<PAGE>

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC  20549

                                   FORM 10-QSB

(Mark One)
 X   Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
     of 1934

     For the quarterly period ended March 31, 1997

     Transition report under Section 13 or 15(d) of the Exchange Act
     For the transition period from __________________ to _________________


                       Commission file number    000-20731
                                                 ---------


                               PHOTRAN CORPORATION
        (Exact Name of Small Business Issuer as Specified in Its Charter)


                MINNESOTA                              41-1697628
     (State or Other Jurisdiction of      (I.R.S. Employer Identification No.)
     Incorporation or Organization)


                              21875 GRENADA AVENUE
                               LAKEVILLE, MN 55044
                    (Address of Principal Executive Offices)


                                 (612) 469-4880
                (Issuer's Telephone Number, Including Area Code)



              (Former Name, Former Address and Former Fiscal Year,
                          if Changed Since Last Report)

     Check whether the issuer:  (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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            .
   --------------   ------------


The number of the registrant's common shares outstanding as of May 15, 1997 was
5,156,392

     Transitional Small Business Disclosure Format (check one):

Yes               No     X      .
   --------------   ------------

<PAGE>

                               PHOTRAN CORPORATION

                                   FORM 10-QSB

                                TABLE OF CONTENTS


                                                                        PAGE
                                                                        ----

PART I         FINANCIAL INFORMATION

Item 1.        Financial Statements

                  Balance Sheets                                          3

                  Statements of Operations                                4

                  Statements of Cash Flows                                5

                  Notes to Financial Statements                           9

Item 2.        Management's Discussion and Analysis of Financial          9
               Condition and Results of Operations              

PART II        OTHER INFORMATION

Item 1.        Legal Proceedings                                         13

Item 6.        Exhibits and Reports on Form 8-K                          13

Signature page                                                           14

Exhibit Index                                                            15


                                        2

<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

                               PHOTRAN CORPORATION
                                  BALANCE SHEETS 

<TABLE>
<CAPTION>

                                                                       MARCH 31,        DECEMBER 31,
                                                                         1997               1996
                                                                     --------------     --------------
                                                                      (UNAUDITED)
ASSETS

<S>                                                                 <C>                <C>
CURRENT ASSETS:
   Cash and cash equivalents                                        $  1,619,827       $  2,038,955
   Accounts receivable, net                                              591,443            606,500
   Inventory, net (Note 2)                                               587,355            754,572
   Equipment held for sale (Note 3)                                    2,093,148          1,547,426
   Prepaid expenses                                                      161,234            109,540
                                                                    ------------       ------------
      Total current assets                                             5,053,007          5,056,993

PROPERTY AND EQUIPMENT, net                                           16,065,381         15,446,311

OTHER ASSETS                                                           2,250,000
                                                                    ------------       ------------
                                                                    $ 23,368,388       $ 20,503,304
                                                                    ------------       ------------
                                                                    ------------       ------------

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Current portion of long term debt,
      notes payable, and capital lease obligations                       726,627             51,592
   Accounts payable                                                      715,783            663,411
   Accrued expenses                                                      298,552            758,915
   Customer advances                                                   2,260,420          2,260,420
                                                                    ------------       ------------
      Total current liabilities                                        4,001,382          3,734,338

LONG TERM DEBT                                                         4,094,953            327,813

COMMITMENTS AND CONTINGENCIES (Note 5)

SHAREHOLDERS' EQUITY (Note 4):
   Undesignated stock, no par value,  6,000,000 shares
      authorized, no shares issued
   Common stock, no par value, 24,000,000 shares authorized,
      5,156,392 and 2,834,823 shares issued and outstanding,
     respectively                                                     25,163,921         25,159,921
   Accumulated deficit                                                (9,891,868)        (8,718,768)
                                                                    ------------       ------------
      Total shareholders' equity                                      15,272,053         16,441,153
                                                                    ------------       ------------

                                                                    $ 23,368,388       $ 20,503,304
                                                                    ------------       ------------
                                                                    ------------       ------------
</TABLE>


                       See notes to financial statements.


                                        3

<PAGE>

                               PHOTRAN CORPORATION
                      STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>

                                                                  THREE MONTHS ENDED
                                                                       MARCH 31
                                                          ----------------------------------
                                                               1997                1996
                                                          --------------      --------------

<S>                                                        <C>                 <C>
REVENUES                                                   $   523,869         $   677,459
COST OF SALES                                                  923,072             428,716
                                                           -----------         -----------

     Gross (loss) profit                                      (399,203)            248,743

OPERATING EXPENSES:
   Process and product development                             147,725              84,657
   General and administrative                                  276,618             164,479
   Selling and marketing                                       156,567              72,165
   Other nonrecurring charges (Note 6)                         198,710
                                                           -----------         -----------
       Total operating expenses                                779,620             321,301
                                                           -----------         -----------

