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Annex B The Small Business Innovation Research Program and NSF SBIR Commercialization Results Roland Tibbetts* Small high-technology firms are a large and growing national asset in terms of their innovative capacity and economic importance to the nation. Between 1985 and 1995, among small firms, the number of full-time equivalent R&D scientists and engineers in R&D performing companies increased 76 percent from 78,300 to 137,500. This compares with a 7 percent reduction during the same period in full-time equivalent R&D scientists and engineers from 437,500 to 408,500 in companies with 10,000 or more employees. Yet, in spite of excellent performance and growth in numbers, small firms have always had a difficult time obtaining R&D funding and receive only four percent of government R&D. SBIR BACKGROUND The forerunner of the Small Business Innovation Research Program (SBIR) was initiated at the National Science Foundation (NSF) in 1977 specifically to increase the opportunity of small high-technology companies to participate in NSF research and to convert research results into technological innovations and commercial applications for economic benefits to the nation. NSF was an excel- lent place to start because it funds advanced research in essentially all fields of science and engineering, except the medical and weapons areas. Early results at * Mr. Tibbetts served as SBIR Program Manager at the National Science Foundation and played an instrumental role in developing the program. He submitted this paper as background material for the symposium. The views expressed in this paper are his own. 129

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130 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM NSF were promising. As a result, in 1982 Congress passed legislation that re- quired all 11 government departments and agencies with external R&D budgets of $100 million or more to initiate an SBIR program. The Small Business Ad- ministration coordinates this interagency effort. High-technology firms by defi- nition must do high-risk research if they are to generate scientific and market breakthrough ideas that attract private investment. But this research often requires a degree of risk unacceptable to the private investor, including venture capitalists. There was also a public need for a better mechanism to convert the results of federally funded R&D into commercial and economic benefits for the country. Prior to SBIR's creation, commercialization was not a high priority for govern- ment R&D managers. However, SBIR was intended to open up government R&D funding to the ideas and participation of innovative small firms. Its second major objective was to stimulate their conversion into commercial applications, by encouraging the use of private capital for the commercialization effort. SBIR DESIGN SBIR is a carefully designed three-phase, highly competitive interagency program for small firms that focuses specifically on government agency research needs and ideas that also may have commercial applications and therefore eco- nomic benefits for the country. Phase I is a short, six month project, currently for up to $100,000 (originally $50,000), depending on the agency. It supports advanced R&D to determine the technical feasibility of a research-based idea. It is a preliminary effort to deter- mine, in the shortest period of time and with the least expenditure of government funds, whether the idea appears promising and whether the firm can do high quality research. Each SBIR agency describes its research needs in detail at least annually in comprehensive solicitations for proposals that also provide instruc- tions to proposers. Proposals are reviewed by each agency's standard practice, such as by peer review at NSF, NIH, and some other agencies, or by in-house scientists and engineers, as in Defense and NASA. Only projects with the most promising results in Phase I go on to a larger Phase II which is to advance the Phase I idea to a proof of concept prototype. It is often a two-year project for up to $750,000 (originally $500,000), depending on the agency. Phase II evaluation must take into consideration not only the scien- tific and technical merit of the project, but also its commercial potential. The latter is usually judged from a commercialization plan and written commitment for Phase III follow-on funding provided by the company, as well as the track record of the company in commercializing any previous SBIR projects it has received. Both Phase I and Phase II cover all allowable costs and allow for a modest profit consistent with government R&D funding practices; both phases are sub- ject to audit. SBIR policy provides world-wide commercial rights to resulting

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ANNEX B 131 patents to the small firm. Government retains rights for its own use. Phase III is for product development to pursue potential commercial applications using pri- vate sector financing. Only if a government agency, such as the Department of Defense, is the potential customer for the Phase III results can government fund- ing finance Phase III. The risk of funding R&D ideas from small firms under SBIR is offset to some extent by the quality of the Federal technical review process and the sheer competitiveness of the program. On the average, NSF SBIR funds are available for only one out of every seven to eight Phase I proposals and only one out of three in Phase II. Only Phase I winners are eligible for Phase II. Only about five percent of proposals received at NSF in Phase I receive the larger Phase II award. These percentages have kept the quality of SBIR awards high, and this has con- tributed to respect for SBIR in both government and the private sector. Opening up federal R&D to thousands of small firms is valuable because it is impossible to predict from where the next breakthrough idea will come. SBIR-funded break- throughs have often come from firms with less than ten employees. PROGRAM RESULTS The response to the SBIR opportunity has been enormous. More than 250,000 proposals have been submitted by firms with 500 or fewer employees since the interagency program began in 1983. More than 40,000 awards have been made to nearly 9,000 companies for a total of $6 billion to date. To demonstrate the quality of the response, many more proposals are recommended for awards than funds are available and, surprisingly, most awards have been in emerging and critical technology areas. SBIR results to date, with respect to both the quality of the research and the commercialization, have been promising. The General Accounting Office has conducted two assessments of SBIR, the first in 1989 and the second in 1992.i Results in both evaluations were quite positive. GAO stated to the Congress that SBIR is a government program that works and that the program in general is doing what the Congress intended. In 1992 Congress doubled the size of the program with gradual increases to 2.5 percent of the external R&D budget of agencies with external budgets over $100 million annually and extended SBIR through the year 2000. SBIR's FY 1997 budget exceeded $1 billion. Included in the Annex are 50 examples of the NSF SBIR research to date that have achieved commercialization.2 They include both direct and indirect results ~ See U.S. General Accounting Office, 1989, Federal research: Assessment of Small Business Innovation Research program. Washington, D.C.: U.S. General Accounting Office and U.S. General Accounting Office, 1992, Federal research: Small Business Innovation Research shows success but can be strengthened. Washington, D.C.: U.S. General Accounting Office. 2 This research was carried out by Tibbetts in 1996.

