<PAGE>


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

                              FORM 10-QSB/A

(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
     Incorporation or Organization)              Identification No.)

                               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 5,154,392

     Transitional Small Business Disclosure Format (check one):

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


<PAGE>

                             PHOTRAN CORPORATION

                                FORM 10-QSB/A

                              TABLE OF CONTENTS

                                                             PAGE
                                                             ----
PART I    FINANCIAL INFORMATION                       
                                                      
Item 1.   Financial Statements

            Balance Sheets                                      2

            Statements of Operations                            3

            Statements of Cash Flows                            4

            Notes to Financial Statements                       5

Item 2.   Management's Discussion and Analysis of Financial 
          Condition and Results of Operations                  10

PART II   OTHER INFORMATION

Item 1.   Legal Proceedings                                    15

Item 3.   Defaults Upon Senior Securities                      16

Item 6.   Exhibits and Reports on Form 8-K                     16

Signature page                                                 16

Exhibit Index                                                  17

                                       1
<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

                               PHOTRAN CORPORATION
                            BALANCE SHEETS (Unaudited)

<TABLE>
<CAPTION>

                                                MARCH 31,    
                                                  1997        
                                              (AS RESTATED   DECEMBER 31,
                                               SEE NOTE 7)     1996
                                              -------------  -------------
<S>                                           <C>            <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                    $  1,619,827    $ 2,038,955
  Accounts receivable                               573,365        544,340
  Inventory                                         587,355        754,572
  Equipment held for sale                         1,453,534        907,812
  Prepaid expenses                                  161,234        109,540
                                              -------------  -------------
    Total current assets                          4,395,315      4,355,219

PROPERTY AND EQUIPMENT, net                      15,551,584     14,927,174

MARKETABLE SECURITIES, restricted                 2,250,000 
                                              -------------  -------------

                                               $ 22,196,899    $19,282,393
                                              -------------  -------------
                                              -------------  -------------

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 8)

SHAREHOLDERS' EQUITY:
  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 
    5,154,392 shares issued and outstanding,
    respectively                                 24,626,551     24,622,551
  Accumulated deficit                           (10,525,987)    (9,402,309)
                                              -------------  -------------
    Total shareholders' equity                   14,100,564     15,220,242
                                              -------------  -------------

                                                $22,196,899    $19,282,393
                                              -------------  -------------
                                              -------------  -------------
</TABLE>

                            See notes to financial statements.

                                       2
<PAGE>

                               PHOTRAN CORPORATION
                       STATEMENTS OF OPERATIONS (UNAUDITED)

                                                      Three months ended
                                                           March 31
                                              ------------------------------

                                                    1997           1996
                                               (AS RESTATED    (AS RESTATED
                                                SEE NOTE 7)     SEE NOTE 7)
                                              --------------  --------------
REVENUES                                       $     567,951       $ 677,459
COST OF SALES                                        917,732         425,707
                                              --------------  --------------

  Gross (loss) profit                               (349,781)        251,752

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                              (1,129,401)        (69,549)

INTEREST (INCOME) EXPENSE, net                        (5,723)        165,831
                                              --------------  --------------
                                              --------------  --------------

NET LOSS                                        $ (1,123,678)   $   (235,380)
                                              --------------  --------------
                                              --------------  --------------

NET LOSS PER COMMON SHARE                         $    (0.22)     $    (0.08)
                                              --------------  --------------
                                              --------------  --------------

WEIGHTED AVERAGE NUMBER OF
  COMMON SHARES OUTSTANDING                        5,156,259       3,038,990
                                              --------------  --------------
                                              --------------  --------------


                         See notes to financial statements.
                                       3
<PAGE>

                               PHOTRAN CORPORATION
                      STATEMENTS OF CASH FLOWS (UNAUDITED)


                                                      Three months ended
                                                           March 31
                                              ------------------------------

                                                    1997           1996
                                               (AS RESTATED    (AS RESTATED
                                                SEE NOTE 7)     SEE NOTE 7)
                                              --------------  --------------

CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                       $(1,123,678)     $ (235,380)
  Adjustments to reconcile net loss to cash
  used in operating activities:
    Depreciation and amortization - property 
      and equipment                                  178,682         125,984
    Interest expense associated with  
      amortization of deferred financing costs                        60,000
    Changes in current assets and liabilities
      that provided (used) cash:
         Accounts receivable                         (29,025)        620,594
         Inventory                                   167,217         (66,913)
         Equipment held for sale                    (545,722)       (926,789)
         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
                                              --------------  --------------
                                              --------------  --------------


                      See notes to financial statements.

