##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
  Form 10-K
  ANNUAL REPORT
 PURSUANT TO SECTIONS 13 OR
    15(d)
 OF THE SECURITIES EXCHANGE ACT
    OF 1934
  (Mark One)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission File
    Number 0-21074
 SUPERCONDUCTOR TECHNOLOGIES
    INC.
 (Exact name of registrant as
    specified in its charter)
  Delaware

77-0158076(State or other jurisdiction
    of
    incorporation or organization)

(IRS Employer
    Identification No.)   460 Ward Drive, Santa Barbara, California
    93111-2310
 (Address of principal executive
    offices) (Zip Code)
  Registrants telephone number, including area code:
 (805) 690-4500
  Securities registered pursuant to Section 12(b) of the
    Act:
 None
  Securities registered pursuant to Section 12(g) of the
    Act:
 Common Stock, $0.001 par value per share
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
  o o þ
  Rule 12b-2 o þ
      DOCUMENTS INCORPORATED BY REFERENCE




---



##### 



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  FORM 10-K
    ANNUAL REPORT
    Year Ended December 31, 2006
  Unless otherwise noted, the terms we,
    us, and our, refer to the combined and
    ongoing business operations of Superconductor Technologies Inc.
    and its subsidiaries
  
  PageSPECIAL
    NOTE REGARDING FORWARD LOOKING STATEMENTS


1WHERE YOU CAN FIND
    MORE INFORMATION


1PART
    IItem 1.


Business


2Item 1A.


Risk
    Factors


8Item 1B.


Unresolved Staff
    Comments


17Item 2.


Properties


17Item 3.


Legal
    Proceedings


17Item 4.


Submission of
    Matters to a Vote of Security Holders


18PART
    IIItem 5.


Market for the
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


18Item 6.


Selected Financial
    Data


20Item 7


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


21Item 7A.


Quantitative and
    Qualitative Disclosures about Market Risk


33Item 8.


Financial
    Statements and Supplementary Data


33Item 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosures


33Item 9A


Controls and
    Procedures


34Item 9B


Other
    Information


34PART
    IIIItem 10.


Directors
    ,Executive Officers and Corporate Governance


34Item 11.


Executive
    Compensation


34Item 12.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


34Item 13.


Certain
    Relationships and Related Transactions, and Director
    Independence


35Item 14.


Principal
    Accountant Fees and Services


35PART
    IVItem 15.


Exhibits and
    Financial Statement Schedules


36EXHIBIT 10.11(c)EXHIBIT 10.18(c)EXHIBIT 10.20(b)EXHIBIT 10.27EXHIBIT 21EXHIBIT 23.1EXHIBIT 23.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2   i




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SPECIAL
    NOTE REGARDING FORWARD-LOOKING STATEMENTS  This Report contains forward-looking statements within the
    meaning of Section 27A of the Securities Act of 1933, as
    amended, and Section 21E of the Securities Exchange Act of
    1934, as amended. You can find many (but not all) of these
    statements by looking for words such as
    approximates, believes,
    expects, anticipates,
    estimates, intends, plans
    would, may or other similar expressions
    in this Report. We claim the protection of the safe harbor
    contained in the Private Securities Litigation Reform Act of
    1995. We caution investors that any forward-looking statements
    presented in this Report, or which we may make orally or in
    writing from time to time, are based on the beliefs of,
    assumptions made by, and information currently available to, us.
    Such statements are based on assumptions and the actual outcome
    will be affected by known and unknown risks, trends,
    uncertainties and factors that are beyond our control or ability
    to predict. Although we believe that our assumptions are
    reasonable, they are not guarantees of future performance and
    some will inevitably prove to be incorrect. As a result, our
    actual future results can be expected to differ from our
    expectations, and those differences may be material.
    Accordingly, investors should use caution in relying on past
    forward-looking statements, which are based on known results and
    trends at the time they are made, to anticipate future results
    or trends.
  Some of the risks and uncertainties that may cause our actual
    results, performance or achievements to differ materially from
    those expressed or implied by forward-looking statements include
    the following: limited assets and a history of losses; limited
    number of potential customers; limited number of suppliers for
    some of our components; no significant backlog from quarter to
    quarter; our market is characterized by rapidly advancing
    technology. For further discussion of these and other factors
    see Item 1A. Risk Factors of this Report.
  This Report and all subsequent written and oral
    forward-looking statements attributable to us or any person
    acting on our behalf are expressly qualified in their entirety
    by the cautionary statements contained or referred to in this
    section. We do not undertake any obligation to release publicly
    any revisions to our forward-looking statements to reflect
    events or circumstances after the date of this Report.
 WHERE
    YOU CAN FIND MORE INFORMATION  1-800-SEC-0330 Forms 8-K, 10-K, 10-Q,
 1




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PART I ITEM 1.  BUSINESS



Our
    Company



We develop, manufacture and market high performance
    infrastructure products for wireless voice and data
    applications. Wireless carriers face many challenges in
    todays competitive marketplace. Minutes of use are
    skyrocketing, and wireless users now expect the same quality of
    service from their mobile devices as from their landline phones.
    We help wireless carriers meet these challenges by doing
    more with less.



Our products help maximize the performance of wireless
    telecommunications networks by improving the quality of uplink
    signals from mobile wireless devices. Our products increase
    capacity utilization, lower dropped and blocked calls, extend
    coverage, and enable higher wireless data throughput 
    all while reducing capital and operating costs. SuperLink
    incorporates patented high-temperature superconductor (HTS)
    technology to create a receiver front-end that enhances network
    performance. Today, we are leveraging our expertise and
    proprietary technology in radio frequency (RF) engineering to
    expand our product line beyond HTS technology. We believe our RF
    engineering expertise provides us with a significant competitive
    advantage in the development of high performance, cost-effective
    solutions for the front end of wireless telecommunications
    networks.



We currently sell most of our commercial products directly to
    wireless network operators in the United States. Our customers
    to date include ALLTEL, Cingular, Sprint Nextel,
    T-Mobile,
    U.S. Cellular and Verizon Wireless. We have a concentrated
    customer base. Verizon Wireless, ALLTEL and
    T-Mobile
    each accounted for more than 10% of our commercial revenues in
    2006 and 2005. We plan to expand our customer base by selling
    directly to other wireless network operators and manufacturers
    of base station equipment, including internationally, but we
    cannot assure that this effort will be successful.



Industry Background.  The ability to provide
    high quality service to subscribers is becoming increasingly
    difficult for wireless operators as the number of users grows,
    minutes of use increase and the market for wireless data
    services expands. Wireless service providers in both rural and
    urban areas are encountering radio frequency interference due to
    greater subscriber density and a larger number of users on
    adjacent channels. This reduced signal quality and higher
    percentage of dropped calls can lead to lower system
    utilization, decreased revenue and, ultimately, higher rates of
    customer churn. Service providers are also facing network
    capacity constraints.



As a result, wireless carriers are seeking to cost-effectively
    reduce interference, increase capacity, expand coverage to
    improve the quality of their systems, and, where possible,
    utilize their spectrum in the most efficient manner possible.



Our Solution.  We leverage our expertise in RF
    technology to cost effectively deliver interference protection
    and increased sensitivity to our wireless carrier customers. Our
    solutions provide the following
    quality-of-service
    improvements: 
    reduction of dropped calls and network access failures;
    elimination of interference from other sources such as
    specialized mobile radio handsets and other base stations;
    increased in-building penetration;
    reduction in base station noise figure; and
    improves handset power consumption  Our Products.
  