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32 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM and benefits in terms of breakthroughs, new technology and products and related sales, private investment, job growth, patents and research collaborations. Sum- mary information for all 50 companies is shown on the attached Performance Indicators spread sheet. The 50 NSF examples were obtained through telephone and personal interviews, usually with the company president at the time of the original NSF award and through the early growth period. Often he or she was also the principal investigator on the project at the time in a very small firm. The results responded to the following questions and statement: . Did any NSF SBIR research award make a significant difference to the performance and growth of your company? Did the NSF SBIR result in significant commercial sales that, directly or indirectly, you would attribute to SBIR? . Please discuss these and other results that, in your opinion, probably would not have occurred, or would not have taken place in the same time frame, had there no SBIR program or NSF SBIR award, such as breakthroughs, sales, ex- ports, private investment, job growth, collaborations and other benefits. What was the most important value of the SBIR program to your company? Summary data on the 50 selected firms show: Startup: 16 of the 50 firms stated that the NSF projects were key to their starting the company. Critical Factor: 45 of the 50 firms said the SBIR projects were critical to their growth and/or survival. Sales: Cumulative sales directly or indirectly attributable to NSF SBIR projects total $9.1 billion. $2.2 billion was judged by the president (or occasion- ally another knowledgeable official) to have been directly related to SBIR re- search or funding from NSF. $6.9 billion was indirectly related, that is, the prod- uct did not come directly from the NSF research but would not have occurred if the NSF research or funding had not taken place because the companies attrib- uted their start, survival, private investment, technology, spinoff or joint venture and growth to an NSF SBIR project. Some of the projects also involved SBIR funding from more than one agency. . Exports: 34 percent of sales were exported. Investment: Private follow-on investment was $963 million of which $527 was considered directly related to the NSF projects and $436 million indi- rectly related. In response to the question about what aspect of SBIR was most valuable to the company, almost all responded that SBIR funded an idea for which the companies had been otherwise unable to obtain financing. Jobs: The 50 companies had a combined total of 527 employees at the time they submitted their first successful SBIR proposal to NSF. At the time of

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ANNEX B 133 the interview in 1996 they had an estimated 11,500 total jobs of which 9,079 were with the SBIR firm or its successor and 436 with related joint ventures or spinoffs. Net new jobs totaled 10,267. Jobs were difficult to attribute to projects and often represented company growth attributed principally to NSF. Patents: The 50 companies received an estimated 377 U.S. and 732 for- eign patents that related directly or indirectly to SBIR research or funding, a total of 1,109 patents. Research Collaborations: The companies had 959 research collabora- tions. Of these 404 were with industrial firms, 394 with universities, 111 with national laboratories and 50 others, mostly with not-for-profit research organiza- tions. The presidents were unable to attribute many of these specifically to indi- vidual projects. They often did say that the credibility of NSF and SBIR and the competitiveness of the SBIR program facilitated most of them. . Cumulative Sales: The cumulative sales attributable directly and indi- rectly to NSF SBIR research since their NSF award for each of these companies ranges from $2 million to more than $2 billion. There are many other examples that were not included in which successful commercialization also has been achieved from NSF funded projects and hundreds in the case of other SBIR agen- cies. NSF represents only five percent of the total SBIR program. Commercial- ization is in process in hundreds of additional completed projects that have had insufficient time to show significant commercial results but are expected to be marketed in the near future. Another 7,000 projects also are still in Phases I and II and many of these, too, will achieve commercial success. Many projects have not been successful for a variety of reasons, mostly because converting research- based ideas into competitive technology and commercial success is very difficult to do. Most of the 50 companies interviewed said that they expected SBIR related new technology, sales, private investment and job growth to continue to increase each year for the foreseeable future, often at a faster rate because they had ob- tained private financing and market acceptance. This growth should continue in a majority of companies for a number of years. BREAKTHROUGHS AND SIGNIFICANT INNOVATION Many breakthroughs and significant technological innovations were made by the 50 companies. They led to commercial products and services in essentially all major areas of NSF research. These include: Interactive embedded software and control systems for electro-mechani cat products All-optical switching allowing use of a high bandwidth Color filter and coatings for flat panel displays

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134 ducers sensing use resistance tiveness . fingers) . hot sheet steel IS lions dustrial use PC's . sheer . antibodies . THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM Viable non-contacting, electronic robotic arc welding sensing system Ultra high pressure abrasive waterjet cutting tools Innovative unidirectional surface acoustic wave (SAW Device) trans Growing commercial tank-farmed striped bass (rockfish) on major scale Unmanned aircraft for atmospheric research, communications and remote Carbide impact bonding of aircraft turbine blades for heat and abrasion Selective laser sintering for rapid prototyping for manufacturing competi Ion-beam surface treatment to improve orthopedic prostheses (knees, hips, High resolution tomographic micro-measurement for on-line gauging of Film sensor technology for very low temperature measurement applica Photochemical bonding for surface modification for biomedical and in Supercomputer and parallel computing software that allowed their use by Airborne optical sensors for early recognition of air turbulence and wind First long-life catalysts that allowed continuous production of monoclonal Critical ingredient from algae needed by nutritionally deficient babies World-leading handwriting recognition for pen/computer interface The only surgical robot cleared by FDA for operating room use (laparoscopy) NDE detection of glass fiber content and its distribution in reinforced plastics atmosphere lure video use . processing Detection of lead in paint and development of needed portable instrument First instrument that could reliably measure green-house gas fluxes in Rapid way to identify, clone and transfer genes for (safe) big-insecticide High resolution realistic full-color pictures at video-rate speeds for minia Cross-linked enzyme catalysts (CLEC's), new technology for chemical Microwave plasma diamond deposition at high growth rates Revolutionary approach for teaching geometry on computers Membrane filtering for advanced separations of gases and liquids