                                       4
<PAGE>

                               PHOTRAN CORPORATION
                    NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

   The accompanying financial statements are unaudited and reflect all 
   adjustments 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.

   As discussed in Note 7, the accompanying financial statements have been 
   restated. These financial statements should be read in conjunction with the 
   financial statements and notes thereto for the year ended December 31, 
   1996, filed with the SEC as part of the Company's Annual Report on Form 
   10-KSB/A.

   The financial statements have been prepared on a going concern basis which 
   contemplates the realization of assets and the satisfaction of 
   liabilities in the normal course of business. The accompanying financial 
   statements do not include any adjustments relating to the recoverability 
   and classification of recorded asset amounts or the amounts and 
   classification of liabilities that might be necessary should the Company 
   be unable to continue as a going concern. As of March 31, 1997, the 
   Company's  principal sources of liquidity included cash and cash 
   equivalents of $1,619,827 and net accounts receivable of $573,365. The 
   Company will require additional debt or equity financing in 1997. 
   Management is pursuing the possibility of obtaining such additional 
   capital expansion financing, although there can be no assurance that such 
   financing will be available or be available on terms acceptable to the 
   Company. (See Note 8 for subsequent financings obtained and the related 
   defaults thereon.)



2. INVENTORIES

   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
                                        ------------     ------------
                                          1,026,335        1,152,461
   Less obsolescence reserve                438,980          397,889
                                        ------------     ------------ 
                                         $  587,355       $  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 was delayed, and the customer had requested the 
   Company to install and operate the equipment in the Company's facilities 
   during 1997 . (See Note 8)

                                       5
<PAGE>
                               PHOTRAN CORPORATION
             NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)

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 $16,025,444 after deducting offering costs, including underwriting 
   commissions, of $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 common 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 $230,000.

5. COMMITMENTS AND CONTINGENCIES

   During the quarter ended December 31, 1996, the Company was informed by 
   its Chinese joint venture partner, Shenzhen WABO Group Company Limited 
   (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.  See Note 8 for subsequent resolution of this matter.

   In connection with the coating equipment that the Company was building for 
   sale to the joint venture company, Shenzhen Fortune Conductive Glass 
   Company, Ltd. (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 moneys 
   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 ultimately be paid. (See 
   Note 8).

   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 of 1997 the Company was served with two separate lawsuits against 
   the Company, certain officers and directors of the Company, and the 
   Company's former president. These lawsuits were filed by certain 
   purchasers of the Company's common stock alleging that the Company's 
   actions with respect to the financial and accounting irregularities 
   announced by the Company in March of 1997 artificially inflated its stock 
   price between May 29, 1996 and March 24, 1997. The plaintiffs in these 
   actions are seeking class certification.

                                       6
<PAGE>
                               PHOTRAN CORPORATION
             NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)


   Both suits were filed in the United States District Court for the District 
   of Minnesota. In July 1997, the court consolidated these lawsuits into a 
   single action captioned IN RE PHOTRAN CORPORATION SECURITIES LITIGATION. 
   The Company has not yet formally responded to this lawsuit, and it is not 
   possible at this time to determine what impact, if any, this lawsuit will 
   have on the Company's financial position or results of operations. (See 
   Note 8).


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 
   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 
   additional 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, 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. RESTATEMENT

   As a result of an investigation which was reopened in October 1997 and was 
   completed in January 1998, the Company has restated its previously issued 
   financial statements. The Company determined that previously recorded 
   amounts purportedly received in 1991 and 1992 for certain issuances of 
   common stock to a former officer of the Company were improper. Also in 
   1991, 1993 and 1995 certain equipment purchases were recorded improperly. 
   In addition, the Company determined that in 1995 revenues were recorded 
   for product sales that did not occur.

   The Company's financial statements for all affected periods have been 
   restated to reflect adjustments for these items. The effects of these 
   adjustments on the financial statements for the three month periods 
   ended March 31, 1997 and 1996 and as of March 31, 1997 are as follows:

                                       7
<PAGE>
                               PHOTRAN CORPORATION
             NOTES TO FINANCIAL STATEMENTS (UNAUDITED)(CONTINUED)

<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:

                                      3 MONTHS ENDED              3 MONTHS ENDED
                                      MARCH 31, 1997              MARCH 31, 1996
                                  ---------------------------------------------------
                                      As                            As      
                                  previously       As           previously      As 
                                   reported     restated         reported    restated
                                  ----------   ----------       ----------   --------
<S>                               <C>            <C>            <C>          <C>
Revenues                          $   523,869    $   567,951    $  677,459   $ 677,459
Cost of sales                         923,072        917,732       428,716     425,707
Gross profit (loss)                  (399,203)      (349,781)      248,743     251,752
Loss from operations               (1,178,823)    (1,129,401)      (72,558)    (69,549)
Interest (income) expense, net         (5,723)        (5,723)      144,838     165,831
Net loss                           (1,173,100)    (1,123,678)     (217,396)   (235,380)
Net loss per share                      (0.23)         (0.22)        (0.07)      (0.08)

