercisable.

Unless terminated sooner, the Director Plan will terminate in December
2002. The Board has the authority to amend or terminate the Director Plan,
provided that no such action may impair the rights of any option holder without
the consent of such holder.

401(k) Plan. In January 1990, the Company adopted a 401(k) Plan covering
all of the Company's employees. Pursuant to the plan, employees may elect to
reduce their current compensation by up to twenty percent (not to exceed the
statutorily prescribed annual limit) and have the amount of such reduction
contributed to the plan. The plan is intended to qualify under Section 401 of
the Code so that employee contributions to the plan, and income earned on such
contributions, are not taxable to employees until withdrawn from the plan. Each
participant's contributions are fully vested. The Company does not make
additional contributions under the plan, and it does not plan to make
contributions in the foreseeable future.

CERTAIN TRANSACTIONS

In connection with his relocation at the time of accepting employment with
the Company in May 1991, the Company entered into an employment agreement with
Dr. Gregory Hey-Shipton, Vice President and General Manager, Government Products
Business Unit of the Company, pursuant to which he was appointed Engineering
Manager at a base annual salary of $90,000. The agreement provided for a loan by
the Company to Dr. Hey-Shipton of $150,000, without interest, payable on or
before April 1997. This loan, the purpose of which was to assist Dr. Hey-Shipton
in the purchase of a residence in Santa Barbara (where the Company's facilities
are located), is secured by a second mortgage on Dr. Hey-Shipton's Santa Barbara
house, and is to be repaid in April 1997 or upon the sale of his Santa Barbara
residence, if consummated prior to that date. The amount outstanding under the
loan as of October 26, 1996 was $150,000.

42
<PAGE> 43

PRINCIPAL STOCKHOLDERS

The following table sets forth the beneficial ownership of the Company's
Common Stock as of October 26, 1996 by all persons known to the Company to be
the beneficial owners of more than 5% of the Company's Common Stock, by each
director, by each of the Named Executive Officers and by all directors and
executive officers as a group. Except as otherwise indicated in the footnotes to
the table, the persons and entities named in the table have sole voting and
investment power with respect to all shares beneficially owned, subject to
community property laws, where applicable.

<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP(1)
------------------------
SHARES BEFORE THE AFTER THE
NAME BENEFICIALLY OWNED OFFERING OFFERING
- ---------------------------------------------------------------- ------------------ ---------- ---------
<S> <C> <C> <C>
Lockheed Martin Corporation(2)
6801 Rockledge Drive
Bethesda, Maryland 20817...................................... 627,380 10.3% 8.3%
Glenn E. Penisten(3)............................................ 183,090 3.0 2.4
Charles Crocker(4).............................................. 131,281 2.2 1.7
Daniel C. Hu(5)................................................. 108,466 1.8 1.4
Robert B. Hammond(6)............................................ 62,084 1.0 *
J. Robert Schrieffer(5)......................................... 41,625 * *
Gregory L. Hey-Shipton(7)....................................... 34,549 * *
James P. Simmons, Jr.(8)........................................ 20,563 * *
James G. Evans, Jr.(5).......................................... 12,188 * *
Dennis Horowitz(5).............................................. 8,375 * *
Robert P. Caren(5).............................................. 8,375 * *
E. Ray Cotten................................................... -- -- --
All executive officers and directors as a group
(11 persons)(9)............................................... 610,596 9.5% 7.7%
</TABLE>

- ---------------
* Less than one percent

(1) If the Underwriter's over-allotment options are exercised in full, the
Company will sell 100,000 shares of Common Stock and the Selling
Stockholder, Lockheed Martin Corporation, will sell 125,000 shares of
Common Stock. In such event, upon completion of this offering, the Selling
Stockholder will sell an aggregate of 125,000 shares and beneficially own
502,380 shares, or 6.6% of the Company's outstanding Common Stock. If the
Underwriter's over-allotment options are exercised only in part, the first
125,000 of such shares shall be sold by the Selling Stockholder and the
balance shall be sold by the Company.

(2) Includes 8,333 shares issuable upon the exercise of warrants that are
exercisable within 60 days of October 26, 1996.

(3) Includes 96,997 shares held by a trust for the benefit of Glenn and Mary
Louise Penisten. Also includes 85,833 shares issuable upon the exercise of
stock options that are exercisable within 60 days of October 26, 1996.

(4) Includes 1,035 shares held of record by Trust Fund FBO Charles Crocker.
Also includes 4,625 shares issuable upon the exercise of stock options and
2,778 shares issuable upon the exercise of a warrant, all of which are
exercisable within 60 days of October 26, 1996. Does not include 113,094
shares beneficially owned by BEI Electronics, Inc., and 2,778 shares
issuable upon the exercise of a warrant which is exercisable by BEI
Electronics, Inc., within 60 days of October 26, 1996. Mr. Crocker is the
Chairman of the Board of Directors of BEI Electronics, Inc., and he
disclaims any beneficial ownership of such shares.

(5) All shares are issuable upon the exercise of stock options that are
exercisable within 60 days of October 26, 1996.

(6) Includes 34,896 shares issuable upon the exercise of stock options that
are exercisable within 60 days of October 26, 1996.

(7) Includes 22,049 shares issuable upon the exercise of stock options that
are exercisable within 60 days of October 26, 1996.

(8) Includes 20,313 shares issuable upon the exercise of stock options that
are exercisable within 60 days of Ocotber 26, 1996.

(9) Includes 2,778 shares issuable upon exercise of a warrant held by Mr.
Crocker and 478,572 shares issuable upon exercise of stock options held by
executive officers and directors that are exercisable within 60 days of
October 26, 1996.

43
<PAGE> 44

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 15,000,000 shares
of Common Stock, $0.001 par value per share, and 2,000,000 shares of Preferred
Stock, $.001 par value per share.

COMMON STOCK

As of October 26, 1996, there were 6,070,348 shares of Common Stock
outstanding and held of record by 151 shareholders. Holders of Common Stock are
entitled to one vote per share on all matters to be voted upon by the
shareholders. Subject to the rights of holders of 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 a liquidation, dissolution or winding up of the Company, subject to
the rights of the holders of Preferred Stock, the holders of Common Stock are
entitled to share ratably in all assets. 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 non-assessable, and the shares of Common
Stock to be outstanding upon consummation of the offering will be fully paid and
non-assessable.

PREFERRED STOCK

Pursuant to the Company's Certificate of Incorporation, the Board of
Directors is authorized to issue up to 2,000,000 shares of Preferred Stock in
one or more series and to fix the rights, preferences, privileges and
restrictions, including the dividend rights, conversion rights, voting rights,
redemption price or prices, liquidation preferences, and the number of shares
constituting any series or the designations of such series, without further vote
or action by the stockholders. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change of control of the Company
without further action of the stockholders. The issuance of Preferred Stock with
voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others. No
shares of Preferred Stock are outstanding. The Company has no present plans to
issue any shares of Preferred Stock.

CERTAIN ANTI-TAKEOVER MATTERS

The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, subject to certain exceptions,
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "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 which resulted in the
stockholder becoming an interested stockholder, or (ii) upon consummation of the
transaction which 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
by (x) persons who are directors and also officers and (y) 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 which is not owned by the
interested stockholder. Section 203 defines a "business combination" to include
certain mergers, consolidations, asset sales and stock issuances and certain
other transactions resulting in a financial benefit to an "interested
stockholder." In addition, Section 203 defines an "interested stockholder" to
include any entity or person beneficially owning 15% or more of the outstanding
voting stock of the corporation and any entity or person affiliated with such an
entity or person.

44
<PAGE> 45

WARRANTS

As of October 26, 1996, the Company had outstanding warrants to purchase up
to 120,750 shares of Common Stock (the "UW Warrants") at an exercise price of
$12.00 per share, originally issued to H.J. Meyers & Co., Inc., the managing
underwriter of the Company's initial public offering, and warrants to purchase
up to 44,447 shares of Common Stock (the "Bridge Warrants") at an exercise price
of $9.00 per share originally issued to various individuals and entities. The UW
Warrants and the Bridge Warrants expire on March 9, 1998 and December 28, 1997,
respectively.