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ANNEX B . software . breath. 135 Simulation technology and operations research in production scheduling NO2 detector to measure sulfur in petrochemicals, medical blood and CONCLUSION Because SBIR companies have had the opportunity to show government agency scientists, engineers and peer reviewers what they could do, they have been able to contribute to government R&D needs, while enhancing the commer- cial potential of their technologies. Creative ideas and impressive research results have often led to larger Phase II awards, as well as useful collaborations and private investment in Phase III. SBIR grants have also given the company cred- ibility in the marketplace. This, in turn, has helped them to obtain other business, investment, a larger staff and better facilities, all of which have been critical to their survival and growth. SBIR has served as a catalyst for a process which, in many cases, led to technological innovation, growth, commercialization of gov- ernment research results. An important result has been a significant socio-eco- nomic return on investment from government-funded R&D to the SBIR compa- nies, their communities, and the nation. NATIONAL SCIENCE FOUNDATION SELECTED EXAMPLES OF NSF SBIR COMMERCIALIZATION RESULTS 1977-1995 1. Relational Technology Inc., later Ingres Corporation, Berkeley and Alameda, CA This SBIR research project resulted in a major technical breakthrough and commercial success. It was the first distributed relational data base software that became the extremely successful Ingres software. Relational was a spinoff from UC Berkeley in late 1980 and received an SBIR award from NSF in 1981. The SBIR results led to $1 million of venture capital in 1982, another $2.5 million in 1984 and $8 million in 1986 after Ingres proved a success in the marketplace. Continued fast growth led to a $30 million Initial Public Offering (IPO). The president of Relational during this period said "SBIR was critical seed capital funding of long term strategic importance." A major contribution to Ingres' suc- cess was that "the NSF SBIR program was willing to provide early high risk funding for a very innovative, high-risk idea at the concept stage. Ingres was the first company to reach the market with distributed relational database software and it was clear that it had major growth potential in many different fields."

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136 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM Customers included more than 100 of the Fortune 500 companies and included Boeing, GM, 3M, British Airways, NASA, DOD and all national laboratories. Ingres also made a significant contribution to the success of Boeing's AWACS aircraft and to airborne surveillance, particularly in the Gulf War. Ingres was acquired by ASK Computer Systems, Inc. in 1990. In 1994, ASK itself was acquired by Computer Associates International, Inc. Estimated cumulative sales that the former president doubts would have happened, or happened in the same time frame, without the early SBIR award which gave Ingres a two year lead time, now total about $2 billion. Approximately fifty percent of these sales were exports. There also have been three success story spinoffs from Ingres which in themselves have a market value in excess of $2 billion. They are Illustra, which was recently acquired by Informix, Forte Software and Documentum. The former president, now a venture capitalist, attributes this success, too, indirectly to the initial NSF SBIR award that resulted in a technical breakthrough that allowed Ingres to get the critical lead time in the field and attracted the key people who did it. Combined employment directly and indirectly related to Ingres is estimated at more than 2500. 2. Symantec Corporation, Cupertino, CA Symantec, now a major US software company, was founded in 1982 with an NSF SBIR grant for research on the first natural language understanding (En- glish) for microcomputers. This important breakthrough became the very suc- cessful Q&A Software. Q&A's significant sales and earnings allowed Symantec to rapidly expand and diversify through acquisitions. Symantec's founder and first president said that "the NSF project had the intellectual and commercial pizzazz that served as a magic catalyst for thinking big about the company's potential." Symantec quickly went after top quality technical and marketing staff and venture capital, and ultimately 19 acquisitions. "SBIR provided the extremely high-risk, startup financing for a very complex idea that had many exciting, po- tential applications and great economic leverage, if successful." It provided the early financing and profits from Q&A for Symantec to pursue rapid growth, the recruiting of 12 outstanding academic scientists and quality marketing people. Today Symantec is a major international broad-based software firm with $2 bil- lion in cumulative sales and about 2000 employees. The success took place, interestingly, in spite of the original SBIR award being made in 1979 to another small company which was unsuccessful in its own high risk effort. However, Machine Intelligence Corporation spun off the NSF natural language understand- ing project with six employees as Symantec in 1982 because it believed that the idea, its potential and the early results were so promising that it could attract its own venture capital. It promptly did so and obtained $3.5 million of venture capital in 1982 followed by an IPO of $10 million in 1987. Symantec, an SBIR startup, is a world-class commercial success.

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ANNEX B 137 3. Flow Research, Inc., later Quest Integrated, Inc., Kent, WA Quest Integrated, Inc. believes that it is the world leader in high pressure waterjet cutting tools and attributes this leadership to NSF and other agency funded SBIR research. NSF's Research Applied to National Needs (RANN) Pro- gram funded early research on ultra high-pressure waterjet cutting tools with Flow Research prior to the SBIR program's beginning in 1977 at NSF. In 1981 Flow's first NSF SBIR project resulted in a major improvement by adding car- bide bits and other abrasives to the waterjet cutting stream which proved far more effective as a cutting tool which would then cut steel, rock, ceramics and glass. Flow quickly became the leader in the high-pressure waterjet cutting-tool field and now has an estimated 70 percent of the market. Sales from the new technol- ogy, mostly from precision metal, ceramic, glass, plastics and composite-cutting machine tools, total $250 million, made primarily by a Flow/Quest affiliated lic- ensee. About 20 percent of sales have been exported. Major customers have in- cluded GE, Corning, Kodak, Lockheed, Rockwell and Allied Signal among oth- ers. Flow and Quest attracted $35 million in private capital and 838 new jobs have been created that directly relate to the waterjet cutting-tools technology. The companies have had research collaborations with 18 universities, five national laboratories and seven major US industrial companies. The universities included Washington, Michigan Tech, Maryland, Missouri-Rolla, Colorado, MIT and 12 others. The reader may remember the news story in 1986 when little Jessica McClure fell into an abandoned well shaft in Midland, TX. She was rescued in three hours time, after other attempts had failed, with SBIR/Flow developed waterjet rock-cutting tools. Flow Research was founded to develop new high technology products from high-risk research and spin them off as separate new companies. Five successful companies owe their origin to this approach and, in part, to SBIR. The Quest president stated that the company would not exist with- out SBIR due to its lack of capital and the risk involved in financing high tech research. 4. RF Monolithics, Inc., Dallas, TX RF Monolithics, Inc. is a leading firm in the development and manufacture of advanced electronic components for the fast growing communications field. It attributes its success to its first SBIR research grant from NSF on "Theoretical Modeling of an Innovative Unidirectional Surface Acoustic Wave Transducer." The company had five employees when they spun off from Texas Instruments in 1979 and immediately prepared an NSF SBIR proposal. The single 1980 project allowed REM to pursue "six bright ideas," all related to their next generation SAW concept. All of the ideas were technically and commercially successful. They resulted in 12 product-lines and a few hundred advanced electronic prod- ucts. The company's president attributes 90 percent of their $141 million sales to