    SuperLinkcombines HTS filters with a proprietary
    cryogenic cooler and an ultra low-noise amplifier to create a
    highly compact and reliable receiver front-end that can
    simultaneously deliver both high selectivity (interference
    rejection) and high sensitivity (detection of low level signals). 2




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
    AmpLinkis a ground-mounted unit which includes a
    high-performance amplifier that provides increased sensitivity.
    SuperPlexis a line of multiplexers that provides
    extremely low insertion loss and excellent cross-band isolation.  Our Strategy.
  
    diversifying our customer base,
    expanding our current product offerings,
    enhancing our productivity and lowering our costs,
    maintaining our focus on technical excellence and
    innovation, and
    pursuing strategic partnerships, alliances and acquisitions.  Government Contracts.
  Corporate Information. (805) 690-4500.
  Our
    Wireless Products
      
    SuperLink.  In order to receive uplink signals
    from wireless handsets, base stations require a filter system to
    eliminate
    out-of-band
    interference, and amplification to enhance the base
    stations sensitivity. To address this need, we offer the
    SuperLink product line for the receiver front-end of base
    stations. These products combine specialized filters using HTS
    technology with a proprietary cryogenic cooler and ultra
    low-noise amplifiers. The result is a highly compact and
    reliable receiver front-end that can simultaneously deliver both
    high selectivity (interference rejection) and high sensitivity
    (detection of low level signals). SuperLink products offer
    significant performance advantages over conventional filter and
    amplifier systems.
    AmpLink.  AmpLink is designed to address the
    sensitivity requirements of wireless base stations. AmpLink is a
    ground-mounted unit which utilizes a high-performance. The
    enhanced uplink performance provided by AmpLink improves network
    coverage immediately and avoids the installation and maintenance
    costs associated with tower mounted alternatives.
    SuperPlex.  SuperPlex is our line of
    multiplexers that provides extremely low insertion loss and
    excellent cross-band isolation. Products in our SuperPlex family
    of high-performance multiplexers are designed to facilitate base
    station antenna sharing and reduce infrastructure costs.
    SuperPlex can be used in conjunction 3




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with AmpLink and SuperLink products to optimize performance in
    networks where 1900 MHz EV-DO capabilities are added to
    existing 850 MHz networks. Relative to competing
    technologies, this portfolio of STI solutions offers increased
    transmit power delivered to the base station antenna, higher
    sensitivity to subscriber handset signals, interference
    rejection and fast and cost-effective network overlays.  Marketing
    and Sales
    T-Mobile
            Backlog
    How We
    Use Government Contracts to Fund Technology
    Development
  non-classified non-classified
 4




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Our
    Manufacturing Capabilities
    state-of-the-art state-of-the-art
          Intellectual
    Property
   5




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##### Table of Contents




    6 patents for technologies directed toward producing thin-film
    materials and structures expiring in 2010 to 2024;
    23 patents for cryogenic and non-microwave circuit designs
    expiring in 2010 to 2023;
    15 patents covering cryogenics, packaging and systems expiring
    in 2013 to 2024; and
    5 patents covering other superconducting technologies expiring
    in 2013 to 2015.               6




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Competition
     7




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Employees
    Environmental
    Issues
    ITEM 1A.
    RISK
    FACTORS    Risks
    Related to Our Business
  We
    have a history of losses and may never become
    profitable.
    We may
    need to raise additional capital, and if we are unable to raise
    capital our ability to implement our current business plan and
    ultimately our viability as a company could be adversely
    affected.
     8




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We
    rely on a small number of customers for the majority of our
    commercial revenues and the loss of any one of these customers,
    or a significant loss, reduction or rescheduling of orders from
    any of these customers, could have a material adverse effect on
    our business, results of operations and financial
    condition.
  T-Mobile T-Mobile
    
    a slowdown or delay in the deployment, upgrading or improvement
    of wireless networks by any one customer could significantly
    reduce demand for our products;
    reductions in a single customers forecasts and demand
    could result in excess inventories;
    each of our customers have significant purchasing leverage over
    us to require changes in sales terms including pricing, payment
    terms and product delivery schedules; and
    concentration of accounts receivable credit risk, which could
    have a material adverse effect on our liquidity and financial
    condition if one of our major customers declared bankruptcy or
    delayed payment of their receivables.    The
    wireless communication industry is highly concentrated, which
    limits the number of potential customers, and further industry
    consolidation could result in the loss of key
    customers.
   9




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We
    experience significant fluctuations in sales and operating
    results from quarter to quarter.
    
    the lack of any contractual obligation by our customers to
    purchase their forecasted demand for our products;
    variations in the timing, cancellation, or rescheduling of
    customer orders and shipments; and
    high fixed expenses that may disproportionately impact operating
    expenses, especially during a quarter with a sales shortfall.    work-in-progress
    Our
    sales cycles are unpredictable, making future performance
    uncertain.
    We
    depend on the capital spending patterns of wireless network
    operators, and if capital spending is decreased or delayed, our
    business may be harmed.
   10




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Our
    reliance on a limited number of suppliers and the long lead time
    of components for our products could impair our ability to
    manufacture and deliver our systems on a timely
    basis.
      Our
    reliance on a limited number of suppliers exposes us to quality
    control issues.
    We
    expect decreases in average selling prices, requiring us to
    reduce product costs in order to achieve and maintain
    profitability.
    Our
    ability to protect our patents and other proprietary rights is
    uncertain, exposing us to possible losses of competitive
    advantage.
   11




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We
    depend on specific patents and licenses to technologies, and we
    will likely need additional technologies in the future that we
    may not be able to obtain.
    Intellectual
    property infringement claims against us could materially harm
    results of operations.
        We
    currently rely on specific technologies and may not successfully
    adapt to the rapidly changing wireless telecommunications
    equipment market.
      Other
    parties may have the right to utilize technology important to
    our business.
   12




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Our
    failure to anticipate and respond to developments in the
    wireless telecommunications market could substantially harm our
    business.
    We may
    not be able to compete effectively against alternative
    technologies.
    We
    depend upon government contracts for a substantial amount of
    revenue, and our business may suffer if significant contracts
    are terminated, adversely modified, or we are unable to win new
    contracts.
      
    termination by the government;
    reduction or modification in the event of changes in the
    governments requirements or budgetary constraints;
    increased or unexpected costs causing losses or reduced profits
    under contracts where prices are fixed or unallowable costs
    under contracts where the government reimburses for costs and
    pays an additional premium;
    risks of potential disclosure of confidential information to
    third parties;
    the failure or inability of the main contractor to perform its
    contract in circumstances where STI is a subcontractor;
    the failure of the government to exercise options for additional
    work provided for in the contracts; and
    the governments right in certain circumstances to freely
    use technology developed under these contracts.     13




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Because
    competition for target employees is intense, we may be subject
    to claims of unfair hiring practices, trade secret
    misappropriation or other related claims.
    If we
    are unable to forecast our inventory needs accurately, we may be
    unable to obtain sufficient manufacturing capacity or may incur
    unnecessary costs and produce excess inventory.
    Our
    success depends on the attraction and retention of senior
    management and technical personnel with relevant
    expertise.
      Regulatory
    changes negatively affecting wireless communications companies
    could substantially harm our business.
    We may
    acquire or make investments in companies or technologies that
    could cause loss of value to stockholders and disruption of
    business.
   14




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
    failure to integrate operations, services and personnel;
    the price paid may exceed the value eventually realized;
    loss of share value to existing stockholders as a result of
    issuing equity securities to finance an acquisition;
    potential loss of key employees from either our then current
    business or any acquired business;
    entering into markets in which we have little or no prior
    experience;
    diversion of financial resources and managements attention
    from other business concerns;
    assumption of unanticipated liabilities related to the acquired
    assets; and
    the business or technologies acquired or invested in may have
    limited operating histories and may be subjected to many of the
    same risks to which we are exposed.    If we
    are unable to implement appropriate controls and procedures to
    manage our expected growth, we may not be able to successfully
    offer our products and implement our business
    plan.
    Compliance
    with environmental regulations could be especially costly due to
    the hazardous materials used in the manufacturing
    process.
    The
    reliability of market data included in our public filings is
    uncertain.
   15




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Our
    international operations expose us to certain
    risks.
    
    changes in exchange rates;
    international political and economic conditions;
    changes in government regulation in various countries;
    trade barriers;
    adverse tax consequences; and
    costs associated with expansion into new territories.  Risks
    Related to Our Common Stock
  Our
    stock price is volatile.
    
    our perceived prospects;
    variations in our operating results and whether we have achieved
    key business targets;
    changes in, or our failure to meet, earnings estimates;
    changes in securities analysts buy/sell recommendations;
    differences between our reported results and those expected by
    investors and securities analysts;
    announcements of new contracts by us or our competitors;
    market reaction to any acquisitions, joint ventures or strategic
    investments announced by us or our competitors; and
    general economic, political or stock market conditions.    We
    have a significant number of outstanding warrants and options,
    and future sales of these shares could adversely affect the
    market price of our common stock.
    Our
    corporate governance structure may prevent our acquisition by
    another company at a premium over the public trading price of
    STI shares.
   16




