##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-K

(Mark One)

|    |  |                                                                                                                           
|--- |  | --------------------------------------------------------------------------------------------------------------------------
|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the Year Ended December 31, 2003

OR

|    |  |                                                                                                                                           
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|[ ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from ______ to _______

Commission File Number 0-21074

SUPERCONDUCTOR TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)


|                                                              |  |                                  
|------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                      |  | 77-0158076                       
|                                                              |  |                                  
|State or other jurisdiction of
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

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

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

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [x] or No [ ].

The aggregate market value of the common stock held by non-affiliates of
the registrant was $122.6 million as of June 27, 2003. The closing price of
the common stock on that date was $2.23 as reported by the Nasdaq Stock Market.
For purposes of the foregoing calculation, we excluded the shares of common
stock held (a) by each officer and director of the registrant and (b) by
Wilmington Securities, Inc. and all related persons and entities. The
exclusion of shares owned by the aforementioned individuals and entities from
this calculation does not constitute an admission by any of such individuals or
entities that he or it was or is an affiliate of the registrant. The number of
outstanding shares of the Registrants common stock as of the close of business
on February 27, 2004 was 69,097,298.

DOCUMENTS INCORPORATED BY REFERENCE

Item 5 of Part II and Items 10, 11, 12, 13 and 14 of Part III incorporate
information by reference from the definitive proxy statement for the
Registrants Annual Meeting of Stockholders to be held on May 25, 2004.





---

TABLE OF CONTENTS



|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | ITEM 1. BUSINESS                                                                             
|              | ITEM 2. PROPERTIES                                                                           
|              | ITEM 3. LEGAL PROCEEDINGS                                                                    
|              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II      
|              | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
|              | ITEM 6. SELECTED FINANCIAL DATA                                                              
|              | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|              | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|              | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|              | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|              | ITEM 9A. DISCLOSURE CONTROLS AND PROCEDURES                                                  
|PART III     
|              | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|              | ITEM 11. EXECUTIVE COMPENSATION                                                              
|              | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|              | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|              | ITEM 14. PRINCIPLE ACCOUNTING FEES AND DISCLOSURES                                           
|PART IV      
|              | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|SIGNATURES   
|EXHIBIT 10.39
|EXHIBIT 10.40
|EXHIBIT 10.41
|EXHIBIT 21   
|EXHIBIT 23   
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 
|EXHIBIT 99   



---



##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.

FORM 10-K ANNUAL REPORT
Year Ended December 31, 2003

|         |  |                                                                                       |  |  |    |      |  | 
|-------- |  | ------------------------------------------------------------------------------------- |  |  | -- | ---- |  | 
|         |  |                                                                                       |  |  |    | Page
|         |  |                                                                                       |  |  |    |     
|PART I  
|Item 1.  |  | Business                                                                              |  |  | 1  |     
|Item 2.  |  | Properties                                                                            |  |  | 10 |     
|Item 3.  |  | Legal Proceedings                                                                     |  |  | 10 |     
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  |  | 11 |     
|PART II 
|Item 5.  |  | Market for the Registrants Common Equity and Related Stockholder Matters             |  |  | 11 |     
|Item 6.  |  | Selected Financial Data                                                               |  |  | 12 |     
|Item 7   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |  | 13 |     
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                            |  |  | 25 |     
|Item 8.  |  | Financial Statements and Supplementary Data                                           |  |  | 25 |     
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures |  |  | 25 |     
|Item 9A  |  | Disclosure Controls and Procedures                                                    |  |  | 25 |     
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  |  | 25 |     
|Item 11. |  | Executive Compensation                                                                |  |  | 25 |     
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  |  | 26 |     
|Item 13. |  | Certain Relationships and Related Transactions                                        |  |  | 26 |     
|Item 14. |  | Principle Accounting Fees and Disclosures                                             |  |  | 26 |     
|PART IV 
|Item 15. |  | Exhibits, Financial Statements Schedules, and Reports on Form 8-K                     |  |  | 26 |     

i



---



##### Table of Contents






PART I




ITEM 1. BUSINESS

Forward-Looking Statements

The discussion in this section of our annual report contains
forward-looking statements that involve risks and uncertainties.
Forward-looking statements are not guarantees of future performance and are
subject to various risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual results may differ materially from those expressed
in forward-looking statements. Please read the discussion under the caption
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Forward Looking Statements for a description of our
forward-looking statements and some of the factors that might affect those
statements. Forward-looking statements are based on information presently
available to senior management, and we do not assume any duty to update our
forward-looking statements.

Overview

We develop, manufacture and market high performance products to service
providers, systems integrators and original equipment manufacturers in the
commercial wireless telecommunications industry. Our innovative products,
known commercially as SuperLink Solutions, maximize the performance of
wireless networks by improving the quality of uplink signals from subscriber
terminals (wireless handsets or mobile wireless devices) to network base
stations and of downlink signals from network base stations to subscriber
terminals. These premium products are built around our flagship, SuperLink Rx,
and work in concert to provide Total LinkSM Enhancement, combining the benefits
of our complementary solutions to meet the growing demand of the wireless
telecommunications industry for improved capacity, reduced interference and
greater coverage for their network base stations.

SuperLink Solutions consist of two unique product families: SuperLink Rx
and SuperPlex. Together, these solutions allow service providers to benefit
from lower capital and operating costs compared to other options. They also
increase minutes of use because subscribers experience better call quality and
fewer dropped calls. They also increase the speed of data transmissions.



| |  | SuperLink Rx.In order to receive uplink signals from wireless
terminals, base stations require a wireless filter system to
eliminate, or filter out, out-of-band interference. To address this
need, we offer SuperLink Rx. Deployed in base stations, these
products combine specialized filters using high-temperature
superconducting (HTS) technology with a proprietary cryogenic cooler
and a cryogenically cooled low-noise amplifier. The result is the
ultimate uplink, a highly compact and reliable cryogenic receiver
front-end (CRFE) that can simultaneously deliver both high selectivity
(interference rejection) and high sensitivity (detection of low level
signals). SuperLink Rx products thereby offer significant advantages
over conventional filter systems.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | SuperPlex.For antenna sharing without compromise, we offer
SuperPlex, a line of multiplexers that provide extremely low insertion
loss and excellent cross-band isolation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

We have undergone three unique phases of development since our
incorporation in 1987. From 1987 to 1996, we focused primarily on the research
and development of HTS technologies. From 1997 to 2001, our second phase, we
made the transition from a research and development firm to a commercial
operating company. During this time we launched our first commercial HTS
product, the SuperFilter System, and concentrated on commercializing HTS
technology for the U.S. wireless market. We are now in our third phase of
development. Our Company has evolved from one oriented solely around HTS
technology to one that is committed to providing best-in-class link enhancement
solutions to the global wireless infrastructure market. Following our strategy
of Total Link Enhancement, (simultaneously optimizing the performance of the
uplink, the downlink and the antenna), we now offer innovative technologies
across multiple product lines and in multiple geographic markets.

Our expanded product line of SuperLink Solutions, combined with our
increased sales and marketing activities, has resulted in multiple product
orders over the last year. In January 2003 we reached a major milestone,
shipping our 2,000th system of the SuperLink Rx family, only 14 months after
hitting the 1,000-unit mark. At the close of 2003, approximately

1



---



##### Table of Contents



3,800
SuperLink Rx products were deployed in networks worldwide, with approximately
42 million cumulative hours of operation. In August 2003, we introduced
SuperLink Rx 1900, an integrated CRFE unit designed specifically for the PCS
wireless market. SuperLink Rx 1900 is STIs first fully integrated system
designed for outdoor use. The fully weatherized unit includes a SuperLink Rx
front-end and up to six dual duplexers in an outdoor enclosure.

We acquired Conductus, Inc. on December 18, 2002. Conductus was a
competing supplier of high-temperature superconducting technology for wireless
networks. The results of Conductus are included in the consolidated financial
statements for 13 days in 2002 following the acquisition and for the entire
year of 2003.

Industry Background

The Wireless Communications Market

Despite the slowdown in the telecommunications infrastructure sector, we
expect the underlying strengths of the wireless communications market will
allow it to weather the storm and to gradually benefit from increased but
more efficient capital spending. Some of these strengths include: continued
worldwide growth in subscribers, particularly in the developing world; rising
minutes of use; and wider availability of advanced air interfaces that permit
faster data throughput.

New subscribers.According to the Yankee Group, at the end of 2003 there
were approximately 1.37 billion wireless subscribers worldwide. The Yankee
Group expects this number to increase to more than 1.7 billion subscribers by
the close of 2006, representing a compound annual growth rate of 10.4%. The
developing world, led by the Peoples Republic of China, is expected to continue
to experience the fastest subscriber growth rates.

Increased usage (minutes of use).Cut-rate prices for wireless calls
have lead to significant increases in minutes of use for the average
subscriber. According to the Cellular Telecommunications & Internet
Association (CTIA), total billable minutes of use are up over 30 percent year
over year (June 2002 to June 2003). We expect that minutes of use will
continue to increase as new data and Internet services such as e-mail and
instant messaging gain in popularity, and will also rise as consumers gradually
shift toward using mobile devices instead of fixed telephones as their primary
telecommunications device.

New air interfaces. Advanced wireless transmission technologies, or air
interfaces, are finally becoming available to consumers in the United States
and other nations. With their faster data speeds and increased bandwidth,
these new air interfaces are expected to usher in a broad range of wireless
services, from music downloads to image and video file sharing. One such new
wireless transmission technology is CDMA IXRTT, which represents an upgrade to
the current technology known as Code Division Multiple Access (commonly
referred to as CDMA). Verizon Wireless and Sprint, two of the largest wireless
carriers in the U.S., have already deployed CDMA 1XRTT technology in many of
their networks across the country and Verizon Wireless recently announced that
they would deploy CDMA 1X-EVDO nationwide. We expect the onset of the data
era in mobile communications will help operators to reverse declining annual
revenues per user and move closer to long-term financial health. Thus, we
expect that infrastructure spending to increase.

Strains on Wireless Networks

We believe the ability to provide high quality service to customers will
become increasingly difficult for wireless operators as the number of
subscribers rises, minutes of use increases, and the market for wireless data
services expands. We expect that wireless service providers in both rural and
urban areas will encounter higher levels of radio frequency, or RF,
interference due to greater subscriber density and a larger number of users on
adjacent channels. Operators can expect that this reduced signal quality and
higher percentage of dropped calls will lead to lower system utilization,
decreased revenue, and ultimately, higher rates of customer churn.

Service providers are also expected to face network capacity constraints.
For example, wireless carriers in some urban areas are reaching their spectrum
capacity and therefore must acquire more spectrum or do more with the available
infrastructure. In particular, CDMA operators, whose networks employ the
same wide communications channels for both data and voice transmission, are
learning that as higher-speed data transmissions proliferate their networks
will have less capacity available for voice users.

2



---



##### Table of Contents



In order to reduce the strain on their wireless networks, providers must
find a way to do more with less, to cost-effectively reduce interference and
increase capacity, expand coverage, and improve the quality of their systems.
Todays restricted corporate budgets and tougher zoning laws make operators far
less likely to have the option of simply deploying new base stations to achieve
these performance goals.

Our Solution

Our empirical data show that our premium SuperLink Solutions provide
dramatic and cost-effective improvements to RF signal quality and network
capacity utilization. In February 2002, an all-day session on superconductor
technology was held at the International Engineering Consortiums fifth annual
National Wireless Engineering Conference. At this session, a top-five U.S.
cellular operator presented data illustrating the benefits of deploying
SuperLink Rx in an urban environment. Over four weeks in November 2001, this
CDMA operator monitored data from a cluster of ten urban cell sites, each
outfitted with SuperLink Rx units. The operator stated that on average, STIs
solutions provided the following quality-of-service improvements across the
cluster:



| |  |  | 6 dB reduction in base station noise figure effectively
doubling base station sensitivity and therefore uplink capacity and
coverage;                     
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 46% reduction of dropped calls (with one site registering a 62%
reduction) and 28.5% reduction of access failures both helping to
reduce subscriber churn;
|
| |  |  | Elimination of inference from Specialized Mobile Radio handsets and base stations; and                                                                     
|
| |  |  | Increased in-building penetration                                                                                                                          

Products in our SuperPlex line of high-performance multiplexers are
designed to eliminate the need for additional base station antennas and reduce
infrastructure costs. These products provide very low transmit and receive
insertion loss and excellent cross-band isolation. The SuperPlex product
family offers network performance benefits synergistic with SuperLink Rx.
Relative to competing technologies, we believe that these products offer:



| |  |  | Increased transmit power delivered to base station antennas;                                                            
| | - |  | ------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Higher sensitivity to customers handset signals; and                                                                   
|
| |  |  | Fast and cost-effective network overlays (such as PCS network
infrastructure on top of cellular network infrastructure).

Our Strategy

We have mastered the use of high-temperature superconducting (HTS)
technology to improve the quality of wireless networks. Our strategy is to
provide Total Link Enhancement by teaming our field-proven HTS solutions with
high-performance multiplexers and multi-carrier power amplifiers. Our
SuperLink Solutions provide the ultimate package of RF link performance
enhancement solutions.

The primary elements of our strategy include:



| |  | Enhance and Extend Current Product Offerings. There is an increasing
demand for more compact, more efficient, and more sophisticated
wireless communication technology. In response, we expect to use our
technical expertise to expand our primary product lines to address
this demand, as represented by SuperLink Rx (uplink enhancement) and
SuperPlex (antenna sharing).
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Expand Domestic and International Sales Channels.We intend to
continue to expand our sales efforts to domestic wireless
communication providers, system integrators and OEMs. We also expect
to expand our international distribution channels, particularly in
Asia and Latin America.                                                                                       

3



---



##### Table of Contents





| |  | Enhance Our Productivity and Lower Our Costs. We intend to continue
developing our manufacturing infrastructure and organization to meet
our expected production requirements. We plan to continue
manufacturing in-house certain key components of our products such as
our proprietary HTS filters and cryogenic coolers. We believe that
this will enable us to: (1) produce highly reliable, quality products;
(2) protect the proprietary nature of our technology and processes;
(3) properly control our manufacturing processes; and (4) achieve
significant cost reductions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Maintain Our Focus on Technical Excellence and Innovation.We are
committed to maintaining our leadership role in the wireless
communication market for link enhancement solutions. In order to
expand and protect our technology, we will continue to seek patent
protection for our products and/or licenses of key technology owned by
others. We also will continue to engage in government research and
development contracts to help fund our commercial technology and
product development.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| 
| |  | Pursue Strategic Partnerships, Alliances and Acquisitions. In
addition to our internal development efforts, we may acquire new
products and technologies that address the complementary issues of
uplink enhancement, downlink enhancement, and antenna optimization.
In March 2003, STI certified Heinz Corporation, a leading provider of
services to the wireless industry, as the first wireless engineering
services firm to install STIs SuperLink Solutions. This move
expanded a strategic alliance that already existed between the two
companies. In November 2002, STI and Heinz announced a strategic
alliance to jointly provide, design and install solutions to improve
the quality of wireless networks, especially in high-volume urban
areas. Since then, the companies have worked together to collect and
analyze RF data in several U.S. cities. This data will be used as the
basis to design solutions that reduce or eliminate the adverse effects
of RF interference on network performance. In December 2002, we
completed a merger with Conductus, Inc., a competing supplier of
high-temperature superconducting technology for wireless networks. We
discontinued their competing commercial product line (the ClearSite)
and are incorporating their technology into our commercial product
line (the SuperLlink). We are also using their technical resources to
supplement ours.