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138 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM date to results obtained from the theories tested under the original SBIR project, of which 50 percent of sales are exported. These include new generations of SAW devices, resonators, oscillators, receivers, filters, low-power modules, notch ele- ments and, most recently, computer clocks. RFM focuses on the telecommunica- tions, low-power wireless and high frequency timing markets. Major customers have included Digital Equipment, GM, Teledyne, United Technologies, Litton, Rockwell, Lucas, Siemens and Samsung. Sales have grown an average of 28 percent each year for the last six years. RFM attributes its survival and growth to the early SBIR awards that were willing to finance new concepts for emerging technology. The results helped them raise $16 million in three rounds of financ- ing from 19 venture capital firms followed by $10 million from a public offering in 1994. Much of the money was used to build two new highly automated manufacturing plants that use flexible manufacturing processes. These have sig- nificantly contributed to the company's growth and competitiveness. RFM has received 78 patents and has collaborations with the University of Maine, UT Dallas, Central Florida and Chiba in Japan. 5. Aquatic Systems, Inc., now a division of Kent SeaFarms, Inc., San Diego, CA Aquatic Systems Division of Kent SeaFarms is the producer of more than half of all striped bass (rockfish) sold commercially in the US as a result of the NSF SBIR research and the program' s incentive to commercialize the results. In 1982 SBIR provided the first R&D funding for two marine scientists who had spun off as a consulting firm in 1972 from San Diego State University. ASD's president said that the SBIR goal to commercialize research results stimulated them to convert their small consulting firm into a commercial fish-farming com- pany and to focus Aquatic Systems on a business growth strategy. The SBIR research involved the effect of water temperature and quality, and various feed- ing combinations, on fish growth rate. The initial NSF research project proved that they could produce 50 times the number of pounds of fish per acre as the average production of 3500 competitors using conventional fish farming meth- ods. Their success attracted another $6 million from Kent SeaFarms to signifi- cantly expand their tank farm facilities. Today, Aquatic Systems has 98 large storage tanks containing a few million fish located in the desert east of San Di- ego. It is now a large fish farming company and is exploring other US and foreign sites for the production of striped bass and other species of fish. Cumulative commercial fish sales are $33 million and employment is up from 7 to 70. SBIR research results and the credibility of NSF helped the company to obtain $2.6 million in limited partnership funds. Research collaborations include San Diego State, North Carolina State and Clemson universities, supplier firms, NOAA's Southwest Fisheries, and our National Marine and Canadian Marine Laborato- ries. The company is also conducting research on the use of their waste water for

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ANNEX B 139 agricultural and environmental advances as an outgrowth of the SBIR research. ASD has received an ATP award relating to water quality treatment as well. 6. Collaborative Research, Inc., now Genome Therapeutics, Inc., Bedford, MA Collaborative was a pioneer US firm in the genetics field thanks to NSF's first SBIR genetics grant in 1977 which the founder, former president and chair- man, said "changed the history of the company." The timing for a genetics com- pany was perfect with Genentec having been founded the same year. Collaborative's genetics award from NSF, the possibilities for the emerging ge- netics field and the commercialization objectives of SBIR research led to a large investment by Dow Chemical. This attracted other venture capital; a total of $36 million of equity funding was obtained by a company that had 33 employees at the time of the Phase I award. Collaborative was a pioneer in the genetics field. It cloned Interferon, bovine enzymes and renin and made a major contribution to the genetics field by being the first to complete and publish a genetic linkage map of the entire human genome in 1987 using $5 million of its own funds for the research. This risk paid off as the mapping became a powerful tool for drug de- velopment. It also helped Collaborative to obtain a $37 million grant from NIH, the largest private sector award for a human genome project. Collaborative Re- search was the first to identify the cystic fibrosis gene at chromosome 7 and has conducted more than 50 genetic probes. The drug development initiative attracted two major drug firms, Astra and Schering Plough, with long-term contracts total- ing $65 million. Pfizer is now the largest producer of renin in the world through its license of a Dow-assigned Collaborative patent. Non-genome Collaborative business was sold off gradually to other companies and in 1994 the company became Genome Therapeutics. Cumulative sales, directly and indirectly related to the NSF funded, first genome project, and later NIH, exceed $50 million. Job growth in Collaborative/Genome Therapeutics and in firms spun off from Col- laborative total 227. The company has collaborated with more than 50 medical scientists in many research institutions all over the world. These include much collaboration with Harvard and Massachusetts General Hospital and, in the cystic fibrosis project, the Universities of Michigan and Toronto. 7. Advanced Technology Materials, Inc., Danbury, CT The potential of the small high tech firm to quickly convert research into economic results was demonstrated by Advanced Technology Materials which was founded in 1986. It has grown rapidly to 170 employees as a result SBIR funded R&D and their focus on commercial markets. It has had two major inno- vation successes, one in micro electronics vapor deposition and the other in envi- ronmental control equipment which it attributes to NSF, DOD and EPA SBIR