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##### Table of Contents



We do
    not anticipate declaring any cash dividends on our common
    stock.
    ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS    ITEM 2.
    PROPERTIES  year-to-year
  ITEM 3.
    LEGAL
    PROCEEDINGS  Settlement
    of Shalvoy Litigation
       17




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##### Table of Contents



Routine
    Litigation
    ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS   PART II  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES  Market
    for Common Stock
    High


Low2005Quarter ended April 2, 2005

$
14.30


$
6.50Quarter ended July 2, 2005

$
8.70


$
3.73Quarter ended October 1, 2005

$
11.10


$
5.80Quarter ended December 31,
    2005

$
7.40


$
4.102006Quarter ended April 1, 2006

$
6.70


$
3.21Quarter ended July 1, 2006

$
4.54


$
1.90Quarter ended September 30,
    2006

$
2.10


$
1.30Quarter ended December 31,
    2006

$
3.24


$
1.43   Holders
    of Record
    Dividends
    Sales of
    Unregistered Securities
    Repurchases
    of Equity Securities
   18




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##### Table of Contents



Securities
    Authorized for Issuance Under Equity Compensation
    Plans
  Number of SecuritiesWeighted-average


Remaining Available forNumber of Securities to


Exercise Price of


Future Issuance Under Equitybe Issued Upon Exercise


Outstanding


Compensation Plansof Outstanding Options,


Options, Warrants


(Excluding Securities Reflected inPlan Category

Warrants and Rights


and Rights


Column (a))Equity compensation plans approved
    by security holders


1,154,941


$
38.33



44,413Equity compensation plans not
    approved by security holders










Total


1,154,941


$
38.33



44,413   Stock
    Performance Graph
    
  31-Dec-01


31-Dec-02


31-Dec-03


31-Dec-04


31-Dec-05


31-Dec-06Superconductor Technologies


$
100.00



$
14.46



$
85.54



$
21.38



$
6.62



$
2.72Nasdaq Composite



100.00




68.47




102.72




111.54




113.07




123.84Nasdaq-Telecommunications



100.00




45.97




77.58




83.78




77.74




99.32  19




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##### Table of Contents



ITEM 6.
    SELECTED
    FINANCIAL DATA    Year Ended December 31,2002


2003


2004


2005


2006(In thousands, except per share data)Statement of Operations
    Data:Net revenues:Net commercial product revenues

$
17,601


$
38,577


$
16,787


$
21,080


$
17,697Government contract revenues


4,785



10,759



6,189



3,107



3,361Sub license royalties


10



58



28



22



20Total net revenues


22,396



49,394



23,004



24,209



21,078Costs and expenses:Cost of commercial product revenues


19,286



28,249



23,421



18,989



15,922Contract research and development


2,531



6,899



4,465



2,806



2,407Other research and development


4,489



4,697



5,036



4,214



3,488Selling, general and administrative


14,976



20,567



16,051



11,442



9,086Restructuring expenses and
    impairment charges










4,128



1,197



38Write off of Goodwill


















20,107Write off of in-process research
    and development


700















Total costs and expenses


41,982



60,412



53,101



38,648



51,048Loss from operations


(19,586
)


(11,018
)


(30,097
)


(14,439
)


(29,970
)Other income (expense), net


73



(327
)


(1,120
)


226



346Net loss


(19,513
)


(11,345
)


(31,217
)


(14,213
)


(29,624
)Less deemed and cumulative
    preferred stock Dividends


(1,756
)














Net loss available to common
    stockholders

$
(21,269
)

$
(11,345
)

$
(31,217
)

$
(14,213
)

$
(29,624
)Basic and diluted net loss per
    share:Net loss per common share

$
(8.85
)

$
(1.81
)

$
(3.71
)

$
(1.24
)

$
(2.37
)Weighted average number of shares
    Outstanding


2,402



6,269



8,424



11,419



12,483   December 31,2002


2003


2004


2005


2006Balance Sheet Data:Cash and cash equivalents

$
18,191


$
11,144


$
12,802


$
13,018


$
5,487Working capital


16,503



15,576



16,146



17,218



9,958Total assets


65,326



68,123



62,358



52,045



21,904Long-term debt, including current
    portion


2,123



721



76



33



14Total stockholders equity


49,524



52,220



49,249



47,257



17,951  20




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ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  This Managements Discussion and Analysis of Financial
    Condition and Results of Operations includes many
    forward-looking statements. For cautions about relying on such
    forward looking statements, please refer to the section entitled
    Forward Looking Statements at the beginning of this
    Report immediately prior to Item 1.
  General
        
    SuperLink.  In order to receive uplink
    signals from wireless handsets, base stations require a wireless
    filter system to eliminate
    out-of-band
    interference. SuperLink combines HTS filters with a proprietary
    cryogenic cooler and an ultra low-noise amplifier. The result is
    a highly compact and reliable receiver front-end that can
    simultaneously deliver both high selectivity (interference
    rejection) and high sensitivity (detection of low level
    signals). SuperLink delivers significant performance advantages
    over conventional filter systems.
    AmpLink.  AmpLink is designed to address
    the sensitivity requirements of wireless base stations. AmpLink
    is a ground-mounted unit which utilizes a high-performance
    amplifier. The enhanced uplink performance provided by AmpLink
    improves network coverage immediately and avoids the
    installation and maintenance costs associated with tower mounted
    alternatives.
    SuperPlex.  SuperPlex is our line of
    multiplexers that provides extremely low insertion loss and
    excellent cross-band isolation. SuperPlex high-performance
    multiplexers are designed to eliminate the need for additional
    base station antennas and reduce infrastructure costs. Relative
    to competing technologies, these products offer increased
    transmit power delivered to the base station antenna, higher
    sensitivity to subscriber handset signals, and fast and
    cost-effective network overlays.  T-Mobile, T-Mobile
   21




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Recent
    Developments
  Settlement
    of Shalvoy Litigation
  Item 3  Legal Proceedings 
    Settlement of Shalvoy Litigation.
  Change of
    Independent Registered Public Accounting Firm
  Form 10-Q,
  Cingular
    Master Supplier Agreement
  MSA
  Critical
    Accounting Policies and Estimates
   22




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and/or
      percentage-of-completion
     23




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96-18.
   24




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For the Years Ended December 31,Net loss:

2004


2005(In thousands, except per share data)As reported

$
(31,217
)

$
(14,213
)Stock-based employee compensation
    included in net loss


48



Stock-based compensation expense
    determined under fair value method


(5,543
)


(6,459
)Pro forma


(36,712
)


(20,672
)Basic and Diluted Loss per
    Share:As reported

$
(3.71
)

$
(1.24
)Stock-based compensation expense
    determined under fair value method


(0.66
)


(0.57
)Pro forma

$
(4.37
)

$
(1.81
)   out-of-the-money out-of-the-money
      Backlog
    Results
    of Operations
  2006
    Compared to 2005
     25




---



##### Table of Contents



and/or
    For the Years Ended December 31,2005


2006(Dollars in thousands)Net commercial product sales

$
21,080



100.0
%

$
17,697



100.0
%Cost of commercial product sales


18,989



90.1
%


15,922



90
%Gross profit

$
2,091



9.9
%

$
1,775



10
%     Contractual
    Contingency
   26




---



##### Table of Contents



For the Year Ended December 31,Restructuring


Impairment





Restructuring


ImpairmentCharges for


Charges for


Total for


Charges for


Charges for


Total for2005


2005


2005


2006


2006


2006Severance costs

$
178,000


$



$
178,000


$



$



$
Fixed assets write offs


137,000







137,000







Facility consolidation costs


6,000







6,000







Employee relocation cost


16,000







16,000











Goodwill Write-off


















20,107,000



20,107,000Impairment charge for notes
    receivable from shareholder and board member






969,000











38,000



38,000Total

$
337,000


$
969,000


$
1,306,000







20,145,000



20,145,000Fixed Asset write off and
    severance costs included in cost of goods sold


(109,000
)






(109,000
)










