SUPERCONDUCTOR TECHNOLOGIES INC, 10-K, 1997-03-27

SUPERCONDUCTOR TECHNOLOGIES INC
10-K, 1997-03-27
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-21074

SUPERCONDUCTOR TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)

DELAWARE 77-0158076
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

460 WARD DRIVE, SUITE F, SANTA BARBARA, CALIFORNIA 93111-2310
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (805) 683-7646

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

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $0.001 PAR VALUE PER SHARE
(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of
the Registrant (based on the closing sale price the Common Stock as reported on
the Nasdaq National Market on February 25, 1997) was approximately $29,469,407.
For purposes of this determination, shares of Common Stock held by each officer
and director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates of
the Registrant. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. The number of outstanding shares of
the Registrant's Common Stock as of the close of business on March 13, 1997 was
7,681,910.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10,11,12 and 13 of Part III incorporate information by reference from
the definitive proxy statement for the Registrant's Annual Meeting of
Stockholders to be held on May 20, 1997.

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PART I

ITEM 1. BUSINESS.

This "Item 1-Business" and other parts of this Report contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference are
discussed throughout "Item 1-Business," including, but are not limited to, under
the caption entitled "Factors Affecting Future Business Operations--Disclosure
Regarding Forward-Looking Statements" and "Item 7- Management's Discussion and
Analysis of Financial Condition and Results of Operations," including, but not
limited to, under the caption entitled "Fluctuations in Periodic Results."

INTRODUCTION AND OVERVIEW

Superconductor Technologies Inc. ("STI" or the "Company") designs,
develops, manufactures and markets 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 SuperFilter(TM) systems are protocol independent, and are currently
undergoing evaluation and testing by leading original equipment manufacturers
("OEMs") and service providers using a variety of wireless protocols including,
among others, cellular, Personal Communication Services ("PCS") and Global
Systems for Mobile communications ("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 stations.

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
coolers 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 over $37 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

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:

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 has the potential to
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

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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 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 thallium barium calcium copper oxide ("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. 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. To this end, the Company markets its cryogenic cooler to end users in the
high-speed computing market. 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 air standard protocols including Code Division
Multiple Access ("CDMA"), and GSM at both cellular and PCS frequencies. 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.

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

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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 $19 billion
in license fees as of January 1997. 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 limitation 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
for increasing capacity.

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."

STI'S PRODUCT SOLUTION

The Company believes that its SuperFilter(TM) systems, which recently have
been formally introduced, 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 air standard protocol used (including CDMA, Time Division
Multiple Access ("TDMA") and GSM, among others) with little or no modification
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,

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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 and maintenance 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 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 could potentially result in an increase
in the volume of calls processed.

- - Rack and Tower Mount Product Application Options. The Company offers the
SuperFilter(TM) system in both rack and tower mount platforms. Conventional
filter implementation in the cellular market has required filter deployment
inside the building enclosure of the base station, and the Company offers a
rack mount product for this application. The Company believes that as new
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
introduced the SuperFilter(TM) system for tower mount platforms in early
1997. The Company's compact system size allows for practical implementation
of the fully integrated tower mount unit. The Company believes offering
multiple product platforms is a significant product advantage.

- - Low Power Consumption. 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 total 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
more than 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. See "Factors Affecting Future Business
Operations--Early Stage of the Commercial Superconductor Products Market:
Market Acceptance and Reliability".

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 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.

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However, there can be no assurance that the Motorola relationship will
ultimately lead to volume orders for the Company's SuperFilter(TM) products. See
"Factors Affecting Future Business Operations--Dependence on Sales to OEMs".

In 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 application test
center. Both customers have reported favorable results. Currently, the Company
is in discussions with both customers to explore potential HTS applications in
their base station offerings.

In December 1996, the Company delivered two filter systems for testing in
the PCS environment to a major Asian telecommunications company. This order was
a follow-up to past filter deliveries to the same company. The Company has
received orders for two cellular tower mount units from a major domestic service
provider, and for one PCS system from a large Asian base station manufacturer.
Currently, the Company has received revenue-generating orders from six
customers. The Company is also in preliminary discussions with several other
OEMs and service providers for initial product shipment and field trials.

HIGH-SPEED COMPUTING

In an effort to provide a complete product solution to the wireless
communications industry, the Company has developed a compact, efficient
cryogenic cooler. The Company has explored additional applications for its
cryogenic technology to increase cooler volume and to decrease the cost and
price of the product. The Company has identified the high-speed computing market
as one potential application. The Company believes its cryogenic coolers can be
used to efficiently and cost-effectively improve the speed of existing
workstations and other high performance computers. 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.

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.

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 degree C (218K) without any further modifications to
the complementary metal oxide semiconductor ("CMOS") central processing unit
("CPU"). With a 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 systems
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 computer manufacturers and anticipates additional cooler orders during
1997. See "Factors Affecting Future Business Operations--Early Stage of the
Commercial Superconductor Products Market: Market Acceptance and Reliability".

GOVERNMENT CONTRACTS

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the Department of Defense ("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 some 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
over $37 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

In addition to certain classified programs, the Company is working with the
consulting firm of Booz Allen & Hamilton Inc., who is serving as a
communications equipment contractor on a government wireless program that
utilizes the Company's commercial technology. The focus of this program is to
improve the integrity of a digital communications link through the use of an HTS
filter system. In December 1996, the Company delivered a pre-production unit
under a government subcontract for $150,000. The unit contained multiple HTS
filters and custom cooled LNA's, incorporated with the proprietary cryogenics
and associated electronics. The application for the unit is in an outdoor
environment, with very similar characteristics to the Company's SuperFilter(TM)
tower mount product. The Company anticipates a follow-on production order based
on successful field testing to be conducted by the customer, although there can
be no assurance in this regard. Development of this technology is consistent
with the Company's strategy to commercialize its HTS products in the wireless
communications area.

The Company has developed a proprietary switched filter bank ("SFB") system
for the military aerospace communications market, 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 communications 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.

CURRENT GOVERNMENT R&D CONTRACTS

At December 31, 1996, the Company was 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 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.