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ANNEX B 157 PerSeptive Biosystems has 569 employees, more than 100 patents and research collaborations with Lilly, Boehringer-Mannheim, Myco and many small compa- nies. The founder of both Verax and Synosis said that NSF and NIH both turned down his SBIR proposals from Synosis on the extremely successful concept be- cause "the principal investigator was a mechanical engineer who obviously can- not improve chromatography." The founder of Verax said that "SBIR projects put Verax into the bio field, and therefore, PerSeptive Biosystems as well. He said "SBIR was the first outside money he had been able to obtain. It led directly to $2 million from Lilly which, in turn, led to $41 million more." 34. Optivision, Inc., Davis, CA NSF funded an SBIR project on Optivision's basic concept which involved New Architectures and Optical Interconnections for Vision Systems. From it Optivision invented one of the first optical switching techniques that is still im- portant in the field. It allowed them, with only about 100 employees founded in 1983, to beat out Rockwell, Unisys and three other firms for a Defense applica- tions contract for all optical switching which enables the use of a high bandwidth. More recently they were also successful with SPRINT and MCI. Improved com- pression from another NSF award in 1991 has allowed low-cost transmission and high resolution still-frame and video to be transmitted over the telephone. A 1993 grant from NSF on Control Methods for Wide-Area All-Optical Networks is a recent significant breakthrough for Optivision in its fast changing field. "SBIR allowed us to try high risk ideas and our founders used the SBIR proposal and funding to start the company as planned. The exciting research also allowed us to attract top people. We would not be here without SBIR." The company received its first NSF SBIR award in 1984, the year following its founding. It had 3 em- ployees at this time and now has 105. Major SBIR funding has also come from Defense and NASA. Sales total $14 million from five SBIR related product-lines with 40 percent exported, primarily to the UK, Germany, Italy and Japan. Principal customers are Kodak, IBM, Lockheed, Olicon, Silicon Graphics, Sun Microsystems, Microsoft, Phillips and Hewlett Packard. Optivision attributes the $6 million of industrial funding it has received to SBIR. It has received four patents and has had 10 research collaborations. These include Stanford, UC Davis, USC and two with Los Alamos. Optivision also is involved in a TRP with Hughes and others. 35. Brewer Science, Inc., Rolla, MO Brewer was the first to develop chemistry for thin anti-reflective coatings for microfabricating electronic circuits to enhance high speed processing and increas- ing memory density. It also believes that it is the only company in the world, except for Japan firms, that has developed color filters and coatings technology

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158 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM for the flat panel industry. It was also the first to use dye-color polymer film for color filters that withstand high temperature processing. All come from 3 sepa- rate NSF SBIR funded research projects as with additional support from DOD and NIH. Brewer says that it has increased US competitiveness in flat panel dis- plays and submicron electronic circuits with antireflectant coatings. Total sales exceed $30 million with 34 percent exported to Japan, Canada, Europe, Southeast Asia, Israel, Korea, Taiwan and South Africa. Customers include IBM, Motorola, National Semiconductor, NEC, Fujitsu, Matsushita, TI, HP, Sony, DEC, Siemens, Phillips, Plessey and GEC. The company has 120 patents and 34 collaborations which they attribute mostly to SBIR. These have been with the University of Wisconsin, SW Missouri State, Missouri-Rolla, Kent State, MIT, SEMATECH, Sandia, NRL, Rohm & Haas and 10 proprietary customers. Brewer "is proud that it is a significant producer of quality jobs in a semi-rural environment with SBIR' s help. It has helped us create and retain high quality technical people. NSF pro- vided the most fundamental research opportunities and the US Patent Office told us that one of our early patents was a 'hallmark' patent. It allows us to micromachine metal parts by removing the organic sacrificial layer without dam- aging the metal." The company has grown from 12 to 130 employees since its first NSF SBIR award in 1984. 36. Millitech Corporation, South Deerfield, MA Millitech carried out NSF SBIR research and developed two instruments that were the first to be able to measure ozone and chlorine monoxide between 20-70 kilometers from a ground-based radio telescope. The instruments and technology are important contributions to long-term environmental monitoring of the world for long term ozone depletion. The company is a spinoff from the Five College Radio Astronomy Laboratory, a laboratory supported by NSF basic research grants. Millitech has produced 5 instruments at approximately $500,000 each, which came from NSF and NASA SBIR research projects. Sales total $2.5 mil- lion with 20 percent exported. Sales have been principally to the International Chemical Manufacturers Association and NASA. SBIR helped Millitech become the world leader in this small, very specialized, but important, ozone monitoring of the upper atmosphere instrumentation field. At the time the instruments con- tract was the largest program in the company. Employment has increased from 27 at the time of the NSF award to 130 today. Research collaborations have been with the University of Massachusetts and NASA Langley. 37. Sawyer Research Products, Inc., Eastlake, OH Sawyer is a major US producer of high purity, electronic grade, quartz crys- tals. It is another example of how a single SBIR award made a major difference to a small high tech company. The resulting single crystal of cultured quartz repre

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ANNEX B 159 sents one-half of the company's total sales and another quarter of their sales have benefitted significantly from the same research. SBIR related sales now total $69 million, 80 percent of which are exported. In the early 1980's Sawyer found that it had real problems because the quality of its crystals was becoming less com- petitive due to technological advances. The NSF Electrical, Computer and Sys- tems Engineering Program was interested in the problem and funded their pro- posed research on The Role of Solid Phase Impurities in Dislocations and the Character of these Defects in Single Crystal Quartz. Phase I was promising and Phase II was supported for research on New Processes for the Growth of High Purity Electronic Grade Quartz Crystals. The research which the company could not otherwise afford resulted in an extremely high quality and competitive crystal for electronic needs. Proprietary customers include major electronics manufac- turers both in the US and abroad and one of the major NSF SBIR successful firms. Most of the exports are to Germany, France, the UK and Korea. Collabora- tion was with Penn State, Case Western, Arizona State and Central Florida and with the Army Research Laboratory. Employment which had been 200 in 1985 is now 220. The president stated "SBIR made a huge difference to Sawyer and we had very significant results. The research helped us understand how to produce a defect-free pure single crystal." 38. Sievers Research Corporation, Boulder, CO Sievers designed and developed a new type of gas chromatography detector that uses gold to catalyze the oxidation of hundreds of organic and inorganic compounds by nitrogen dioxide and synthesized oxidation products coupled with chemoluminescence measurements. The instrument has been very successful when used in chemistry, petrochemical research and in industrial process control. It also has major applications in the environmental field and has led to the devel- opment of other instruments. One, an NO2 detector measures sulfur in petro- chemicals, medical blood flow and breath analysis. Another is a new water puri- fier that has great promise in the water quality-testing field. The water purifier also will go into space on MIR this December. Cumulative sales are $28 million with 40 percent exported to 35 countries. Customers include Intel, Motorola, Texas Instruments, Exxon, Amoco, Chevron and 20 more of the Fortune 100. Employment increased from 6 at the time of the first SBIR award to 100 at the time of sale of the company to tonics, Inc. of Watertown, Massachusetts in May, 1996. There are 24 patents and three collaborations, the latter with the University of Colorado, Hewlett and with NASA for MIR. The NSF SBIR award was the first outside funding that Sievers' obtained and SBIR awards from NSF, DOE, NASA and EPA have financed their R&D ideas. Their SBIR success also helped them raise venture capital. With Sievers' acquisition by tonics, for approximately $20 million, it looks forward to significant future growth, particularly in the wa- ter quality field. The new water quality measurement instrument will go into