LOSS FROM OPERATIONS                                        (1,178,823)            (72,558)


INTEREST INCOME (EXPENSE), net                                   5,723            (144,838)
                                                           -----------         -----------
NET (LOSS)                                                 $(1,173,100)        $  (217,396)
                                                           -----------         -----------
                                                           -----------         -----------

NET (LOSS) PER COMMON
   AND COMMON EQUIVALENT SHARE                             $     (0.23)         $    (0.07)
                                                           -----------         -----------
                                                           -----------         -----------

WEIGHTED AVERAGE NUMBER OF
   COMMON AND COMMON EQUIVALENT
   SHARES OUTSTANDING                                        5,156,259           3,038,990
                                                           -----------         -----------
                                                           -----------         -----------
</TABLE>


                       See notes to financial statements.


                                        4

<PAGE>

                               PHOTRAN CORPORATION
                      STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                   THREE MONTHS ENDED
                                                                                       MARCH  31
                                                                              -----------------------------
                                                                                   1997           1996
                                                                              -------------- --------------

<S>                                                                          <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net (loss)                                                                $  (1,173,100)   $  (217,396)
   Adjustments to reconcile net loss to cash
      (used in) operating activities:
         Depreciation and amortization - property and
            equipment                                                              184,022        128,993
         Amortization of deferred financing costs                                                  60,000
   Changes in current assets and liabilities that provided (used) cash:
      Accounts receivable                                                           15,057        620,594
      Inventory                                                                    167,217        (66,913)
      Equipment held for sale                                                     (545,722)      (947,782)
      Prepaid expenses                                                             (51,694)       (39,651)
      Accounts payable                                                              52,372        226,694
      Accrued expenses                                                            (460,363)       112,693
                                                                              ------------    -----------
         Cash used in operating activities                                      (1,812,211)      (122,768)

CASH FLOWS FROM INVESTING ACTIVITIES:
   Property additions                                                             (803,092)      (825,916)
   Deferred offering costs                                                                       (111,511)
   Purchases of  investments                                                    (2,250,000)
                                                                              ------------    ------------
         Cash used in investing activities                                      (3,053,092)      (937,427)
                                                                              ------------    -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from notes payable and long-term debt                                4,500,000         40,083
   Proceeds from lines of credit                                                                   50,000
   Payments of notes payable and long-debt                                         (57,825)      (263,231)
   Common stock issued                                                               4,000
                                                                              ------------    -----------
         Cash provided by (used in) financing activities                         4,446,175       (173,148)
                                                                              ------------    -----------

DECREASE IN CASH AND CASH EQUIVALENTS                                             (419,128)    (1,233,343)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                 2,038,955      1,532,361
                                                                              ------------    -----------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                    $  1,619,827    $   299,018
                                                                              ------------    -----------
                                                                              ------------    -----------
</TABLE>




                       See notes to financial statements.


                                        5

<PAGE>

                               PHOTRAN CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (UNAUDITED)


1.   BASIS OF PRESENTATION

     The accompanying financial statements except for the December 31, 
     1996 balance sheet are unaudited and reflect all adjustments except for 
     the nonrecurring charges as discussed in note 6, consisting of normal 
     recurring adjustments, which are, in the opinion of management, necessary 
     for a fair presentation.  Operating results for the three-month period 
     ended March 31, 1997 are not necessarily indicative of the results that 
     may be expected for the year ended December 31, 1997.

     These financial statements should be read in conjunction with the financial
     statements and notes thereto for the year ended December 31, 1996,
     previously filed with the SEC as part of the Company's Annual Report on
     form 10-KSB.

2.   INVENTORY

     Inventories consist of the following:

                                                   MARCH 31,    DECEMBER 31,
                                                     1997           1996
                                                     ----           ----
     Raw materials and supplies at cost          $1,009,630       $1,117,569
     Finished goods                                  16,705           34,892
                                                 ----------       ----------
                                                  1,076,335        1,152,461
     Less obsolescence reserve                     (438,980)        (397,889)
                                                 ----------       ----------
                                                 $  587,335       $  754,572
                                                 ----------       ----------
                                                 ----------       ----------

3.   EQUIPMENT HELD FOR SALE

     In 1996 the Company entered into an agreement to sell ITO coating equipment
     to its largest customer for a total contract price of $2,916,500.  The
     Company received a down payment of $500,000 which is recorded as a customer
     advance at March 31, 1997 and December 31, 1996. Delivery of the equipment
     was originally scheduled for the fourth quarter of 1996.  This delivery has
     been delayed, and the customer has requested the Company to install and
     operate the equipment in the Company's facilities during 1997.  The Company
     is in the process of negotiating contract amendments to extend the delivery
     date.  The amendments have not yet been finalized.