</TABLE>


BALANCE SHEET DATA:
                                           As of           
                                      MARCH 31, 1997       
                                  -------------------------
                                      As                   
                                  previously       As      
                                   reported     restated   
                                  -----------  ------------
Accounts receivable               $   591,443  $    573,365
Equipment held for sale             2,093,148     1,435,534
Property & equipment, net          16,065,381    15,551,584
Common stock                       25,163,921    24,626,551
Accumulated deficit                (9,891,868)  (10,525,987)



8. SUBSEQUENT EVENTS

   During the second quarter of 1997, the Company reached an agreement with 
   the customer for whom it was building a coating line whereby the Company 
   will keep the equipment and refund the deposit previously received via 
   credits against future glass purchases by the customer.  The cost of this 
   equipment has been reclassified to property and equipment subsequent to 
   March 31, 1997.

   In August 1997, the Company was served with a lawsuit by its former 
   president, David E. Stevenson, demanding the return of certain stock 
   certificates which are registered in his name which are currently in the 
   possession of the Company. In October 1997, the Company filed a 
   counterclaim alleging that Stevenson had committed fraud and had damaged 
   the Company and that his shares should be awarded to the Company. The 
   Company further alleged that Stevenson did not provide adequate 
   consideration for such shares and that therefore they are not properly 
   issued. This suit is in the early stages of discovery and it is not 
   possible to determine what impact, if any, its outcome could have on the 
   financial condition or results of operations of the Company.

   In September and October 1997, the Company entered into a loan agreement with
   a shareholder, whereby the shareholder loaned the Company a total of 
   $1,100,000. The loan bears interest at 3.5% over the reference rate, as 
   defined, and is payable in monthly installments through September 1999. In 
   connection with the loan, the Company issued to the shareholder warrants for
   the purchase of 110,000 shares of the Company's common stock at a price of 
   $5.00 per share. The warrants are exercisable between September 1998 and 
   September 2007.

   In October 1997, the Company was unable to continue making principal 
   payments on the shareholder note discussed above and certain of its lease 
   obligations. The Company is currently in default on the shareholder loan 
   and two leases, including the $4,500,000 lease financing of the P-1000 
   line. The Company is currently pursuing additional financing and is 
   negotiating with its creditors to cure these defaults or otherwise 
   restructure these obligations. Should these negotiations prove 
   unsuccessful, the Company could be liable for additional interest and 
   penalties. Such additional amounts may be material to the results of 
   operations and financial condition of the Company.

   On or about June 20, 1997, the third party with whom the Company is 
   disputing the cancellation of a contract to build power supplies brought 
   an action against the Company in Dakota County District Court. In the 
   fourth quarter of 1997, this third party increased its demand for damages 
   from $240,000 to $1,300,000. The Company has denied liability and demanded 
   the return of all monies paid to the third party 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 ultimately be paid.

   In November 1997, the shareholder lawsuit was amended to make similar 
   allegations with respect to the disclosures made by the Company in October 
   1997. The Company has moved the court for an order to dismiss the action; 
   however, it is not possible at this time to determine what impact, if any, 
   this matter may have on the Company's financial position or results of 
   operations.

   In the fourth quarter of 1997, the Company was informed by the SEC that 
   they have expanded their investigation to include certain accounting and 
   financial reporting irregularities prior to 1996 which the Company 
   announced in October 1997.

   In December 1997, the Company obtained an $833,000 transaction-specific 
   export working capital line of credit.

   The Company and WABO finalized a negotiated settlement in January 1998 
   subject to a final approval by the Chinese arbitration board.  Under the 
   terms of  the settlement, the Company will pay WABO $1.5 million in cash 
   and issue 200,000 shares of common stock to settle all claims in connection 
   with the joint venture contract, the equipment contract, and related 
   agreements.  The total value of this settlement is approximately $2,425,000 
   based on the market value of the Company's common stock as of January 13, 
   1998.  The Company had previously recorded a liability of $1,735,435 for 
   amounts due to WABO.  The balance of $689,565, will be recorded in the 
   quarter ended September 30, 1997.

   In January 1998, a shareholder agreed to extend the due date on a $200,000 
   convertible note to January 1999.