Phase Three, SFB Development. During 1996, the Company received funding for
the third phase of development of the SFB (See "--Products Developed Under
Government Contracts"). The incrementally-funded contract was awarded from DARPA
through WP-AFB. The product development contract is for $6.1 million over two
and one quarter years, $2.3 million of which has been

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funded through 1997. The contract provides funding for the continued development
of the SFB product, a project first undertaken by the Company in 1992. Under
phase three of the development program, STI is scheduled to deliver an advanced
development, flight-worthy cryogenic system by the end of 1997.

Military Communications Systems. The Company has been awarded a contract
from DARPA through the U.S. Army at Fort Huachuca, Arizona for the development
of HTS and cryogenic technology for military communications systems. The
incrementally-funded contract includes the development of basic technology for
wireless communications, addressing both commercial and military applications.
The contract is for $9.1 million over two and one half years, $3.1 million of
which has been funded.

For the year ended December 31, 1996, the Company secured new government
contract awards for a total of $20.6 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 "Factors
Affecting Future Business Operations--High Degree of Dependence on Government
Contracts," "--Dependence on Sales to OEMs and Service Providers" 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 degree C). 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 degree C) were discovered. In early 1987 yttrium barium copper oxide
("YBCO") was discovered, which has a critical temperature of 93K (-180 degree
C). Shortly thereafter thallium barium calcium copper oxide ("TBCCO") was
discovered, which has a critical temperature of 125K (-148 degree C). These
discoveries were important because these high temperature superconductors
allowed for operating temperatures higher than 77K (-196 degree C), 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.

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 nine 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.

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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 RF engineering team has a strong
background in RF applications, and includes Dr. George Matthaei, a
internationally renowned leader in microwave engineering. 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. See"--Manufacturing".

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 degree C) 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 provide 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".

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 and
patented 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 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. 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.

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 is in the process of transferring
manufacturing technology and the line is producing limited quantities. See
"--STI's Technology--STI's Approach," "--Strategic Relationships," "Factors
Affecting Future Business Operations--Limited Manufacturing Experience," and
"--Business Interruptions and Dependence on a single U.S. Facility.

MARKETING AND SALES

The Company pursues a marketing strategy aimed at a select group of OEMs,
service providers, computer manufacturers, and government agencies where
long-term business relationships have been solidified over the years. In
addition, the Company

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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 has formally introduced
its new product line, its SuperFilter(TM) systems, at trade shows and through
other promotional activities. The Company has only recently focused substantial
resources on its marketing and sales efforts aimed at the commercial wireless
communications market and other markets. 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. Failure to develop such
capabilities 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.

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.

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 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 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

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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. In addition, the Company granted a non-exclusive license for TBCCO to
Midwest Superconductivity, Inc. for a specific, non-thin film field of use.
DuPont, Superconducting Core Technologies, Inc., Midwest Superconductivity,
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 any such 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 December 31, 1996, the Company holds 13 U.S. patents, and three
patents have been allowed but have not yet issued. Nine of the Company's patents
are for technologies directed toward 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 December 31, 1996, the
Company has eight patents pending, including three related to materials, two
related to cryogenics, and three covering STI circuit designs. As the Company
has developed prototype products, it has increased the number of circuit design
patents applied for in an effort to protect all phases of product development.
See "Factors Affecting Future Business Operations-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 December 31, 1996, the
Company's research and development department consisted of 50 individuals. 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 1994, 1995 and 1996,
contract research and development expenses were approximately $4.0 million, $5.4
million and $5.7 million, respectively. The Company's revenues from
government-related contracts provided for approximately $5.0 million, $7.3
million and $7.1 million, respectively, during these same periods. This
accounted for 90%, 96% and 96% of the Company's total revenues in the fiscal
years ended 1994, 1995 and 1996, respectively.

Since the Company's inception, it has received approximately $37 million of
revenues from government contracts. The Company believes that it will continue
to rely on government research and development awards to fund a significant
portion of its research and development activities. See "Factors Affecting
Future Business Operations--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.

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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.

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 "--Wireless Communications--Wireless
Communications Constraints," and "--Uncertainty of Patents and Proprietary
Rights."

ENVIRONMENTAL ISSUES

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 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 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.

EMPLOYEES

As of December 31, 1996, the Company employed a total of 66 persons, 50 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.

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.

FACTORS AFFECTING FUTURE BUSINESS OPERATIONS

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-K 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 Form 10-K,
including, without limitation, the statements under "Factors Affecting Future
Business Operations," "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.

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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
are set forth in these "Factors Affecting Future Business Operations," as well
as elsewhere in this Form 10-K.

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 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," "Business--Wireless Communications--STI's Product Solution," and
"Business--High-Speed Computing--Cold Computing Customers."

DEPENDENCE ON SALES TO OEMS AND SERVICE PROVIDERS

Most of the Company's products, including those developed for wireless
communications base stations and government applications, are intended for use
as components or systems in systems manufactured and sold by third party OEMs
and wireless service providers. Therefore, to gain market acceptance, the
Company must demonstrate that its products will provide advantages to such OEMs
and service providers, 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 and service providers 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 Communication--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 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

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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

Since inception, over 94% 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 United States Department of Defense (the
"DoD"). The Company uses these contracts to help fund its research and
development programs. Although the Company recently has been devoting
substantial resources to the development of commercial markets for its products,
the Company is, and expects to continue to be in the near term, dependent on
government funding for its research and development projects. The DoD has been
reducing total expenditures over the past few years, and while to date DoD
research and development funding for electronics has been relatively stable
despite overall cutbacks, there can be no assurance that such funding will not
be reduced in the future. Absent significant future revenues from commercial
sales, a significant loss of government funding would have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Business--Research and Development" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

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."

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.

The Company has an exclusive, worldwide license, in all fields of use, to
formulations covered by patents held by the University of Arkansas covering
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 Midwest
Superconductivity, Inc. (for a specific non-thin film field of use only), 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. 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
other currently known materials or materials that may be discovered in the
future.

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<PAGE> 15

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. 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 issued will afford meaningful protection
against competitors with similar technology, or that any patents issued will not
be challenged by third parties. Since U.S. patent applications are maintained in
secrecy until 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 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. 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 intends to continue to develop and integrate advances in
wireless filter and cryogenic cooling technologies in the manufacture of
commercial quantities of products. 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 "Business--Intellectual Property" and
"Business--Competition".