Merger with Conductus, Inc.

We acquired Conductus, Inc. on December 18, 2002. Conductus was a
competing supplier of high-temperature superconducting technology for wireless
networks. We concurrently closed a related $20-million equity private
placement that was contingent upon the acquisition. The acquisition of
Conductus is expected to have a long-term, positive impact on STI, allowing the
company to be able to provide greater technical expertise and provide a
stronger product offering to the industry.

Our acquisition of Conductus added to our intellectual property portfolio.
Conductus owns 24 patents alone or with others, and has 19 pending
applications in the United States. Conductus has international patents and a
number of international applications pending under the Patent Cooperation
treaty or in various countries worldwide. Several of Conductus patents and
patent applications relate to various aspects of its communications products,
including thin-film processing, filer design and tuning, and other aspects of
interference devices or digital electronics and some of which are licensed to
one or more entities.

Our Wireless Products

Commercial wireless providers can use our SuperLink Solutions to keep pace
with the growing demand for wireless communications. Wireless providers may
deploy our products in connection with the installation of additional base
stations in a network, as well as with the installation of an entirely new
network. They can also improve the performance of existing base stations and
networks by retrofitting their equipment with our link enhancement products in
order to reduce the number of new base stations required.

Our SuperLink Solutions are comprised of two unique product families: SuperLink Rx and SuperPlex.



| |  | SuperLink Rxproducts are uplink solutions that combine specialized filters using HTS technology with a proprietary
cryogenic cooler and a low-noise amplifier. The result is a highly compact and reliable cryogenic receiver front-end
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4



---



##### Table of Contents





| |  | that can simultaneously deliver both high selectivity and high sensitivity. This product family includes systems for 850 MHz and
1900 MHz in addition to systems designed to assist in overlays of different technology at the same frequency. The small
size and low power consumption of our SuperLink Rx product is largely the result of our choice of cooling technology. In
order to incorporate a compact, efficient, and reliable cooling system, we developed a proprietary Stirling cryogenic
cooler. Approximately the size of a wine bottle, the cooler utilizes helium gas as both the lubricant and coolant. This
eliminates the use of oils and grease as well as the need for scheduled maintenance. Our cooler requires approximately 100
watts of power far less than other cryogenic systems.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The SuperPlexfamily consists of antenna sharing solutions such as HTS-Ready Duplexers. These high-performance products
are designed to eliminate the need for additional antennas and reduce costs. SuperPlex products have extremely low
insertion loss and excellent cross-band isolation; making them highly effective HTS companion products. They are available
for 850 MHz as well as 1900 MHz wireless networks and in regular and high power versions.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We introduced several new SuperLink Solutions products in 2003, including
the SuperLink Rx 850, the most compact and lowest power cryogenic receiver
front end (CRFE) in the industry, and the HTS-Ready Duplexer HP, which
delivers superior duplexing functionality in the 850 MHz cellular band and
provides twice the amount of average (1200 watts versus 600 watts) and four
times as much peak power handling (40 kilowatts versus 10 kilowatts) as found
in our standard HTS-Ready Duplexer 850. In August 2003, we introduced
SuperLink Rx 1900, an integrated CRFE unit designed specifically for the PCS
wireless market. SuperLink Rx 1900 is STIs first fully integrated system
designed for outdoor use. The fully weatherized unit includes a SuperLink Rx
front-end and up to six dual duplexers in an outdoor enclosure.

During 2002 and 2003, we were marketing a power amplifier product called
the SuperLink Tx manufactured by another company. The SuperLink Tx was for
wireless networks that suffer from insufficient transmit power on the downlink
signal path. This problem is particularly prevalent after the uplink has been
improved by using SuperLink Rx. Our supplier for this product was acquired by
a competitor of ours in November 2003. We have not had significant sales of
the SuperLink Tx product to date. We are evaluating whether we can and should
develop an alternative source of power amplifiers.

Net commercial product revenues are derived from the following products:

|                      |  |                                 |           |      |  |      |            |  |  |   |            | 
|--------------------- |  | ------------------------------- | --------- | ---- |  | ---- | ---------- |  |  | - | ---------- | 
|                      |  | For the year ended December 31,
|                      |  |                                
|                      |  | 2001                            |           | 2002 |  | 2003
|                      |  |                                 |           |      |  |     
|SuperLink Rx          |  | $                               | 6,966,000 |      |  | $    | 15,195,000 |  |  | $ | 34,544,000 | 
|SuperPlex multiplexer |  |                                 | 635,000   |      |  |      | 2,262,000  |  |  |   | 3,434,000  | 
|SuperLink Tx          |  |                                 |           |      |  |      |            |  |  |   | 88,000     | 
|Other                 |  |                                 |          |      |  |      | 144,000    |  |  |   | 511,000    | 
|                      |  |                                 |           |      |  |      |            |  |  |   |            | 
|Total                 |  | $                               | 7,601,000 |      |  | $    | 17,601,000 |  |  | $ | 38,577,000 | 
|                      |  |                                 |           |      |  |      |            |  |  |   |            | 

Marketing and Sales

We sell solutions to wireless communication service providers in the
Americas and have plans to expand worldwide. Our earliest experience was with
small rural providers who had the most immediate need for the SuperFilter®
for range extension and coverage enhancement. We sold our first systems
in the fourth quarter of 1997. We sold 83 more systems in 1998, 123 systems in
1999, 393 systems in 2000, 438 systems in 2001, 927 systems in 2002 and 1,884
systems in 2003. We continue to increase systems sales in spite of a shift in
our sales focus to the large service providers where the sales cycle requires
numerous trials and is very long. This shift in focus was undertaken to begin
a move to the suburban and urban markets where the majority of base stations
are located and where the need for interference rejection is greatest. In mid
1999, we signed a five-year supply agreement with U.S. Cellular Corporation,
one of the five largest cellular providers in the country. In March 2000, we
signed a one year supply agreement with ALLTEL, an even larger domestic
wireless service

5



---



##### Table of Contents



provider, designating STI as their supplier of HTS base
station receiver solutions. In December 2001, we signed a follow-on agreement
with a major customer for 1,000 SuperFilter Systems, to be delivered over five
quarters. During 2003, we signed supply agreements with Verizon Wireless and
another major wireless service provider. In 2001, U.S. Cellular accounted for
44% of our net commercial revenues and ALLTEL accounted for 41% of our net
commercial revenues. In 2002, U.S. Cellular accounted for 8% of our net
commercial revenues and ALLTEL for 84% of our net commercial revenues. In
2003, ALLTEL accounted for 70% of our net commercial revenues and Verizon
accounted for 15% of our net commercial revenues.

We sell using a direct sales force in the U.S. and internationally. We
have only recently begun efforts to market our products internationally and
have not yet had significant international sales. We plan to supplement our
direct sales by building a network of international distributors. We are also
working with many consulting firms to provide data that illustrates the
benefits of deploying our products in their customers networks. We also
demonstrate our products at trade shows, participate in industry conferences,
utilize advertising and direct mailings, and provide technical and application
reports to recognized trade journals. We also advertise our products through
our website, brochures, data sheets, application notes, trade journal reports,
and press releases. Our sales and marketing efforts are supplemented by a team
of engineers who manage field trials and initial customer installations and
educate customers.

Backlog

Our commercial backlog consists of accepted product purchase orders
scheduled for delivery within 24 months and consists of purchase orders for
both dollar and unit purchase commitments. The exact dollar commitment for
unit commitments may vary depending on the exact units purchased. Based on past
purchasing patterns and expected purchasing trends of customers with unit
commitments, we estimate our backlog at December 31, 2003 to be $250,000, as
compared to $1.4 million at December 31, 2002.

Our Technology

Superconducting Technology

We use superconducting technology to improve both the selectivity
(rejection of adjacent band interference) and the sensitivity (ability to
hear signals better) of a base station receiver. Superconductors are
materials that have the ability to conduct electrical energy with little or no
resistance when cooled to critical temperatures. In contrast, electric
currents that flow through normal conductors encounter resistance that requires
power to overcome and generates heat. Substantial improvements in the
performance characteristics of electrical systems can be made with
superconductors, including reduced power loss, lower heat generation and
decreased electrical noise. As these properties have been applied to radio and
microwave frequency applications, new products, such as wireless filters, have
been developed that can be extremely small, highly sensitive and highly
frequency selective.

The discovery of superconductors was made in 1911. However, a fundamental
understanding of the phenomenon of superconductivity eluded physicists until J.
Robert Schrieffer (a director emeritus to our Board of Directors and Chairman
of our Technical Advisory Board), John Bardeen (co-inventor of the transistor)
and Leon Cooper proposed a theory explaining superconductivity, for which they
were awarded the Nobel Prize in Physics in 1972. Until 1986, all
superconductor utilization was done at extremely low temperatures, below 23K
(-250°C). Superconductors were not widely used in commercial applications
because of the high cost and complexities associated with reaching and
maintaining such low temperatures. In 1986, high temperature superconductors
with critical temperatures greater than 30K (-243°C) were discovered. In early
1987, yttrium barium copper oxide (YBCO) was discovered, which has a critical
temperature of 93K
(-180°C). Shortly thereafter, thallium barium calcium copper oxide
(TBCCO) was discovered, which has a critical temperature of 125K (-148°C).
These discoveries were important because these high temperature superconductors
allowed for operating temperatures higher than 77K (-196°C), or the point at
which nitrogen liquefies at atmospheric pressure. These high critical
temperatures allow superconductors to be cooled using less expensive and more
efficient refrigeration processes. Our Company was formed following this
discovery for the initial purpose of developing and commercializing high
temperature superconductors.

6



---



##### Table of Contents



How We Develop Our Technology

As part of our strategy to maintain our technological leadership, we have
focused our research and development activities on high temperature
superconducting (HTS) materials, RF circuitry, and cryogenics design and
product application. We have internally developed our key technologies from a
standard set of technology platforms. We utilize a proprietary manufacturing
process for HTS thin-film production, the base material for our filtering
products. An in-house design team develops the filters, which are packaged
into a vacuum-sealed container for thermal insulation. The filter package is
incorporated with our cryogenic cooler and then integrated with the necessary
control electronics into a complete system for simple adaptation into new or
existing wireless communications base stations. We believe that our filter
systems provide our targeted markets with the smallest and most cost-effective
products and that we are the only superconducting company that develops and
manufactures all of these key components. We also utilize technologies under
licenses of patents from others for our products.

HTS Materials

A number of HTS materials have been discovered with superconducting
properties, but only a few have characteristics capable of commercialization.
We primarily utilize TBCCO, which has one of the highest known critical
temperatures, allowing for reduced cooling needs in order to achieve
superconducting properties. We hold a worldwide exclusive license, in all
fields of use, to TBCCO formulations covered by patents held by the University
of Arkansas through a license agreement. As part of our strategy to stimulate
the development and use of TBCCO, we granted DuPont a non-exclusive worldwide
sublicense to develop processes and market TBCCO thin-films. We also utilize
YBCO in some of our products, which we manufacture using proprietary processes.
We license primary patents on this material from Lucent. Thin-film
superconductors are the base materials used by us to produce RF components,
such as wireless communications filters. We hold 21 patents for technologies
related to thin-film materials and structures. We believe that the process
technology we have developed produces state of the art HTS thin-films of the
highest quality.

RF Circuitry

We have devoted a significant portion of our engineering resources to
design and model the complex RF circuitry that is basic to our products. Our
RF engineering team is led by Vice President of Engineering Dr. Gregory
Hey-Shipton and includes Dr. George Matthaei, recognized international leaders
in RF filter design. In addition, Dr. J. Robert Schrieffer, a Nobel laureate,
is head of our Technical Advisory Board. The expertise of this highly
qualified team has allowed us to design and fabricate very precise individual
components, such as RF signal filters. We have implemented computer simulation
systems to design our products and this RF circuitry design has allowed us to
produce extremely small, high-performance circuits. Some of our design and
engineering innovations have been patented; others are the subjects of pending
patent applications. We believe that our RF engineering expertise provides us
with a unique competitive advantage.

Cryogenic Cooling Technology

The availability of a low-cost, highly reliable, compact cooling
technology is critical to the successful commercialization of our
superconducting products. Prior to the Companys efforts no such cryogenic
cooler has been commercially available. In response to this lack of
availability, we developed a low-cost, highly reliable low-power cooler
designed to cool to 77K (-196°C) with sufficient cooling capacity for our
superconducting applications. We have shipped more than 3,800 SuperLink Rx
systems worldwide, logging in excess of 42 million hours of cumulative
operation. The cryogenic coolers in our current models have demonstrated a
mean time between failure of greater than 1 million hours. Its
development was based in part on patents licensed by us from Sunpower,
Inc. We believe our internally developed cooler, which is both compact enough
and reliable enough to meet the most demanding wireless industry standards,
provides us with a significant and unique competitive advantage.

Cryogenic Packaging

Cooling to cryogenic temperatures requires proper thermal isolation and
packaging. Any superconducting or other cryogenically cooled device must be
maintained at its optimal operating temperature, and its interaction with
higher

7



---



##### Table of Contents



temperature components must be controlled. We have developed a variety
of proprietary and patented cryogenic packaging innovations to satisfy this
requirement.

How we use Government Contracts to fund technology development

Our strategy is to continue to pursue government research and development
contract awards, which complement our commercial product and technology
development and allow for commercialization of the underlying technology. For
example, we are currently working on a project to develop rapid tuning of
superconducting filters funded by the Department of Defense Advanced Research
Projects Agency (DARPA). This capability would greatly increase the
effectiveness of our systems in blocking interference in government and
potentially also commercial applications.