                                       8
<PAGE>

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

9. 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). The Statement is 
   effective for financial statements issued for periods ending after 
   December 15, 1997, including interim periods.  The Company's EPS 
   determined in accordance with SFAS No. 128 will not be materially 
   different than the current disclosure under Accounting Principles Board 
   (APB) Opinion No. 15, EARNINGS PER SHARE.

                                       9
<PAGE>

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

FORWARD LOOKING STATEMENTS

THIS FORM 10-QSB/A 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/A.  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.

Management's discussion and analysis has been revised to reflect the impact 
of the restatement of the financial statements discussed in Item 1 above.

The financial statements have been prepared on a going concern basis which 
contemplates the realization of assets and the satisfaction of liabilities in 
the normal course of business. The accompanying financial statements do not 
include any adjustments relating to the recoverability and classification of 
recorded asset amounts or the amounts and classification of liabilities that 
might be necessary should the Company be unable to continue as a going 
concern. See further discussion at "Liquidity and Capital Resources."

RESULTS OF OPERATIONS

REVENUES

   For the quarter ended March 31, 1997, net sales decreased to $567,951 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 thin film 
coating line.  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 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.

GROSS PROFIT (LOSS)

   Gross loss was $349,781 for the quarter ended March 31, 1997, compared to 
gross profit of $251,752 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 during the first quarter of 1997 because in the first quarter of 
1996 the Company developed a process to reuse spent target materials which 
had been expensed in 1995 thereby reducing target material expense during the 
first quarter of 1996.  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.

                                       10
<PAGE>

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 and 1998 in 
connection with these matters as well as certain litigation described in Part 
II, Item 1. Legal Proceedings, and such fees may  be material to the 
Company's future results of operations.

SELLING AND MARKETING EXPENSES

   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.

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 additional 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, 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.

NET INTEREST EXPENSE

   For the quarter ended March 31, 1997, the Company had net interest income 
of $5,723 compared to interest expense of $165,831 for the quarter ended 
March 31, 1996. The Company retired substantially all of its outstanding debt 
in June 1996 after its initial public offering.

NET LOSS

   The net loss of $1,123,678 for the quarter ended March 31, 1997 compares 
to a net loss  of $235,380 for the quarter ended March 31, 1996.  The 
increase was primarily due to the nonrecurring charges and the decrease in 
the revenues discussed above.

NET OPERATING LOSS CARRYFORWARDS

                                       11
<PAGE>

   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 $7.6 
million, which expires in 2006 through 2010.  Due to certain ownership 
changes which occurred during the year ended December 31, 1993, 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 $6.9 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 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 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.

   The equipment was originally scheduled to be shipped by November 6, 1995. 
The project was delayed for several months. The project schedule was 
subsequently extended by mutual agreement between the parties. Further delays 
prevented the Company from  meeting the extended shipment date, which 
triggered certain penalty clauses in the agreement.

   During the quarter ended December  31, 1996,  the Company was 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.   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. The Company and WABO finalized a negotiated settlement in January 1998 
subject to final approval by the Chinese arbitration board.  Under the terms 
of this settlement the Company will pay WABO $1.5 million in cash and issue 
200,000 shares of common stock  to settle all claims in connection with the 
joint venture contract, the equipment contract and related agreements.  The 
total value of this settlement is approximately $2,425,000 based on the 
market value of the Company's common stock as of January 13, 1998.  The 
Company had previously recorded a liability of $1,735,435 for amounts due to 
WABO.  The balance of $689,565 will be recorded in the quarter ended 
September 30, 1997.

LIQUIDITY AND CAPITAL RESOURCES

   As of  March 31, 1997, the Company's principal sources of liquidity 
included cash and cash equivalents of $1,619,827 and net accounts receivable 
of $573,365.  At the date of the original filing of the quarterly report, the 
Company believed that its existing sources of liquidity and anticipated funds 
from operations, including collections on equipment sales, would satisfy the 
Company's 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.

                                       12
<PAGE>


   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 which 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, compared to $926,789 for the quarter ended March 31, 1996.

   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. 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 this 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 was 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.

   In October 1997, the Company was unable to continue making principal payments
on the shareholder note discussed above and certain of its lease obligations. 
As a result, the Company is in default on the shareholder loan and two 
leases, including the $4,500,000 lease financing of the P-1000 line. The 
Company is pursuing additional financing and is negotiating with its 
creditors to cure these defaults or otherwise restructure these obligations. 
Should these negotiations prove unsuccessful, the Company could be liable for 
additional interest and penalties. Such additional amounts may be material to 
the results of operations and financial condition of the Company. 