Expense included in operating
    expenses

$
228,000


$
969,000


$
1,197,000


$



$
20,145,000


$
20,145,000           2005
    Compared to 2004
     27




---



##### Table of Contents



For the Years Ended December 31,2004


2005(Dollars in thousands)Net commercial product sales

$
16,787



100.0
%

$
21,080



100.0
%Cost of commercial product sales


23,421



139.5
%


18,989



90.1
%Gross profit

$
(6,634
)


(39.5
)%

$
2,091



9.9
%     Contractual Contingency
     28




---



##### Table of Contents



Item 3  Legal Proceedings 
    Settlement of Shalvoy Litigation.
  For the Year Ended December 31,Restructuring


Impairment





Restructuring


ImpairmentCharges for


Charges for


Total for


Charges for


Charges for


Total for2004


2004


2004


2005


2005


2005Severance costs

$
826,000


$



$
826,000


$
178,000


$



$
178,000Fixed assets write offs


803,000



403,000



1,206,000



137,000







137,000Patents, licenses and purchased
    technology write-off


1,051,000



1,171,000



2,222,000











Lease abandonment costs


279,000







279,000











Facility consolidation costs


268,000







268,000



6,000







6,000Employee relocation cost


382,000







382,000



16,000







16,000Impairment charge for notes
    receivable from shareholder and board member


















969,000



969,000Total

$
3,609,000


$
1,574,000


$
5,183,000



337,000



969,000



1,306,000Fixed Asset write off and
    severance costs included in cost of goods sold


669,000



386,000



1,055,000



109,000







109,000Expense included in operating
    expenses

$
2,940,000


$
1,188,000


$
4,128,000


$
228,000


$
969,000


$
1,197,000           Liquidity
    and Capital Resources
  Cash
    Flow Analysis
     29




---



##### Table of Contents



Financing
    Activities
      5-year
  Contractual
    Obligations and Commercial Commitments
    
    Capital Lease Obligations    
    Operating Lease Obligations 30




---



##### Table of Contents




    Patents and Licenses    
    Purchase Commitments    
    Quantitative Summary of Contractual Obligations and
    Commercial Commitments    Payments Due by PeriodContractual Obligations

Total


Less Than 1 Year


2-3 Years


4-5 Years


After 5 YearsCapital lease obligations

$
15,000


$
15,000


$



$



$
Operating leases


6,665,000



1,303,000



2,653,000



2,709,000



Minimum license commitment


1,950,000



150,000



300,000



300,000



1,200,000Fixed asset and inventory purchase
    commitments


1,414,000



1,414,000











Total contractual cash obligations

$
10,044,000


$
2,882,000


$
2,953,000


$
3,009,000


$
1,200,000   Capital
    Expenditures
    Future
    Liquidity
         31




---



##### Table of Contents



2002-2005.
  Net
    Operating Loss Carryforward
        Future
    Accounting Requirements
  contract-by-contract
     32




---



##### Table of Contents



06-03,
  Market
    Risk
      Inflation
    ITEM 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Managements Discussion and Analysis of
    Financial Condition and Results of Operations  Market
    Risk.
  ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA    ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
    ANDFINANCIAL DISCLOSURE  Form 10-Q,
 33




---



##### Table of Contents



ITEM 9A.
    CONTROLS
    AND PROCEDURES  Evaluation
    of Disclosure Controls and Procedures
      Changes
    in Internal Control over Financial Reporting
      ITEM 9B.
    OTHER
    INFORMATION  Form 8-K
 PART III  ITEM 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE  Directors and Executive Officers
  93111-2310,
  ITEM 11.
    EXECUTIVE
    COMPENSATION  Executive Compensation
  ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS  Security Ownership of
    Certain Beneficial Owners and Management
 34




---



##### Table of Contents



ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE  Transactions With Related
    Persons Corporate Governance 
    Director Independence
  ITEM 14.
    PRINCIPAL
    ACCOUNTING FEES AND DISCLOSURES  Fees Paid to Independent Auditors
 35




---



##### 



PART IV ITEM 15.  EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES    Index to Financial
    Statements.
  PageReports of Independent Registered
    Public Accounting Firms


F-1Consolidated Balance Sheet as of
    December 31, 2005 and 2006


F-3Consolidated Statement of
    Operations for the years ended December 31, 2004, 2005 and
    2006


F-4Consolidated Statement of
    Stockholders Equity for the years ended December 31,
    2004, 2005 and 2006


F-5Consolidated Statement of Cash
    Flows for the years ended December 31, 2004, 2005 and 2006


F-6Notes to Consolidated Financial
    Statements


F-7   Financial Statement Schedule Covered by the
    Foregoing Report of Independent Registered Public Accounting
    Firms.
  Schedule II 
    Valuation and Qualifying Accounts


F-29      Exhibits.
  Number

Description of Document3
.1

Amended and Restated Certificate
    of Incorporation of the Company(1)3
.2

Certificate of Amendment of
    Restated Certificate of Incorporation(2)3
.3

Certificate of Amendment of
    Restated Certificate of Incorporation(3)3
.4

Amended and Restated Bylaws of the
    Registrant(4)4
.1

Form of Common Stock Certificate(5)4
.2

Third Amended and Restated
    Stockholders Rights Agreement(6)4
.3

Warrant Issued to PNC Bank,
    National Association in connection with Credit Agreement(6)4
.4

Warrant Purchase Agreement dated
    December 1, 1999 with PNC Bank(7)4
.5

Warrant Purchase Agreement dated
    January 12, 2000 with PNC Bank(7)4
.6

Certificate of Designations,
    Preferences and Rights of Series E Convertible Stock(8)4
.7

Securities Purchase Agreement
    dated as of September 29, 2000 between the Company and RGC
    International Investors, LDC. (Exhibits and Schedules Omitted)(8)4
.8

Registration Rights Agreement
    dated as of September 29, 2000 between the Company and RGC
    International Investors, LDC.(8)4
.9

Initial Stock Purchase Warrant
    dated as of September 29, 2000 between the Company and RGC
    International Investors, LDC.(8)4
.10

Incentive Stock Purchase Warrant
    dated as of September 29, 2000 between the Company and RGC
    International Investors, LDC.(8)4
.11

Registration Rights Agreement,
    dated March 6, 2002(9)4
.12

Warrants to Purchase Shares of
    Common Stock, dated March 11, 2002(9)4
.13

Registration Rights Agreement
    dated October 10, 2002(10)4
.14

Warrants to Purchase Common Stock
    dated October 10, 2002(10)4
.15

Common Stock Purchase Agreement,
    dated March 8, 2002 between Conductus, Inc. and the
    investors signatory thereto(11) 36




---



##### Table of Contents



Number

Description of Document4
.16

Warrant to Purchase Common Stock,
    dated March 8, 2002 by Conductus, Inc. to certain
    investors(12)4
.17

Registration Rights Agreement,
    dated March 26, 2002, between Conductus, Inc. and certain
    investors(12)4
.18

Warrant to Purchase Common Stock,
    dated August 7, 2000, issued by Conductus to Dobson
    Communications Corporation(13)4
.19

Form of Series B Preferred
    Stock and Warrant Purchase Agreement dated September 11, 1998
    and September 22, 1998 between Conductus and Series B
    Investors(14)4
.20

Form of Warrant to Purchase Common
    Stock between Conductus and Series B investors, dated
    September 28, 1998, issued by Conductus in a private
    placement(14)4
.21

Form of Series C Preferred
    Stock and Warrant Purchase Agreement, dated December 10, 1999,
    between Conductus and Series C Investors(15)4
.22

Form of Warrant Purchase Common
    Stock between Conductus and Series C investors, dated
    December 10, 1999, issued by Conductus in a private
    placement(15)4
.23

Form of Warrant to Purchase Common
    Stock dated March 28, 2003, issued to Silicon Valley
    Bank(16)4
.24

Form of Warrant(17)4
.25

Form of Registration Rights
    Agreement(17)4
.26

Agility Capital Warrant dated May
    2004(18)4
.27

Silicon Valley Bank Warrant dated
    May 2004(18)4
.28

Form of Warrant dated August
    2005(19)10
.1

1992 Director Option Plan(20)10
.2

1992 Stock Option Plan(20)10
.3

Joint Venture Company (JDC)
    Agreement between the Registrant and Sunpower Incorporated dated
    April 2, 1992(20)10
.4