4.   SHAREHOLDERS' EQUITY

     INITIAL PUBLIC OFFERING - On May 29, 1996, the Company sold 2,000,000
     Common Shares in an initial public offering.  Net proceeds to the Company
     were approximately $16,025,444 after deducting offering costs, including
     underwriting commissions, of approximately $1,974,556.

     OVERALLOTMENT OPTION - In connection with the Company's initial public
     offering of common stock the company issued an option to the underwriters
     to purchase up to 300,000 shares solely to cover overallotments.  This
     option was exercised in June 1996 resulting in additional net proceeds of
     approximately $2,470,000 after deducting offering costs, including
     underwriting commissions, of approximately $230,000.


5.   COMMITMENTS AND CONTINGENCIES

     During the quarter ended December 31, 1996, the Company was informed by 
     WABO of their intention to dissolve the joint venture agreement and 
     cancel the related equipment purchase contract. In April 1997, the 
     Company received notice that arbitration proceedings have been 
     commenced against it by WABO in Shenzhen, China claiming approximately 
     $4.4 million plus legal fees and costs. This process is still in a very 
     early stage, and it is too soon to determine whether the Company will 
     be liable for any additional amounts beyond the return of amounts which 
     are recorded as customer advances. It is possible that additional 
     amounts due upon final dissolution of this agreement could be material 
     to the financial position and operating results of the Company.
     
     In connection with the coating equipment that the Company was building 
     for sale to Fortune, the Company entered into a contract with a third 
     party to design and build power supplies to be sold under the equipment 
     contract, as well as for the Company's own use. The third party has 
     asserted that the Company is liable to it for various costs incurred in 
     connection with the production of the power supplies and has demanded 
     payment of $240,000 in addition to amounts the Company has already paid 
     under the contract. Due to various defects in the contract as well as 
     the third party's failure to perform its obligations, the Company has 
     rescinded the contract and demanded that the third party refund all 
     monies paid to it by the Company. Management, in consultation with the 
     company's legal counsel, is of the opinion that the Company has valid 
     defenses against the claims asserted by the third party. However, it is 
     possible that the Company will be liable for amounts in addition to 
     those already paid under the contract. Such amounts could be material 
     but the Company is unable to estimate what amounts, if any, will be 
     ultimately paid.
     
     The Securities and Exchange Commission (SEC) has informed the Company 
     that it is conducting a formal investigation with respect to certain 
     financial and accounting irregularities announced by the Company in 
     March 1997 relating to fiscal 1996. The investigation is in the 
     preliminary stages and it is impossible to determine what impact, if 
     any, the investigation will have on the Company's financial condition 
     or results of operations.
     
     In May 1997, the Company was served with a lawsuit filed in the United 
     States District Court for the District of Minnesota by two 
     shareholders who purport to act on their own behalf and on behalf of a 
     class consisting of individuals and entities who purchased the 
     Company's stock in its initial public offering, and in the secondary 
     market up to and including March 24, 1997. This complaint alleges that 
     the registration statement and prospectus for the Company's offering 
     dated May 29, 1996 as well as quarterly reports filed with the 
     Securities and Exchange Commission during 1996, contained false and 
     misleading information, including the reported financial results. 
     Plaintiffs seek to have the action certified as a class action on 
     behalf of certain purchasers of the Company's stock from May 29, 1996 
     through March 24, 1997, and seek damages, costs, expenses and 
     reasonable attorneys' fees. The Company denies that the plaintiffs are 
     entitled to any relief. At this time it is impossible to determine 
     what impact if any, the lawsuit will have on the Company's financial 
     condition or results of operations.

     
6. OTHER NONRECURRING CHARGES
     
     In the fourth quarter of 1996, the Company's China joint venture 
     partner notified the Company of its intention to cancel the joint 
     venture agreements and a related equipment purchase contract with the 
     Company. In connection with the cancellation of the equipment purchase 
     contract, the Company determined that certain equipment which was to 
     have been sold to the joint venture and equipment that was under 
     development for the Company's use was no longer economically feasible 
     or did not fit the Company's current manufacturing needs. This 
     equipment, which the Company determined had no foreseeable future 
     value, was deemed to be impaired and costs of $110,788 relating to this 
     equipment that were incurred during the quarter ended March 31, 1997 
     were written off.
     
     In addition, the Company determined that as a result of refocusing its 
     operations in the first quarter of 1997, a facility it had been leasing 
     was no longer necessary. Leasehold improvements of $34,270 were written 
     off in connection with the termination of the lease agreement. 
     Equipment which was determined to have no future value to the Company at 
     March 31, 1997 has been written down to its fair value, resulting in an 
     impairment charge of $53,652.
     