Since our inception in 1987, a substantial part of our net revenues have
been from research and development contracts, sales directly with the U.S.
government or resellers to the U.S. government. Nearly all of these revenues
were paid under contracts with the U.S. Department of Defense. We have
marketed to various government agencies to identify opportunities and actively
solicit partners for product development proposals. Since 1988, we have
successfully obtained a number of classified and non-classified government
contracts for superconductor research, including one of the largest
non-classified HTS awards from DARPA through the Office of Naval Research. In
addition to actively soliciting government contracts, we have participated in
the Small Business Innovative Research, or SBIR, program. We have been awarded
32 Phase I SBIR contracts, each of which typically generates from $70,000 to
$100,000 of revenues. We have been successful in converting eight of these
Phase I contracts into Phase II programs, each of which typically generates
$500,000 to $750,000 in revenues, and we converted one of these contracts into
a Phase III program valued at $2.2 million. Since our formation, government
contracts have provided us approximately $80 million of revenue, and remain a
significant source of revenue today, supporting our research and development
programs.

Our Manufacturing Capabilities

We currently manufacture our SuperLink Rx systems and SuperPlex products
at our facilities in Santa Barbara, California. In 1998, we opened a
state-of-the-art manufacturing facility in Santa Barbara. STI renovated these
manufacturing areas in early 2003, the first in a series of moves that have
enabled us to produce larger quantities of our SuperLink Rx products into a
routine and reproducible basis. Throughout 2003, we have expanded our
controlled clean rooms, continued to develop and introduce new,
state-of-the-art production and test equipment and processes, and implemented a
continuous flow manufacturing strategy. In addition, performance testing and
systems screening methods, along with optimized quality improvement techniques,
have been instrumental in enabling our SuperLink Rx units to reach Mean Time
Between Failure (MTBF) levels of more than 500,000 hours.

In 2003, we expanded our manufacturing capacity to meet the rising demand
for SuperLink Rx units within the wireless industry, as evidenced by our annual
doubling of sales in 2003. Manufacturing capacity was 2,800 SuperLink Rx units
per year in 2003, up from 1,000 units per year in 2002. We are holding
capacity at this level to conserve cash resources. We could expand
manufacturing capacity to approximately 5,000 units per year in our current
facility.

This expansion includes the addition of a second manufacturing site in
Sunnyvale, California, that will produce films using a new process that greatly
reduces die production costs. As manufacturing and sales needs exceed 5,000
systems, copy exact facilities of our core competency production areas will
be built and strategically placed to provide optimal support to our customers.
Selective and cost effective assembly buffers will continue to provide for a
quick response to customer needs.

Our internal capabilities include a proprietary manufacturing process for
thin-film materials that is scaleable for high volume production. In addition,
we have established a production operation that we use to produce thin films on
wafers for wireless electronics applications. Our radio frequency circuitry is
designed, modeled and tested by internal engineering resources. We have
in-house capabilities to pattern the superconducting material and all other
aspects of radio frequency component production, including packaging the
filters. We also have in-house capabilities to manufacture our cryogenic
coolers at a pace consistent with current quantity requirements. The
consolidation of STIs supplier base has improved the quality of received
parts, while lowering their cost and decreasing lead-times.

8



---



##### Table of Contents



Intellectual Property

We regard our product designs, design tools, fabrication equipment and
manufacturing processes as proprietary and seek to protect our rights in them
through a combination of patent, trademark, trade secret and copyright law and
internal procedures and non-disclosure agreements. We also seek licenses from
third parties for HTS materials and processes used by us, which have been
patented by other parties. We believe that our success will depend, in part,
on the protection of our proprietary information, patents and the licensing of
key technologies from third parties.

We have focused our HTS materials development efforts on TBCCO. We have
an exclusive worldwide license (including the right to sublicense) under
several U.S. patents which have been issued to the University of Arkansas
covering TBCCO, subject to the University of Arkansas right to conduct
research related to the patents. We also utilize YBCO in some of our products,
which we manufacture using proprietary processes. We license primary patents
on this material from Lucent.

As of December 31, 2003, we held 70 U.S. patents, including those from the
Conductus acquisition. Of these patents, 21 are for technologies directed
toward producing thin-film materials and structures, including our proprietary
thin-film process for TBCCO production, expiring in 2010 to 2021. In addition,
we currently hold 19 U.S. patents for cryogenic microwave circuit designs
expiring in 2011 to 2019 and 19 U.S. patents covering cryogenics, packaging and
systems expiring in 2011 to 2021. Another 11 U.S. patents are in other
superconducting technologies expiring in 2011 to 2017. As of December 31,
2003, we had 36 U.S. patents pending.

As of December 31, 2003, we held 40 foreign issued patents and 59 foreign
patents pending. We also have license rights to 14 issued patents in the
United States and to 62 patents issued or pending internationally.

We have trade secrets and unpatented technology and proprietary knowledge
about the sale, promotion, operation, development and manufacturing of our
products. We have confidentiality agreements with our employees and
consultants to protect these rights.

We own federally registered trademarks to Superconductor Technologies,
Conductus and Improving the Quality of Wireless with several other
registrations pending. We own other registered and unregistered trademarks,
and have certain trademark rights in foreign jurisdictions.

Competition

The wireless communication market is intensely competitive. We face
competition in various aspects of our technology and product development and in
each of our targeted markets. Our current and potential competitors include
conventional RF filter manufacturers and both established and newly emerging
companies developing similar or competing HTS technologies. We also compete
with companies that design, manufacture, or market conventional downlink
enhancement products such as power amplifiers, as well as with companies that
sell antenna-optimizing multiplexers. We also compete against companies that
seek to enhance base station range and selectivity by means other than a
superconducting filter. The primary competitors use tower mount and ground
mount amplifiers, conventional filters, repeaters or smart antenna
technologies. Tower mount and ground mount amplifiers pass an RF signal
received by an antenna through a broad filter, followed by a low noise
amplifier. These units are produced by a number of companies, which include
most of the base station original equipment manufacturers (OEMs) such as
Ericsson and Nokia. Filter manufacturers, including Andrew, REMEC, LGP/Allgon,
Filtronic and Radio Frequency Systems, also produce these units. Smart
antennas allow base stations to focus energy more directly on individual
wireless devices in order to improve
capacity. Arraycom is among the leading independent companies that
produce these systems. Base station manufactures, such as Ericsson, Nokia,
Nortel and Lucent are also developing smart antennas for their base stations.

In addition, we currently supply components and license technology to
several companies that may eventually decide to manufacture or design their own
HTS components, rather than simply purchasing or licensing our technology.
With respect to our HTS materials, we compete with DuPont among others. In the
government sector, we compete with universities, national laboratories and both
large and small companies for research and development contracts, and with
larger

9



---



##### Table of Contents



defense contractors, such as Raytheon and Northrop Grumman for
government products. We expect increased competition both from existing
competitors and a number of companies that may enter the wireless
communications market.

Employees

We employed a total of 302 persons as of December 31, 2003: 175 in
manufacturing, 60 in research and development, 31 in sales and marketing and 36
in administration. Twenty-one of our employees have Ph.D.s, and thirty-eight
others hold advanced degrees in physics, materials science, electrical
engineering and other fields. Our employees are not represented by a labor
union, and we believe that our employee relations are good.

We are highly dependent upon the efforts of our senior management. Due to
the specialized technical nature of our business, we are also highly dependent
upon our ability to attract and retain qualified technical personnel, primarily
in the areas of wireless communications. The loss of the services of one or
more members of our senior management or technical teams could hinder our
ability to achieve our product development and commercialization objectives.
There is intense competition for qualified personnel in our market areas and we
can give no assurance that we will be able to continue to attract and retain
qualified personnel necessary for the development of our business.

Environmental Issues

The Company uses certain hazardous materials in its research, development
and manufacturing operations. As a result, the Company is subject to stringent
federal, state and local regulations governing the storage, use and disposal of
such materials. Current or future laws and regulations could require
substantial expenditures for preventative or remedial action, reduction of
chemical exposure or waste treatment or disposal. Although the Company
believes that its safety procedures for the handling and disposing of hazardous
materials comply with the standards prescribed by state and federal
regulations, there is always the risk of accidental contamination or injury
from these materials. To date, the Company has not incurred substantial
expenditures for preventive action with respect to hazardous materials or for
remedial action with respect to any hazardous materials accident, but the use
and disposal of hazardous materials involves the risk that the Company could
incur substantial expenditures for such preventive or remedial actions. If
such an accident occurred, the Company could be held liable for resulting
damages. The liability in the event of an accident or the costs of such
remedial actions could exceed the Companys resources or otherwise have a
material adverse effect on the Companys financial condition and results of
operations.




ITEM 2. PROPERTIES

We lease all of our properties. Most of our operations, including our
manufacturing facility, are located in an industrial complex in Santa Barbara,
California. We occupy approximately 75,000 square feet in Santa
Barbara in this complex. We have a long term lease for 60,000 square
feet that expires in 2011, and we rent the remaining 15,000 square
feet on a month to month basis. We acquired a second leased facility in
Sunnyvale, California through the acquisition of Conductus in December 2002.
We plan to use this facility for a second manufacturing site to produce some of
the thin films we use to make our filters. The facility is currently comprised
of two 20,000 square feet buildings under leases, which expire in 2006, with
offices, labs and cleanrooms. One building will remain occupied and the other
has been abandoned and is available for sublease. We believe that our
facilities are adequate to meet current and reasonably anticipated needs for
approximately the next two years.




ITEM 3. LEGAL PROCEEDINGS

We are engaged in a patent dispute with ISCO International, Inc. relating
to U.S. Patent No. 6,263,215 entitled Cryoelectronically Cooled Receiver Front
End for Mobile Radio Systems. ISCO filed a complaint on July 17, 2001 in the
United States District Court for the District of Delaware against us and
our wholly-owned subsidiary, Conductus, Inc. The ISCO complaint alleged that
our SuperFilter product and Conductus ClearSite® product infringe ISCOs
patent. The matter went to trial on March 17, 2003.

On April 3, 2003, the jury returned a unanimous verdict that our
SuperFilter III product does not infringe the patent in question, and that
ISCOs patent is invalid and unenforceable. The jury also awarded us $3.8
million in compensatory

10



---



##### Table of Contents



damages based upon a finding that ISCO engaged in
unfair competition and acted in bad faith by issuing press releases and
contacting our customers asserting rights under this patent.

On April 17, 2003, we filed a Motion for Attorneys Fees and
Disbursements, in which we asked the court to award us our attorneys fees and
other litigation expenses. On the same date, ISCO filed a motion, asking the
court to overturn the verdict and grant a new trial. In August 2003, the court
rejected ISCOs request to overturn the jurys verdict that the patent is
invalid and not infringed by the SuperFilter III product, and accepted the
jurys verdict that the patent is unenforceable because of inequitable conduct
committed by one of the alleged inventors. ISCO subsequently filed a notice of
appeal as to this portion of the courts decision. The court overturned the
jurys verdict of unfair competition and bad faith on the part of ISCO and the
related $3.8 million compensatory damage award to us, and also denied our
request for reimbursement of our legal fees associated with the case. We have
filed a notice of appeal as to this portion of the courts decision.




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

No matters were submitted to security holders during the last quarter of the year.




PART II




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

Market for Common Stock

The Companys common stock is listed on The NASDAQ Stock Market® under the
symbol SCON. The following table sets forth for the periods indicated the
high and low intraday sales prices for our common stock as reported on The
NASDAQ Stock Market®.

|                                 |  |      |      |     |  |   |      | 
|-------------------------------- |  | ---- | ---- | --- |  | - | ---- | 
|                                 |  | High |      | Low
|                                 |  |      |      |    
|2002                             |  |      |      |     |  |   |      | 
|Quarter ended April 1, 2002      |  | $    | 6.79 |     |  | $ | 3.90 | 
|Quarter ended July 1, 2002       |  | $    | 5.09 |     |  | $ | 1.55 | 
|Quarter ended October 1, 2002    |  | $    | 1.93 |     |  | $ | 0.93 | 
|Quarter ended December 31, 2002  |  | $    | 1.60 |     |  | $ | 0.94 | 
|2003                             |  |      |      |     |  |   |      | 
|Quarter ended March 29, 2003     |  | $    | 1.20 |     |  | $ | 0.95 | 
|Quarter ended June 28, 2003      |  | $    | 3.67 |     |  | $ | 0.75 | 
|Quarter ended September 27, 2003 |  | $    | 5.25 |     |  | $ | 2.05 | 
|Quarter ended December 31, 2003  |  | $    | 7.65 |     |  | $ | 3.64 | 

Holders of Record

We had approximately 402 holders of record of our common stock as of March
5, 2004. We estimate that there are more than 18,000 round lot beneficial
owners of our common stock

Dividends

We have never paid dividends and intend to employ all available funds in
the development of our business. We do not expect to pay any cash dividends
for the foreseeable future.

Sales of Unregistered Securities

During the fourth quarter of 2003, we did not issue any equity securities
that were not registered under the Securities Act of 1933.

11



---



##### Table of Contents






ITEM 6. SELECTED FINANCIAL DATA

The information set forth below is not necessarily indicative of results
of future operations and should be read in conjunction with the Companys
Financial Statements and Notes thereto appearing in Item 15 of Part IV of this
Report and Managements Discussion and Analysis of Financial Condition and
Results of Operations.