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160 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM space on the Space Shuttle to Mir this December. The president, who is a Russian immigrant, and the founder, a University of Colorado chemistry professor, in- tended Sievers to be an R&D firm when was established in 1983. It was SBIR that focused them on a product and then becoming a commercial company. 39. AstroPower, Inc., Newark, DE NSF and DOD SBIR research has led to superior thin layer, silicon and gal- lium-arsenide technology with optical and speed advantages in photovoltaic de- vices. It has made AstroPower the third largest US manufacturer and seventh largest in the world of photovoltaic devices with product sales totaling $19 mil- lion, 80 percent of which have been exported. NSF research projects were for Nucleation and Lateral Overgrowth of GaAs on Silicon for Optical Communica- tions in 1986, for Integrated GaAs Emitter Element for Optical Interconnections in 1987, and for New Materials for Microelectronic and Optical Integrated Cir- cuits in 1988. AstroPower products include the photovoltaic detectors, high per- formance UV and IR detectors, solar cells, IR energy conversion devices, light emitting diodes and specialty products for the Defense. Clients are original equip- ment manufacturers (OEM) world-wide, Niagara Mohawk Power and General Public Utility (NJ). Foreign customers have been in Germany, India, Spain, Aus- tralia and Mexico. SBIR has resulted in the company attracting additional private funding, venture capital and industrial investment totaling $6 million. At the time of the earl NSF awards AstroPower was a 30 employee division of AstroSystems, Inc. Today it has 130 employees. NSF research has resulted in or contributed to 31 patents. Collaborations have been with the University of Delaware, Georgia Tech, Sandia, DOE's National Renewable Materials Lab, Dow Chemical and Niagara Mohawk. The president said that "NSF and DOD support is responsible for the company's existence. This technology became the basis for our growth and our moves into other areas." 40. Key Curriculum Press, Inc., Berkeley, CA NSF also supports research in science and engineering education. Key Cur- riculum has introduced a revolutionary approach to teaching geometry into 10,000 schools in 8 languages. It has conducted seven to ten day courses for approxi- mately 8,000 teachers who have taught "Geometry Sketchpad"; these teachers reach over one million students in grade schools alone. The innovative technique involves teaching geometry on the computer with the computers unique capabili- ties to show relationships. Now 2,000 teachers a year are taking the courses. A second program is teaching probability and statistics in a visionary manner via "Dataspace" at the high school and college level in the US and world-wide. Dataspace also teaches students, teachers and the public how to access and use available, relevant government and other information on-line. A third program

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ANNEX B 161 has replaced laboratory equipment in teaching optometry and Key Curriculum is exploring it as a model for teaching other science courses in the future. The com- pany is extremely talented and very successful. The sales mostly relate to a 1990 NSF SBIR project completed in 1993 and they are already at $5 million. Sales are made through distributors in the US, Europe, Japan, Russia, Australia, China, Egypt and Saudi Arabia. Employment has increased from 12 to 60 during this period. Research collaborations have been with UC Berkeley, Carnegie-Mellon, Wright State, IBM, TI and a large German publisher. Key Curriculum says it attributes its success to NSF's willingness to fund advanced, cutting-edge, and innovative, teaching ideas. NSF's reputation and prestige has also helped im- mensely in creating alliances and partnering with major players in the education field. 41. Martek Corporation, Columbia, MD Martek is a biotech firm principally involved in algae. A research break- through discovered has made it possible for a critical ingredient needed by ba- bies, normally found in mothers milk, to be produced from algae. Martek says that nutritional organizations in Europe, including the World Health Organiza- tion, have recommended that the ingredient, referred to chemically as DHA, be added to infant formulas to offset nutrient deficiency in preterm babies and ba- bies that are not breast fed. Currently Martek licenses 6 companies to use of DHA. They represent 40 percent of the world's infant formula sales. NSF SBIR was the first to provide Martek with research funds for a project on Biological Production of Novel Deuterated Lubricants in 1986. The results have been of fundamental importance to all Martek products. The NIH SBIR program has also made significant contributions to Martek's technical success. Martek's product sales to date are $10 million but this does not include the licensed sales which are just getting started in The Netherlands and Belgium. They will expand into most of Europe in 1996 and to the US in 1997. US clients include Mead Johnson, Wyeth and Nutritia. Other products include drug design reagents and aquiculture feed. The product appears to be very promising and Martek has been able to raise $77 million from venture capital and public offerings. The company has 117 patents and collaborations with 15 institutions which include Auburn, Arizona State, Washington, Maryland, Columbia, VPI, the Carnegie Institution and with one industrial firm, ISE. Martek, formerly Martin-Marietta's BioScience Depart- ment, spun off in 1985 and received its key NSF SBIR success award in 1986. According to Martek of finials, "SBIR was the company's major support for R&D up until 1993. The NSF SBIR allowed us to convert an idea into technical results which were the key to raising $8 million in venture capital, $53 million from public offerings and $16 million from other sources. NSF was our earliest re- search support and it was fundamental to Martek's broad base in deuterated lubri- cants from algae and its raising of this investment."