7. NEW ACCOUNTING PRONOUNCEMENT
     
     In February 1997, the Financial Accounting Standards Board issued 
     Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings 
     per Share". This statement specifies the computation, presentation, 
     and disclosure requirements for earnings per share (EPS). This 
     Statement is effective for financial statements issued for periods 
     ending after December 15, 1997, including interim periods. EPS 
     determined in accordance with SFAS No. 128 is not materially different 
     than the current disclosure under Accounting Principals Board (APB) 
     Opinion No. 15, "Earnings per Share".
     
                                             6
     
<PAGE>

                               PHOTRAN CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
                                   (CONTINUED)


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD LOOKING STATEMENTS

THIS FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS AS DEFINED IN SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.  THESE FORWARD-LOOKING
STATEMENTS INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES, INCLUDING DEMAND FROM
MAJOR CUSTOMERS, EFFECTS OF COMPETITION, CHANGES IN THE PRODUCT OR CUSTOMER MIX
OR REVENUES AND IN THE LEVEL OF OPERATING EXPENSES, RAPIDLY CHANGING
TECHNOLOGIES AND THE COMPANY'S ABILITY TO RESPOND THERETO, THE IMPACT OF
COMPETITIVE PRODUCTS AND PRICING, THE TIMELY COMPLETION OF CONSTRUCTION AND
INSTALLATION, AND THE ACTUAL PERFORMANCE OF NEW MANUFACTURING EQUIPMENT, THE
TIMELY COMPLETION, TESTING, ACCEPTANCE AND SHIPMENT OF EQUIPMENT MANUFACTURED
FOR SALE, THE TIMELY DEVELOPMENT AND ACCEPTANCE OF NEW PRODUCTS, THE IMPACT OF
PENDING AND THREATENED LITIGATION AND OTHER FACTORS DISCLOSED THROUGHOUT THIS
FORM 10-QSB.  THE ACTUAL RESULTS THAT THE COMPANY ACHIEVES MAY DIFFER MATERIALLY
FROM ANY FORWARD-LOOKING STATEMENTS DUE TO SUCH RISKS AND UNCERTAINTIES.  THE
COMPANY UNDERTAKES NO OBLIGATION TO REVISE ANY FORWARD-LOOKING STATEMENTS IN
ORDER TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE OF THIS
REPORT.  READERS ARE URGED TO CAREFULLY REVIEW AND CONSIDER THE VARIOUS
DISCLOSURES MADE BY THE COMPANY IN THIS REPORT, INCLUDING THE DISCUSSION SET
FORTH IN THE SECTION TITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - - OTHER FACTORS THAT MAY AFFECT FUTURE
OPERATING RESULTS," AND IN THE COMPANY'S OTHER REGISTRATION STATEMENTS AND
REPORTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FROM TIME TO TIME THAT
ATTEMPT TO ADVISE INTERESTED PARTIES OF THE RISKS AND FACTORS THAT MAY AFFECT
THE COMPANY'S BUSINESS AND RESULTS OF OPERATIONS.

RESULTS OF OPERATIONS

REVENUES

     For the quarter ended March 31, 1997 net sales decreased to $523,869 from
$677,459 for the quarter ended March 31, 1996.  Revenues consisted primarily of
gross sales of TN grade ITO coated glass.  The decrease in revenue is due to a
combination of a general market price reduction for TN grade ITO coated glass
and a change by the Company's principal customer to a smaller sheet size. The
market price reductions and change in sheet size had the combined effect of
reducing the unit price of the Company's TN grade ITO coated glass by
approximately 50% from the quarter ended March 31, 1996 to the quarter ended
March 31, 1997.  In addition, during the first quarter of 1997, the Company's
principal customer began supplying the raw glass and paying only for the coating
applied by the Company.  Glass cost had been approximately 35% of the total unit
price.  Since the customer is supplying the glass, revenue has been reduced
accordingly.  The decreases in per unit revenue were partially offset by an
increase in the number of units produced of approximately 32%.

     The Company expects the market price for TN grade ITO coated glass will
begin to recover in the second half of 1997.  The Company is also pursuing sales
of larger size substrates that will provide increased revenue per unit for
substantially the same coating cost per unit.  The Company also expects to
expand its productive capacity in 1997 with the addition of one or more thin
film coating lines.  Based on recent discussions with its Asian selling agents
and current customers, management anticipates significant growth in revenue from
the sale of ITO coated glass in 1997 following the addition of productive
capacity.

     During 1996, the Company dedicated a significant portion of its available
production time on its P-1 line to the development of full scale production
processes for enhanced reflection mirrors and its LCM brand
                                        7

<PAGE>

ITO coated glass.  Management believes because of the fluctuations in the market
for TN grade ITO it is necessary to accelerate the shift in product mix from TN
grade ITO to these products.  The Company is providing samples to prospective
customers and is working with its independent sales representatives to develop
customers for these products.