In addition, the Company has issued to the Underwriter a warrant to
purchase up to 150,000 shares of Common Stock (the "Underwriter's Warrant") at
an exercise price equal to 120% of the offering price under this offering. The
Underwriter's Warrant is exercisable for a four year period beginning one year
from the date of this Prospectus.

REGISTRATION RIGHTS

The UW Warrants and the Underwriter's Warrant provide for certain rights
with respect to registration of the shares issuable upon exercise of such
warrants under the Securities Act. If the Company registers any of its Common
Stock, for its own account or for the account of other security holders, then
all holders of the UW Warrants and the Underwriter's Warrant are entitled to
notice of such registration and are entitled to include their shares of Common
Stock in the registration, subject to any limitations placed on the number of
such shares included in any such registration by the underwriters.

The holders of Bridge Warrants and their respective permitted transferees
(the "Bridge Holders") and the holder of the Underwriter's Warrant and its
registered assigns (the "Holders") are entitled to certain rights with respect
to the registration of such shares under the Securities Act. Under the terms of
agreements between the Company and the Bridge Holders, and the Company and the
Holders, respectively, if the Company proposes registration of any of its Common
Stock for its own account, then the Bridge Holders and the Holders are entitled
to notice of such registration and are entitled to include shares of such Common
Stock in such registration; provided, among other conditions, that the
underwriters of any such offering have the right to limit the number of such
shares included in such registration.

The Bridge Holders of at least 40% of securities with registration rights
may also require the Company, on not more than two occasions, to file a
registration statement under the Act with respect to such shares, and the
Company is required to use its best efforts to effect such registration. A
Bridge Holder's right to include shares in an underwritten registration is
subject to the ability of the underwriters to limit the number of shares
included in the offering. Generally, the Company is required to bear the expense
of all such registrations. The Bridge Holders also may require the Company on
not more than one occasion every 12 months to register all or a portion of their
shares with registration rights on Form S-3, at the sole expense of such Bridge
Holders, when use of such form becomes available to the Company, provided the
proposed aggregate selling price of the shares to be registered is at least $1
million. The Company may defer the filing of a registration statement for up to
120 days if, in the Company's good faith judgement, it would be seriously
detrimental to the Company or its stockholders to file a registration statement.

The Holders of securities with registration rights may require the Company,
on not more than one occasion, to file a registration statement under the Act
with respect to such shares, provided that the proposed aggregate number of
shares to be registered is at least two-thirds of the shares subject to the
Underwriter's Warrant, and the Company is required to use its best efforts to
effect such registration. A Holder's right to include shares in an underwritten
registration is subject to the ability of the underwriters to limit the number
of shares included in the offering. Generally, the Company is required to bear
the expense of all such registrations. The Company may defer the filing of a
registration statement for up to 120 days if, in the Company's good faith
judgement, it would be seriously detrimental to the Company or its stockholders
to file a registration statement.

45
<PAGE> 46

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Company's Common Stock is Boston
Equiserve L.P.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 7,570,348 shares of
Common Stock outstanding (7,670,348 shares if the Underwriter's over-allotment
options are exercised in full). These shares will be freely tradable without
restriction or further registration under the Securities Act unless such shares
are owned by "affiliates" of the Company as that term is defined under Rule 144
under the Securities Act or unless such securities are "restricted securities"
as that term is defined under Rule 144. Shares of Common Stock that are deemed
to be "restricted securities" within the meaning of the Securities Act may be
publicly sold only if registered under the Securities Act or sold in accordance
with an applicable exemption from registration, such as those provided by Rule
144 promulgated under the Securities Act, as described below. See "Principal
Stockholders."

In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of acquisition of restricted securities from
the issuer or from an "affiliate" of the issuer, as that term is defined under
the Securities Act, the acquirer or subsequent holder would be entitled to sell
within any three-month period a number of those shares that does not exceed the
greater of one percent of the number of shares of such class of stock then
outstanding or the average weekly trading volume of the shares of such class of
stock during the four calendar weeks preceding the filing of a Form 144 with
respect to such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions and notice requirements and to the availability of current
public information about the issuer. In addition, if three years have elapsed
since the later of the date of acquisition of restricted securities from the
issuer or from any affiliate of the issuer, and the acquirer or subsequent
holder thereof is deemed not to have been an affiliate of the issuer of such
restricted securities at any time during the 90 days preceding a sale, such
person would be entitled to sell such restricted securities under Rule 144(k)
without regard to the requirements described above.

The Company has agreed not to sell or issue additional shares of Common
Stock, subject to certain limited exceptions, for 180 days after the date of
this Prospectus and the Company's executive officers and directors and the
Selling Stockholder have agreed not to offer, sell, contract to sell, grant any
option or other right for the sale of, or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for such Common Stock or, in any manner, transfer all or a portion of the
economic consequences associated with the ownership of the Common Stock without
the prior written consent of Van Kasper & Company for 180 days after the date of
this Prospectus.

No prediction can be made of the effect, if any, that sales of shares under
Rule 144 or the availability of shares for sale will have on the market price of
the Common Stock prevailing from time to time after the offering. The Company is
unable to estimate the number of shares that may be sold in the public market
under Rule 144, because such amount will depend on the trading volume in, and
market price for, the Common Stock and other factors. Nevertheless, sales of
substantial amounts of shares in the public market, or the perception that such
sales could occur, could adversely affect the market price of the Common Stock.
See "Underwriting."

46
<PAGE> 47

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, Van
Kasper & Company has agreed to purchase 1,500,000 shares of Common Stock from
the Company. The nature of the obligations of the Underwriter are such that, if
any of such shares are purchased, all must be purchased.

The Underwriter proposes initially to offer the shares of Common Stock
offered hereby to the public at the public offering price set forth on the cover
page of this Prospectus. The Underwriter may allow a concession to selected
dealers who are members of the National Association of Securities Dealers, Inc.
("NASD") not in excess of $0.18 per share, and the Underwriter may allow and
such dealers may reallow to members of the NASD a concession not in excess of
$0.10 per share. After this offering, the price to the public, the concession
and reallowance may be changed by the Underwriter.

The Company and the Selling Stockholder have granted options to the
Underwriter, exercisable within 45 days after the date of this Prospectus, to
purchase up to an aggregate of 225,000 additional shares of Common Stock at the
initial price to the public, less underwriting discount, set forth on the cover
page of this Prospectus. See footnote 1 of the table under "Principal
Stockholders." The Underwriter may exercise such option only for the purpose of
covering any over-allotments.

The Company and the Selling Stockholder have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act.

In connection with the offering made hereby, the Company has agreed to sell
to the Underwriter, for nominal consideration, a warrant to purchase from the
Company a number of shares of Common Stock equal to 10% of the number of shares
issued in the offering, excluding the over-allotment option, pursuant to the
Underwriter's Warrant. The Underwriter's Warrant is exercisable, in whole or in
part, at an exercise price of 120% of the price to public set forth on the cover
page of this Prospectus at any time during the four-year period commencing one
year after the effective date of the Registration Statement of which this
Prospectus is a part. The Underwriter's Warrant will contain provisions
providing for adjustment of the exercise price and the number and type of
securities issuable upon exercise of the Underwriter's Warrant should any one or
more of certain specified events occur. The Underwriter's Warrant grants to the
holders thereof certain rights of registration for the securities issuable upon
exercise of the Underwriter's Warrant.

In addition, the Underwriting Agreement provides for payment by the Company
of a non-accountable expense allowance of $150,000 payable to the Underwriter.