Government Contract issued to
    Registrant by the Defense Advanced Research Projects Agency
    through the Office of Naval Research dated September 4,
    1991(20)10
.5

License Agreement between the
    Registrant and E.I. DuPont de Nemours and Company dated December
    1992(20)10
.6

Amended and Restated 1988 Stock
    Option Plan, as amended, with form of stock option agreement(21)10
.7

1999 Stock Option Agreement(7)10
.8

1998 Stock Option Plan(22)10
.10(a)

Promissory Note between Charles E.
    Shalvoy and Conductus dated December 28, 2000(23)10
.10(b)

Security Agreement between Charles
    E. Shalvoy and Conductus dated December 28, 2000(23)10
.10(c)

Promissory Note Agreement
    between Charles E. Shalvoy and Conductus dated August 21,2001(23)10
.10(d)

Security Agreement between Charles
    E. Shalvoy and Conductus dated August 21, 2000(23)10
.11(a)

Form of Change of Control
    Agreement dated March 28, 2003(24)10
.11(b)

Form of Amendment to Change of
    Control Agreement dated as of May 24, 2005(30)10
.11(c)

Form of Amendment to Change of
    Control Agreement dated as of December 31, 2006*10
.12(b)

Accounts Receivable Purchase
    Agreement dated March 28, 2003 by and between Registrant
    and Silicon Valley Bank(24)10
.12(c)

Accounts Receivable Purchase
    Modification Agreement with Silicon Valley Bank dated
    March 17, 2004(25)10
.12(d)

Accounts Receivable Purchase
    Modification Agreement with Silicon Valley Bank dated
    March 29, 2005(26)10
.13

Unconditional Guaranty dated
    March 27, 2003 issued by Conductus, Inc. to Silicon Valley
    Bank(24) 37




---



##### Table of Contents



Number

Description of Document10
.13

Patent License Agreement between
    Telcordia Technologies, Inc. and Registrant dated July 13,
    2002(24)10
.14(b)

Securities Purchase Agreement
    dated June 23, 2003(27)10
.14(c)

Form of Investor Warrant(27)10
.15

Form of Registration Rights
    Agreement(27)10
.16

Patent License Agreement by and
    between Lucent Technologies and the Company**(28)10
.17

License Agreement with Charles
    Shalvoy dated November 4, 2004(31)10
.17

License Agreement with
    Sunpower**(31)10
.18(a)

Employment Agreement with Jeffrey
    Quiram(29)10
.18(b)

Option Agreement with Jeffrey
    Quiram(29)10
.18(c)

Amendment to Employment Agreement
    with Jeffrey Quiram dated as of December 31, 2006*10
.19(a)

2003 Equity Management Incentive
    Plan (as amended May 25, 2005)(4)10
.19(b)

Form of Option Agreement for 2003
    Equity Incentive Plan(29)10
.19(c)

Management Incentive Plan(31)10
.20(a)

Employment Agreement with Terry
    White(32)10
.20(b)

Amendment to Employment Agreement
    with Terry White dated as of December 31, 2006 *10
.22

Compensation Policy for
    Non-Employee Directors dated March 18, 2005(32)10
.22

Stipulation of Settlement to
    Class Action dated August 10, 2005(32)10
.23(b)

Placement Agency Agreement for
    August 2005(19)10
.23(b)

Form of Subscription Agreement for
    August 2005 offering(31)10
.24

Form of Director and Officer
    Indemnification Agreement(30)10
.25

Code of Business Conduct and
    Ethics(30)10
.26

Master Services Agreement dated as
    of September 8, 2006 with Cingular Wireless, LLC10
.27

Settlement Agreement and Mutual
    Release of All Claims with Charles Shalvoy and John Lockton*21


List of Subsidiaries*23
.1

Consent of Stonefield Josephson
    Inc, Independent Registered Public Accounting Firm23
.2

Consent of PricewaterhouseCoopers
    LLP, Independent Registered Public Accounting Firm31
.1

Statement of CEO Pursuant to 302
    of the Sarbanes-Oxley Act of 200231
.2

Statement of CFO Pursuant to 302
    of the Sarbanes-Oxley Act of 200232
.1

Statement of CEO Pursuant to 906
    of the Sarbanes-Oxley Act of 200232
.2

Statement of CFO Pursuant to 906
    of the Sarbanes-Oxley Act of 2002     (1)
    
    Incorporated by reference from the Registrants Quarterly
    Report on Form
    10-Q filed
    for the quarter ended April 3, 1999.(2)
    
    Incorporated by reference from the Registrants Quarterly
    Report on Form
    10-Q filed
    for the quarter ended June 30, 2001.(3)
    
    Incorporated by reference from Registrants
    Form 8-K
    dated March 13, 2006.(4)
    
    Incorporated by reference from Registrants
    Form 8-K
    dated May 25, 2005.(5)
    
    Incorporated by reference from the Registrants
    Registration Statement on
    Form S-1
    (Reg.
    No. 33-56714).(6)
    
    Incorporated by reference from the Registrants Quarterly
    Report on Form
    10-Q filed
    for the quarter ended July 3, 1999.(7)
    
    Incorporated by reference from the Registrants
    Registration Statement on
    Form S-8
    (Reg.
    No. 333-90293).(8)
    
    Incorporated by reference from the Registrants Annual
    Report on Form
    10-K for the
    year ended December 31, 1999. 38




---



##### Table of Contents



(9)
    
    Incorporated by reference from Registrants Annual Report
    on
    Form 10-K
    for the year ended December 31, 2001.(10)
    
    Incorporated by reference from the Registrants Current
    Report on Form
    8-K, filed
    October 2, 2002.(11)
    
    Incorporated by reference from the Registrants Annual
    Report on Form
    10-K filed
    for the year ended December 31, 1997.(12)
    
    Incorporated by reference from the Conductus, Inc.s
    Registration Statement on
    Form S-3
    (Reg.
    No. 333-85928)
    filed on April 9, 2002.(13)
    
    Incorporated by reference from Conductus, Inc.s Quarterly
    Report on Form
    10-Q, filed
    with the SEC on November 16, 1998.(14)
    
    Incorporated by reference from Conductus, Inc.s Annual
    Report on Form
    10-K for the
    year ended December 31, 1999.(15)
    
    Incorporated by reference from Conductus, Inc.s Annual
    Report on Form
    10-K for the
    year ended December 31, 1999.(16)
    
    Incorporate by reference from Registrants Quarterly Report
    on
    Form 10-Q
    for the quarter ended March 29, 2003.(17)
    
    Incorporated by reference from Registrants Current Report
    on
    Form 8-K
    filed June 25, 2003.(18)
    
    Incorporated by reference from Registrants Registration
    Statement of
    Form S-3
    (Reg.
    333-89184).(19)
    
    Incorporated by reference from Registrants
    Form 8-K
    dated August 10, 2005.(20)
    
    Incorporated by reference from Amendment No. 1 to the
    Registrants Registration Statement on
    Form S-1
    (Reg.
    No. 33-56714).(21)
    
    Incorporated by reference from the Registrants Annual
    Report on Form
    10-K filed
    for the year ended December 31, 1994.(22)
    
    Incorporated by reference from the Registrants
    Registration Statement on
    Form S-8
    (Reg.
    No. 333-56606)
    filed March 6, 2001.(23)
    
    Incorporated by reference from the Registrants
    Registration Statement on
    Form S-4
    (Reg.
    No. 333-100908).(24)
    
    Incorporate by reference from Registrants Quarterly Report
    on
    Form 10-Q
    for the quarter ended March 29, 2003.(25)
    
    Incorporated by reference from Registrants Quarterly
    Report on
    Form 10-Q
    for the quarter ended April 3, 2004.(26)
    
    Incorporated by reference from Registrants
    Form 8-K
    dated March 29, 2005.(27)
    
    Incorporated by reference from Registrants
    Form 8-K
    dated June 25, 2003.(28)
    
    Incorporated by reference from Registrants Annual Report
    on
    Form 10-K
    for the year ended December 31, 2003.(29)
    
    Incorporated by reference from Registrants Annual Report
    on
    Form 10-K
    for the year ended December 31, 2004.(30)
    
    Incorporated by reference from Registrants Annual Report
    on
    Form 10-K
    for the year ended December 31, 2005(31)
    
    Incorporated by reference from Registrants
    Form 8-K
    dated July 27, 2006.(32)
    
    Incorporated by reference from Registrants Quarterly
    Report on
    Form 10-Q
    for the quarter ended April 2, 2005.*
    
    Filed herewith.**
    
    Confidential treatment has been previously granted for certain
    portions of these exhibits.  Exhibits.
 39




---



##### Table of Contents



Reports
    of Independent Registered Public Accounting Firms               
    F-1




---



##### Table of Contents



F-2




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.