     The Company's largest customer accounted for 93% and 95% of the Company's
revenue during the quarters ended March 31, 1997 and 1996, respectively.  This
customer is the prospective purchaser of the ITO coating equipment discussed
above.  If the sale is consummated, to the extent that this equipment satisfies
a significant portion of the customer's need for ITO coated glass, the Company
will need to find additional customers to replace this source of revenue.  The
Company expects, however, to continue supplying this customer with ITO coated
glass in future periods.  Based on recent discussions with this customer,
management currently expects the customer's purchases of ITO coated glass in
future periods to be comparable to historical levels, although no long-term
purchase commitments exist.

GROSS PROFIT (LOSS)

     Gross loss was $399,203 for the quarter ended March 31, 1997, 
compared to gross profit of $248,743 for the quarter ended March 31, 
1996.  The gross loss was primarily due to the shift to a smaller sheet 
size by the Company's largest customer the supplying of raw glass by 
the Company's largest customer (rather than purchasing it from the 
Company), and market and unit price decreases discussed above. Target 
material expense increased by $100,000 because in the first quarter of 
1996 the Company developed a process to reuse spent target materials 
which had been expensed in 1995. Prior to the first quarter of 1997 the 
Company's supply of this spent material was substantially exhausted, 
such that the Comany is utilized primarily new purchased target 
material in the first quarter of 1997. In addition, depreciation 
expense increased under the units of production method due to an 
increase in units produced over 1996 levels and an increase in the 
capitalized cost basis of the Company's production equipment. Cost of 
sales consists of substrate costs, target material costs, labor and 
overhead related to the Company's manufacturing operations.

PROCESS AND PRODUCT DEVELOPMENT

     Process and product development expenses increased to $147,725 for the
quarter ended March 31, 1997 from $84,657 for the quarter ended March 31, 1996.
These expenses consisted of personnel costs, consulting, testing, supplies and
depreciation expenses.  The increase was due primarily to increased personnel
and consulting fees incurred for the purpose of expanding the Company's product
line.

GENERAL AND ADMINISTRATIVE EXPENSES

     General and administrative expenses increased to $276,618 for the quarter
ended March 31, 1997 from $164,479 for the quarter ended March 31, 1996.  These
expenses consist primarily of compensation expenses for administration, finance,
and general management personnel, as well as office supplies, depreciation, bad
debt and professional fees.  The increase is primarily a result of increased
staffing.  Professional fees also increased in the first quarter of 1997 due to
a special investigation of certain accounting and financial reporting
irregularities related to interim periods in 1996 and legal fees related to a
dispute with the Company's Chinese joint venture partner. Additional
professional fees will be incurred in 1997 connection with these matters as well
as certain litigation described in Part II, Item 1. Legal Proceedings, but it is
not currently possible to determine whether such fees will be material to the
Company's 1997 results of operations.

SELLING AND MARKETING

     Selling and marketing expenses increased to $156,567 for the quarter ended
March 31, 1997 from $72,165 for the quarter ended March 31, 1996.  These
expenses consisted principally of compensation costs for sales personnel,
commissions, travel expenses, trade show expenses, and freight out costs.  The
addition of sales and customer support staff and increases in trade show, travel
and freight costs are the primary reasons for the increase in selling expenses
for the quarter ended March 31, 1997.

                                        8

<PAGE>

OTHER NONRECURRING CHARGES

In the fourth quarter of 1996, the Company's China joint venture partner 
notified the Company of its intention to cancel the joint venture agreement 
and a related equipment purchase contract with the Company.  In connection 
with the cancellation of the equipment purchase contract, the Company 
determined that certain equipment which was to have been sold to the joint 
venture and equipment that was under development for the Company's use was no 
longer economically feasible or did not fit the Company's current 
manufacturing needs.  This equipment, which the Company determined had no 
foreseeable future value, was deemed to be impaired and costs of $110,778 
relating to this equipment that were incurred during the quarter ended March 
31, 1997 were written off.

In addition, the Company determined that as a result of refocusing its 
operations in the first quarter of 1997, a facility it had been leasing 
was no longer necessary.  Leasehold improvements of $34,270 were 
written off in connection with the termination of the lease agreement.  
Equipment that was determined to have no future value to the Company at 
March 31, 1997 has been written down to its fair value, resulting in an 
impairment charge of $53,652.

NET INTEREST EXPENSE

     For the quarter ended March 31, 1997, the Company had interest income net
of interest expense of $5,723 compared to interest expense of $144,838 for the
quarter ended March 31, 1996.  The change was due to the earnings from the
investment of the proceeds from the Company's initial public offering.  In
addition, the Company retired substantially all of its outstanding debt in June
1996 after its initial public offering.