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."

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

15
<PAGE> 16
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 "--Uncertainty of Patents and
Proprietary Rights" and Business--Intellectual Property" and "--Competition."

16
<PAGE> 17

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company and their ages as
of March 7, 1997 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Glenn E. Penisten 65 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. 45 Vice President and Chief Financial Officer
James P. Simmons, Jr. 47 Vice President, Marketing and Sales
Robert P. Caren, Ph.D. (1)(2) 64 Director
Charles Crocker (1)(2) 58 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 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

17
<PAGE> 18

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.

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 has 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.

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. Philip 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.

18
<PAGE> 19

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. There are no family
relationships between any of the directors or executive officers of the Company.

ITEM 2. 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 will be adequate to meet its current and
reasonably anticipated needs for the next year. See "Factors Affecting Business
Operations--Business Interruptions and Dependence on a Single U.S. Facility".

ITEM 3. LEGAL PROCEEDINGS

There are currently no pending or threatened material legal actions against
the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of the Company's stockholders during
the fiscal quarter ended December 31, 1996.

19
<PAGE> 20
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET FOR COMMON STOCK

Pursuant to the Company's initial public offering, the Company's Common
Stock commenced trading on the Nasdaq National Market on March 7, 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 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 29, 1996...........................................................$ 8.34 $ 6.25
Quarter ended December 31, 1996 ...........................................................$ 7.50 $ 3.38

FISCAL 1997
Quarter ended March 29, 1997...............................................................$ 4.75 $ 3.50
(Through March 13, 1997)
</TABLE>

HOLDERS OF RECORD

As of March 13, 1997, there were approximately 164 holders of record of the
Common Stock.

DIVIDENDS

The Company has never paid cash dividends on its capital stock and does not
expect to pay any dividends in the foreseeable future. Furthermore, the
Company's equipment lease lines prohibit it from paying cash dividends. The
Company intends to retain future earnings, if any, for use in its business.

20
<PAGE> 21

ITEM 6. SELECTED FINANCIAL DATA. (IN THOUSANDS, EXCEPT PER SHARE DATA)

The information set forth below is not necessarily indicative of results of
future operations and 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" appearing in Item 14 of Part IV
of this Report.

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Revenues:
Government contract revenues ............................ $ 3,717 $ 4,334 $ 4,979 $ 7,310 $ 7,104
Commercial product revenues ............................. 234 280 450 300 250
Sub license royalties .................................. 0 388 75 0 38
-------- -------- -------- -------- --------
Total net revenues ................................... 3,951 5,002 5,504 7,610 7,392

Costs and expenses:
Contract research and development ....................... 2,546 2,862 4,030 5,414 5,721
Other research and development ......................... 1,784 1,998 2,085 2,397 2,260
Selling, general and administrative .................... 2,274 2,468 2,928 2,871 2,967
-------- -------- -------- -------- --------
Total operating expenses ............................ 6,604 7,328 9,043 10,682 10,948
-------- -------- -------- -------- --------
Loss from operations ....................................... (2,653) (2,326) (3,539) (3,072) (3,556)
Other income (expense), net ................................ (164) 188 280 253 85
-------- -------- -------- -------- --------
Net loss ................................................... $ (2,817) $ (2,138) $ (3,259) $ (2,819) $ (3,471)
======== ======== ======== ======== ========
Net loss per share ......................................... $ (.68) $ (.42) $ (.55) $ (.47) $ (.57)

Weighted average number of shares outstanding .............. 4,157 5,032 5,971 6,026 6,117
</TABLE>

<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $ 431 $10,583 $ 7,930 $ 5,244 6,871
Working capital ................................. 841 11,134 8,242 5,695 7,178
Total assets .................................... 7,360 16,616 14,613 11,878 13,344
Long-term debt .................................. 938 56 724 453 77
Total stockholders' equity ...................... 4,853 15,741 12,640 10,087 11,290
</TABLE>

21
<PAGE> 22

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This "Item 7- Management's Discussion and Analysis of Financial Condition
and Results of Operations" and other parts of this report contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly 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 caption entitled
"Factors Affecting Future Business Operations".

Superconductor Technologies Inc. is a development stage company founded in
1987 to develop and market advanced electronics products incorporating high
temperature superconductor materials. Since its inception, the Company has been
primarily engaged in research and development activities, recruiting technical
and administrative personnel, and raising capital. To date, the Company has
received revenue primarily from government research contracts and, to a limited
extent, from sales of its products. The Company has incurred cumulative losses
of $23,512,000 from inception to December 31, 1996.

RESULTS OF OPERATIONS

FISCAL YEAR 1996 AS COMPARED WITH FISCAL YEAR 1995

Net revenues. Net revenues decreased by $218,000, or 3% from $7.6 million in
fiscal 1995 to $7.4 million in fiscal 1996, due primarily to a decrease in
government contract revenues.

Government contract revenues decreased by $206,000, or 3% from $7.3 million
for fiscal year 1995 to $7.1 million for fiscal year 1996 as a result of delays
in government funding in the first half of the year. Government contract
revenues constituted 96% of net revenues in fiscal 1995 and fiscal 1996. In
fiscal 1996, the Company was awarded $20.6 million in incrementally-funded
government contracts, 51% of which has been funded through 1997 and beyond.

Commercial sales of the Company's HTS products decreased by $50,000, or
17%, from $300,000 in fiscal year 1995 to $250,000 in fiscal year 1996. However,
1996 sales were primarily comprised of sales of the Company's Superfilter(TM)
prototypes and cryogenic coolers as compared to prior years in which commercial
sales were associated with sales of superconducting films. All film production
is now being used internally for expanding the Company's efforts to develop
products for commercialization.

Sublicense royalties increased $38,000, or 100% in fiscal year 1996 as the
Company entered into one sublicense agreement with respect to its patents in
1996 and none during 1995.

Contract research and development. Contract research and development
expenses increased by $307,000 or 6%, from $5.4 million in fiscal 1995 to $5.7
million in fiscal 1996. This increase is the result of the increased use of
subcontractors and increased research and development efforts which are
allowable expenses under contracts.