We acquired Conductus, Inc. on December 18, 2002. The results of
Conductus, Inc. are included in the consolidated financial statement for 13
days in 2002 following its acquisition through December 31, 2002 and for the
entire year of 2003.

|                                                                                        |                                                  |                          |         |                         |        |      |         |        |        |      |         |        |        |    |         |        |        |    |         |        |        | 
|--------------------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------ | ------- | ----------------------- | ------ | ---- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | -- | ------- | ------ | ------ | -- | ------- | ------ | ------ | 
|                                                                                        |                                                  |                          |         | Year Ended December 31,
|(In thousands, except per share data)                                                   |                                                  | 1999                     |         | 2000                    |        | 2001 |         | 2002   |        | 2003
|Statement of Operations Data:                                                           |                                                  |                          |         |                         |        |      |         |        |        |      |         |        |        |    |         |        |        |    |         |       
|Net revenues:                                                                           |                                                  |                          |         |                         |        |      |         |        |        |      |         |        |        |    |         |        |        |    |         |       
|Net commercial product revenues                                                         |                                                  | $                        | 2,053   |                         |        | $    | 5,303   |        |        | $    | 7,601   |        |        | $  | 17,601  |        |        | $  | 38,577  |       
|Government contract revenues                                                            |                                                  |                          | 5,059   |                         |        |      | 4,643   |        |        |      | 4,782   |        |        |    | 4,785   |        |        |    | 10,759  |       
|Sub license royalties                                                                   |                                                  |                          | 10      |                         |        |      | 10      |        |        |      | 10      |        |        |    | 10      |        |        |    | 58      |       
|                                                                                        |                                                  |                          |         |                         |        |      |         |        |        |      |         |        |        |    |         |        |        |    |         |       
|                                                                                        | Total net revenues                               |                          |         | 7,122                   |        |      |         | 9,956  |        |      |         | 12,393 |        |    |         | 22,396 |        |    |         | 49,394 |       
|Costs and expenses:                                                                     |                                                  |                          |         |                         |        |      |         |        |        |      |         |        |        |    |         |        |        |    |         |       
|                                                                                        | Cost of commercial product revenues              |                          |         | 6,848                   |        |      |         | 15,710 |        |      |         | 10,626 |        |    |         | 19,286 |        |    |         | 28,249 |       
|                                                                                        | Contract research and development                |                          |         | 3,427                   |        |      |         | 4,235  |        |      |         | 3,359  |        |    |         | 2,531  |        |    |         | 6,899  |       
|                                                                                        | Other research and development                   |                          |         | 1,747                   |        |      |         | 2,633  |        |      |         | 4,606  |        |    |         | 4,489  |        |    |         | 4,697  |       
|                                                                                        | Selling, general and administrative              |                          |         | 5,664                   |        |      |         | 8,357  |        |      |         | 11,907 |        |    |         | 14,976 |        |    |         | 20,567 |       
|                                                                                        | Write off of in-process
research and development |                          |         |                        |        |      |         |       |        |      |         |       |        |    |         | 700    |        |    |         |       |       
|                                                                                        |                                                  |                          |         |                         |        |      |         |        |        |      |         |        |        |    |         |        |        |    |         |       
|                                                                                        |                                                  | Total costs and expenses |         |                         | 17,686 |      |         |        | 30,935 |      |         |        | 30,498 |    |         |        | 41,982 |    |         |        | 60,412 | 
|                                                                                        |                                                  |                          |         |                         |        |      |         |        |        |      |         |        |        |    |         |        |        |    |         |       
|Loss from operations                                                                    |                                                  |                          | (10,564 | )                       |        |      | (20,979 | )      |        |      | (18,105 | )      |        |    | (19,586 | )      |        |    | (11,018 | )     
|Other income (expense), net                                                             |                                                  |                          | (311    | )                       |        |      | 323     |        |        |      | 904     |        |        |    | 73      |        |        |    | (327    | )     
|                                                                                        |                                                  |                          |         |                         |        |      |         |        |        |      |         |        |        |    |         |        |        |    |         |       
|Net loss                                                                                |                                                  |                          | (10,875 | )                       |        |      | (20,656 | )      |        |      | (17,201 | )      |        |    | (19,513 | )      |        |    | (11,345 | )     
|Less deemed and cumulative preferred stock
Dividends                                    |                                                  |                          | (1,364  | )                       |        |      | (2,203  | )      |        |      | (2,603  | )      |        |    | (1,756  | )      |        |    |        |       
|                                                                                        |                                                  |                          |         |                         |        |      |         |        |        |      |         |        |        |    |         |        |        |    |         |       
|Net loss available to common stockholders before
cumulative effect of accounting change |                                                  |                          | (12,239 | )                       |        |      | (22,859 | )      |        |      | (19,804 | )      |        |    | (21,269 | )      |        |    | (11,345 | )     
|Cumulative effect of accounting change on preferred
stock beneficial conversion feature |                                                  |                          |        |                         |        |      | (10,612 | )      |        |      |        |        |        |    |        |        |        |    |        |       
|                                                                                        |                                                  |                          |         |                         |        |      |         |        |        |      |         |        |        |    |         |        |        |    |         |       
|Net loss available to common stockholders                                               |                                                  | ($                       | 12,239  | )                       |        | ($   | 33,471  | )      |        | ($   | 19,804  | )      |        | ($ | 21,269  | )      |        | ($ | 11,345  | )     
|                                                                                        |                                                  |                          |         |                         |        |      |         |        |        |      |         |        |        |    |         |        |        |    |         |       
|Basic and diluted net loss per share:                                                   |                                                  |                          |         |                         |        |      |         |        |        |      |         |        |        |    |         |        |        |    |         |       
|Net loss per common share before cumulative effect of
accounting change                 |                                                  | ($                       | 1.58    | )                       |        | ($   | 1.42    | )      |        | ($   | 1.10    | )      |        | ($ | 0.89    | )      |        | ($ | 0.18    | )     
|Cumulative effect of accounting change                                                  |                                                  |                          |        |                         |        |      | (0.67   | )      |        |      |        |        |        |    |        |        |        |    |        |       
|                                                                                        |                                                  |                          |         |                         |        |      |         |        |        |      |         |        |        |    |         |        |        |    |         |       
|Net loss per common share                                                               |                                                  | ($                       | 1.58    | )                       |        | ($   | 2.09    | )      |        | ($   | 1.10    | )      |        | ($ | 0.89    | )      |        | ($ | 0.18    | )     
|                                                                                        |                                                  |                          |         |                         |        |      |         |        |        |      |         |        |        |    |         |        |        |    |         |       
|Weighted average number of shares
Outstanding                                           |                                                  |                          | 7,744   |                         |        |      | 16,050  |        |        |      | 17,956  |        |        |    | 24,020  |        |        |    | 62,685  |       

12



---



##### Table of Contents



|                                          |  |              |         |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|----------------------------------------- |  | ------------ | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                          |  | December 31,
|                                          |  |             
|                                          |  | 1999         |         | 2000 |  | 2001 |        | 2002 |  | 2003
|                                          |  |              |         |      |  |      |        |      |  |     
|Balance Sheet Data:                       |  |              |         |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Cash and cash equivalents                 |  | $            | 66      |      |  | $    | 31,824 |      |  | $    | 15,205 |  |  | $ | 18,191 |  |  | $ | 11,144 | 
|Working capital (deficit)                 |  |              | (13     | )    |  |      | 36,186 |      |  |      | 18,753 |  |  |   | 16,503 |  |  |   | 15,576 | 
|Total assets                              |  |              | 11,085  |      |  |      | 46,761 |      |  |      | 30,161 |  |  |   | 65,326 |  |  |   | 68,123 | 
|Long-term debt, including current portion |  |              | 961     |      |  |      | 751    |      |  |      | 509    |  |  |   | 2,123  |  |  |   | 721    | 
|Redeemable preferred stock                |  |              | 17,125  |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|Total stockholders equity (deficit)      |  |              | (11,656 | )    |  |      | 38,409 |      |  |      | 23,663 |  |  |   | 49,524 |  |  |   | 52,220 | 




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

General

We develop, manufacture and market high performance products to service
providers, systems integrators and original equipment manufacturers in the
commercial wireless telecommunications industry. Our products, known
commercially as SuperLink Solutions, maximize the performance of wireless
networks by improving the quality of uplink signals from subscriber terminals
(wireless handsets or mobile wireless devices) to network base stations and of
downlink signals from network base stations to subscriber terminals. These
premium products are built around our flagship product, SuperLink Rx, and work
in concert to provide Total Link Enhancement, combining the benefits of our
complementary solutions to meet the growing demand of the wireless
telecommunications industry for improved capacity, reduced interference, and
greater coverage for their network base stations.

SuperLink Solutions consist of two unique product families: SuperLink Rx
Solutions and SuperPlex Solutions. Together, these solutions allow service
providers to benefit from lower capital and operating costs. They also
increase the minutes of use because subscribers experience better call quality,
fewer dropped calls and higher speed data transmissions.



| |  | SuperLink Rx.In order to receive uplink signals from wireless
terminals, base stations require a wireless filter system to
eliminate, or filter out, out-of-band interference. To address this
need, we offer SuperLink Rx. Deployed in base stations, these
solutions combine specialized filters using high-temperature
superconducting (HTS) technology with a proprietary cryogenic cooler
and a low-noise amplifier. The result is the ultimate uplink, a
highly compact and reliable cryogenic receiver front-end that can
simultaneously deliver both high selectivity (interference rejection)
and high sensitivity (detection of low level signals). SuperLink Rx
products thereby offer significant advantages over conventional filter
systems.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | SuperPlex.For antenna sharing without compromise, we offer
SuperPlex, a line of multiplexers that provide extremely low insertion
loss and excellent cross-band isolation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

During 2002 and 2003, we were marketing a power amplifier product called
the SuperLink Tx manufactured by another company. The SuperLink Tx was for
wireless networks that suffer from insufficient transmit power on the downlink
signal path. This problem is particularly prevalent after the uplink has been
improved by using SuperLink Rx. Our supplier for this product was acquired by
a competitor of ours in November 2003. We have not had significant sales of
the SuperLink Tx product to date. We are evaluating whether we can and
should develop an alternative source of power amplifiers.

From 1987 to 1997, we were engaged primarily in research and development
and generated revenues primarily from government research contracts. We began
full-scale commercial production of the SuperFilter in 1997 and shipped 1,838
units in 2003. Our focus is now fully on our commercial products, and we
expect commercial revenues to continue increasing as a percentage of our total
revenues. We have incurred cumulative losses of $116 million from inception to
December 31, 2003.

13



---



##### Table of Contents



Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad
debts, inventories, intangible assets, income taxes, warranty obligations,
contingencies and our loss contract with U.S. Cellular. We base our estimates
on historical experience and on various other assumptions that we believed to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of the financial
statements. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. We write down our inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory
and the estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less favorable than those
projected by management, additional inventory write-downs may be required.

Our net sales consist of revenue from sales of products net of trade
discounts and allowances. We recognize revenue when evidence of an arrangement
exists, contractual obligations have been satisfied, title and risk of loss
have been transferred to the customer and collection of the resulting
receivable is reasonably assured. At the time revenue is recognized, we
provide for the estimated cost of product warranties if allowed for under
contractual arrangements. Our warranty obligation is effected by product
failure rates and service delivery costs incurred in correcting a product
failure. Should such failure rates or costs differ from these estimates,
accrued warranty costs would be adjusted.

In connection with the sales of its commercial products, the Company
indemnifies, without limit or term, its customers against all claims, suits,
demands, damages, liabilities, expenses, judgments, settlements and penalties
arising from actual or alleged infringement or misappropriation of any
intellectual property relating to its products or other claims arising from its
products. The Company cannot reasonably develop an estimate of the maximum
potential amount of payments that might be made under its guarantee because of
the uncertainty as to whether a claim might arise and how much it might total.

Contract revenues are principally generated under research and development
contracts. Contract revenues are recognized utilizing the
percentage-of-completion method measured by the relationship of costs incurred
to total estimated contract costs. If the current contract estimate were to
indicate a loss, utilizing the funded amount of the contract, a provision would
be made for the total anticipated loss. Revenues from research related
activities are derived primarily from contracts with agencies of the United
States Government. Credit risk related to accounts receivable arising from
such contracts is considered minimal. These contracts include cost-plus, fixed
price and cost sharing arrangements and are generally short-term in nature.

All payments to the Company for work performed on contracts with agencies
of the U.S. Government are subject to adjustment upon audit by the Defense
Contract Audit Agency. Based on historical experience and review of current
projects
in process, management believes that the audits will not have a
significant effect on the financial position, results of operations or cash
flows of the Company.

In connection with the acquisition of Conductus we recognized $20 million
of goodwill. During the fourth quarter of 2003 we tested the goodwill for
possible impairment and determined that there was no impairment. This goodwill
will again be tested for impairment in the fourth quarter of 2004 or earlier if
events occur which require an earlier assessment. If the carrying amount
exceeds its implied fair value, an impairment loss will be recognized equal to
the excess.

As permitted under Statement of Financial Accounting Standards No. 123
(SFAS 123), Accounting for Stock-Based Compensation, the Company has elected
to follow Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees in accounting for its stock options and other stock-based
employee awards. Pro forma information regarding net loss and loss per share,
as calculated under the provisions of SFAS 123, are disclosed in the notes to
the financial statements. The

14



---



##### Table of Contents



Company accounts for equity securities issued to
non-employees in accordance with the provision of SFAS 123 and Emerging Issues
Task Force 96-18.

If the Company had elected to recognize compensation expense for employee
awards based upon the fair value at the grant date consistent with the
methodology prescribed by SFAS 123, the Companys net loss and net loss per
share would have been increased to the pro forma amounts indicated below:

|                                  |                                                                     |  |      |            |      |  |      |            |   |  |    |            |  
|--------------------------------- | ------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | -- | ---------- | -
|                                  |                                                                     |  | 2001 |            | 2002 |  | 2003
|                                  |                                                                     |  |      |            |      |  |     
|Net Loss:                         |                                                                     |  |      |            |      |  |      |            |   |  |    |           
|                                  | As reported                                                         |  | ($   | 17,201,000 | )    |  | ($   | 19,513,000 | ) |  | ($ | 11,345,000 | )
|                                  | Stock-based compensation included in net loss                       |  |      |           |      |  |      |           |   |  |    |           |  
|                                  | Stock-based compensation expense determined under
fair value method |  |      | (3,970,000 | )    |  |      | (4,056,000 | ) |  |    | (5,435,000 | )
|                                  |                                                                     |  |      |            |      |  |      |            |   |  |    |            |  
|                                  | Pro forma                                                           |  | ($   | 21,171,000 | )    |  | ($   | 23,569,000 | ) |  | ($ | 16,780,000 | )
|                                  |                                                                     |  |      |            |      |  |      |            |   |  |    |            |  
|Basic and diluted loss per
share:
|                                  | As reported                                                         |  | ($   | 1.10       | )    |  | ($   | 0.89       | ) |  | ($ | 0.18       | )
|                                  | Stock compensation expense                                          |  |      | (0.22      | )    |  |      | (0.17      | ) |  |    | (0.09      | )
|                                  |                                                                     |  |      |            |      |  |      |            |   |  |    |            |  
|                                  | Pro forma                                                           |  | ($   | 1.32       | )    |  | ($   | 1.06       | ) |  | ($ | 0.27       | )
|                                  |                                                                     |  |      |            |      |  |      |            |   |  |    |           

Our valuation allowance against the deferred tax assets is based on our
assessments of historical losses and projected operating results in future
periods. If and when we generate future taxable income in the U.S. against
which these tax assets may be applied, some portion or all of the valuation
allowance would be reversed and an increase in net income would consequently be
reported in future years.

Backlog

Our commercial backlog consists of accepted product purchase orders
scheduled for delivery within 24 months and consists of purchase orders for
both dollar and unit purchase commitments. The exact dollar commitment for
unit commitments may vary depending on the exact units purchased. Based on past
purchasing patterns and expected purchasing trends of customers with unit
commitments, we estimate our backlog at December 31, 2003 to be $250,000, as
compared to $1.4 million at December 31, 2002.

Results of Operations

Acquisition of Conductus

We acquired Conductus, Inc. on December 18, 2002. Conductus is located in
Sunnyvale California and was a competing supplier of high-temperature
superconducting technology for wireless networks. We discontinued their
competing commercial product line (the ClearSite) and are incorporating their
technology into our commercial product line
(the SuperLink). We are also using their technical resources in Sunnyvale
to supplement ours. The results of Conductus are included in the consolidated
financial statement for 13 days in 2002 following its acquisition and for the
entire year of 2003. The acquisition did not have a significant impact on the
results of operations for the year ended December 31, 2002.