The Company has agreed not to sell or issue additional shares of Common
Stock, subject to certain limited exceptions, for 180 days after the date of
this Prospectus and the Company's executive officers and directors and the
Selling Stockholder have agreed not to offer, sell, contract to sell, grant any
option or other right for the sale of or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for such Common Stock or, in any manner, transfer all or a portion of the
economic consequences associated with the ownership of the Common Stock without
the prior written consent of Van Kasper & Company for 180 days after the date of
this Prospectus.

The Underwriter may engage in "passive market making" in the Common Stock
on Nasdaq in accordance with Rule 10b-6A under the Exchange Act. Rule 10b-6A
permits, upon the satisfaction of certain conditions, underwriters participating
in a distribution that are also Nasdaq marketmakers in the security being
distributed to engage in limited market making transactions during the period
when Rule 10b-6 under the Exchange Act would otherwise prohibit such activity.
In general, under Rule 10b-6A, any underwriter engaged in passive market making
in the Common Stock (i) may not effect transactions in, or display bids for, the
Common Stock at a price that exceeds the highest bid for the Common Stock
displayed on Nasdaq by a marketmaker that is not participating in the
distribution of the Common Stock, (ii) may not have net daily purchases of the
Common Stock that exceed 30% of its average daily trading volume in such stock
for the two full consecutive calendar months immediately preceding the filing
date of the Registration Statement of which this Prospectus is a part, and (iii)
must identify its bids as bids made by a passive marketmaker.

47
<PAGE> 48

LEGAL MATTERS

Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Wilson Sonsini Goodrich & Rosati, A Professional Corporation, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Baker & Botts, L.L.P., Dallas, Texas.

EXPERTS

The financial statements as of December 31, 1994 and 1995 and for the three
years in the period ended December 31, 1995 and the period from May 11, 1987
(inception) to December 31, 1995 included in this Prospectus have been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.

AVAILABLE INFORMATION

The Company is subject to the information requirements of the Exchange Act,
and in accordance therewith files reports and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and other information filed by the Company with the Commission in accordance
with the Exchange Act may be inspected and copied at the public reference
facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: 7 World Trade Center, Suite 1300, New York, New York 10048 and Suite
1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of such material
can be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, such
material concerning the Company can be inspected at the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.

The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the shares of Common Stock offered
hereby. 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
filed therewith. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. A copy of the Registration
Statement, and the exhibits and schedules thereto, may be inspected without
charge at the public reference facilities maintained by the Commission in Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices and copies of all or any part of the Registration Statement may
be obtained from such offices or by mail from the Public Reference Section of
the Commission at its principal office upon the payment of the fees prescribed
by the Commission.

The Commission also maintains a World Wide Web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.

48
<PAGE> 49

GLOSSARY OF TERMS

Accelerated Life
Testing.................A sequence of tests in which equipment is put through a
series of harsh temperature and humidity cycles that act
to simulate years of operation in a few weeks. This
allows manufacturers to determine the durability and
reliability of the product.

Base Station............Electronic equipment including an antenna, transmitters,
receivers, filters, amplifiers and other network
interface electronics. This equipment transmits and
receives wireless information. The base station connects
the information transmitted over the airwaves to the
telephone network.

CDMA....................Code Division Multiple Access. A protocol for packaging
digital information in PCS wireless communications.

Cellular................A concept in which territory is broken up into regions
called cells, often in the configuration of a honeycomb.
Because wireless systems operating at 800-1000 MHz used
this concept, voice communications networks in this
frequency range are often called "cellular" systems.

CMOS....................Complementary Metal Oxide Semiconductor. A common type
of semiconductor device used in the fabrication of
computer chips.

Cold Computing..........The process by which cryogenic cooling is utilized to
increase the speed of a computer.

CPU.....................Central Processing Unit. The chip that acts as the
"brain" of a computing system by executing instructions
and performing logical operations.

Critical Temperature....Also known as the transition temperature of a
superconductor, it is the point at which a material
reaches the superconducting threshold. Below this
temperature, a superconducting material has
significantly reduced resistance to electrical current
flow.

Cross Talk..............An undesired effect in which a cellular call interferes
with another cellular call, resulting in information
from one channel being received on the other channel.

Cryogenics..............Technology associated with low temperatures, including
very cold liquids known as cryogens and mechanical
coolers which can chill a device to ultra-cold
temperatures.

DARPA...................U.S. Department of Defense Advanced Research Projects
Agency.

Electrical Noise........Electrical disturbances in an electronic system which
limit the system's capability to process very weak
signals. Electrical noise often is manifested as
"static" in radio-frequency communications.

Filter..................An electronic component which allows desired frequencies
to be received while blocking undesired frequencies.
Filters are used in wireless communications base
stations to make communications more clear.

Frequency...............The number of periodic vibrations, or waves, per unit of
time. Voice and data information are transmitted on
specific frequencies in the radio spectrum in order to
differentiate signals from one another.

Fully-Integrated........Containing all of the necessary components to run as a
stand-alone system. The Company's SuperFilter(TM)
products are fully-integrated systems that are
incorporated into base stations.

GSM.....................Global System for Mobile communications. A protocol for
packaging digital information in wireless
communications.

Hertz (Hz)..............The international unit of frequency, equal to one cycle
per second, commonly expressed in units of millions, or
megahertz (MHz).

49
<PAGE> 50

High-Speed Computing....The segment of the computer market with high processing
speeds currently in the 200 MHz range or greater.

HTS.....................High Temperature Superconductor. Materials that have the
ability to conduct electrical energy with little or no
resistance when cooled to "critical" temperatures above
20K (-253 degrees Celsius). Some of these materials can
operate as high as 100-130K, therefore requiring less
expensive cooling systems than their lower-temperature
counterparts.

Interference............The mutual action of two radio waves of the same
frequency in distorting each other; in wireless
communications this can result in cross talk or dropped
calls.

LNA.....................Low Noise Amplifier. A product that boosts the power of
a radio signal while adding very little electrical
noise.

OEM.....................Original Equipment Manufacturer.

PCS.....................Personal Communications Services. Wireless
communications that occur within the 1800-2000 MHz radio
frequency spectrum.

Range...................The maximum distance at which a wireless transmission
can be received.

Resistance..............A measure of the obstruction to the free flow of
electrons in a material. Resistance causes electrical
current to lose energy in the form of heat.

Retrofit................The upgrade of any existing product in order to increase
performance. As it pertains to the Company, the retrofit
market is defined as the upgrading of existing base
stations with new filters and other components to
increase performance.

Selectivity.............The ability of a base station to filter out unwanted
signals and clearly connect to a particular frequency
channel.

Service Provider........A company that provides wireless communication services
to the public. Service providers license frequencies
from the FCC and administer the wireless communications
infrastructure.

Standard Platform.......A basic design structure that allows for tailoring to
specific customer specifications with little or no
modification of the subsystem. The Company's
SuperFilter(TM) product is built on a standard platform.

SuperFilter(TM).........The Company's proprietary wireless product, containing
an HTS filter and a cryogenic cooling system. Some
SuperFilter(TM) products contain LNAs.

TBCCO...................Thallium Barium Calcium Copper Oxide. A superconducting
material utilized by the Company with one of the highest
known critical temperatures (125K (-148 degrees
Celsius)).

TDMA....................Time Division Multiple Access. A protocol for packaging
digital information in PCS wireless communications.

Thin Film...............A thin layer of HTS material on a supporting substrate
material. A circuit design is etched into the HTS thin
film.

Watt....................A measure of electrical power, equal to one joule per
second. Cellular systems are engineered to minimize the
power consumed in watts due to the need for backup power
systems in the event of power failures.

Wireless
Communications..........The transmission of signals in the radio frequency
spectrum. Devices in this area of communications
transmit and receive signals via the airwaves and not
through coaxial cables, fiberoptics, or telephone wires.

YBCO....................Yttrium Barium Copper Oxide. A superconducting material
utilized by the Company with a critical temperature of
93K (-180 degrees Celsius).