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162 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM 42. Ecogen, Inc., Langhorne, PA Ecogen accomplished a significant breakthrough in the environmental field with its discovery of the first rapid way to identify, clone and transfer genes for the development of a new bioinsecticide. Ecogen was successful and this has led to tripling the use of environmentally safe insecticide products. The breakthrough represents important progress and a promising possible answer to one of our major environmental problems, that of overuse of highly toxic, chemical insecticides. The breakthrough came from an NSF SBIR funded Ecogen proposal in 1986 on a Novel Cloning and Transfer Systems for Bacillus thuringiensis (BT) Insecticidal Genes. The aim was to identify the toxin gene, find a host bacteria, clone them and develop novel biological insecticides and maximum yields for potential com- mercial use. They did, discovered the innovative cloning methodology approach, and the results have had a significant impact on the bioinsecticide field. Sales of the NSF related product total $40 million, plus another $20 million of related non-government R&D. The results also have generated two, small joint ventures but they are too new for sales. One is with Monsanto and the other with Rousell Ucles (France). The project also helped Ecogen to obtain $39 million of outside investment including $9 million in venture capital and $27 million from a public offering. Employment has increased from 41 at the time of the first award to about 100 today. Ecogen also has 27 related patents and one research collabora- tion with Seregen (Monsanto). The company vice-president for R&D said, "The NSF project was very important. Ecogen wouldn't be here today without it. SBIR research results are the basis of the company's business". 43. CyberOptics, Inc., Golden Valley, MN NSF funded an SBIR project with CyberOptics in 1987 on Non-Contact Pen- cil Probe for Advanced Manufacturing Inspection to help meet the need for more rapid and accurate inspection techniques. The research aimed at the ultimate de- velopment of a high accuracy, miniature pencil probe capable of inspecting manu- factured parts with complex geometries. Although the project was not entirely successful commercially, the research was ahead of others in the market, on tar- get and fundamentally important to the company's rapid growth in the sensor field. CyberOptics is now the innovation and technology leader in this electronics niche. Cumulative sales are $70 million with a 100 percent growth last year. Some 67 percent of sales are exported about equally to Europe and Japan. Its laser-based, high precision sensors products are mostly sold OEM to major elec- tronics firms, such as Phillips, as well as to NASA. It also has a CyberScan Sta- tion which is to the same market. The company had a small initial public offering in 1988 and a $37 million one last year. Employment has increased from 12 at the time of the NSF award to 200 today. The company has 57 patents and has had 12 research collaborations with the University of Minnesota where the president was

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ANNEX B 163 formerly a professor, IBM, Motorola, TI, Phillips, Siemens, Fuji, Yamaha, Panasonic, Samsung, Aman and a German research institute. The CyberOptics president said that "The NSF award was important in 1987 because the company had little money from its founding in 1984 and was faced with the stock market collapse at that time. SBIR was right on target for CyberOptic's focus and the NSF credibility helped with the stock offering in March of 1988." 44. Displaytech, Inc., Boulder, CO Displaytech is a leading firm in developing color miniature liquid crystal displays based upon ferroelectric liquid crystal (FLC) technology that has signifi- cant potential in many emerging communications areas. The company has pro- duced realistic full color pictures at video-rate speeds that are high resolution, lightweight and low in power consumption as well as ChronoColor miniature displays for optical document readers, personal viewers, front and rear projec- tions and optical correlations for fingerprint reading. Sales of components exceed $2 million and the NSF results were a key to the company receiving an Advanced Technology Program (ATP) award. NSF SBIR projects have been important to Displaytech's achievements. NSF made its first and basic grant for Synthesis and Evaluation of New Ferroelectric Liquid Crystals in 1987 plus other research projects relating to high speed applications, ultrahigh polarization of FLC's, FLC's for infrared modulators and for the linear electroptic effect of sinectic analog materials. Displaytech has attracted $3 million in venture capital and em- ployment has increased from 6 at the time of their first SBIR award to 42. The company has 10 related patents and research collaborations with the University of Colorado and MIT. It has also had SBIR funding from Defense and NASA. 45. Communication Intelligence Corporation, Redwood Shores, CA CIC is already a world leader in the revolutionary development of pen com- puting products, such as handwriting recognition for signature verification, com- puter entry products, the editing of computer text and related software, in part as a result of NSF SBIR research. This includes CIC leadership in understanding human behavior characteristics in using the pen to instruct the computer. NSF SBIR projects with CIC since 1988 include: (1) On-Line Cursive Handwriting Recognition, (2) OCR Handwriting Recognition with Application to Man-Ma- chine Interaction, and (3) Personal Authentication for Database and Network Se- curity. Pen computing is a rapidly emerging new technology that may have many potential applications. For example, handwritten editing of computer generated text and graphics and data security are rapidly growing new markets. CIC says that it wants to bring multi-lingual "pen computing" to the world. NSF's SBIR program has contributed to CIC's surprising start. Fifty percent of all major computer manufacturers in the world, and 80 percent of Japan' s, already use CIC

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164 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM handwriting recognition products and software. Major customers include IBM, Apple, NCR, Lotus, Epson, Fujitsu, Samsung and ACER. Chase Manhattan and GNMA are recent converts. The president of CIC said that "The SBIR awards came at a critical time for CIC in terms of the market opening and the company's need for financing after going through its own $1 million. We had not been able to attract other funding for this very high risk idea. The projects were of major importance to their technical success and the results are used on all of the company's products to date. NSF credibility also helped CIC raise additional money and obtain partners and collaborations. CIC now licenses its software to 30 computer manufacturers." Total CIC licensee sales of the software and hard- ware directly related to the pen/computer interface (only) are more than $1.5 billion world-wide. CIC's directly related private investment is $51 million to date. Employment has increased from 12 to 51. (CIC operates like a virtual corporation and farms out all but the critical R&D.) The company has 37 patents and nine collaborations. The latter include UC Berkeley, Stanford, Waterloo (Canada), NCR, Apple, IBM, Samsung and ACER. CIC also has been the recipi- ent of a NIST ATP project in this field. 46. Aerometrics, Inc., Sunnyvale, CA Aerometrics is the developer and manufacturer of the world's leading Phase Doppler Analyzer. SBIR awards from NASA, NSF and DOD have contributed to the company's strength in the marketplace. SBIR has allowed Aerometrics to pursue major advances to increase its performance which otherwise would not have been possible because of the cost and risk involved. NSF funded projects for diagnosing swirl combustion processes, diagnosing the effects of turbulence struc- ture on cavitation of turbomachinery, and using laser diagnostics for interacting droplet combustion in low-grade fuels. Our results have made a major contribu- tion to each of these areas. Aerometrics products are used world-wide for weather, pollution formation in the environment, combustion measurement, engine effi- ciency, etc. For example, gas turbine efficiency has improved performance and pollution reduction. 90 percent of automotive companies use their equipment world-wide for fuel injection measurement and 80 percent of national energy production is via fuel spray. According to company officials, "75 percent of the company's current sales are due to improvements that would not have been pos- sible without SBIR. SBIR funds ideas. Sales total $45 million, half are due to SBIR but only $7 million directly to NSF." Major customers are the automotive, aerospace and fuel spray nozzle manufacturers, the power and energy industry, and universities and national laboratories for research. About 55 percent of sales are from overseas, principally Japan, Germany, Korea, France, Italy and the UK.