Recent Developments and Trends for 2004

We are a manufacturer of equipment to a relatively small number of
customers and are highly sensitive to any changes experienced by our customers.
We are currently experiencing the downside of such changes with two customers
that we consider important for our revenues in 2004. One of our
customers is being
acquired. We believe that this customer has stopped work
temporarily on certain infrastructure projects because of the acquisition.
Some of these projects involved our products. We also believe that
another customer meanwhile has decided to greatly accelerate a project to roll
out a new third generation technology that has diverted their resources. This
is delaying some projects to deploy our product for improvements to their

15



---



##### Table of Contents



existing network. We believe these are temporary impediments but cannot be
certain of their duration. We are also aggressively pursuing efforts to have
our product incorporated into our customers new third
generation wireless networks. We believe our product sales will, in the long
run, continue to be driven by the need for efficient capital spending and
improved network performance of both the existing wireless technologies and the
new third generation wireless technologies such as 1X-EVDO, EDGE and W-CDMA.

We also expect increased competition in 2004 from venders of other
interference solutions such as tower mount amplifiers and conventional filters.
We expect this will increase customer pressure on our product pricing in 2004.
Our product pricing has always been influenced by this competition, and we
have responded by continually and substantially reducing our product costs. We
expect our product costs will continue to decline in 2004, but we cannot
predict whether they will decline at a rate sufficient to keep pace with the
competitive pricing pressure. This could adversely affect our net commercial
product revenues and gross margins in 2004.

2003 Compared to 2002

Total net revenues increased by $27.0 million, or more than 100%, from
$22.4 million in 2002 to $49.4 million for 2003. This increase is primarily
due to higher commercial product sales and government and other contract
revenues, including the government contract and other revenue from our
acquisition of Conductus in December 2002.

We generate commercial revenues primarily from sales of our SuperLink Rx
product line which combines specialized filters using high-temperature
superconducting (HTS) technology with a proprietary cryogenic cooler and a
low-noise amplifier in highly compact systems. We also started selling
significant quantities of a new multiplexer product line starting in February
2001. Net commercial product revenue consists of gross commercial product
sales proceeds less sales discounts and the allocation of certain sales
proceeds to a warrant issued to one customer in 1999 under a long-term supply
agreement. The following table summarizes the calculation of net commercial
product revenue for 2003 and 2002:

|                                                  |               |      |                         |        |   |   |        |     |  
|------------------------------------------------- | ------------- | ---- | ----------------------- | ------ | - | - | ------ | --- | -
|                                                  |               |      | Year Ended December 31,
|Dollars in thousands                              |               | 2002 |                         | 2003  
|                                                  |               |      |                         |        |  
|Gross commercial product sales proceeds           |               | $    | 20,040                  |        |   | $ | 38,964 |    
|Less allocation of proceeds to warrants
issued to |               |      |                         |        |   |   |        |    
|                                                  | U.S. Cellular |      |                         | (2,283 | ) |   |        | (90 | )
|Less sales discounts                              |               |      | (156                    | )      |   |   | (297   | )  
|                                                  |               |      |                         |        |   |   |        |    
|Net commercial product revenues                   |               | $    | 17,601                  |        |   | $ | 38,577 |    
|                                                  |               |      |                         |        |   |   |        |    

Net commercial product revenues increased to $38.6 million in 2003 from
$17.6 million in 2002, an increase of $21.0 million, or more than 100%. This
increase is primarily the result of an increase in sales of our SuperLink Rx
products of $17.2 million, increased sales of our multiplexer product of $1.2
million and a $2.3 million decrease in sales proceeds allocated to warrants
issued to U.S. Cellular. The average selling price for the SuperLink Rx
decreased 7% on our
SIX-Pak units and increased 1% on our TWO-Pak units. Our two largest
customers accounted for 85% of our net commercial revenues in 2003 and 92% in
2002.

Government contract revenues increased by $6.0 million, or more than 100%,
from $4.8 million in 2002 to $10.8 million in 2003. This increase results
primarily from the acquisition of Conductus which totaled $4.6 million and the
remainder to a modest increase in other government contracts at our Santa
Barbara facility. In our business model, we use government contracts as a
source of funds for our commercial technology development. We primarily pursue
government research and development contracts which compliment our commercial
product development. In other words, we undertake government contract work
which has the potential to add to or improve our commercial product line.
These contracts often yield valuable intellectual property relevant to our
commercial business. Under the terms of our government contracts, we retain
exclusive rights to this technology for commercial applications and the federal
government has a non-exclusive license to exploit the technology for government
applications.

16



---



##### Table of Contents



Cost of commercial product revenue includes all direct costs,
manufacturing overhead and related start-up costs. The cost of commercial
product revenues totaled $28.2 million for 2003. For 2002, cost of commercial
products revenues totaled $19.3 million, and was reduced by amortization
credits of $2.0 million for the accrual of a non-cash contract loss on the
purchase order from U.S. Cellular. Please read the discussion on page 21
entitled Non-Cash Charges for Warrants Issued to U.S. Cellular. For 2002,
excluding these amortization credits, the cost of commercial revenues totaled
$21.3 million compared to $28.2 million in 2003. Increased costs resulting
from increased unit shipments and higher costs associated with ramping up our
manufacturing capacity were offset by lower material and labor costs per unit
and the effect of increased manufacturing efficiencies.

We generated positive commercial gross margins of $10.3 million in 2003
from the sale of our commercial products, as compared to negative gross margins
of $1.7 million for 2002. The improvement is due to increased commercial
product revenues and decreased manufacturing cost per unit.

Contract research and development expenses totaled $6.9 million in 2003
and $2.5 million in 2002. The increase is primarily from the acquisition of
Conductus. The remainder is attributable to a modest increase in government
contract revenues at our Santa Barbara facility.

Other research and development expenses are for internally funded
development of our commercial products. These expenses increased to $4.7
million in 2003, and are comparable to $4.5 million in 2002.

Selling, general and administrative expenses totaled $20.6 million in 2003
as compared to $15.0 million in 2002. This increase results primarily from
increased domestic and international marketing and sales efforts, higher
expenses related to the acquired Conductus operations and higher ISCO
litigation expenses. ISCO litigation expenses totaled $4.8 million in 2003, as
compared to $3.1 million in 2002. ISCO has appealed their loss in the trial
court, and we expect ongoing but modest litigation expenses in 2004 for the
appeal process.

Interest income decreased in 2003 as compared to 2002 due to decreased
levels of cash available for investment and the decline in interest rates.

Interest expense increased in 2003 as compared to 2002 and resulted from
the increased debt incurred in the fourth quarter of 2002, from short-term
borrowings in 2003 and accretion of long term liabilities recorded in the
Conductus acquisition.

We had a net loss of $11.3 million for 2003 as compared to $19.5 million
in 2002.

The net loss available to common shareholders totaled $11.3 million in
2003, or $0.18 per common share, as compared to $21.3 million, or $0.89 per
common share, in 2002. The amounts for 2002 include a charge of $1.8 million
for a non-cash deemed distribution on preferred stock.

2002 Compared to 2001

Total net revenues increased by $10.0 million, or more than 81%, from
$12.4 million for 2001 to $22.4 million for 2002. The increase is primarily
due to higher commercial product sales. The following table summarizes the
calculation of net commercial product revenue for 2002 and 2001. (Please read
the discussion on page 21 under the caption Non-Cash Charges for Warrants
Issued To U.S. Cellular for a discussion of the allocation to warrants.)

|                                        |                                                                 |      |                        |        |   |   |        |        |  
|--------------------------------------- | --------------------------------------------------------------- | ---- | ---------------------- | ------ | - | - | ------ | ------ | -
|                                        |                                                                 |      | Year Ended December 31
|                                        |                                                                 |      |                       
|Dollars in thousands                    |                                                                 | 2001 |                        | 2002  
|                                        |                                                                 |      |                        |        |  
|Gross commercial product sales proceeds |                                                                 | $    | 9,907                  |        |   | $ | 20,040 |       
|                                        | Less allocation of proceeds to warrants
issued to
U.S. Cellular |      |                        | (2,238 | ) |   |        | (2,283 | )
|                                        | Less sales discounts                                            |      |                        | (68    | ) |   |        | (156   | )
|                                        |                                                                 |      |                        |        |   |   |        |       
|Net commercial product revenues         |                                                                 | $    | 7,601                  |        |   | $ | 17,601 |       
|                                        |                                                                 |      |                        |        |   |   |        |       

17



---



##### Table of Contents



Net commercial product revenues increased to $17.6 million in 2002 from
$7.6 million in 2001, an increase of $10.0 million, or more than 100%. This
increase is primarily the result of an increase in sales of our SuperLink Rx
products of $8.2 million-and increased sales of our new multiplexer product of
$1.6 million. The average selling price for the SuperLink Rx decreased 19% on
our SIX-Pak units and decreased 2% on our TWO-Pak units. The SIX-Pak price
decrease followed a discount on a large order of product in December 2001. Our
two largest customers accounted for 92% of our net commercial revenues in 2002
and 85% in 2001.

Government contract revenues totaled $4.8 million in 2002 and are
comparable to the prior year.

Cost of commercial product revenue includes all direct costs,
manufacturing overhead and related start-up costs. The cost of commercial
product revenues totaled $19.3 million for 2002, and was reduced by
amortization credits of $2.0 million relating to the accrual for non-cash
contract loss on the purchase order from U.S. Cellular. Please read the
subsection below entitled Non-Cash Charges for Warrants Issued To U.S.
Cellular. For 2002, excluding these amortization credits, the cost of
commercial revenues totaled $21.3 million as compared to $12.9 million in 2001.
This increase resulted from increased unit shipments and higher costs
associated with ramping up the Companys manufacturing capacity, partially
offset by lower material and labor costs per unit and the effect of increased
manufacturing efficiencies.

For the year ended December 31, 2002 we generated negative gross margins
on our commercial products at current sales levels primarily due to fixed
manufacturing overhead costs. However, in the fourth quarter of 2002 we
generated positive gross margins of $112,000 from net commercial sales of $4.3
million..

Contract research and development expenses totaled $2.5 million in 2002 as
compared to $3.4 million in the prior year and included subcontract expenses of
$93,000 and $1.4 million, respectively. Excluding subcontract expenses,
contract research and development expenses decreased to $2.4 million in 2002,
as compared to $2.0 million last year. This decrease results from the
increased focus on commercial research efforts.

Other research and development expenses relate to development of our
commercial products. These expenses totaled $4.5 million in 2002 and are
comparable to the prior year.

Write off of in-process research and development (IPR&D) totaled $700,000
and resulted from the acquisition of Conductus. The amount of the purchase
price allocated to purchased IPR&D was expensed upon acquisition, because the
technological feasibility of products under development has not been
established and no alternative future uses existed. The IPR&D relates to
technologies representing processes and expertise employed to make new high
temperature superconducting materials technology and device design and
cryopackaging and systems integration technology. At the time of the
acquisition, the products under development were about 50% complete and it was
expected that the remaining efforts would be completed by the end of 2004 at a
cost of approximately $2.5 million. The remaining efforts include completion
of development processes, manufacturing processes, final product integration
and testing. All of the IPR&D projects are subject to the normal risks and
uncertainties.

Selling, general and administrative expenses totaled $15.0 million in 2002
as compared to $11.9 million in 2001. This increase results primarily from
increased domestic and international marketing and sales efforts and ISCO
litigation expenses. ISCO litigation expenses totaled $3.1 million for 2002 as
compared to $976,000 in 2001.

Interest income decreased in 2002 as compared to 2001 due to decreased
levels of cash available for investment and the decline in interest rates.

Interest expense in 2002 was comparable to the prior year.

We had a net loss of $19.5 million in 2002 as compared to $17.2 million in
2001.

The net loss available to common shareholders totaled $21.3 million in
2002, or $0.89 per common share, as compared to $19.8 million, or $1.10 per
common share, in 2001. The amounts for 2002 and 2001 include a $1.8 million
and $2.6 million, respectively, non-cash deemed distribution on preferred
stock.

18



---



##### Table of Contents



Liquidity and Capital Resources

We continue to depend on equity transactions for a significant portion of
the financing for our operations. The following summarizes our equity
transactions since January 1, 2000:



| |  | On February 11, 2000, we completed a public offering of 2,473,701
shares of common stock, priced at $3.25 per share, of which 2,319,855
shares of common stock were sold for a cash payment totaling
$7,540,000 and 153,846 shares of common stock were exchanged for
short-term indebtedness of $500,000. We received net proceeds totaling
$7.4 million. Concurrent with the offering, the holders of the Series
A-2, A-3 and C Redeemable Convertible Preferred Stock converted their
holdings into 2,458,391 shares of common stock. As an inducement to
convert the preferred shares, we issued the preferred stockholders
warrants to purchase 250,000 shares of common stock at $3.58 per
share. Also during the year ended December 31, 2000, the holders of
the outstanding Series B-1 and D preferred shares elected to convert
their holdings into 3,175,409 shares of common stock.                                                                                                                                                     
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | On September 29, 2000, we completed a private placement of 37,500
shares of Series E Convertible Preferred Stock and warrants to
purchase up to an additional 1,044,568 shares of common stock. We
received net proceeds totaling $35,155,000. The preferred stock was
non-voting, had a stated value and a liquidation preference of $1,000
per share, and was convertible into common stock at the lower of
$17.95 per common share or the market price of the common stock at the
time of conversion, subject to an implicit floor.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| 
| |  | During 2001, preferred stockholders converted 3,000 Series E preferred
shares into 625,093 shares of common stock, and we issued 51,212
shares of common stock to pay for the conversion premium. During 2002,
preferred stockholders converted the remaining 34,500 shares of Series
E preferred stock into 2,878,351 shares of common stock. We paid the
associated conversion premium of $4,686,000 with $3.0 million in cash
and an eighteen-month $1.7 million subordinated note. The subordinated
note carries eight percent interest with interest only payable for the
first six months and monthly amortization of principal and interest
for the remaining twelve months.                                                                                                                                                                                                                                                                                                                                                                 
| 
| |  | In connection with the sale of the Series E preferred stock, we also
issued two five-year warrants to purchase shares of common stock at an
exercise price of $21.54 per share. The first warrant is for the
purchase of 313,370 shares and the second warrant is for the purchase
of up to 731,198 additional shares of common stock. Both warrants are
currently exercisable and contain weighted average anti-dilution
provisions which adjust the warrant exercise price and number of
shares in the event the Company sells equity securities at a discount
to then prevailing market prices. The amount of the adjustment
depends on the size of the below-market transaction and the amount of
the discount to the market price. The warrant exercise price cannot
be reduced below a minimum of $18.91 as the result of adjustments
under this provision. As a result of the issuance of common shares
during 2002 and 2003, the warrant exercise prices were reduced to
$19.28 and the aggregate number of shares increased to 1,166,477.
| 
| |  | In March 2002, we raised net proceeds of $12,122,000 from the private
sale of 3,714,286 shares of common stock at $3.50 per share based on a
negotiated discount to market and 5-year warrants to purchase an
additional 557,143 shares of common stock exercisable at $5.50 per
share. In conjunction with this equity issuance, we also issued to the
placement agent 5-year warrants to purchase up to 213,571 shares of
common stock at an exercise price of $5.50 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| 
| |  | In connection with the acquisition of Conductus, Inc. in December
2002, we raised net proceeds of $19,704,000 from the private sale of
21,096,954 shares of common stock at $0.95 per share based on a
negotiated discount to market and 5-year warrants to purchase an
additional 5,274,240 shares of common stock exercisable at $1.19 per
share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| 
| |  | In June 2003, we raised net proceeds of $10.1 million from the private
sale of 5,116,278 shares of common stock at $2.15 per share and 5-year
warrants to purchase an additional 1,279,069 shares of common stock at
$2.90 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

We have effective registration statements on file with the SEC covering
the public resale by investors of all the common stock issued in our private
placements, as well as any common stock acquired upon the exercise of their
warrants.