   While the Company had previously believed that its existing sources of 
liquidity and anticipated funds from operations, including proceeds from the 
sale of equipment discussed above, would satisfy its working capital and 
capital expansion needs for 1997, it was subsequently forced to seek 
additional financing. During the third and fourth quarters of 1997, the 
Company received a total of $1,100,000 as a loan from a shareholder, and an 
$833,000 transaction-specific working capital export line of credit which 
management believes will satisfy the Company's projected working capital 
requirements for 1997. The Company will require additional debt or equity 
financing in 1998.  Management is pursuing the possibility of obtaining such 
additional financing, although there can be no assurance that such financing 
will be available or be available on terms acceptable to the Company.

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 its new President, a Vice President for Finance and 
Administration, a Vice President for Manufacturing, and a Vice President for 
Technology. 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 ensure the 
Company's future profitability.  The new management team, together with the 
Company's Board of Directors, has taken several steps to refocus the 
Company's efforts.  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.

                                       13
<PAGE>

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 and the subsequent financings 
discussed 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. The Company 
will require additional debt or equity financing in 1998. Management is 
pursuing the possibility of obtaining such additional financing, although 
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 revenues and earnings necessary for the long term financial 
health of the Company.

   Subsequent to the original filing date of the quarterly report, the 
Company reached an agreement with the customer for whom it had been building 
a coating line whereby the Company would keep the coating line. As a result, 
the Company will not collect the remainder of the sale price, and will refund 
the $500,000 down payment received from the customer. 

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, 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 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). The Statement is effective for 
financial statements issued for periods ending after December 15, 1997, 
including interim periods. The Company's EPS determined in accordance with 
SFAS No. 128 will not be materially different than the current disclosure 
under Accounting Principles Board (APB) Opinion No. 15, EARNINGS PER SHARE.

                                       14
<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. The Company and WABO finalized a negotiated settlement in January 1998 
subject to approval by the Chinese arbitration board.  Under the terms of 
this settlement the Company will pay WABO $1.5 million is cash and issue 
200,000 shares of common stock  to settle all claims in connection with the 
joint venture contract, the equipment contract and related agreements.  The 
total value of this settlement is approximately $2,425,000 based on the 
market value of the Company's common stock as of January 13, 1998.  The 
Company had previously recorded a liability of $1,735,435 for amounts due to 
WABO.  The balance of $689,565 will be recorded in the quarter ended 
September 30, 1997.

   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.  On or 
about June 20, 1997, the third party brought an action against the Company in 
Dakota County District Court.  The demand was subsequently increased to $1.3 
million during the fourth quarter of 1997.  The Company has denied liability 
and demanded that the third-party refund all moneys 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 and October 1997 
relating to fiscal 1996 and prior periods. 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 of 1997, the Company was served with two separate lawsuits 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. In 
November 1997, the shareholder lawsuit was amended to make similar 
allegations regarding the disclosures made by the Company in October 1997. 
The Company has moved the court for an order to dismiss the action; however, 
it is not possible at this time to determine what impact, if any, this matter 
may have on the Company's financial position or results of operations.

   In August 1997, the Company was served with a lawsuit by its former 
president, David E. Stevenson, demanding the return of certain stock 
certificates which are registered in his name which are currently in the 
possession of the Company. In October 1997 the Company filed a counterclaim 
alleging that Stevenson had committed fraud and had damaged the Company and 
that his shares should be awarded to the Company. The Company 
further alleged that Stevenson did not provide adequate consideration for 
such shares and that therefore they are not properly issued. This suit is in 
the early stages of discovery and it is not possible to determine what 
impact, if any, its outcome could have on the financial condition or results 
of operations of the Company.

                                       15
<PAGE>

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

   In October of 1997, the Company became unable to make principal and 
interest payments on the shareholder loan obtained in the third quarter of 
1997. The Company is currently in default on this note in the amount of 
approximately $220,000 in principal and interest payments, but was not in 
default as of the date of the original filing of this report.

   Also in October 1997, the Company was unable to continue making payments 
on the $4,500,000 lease financing transaction entered into in the first 
quarter of 1997. The Company is currently in default on this obligation in 
the amount of approximately $400,000.

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.

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 January 30, 1998          -------------------------
                                    Paul T. Fink,
                                    President, Chief Executive Officer



                                    /s/ Judith E. Tucker
Dated January 30, 1998          -------------------------
                                    Judith E. Tucker,
                                    Vice President for Finance and
                                    Administration, Chief Financial Officer


                                       16
<PAGE>

                                  EXHIBIT INDEX

       EXHIBIT                                              PAGE
       NUMBER                                              NUMBER

       27   Financial Data Schedule   

                                       17