Other research and development expenses. Other research and development
expenses decreased by $137,000, or 6%, from $2.4 million in fiscal 1995 to $2.3
million in fiscal 1996. This decrease is the result of some costs being expensed
under contract research and development expenses.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 96,000, or 3%, from $2.9 million in fiscal
1995 to $3.0 million in fiscal 1996. This increase is primarily attributable to
start-up costs for Cryo-Asia, the joint venture with Alantac. See "Item 1.
Business-Strategic Relationships".

Other income (expense), net. Interest income decreased by $197,000, or 56%,
from $353,000 in fiscal 1995 to $156,000 in fiscal 1996 due to a decline in
interest-earning investment balances during the first ten months of 1996 as
these funds were utilized to fund operations. Interest expense decreased by
$29,000, or 29%, from $100,000 in fiscal 1995 to $71,000 in fiscal 1996 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

22
<PAGE> 23

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 which 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.

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 decreased 2% from $2,928,000 in fiscal 1994 to
$2,871,000 in fiscal 1995, due primarily to lower expenses related to travel,
trade shows and general supplies.

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 lease line during the third
fiscal quarter of 1994. See " -- Liquidity and Capital Resources."

FLUCTUATIONS IN PERIODIC RESULTS

A significant portion of the Company's revenues have historically consisted
of government research and development contract revenues. The Company expects
that government contract revenue will continue to account for a substantial
portion of total net revenues over the next several quarters. Government
contract revenues have historically fluctuated from period to period. This
variability is attributable to government contract budgeting and funding
patterns, as the government procurement process is lengthy and may involve
competing budget considerations, making the timing of the Company's revenues
difficult to predict. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations--Net Revenues" and
"Item 1--Business--Government Contracts" and -- "Factors Affecting Future
Business Operations-High Degree of Dependence on Government Contracts".

As the Company continues to focus on its commercial products, commercial
revenues are expected to increase as a percentage of revenues over the next
several quarters; however, there can be no assurance that such commercial
revenue will increase. Furthermore, as the Company attempts to achieve
commercialization of products, it could encounter seasonality or other currently
unforeseen factors causing additional variability in its results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Net revenues" and "Item 1 -- Business --
Government Contracts". In addition, as the Company attempts to achieve
commercialization of HTS products, it could encounter seasonality or other
currently unforeseen factors causing additional variability in its results.

23
<PAGE> 24

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1996, the Company's cash and cash equivalents totaled $2.6
million and short-term investments totaled $4.2 million. The Company considers
investments with original maturities of three months or less to be cash
equivalents. Cash and short-term investments increased $1.6 million, or 31%,
from $5.2 million in fiscal 1995 to $6.8 million in fiscal 1996. The increase in
cash and cash equivalents and short-term investments is due primarily to the
successful completion of the Company's secondary offering in the fourth quarter.

The Company financed its operations from inception through December 31,
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, $4.6 million from net proceeds raised in its secondary offering, $37.0
million in government development contract revenues and $2.2 million in product
and license revenues. Operating activities used $2.2 million, $2.3 million and
$2.4 million of cash and cash equivalents in fiscal 1994 1995 and 1996,
respectively. Investing activities used cash of $516,000 in fiscal 1994,
provided cash of $2.3 million in fiscal 1995 and used cash of $1.7 million in
fiscal 1996. Financing activities provided cash of $869,000 in fiscal 1994, used
cash of $104,000 in fiscal 1995 and provided cash of $4.3 million in 1996
(primarily from the proceeds of the secondary offering).

The Company's principal resource commitments at December 31, 1996 consisted
of accounts payable and accrued employment compensation of $935,000 and
$313,000, respectively, and approximately $500,000 of obligations under
equipment financing commitments.

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
arrangement to permit an additional $500,000 in borrowings through the end of
1995 at the same interest rate of the initial agreement. As of December 31,
1996, borrowings of $467,000 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, inflation has not had a material impact on the Company's financial
results.

After the completion of the secondary offering, the Company believes that
its existing cash, cash equivalents and short-term investments, together with
revenue from operations, should provide sufficient resources to meet its current
anticipated liquidity and capital requirements to meet the Company's expansion
objectives for at least the next 12 months.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

All information required by this item is included on pages 28 to 40 in Item
14 of Part IV of this Report and is incorporated into this item by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not applicable.

24
<PAGE> 25
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information regarding the executive officers and directors of the Company
is incorporated by reference to the information set forth under the caption
"Business--Executive Officers and Directors" and under the caption "Proposal
One: Election of Directors" in the Company's Proxy Statement for the Annual
Meeting of Stockholders to be filed with the Commission within 120 days after
the end of the Company's fiscal year ended December 31, 1996.

ITEM 11. EXECUTIVE COMPENSATION.

Information regarding executive compensation is incorporated by reference
to the information set forth under the caption "Executive Compensation" in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be filed
with the Commission within 120 days after the end of the Company's fiscal year
ended December 31, 1996.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the information set forth under the
caption "Voting Securities of Principal Stockholders and Management" in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be filed
with the Commission within 120 days after the end of the Company's fiscal year
ended December 31, 1996.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information regarding certain relationships and related transactions is
incorporated by reference to the information set forth under the caption
"Executive Compensation -Certain Transactions" in the Company's Proxy Statement
for the Annual Meeting of Stockholders to be filed with the Commission within
120 days after the end of the Company's fiscal year ended December 31, 1996.

25
<PAGE> 26
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) The following documents are filed as part of this Report:

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Financial Statements. The following financial statements of the Company and the
Report of Price Waterhouse LLP, Independent Accountants, are included in Part IV of
this Report on the pages indicated:

Report of Independent Accountants............................................................ 28

Balance Sheet as of December 31, 1995 and 1996............................................... 29

Statement of Operations for the years ended December 31, 1994, 1995 and 1996
and for the period May 11, 1987 (inception) to December 31, 1996............................. 30

Statement of Stockholders' Equity for the period from May 11, 1987 (inception)
to December 31, 1996......................................................................... 31

Statement of Cash Flows for the years ended December 31, 1994, 1995 and
1996 and for the period May 11, 1987 (inception) to December 31, 1996........................ 32

Notes to Financial Statements................................................................ 33
</TABLE>

All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the notes thereto.

2. Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
-------- -----------------------
<S> <C>
3.1(2) Amended and Restated Certificate of Incorporation of the Registrant (Exhibit 3.3).
3.2(1) Bylaws of the Registrant (Exhibit 3.4).
10.1(1)* Technology Agreement between the Registrant and Lockheed Corporation dated January 8, 1988.
10.2(1) Technical Information Exchange Agreement between the Registrant and Philips dated September 1989.
10.3(1) Standard Industrial Lease between the Registrant and UML Real Estate Partnership dated January 1, 1990;
Sublease between Registrant and Consolidated Packaging Machinery Company dba Industrial Automation
Corporation dated October 25 1989.
10.4(1) Form of Consulting Agreement.
10.5(1) Form of Employee Proprietary Information Agreement.
10.6(1) Offer of Employment Letter to William D. Baker dated December 21, 1991.
10.7(1) Offer of Employment Letter to Gregory L. Hey-Shipton dated May 7, 1991, as amended.
10.9(1) 1992 Director Option Plan.
10.10(1) Form of Indemnification Agreement.
10.11(1) License Agreement between the Registrant and the University of Arkansas dated April 9, 1992, as amended.
10.15(1) Loan and Security Agreement between the Registrant and Silicon Valley Bank dated May 17, 1991, as
amended.
10.17(1) 1992 Stock Option Plan.
10.19(1) Proprietary Information & Patents Inventions Agreement among the Registrant, E-Systems, Inc. and
various other parties; Purchase Order dated October 10, 1991.
10.20(1)* Joint Venture Company (JVC) Agreement between the Registrant and Sunpower Incorporated dated
</TABLE>

26
<PAGE> 27
<TABLE>
<S> <C>
April 2, 1992.
10.21(1) Government Contract issued to Registrant by the Defense Advanced
Research Projects Agency through the Office of Naval Research
dated September 4, 1991.
10.22(1) Offer of Employment Letter to Daniel Hu dated November 23, 1992.
10.25(2)* License Agreement between the Registrant and E.I. DuPont de Nemours and Company dated December 1992.
10.26(1) Note and Warrant Purchase Agreement dated December 28, 1992.
10.27(2) Form of Representative's Warrant Agreement.
10.28(3)* Superconductor Technologies Inc. Purchase Agreement.
10.29(4) Loan and Security Agreement between Registrant and Silicon Valley Bank dated August 26, 1994.
10.30(4) Form of Distribution Agreement.
10.31(4) Amended and Restated 1988 Stock Option Plan, as amended, with form of stock option agreement.
10.32(5) Loan and Security Agreement between Registrant and Silicon Valley Bank dated June 27, 1995.
10.33(6)* Joint Venture Agreement between Registrant and Alantac Technologies (S) Pte Ltd., dated May 20, 1996.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 41).
</TABLE>
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (Reg. No. 33-56714).

(2) Incorporated by reference from Amendment No. 1 to the Registrant's
Registration Statement on Form S-1 (Reg. No. 33-56714).

(3) Incorporated by reference from the Registrant's Annual Report on Form 10-K
filed for the fiscal year ended December 31, 1993.

(4) Incorporated by reference from the Registrant's Annual Report on Form 10-K
filed for the fiscal year ended December 31, 1994.

(5) Incorporated by reference from the Registrant's Annual Report on Form 10-K
filed for the fiscal year ended December 31, 1995.

(6) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (Reg. No. 333-10569).

* Confidential treatment has been previously granted for certain portions of
these exhibits.

(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the last quarter of the fiscal year ended December 31, 1996.

27
<PAGE> 28
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, 1995 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, and the period from May 11, 1987 (inception) to December 31, 1996, 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
Los Angeles, California
February 14, 1997

28
<PAGE> 29

SUPERCONDUCTOR TECHNOLOGIES INC.
(A Development Stage Enterprise)

BALANCE SHEET

<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
----------------------------
1995 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,430,000 $ 2,599,000
Short-term investments 2,814,000 4,272,000
Accounts receivable 1,313,000 1,599,000
Inventory 228,000 502,000
Prepaid expenses and other current assets 248,000 183,000
------------ ------------

Total current assets 7,033,000 9,155,000

Note receivable from related party 150,000 150,000
Property and equipment, net 2,369,000 1,799,000
Patents and licenses, net of accumulated amortization
of $603,000 and $835,000, respectively 2,280,000 2,204,000
Other assets, net of accumulated
amortization of $77,000 and $86,000, respectively 46,000 36,000
------------ ------------

Total assets $ 11,878,000 $ 13,344,000
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 463,000 $ 935,000
Accrued compensation 270,000 313,000
Long-term debt --current 405,000 423,000
Billings in excess of cost and earnings on uncompleted contracts 200,000 306,000
------------ ------------
Total current liabilities 1,338,000 1,977,000
Long-term debt 453,000 77,000
------------ ------------

Total liabilities 1,791,000 2,054,000
------------ ------------

Commitments
Stockholders' equity:
Preferred Stock, $.001 par value, 2,000,000 shares authorized,
none issued 0 0
Common Stock, $.001 par value, 15,000,000 shares authorized,
6,026,065 and 7,575,660 shares issued and outstanding 6,000 8,000
Capital in excess of par value 30,122,000 34,794,000
Deficit accumulated during development stage (20,041,000) (23,512,000)
------------ ------------

Total stockholders' equity 10,087,000 11,290,000
------------ ------------

Total liabilities and stockholders' equity $ 11,878,000 $ 13,344,000
============ ============
</TABLE>

See accompanying notes to the financial statements.