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ANNEX B 165 47. Altus Biologics, Inc., Cambridge, MA NSF made an award in 1992 to Vertex Pharmaceuticals, Inc. for Crosslinked Enzyme Crystals as Catalysts in Organic Synthesis. The objective was to deter- mine if crosslinked enzyme catalysts (CLEC) is a technology for stabilizing en- zymes so that they can work in extreme environments used in industrial chemical processing. An Eli Lilly team said the CLEC developed under the NSF SBIR project was one of the most significant breakthroughs in biocatalysts of the last 10 years. Vertex spun the project off in 1992 and formed Altus Biologics. By 1995 Altus had 3 products which were sold to over 100 companies in 15 coun- tries. In 1996 it has 7 products sold to 180 companies in 25 countries. Sales total $3 million with 60 percent exported, mostly to the UK, France and Germany. Major customers include Lilly, Hofmann LaRoche, Bayer, Ciba Geigy, ChiroScience, Eastman Chemical and Vertex itself, which used it to come up with a new anti-cancer drug. The project has generated $10 million in capital from Vertex. Altus has 5 patents and had 6 collaborations to date. These include Texas A&M, Pittsburgh, Glaxo-Welcome, Ciba-Geigy, 3M and the Army's En- gineering R&D Center at Aberdeen, MD. The president of Altus said, "NSF had faith in our concepts and provided funds for early stage development of the tech- nology when Altus only had 3 employees and no products or revenues. As a result of NSF's support, we were able to obtain funding and expand our efforts. We now have 15 employees and expect to approach $1 million in revenues this year." 48. Computer Motion, Inc., formerly Dynamic Microsystems, Goleta, CA Computer Motion states that, as of 1996, it had the only surgical robot in the world cleared by FDA for operating room use. The company was the first to develop a 6 axis robotic arm, and the first to combine the robot, computer and camera into a laparascopic camera for minimally invasive surgery. It is used prin- cipally for surgery on the gall bladder, appendectomies, tube tying, and en- dometriosis. Benefits of the approach include less risk, less pain, smaller scar, quicker recovery, less cost, less time in the hospital, and lower time burdens on doctors and staff. The actual quality of surgery is considered to be better because the doctor can see better with the laparoscope and the picture on the monitor. Computer Motion was formed in 1988 by the first graduate of the NSF Robot Center at UC Santa Barbara and it was the first successful spinoff from the Ro- botics Center and received an NSF SBIR award the next year. Sales of about 200 robots already exceed $4 million with 10 percent exported to Europe and Japan. The company has raised $11 million of venture capital, has 6 patents and 6 re- search collaborations. The latter are with Johns Hopkins, George Washington, Yale, Emory, St. Joseph and the Cleveland Clinic. The company now has 65 employees compared to 5 at the time of proposal. Computer Motion obtained 10 of the employees from the Robotics Center when it was terminated. The

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166 THE SMALL BUSINESS INNOVATION AND RESEARCH PROGRAM company's president says that "The NSF funding was critical early financing and it served as preventure capital. Without SBIR, it is highly unlikely that the com- pany would exist." SBIR funding has also been received from NIH and NASA. 49. NonVolatile Electronics, Inc., Eden Prairie, MN NonVolatile is the first company to make giant magneto resistance sensors, which are important to automotive markets for speed, position and current detec- tion relative to brakes, anti-lock brake systems, engine management (cam and crankshaft position), position sensing of machine tools. In industrial markets, the sensors are used for automatic utility meter readers. The firm received an NSF SBIR research award in its first year of operation on Highly Magnetoresistive Thin Film Multilayers and another from NASA proved to be basic to the company's new technology and its rapid acceptance in the marketplace. Sales total $5 million and customers include ITT (brakes), Phillips (engine manage- ment), Wabash (machine tool positioning) and Itron (automatic utility readers). This generated $3 million in venture capital from Norwest Venture Capital and Motorola. NonVolatile also has initiated 4 licenses, which are just starting, and the company has is a recently hired distributor in the UK. Employment has gone from one plus 3 part-time at the time of NSF's 1990 award to 53 at this time. The company has 16 patents and 12 research collaborations. The latter include the University of Minnesota, Iowa State, MIT, CMU, Alabama, Stanford, NIST, Lawrence Livermore, Southwest Research Institute, Honeywell, Seagate and Motorola. 50. Applied Science & Technology, Inc., Woburn, MA The company, which also is known as ASTeX, has had a major success from two NSF SBIR awards, one on Microwave Plasma Diamond Deposition at High Growth Rates and the other on Plasma and Ultraviolet Damage in Oxygen Photo- resist Stripping with a Downstream Microwave Plasma Source. The resulting product from two Phase I awards was so successful that sales exceeded $4 million after only two years on the market and should continue to grow. SBIR and ARPA provided much of ASTeX's core technology used in its production of diamond films using the chemical deposition process. Directly and indirectly $10 million of sales were attributed to the base technology from NSF and ARPA SBIR re- search. About 60 percent of sales are exported to Japan, Hong Kong, Korea, Taiwan, Germany, the UK and Russia. Major products are plasma deposition and diamond deposition systems. Major customers include Mitsubishi, Kobe Steel, GE and GEC (UK). The company says that SBIR success has also contributed to its obtaining $21 million of investment, $16 million from a public offering, $4.5 million from venture capital, and $500,000 from private investment. Employ

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ANNEX B 167 ment was 52 in 1991 at the time of the first award. It is 260 today, including 90 that came with the acquisition of another firm. ASTeX has 12 related patents and 7 collaborations. The collaborations include Boston University, NC State, Penn State, MIT, Oak Ridge, Sandia and Applied Materials.