50
<PAGE> 51

SUPERCONDUCTOR TECHNOLOGIES INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Report of Independent Accountants................................................... F-2
Balance Sheet as of December 31, 1994 and 1995, and September 28, 1996
(unaudited)....................................................................... F-3
Statement of Operations, for the years ended December 31, 1993, 1994, and 1995, for
the nine months ended September 30, 1995 and for the nine months ended September
28, 1996 (unaudited) and for the period from May 11, 1987 (Inception) to December
31, 1995 and September 28, 1996 (unaudited)....................................... F-4
Statement of Stockholders' Equity for the period from May 11, 1987 (Inception) to
December 31, 1992 and for the period January 1, 1993 to September 28, 1996
(unaudited), and January 1, 1996 to September 28, 1996 (unaudited)................ F-5-6
Statement of Cash Flows for the years ended December 31, 1993, 1994, and 1995, for
the nine months ended September 30, 1995, and for the nine months ended September
28, 1996 (unaudited) and for the period from May 11, 1987 (Inception) to December
31, 1995 and September 28, 1996 (unaudited)....................................... F-7
Notes to Financial Statements....................................................... F-8-16
</TABLE>

F-1
<PAGE> 52

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of
Superconductor Technologies Inc. (a Development Stage Enterprise)

In our opinion, the balance sheet and the related statements of operations,
of stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of Superconductor Technologies Inc. (a
Development Stage Enterprise) at December 31, 1994 and 1995, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995, and the period from May 11, 1987 (inception) to
December 31, 1995, in conformity with generally accepted accounting principles.
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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PRICE WATERHOUSE LLP
Woodland Hills, California
February 23, 1996

F-2
<PAGE> 53

SUPERCONDUCTOR TECHNOLOGIES INC.
(A DEVELOPMENT STAGE ENTERPRISE)

BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1995
------------ ------------ SEPTEMBER 28,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 2,452,000 $ 2,430,000 $ 1,229,000
Short-term investments (Note 3)................ 5,478,000 2,814,000 653,000
Accounts receivable (Note 5)................... 1,157,000 1,113,000 1,767,000
Inventories (Note 5)........................... 295,000 228,000 397,000
Prepaid expenses and other current assets...... 109,000 248,000 598,000
----------- ----------- ----------
Total current assets................... 9,491,000 6,833,000 4,644,000
Note receivable from related party............... 150,000 150,000 150,000
Property and equipment, net (Notes 5, 6 and
10)............................................ 2,868,000 2,369,000 1,879,000
Patents and licenses, net of accumulated
amortization of $399,000, $603,000 and $781,000
(Note 4)....................................... 2,043,000 2,280,000 2,218,000
Other assets, net of accumulated amortization of
$61,000, $77,000 and $86,000................... 61,000 46,000 37,000
----------- ----------- ----------
Total assets........................... $ 14,613,000 $ 11,678,000 $ 8,928,000
=========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses (Note
5).......................................... $ 917,000 $ 733,000 $ 1,306,000
Long-term debt -- current (Note 6 and 10)...... 332,000 405,000 434,000
----------- ----------- ----------
Total current liabilities.............. 1,249,000 1,138,000 1,740,000
Long-term debt (Notes 6 and 10).................. 724,000 453,000 172,000
----------- ----------- ----------
1,973,000 1,591,000 1,912,000
----------- ----------- ----------
Commitments (Note 10)
Stockholders' equity: (Note 8)
Preferred Stock, $.001 par value, 2,000,000
shares authorized, none issued.............. -- -- --
Common Stock, $.001 par value, 15,000,000
shares authorized, 5,955,170, 6,026,065 and
6,065,348 shares issued and outstanding..... 6,000 6,000 6,000
Capital in excess of par value................. 29,991,000 30,122,000 30,180,000
Common stock subscription receivable from
related party............................... (33,000) -- --
Deficit accumulated during development stage... (17,222,000) (20,041,000) (23,170,000)
Unrealized loss on available-for-sale
securities.................................. (102,000) -- --
----------- ----------- ----------
Total stockholders' equity............. 12,640,000 10,087,000 7,016,000
----------- ----------- ----------
Total liabilities and stockholders'
equity............................... $ 14,613,000 $ 11,678,000 $ 8,928,000
=========== =========== ==========
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE> 54

SUPERCONDUCTOR TECHNOLOGIES INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
MAY 11, 1987 NINE MONTHS ENDED MAY 11, 1987
YEAR ENDED DECEMBER 31, (INCEPTION) ----------------------------- (INCEPTION)
--------------------------------------- TO DECEMBER 31, SEPTEMBER 30, SEPTEMBER 28, TO SEPTEMBER 28
1993 1994 1995 1995 1995 1996 1996
----------- ----------- ----------- --------------- ------------- ------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Government
contract
revenues........ $ 4,334,000 $ 4,979,000 $ 7,310,000 $ 29,900,000 $ 5,199,000 $ 5,053,000 $ 34,953,000
Commercial product
revenues........ 280,000 450,000 300,000 1,473,000 189,000 128,000 1,601,000
Sub license
royalties....... 388,000 75,000 463,000 463,000
----------- ----------- ----------- ----------- ----------- ------------ -----------
Total net
revenues........ 5,002,000 5,504,000 7,610,000 31,836,000 5,388,000 5,181,000 37,017,000
----------- ----------- ----------- ----------- ----------- ------------ -----------
Costs and expenses:
Contract research
and
development..... 2,862,000 4,030,000 5,414,000 23,489,000 3,906,000 4,170,000 27,659,000
Other research and
development and
commercial...... 1,998,000 2,085,000 2,397,000 13,966,000 1,904,000 1,982,000 15,948,000
Selling, general
and
administrative... 2,468,000 2,928,000 2,871,000 15,608,000 2,199,000 2,217,000 17,825,000
----------- ----------- ----------- ----------- ----------- ------------ ------------
7,328,000 9,043,000 10,682,000 53,063,000 8,009,000 8,369,000 61,432,000
----------- ----------- ----------- ----------- ----------- ------------ ------------
Loss from
operations........ (2,326,000) (3,539,000) (3,072,000) (21,227,000) (2,621,000) (3,188,000) (24,415,000)
Interest income..... 347,000 324,000 353,000 2,459,000 245,000 116,000 2,575,000
Interest expense.... (172,000) (39,000) (100,000) (1,154,000) (127,000) (57,000) (1,211,000)
Other income
(expense), net.... 13,000 (5,000) (119,000) (119,000)
----------- ----------- ----------- ----------- ----------- ------------ --------------
Net loss........ $(2,138,000) $(3,259,000) $(2,819,000) $ (20,041,000) $(2,503,000) $(3,129,000) $(23,170,000)
=========== =========== =========== =========== =========== ============ ==============
Net loss per
share............. $ (0.42) $ (0.55) $ (0.47) $ (0.42) $ (0.51)
=========== =========== =========== =========== ============
Weighted average
number of shares
outstanding....... 5,032,130 5,970,969 6,025,790 6,020,405 6,076,770
=========== =========== =========== =========== ============
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE> 55

SUPERCONDUCTOR TECHNOLOGIES INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM MAY 11, 1987 (INCEPTION) TO SEPTEMBER 28, 1996