19



---



##### Table of Contents



Cash and cash equivalents decreased by $7.1 million, from $18.2 million at
December 31, 2002 to $11.1 million at December 31, 2003. Cash used in
operations and investing activities during 2003 was partially offset by cash
received from the sale of common stock and warrants in a private placement,
exercises of warrants and options and a net increase in borrowings. Cash and
cash equivalents increased by $3.0 million, from $15.2 million at December 31,
2001 to $18.2 million at December 31, 2002. Cash used in operations and
investing activities during 2002 was offset by cash received from the sale of
common stock and warrants in a private placement during the first and fourth
quarters.

Net cash used in operations totaled $14.7 million in 2001, $20.0 million
in 2002 and $18.5 million in 2003. The increase in cash used in operations in
2002 is primarily the result of the $1.5 million increased cash portion of our
net loss and to a $3.8 million net increase in accounts receivable, inventories
and other current and non current assets and paydown of accounts payable and
accrued liabilities. The decrease in cash used in operations in 2003 is
primarily due the decrease in cash loss of $8.6 million, partially offset by
increased cash used in other operating assets and liabilities over that in
2002. Depreciation and amortization expense increased in the year ended
December 31, 2003 due to increased amortization related to the acquired
technology in the Conductus acquisition and increased fixed assets expenditures
in the prior year.

Net cash used in investing activities totaled $1.9 million in 2001, $5.5
million in 2002 and $4.4 million in 2003. It related in each year primarily to
purchases of manufacturing equipment and facilities improvements. In 2003,
cash of $500,000 was used to pay upfront license fees for a new technology
license. In 2002, cash of $429,000 was used in the acquisition of Conductus,
Inc. and $374,000 was provided by the release of restrictions on $374,000 of
cash obtained through the Conductus acquisition.

Net cash provided by (used in) financing activities totaled ($24,000) in
2001, $28.4 million in 2002 and $15.8 million in 2003. The net cash provided
by financing activities in 2003 primarily resulted from the sales of common
stock and warrants for $10.1 million in June 2003, $3.8 million from the
exercise of warrants in December 2003 and, net borrowings against our credit
facility totaling $3.3 million. These sources of funds were partially offset
by the reduction in long-term borrowings of $1.4 million. The net cash
provided by financing activities in 2002 primarily resulted from the sale of
common stock and warrants for $12.2 million in March 2002 and for $19.7 million
in December 2002 relating to the Conductus acquisition. These amounts were
partially offset by the payments on long-term debt and $3.0 million premium
paid on the conversion of the Series E convertible preferred stock. In 2001,
cash used in financing operations resulted from the exercise of stock options,
which totaled $218,000 and was offset by the net reduction in borrowings of
$242,000.

We have a line of credit from a bank. It is a material source of funds
for our business. We recently renewed the line of credit for an additional
year until March 17, 2005. The line of credit is structured as a sale of our
accounts receivable. The loan agreement provides for the sale of up to $5.0
million of eligible accounts receivable, with advances to us totaling 80% of
the receivables sold. Advances bear interest at the prime rate (4.00% at
December 31, 2003) plus 2.50% subject to a minimum monthly charge.
Outstanding amounts under this borrowing
facility at December 31, 2003 totaled $3,308,000. The amount outstanding is
repayable upon collection of the underlying accounts receivable. Advances are
secured by a lien on all of our assets. Under the terms of the agreement, we
continue to service the sold receivables and are subject to recourse
provisions. In connection with this agreement, we issued seven year warrants
to the bank for the purchase of 94,340 shares of common stock at $1.06 per
share.

At December 31, 2003, we had the following cash commitments:

|                                                             |  |                        |            |                  |  |           |           |           |  |               |           |  |  |   |           |  |  |   |           | 
|------------------------------------------------------------ |  | ---------------------- | ---------- | ---------------- |  | --------- | --------- | --------- |  | ------------- | --------- |  |  | - | --------- |  |  | - | --------- | 
|                                                             |  | Payments Due by Period
|                                                             |  |                       
|Contractual Obligations                                      |  | Total                  |            | Less than 1 year |  | 2-3 years |           | 4-5 years |  | After 5 years
|                                                             |  |                        |            |                  |  |           |           |           |  |              
|Capital lease obligations                                    |  | $                      | 174,000    |                  |  | $         | 85,000    |           |  | $             | 74,000    |  |  | $ | 15,000    |  |  | $ |          | 
|Principal and interest
payments on subordinated
note payable |  |                        | 587,000    |                  |  |           | 587,000   |           |  |               |          |  |  |   |          |  |  |   |          | 
|Operating leases                                             |  |                        | 13,399,000 |                  |  |           | 2,466,000 |           |  |               | 3,877,000 |  |  |   | 2,730,000 |  |  |   | 4,326,000 | 

20



---



##### Table of Contents



|                                   |  |                        |            |                  |  |           |           |           |  |               |           |  |  |   |           |  |  |   |           | 
|---------------------------------- |  | ---------------------- | ---------- | ---------------- |  | --------- | --------- | --------- |  | ------------- | --------- |  |  | - | --------- |  |  | - | --------- | 
|                                   |  | Payments Due by Period
|                                   |  |                       
|Contractual Obligations            |  | Total                  |            | Less than 1 year |  | 2-3 years |           | 4-5 years |  | After 5 years
|                                   |  |                        |            |                  |  |           |           |           |  |              
|Minimum license
commitment         |  |                        | 3,150,000  |                  |  |           | 270,000   |           |  |               | 540,000   |  |  |   | 540,000   |  |  |   | 1,800,000 | 
|Fixed asset purchase
commitments   |  |                        | 817,000    |                  |  |           | 817,000   |           |  |               |          |  |  |   |          |  |  |   |          | 
|                                   |  |                        |            |                  |  |           |           |           |  |               |           |  |  |   |           |  |  |   |           | 
|Total contractual cash
obligations |  | $                      | 18,127,000 |                  |  | $         | 4,225,000 |           |  | $             | 4,491,000 |  |  | $ | 3,285,000 |  |  | $ | 6,126,000 | 
|                                   |  |                        |            |                  |  |           |           |           |  |               |           |  |  |   |           |  |  |   |           | 

We plan to invest approximately $2.0 to 5.0 million in fixed assets during
2004 to continue to expand manufacturing ability depending on market demand for
our product. This plan is contingent on our ability to raise additional
capital later this year.

Our auditors have included in their report for the 2003 year an
explanatory paragraph expressing doubt about our ability to continue as a going
concern due to past losses and negative cash flows. They included a similar
explanatory paragraph in their audit report for 2002. In 2003, we incurred a
net loss of $11,345,000 and negative cash flows from operations of $18,458,000.
We are also experiencing lower than expected revenues in the first quarter of
2004. In response, we are adjusting our inventory build plan, reducing direct
labor, cutting certain fixed costs and implementing a reduced work week. We
believe these steps will provide us with sufficient capital resources to
continue normal operations until we can complete a financing transaction. We
will need additional financing in the short term, but we have not yet made any
decision concerning our fund raising plans.

We cannot give assurance that additional financing (public or private)
will be available on acceptable terms or at all. If we issue additional equity
securities to raise funds, the ownership percentage of its existing
stockholders would be reduced. New investors may demand rights, preferences or
privileges senior to those of existing holders of common stock. If we cannot
raise any needed funds, we would also be forced to make further substantial
reductions in its operating expenses, which could adversely affect our ability
to implement our current business plan and ultimately our viability as a
company.

Our financial statements have been prepared assuming that we will continue
as a going concern. The factors described above raise substantial doubt about
our ability to continue as a going concern. These financial statements do not
include any adjustments that might result from this uncertainty.

Non-Cash Charges for Warrants Issued To U.S. Cellular

In August 1999, we entered into a warrant agreement with United States
Cellular Corporation (U.S. Cellular) where the exercise of a warrant to
purchase up to 1,000,000 shares of common stock was conditioned upon future
product purchases by U.S. Cellular. Under the terms of the warrant, U.S.
Cellular vests in the right to purchase one share of common stock at $4 per
share for every $25 of SuperFilter systems purchased. The warrant is
immediately exercisable with respect to any vested shares and expires August
27, 2004. For accounting purposes, we are allocating proceeds from sales under
this agreement between commercial product revenues and the estimated value of
the warrants vesting in connection with those sales. The estimated fair value
of the warrants in excess of the related sales, when applicable, is recorded in
cost of commercial product revenues.

In September 2000, we received a $7.8 million noncancelable purchase order
from U.S. Cellular for SuperFilter® systems to be shipped over the next nine
quarters. In consideration for the purchase order, we amended the August 1999
warrant agreement and vested 312,000 warrants to U.S. Cellular. The vested
warrants are immediately exercisable, not subject to forfeiture, and U.S.
Cellular has no other purchase obligations.

We estimated the fair value of the warrants vesting upon receipt of this
order at $5,635,000 using the Black-Scholes option-pricing model and recorded
this amount as a deferred warrant charge in the statement of stockholders
equity. As SuperFilter systems are shipped under this purchase order, the
related sales proceeds will be allocated between stockholders equity and
commercial product revenue using the percentage relationship which existed
between the fair value of the warrants as recorded in September 2000 and the
amount of the non-cancelable purchase order. During 2001 and 2002 sales
proceeds of $2,237,000 and $2,280,000, respectively, for shipments pursuant to
this purchase order were allocated to the deferred warrant

21



---



##### Table of Contents



charge and proceeds of $879,000 and $967,000, respectively, were recorded
as commercial product revenues under this purchase order.

After the allocation of sales proceeds under the $7.8 million purchase
order to the related warrants, the estimated cost of providing products under
the purchase order exceeded related revenue by $5.3 million. The resulting
loss was reflected in the results of operations for the year ended December 31,
2000. During the years ending December 31, 2001 and 2002, $2,243,000 and
$1,998,000, respectively, of this reserve was reversed against the cost of
product delivered under this purchase order.

During the fourth quarter of 2002, deliveries under the $7.8 million
purchase order were completed. For accounting purposes proceeds from
subsequent sales to U.S. Cellular under this agreement are again being
allocated between commercial product revenue and the estimated value of the
warrants vesting using the Black-Scholes option-pricing model. For subsequent
product sales in the fourth quarter of 2002 and the year ended December 31,
2003, U.S. Cellular vested in the right to exercise the warrant and purchase a
total of 22,540 and 38,088 shares of common stock and sales proceeds allocated
to warrants vesting in 2002 and 2003 totaled $3,000 and $90,000, respectively.

As of December 31, 2003, U.S. Cellular had 524,932 unvested warrants that
can be earned from future product orders through August 27, 2004.

Net Operating Loss Carryforward

As of December 31, 2003, the Company has net operating loss carryforwards
for federal and state income tax purposes of approximately $215.1 million and
$90.6 million, respectively, which expire in the years 2003 through 2023. Of
these amounts $93.9 million and $30.2 million, respectively resulted from the
acquisition of Conductus. Included in the net operating loss carryforwards are
deductions related to stock options of approximately $24.0 million and $13.0
million for federal and California income tax purposes. To the extent net
operating loss carryforwards are recognized for accounting purposes the
resulting benefits related to the stock options will be credited to
stockholders equity. In addition, the Company has research and development and
other tax credits for federal and state income tax purposes of approximately
$2.6 million and $2.3 million, respectively, which expire in the years 2003
through 2023. Of these amounts $972,000 and $736,000, respectively resulted
from the acquisition of Conductus.

Due to the uncertainty surrounding their realization, the Company has
recorded a full valuation allowance against its net deferred tax assets.
Accordingly, no deferred tax asset has been recorded in the accompanying
balance sheet.

Section 382 of the Internal Revenue Code imposes an annual limitation on
the utilization of net operating loss carryforwards based on a statutory rate
of return (usually the applicable federal funds rate, as defined in the
Internal Revenue Code) and the value of the corporation at the time of a
change of ownership as defined by Section 382. Recently, the Company
completed an analysis of its equity transactions and determined that it had a
change in ownership in August 1999 and December 2002. Therefore, the ability
to utilize net operating loss carryforwards incurred prior to the change of
ownership totaling $101.6 million will be subject in future periods to an
annual limitation of $1.3 million. In addition, the Company acquired the right
to Conductus net operating losses, which are also subject to the limitations
imposed by Section 382. Conductus underwent three ownership changes which
occurred in February 1999, February 2001 and December 2002. Therefore, the
ability to utilize Conductus net operating loss carryforwards of $93.9 million
incurred prior to the ownership changes will be subject in future periods to
annual limitation of $700,000. Net operating losses incurred by the Company
subsequent to the ownership changes totaled $19.5 million and are not subject
to this limitation.

Future Accounting Requirements

In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities(SFAS 146), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF Issue 94-3,
a liability for an exit cost as defined in

22



---



##### Table of Contents



EITF Issue 94-3 was recognized at the date of an entitys commitment to an
exit plan. SFAS 146 also establishes that the liability should initially be
measured and recorded at fair value. The Company adopted the provisions of
SFAS 146 effective January 1, 2003 and such adoption did not have a material
impact on the consolidated financial statements. In November 2002, the FASB
issued Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of
Others(FIN 45). FIN 45 elaborates on the disclosures to be made by the
guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also requires that a guarantor
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The Company adopted the
disclosure provisions of FIN 45 during the fourth quarter of 2002 and the
recognition provisions of FIN 45 effective January 1, 2003. Such adoption did
not have a material impact on the consolidated financial statements.