NET INCOME (LOSS)

     The increase in net loss of $1,173,100 for the quarter ended March 31, 1997
compared to the net loss of $217,396 for the quarter ended March 31, 1996 was
primarily due to the nonrecurring charges and the decrease in revenues and 
decrease in gross profit discussed above.

NET OPERATING LOSS CARRYFORWARDS

     In accordance with Section 382 of the Internal Revenue Code of 1986, as
amended (the "Code"), a change in ownership of greater than 50% of the Company
within a three year period results in an annual limitation on the Company's
ability to utilize its net operating loss ("NOL") carryforwards which accrued
during the tax periods prior to the change in ownership.  As of December 31,
1996, the Company had an NOL carryforward of approximately $6 million, which
expires in 2006 through 2010.  Due to certain ownership changes which occurred
during the year ended December 31, 1993, the NOL carryforwards of $700,000
incurred through February 1993, which can be utilized by the Company on an
annual basis, are limited to approximately $50,000.  The annual limitation may
be increased for any built-in gains recognized within five years of the date of
the ownership change.  Utilization of the approximately $5.3 million of NOL
carryforwards incurred after February 1993 is not limited under Section 382 of
the Code.  However, the Company's ability to use its NOL carryforwards may be
further limited by subsequent issuances of common stock.

CHINA JOINT VENTURE

      In 1994 the Company entered into a joint venture agreement with the
Shenzhen WABO Group Company Limited ("WABO"), of Shenzhen, China.  The agreement
is governed by the laws of the People's Republic of China.  The joint venture
company, known as the Shenzhen Fortune Conductive Glass Company, Ltd.
("Fortune"), was created to produce TN grade ITO coated glass for the Asian
market.

      The Company had agreed to sell to Fortune an ITO glass coating system and
technology limited to the production of TN grade ITO coated glass for the gross
purchase price of $10,145,000.  The Company had also agreed to provide a royalty
free license to Fortune for the use of certain of the Company's proprietary
technology for the production of TN grade ITO coated glass.  The Company was
obligated to provide 40% of the $11,645,000 total capitalization of the joint
venture.  This 40% contribution, totaling $4,658,000, was deducted from the
gross purchase price of the coating system.  This was to result in the Company
receiving a net purchase price of $5,487,000 for the equipment sold to the joint
venture
                                        9

<PAGE>

     The equipment was originally scheduled to be shipped by November 6, 1995.
The project was delayed for several months due to a delay by WABO in delivering
a required letter of credit and the Company's resulting inability to obtain
working capital financing on a timely basis.  The project schedule was
subsequently extended by mutual agreement between the parties.  WABO failed to
deliver a required extension of the letter of credit on a timely basis, which
further delayed the project and prevented the Company from shipping the
equipment by April 15, 1996.  The Company was subject to certain contractual
penalties for failure to ship by April 15, including the refund of Fortune's
advance of approximately $1.5 million, which amount had been recorded as a
current liability of the Company.  WABO orally agreed to waive these penalties
provided the equipment was shipped no later than June 30, 1996.  The equipment
did not ship by June 30, 1996.

     During the quarter ended December 31, 1996, the Company attempted to
resolve the issues regarding payment of penalties as well as payment for various
technical modifications.  The Company had negotiated with representatives of
WABO and had drafted an amendment to the agreement to resolve these issues.  The
Company was subsequently informed by WABO of their intention to dissolve the
joint venture agreement.

     The Company will keep the glass coating system, and plans to modify and
install the equipment for its own use.  The Company has recorded an additional
liability of approximately $200,000 related to glass that was provided by WABO
for use in testing the system.  In April 1997, the Company received notice that
arbitration proceedings have been commenced against it by WABO, claiming damages
of or reimbursement of approximately $4.4 million plus legal fees.  This process
is still in a very early stage, and it is too soon to determine whether the
Company will be liable for any additional amounts.  It is possible, however,
that additional amounts due upon final dissolution of the joint venture could
have a material adverse effect on the financial position and operating results
of the Company.

LIQUIDITY AND CAPITAL RESOURCES

     As of March 31, 1997, the Company's principal sources of liquidity included
cash and cash equivalents of $1,619,829 and net accounts receivable of $591,443.
The Company believes that its existing sources of liquidity and anticipated
funds from operations, including collections on equipment sales, will satisfy
the Company' projected working capital and capital expenditure requirements for
1997.  Management is, however, also investigating the possibility of obtaining
working capital financing, although there can be no assurance that such
financing will be available or be available on terms acceptable to the 
Company. (See also Outlook section below)

     The net cash used in operating activities for quarters ended March 31, 1997
and 1996 was $1,812,211 and $122,768, respectively. This change was due
principally to the net loss for the period that was partially offset by non-cash
charges for depreciation and asset impairment losses.  Expenditures for
equipment held for sale were $545,722 for the three months ended March 31,
1997.