<TABLE>
<CAPTION>
DEFICIT UNREALIZED
CAPITAL COMMON ACCUMULATED GAIN (LOSS)
COMMON STOCK CONVERTIBLE PREFERRED IN EXCESS STOCK DURING ON AVAILABLE-
------------------ ---------------------- OF PAR SUBSCRIPTIONS DEVELOPMENT FOR-SALE
SHARES AMOUNT SHARES AMOUNT VALUE RECEIVABLE STAGE SECURITIES TOTAL
---------- ------ ----------- --------- ----------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock
issued to
directors..... 310,000 $1,000 $ 99,000 $ 100,000
Common stock
issued for
acquisition... 250,000 25,000 25,000
Common stock
issued to
employees and
consultants... 772,542 1,000 222,000 $(176,000) 47,000
Common stock
issued for
services...... 6,000 42,000 42,000
Payment received
on common
stock
subscription
receivable.... 3,000 3,000
Series A
preferred
stock
issued........ 615,000 $ 1,000 427,000 428,000
Series B
preferred
stock
issued........ 2,546,482 3,000 7,576,000 7,579,000
Repurchase of
common stock
and
elimination of
related
subscription
receivable.... (42,301) (17,000) 23,000 6,000
Series D
preferred
stock
issued........ 2,394,288 2,000 8,268,000 8,270,000
Compensation
associated
with stock
options
granted....... 178,000 178,000
Net loss from
5/11/87
(inception)
through
12/31/92...... $(11,825,000) (11,825,000)
-------- ------ ---------- ------ ----------- --------- ------------ -------- ------------
Balance at
12/31/92...... 1,296,241 2,000 5,555,770 6,000 16,820,000 (150,000) (11,825,000 ) 4,853,000
Initial public
offering of
shares........ 1,500,000 1,000 12,730,000 12,731,000
Conversion of
preferred
shares........ 2,777,885 3,000 (5,555,770) (6,000) 3,000
Compensation
associated
with stock
options
granted....... 101,000 101,000
Common stock
issued,
exercise of
stock
options....... 194,437 100,000 (56,000) 44,000
Repayment of
stockholder
note.......... 150,000 150,000
Net loss........ (2,138,000 ) (2,138,000)
-------- ------ ---------- ------ ----------- --------- ------------ -------- ------------
Balance at
12/31/93...... 5,768,563 $6,000 -- $ -- $ 29,754,00 $ (56,000) $(13,963,000) $ -- $15,741,000
======== ====== ========== ====== =========== ========= ============ ======== ============
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE> 56

SUPERCONDUCTOR TECHNOLOGIES INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM MAY 11, 1987 (INCEPTION) TO SEPTEMBER 28, 1996

<TABLE>
<CAPTION>
DEFICIT UNREALIZED
CAPITAL COMMON ACCUMULATED GAIN (LOSS)
COMMON STOCK CONVERTIBLE PREFERRED IN EXCESS STOCK DURING ON AVAILABLE-
------------------- ----------------------- OF PAR SUBSCRIPTIONS DEVELOPMENT FOR-SALE
SHARES AMOUNT SHARES AMOUNT VALUE RECEIVABLE STAGE SECURITIES TOTAL
---------- ------ ----------- --------- ----------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
forward...
5,768,563 $6,000 $29,754,000 $ (56,000) $(13,963,000) $15,741,000
Common
stock
issued,
exercise
of
stock
options...
186,607 145,000 23,000 168,000
Compensation
associated
with
stock
options
granted... 92,000 92,000
Unrealized
loss on
available-
for-sale
securities... $(102,000) (102,000)
Net
loss... (3,259,000 ) (3,259,000)
---------- ------ ----------- ------ ----------- -------- ------------ --------- -----------
Balance
at
12/31/94...
5,955,170 6,000 29,991,000 (33,000) (17,222,000 ) (102,000) 12,640,000
Common
stock
issued,
exercise
of
stock
options...
70,895 61,000 33,000 94,000
Compensation
associated
with
stock
options
granted... 70,000 70,000
Unrealized
gain on
available
for-sale
securities... 102,000 102,000
Net
loss... (2,819,000 ) (2,819,000)
---------- ------ ----------- ------ ----------- -------- ------------ --------- -----------
Balance
at
12/31/95...
6,026,065 6,000 30,122,000 (20,041,000 ) 10,087,000
Unaudited
Information:
Common
stock
issued,
exercise
of
stock
options...
37,936 46,000 46,000
Common
stock
issued,
cashless
exercise
of
warrants...
1,347
Compensation
associated
with
stock
options
granted... 12,000 12,000
Net
loss... (3,129,000 ) (3,129,000)
---------- ------ ----------- ------ ----------- -------- ------------ --------- -----------
Balance
at
9/28/96...
6,065,348 $6,000 -- $ -- $30,180,000 $ -- $(23,170,000) $ -- $ 7,016,000
========== ====== =========== ====== =========== ======== ============ ========= ===========
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE> 57

SUPERCONDUCTOR TECHNOLOGIES INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1993 TO SEPTEMBER 28, 1996
(NOTE 11)

<TABLE>
<CAPTION>
MAY 11, 1987 MAY 11, 1987
(INCEPTION) NINE MONTHS ENDED (INCEPTION)
YEAR ENDED DECEMBER 31, TO ----------------------------- TO
--------------------------------------- DECEMBER 31, SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 28,
1993 1994 1995 1995 1995 1996 1996
----------- ----------- ----------- ------------ ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss.................. $(2,138,000) $(3,259,000) $(2,819,000) $(20,041,000) $(2,503,000) $(3,129,000) $(23,170,000 )
Adjustments to reconcile
net loss to net cash
used for operating
activities:
Depreciation and
amortization.......... 845,000 958,000 1,145,000 5,735,000 851,000 850,000 6,585,000
Compensation expense
associated with stock
options granted....... 101,000 92,000 70,000 441,000 52,000 12,000 453,000
Loss on disposal of
property and
equipment............. 89,000 89,000
Common stock issued for
services.............. 42,000 42,000
Changes in assets and
liabilities:
Accounts receivable... 463,000 (81,000) 44,000 (1,113,000 ) (378,000) (654,000) (1,767,000 )
Note receivable from
employee............ (150,000 ) (150,000 )
Inventory............. 48,000 (105,000) 66,000 (228,000 ) 95,000 (169,000) (397,000 )
Prepaid expenses and
other current
assets.............. (32,000) 25,000 (139,000) (248,000 ) (21,000) (350,000) (598,000 )
Patents and
licenses............ (255,000) (371,000) (441,000) (1,442,000 ) (402,000) (116,000) (1,558,000 )
Other assets.......... (61,000) 152,000 (134,000 ) (134,000 )
Accounts payable and
accrued expenses.... (389,000) 397,000 (184,000) 677,000 (328,000) 573,000 1,250,000
------------ ----------- ----------- ------------ ----------- ----------- ------------
Net cash used for
operating
activities.......... (1,418,000) (2,192,000) (2,258,000) (16,372,000 ) (2,634,000) (2,983,000) (19,355,000 )
CASH FLOWS FROM INVESTING
ACTIVITIES:
Change in short-term
investments............. (6,262,000) 682,000 2,766,000 (2,814,000 ) 4,575,000 2,161,000 (653,000 )
Change in noncurrent
restricted cash......... 200,000
Purchases of property and
equipment............... (442,000) (1,198,000) (426,000) (5,022,000 ) (377,000) (173,000) (5,195,000 )
Proceeds from sale of
property and
equipment............... 922,000 922,000
------------ ----------- ----------- ------------ ----------- ----------- ------------
Net cash provided by
(used for) investing
activities............ (6,504,000) (516,000) 2,340,000 (6,914,000 ) 4,198,000 1,988,000 (4,926,000 )
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from
borrowings.............. 1,001,000 134,000 1,215,000 134,000 39,000 1,254,000
Principal payments on
long-term obligations... (1,243,000) (300,000) (332,000) (3,840,000 ) (242,000) (291,000) (4,131,000 )
Proceeds from sale of
preferred and common
stock................... 12,831,000 145,000 61,000 27,545,000 93,000 46,000 27,591,000
Decrease in common stock
subscriptions
receivable.............. 94,000 23,000 33,000 152,000 152,000
Change in deferred
offering costs.......... 300,000
Increase in notes payable
to stockholders......... 150,000 150,000
Increase in note
payable................. 353,000 353,000
Proceeds from
sale -- lease back...... 141,000 141,000
------------ ----------- ----------- ------------ ----------- ----------- ------------
Net cash (used for)
provided by
financing
activities.......... 11,982,000 869,000 (104,000) 25,716,000 (15,000) (206,000) 25,510,000
------------ ----------- ----------- ------------ ----------- ----------- ------------
Net (decrease) increase in
cash and cash
equivalents............. 4,060,000 (1,839,000) (22,000) 2,430,000 1,549,000 (1,201,000) 1,229,000
------------ ----------- ----------- ------------ ----------- ----------- ------------
Cash and cash equivalents
at beginning of
period.................. 231,000 4,291,000 2,452,000 -- 2,452,000 2,430,000 --
------------ ----------- ----------- ------------ ----------- ----------- ------------
Cash and cash equivalents
at end of period........ $ 4,291,000 $ 2,452,000 $ 2,430,000 $ 2,430,000 $ 4,001,000 $ 1,229,000 $ 1,229,000
============ =========== =========== ============ =========== =========== ============
</TABLE>

See accompanying notes to financial statements.