CONSOLIDATED
    BALANCE SHEET  December 31,


December 31,2005


2006ASSETSCurrent
    Assets:Cash and cash equivalents

$
13,018,000


$
5,487,000Accounts receivable, net


2,166,000



1,535,000Inventory, net


5,364,000



5,978,000Prepaid expenses and other current
    assets


723,000



507,000Total Current Assets


21,271,000



13,507,000Property and equipment, net of
    accumulated depreciation of $17,295,000 and $18,599,000,
    respectively


7,803,000



5,770,000Patents, licenses and purchased
    technology, net of accumulated amortization of $1,065,000 and
    $1,382,000, respectively


2,514,000



2,221,000Goodwill


20,107,000



Other assets


350,000



406,000Total Assets

$
52,045,000


$
21,904,000LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent
    Liabilities:Accounts payable

$
2,036,000


$
1,725,000Accrued expenses


1,998,000



1,610,000Current portion of capitalized
    lease obligations and long term debt


19,000



14,000Total Current
    Liabilities


4,053,000



3,549,000Capitalized lease obligations and
    long term-debt


14,000Other long term liabilities


721,000



604,000Total Liabilities


4,788,000



3,953,000Commitments and contingencies
    (Notes 9, 10 and 11)Stockholders
    Equity:Preferred stock, $.001 par
    value, 2,000,000 shares authorized, none issued and
    outstanding






Common stock, $.001 par
    value, 250,000,000 shares authorized, 12,483,431 and
    12,483,367 shares issued and outstanding, respectively


12,000



12,000Capital in excess of par value


208,545,000



208,825,000Notes receivable from stockholder
    and board member


(65,000
)


(27,000
)Accumulated deficit


(161,235,000
)


(190,859,000
)Total Stockholders
    Equity


47,257,000



17,951,000Total Liabilities and
    Stockholders Equity

$
52,045,000


$
21,904,000    F-3




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.



CONSOLIDATED
    STATEMENT OF OPERATIONS  For the Year Ended December 312004


2005


2006Net revenues:Net commercial product revenues

$
16,787,000


$
21,080,000


$
17,697,000Government and other contract
    revenues


6,189,000



3,107,000



3,361,000Sub license royalties


28,000



22,000



20,000Total net revenues


23,004,000



24,209,000



21,078,000Costs and expenses:Cost of commercial product revenues


23,421,000



18,989,000



15,922,000Contract research and development


4,465,000



2,806,000



2,407,000Other research and development


5,036,000



4,214,000



3,488,000Selling, general and administrative


16,051,000



11,442,000



9,086,000Restructuring expenses and
    impairment charges


4,128,000



1,197,000



38,000Write off Goodwill










20,107,000Total costs and
    expenses


53,101,000



38,648,000



51,048,000Loss from operations


(30,097,000
)


(14,439,000
)


(29,970,000
)Interest income


125,000



342,000



391,000Interest expense


(1,245,000
)


(116,000
)


(45,000
)Net loss

$
(31,217,000
)

$
(14,213,000
)

$
(29,624,000
)Basic and diluted net loss per
    common share

$
(3.71
)

$
(1.24
)

$
(2.37
)Basic and diluted weighted
    average number of common shares outstanding


8,424,145



11,418,504



12,483,367    F-4




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.



CONSOLIDATED
    STATEMENT OF STOCKHOLDERS EQUITY  Convertible Preferred








Capital in


ReceivableStock


Common Stock


Excess of


From


AccumulatedShares


Amount


Shares


Amount


Par Value


Stockholder


Deficit


TotalBalance at December 31,
    2003










6,890,711


$
7,000


$
168,838,000


$
(820,000
)

$
(115,805,000
)

$
52,220,000Exercise of stock options










8,975







250,000











250,000Issuance of common stock and
    warrants for cash










3,860,000



4,000



26,783,000











26,787,000Exercise of warrants










11,417







236,000











236,000Issuance of options and warrants


















973,000











973,000Net loss


























(31,217,000
)


(31,217,000
)Balance at December 31,
    2004










10,771,103



11,000



197,080,000



(820,000
)


(147,022,000
)


49,249,000Exercise of stock options Issuance
    of common stock










1,712,329



1,000



11,440,000











11,441,000Issuance of options and warrants


















25,000











25,000Reserve for impairment






















755,000







755,000Net loss


























(14,213,000
)


(14,213,000
)Balance at December 31,
    2005










12,483,431



12,000



208,545,000



(65,000
)


(161,235,000
)


47,257,000Issuance of common stock and
    warrants










(64
)Issuance of options


















280,000











280,000Reserve for impairment






















38,000







38,000Net loss


























(29,624,000
)


(29,624,000
)Balance at December 31,
    2006










12,483,367


$
12,000


$
208,825,000


$
(27,000
)

$
(190,859,000
)

$
17,951,000    F-5




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  CONSOLIDATED
    STATEMENT OF CASH FLOWS
  For the Year Ended December 312004


2005


2006CASH FLOWS FROM OPERATING
    ACTIVITIES:Net loss

$
(31,217,000
)

$
(14,213,000
)

$
(29,624,000
)Adjustments to reconcile net loss
    to net cash used for operating activities:Depreciation and amortization


3,463,000



3,225,000



2,600,000Non-cash restructuring and
    impairment charges


3,659,000







Warrants and options charges


973,000



25,000



280,000Provision for excess and obsolete
    inventories


4,836,000



984,000



360,000Forgiveness of note receivable
    from former CEO






150,000



Reserve for impairment of note and
    interest receivable from stockholder






924,000



38,000Write off Goodwill










20,107,000Gain on disposal of property and
    equipment






(138,000
)


Changes in assets and liabilities:Accounts receivable


7,375,000



(732,000
)


631,000Inventory


(5,361,000
)


2,979,000



(974,000
)Prepaid expenses and other current
    assets


(146,000
)


112,000



115,000Patents and licenses


(546,000
)


(154,000
)


(217,000
)Other assets


(46,000
)


(23,000
)


128,000Accounts payable and accrued
    expenses


(4,570,000
)


(2,543,000
)


(727,000
)Net cash used in operating
    activities


(21,580,000
)


(9,404,000
)


(7,283,000
)CASH FLOWS FROM INVESTING
    ACTIVITIES:Proceeds from the sale of property
    and equipment






216,000



Purchase of property and equipment


(1,812,000
)


(261,000
)


(229,000
)Net cash used in investing
    activities


(1,812,000
)


(45,000
)


(229,000
)CASH FLOW FROM FINANCING
    ACTIVITIES:Proceeds from short-term borrowings


5,567,000



662,000



Payments on short-term borrowings


(7,937,000
)


(1,600,000
)


Payments on long-term obligations


(645,000
)


(43,000
)


(19,000
)Gross proceeds from sale of common
    stock and exercise of warrants and options


29,829,000



12,500,000



Payment of common stock issuance
    costs


(1,764,000
)


(1,854,000
)


Net cash provided by (used in)
    financing activities


25,050,000



9,665,000



(19,000
)Net increase (decrease) in cash
    and cash equivalents


1,658,000



216,000



(7,531,000
)Cash and cash equivalents at
    beginning of year


11,144,000



12,802,000



13,018,000Cash and cash equivalents at end
    of year

$
12,802,000


$
13,018,000


$
5,487,000    F-6




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  Note 1 
    The Company
      Note 2 
    Summary of Significant Accounting Policies
  Basis
    of Presentation
          Principles
    of Consolidation
   F-7