In January 2003, FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities(FIN 46). In general, a variable interest entity
is a corporation, partnership, trust or any other legal structure used for
business purposes that either (a) does not have equity investors with voting
rights nor (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The Company adopted
the provisions of FIN 46 effective February 1, 2003 and such adoption did not
have an impact on its consolidated financial statements since it currently has
no variable interest entities. In December 2003, the FASB issued FIN 46R with
respect to variable interest entities created before January 31, 2003, which
among other things, revised the implementation date to the first year or
interim period ending after March 15, 2004, with the exception of Special
Purpose Entities (SPE). The consolidation requirements apply to all SPEs in
the first year or interim period beginning after December 15, 2003. The
Company adoption of the provisions of FIN 46R is not expected to have a
material impact on the Companys its consolidated financial statements since it
currently has no SPEs.

In April 2003, FASB issued Statement of Financial Accounting Standards No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities(SFAS 149). SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS 133. SFAS 149 is
effective for contracts and hedging relationships entered into or modified
after June 30, 2003. The Company adopted the provisions of SFAS 149 effective
June 30, 2003 and such adoption did not have an impact on its consolidated
financial statements since the Company has not entered into any derivative or
hedging transactions.

In May 2003, FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity(SFAS 150). SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both debt and equity and requires an issuer to classify the
following instruments as liabilities in its balance sheet:



| |  | a financial instrument issued in the form of shares that is
mandatorily redeemable and embodies an unconditional obligation that
requires the issuer to redeem it by transferring its assets at a
specified or determinable date or upon an event that is certain to
occur;                                                                                                                                                                 
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | a financial instrument, other than an outstanding share, that embodies
an obligation to repurchase the issuers equity shares, or is indexed
to such an obligation, and requires the issuer to settle the
obligation by transferring assets; and                                                                                                                                                                                            
| 
| |  | a financial instrument that embodies an unconditional obligation that
the issuer must settle by issuing a variable number of its equity
shares if the monetary value of the obligation is based solely or
predominantly on (1) a fixed monetary amount, (2) variations in
something other than the fair value of the issuers equity shares, or
(3) variations inversely related to changes in the fair value of the
issuers equity shares.

In November 2003, FASB issued FASB Staff Position No. 150-3 which deferred
the effective dates for applying certain provisions of SFAS 150 related to
mandatorily redeemable financial instruments of certain non-public entities and
certain mandatorily redeemable non-controlling interests for public and
non-public companies. For public entities, SFAS 150 is effective for
mandatorily redeemable financial instruments entered into or modified after May
31, 2003 and is effective for

23



---



##### Table of Contents



all other financial instruments as of the first interim period beginning
after June 15, 2003. For mandatorily redeemable non-controlling interests that
would not have to be classified as liabilities by a subsidiary under the
exception in paragraph 9 of SFAS 150, but would be classified as liabilities by
the parent, the classification and measurement provisions of SFAS 150 are
deferred indefinitely. The measurement provisions of SFAS 150 are also
deferred indefinitely for other mandatorily redeemable non-controlling
interests that were issued before November 4, 2003. For those instruments, the
measurement guidance for redeemable shares and non-controlling interests in
other literature shall apply during the deferral period.

We adopted the provisions of SFAS 150 effective June 30, 2003, and such
adoption did not have an impact on our consolidated financial statements.

Market Risk

We are exposed to various market risks, including changes in interest
rates. Market risk is the potential loss arising from adverse changes in
market rates and prices. We do not enter into derivatives or other financial
instruments for trading or speculation purposes.

At December 31, 2003, we had approximately $10.6 million invested in a
money market account yielding approximately 0.9%. Assuming a 0.9% decrease in
the yield on this money market account and no liquidation of principal for the
year, our total interest income would decrease by approximately $95,000 per
annum. Also, at December 31, 2003 we had $3.3 million outstanding under a bank
borrowing arrangement bearing interest at the prime rate (4.00% at December 31,
2003) plus 2.50%. Assuming a 1% increase in the prime rate interest and that
the amount was outstanding for the entire year, interest expense would increase
$33,000.

Forward-Looking Statements

This report contains forward-looking statements that involve risks and
uncertainties. We have made these statements in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Our
forward-looking statements relate to future events or our future performance
and include, but are not limited to, statements concerning our business
strategy, future commercial revenues, market growth, capital requirements, new
product introductions, expansion plans and the adequacy of our funding. Other
statements contained in this report that are not historical facts are also
forward-looking statements. We have tried, wherever possible, to identify
forward-looking statements by terminology such as may, will, could,
should, expects, anticipates, intends, plans, believes, seeks,
estimates and other comparable terminology.

Forward-looking statements are not guarantees of future performance and
are subject to various risks, uncertainties and assumptions that are difficult
to predict. Therefore, actual results may differ materially from those
expressed in forward-looking statements. They can be affected by many factors,
including, but not limited to the following:



| |  |  | fluctuations in product demand,                                     
| | - |  | --------------------------------------------------------------------
|
| |  |  | the impact of competitive filter products, technologies and pricing,
|
| |  |  | manufacturing capacity constraints and difficulties,                
|
| |  |  | market acceptance risks, and                                        
|
| |  |  | general economic conditions.                                        

Please read Exhibit 99 to this report entitled Disclosure Regarding
Forward-Looking Statements for a description of additional uncertainties and
factors that may affect our forward-looking statements. Forward-looking
statements are based on information presently available to senior management,
and we do not assume any duty to update our forward-looking statements.

Inflation

We do not foresee any material impact on our operations from inflation.




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

24



---



##### Table of Contents



See Managements Discussion and Analysis of Financial Condition and
Results of Operations  Market Risk.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

All information required by this item is listed in the Index to Financial Statements in Part IV, Item 15(a) 1.




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

Not applicable.




ITEM 9A. DISCLOSURE CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of December 31, 2003, we carried out an evaluation, under the
supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls
and procedures are effective in timely alerting them to material information
relating to the company that is required to be included in our periodic SEC
filings. There were no significant changes in internal controls or in other
factors that could significantly affect these controls during the fourth
quarter of 2003, including any corrective actions with regard to significant
deficiencies and material weaknesses.

Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting
during the fourth quarter that has materially affected, or is reasonable likely
to materially affect, our internal control over financial reporting.




PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding our executive officers and directors is incorporated
by reference to the information set forth under the caption
BusinessExecutive Officers and Directors and under the caption Proposal
One: Election of Directors in the our Proxy Statement for the Annual Meeting
of Stockholders to be filed with the Commission within 120 days after the end
of the our year ended December 31, 2003.

We adopted a Code of Business Conduct and Ethics in 2003 for all of our
employees, including our Chief Executive Officer, Chief Financial Officer and
Principal Accounting Officer. The purpose of the code is to ensure that our
business is conducted in a consistently legal and ethical matter. We have
posted the text of the code on our website at www.suptech.com. We will post
any future amendment to the code on our website. We plan to review the code in
the near future in light of Nasdaqs recently adopted corporate governance
rules. We will provide a copy of our code free of charge to any person upon
request by writing to us at the following address: Superconductor Technologies
Inc., 460 Ward Drive, Santa Barbara, California 93111-2310, Attn: Martin S.
McDermut, SVP/CFO.




ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation is incorporated by reference
to the information set forth under the caption Executive Compensation in our
Proxy Statement for the Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the end of our year ended December 31, 2003.

25



---



##### Table of Contents






ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners and
management is incorporated by reference to the information set forth under the
caption Voting Securities of Principal Stockholders and Management in our
Proxy Statement for the Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the end of Companys year ended December 31,
2003.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions is
incorporated by reference to the information set forth under the caption
Executive Compensation -Certain Transactions in the Companys Proxy Statement
for the Annual Meeting of Stockholders to be filed with the Commission within
120 days after the end of the Companys year ended December 31, 2003.




ITEM 14. PRINCIPLE ACCOUNTING FEES AND DISCLOSURES

Information regarding on accounting fees and disclosures is incorporated
by reference to the information set forth under the caption Principal
Accounting Fees and Disclosures in the Companys Proxy Statement for the
Annual Meeting of Stockholders to be filed with the Commission within 120 days
after the end of the Companys year ended December 31, 2003.




PART IV




ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



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



1.    Index to Financial Statements. The following financial statements of
the Company and the Report of PricewaterhouseCoopers LLP, Independent
Accountants, are included in Part IV of this Report on the pages
indicated:

|                                                                                       |  |      |     | 
|-------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                       |  | Page
|                                                                                       |  |     
|Report of Independent Auditors                                                         |  |      | F-1 | 
|Balance Sheet as of December 31, 2002 and 2003                                         |  |      | F-2 | 
|Statement of Operations for the years ended December 31, 2001, 2002 and 2003           |  |      | F-3 | 
|Statement of Stockholders Equity for the years ended December 31, 2001, 2002 and 2003 |  |      | F-4 | 
|Statement of Cash Flows for the years ended December 31, 2001, 2002 and 2003           |  |      | F-5 | 
|Notes to Financial Statements                                                          |  |      | F-6 | 



2.   Financial Statement Schedule Covered by the Foregoing Report of
Independent Public Accounts Statement.



| |  |  | Schedule II - Valuation and
Qualifying Accounts F-28                                                                                                  
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | All other schedules are omitted because they are not applicable or
the required information is shown in the financial statements or the
notes thereto.



3.   Exhibits.

|       |     |                         |  |                                                                       
|------ | --- | ----------------------- |  | ----------------------------------------------------------------------
|Number |     | Description of Document
|       |     |                        
|       | 3.1 |                         |  | Amended and Restated Certificate of Incorporation of the Company (8)  
|       | 3.2 |                         |  | Certificate of Amendment of Restated Certificate of Incorporation (15)
|       | 3.3 |                         |  | Bylaws of the Registrant (9)                                          
|       | 3.4 |                         |  | Certificate of Amendment of Bylaws dated May 17, 2001 (15)            

26



---



##### Table of Contents



|       |      |                         |  |                                                                                                                                                                 
|------ | ---- | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |      | Description of Document
|       |      |                        
|       | 3.5  |                         |  | Certificate of Amendment of Bylaws dated August 8, 2001 (15)                                                                                                    
|       | 4.1  |                         |  | Form of Common Stock Certificate (1)                                                                                                                            
|       | 4.2  |                         |  | Third Amended and Restated Stockholders Rights Agreement (9)                                                                                                    
|       | 4.3  |                         |  | Warrant Issued to PNC Bank, National Association in connection with Credit Agreement (9)                                                                        
|       | 4.4  |                         |  | Registration Rights Agreement to United States Cellular Corporation (10)                                                                                        
|       | 4.5  |                         |  | Form of Warrant to United States Cellular Corporation (10)                                                                                                      
|       | 4.6  |                         |  | Warrant Purchase Agreement dated December 1, 1999 with PNC Bank (12)                                                                                            
|       | 4.7  |                         |  | Warrant Purchase Agreement dated January 12, 2000 with PNC Bank (12)                                                                                            
|       | 4.8  |                         |  | Certificate of Designations, Preferences and Rights of Series E Convertible Stock (13)                                                                          
|       | 4.9  |                         |  | Securities Purchase Agreement dated as of September 29, 2000 between the Company and
RGC International Investors, LDC. (Exhibits and Schedules Omitted) (13)    
|       | 4.10 |                         |  | Registration Rights Agreement dated as of September 29, 2000 between the Company and
RGC International Investors, LDC. (13)                                     
|       | 4.11 |                         |  | Initial Stock Purchase Warrant dated as of September 29, 2000 between the Company and
RGC International Investors, LDC. (13)                                    
|       | 4.12 |                         |  | Incentive Stock Purchase Warrant dated as of September 29, 2000 between the Company
and RGC International Investors, LDC. (13)                                  
|       | 4.13 |                         |  | Registration Rights Agreement, dated March 6, 2002 (16)                                                                                                         
|       | 4.14 |                         |  | Warrants to Purchase Shares of Common Stock, dated March 11, 2002 (16)                                                                                          
|       | 4.15 |                         |  | Registration Rights Agreement dated October 10, 2002 (17)                                                                                                       
|       | 4.16 |                         |  | Warrants to Purchase Common Stock dated October 10, 2002 (17)                                                                                                   
|       | 4.17 |                         |  | Common Stock Purchase Agreement, dated March 8, 2002 between Conductus, Inc. and the
investors signatory thereto (7)                                            
|       | 4.18 |                         |  | Warrant to Purchase Common Stock, dated March 8, 2002 by Conductus, Inc. to certain
investors (20)                                                              
|       | 4.19 |                         |  | Registration Rights Agreement, dated March 26, 2002, between Conductus, Inc. and
certain investors (20)                                                         
|       | 4.20 |                         |  | Warrant to Purchase Common Stock, dated August 7, 2000, issued by Conductus to Dobson
Communications Corporation (22) *                                         
|       | 4.21 |                         |  | Form of Series B Preferred Stock and Warrant Purchase Agreement dated September 11,
1998 and September 22, 1998 between Conductus and Series B Investors (23)   
|       | 4.22 |                         |  | Form of Warrant to Purchase Common Stock between Conductus and Series B investors,
dated September 28, 1998, issued by Conductus in a private placement (23)    
|       | 4.23 |                         |  | Form of Series C Preferred Stock and Warrant Purchase Agreement, dated December 10,
1999, between Conductus and Series C Investors (24)                         
|       | 4.24 |                         |  | Form of Warrant Purchase Common Stock between Conductus and Series C investors, dated
December 10, 1999, issued by Conductus in a private placement (24)        
|       | 4.25 |                         |  | Form of Warrant to Purchase Common Stock dated March 28, 2003, issued to Silicon
Valley Bank (25)                                                               
|       | 4.26 |                         |  | Form of Warrant (26)                                                                                                                                            
|       | 4.27 |                         |  | Form of Registration Rights Agreement (26)                                                                                                                      
|       | 10.1 |                         |  | Technical Information Exchange Agreement between the Registrant and Philips dated
September 1989(2)                                                             
|       | 10.2 |                         |  | 1992 Director Option Plan (2)                                                                                                                                   
|       | 10.3 |                         |  | Form of Indemnification Agreement (2)                                                                                                                           
|       | 10.4 |                         |  | License Agreement between the Registrant and the University of Arkansas dated April
9, 1992, as amended (2)                                                     
|       | 10.5 |                         |  | 1992 Stock Option Plan (2)                                                                                                                                      
|       | 10.6 |                         |  | Proprietary Information & Patents Inventions Agreement among the Registrant,
E-Systems, Inc. and various other parties; Purchase Order dated October 10, 1991(2)
|       | 10.7 |                         |  | Joint Venture Company (JDC) Agreement between the Registrant and Sunpower
Incorporated dated April 2, 1992(2)*                                                  