F-7
<PAGE> 58

SUPERCONDUCTOR TECHNOLOGIES INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- THE COMPANY

Superconductor Technologies Inc. (the "Company") was incorporated in
Delaware on May 11, 1987 and maintains its facilities at a single location in
Santa Barbara, California. Since formation, the Company has been principally
engaged in research and development activities relating to advanced electronic
products that incorporate high temperature superconducting ("HTS") materials.
The Company has recently shifted its focus to the commercialization of its HTS
and cold computing products, while continuing to pursue product development
activities. The Company has targeted its products toward a variety of commercial
applications in the worldwide wireless communications, high-speed computing and
government markets. In addition, the Company is involved as either contractor or
subcontractor on a number of contracts with the United States Government. Credit
risk related to accounts receivable arising from such contracts is considered
minimal. For the years ended December 31, 1993, 1994 and 1995, government
related contracts accounted for 87%, 90% and 96% of the Company's revenues,
respectively.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Information

The unaudited financial information furnished herein reflects all
adjustments, consisting only of normal recurring adjustments, which in the
opinion of management, are necessary to fairly state the Company's financial
position, the results of its operations and its cash flows for the periods
presented.

The results of operations for the nine months ended September 28, 1996 are
not necessarily indicative of results for the entire fiscal year ending December
31, 1996.

In fiscal year 1993, the Company adopted a 13-week quarter reporting period
ending on the Saturday nearest the calendar quarter end. The Company's fiscal
year-end is December 31.

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 amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates and such
differences may be material to the financial statements.

Revenue Recognition

Revenues are principally generated under research and development
contracts. Contract revenues are recognized utilizing the
percentage-of-completion method measured by the relationship of costs incurred
to total estimated contract costs. If the current contract estimate were to
indicate a loss utilizing the funded amount of the contract, a provision would
be made for the total anticipated loss. Revenues from research related
activities are derived primarily from contracts with agencies of the United
States Government. These contracts include cost-plus, fixed price and cost
sharing arrangements and are generally short-term in nature.

All payments to the Company for work performed on contracts with agencies
of the U.S. Government are subject to adjustment upon audit by the Defense
Contract Audit Agency. Based on historical experience and review of current
projects in process, management believes that the audits will not have a
significant effect on the financial position, results of operations or cash
flows of the Company.

Research and Development Costs

Research and development costs are expensed as incurred. Research and
development costs incurred solely in connection with research and development
contracts are charged to contract research and

F-8
<PAGE> 59

SUPERCONDUCTOR TECHNOLOGIES INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

development expense. Other research and development costs are charged to
research and development expense.

Cash and Cash Equivalents

For purposes of reporting cash flows, the Company considers investments
with original maturities of three months or less to be cash equivalents.

Short-Term Investments

Short-term investments consist of highly liquid investments with original
maturities in excess of three months. Such investments are stated at fair market
value. Management believes that the financial institutions and companies in
which it has made such short-term investments are financially sound and,
accordingly, minimal credit risk exists with respect to these investments.

Inventories

Inventories are stated at the lower of cost or market. Costs are determined
using the first-in, first-out method.

Property and Equipment

Property and equipment are recorded at cost. Expenditures for additions and
major improvements are capitalized. Expenditures for repairs and maintenance and
minor improvements are charged to expense as incurred. When property or
equipment is retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts. Gains or losses from retirements and
disposals are recorded as other income or expense.

Property and equipment and furniture and fixtures are depreciated over
their estimated useful lives ranging from three to seven years. Leasehold
improvements and assets financed under capital leases are amortized over their
useful lives or the lease term, whichever is shorter. Depreciation and
amortization are computed using the straight-line method.

Patents and Licenses

Patents and licenses are recorded at cost and are amortized using the
straight-line method over their estimated useful lives or seventeen years,
whichever is shorter. The recoverability of carrying values of patents and
licenses is evaluated on a recurring basis.

Income Taxes

The Company has adopted Statement of Financial Accounting Standards No. 109
("SFAS 109"), Accounting for Income Taxes. SFAS 109 utilizes an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the Company's financial statements or tax returns. In estimating
future tax consequences, SFAS 109 generally considers events other than
enactments of changes in the tax law or rates.

Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates fair value due to the short
term nature of these instruments. The Company estimates

F-9
<PAGE> 60

SUPERCONDUCTOR TECHNOLOGIES INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

that the carrying amount of the note payable approximates fair value based on
the Company's current incremental borrowing rates for similar types of borrowing
arrangements.

Net Loss Per Share

Net loss per share is computed on the basis of weighted average common
shares and common stock equivalent shares outstanding, if dilutive. Options
granted during the period June 1991 through December 1992 are assumed to be
outstanding since inception and included in the computation of net loss per
share.

NOTE 3 -- SHORT-TERM INVESTMENTS

Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities ("SFAS 115"). The adoption of SFAS 115 requires that certain
investments in short-term debt securities held by the Company be classified as
"available-for-sale" and measured at fair value. Available-for-sale securities
are those securities that may be sold prior to maturity in response to liquidity
or other factors. Prior to 1994, the Company carried its investment in debt
securities at market value which approximated cost. At December 31, 1994, the
aggregate fair market value of such debt securities was $6,726,000, which was
less than the aggregate cost by $102,000. The net unrealized loss is included as
a separate item in stockholders' equity. At December 31, 1995, the aggregate
fair market value of the debt securities including cash equivalents was
$3,973,000 and approximated the aggregate cost.

NOTE 4 -- PATENTS AND LICENSES

In April 1992, the Company obtained an exclusive license from the
University of Arkansas (the "University") to use the superconducting material
thallium barium calcium copper oxide ("TBCCO"). The Company's primary research
and development activities to date have used TBCCO. Upon execution of the
license, the Company paid $250,000 and issued 350,000 shares of its Series D
Preferred Stock to the University. (Such Series D shares were subsequently
converted into 175,000 shares of common stock in connection with the Company's
March 1993 initial public offering).

Since April 1995, the Company has been obligated to pay a four percent
royalty on sales of certain products. Commencing in April 1997, the royalty
payments are subject to an annual minimum of $100,000. The Company was initially
obligated to prepay royalties of $750,000 over a twenty-four month period. In
October 1992, the Company issued an additional 50,000 shares of Series D
Preferred Stock (subsequently converted to 25,000 shares of common stock) to the
University as consideration for extending the payment period for the prepaid
royalties to thirty-six months. The Company has fulfilled its royalty prepayment
obligation. The license is being amortized over thirteen years which represents
the estimated useful life of the patent and the underlying material (TBCCO).

The Company sublicensed certain of its rights in 1993 and 1994 in exchange
for non-refundable payments and royalties based on future sales, if any, by the
sublicensor. The Company has no future obligations with respect to such
sublicenses.

F-10
<PAGE> 61
SUPERCONDUCTOR TECHNOLOGIES INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5 -- DETAILS OF CERTAIN FINANCIAL STATEMENT COMPONENTS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
Accounts receivable:
Unbilled accounts receivable.............. $ 829,000 $ 849,000
Billed accounts receivable................ 328,000 264,000
---------- ----------
$1,157,000 $1,113,000
========== ==========
</TABLE>

Unbilled accounts receivable represent costs and profits in excess of
billed amounts on contracts-in-progress at period end. Such amounts are billed
based upon the government's notification of contract funding. Such amounts are
generally collected within one year.