     In 1996, the Company entered into an agreement to sell ITO coating
equipment to its largest customer for a total contract price of $2,916,500.  The
Company received a down payment of $500,000 which is recorded as a customer
advance at March 31, 1997.  Delivery of the equipment was originally scheduled
for the fourth quarter of 1996.  This delivery has been delayed, and the
customer has requested the Company to install and operate the equipment in the
Company's facilities during 1997.  The Company is in the process of negotiating
contract amendments to extend the delivery date and clarify payment terms in
light of the changed nature of the agreement.  Costs incurred to date have been
classified as equipment held for sale as of March 31, 1997.

     Cash used in investing activities was $3,053,092 for the quarter ended 
March 31, 1997 compared to $937,427 for the quarter ended March 31, 1996.  In 
both periods cash was used for the purchase of equipment and leasehold 
improvements.  In the quarter ended March 31, 1997, $2,250,000 was used to 
purchase investments in connection with the Company's $4,500,000 
sale-leaseback of the coating equipment in construction-in-progress that was 
originally intended to be sold to Fortune.

     Cash flows from financing activities of  $4,446,175 for quarter ended March
31, 1997 consisted primarily of  $4,500,000 in proceeds from the Company's sale-
leaseback for the coating equipment in construction-in-progress that was
originally intended to be sold to Fortune.  Under the terms of the agreement
which will be treated as a financing transaction, the Company received proceeds
of $4,500,000 of which $2,250,000 is restricted and $2,250,000 is available to
the Company.
                                       10

<PAGE>

OUTLOOK

     In March 1997, David E. Stevenson, the Company's president and founder,
resigned as an officer and director.  The Company has assembled an executive
committee comprised of a Vice President for Finance and Administration, a Vice
President for Manufacturing, and a Vice President for Technology.  The Company
has also hired a  Corporate Controller.  The Company's short-term focus is on
increasing revenues, decreasing expenses, increasing production capacity, and
improving manufacturing capabilities.  The executive committee, together with
the Board of Directors, is currently developing a strategic plan to return the
Company to profitability.  The new management team, together with the Company's
Board of Directors, has taken several steps to refocus the Company's efforts
during the last two months.  The Company has terminated several engineering
projects that did not directly relate to the installation of additional coating
equipment at the Company's facilities.  In an effort to focus all of the
Company's personnel on manufacturing activities and the development and
refinement of core deposition technologies, in March  1997 the Company also laid
off 21 employees, and reassigned several others.  In addition, the restructuring
of manufacturing shifts and process modifications made to the Company's
manufacturing line have resulted in a significant increase in production output.
Moreover, the Company has engaged in direct discussions with its major
customers, selling agents, and suppliers, and none of these customers, selling
agents or suppliers have indicated an intention to terminate their relationships
with the Company.

     Management expects that sales of TN grade ITO coated glass will be the
predominant source of revenue during 1997.  Although the Company is continuing
to work on the development of additional products for introduction in 1998,
management expects that TN grade ITO coated glass sales will continue to
generate the majority of the Company's revenues in 1998 as well.

     Based on the actions described above, the Company believes that its
existing sources of liquidity and anticipated funds generated by operations will
satisfy the Company's working capital and capital expenditure requirements for
1997.  It is possible, however, that the Company may have to obtain additional
capital through the issuance of equity or debt securities.  There can be no
assurance that such additional capital will be available or be available on
terms acceptable to the Company.

     New product introductions will depend on the success of the Company's
development efforts and on the results of management's analysis of market
opportunities and capital expenditure requirements.  The Company's ability to
increase revenues is highly dependent on its ability to complete the
installation of additional coating equipment.  The capital expenditures related
to such installation are expected to be available from internally generated
funds, including proceeds from the sale of ITO coating equipment to the
Company's principal customer (see "Results of Operations - Revenues").  If the
Company is unable to finalize the contract amendments currently under discussion
with that customer, it intends to keep the equipment for its own use; the loss
of equipment sale revenue associated with this transaction, together with a
refund of the customer's down payment of $500,000, however, would force the
Company to slow the process of installing additional equipment significantly,
and possibly force it to seek external capital to fund necessary capital
expenditures.  Barring any unforeseen adverse external developments, however,
management believes that the Company's new plan, which will build on the
Company's asset base and technology position, will provide for the growth in
revenue and earnings necessary for the long term financial health of the
Company.