29
<PAGE> 30

SUPERCONDUCTOR TECHNOLOGIES INC.
(A Development Stage Enterprise)

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION> FOR THE YEAR ENDED
DECEMBER 31, MAY 11, 1987
(INCEPTION) TO
1994 1995 1996 DECEMBER 31, 1996
------------ ------------ ------------ -----------------

<S> <C> <C> <C> <C>
Net Revenues:
Government contract revenues $ 4,979,000 $ 7,310,000 $ 7,104,000 $ 37,004,000
Commercial product revenues 450,000 300,000 250,000 1,723,000
Sub license royalties 75,000 0 38,000 501,000
------------ ------------ ------------ ------------
Total net revenues 5,504,000 7,610,000 7,392,000 39,228,000
------------ ------------ ------------ ------------
Costs and expenses:
Contract research and development 4,030,000 5,414,000 5,721,000 29,210,000
Other research and development and
commercial 2,085,000 2,397,000 2,260,000 16,226,000
Selling, general and administrative 2,928,000 2,871,000 2,967,000 18,575,000
------------ ------------ ------------ ------------

Total costs and expenses 9,043,000 10,682,000 10,948,000 64,011,000
------------ ------------ ------------ ------------
Loss from operations (3,539,000) (3,072,000) (3,556,000) (24,783,000)
Interest income 324,000 353,000 156,000 2,615,000
Interest expense (39,000) (100,000) (71,000) (1,225,000)
Other income (expense), net (5,000) 0 0 (119,000)
------------ ------------ ------------ ------------
Net loss ($ 3,259,000) ($ 2,819,000) ($ 3,471,000) ($23,512,000)
============ ============ ============ ============
Net loss per share ($ 0.55) ($ 0.47) ($ 0.57)
============ ============ ============
Weighted average number of
shares outstanding 5,970,969 6,025,790 6,117,126
============ ============ ============
</TABLE>

See accompanying notes to the financial statements.

30
<PAGE> 31
SUPERCONDUCTOR TECHNOLOGIES INC.
(A Development Stage Enterprise)

STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
UNREALIZED
GAIN/
DEFICIT (LOSS)
CAPITAL COMMON ACCUMULATED ON
IN EXCESS STOCK DURING AVAILABLE-
COMMON STOCK CONVERTIBLE PREFERRED 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 $29,754,000 ($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
Common stock issued,
exercise of stock
options 48,248 74,000 74,000
Common stock issued,
cashless exercise of
warrants 1,347
Common stock issued,
secondary offering 1,500,000 2,000 4,582,000 4,584,000
Compensation associated
with stock options
granted 16,000 16,000
Net loss (3,471,000) (3,471,000)
--------- ------ ---------- ------ ----------- --------- ------------ --------- -----------
Balance at 12/31/96 7,575,660 $8,000 - $ - $34,794,000 $ - ($23,512,000) $ - $11,290,000
========= ====== ========== ====== =========== ========= ============ ========= ===========
</TABLE>

See accompanying notes to the financial statements.

31
<PAGE> 32
SUPERCONDUCTOR TECHNOLOGIES INC.
(A Development Stage Enterprise)

STATEMENT OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(NOTE 10)

<TABLE>
<CAPTION>
FOR THE YEAR ENDED MAY 11, 1987
DECEMBER 31, (INCEPTION) TO
------------------------------------------ DECEMBER 31,
1994 1995 1996 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 3,259,000) ($ 2,819,000) ($ 3,471,000) ($23,512,000)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 958,000 1,145,000 1,101,000 6,836,000
Compensation expense associated with stock options granted 92,000 70,000 16,000 457,000
Loss on disposal of property and equipment 0 0 0 89,000
Common stock issued for services 0 0 0 42,000
Changes in assets and liabilities:
Accounts receivable (81,000) (156,000) (286,000) (1,599,000)
Note receivable from employee 0 0 0 (150,000)
Inventory (105,000) 66,000 (274,000) (502,000)
Prepaid expenses and other current assets 25,000 (139,000) 65,000 (183,000)
Patents and licenses (371,000) (441,000) (156,000) (1,598,000)
Other assets 0 0 1,000 (97,000)
Security deposits 152,000 0 0 (36,000)
Accounts payable and accrued expenses 397,000 (184,000) 515,000 1,192,000
Billings in excess of cost and earnings on
uncompleted contracts 0 200,000 106,000 306,000
------------ ------------ ------------ ------------
Net cash used in operating activities (2,192,000) (2,258,000) (2,383,000) (18,755,000)
------------ ------------ ------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Change in short-term investments 682,000 2,766,000 (1,458,000) (4,272,000)
Purchases of property and equipment (1,198,000) (426,000) (289,000) (5,311,000)
Proceeds from sale of property and equipment 0 0 0 922,000
------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities (516,000) 2,340,000 (1,747,000) (8,661,000)
------------ ------------ ------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 1,001,000 134,000 57,000 1,916,000
Principal payments on long-term obligations (300,000) (332,000) (416,000) (4,256,000)
Proceeds from sale of preferred and common stock 168,000 94,000 4,658,000 32,355,000
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities 869,000 (104,000) 4,299,000 30,015,000
------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (1,839,000) (22,000) 169,000 2,599,000
Cash and cash equivalents at beginning of period 4,291,000 2,452,000 2,430,000 0
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 2,452,000 $ 2,430,000 $ 2,599,000 $ 2,599,000
============ ============ ============ ============
</TABLE>

See accompanying notes to the financial statements.

32
<PAGE> 33
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, 1994, 1995 and 1996, government
related contracts accounted for 90%, 96% and 96% of the Company's revenues,
respectively.

NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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.

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

Inventories

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

33
<PAGE> 34

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 all expected future events
other than enactments of changes in the tax law or rates.

Net Loss Per Share

Net loss per share is computed on the basis of weighted average 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.

Stock-based Compensation

The Company measures and records compensation expense relating to stock
options as the excess, if any, between the market value of shares on the date of
option grant and the expected proceeds upon exercise. Such expense is accrued
ratably over the period to be benefited. The Company has adopted the provisions
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") to disclose in the footnotes to the
financial statements the impact of compensation cost on earnings as determined
under the fair value method prescribed by SFAS No. 123.

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.

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 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.

Reclassification

Reclassifications have been made to certain 1995 asset and liability
amounts in order to conform to the 1996 presentation.

34
<PAGE> 35

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"). In accordance with the provisions of SFAS 115,
the Company has classified investments in short-term debt securities as
"available-for-sale" and reported them at fair value on the balance sheet with
unrealized gains and losses charged or credited to a separate component of
stockholders' equity. Available-for-sale securities are those securities that
may be sold prior to maturity in response to liquidity or other factors. At
December 31, 1995 and 1996, the aggregate fair market value of the debt
securities was $3,973,000 and $5,840,000, respectively, which approximates the
aggregate cost.