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
   Cash
    and Cash Equivalents
    Accounts
    Receivable
    Revenue
    Recognition
    percentage-of-completion
    Shipping
    and Handling Fees and Costs
    Warranties
   F-8




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
   Guarantees
    Research
    and Development Costs
    Inventories
  first-in, and/or
  Property
    and Equipment
    Patents,
    Licenses and Purchased Technology
    Goodwill
   F-9




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
      Long-Lived
    Assets
    Restructuring
    Expenses
    Loss
    Contingencies
    Income
    Taxes
   F-10




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
    Marketing
    Costs
    Net
    Loss Per Share
    Stock-based
    Compensation
      96-18.
   F-11




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
    For the Years Ended December 31,2004


2005Net loss:As reported

$
(31,217,000
)

$
(14,213,000
)Stock-based employee compensation
    included in net loss


48,000



Stock-based compensation expense
    determined under fair value method


(5,543,000
)


(6,459,000
)Pro forma

$
(36,712,000
)

$
(20,672,000
)Basic and diluted loss per
    shareAs reported

$
(3.71
)

$
(1.24
)Stock-based compensation expense
    determined under fair value method


(0.66
)


(0.57
)Pro forma

$
(4.37
)

$
(1.81
)   Use of
    Estimates
    Fair
    Value of Financial Instruments
    Comprehensive
    Income
    Segment
    Information
   F-12




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
   Reverse
    Stock Split
  one-for-ten
  Certain
    Risks and Uncertainties
          Recent
    Accounting Pronouncements
  contract-by-contract
     F-13




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
     06-03,
  Note 3 
    Short Term Borrowings
           F-14




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
   Note 4 
    Retirement of Companys Chief Executive Officer
    Note 5 
    Notes Receivable From Stockholder
        Note 6 
    Income Taxes
      For the Year Ending December 312004


2005


2006Tax benefit computed at Federal
    statutory rate


34.0
%


34.0
%


34.0
%Increase (decrease) in taxes due
    to:Change in valuation allowance


(39.8
)


(39.8
)


(16.7
)State taxes, net of federal benefit


5.8



5.8



5.8Impairment of Goodwill (not
    deductible for tax)










(23.1
)
%



%



%  F-15




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
    For the Year Ended December 31,2005


2006Loss carryforwards

$
90,521,000


$
101,519,000Capitalized research and
    development


5,236,000



3,972,000Depreciation


2,306,000



2,430,000Tax credits


3,538,000



3,226,000Inventory


1,311,000



559,000Purchase accounting adjustments


138,000



93,000Acquired intellectual property


(383,000
)


(286,000
)Other


632,000



640,000Less: valuation allowance


(106,299,000
)


(112,153,000
)$



$
     ,
      Note 7 
    Stockholders Equity
  Preferred
    Stock
   F-16




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
    Common
    Stock
    5-year
      Stock
    Options
       F-17




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
      out-of-the-money out-of-the-money
      Year EndedDecember 31, 2006Per share fair value at grant date

$
2.55Risk free interest rate


4.82
%Expected volatility


95
%Dividend yield


0
%Expected life in years


4.0      F-18




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
     WeightedNumber of


Average ExerciseShares


PriceOutstanding at
    December 31, 2003


754,532



62.830Granted


312,616



35.520Canceled


(111,445
)


53.860Exercised


(8,978
)


27.800Outstanding at
    December 31, 2004


946,275



55.210Granted


453,206



8.020Canceled


(197,555
)


37.180Exercised






Outstanding at
    December 31, 2005


1,202,376


$
40.380Granted


80,900



3.702Canceled


(128,335
)


34.643Exercised






Outstanding at
    December 31, 2006


1,154,941


$
38.334     WeightedAverage





ExercisableRemaining


Weighted





WeightedRange of

Number


Contractual


Average


Number


AverageExercise Prices

Outstanding


Life


Exercise Price


Exercisable


Exercise Price$ 1.43 - $ 6.90


322,000



8.590


$
6.12



239,350


$
6.87$ 7.02 - $10.40


277,760



7.217


$
10.01



273,683


$
10.04$10.50 - $37.50


209,577



5.005


$
28.19



208,671


$
28.26$38.00 - $66.40


204,272



4.255


$
55.16



204,270


$
55.16$68.80 - $493.75


141,332



3.705


$
158.11



141,322


$
158.111,154,941



6.245


$
38.334



1,067,296


$
41.133       65-112%
 F-19




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
  ,
  Restricted
    Stock Awards
      Warrants
    Common SharesPriceCurrently


perTotal


Exercisable


Share


Expiration DateWarrants and options related to
    issuance of common stock


342,466



342,466


$
11.10


August 16, 201039,786



39,786



55.00


March 10, 2007140,658



140,658



11.90


December 17, 2007*116,279



116,279



29.00


June 24, 2008*Warrants related to April 2004
    Bridge Loans


69,549



69,549



13.30


April 28, 2011* **10,000



10,000



18.50


April 28, 2011*Warrants assumed in connection
    with the Conductus, Inc. acquisition


109,500



109,500



45.83


September 27, 2007600



600



312.50


September 1, 2007Total


828,838



828,838     *
    
    The terms of these warrants contain net exercise provisions,
    wherein instead of a cash exercise holders can elect to receive
    common stock equal to the difference between the exercise price
    and the average closing sale price for common shares over
    10-30 days
    immediately preceding the exercise date.**
    
    The terms of these warrants contain antidilution adjustment
    provisions.      Common Shares IssuedWarrants





In Accordance withWarrants


Price per





Net ExerciseExercised


Share


For Cash


ProvisionsWarrants related to bank borrowings


12,353


$
30 - 32.50







7,131Warrants related to issuance of
    common stock


4,286



55.00



4,286



Total


16,639







4,286



7,131  F-20




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
  Note 8 
    Employee Savings Plan
    Note 9 
    Commitments and Contingencies
  Operating
    Leases
      Capital
    Leases
    Patents
    and Licenses
      Year Ending December 31,

Licenses


Operating Leases


Capital Leases2007

$
150,000


$
1,303,000


$
15,0002008


150,000



1,304,000



2009


150,000



1,349,000



2010


150,000



1,396,000



2011


150,000



1,313,000



Thereafter


1,200,000



0



Total payments

$
1,950,000


$
6,665,000



15,000Less: amount representing interest










(1,000
)Present value of minimum lease










14,000Less current portion










(14,000
)Long term portion









$
  F-21




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
  Note 10 
    Contractual Guarantees and Indemnities
    Warranties
    Intellectual
    Property Indemnities
    Director
    and Officer Indemnities and Contractual Guarantees
      General
    Contractual Indemnities/Products Liability
   F-22




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
   Short
    Term Borrowings
    Contractual
    Contingency
    Note 11 
    Legal Proceedings
  Settlement
    of Shalvoy Litigation
        Routine
    Litigation
    Note 12 
    Earnings Per Share
   F-23




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
   Note 13 
    Restructuring Expenses and Impairment Charges
          For the Years Ended December 31,Restructuring


Impairment





Restructuring


Impairment





Restructuring


ImpairmentCharges for


Charges for


Total for


Charges for


Charges for


Total for


Charges for


Charges for


Total for2004


2004


2004


2005


2005


2005


2006


2006


2006Severance costs

$
826,000


$



$
826,000


$
178,000


$



$
178,000


$



$



$
Fixed assets write-offs


803,000



403,000



1,206,000



137,000







137,000











Patent, licenses and purchased
    technology write-off


1,051,000



1,171,000



2,222,000























Lease abandonment costs


279,000







279,000























Facility consolidation costs


268,000







268,000



6,000







6,000











Employee relocation costs


382,000







382,000



16,000







16,000











Goodwill write-off






























20,107,000



20,107,000Impairment charge for notes
    receivable from shareholder and board member


















969,000



969,000







38,000



38,000Total


3,609,000



1,574,000



5,183,000



337,000



969,000



1,306,000







20,145,000



20,145,000Fixed assets write-off and
    severance costs included in cost of goods sold


669,000



386,000



1,055,000



109,000







109,000











Expense included in operating
    expenses

$
2,940,000


$
1,188,000


$
4,128,000


$
228,000


$
969,000


$
1,197,000


$



$
20,145,000


$
20,145,000  F-24




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
  Note 14 
    Details
    of Certain Financial Statement Components and Supplemental
    Disclosures of Cash Flow Information and Non-Cash
    Activities  Balance Sheet Data
  December 31,