OTHER FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

     The Company's future operating results may fluctuate significantly due to
factors such as the timing of new product announcements and introductions by the
Company, its major customer and its competitors, market acceptance of new or
enhanced versions of the Company's products, changes in the product or customer
mix, changes in the level of operating expenses, inventory obsolescence and
asset impairments, competitive pricing pressures, the gain or loss of
significant customers, increased product and process development costs
associated with new product introductions, the timely completion of construction
and installation of new manufacturing equipment, the timely completion, testing,
acceptance and shipment of equipment manufactured for sale, and general economic
conditions.  All of the above factors are difficult for the Company to forecast,
and these and other factors may materially adversely affect the Company's
business and operating results for one quarter or a series of quarters,  The
Company's current expense levels are based in part on its expectations regarding
future revenues and in the short term are fixed to a large extent.  Therefore,
the Company may be unable to adjust spending in a timely manner to compensate
for
                                       11

<PAGE>

any unexpected revenue shortfall.  Accordingly, any significant decline in
demand relative to the Company's expectations or any material delay of customer
orders would have a material adverse effect on the Company's financial condition
and operating results.

NEW ACCOUNTING PRONOUNCEMENT

In February 1997, the Financial Accounting Standards Board issued Statement 
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share". This 
statement specifies the computation, presentation, and disclosure 
requirements for earnings per share (EPS). This Statement is effective for 
financial statements issued for periods ending after December 15, 1997, 
including interim periods. EPS determined in accordance with SFAS No. 128 is 
not materially different than the current disclosure under Accounting 
Principles Board (APB) Opinion No. 15, "Earnings per Share".


                                       12

<PAGE>

PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     During the quarter ended December 31, 1996, the Company was informed by
WABO of their intention to dissolve the joint venture agreement and cancel the
related equipment purchase contract.  In April 1997, the Company received notice
that arbitration proceedings have been commenced against it by WABO in Shenzhen,
China claiming approximately $4.4 million plus legal fees and costs.  This
process is still in a very early stage, and it is too soon to determine whether
the Company will be liable for any additional amounts beyond the return of
amounts which are recorded as customer deposits.   It is possible that
additional amounts due upon final dissolution of this agreement could be
material to the financial position and operating results of the Company.

     In connection with the coating equipment that the Company was building for
sale to Fortune, the Company entered into a contract with a third party to
design and build power supplies to be sold under the equipment contract, as well
as for the Company's own use.  The third party has asserted that the Company is
liable to it for various costs incurred in connection with the production of the
power supplies and has demanded payment of $240,000 in addition to amounts the
Company has already paid under the contract.  Due to various defects in the
contract as well as the third party's failure to perform its obligations, the
Company has rescinded the contract and demanded that the third-party refund all
monies paid to it by the Company.  Management, in consultation with the
company's legal counsel, is of the opinion that the Company has valid defenses
against the claims asserted by the third party.  However, it is possible that
the Company will be liable for amounts in addition to those already paid under
the contract.  Such amounts could be material but the Company is unable to
estimate what amounts, if any, will be ultimately paid.

     The Securities and Exchange Commission (SEC) has informed the Company that
it is conducting a formal investigation with respect to certain financial and
accounting irregularities announced by the Company in March 1997 relating to
fiscal 1996. The investigation is in the preliminary stages and it is impossible
to determine what impact, if any, the investigation will have on the Company's
financial condition or results of operations.

     In May 1997, the Company was served with a lawsuit filed in 
the United States District Court for the District of Minnesota by two 
shareholders who purport to act on their own behalf and on behalf of a class 
consisting of individuals and entities who purchased the Company's stock in 
its initial public offering, and in the secondary market up to and including 
March 24, 1997. This complaint alleges that the registration statement and 
prospectus for the Company's offering dated May 29, 1996, as well as 
quarterly reports filed with the Securities and Exchange Commission during 
1996, contained false and misleading information, including the reported 
financial results. Plaintiffs seek to have the action certified as a class 
action on behalf of certain purchasers of the Company's stock from May 29, 
1996 through March 24, 1997, and seek damages, costs, expenses and reasonable 
attorneys' fees. The Company denies that the plaintiffs are entitled to any 
relief. At this time it is impossible to determine what impact, if 
any, the lawsuit will have on the Company's financial condition or 
results of operations.

ITEM 6.

a.   Exhibits

     27.  Financial Data Schedule

b.   Reports on Form 8-K

     A report on Form 8-K was filed with the Commission on March 25, 1997 
regarding the resignation of two persons who were officers and directors of 
the Company, including David E. Stevenson, the Company's Chief Executive 
Officer, Chairman and its founder.

     A report on Form 8-K was filed with the Commission on May 7, 1997 
regarding the restatement of previously reported interim results for the 
first, second and third quarters of 1996.

                                       13

<PAGE>

SIGNATURES

Pursuant to the requirements 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.




                                        /s/ Paul T. Fink
Dated May 16, 1997                      ____________________________
                                        Paul T. Fink, Vice President
                                        Finance and Administration,
                                        Chief Financial Officer, Treasurer,
                                        and Secretary


                                       14

<PAGE>

                                  EXHIBIT INDEX

EXHIBIT                                      
NUMBER                                       


27        Financial Data Schedule

                                       15