NOTE 4--PATENTS AND LICENSES

The Company has focused its development efforts on thallium barium calcium
copper oxide ("TBCCO") materials and, to a lesser extent, on yttrium barium
copper oxide ("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 400,000 shares of
Series D preferred stock (such Series D shares were subsequently converted into
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 beginning 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. The license is being
amortized over thirteen years which represents the estimated useful life of the
patent and the underlying material (TBCCO). As the Company places reliance on
its exclusive license, total or partial loss of the license could have a
material adverse effect on manufacturing, sales or operating results.

The Company sublicensed certain of its rights in 1993, 1994 and 1996 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.

NOTE 5--LONG-TERM DEBT

In August 1994, the Company and its bank entered into an equipment financing
agreement. 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.

Equipment financing and capitalized lease obligations comprise the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
-------- --------
<S> <C> <C>
Note payable to bank $820,000 $467,000
Capitalized lease obligations (Note 10) 38,000 33,000
-------- --------
Total 858,000 500,000
Current portion 405,000 423,000
-------- --------
Noncurrent portion $453,000 $ 77,000
======== ========
</TABLE>

35
<PAGE> 36

NOTE 6--INCOME TAXES

As of December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $17,245,000 and California net operating loss
carryforwards of approximately $8,366,000. The federal carryforwards will expire
during the years 1999 through 2011 and the California carryforwards will expire
during the years 1997 through 2001. As a result of research and development
activities to date, the Company has accumulated research and development credit
carryforwards of $626,000 and $232,000 for federal and California purposes,
respectively. These federal credit carryforwards will expire during the years
2002 through 2011, while the California credit has no expiration date. As of
June 30, 1995, the provisions of the federal research and development credit
expired. It was reinstated on January 1, 1996. Accordingly, no federal research
and development credits may be claimed for expenses incurred for the period June
30, 1995 through December 31, 1995.

Due to the uncertainty surrounding the realization of the favorable tax
attributes of such net operating loss carryforwards 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 7--STOCKHOLDERS' EQUITY

Public Offering

On November 27, 1996, the Company completed a secondary public offering for
1,500,000 shares of common stock resulting in approximately $4,584,000 of cash
proceeds to the Company, net of offering costs of $1,041,000. On January 9,
1997, the underwriter of the secondary offering exercised the option to purchase
an additional 100,000 shares of common stock resulting in $345,000 of cash
proceeds to the Company, net of offering costs of $30,000.

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 designation 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.
Pending stockholder approval, the 1988 plan will increase by 500,000 shares in
May 1997. 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 STOCKHOLDER OTHER
---- -------------------------- -----
<S> <C> <C>
Option duration No longer than 5 years No longer than 10 years
Option price Not less than 50% of fair market value Not less than 100% of fair market value
Exercise period Four equal installments beginning one year Same
after the date of grant
</TABLE>

36
<PAGE> 37
In addition, the Company adopted the 1992 Directors' Stock Option Plan (the
"Directors' Plan") and reserved 51,000 shares of Common Stock for issuance under
the plan. The Directors' Plan provides for the grant of nonstatutory stock
options to nonemployee directors of the Company. In May 1996, the Directors'
Plan was amended to increase the number of shares reserved for issuance to
135,000. At December 31, 1996, options to purchase 91,500 shares of Common Stock
are outstanding pursuant to this plan. Options to purchase 57,000 shares of
Common Stock were granted during the year ended December 31, 1996.

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.

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock-based compensation other than for non-employees. If the Company had
elected to recognized compensation expense for employee awards based upon the
fair value at the grant date consistent with the methodology prescribed by SFAS
No. 123, the Company's net loss and net loss per share would have been increased
to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net loss- as reported ($ 2,819,000) ($ 3,471,000)
Net loss- pro forma ($ 2,968,000) ($ 4,300,000)
Net loss per share- as reported ($ 0.47) ($ 0.57)
Net loss per share- pro forma ($ 0.49) ($ 0.70)
</TABLE>

These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the years ended December 31, 1995 and 1996, respectively:
Dividend yields of zero percent each year; expected volatility of 59 and 52
percent; risk-free interest rates of 5.83 and 6.16 percent; and expected life of
2.84 and 3.38 years. The weighted average fair value of options granted for
which the exercise price equals the market price on the grant date was $2.00 and
$2.97, respectively.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

Transactions involving stock options are summarized as follows:

<TABLE>
<CAPTION>
AMOUNT WTD. AVG. EXERCISE PRICE
------ ------------------------
<S> <C> <C>
Outstanding at December 31, 1993 947,599 $ 4.479

Granted 317,501 6.633
Canceled (62,314) 5.180
Exercised (186,607) .794
---------
Outstanding at December 31, 1994 1,016,179 $ 5.786

Granted 865,018 5.254
Canceled (742,854) 6.828
Exercised (70,895) .824
---------
Outstanding at December 31, 1995 1,067,448 $ 4.959

Granted 565,034 6.958
Canceled (84,933) 6.278
Exercised (48,248) 1.609
---------

Outstanding at December 31, 1996 1,499,301 $ 5.746
=========
</TABLE>

37
<PAGE> 38
The following table summarizes information concerning currently outstanding and
exercisable stock options:
<TABLE>
<CAPTION>

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------------
Wtd. Average Wtd. Average Wtd. Average
Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices 12/31/96 Contractual Life Price 12/31/96 Price
- --------------- -------- ---------------- ----- -------- -----
<C> <C> <C> <C> <C> <C>
$0.70-$4.75 66,608 4.42 $ 1.235 59,962 $ 0.856
$4.875-$4.875 617,847 8.85 $ 4.875 257,846 $ 4.875
$5.00-$6.50 370,671 8.08 $ 6.068 154,002 $ 6.302
$6.75-$7.50 347,925 9.34 $ 7.264 21,167 $ 7.074
$7.625-$8.00 96,250 8.24 $ 7.727 21,691 $ 7.870
--------- ---- ---------- -------- ----------
$0.70-$8.00 1,499,301 8.54 $ 5.746 514,668 $ 5.050
</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 $92,000, $70,000 and $16,000
for the years ended December 31, 1994, 1995 and 1996, respectively.
Deferred compensation was fully amortized at December 31, 1996.