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1994 1995
---------- ----------
<S> <C> <C>
Inventories:
Raw materials............................. $ 236,000 $ 134,000
Work-in-process........................... 50,000 84,000
Finished goods............................ 9,000 10,000
---------- ----------
$ 295,000 $ 228,000
========== ==========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
----------- -----------
<S> <C> <C>
Property and equipment:
Equipment.............................. $ 5,454,000 $ 5,869,000
Leasehold improvements................. 1,334,000 1,346,000
Furniture and fixtures................. 80,000 80,000
---------- ----------
6,868,000 7,295,000
Less: accumulated depreciation
and amortization.................. (4,000,000) (4,926,000)
---------- ----------
$ 2,868,000 $ 2,369,000
=========== ===========
</TABLE>

At December 31, 1994 and 1995, property and equipment includes $51,000 and
$38,000 of assets financed under capital lease arrangements, net of $41,000 and
$54,000 of accumulated amortization, respectively. Depreciation expense amounted
to $690,000, $781,000 and $933,000 for the years ended December 31, 1993, 1994
and 1995, respectively.

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
Accounts payable and accrued expenses:
Accounts payable............................. $593,000 $415,000
Accrued salaries............................. 133,000 149,000
Accrued vacation............................. 101,000 121,000
Other accrued expenses....................... 90,000 48,000
-------- --------
$917,000 $733,000
======== ========
</TABLE>

F-11
<PAGE> 62

SUPERCONDUCTOR TECHNOLOGIES INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6 -- LONG-TERM DEBT

In August 1994 the Company entered into an equipment financing agreement
with a bank. The agreement provided for borrowings of up to $1,500,000 through
the end of 1994, which are secured by substantially all of the Company's assets.
Amounts borrowed pursuant to this agreement accrue interest at the annual rate
of prime plus 1% and are to be repaid in 36 monthly installments beginning
January 1995. In October 1995, the Company extended and amended its equipment
financing arrangement in order to borrow an additional $500,000 through the end
of 1995 at the same interest rate of the initial agreement.

Long-term debt comprises the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1994 1995
---------- --------
<S> <C> <C>
Note payable to bank...................................... $1,001,000 $820,000
Capitalized lease obligations payable in monthly
installments aggregating approximately $2,200 including
interest calculated at rates ranging from 16.55% to
20.01% through 1997 (note 10)........................... 55,000 38,000
---------- --------
Total................................................ 1,056,000 858,000
Current portion........................................... 332,000 405,000
---------- --------
Noncurrent portion........................................ $ 724,000 $453,000
========== ========
</TABLE>

NOTE 7 -- INCOME TAXES

As of December 31, 1995, the Company had federal net operating loss
carryforwards of approximately $13,160,000 and California net operating loss
carryforwards of approximately $6,324,000. The federal carryforwards will expire
during the years 1999 through 2010 and the California carryforwards will expire
during the years 1996 through 2000. As a result of research and development
activities to date, the Company has accumulated research and development credit
carryforwards of $605,000 and $203,000 for federal and California purposes,
respectively. These federal credit carryforwards will expire during the years
2002 through 2010, while the California credit has no expiration date. As of
June 30, 1995, the provisions of the federal research and development credit
expired. Accordingly, no federal research and development credits may be claimed
for expenses incurred after June 30, 1995.

Due to the uncertainty surrounding the realization of the favorable tax
attributes of such net operating loss carryforwards and credits in future tax
returns, the Company has recorded a valuation allowance against its otherwise
recognizable deferred tax assets. Accordingly, no deferred tax asset has been
recorded in the accompanying balance sheet.

Under the provisions of the Tax Reform Act of 1986, when there has been a
change in an entity's ownership of fifty percent or greater, utilization of net
operating loss carryforwards may be limited. As a result of certain equity
transactions, the Company will be subject to such limitations. The annual
limitations have not been determined.

NOTE 8 -- STOCKHOLDERS' EQUITY

Preferred Stock

Pursuant to the Company's Certificate of Incorporation, the Board of
Directors is authorized to issue up to 2,000,000 shares of Preferred Stock (par
value $.001 per share) in one or more series and to fix the rights, preferences,
privileges and restrictions, including the dividend rights, conversion rights,
voting rights, redemption price or prices, liquidation preferences, and the
number of shares constituting any series or the

F-12
<PAGE> 63

SUPERCONDUCTOR TECHNOLOGIES INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

designations of such series, without further vote or action by the stockholders.
The issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change of control of the Company without further action of the
stockholders. The issuance of Preferred Stock with voting and conversion rights
may adversely affect the voting power of the holders of Common Stock, including
the loss of voting control to others. The Company has no present plans to issue
any shares of Preferred Stock.

Stock Options

Effective October 1988, the Board of Directors adopted the Superconductor
Technologies Inc. 1988 Stock Option Plan (the "1988 Plan") and reserved 600,000
shares of common stock for issuance under the 1988 Plan. The 1988 Plan has been
amended to increase the number of shares reserved for issuance as follows:
January 1991 to 772,883; May 1994 to 1,072,883 and May 1995 to 1,472,883.
Pursuant to the 1988 Plan, key employees, directors and consultants are granted
options to purchase the Company's common stock under the following terms:

<TABLE>
<CAPTION>
TERM 10% OR GREATER SHAREHOLDER OTHER
- ----------------- ----------------------------------------- ----------------------------------------
<S> <C> <C>
Option duration No longer than 5 years No longer than 10 years
Option price Not less than 110% of fair market value Not less than 100% of fair market value
Exercise period Four equal installments beginning one Same
year after the date of grant
</TABLE>

In addition, the Company adopted the 1992 Directors' Stock Option Plan (the
"Directors' Plan"). The Directors' Plan provides for the grant of nonstatutory
stock options to nonemployee directors of the Company. An aggregate of 51,000
shares have been authorized for issuance under this plan. At December 31, 1995,
options to purchase 42,500 shares of Common Stock are outstanding pursuant to
this plan of which 10,625 are exercisable at an average price of $6.22. Options
to purchase 15,000 shares of Common Stock were granted during the year ended
December 31, 1995.

The Company also adopted the 1992 Stock Option Plan. The terms of the plan
are similar to the 1988 Plan. An aggregate of 240,293 shares were authorized and
options to purchase the entire amount were granted in November 1992.

F-13
<PAGE> 64

SUPERCONDUCTOR TECHNOLOGIES INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Exercise prices are determined by the Board of Directors and represent
estimated fair values of the Company's common stock at grant date. The table
below summarizes stock option activity through December 31, 1995:

<TABLE>
<CAPTION>
AMOUNT EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1992...................... 917,881 $ .70 - 8.00
Granted............................................... 251,262 6.00 - 10.00
Canceled.............................................. (27,089) .80 - 8.00
Exercised............................................. (194,455) .70 - .80
---------
Outstanding at December 31, 1993...................... 947,599 $ .70 - 10.00
Granted............................................... 311,151 6.38 - 7.25
Canceled.............................................. (62,314) .80 - 7.25
Exercised............................................. (186,607) .70 - 7.00
---------
Outstanding at December 31, 1994...................... 1,009,829 $ .70 - 10.00
Granted............................................... 228,750 3.875 - 7.125
Canceled.............................................. (109,586) .80 - 7.50
Exercised............................................. (70,895) .70 - 6.25
---------
Outstanding at December 31, 1995...................... 1,058,098 $ .70 - 10.00
=========
</TABLE>

Based upon certain factors, the Company subsequently determined that
options granted during the period June 1991 through October 1992 were issued at
exercise prices which were less than fair market value. As such, the difference
between the fair market value of these options and their exercise price is being
charged against results of operations as compensation expense over the options'
vesting period. Related compensation expense recorded was $101,000, $92,000 and
$70,000, for the years ended December 31,1993, 1994 and 1995 respectively.
Deferred compensation was fully amortized at December 31, 1995.