December 31,2005


2006Accounts receivable:Accounts receivable-trade

$
1,930,000


$
1,117,000U.S. government accounts
    receivable-billed


311,000



493,000Less: allowance for doubtful
    accounts


(75,000
)


(75,000
)$
2,166,000


$
1,535,000   December 31,


December 31,2005


2006Inventories:Raw materials

$
3,328,000


$
2,368,000Work-in-process


2,384,000



716,000Finished goods


2,861,000



4,261,000Less inventory reserves


(3,209,000
)


(1,367,000
)$
5,364,000


$
5,978,000   December 31,


December 31,2005


2006Property and
    Equipment:Equipment

$
18,000,000


$
17,187,000Leasehold improvements


6,647,000



6,732,000Furniture and fixtures


451,000



451,00025,098,000



24,370,000Less: accumulated depreciation and
    amortization


(17,295,000
)


(18,599,000
)$
7,803,000


$
5,771,000     F-25




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
  December 31,


December 31,2005


2006Patents and Licenses:Patents pending

$
435,000


$
632,000Patents issued


875,000



899,000Less accumulated amortization


(230,000
)


(286,000
)Net patents issued


645,000



613,000Licenses


563,000



563,000Less accumulated amortization


(66,000
)


(100,000
)Net licenses


497,000



463,000Purchased technology


1,706,000



1,706,000Less accumulated amortization


(769,000
)


(1,005,000
)Net purchased technology


937,000



701,000$
2,514,000


$
2,409,000     December 31,


December 31,2005


2006Accrued Expenses and Other Long
    Term Liabilities:Salaries payable

$
365,000


$
287,000Compensated absences


423,000



379,000Compensation related


253,000



299,000Warranty reserve


491,000



428,000Lease abandonment costs


225,000



8,000Product line exit costs


402,000



319,000Severance costs


32,000Deferred rent


378,000



390,000Other


150,000



104,0002,719,000



2,214,000Less current portion


(1,998,000
)


(1,610,000
)Long term portion

$
721,000


$
604,000   F-26




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
  For the Year Ended,December 31,


December 31,2005


2006Warranty Reserve
    Activity:Beginning balance

$
419,000


$
491,000Additions


204,000



140,000Deductions


(273,000
)


(203,000
)Change in estimate relating to
    previous warranty accruals


141,000



Ending balance

$
491,000


$
428,000Lease Abandonment
    Costs:Beginning balance

$
1,336,000


$
225,000Additions






Transfers from unfavorable lease
    costs






Deductions


(1,111,000
)


(217,000
)Ending balance

$
225,000


$
8,000Product Line Exit
    Costs:Beginning balance

$
885,000


$
402,000Additions






Deductions


(483,000
)


(83,000
)Change in estimate relating to
    previous exit costs accrual






Ending balance

$
402,000


$
319,000Severance Costs:Beginning balance

$
36,000


$
32,000Additions


218,000



Deductions


(222,000
)


(32,000
)Ending balance

$
32,000


$
   Supplemental
    Cash Flow Information:
  Dec. 31,


Dec. 31,


Dec. 31,2004


2005


2006Cash paid for interest

$
443,000


$
116,000


$
49,000Non-cash investing and
    financing activities:Unpaid offering expenses


792,000







Insurance settlement receivable


4,000,000







Legal settlement liability

$
(4,000,000
)






   Note 15 
    Subsequent
    Event  Settlement
    of Shalvoy Litigation
   F-27




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS (Continued)
        Quarterly
    Financial Data (Unaudited)
  First Quarter


Second Quarter


Third Quarter


Fourth Quarter2006Net revenues(1)

$
4,840,000


$
5,021,000


$
5,910,000


$
5,307,000Loss from operations(2)(3)


(3,340,000
)


(22,755,000
)


(2,164,000
)


(1,712,000
)Net loss


(3,226,000
)


(22,659,000
)


(2,092,000
)


(1,647,000
)Basic and diluted loss per common
    share

$
(0.26
)

$
(1.81
)

$
(0.17
)

$
(0.13
)Weighted average number of shares
    outstanding


12,483,367



12,483,367



12,483,367



12,483,3672005Net revenues(1)

$
4,354,000


$
8,553,000


$
3,917,000


$
7,385,000Loss from operations(4)(5)(6)


(5,555,000
)


(2,065,000
)


(3,696,000
)


(3,123,000
)Net loss


(5,537,000
)


(2,046,000
)


(3,623,000
)


(3,007,000
)Basic and diluted loss per common
    share

$
(0.51
)

$
(0.19
)

$
(0.31
)

$
(0.24
)Weighted average number of shares
    outstanding


10,771,103



10,771,103



11,655,492



12,483,431     (1)
    
    Our revenues vary from quarter to quarter as our customers
    provide minimal lead-time prior to the release of their purchase
    orders and have non-binding commitments to purchase from us.(2)
    
    Includes sale of previously written-off inventory of $119,000,
    $273,000, $309,000 and none, respectively.(3)
    
    Includes increased reserve for inventory obsolescence of
    $90,000, $90,000, $90,000 and $90,000, respectively.(4)
    
    Includes restructuring expense of $133,000, $204,000, none and
    none, respectively.(5)
    
    Includes increased reserve for inventory obsolescence of
    $90,000, $90,000, $432,000 and $372,000, respectively.(6)
    
    Includes sale of previously written-off inventory of none, none,
    $319,000, and $806,000, respectively. F-28




---



##### Table of Contents



SUPERCONDUCTOR
    TECHNOLOGIES INC.
 Schedule II-
    Valuation and Qualifying Accounts  AdditionsCharge to


Charge to


Charge toBeginning


Costs &


Other


Other


EndingBalance


Expenses


Accounts


Deductions


BalanceYear Ended December 31,
    2006Allowance for Uncollectible
    Accounts

$
75,000


$



$



$



$
75,000Impairment for
    Notes Receivable from Stockholder


969,000



38,000











1,007,000Reserve for Inventory Obsolescence


3,209,000



360,000







(2,202,000
)


1,367,000Reserve for Warranty


491,000



140,000







(203,000
)


428,000Deferred Tax Asset Valuation
    Allowance


106,299,000



5,854,000











112,153,000Year Ended December 31,
    2005Allowance for Uncollectible
    Accounts


77,000











(2,000
)


75,000Impairment for
    Notes Receivable from Stockholder






969,000











969,000Reserve for Inventory Obsolescence


5,402,000



984,000







(3,177,000
)


3,209,000Reserve for Warranty


419,000



204,000







(132,000
)


491,000Deferred Tax Asset Valuation
    Allowance


106,629,000



(330,000
)










106,299,000Year Ended December 31,
    2004Allowance for Uncollectible
    Accounts


64,000



13,000











77,000Reserve for Inventory Obsolescence


803,000



4,836,000







(237,000
)


5,402,000Reserve for Warranty


494,000



84,000







(159,000
)


419,000Deferred Tax Asset Valuation
    Allowance

$
94,576,000


$
12,053,000


$



$



$
106,629,000  F-29




---



##### Table of Contents



SIGNATURES
      By:
    /s/  Jeffrey
    A. Quiram     POWER OF
    ATTORNEY
  attorney-in-fact, Form 10-K, attorney-in-fact
  Form 10-K
  Signature

Title

Date/s/  Jeffrey
    A. QuiramJeffrey
    A. Quiram

President, Chief Executive Officer
    and Director (Principal Executive Officer)

March 30,2007/s/  William
    J. BuchananWilliam
    J. Buchanan

Controller (Principal Accounting
    Officer) (Principal Financial Officer)

March 30,2007/s/  David
    W. VellequetteDavid
    W. Vellequette

Director

March 30,2007/s/  Lynn
    J. DavisLynn
    J. Davis

Director

March 30,2007/s/  Dennis
    J. HorowitzDennis
    J. Horowitz

Director

March 30,2007/s/  Martin
    A. KaplanMartin
    A. Kaplan

Director

March 30,2007/s/  John
    D. LocktonJohn
    D. Lockton

Chairman of the Board

March 30,2007Charles
    E. Shalvoy

Director  S-1