In November 1995, the Board of Directors approved a Stock Option Repricing
Program for all employees. The Repricing Program was 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 elected to reprice the options then
the options started a new vesting schedule. For options repriced with less than
one year vesting, a new four year vesting schedule was started. For options with
more than one year and less than two years vesting, a three year vesting
schedule was started with the first vesting after nine months. For options with
over two years vesting, a two year vesting schedule was started with the first
vesting in six months. Fifty-one employees with a total of 135 grants equal to
797,055 shares were eligible for repricing. No options were repriced as of
December 31, 1995. 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 recognizable compensation expense 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. These warrants were partially
exercised in 1996 and the remaining portion expired in 1996.

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.

In November 1996, in conjunction with the Company's secondary offering, the
Company issued to the underwriter a warrant to

38
<PAGE> 39

purchase up to 150,000 shares of common stock at an exercise price equal to 120%
of the offering price. The Underwriter's Warrant is exercisable for a four year
period beginning November 22, 1997.

The following table summarizes warrant activity through December 31, 1996:

<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 179,482

Granted 150,000
Exercised (11,175)
Expired (3,110)
--------
Outstanding at December 31, 1996 315,197
========
</TABLE>

NOTE 8--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 9--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>
1997 $244,000 24,000
1998 141,000 6,000
1999 147,000 6,000
2000 0 3,000
--------- --------
Total minimum obligations $ 532,000 39,000
=========
Less amount representing interest 6,000
--------
Present value of net minimum obligations 33,000
Less current portion 21,000
--------
Long-term portion $ 12,000
========
</TABLE>

For the years ended December 31, 1994, 1995 and 1996, rent expense was $245,000,
$252,000 and $266,000, respectively.

39
<PAGE> 40
NOTE 10--DETAILS OF CERTAIN FINANCIAL COMPONENTS AND SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION AND NON-CASH ACTIVITIES

Balance sheet data:

DECEMBER 31,
------------
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Accounts receivable:
Billed accounts receivable $ 364,000 $1,486,000
Unbilled accounts receivable 949,000 113,000
---------- ----------
$1,313,000 $1,599,000
========== ==========
</TABLE>

Unbilled accounts receivable represent costs and profits in excess of
billed amounts on contracts-in-progress at year end. Such amounts are billed
based upon the terms of the contractual agreements. Such amounts are
substantially collected within one year.

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
-------- --------
<S> <C> <C>
Inventories:
Raw materials $134,000 $200,000
Work-in-process 84,000 281,000
Finished goods 10,000 21,000
-------- --------
$228,000 $502,000
======== ========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Property and equipment:
Equipment $ 5,869,000 $ 6,119,000
Leasehold improvements 1,346,000 1,362,000
Furniture and fixtures 80,000 80,000
----------- -----------
7,295,000 7,561,000
Less: accumulated depreciation
and amortization (4,926,000) (5,762,000)
----------- -----------
$ 2,369,000 $ 1,799,000
=========== ===========
</TABLE>

At December 31, 1995 and 1996, property and equipment includes $38,000 and
$36,000 of assets financed under capital lease arrangements, net of $54,000 and
$47,000 of accumulated amortization, respectively. Depreciation expense amounted
to $781,000, $933,000 and $863,000 for the years ended December 31, 1994, 1995
and 1996 respectively.

Supplemental Cash Flow data:

The Company paid $39,000, $100,000 and $71,000 in interest expense during the
years ended December 31, 1994, 1995 and 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).

40
<PAGE> 41
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 27th day of March
1997.

SUPERCONDUCTOR TECHNOLOGIES INC.

By: /s/ DANIEL C. HU
-------------------------------------------
Daniel C. Hu
President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Daniel C. Hu and James G. Evans, Jr. and
each of them, jointly and severally, his attorneys-in-fact, each with full power
of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each said
attorneys-in-fact or his substitute or substitutes, may do or cause to be done
by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:

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

<S> <C> <C>
/s/ Daniel C. Hu President, Chief Executive Officer and Director March 27, 1997
- ----------------------------------- (Principal Executive Officer)
Daniel C. Hu

/s/ James G. Evans, Jr. Vice President, Chief Financial Officer and Secretary March 27, 1997
- ----------------------------------- (Principal Financial and Accounting Officer)
James G. Evans, Jr.

/s/ Glenn E. Penisten Chairman of the Board March 27, 1997
- -----------------------------------
Glenn E. Penisten

/s/ E. Ray Cotten Vice Chairman of the Board March 27, 1997
- -----------------------------------
E. Ray Cotten

/s/ Robert P. Caren Director March 27, 1997
- -----------------------------------
Robert P. Caren

/s/ Charles Crocker Director March 27, 1997
- -----------------------------------
Charles Crocker

/s/ Dennis J. Horowitz Director March 27, 1997
- -----------------------------------
Dennis Horowitz

/s/ J. Robert Schrieffer Director March 27, 1997
- -----------------------------------
J. Robert Schrieffer
</TABLE>

41
<PAGE> 42
EXHIBIT INDEX
Exhibit
No. Document

23 Consent of Independent Accountants

<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-68490, No. 33-82798 and No. 33-92866) of
Superconductor Technologies Inc. of our report dated February 14, 1997
appearing on page 28 of this Annual Report on Form 10-K.

PRICE WATERHOUSE LLP

Los Angeles, California
March 27, 1997

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,031,000
<SECURITIES> 5,840,000
<RECEIVABLES> 1,599,000
<ALLOWANCES> 0
<INVENTORY> 502,000
<CURRENT-ASSETS> 9,155,000
<PP&E> 7,561,000
<DEPRECIATION> 5,762,000
<TOTAL-ASSETS> 13,344,000
<CURRENT-LIABILITIES> 1,977,000
<BONDS> 0
0
0
<COMMON> 8,000
<OTHER-SE> 34,794,000
<TOTAL-LIABILITY-AND-EQUITY> 13,344,000
<SALES> 0
<TOTAL-REVENUES> 7,392,000
<CGS> 0
<TOTAL-COSTS> 8,688,000
<OTHER-EXPENSES> 2,260,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71,000
<INCOME-PRETAX> (3,471,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,512,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,471,000)
<EPS-PRIMARY> (.57)
<EPS-DILUTED> (.57)

</TABLE>