In November 1995, the Board of Directors approved a Stock Option Repricing
Program for all employees. The Repricing Program has been offered on an optional
basis to reprice the outstanding options held by the employees to $4.875, the
closing price of the Company's Common Stock as quoted on the Nasdaq National
Market on November 9, 1995. If the employee elects to reprice the options then a
new measurement date is established and the options start a new vesting
schedule. For options repriced with less than one year vesting, a new four year
vesting schedule is started. For options with more than one year and less than
two years vesting, a three year vesting schedule is started with the first
vesting after nine months. For options with over two years vesting, a two year
vesting schedule is started with the first vesting in six months. No options
were repriced as of December 31, 1995. Fifty-one employees with a total of 135
grants equal to 797,055 shares were eligible for repricing. The employees had
until January 15, 1996 to exercise the repricing option. Forty-two employees
chose to reprice 102 of these grants with a total of 633,268 shares. There was
no compensation expense recognizable under the Repricing Program.

Warrants

In conjunction with certain obligations under capitalized leases entered
into in January 1988, the Company issued Series C warrants to two lessors to
purchase 83,333 shares of preferred stock. The warrants were exercisable for
$3.00 per share five years from the date of issue. Such warrants expired in
January 1993. In May 1991, the Company entered into an additional equipment
financing agreement with one of these same lessors. In connection with this
agreement, the lessor was granted a Series D warrant to purchase 17,142 shares
of preferred stock at a price of $3.50 per share. This warrant expired in 1996.

F-14
<PAGE> 65

SUPERCONDUCTOR TECHNOLOGIES INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

In May 1991, in connection with a previous equipment financing agreement, a
bank was granted a Series D warrant to purchase 11,429 shares of preferred stock
at a price of $3.50 per share. This warrant expired in 1996. Upon consummation
of the initial public offering in March 1993, all series of preferred stock
warrants were automatically converted into common stock warrants at a rate of
two shares to one. Additionally, in conjunction with the initial public
offering, five-year warrants to purchase 120,750 shares of Common Stock were
issued to the underwriters of the offering.

The following table summarizes warrant activity through December 31, 1995:

<TABLE>
<CAPTION>
SERIES C SERIES D
COMMON STOCK WARRANTS WARRANTS
------------ -------- --------
<S> <C> <C> <C>
Outstanding at December 31, 1992.............. 44,447 83,333 28,571
Granted....................................... 120,750
Conversion of preferred stock warrants to
common stock warrants....................... 55,952 (83,333) (28,571)
Expired....................................... (41,667)
------- ------- -------
Outstanding at December 31, 1993, 1994 and
1995
(exercisable at prices ranging from $6.00 to
$9.00)...................................... 179,482 -- --
======= ======= =======
</TABLE>

NOTE 9 -- EMPLOYEE SAVINGS PLAN

In December 1989, the Board of Directors approved a 401(k) savings plan
(the "401(k) Plan") for the employees of the Company which became effective in
fiscal 1990. Eligible employees may elect to make contributions under the terms
of the 401(k) Plan, however, contributions by the Company are made at the
discretion of management. The Company has made no contributions to the Plan.

NOTE 10 -- COMMITMENTS

The Company leases its facilities under operating leases which contain
escalation clauses for increases in annual rent based upon increases in the Los
Angeles area consumer price index. Lease expirations range from December 1997 to
December 1999. In addition, the Company leases certain property and equipment
under capital lease arrangements. Future minimum payments under lease
commitments are as follows:

<TABLE>
<CAPTION>
YEAR ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
------------------------------------------------------------ --------- -------
<S> <C> <C>
1996........................................................ $ 235,000 $27,000
1997........................................................ 244,000 18,000
1998........................................................ 141,000
1999........................................................ 147,000
-------- -------
Total minimum obligations................................... $ 767,000 45,000
========
Less amount representing interest........................... 7,000
-------
Present value of net minimum obligations.................... 38,000
Less current portion........................................ 21,000
-------
Long-term portion........................................... $17,000
=======
</TABLE>

For the years ended December 31, 1993, 1994 and 1995 rent expense was
$231,000, $245,000 and $252,000, respectively.

F-15
<PAGE> 66

SUPERCONDUCTOR TECHNOLOGIES INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH
ACTIVITIES

The Company paid $172,000, $39,000 and $100,000 in interest expense during
the years ended December 31, 1993, 1994 and 1995, respectively. The Company paid
$127,000 and $57,000 in interest expense during the nine month periods ended
September 30, 1995 and September 28, 1996, respectively.

In 1992, the Company issued 400,000 shares of Series D preferred stock
valued at $1,382,000 as partial consideration to acquire a patent (Note 4).

F-16
<PAGE> 67

APPENDIX
DESCRIPTION OF GRAPHICS

INSIDE FRONT COVER:

OVERALL CAPTION AT TOP OF PAGE: Wireless Communications HTS Filter Systems.

GRAPHICS ARE IN A SEMICIRCLE WITH ARROWS AS GUIDES.

FIRST GRAPHIC AT TOP DEPICTS AN HTS FILTER.

GRAPHIC CAPTION: High Temperature Superconducting Filter.

SECOND GRAPHIC DEPICTS A PACKAGED HTS FILTER.

GRAPHIC CAPTION: Packaged HTS Filter.

GRAPHIC ON MIDDLE OR 3RD LEFT PANEL DEPICTS A CRYOPACKAGE.

GRAPHIC CAPTION: Cryopackage.

GRAPHIC ON LOWER OR 4TH MIDDLE PANEL DEPICTS A CRYOGENIC COOLER.

GRAPHIC CAPTION: Cryogenic Cooler.

GRAPHIC ON MIDDLE OF RIGHT PANEL DEPICTS ANOTHER VIEW OF THE SUPERFILTER(TM)
SYSTEM.

GRAPHIC ON MIDDLE LEFT PANEL DEPICTS A SUPERFILTER(TM) SYSTEM.

GRAPHIC CAPTION: SuperFilter(TM) system.

GRAPHIC ON RIGHT PANEL DEPICTS A BASE STATION AND ANTENNA.

INSIDE BACK COVER:

GRAPHICS ON LEFT DEPICT A CRYOGENIC COOLER AND A COMPUTER WITH MONITOR AND
KEYBOARD.

GRAPHIC CAPTION: Cold Computing Products.

GRAPHICS IN CENTER DEPICT AN ANTENNA AND A CELLULAR PHONE AND A SUPERFILTER(TM)
SYSTEM.

GRAPHIC CAPTION: Wireless Communications Filters.

GRAPHICS ON RIGHT DEPICT A SWITCHED FILTER BANK AND A MILITARY JET AIRCRAFT.

GRAPHIC CAPTION: Government Communications Products.

OVERALL CAPTION ON BOTTOM OF PAGE: Superconductor Technologies, preceded by the
Company's logo.
<PAGE> 68

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

NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, 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 THE SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR ANY
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH AN OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO ITS DATE.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 6
Use of Proceeds........................ 14
Price Range of Common Stock
and Dividend Policy.................. 14
Capitalization......................... 15
Dilution............................... 16
Selected Financial Data................ 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 18
Business............................... 23
Management............................. 35
Certain Transactions................... 42
Principal Stockholders................. 43
Description of Capital Stock........... 44
Shares Eligible for Future Sale........ 46
Underwriting........................... 47
Legal Matters.......................... 48
Experts................................ 48
Available Information.................. 48
Glossary of Terms...................... 49
Index to Financial Statements.......... F-1
</TABLE>

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

- ------------------------------------------------------
- ------------------------------------------------------
1,500,000 SHARES
LOGO
COMMON STOCK

------------------------------
PROSPECTUS
------------------------------
VAN KASPER & COMPANY
NOVEMBER 22, 1996
------------------------------------------------------
------------------------------------------------------