27



---



##### Table of Contents



|       |       |                         |  |                                                                                                                                                           
|------ | ----- | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |       | Description of Document
|       |       |                        
|       | 10.8  |                         |  | Government Contract issued to Registrant by the Defense Advanced Research Projects
Agency through the Office of Naval Research dated September 4, 1991 (2)
|       | 10.9  |                         |  | License Agreement between the Registrant and E.I. DuPont de Nemours and Company dated
December 1992 (2) *                                                 
|       | 10.10 |                         |  | Superconductor Technologies Inc. Purchase Agreement (3) *                                                                                                 
|       | 10.11 |                         |  | Form of Distribution Agreement (4)                                                                                                                        
|       | 10.12 |                         |  | Amended and Restated 1988 Stock Option Plan, as amended, with form of stock option
agreement (4)                                                          
|       | 10.13 |                         |  | Joint Venture Agreement between Registrant and Analeptic Technologies (S) Pet Ltd.,
dated May 20, 1996 (5) *                                              
|       | 10.14 |                         |  | Employment Offer Letter to M. Peter Thomas dated April 3, 1997 (6)                                                                                        
|       | 10.15 |                         |  | 1999 Stock Option Agreement (11)                                                                                                                          
|       | 10.16 |                         |  | 1998 Stock Option Plan (14)                                                                                                                               
|       | 10.17 |                         |  | Employment Agreement with M. Peter Thomas dated January 1, 2001 (15)                                                                                      
|       | 10.18 |                         |  | Promissory Note with M. Peter Thomas dated April 9, 2001 (15)                                                                                             
|       | 10.19 |                         |  | Securities Purchase Agreement, dated March 6, 2002 (16)                                                                                                   
|       | 10.20 |                         |  | Agreement Concerning Additional Investors, dated March 8, 2002 (16)                                                                                       
|       | 10.21 |                         |  | Letter Agreement dated September 29, 2002 between Superconductor and RGC
International Investors, LPC (17)                                                
|       | 10.22 |                         |  | Subordinated Promissory Note dated September 30, 2002 issued to RGC International
Investors, LPC (17)                                                     
|       | 10.23 |                         |  | Form of Change in Control Agreement dated October 10, 2002 (19)                                                                                           
|       | 10.24 |                         |  | Charles E. Shalvoy Change in Control Agreement dated October 10, 2002 (19)                                                                                
|       | 10.25 | (a)                     |  | Securities Purchase Agreement dated October 20, 2002 (18)                                                                                                 
|       | 10.25 | (b)                     |  | Supplement to Securities Purchase Agreement dated October 28, 2002 for additional
investment (19)                                                         
|       | 10.26 |                         |  | Promissory Note between Charles E. Shalvoy and Conductus dated December 28, 2000 (19)                                                                     
|       | 10.27 |                         |  | Security Agreement between Charles E. Shalvoy and Conductus dated December 28, 2000
(19)                                                                  
|       | 10.28 |                         |  | Promissory Note Agreement between Charles E. Shalvoy and Conductus dated August 21,
2001 (19)                                                             
|       | 10.29 |                         |  | Security Agreement between Charles E. Shalvoy and Conductus dated August 21, 2000 (19)                                                                    
|       | 10.30 |                         |  | Purchase Contract, dated as of August 7, 2000, between Conductus and Dobson Cellular
Systems, Inc. (21)                                                   
|       | 10.31 |                         |  | Form of Change of Control Agreement dated March 28, 2003 (25)                                                                                             
|       | 10.32 |                         |  | Accounts Receivable Purchases Agreement dated March 28, 2003 by and between
Registrant and Silicon Valley Bank (25)                                       
|       | 10.33 |                         |  | Unconditional Guaranty dated March 27, 2003 issued by Conductus, Inc. to Silicon
Valley Bank (25)                                                         
|       | 10.34 |                         |  | Patent License Agreement between Telcordia Technologies, Inc. and Registrant dated
July 13, 2002 (25)                                                     
|       | 10.35 |                         |  | Securities Purchase Agreement dated June 23, 2003 (26)                                                                                                    
|       | 10.36 |                         |  | Form of Investor Warrant (26)                                                                                                                             
|       | 10.37 |                         |  | Form of Registration Rights Agreement (26)                                                                                                                
|       | 10.38 |                         |  | 2003 Equity Incentive Plan (27)                                                                                                                           
|       | 10.39 |                         |  | Code of Business Conduct and Ethics                                                                                                                       
|       | 10.40 |                         |  | Patent License Agreement by and between Lucent Technologies and the Company **                                                                            
|       | 10.41 |                         |  | Executive Incentive Compensation Plan                                                                                                                     
|       | 21    |                         |  | List of Subsidiaries                                                                                                                                      
|       | 23    |                         |  | Consent of Independent Accountants                                                                                                                        
|       | 31.1  |                         |  | Statement of CEO Pursuant to 302 of the Sarbanes-Oxley Act of 2002                                                                                        

28



---



##### Table of Contents



|       |      |                         |  |                                                                   
|------ | ---- | ----------------------- |  | ------------------------------------------------------------------
|Number |      | Description of Document
|       |      |                        
|       | 31.2 |                         |  | Statement of CFO Pursuant to 302 of the Sarbanes-Oxley Act of 2002
|       | 32.1 |                         |  | Statement of CEO Pursuant to 906 of the Sarbanes-Oxley Act of 2002
|       | 32.2 |                         |  | Statement of CFO Pursuant to 906 of the Sarbanes-Oxley Act of 2002



---

|(1)  |  | Incorporated by reference from the Registrants Registration Statement on
Form S-1 (Reg. No. 33-56714).                                                                                                                            
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(2)  |  | Incorporated by reference from Amendment No. 1 to the Registrants
Registration Statement on Form S-1 (Reg. No. 33-56714).                                                                                                         
|    
|(3)  |  | Incorporated by reference from the Registrants Annual Report on Form
10-K filed for the year ended December 31, 1993.                                                                                                             
|    
|(4)  |  | Incorporated by reference from the Registrants Annual Report on Form
10-K filed for the year ended December 31, 1994.                                                                                                             
|    
|(5)  |  | Incorporated by reference from the Registrants Registration Statement on
Form S-1 (Reg. No. 333-10569).                                                                                                                           
|    
|(6)  |  | Incorporated by reference from the Registrants Report on Form 10-Q filed
on May 8, 1997 for the quarter ended March 29, 1997. The exhibit listed
is incorporated by reference to Exhibit 10.1 of Registrants Report on
Form 10-Q.
|    
|(7)  |  | Incorporated by reference from the Registrants Annual Report on Form
10-K filed for the year ended December 31, 1997.                                                                                                             
|    
|(8)  |  | Incorporated by reference from the Registrants Quarterly Report on Form
10-Q filed for the quarter ended April 3, 1999.                                                                                                           
|    
|(9)  |  | Incorporated by reference from the Registrants Quarterly Report on Form
10-Q filed for the quarter ended July 3, 1999.                                                                                                            
|    
|(10) |  | Incorporated by reference from the Registrants Quarterly Report on Form
10-Q filed for the quarter ended October 2, 1999.                                                                                                         
|    
|(11) |  | Incorporated by reference from the Registrants Registration Statement on
Form S-8 (Reg. No. 333-90293).                                                                                                                           
|    
|(12) |  | Incorporated by reference from the Registrants Annual Report on Form
10-K for the year ended December 31, 1999.                                                                                                                   
|    
|(13) |  | Incorporated by reference from the Registrants Current Report on Form
8-K, filed October 4, 2000.                                                                                                                                 
|    
|(14) |  | Incorporated by reference from the Registrants Registration Statement on
Form S-8 (Reg. No. 333-56606).                                                                                                                           
|    
|(15) |  | Incorporated by reference from the Registrants Quarterly Report on Form
10-Q filed for the quarter ended June 30, 2001.                                                                                                           
|    
|(16) |  | Incorporated by reference from Registrants Annual Report on Form 10-K
for the year ended December 31, 2001.                                                                                                                       
|    
|(17) |  | Incorporated by reference from the Registrants Current Report on Form
8-K, filed October 2, 2002.                                                                                                                                 
|    
|(18) |  | Incorporated by reference from the Registrants Current Report on Form
8-K, filed October 14, 2002.                                                                                                                                
|    
|(19) |  | Incorporated by reference from the Registrants Registration Statement on
Form S-4 (Reg. No. 333-100908).                                                                                                                          
|    
|(20) |  | Incorporated by reference from the Conductus, Inc.s Registration
Statement on Form S-3 (Reg. No. 333-85928), filed on April 9, 2002.                                                                                              
|    
|(21) |  | Incorporated by reference from Conductus, Inc.s Quarterly Report on Form
10-Q, filed with the SEC on November 14, 2000.                                                                                                           
|    
|(22) |  | Incorporated by reference from Conductus, Inc.s Quarterly Report on Form
10-Q, filed with the SEC on November 16, 1998.                                                                                                           
|    
|(23) |  | Incorporated by reference from Conductus, Inc.s Annual Report on Form
10-K, filed with the SEC on March 30, 2000.                                                                                                                 
|    
|(24) |  | Incorporated by reference from Conductus, Inc.s Annual Report on Form
10-K, for the year ended December 31, 1999.                                                                                                                 
|    
|(25) |  | Incorporate by reference from Registrants Quarterly Report on Form 10-Q
for the quarter ended March 29, 2003                                                                                                                      
|    
|(26) |  | Incorporated by reference from Registrants Current Report on Form 8-K
filed June 25, 2003                                                                                                                                         
|    
|(27) |  | Incorporated by reference from Registrants Registration Statement on Form
S-8 (Reg. No. 333-106594)                                                                                                                               
|    
|*    |  | Confidential treatment has been previously granted for certain portions
of these exhibits.                                                                                                                                         
|    
|**   |  | Confidential treatment has been requested for certain portions of this
exhibit.                                                                                                                                                    

29



---



##### Table of Contents





| | (b) |  | Reports on Form 8-K.
| | --- |  | --------------------

We filed or furnished the following Current Reports on Form 8-K during the
quarter ended December 31, 2003:



| |  |  | Filed September 29, 2003  Item 5- Announcing the
filing of a cross appeal in its patent infringement suit with
ISCO International, Inc.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Furnished October 31, 2003  Items 9 and 12
Announcing results for the quarter ended September 27, 2003.                                

We filed
or furnished the following Current Reports on Form 8-K subsequent to the
quarter ended December 31, 2003:



| |  |  | Furnished February 4, 2004  Items 9 and 12 Announcing
preliminary financial results for the fourth quarter and year
ended December 31, 2003.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Furnished March 1, 2004 Items 9 and 12 Announcing financial
results for the fourth quarter and year ended December 31,
2003.                 



| | (c) |  | Exhibits. See Item 15(a) above.
| | --- |  | -------------------------------

30



---



##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

To the Board of Directors
and Stockholders of
Superconductor Technologies Inc.

In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) on page 26, present fairly, in all material
respects, the financial position of Superconductor Technologies Inc. and
subsidiaries at December 31, 2002 and 2003, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2003 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion the financial statement
schedule listed in the index appearing under Item 15(a)(2) on page 26 presents
fairly, in all material respects, the information set forth therein when read
in conjunction with the related financial statements. These financial
statements and financial statement schedule are the responsibility of the
Companys management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements and financial statement schedule in accordance with auditing
standards generally accepted in the United States of America, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to
the consolidated financial statements, the Company has had recurring losses and
used $18.5 million in cash for operations in 2003. These matters raise a
substantial doubt about the Companys ability to continue as a going concern.
Managements plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ PRICEWATERHOUSECOOPERS LLP

Los Angeles, California
February 27, 2004

F-1



---



##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEET

|                                                                                                                       |                                                                                                                                     |                                            |                                      |              |            |              |            |              |            |  |  | 
|---------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------------ | ---------- | ------------ | ---------- | ------------ | ---------- |  |  | 
|                                                                                                                       |                                                                                                                                     |                                            |                                      |              |            | December 31, |            | December 31,
|                                                                                                                       |                                                                                                                                     |                                            |                                      |              |            | 2002         |            | 2003        
|                                                                                                                       |                                                                                                                                     |                                            |                                      |              |            |              |            |             
|                                                                                                                       |                                                                                                                                     |                                            |                                      | ASSETS       |            |              |            |              |            |  |  | 
|Current Assets:                                                                                                        |                                                                                                                                     |                                            |                                      |              |            |              |            |             
|                                                                                                                       | Cash and cash equivalents                                                                                                           |                                            | $                                    | 18,191,000   |            |              | $          | 11,144,000   |           
|                                                                                                                       | Accounts receivable, net                                                                                                            |                                            |                                      | 3,405,000    |            |              |            | 8,809,000    |           
|                                                                                                                       | Inventory                                                                                                                           |                                            |                                      | 6,347,000    |            |              |            | 8,802,000    |           
|                                                                                                                       | Prepaid expenses and other current assets                                                                                           |                                            |                                      | 555,000      |            |              |            | 760,000      |           
|                                                                                                                       |                                                                                                                                     |                                            |                                      |              |            |              |            |             
|                                                                                                                       |                                                                                                                                     | Total Current Assets                       |                                      |              | 28,498,000 |              |            |              | 29,515,000 | 
|Property and equipment, net of accumulated depreciation of
$12,648,000 and $15,061,000, respectively                   |                                                                                                                                     |                                            | 11,091,000                           |              |            |              | 12,534,000 |             
|Patents, licenses and purchased technology, net of accumulated amortization of
$2,368,000 and $3,173,000, respectively |                                                                                                                                     |                                            | 5,141,000                            |              |            |              | 5,367,000  |             
|Goodwill                                                                                                               |                                                                                                                                     |                                            | 20,107,000                           |              |            |              | 20,107,000 |             
|Other assets                                                                                                           |                                                                                                                                     |                                            | 489,000                              |              |            |              | 600,000    |             
|                                                                                                                       |                                                                                                                                     |                                            |                                      |              |            |              |            |             
|                                                                                                                       |                                                                                                                                     | Total Assets                               |                                      | $            | 65,326,000 |              |            | $            | 68,123,000 | 
|                                                                                                                       |                                                                                                                                     |                                            |                                      |              |            |              |            |             
|                                                                                                                       |                                                                                                                                     |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |              |            |              |            |              |            |  | 
|Current Liabilities:                                                                                                   |                                                                                                                                     |                                            |                                      |              |            |              |            |             
|                                                                                                                       | Line of credit                                                                                                                      |                                            | $                                    |             |            |              | $          | 3,308,000    |           
|                                                                                                                       | Accounts payable                                                                                                                    |                                            |                                      | 5,888,000    |            |              |            | 5,154,000    |           
|                                                                                                                       | Accrued expenses                                                                                                                    |                                            |                                      | 4,557,000    |            |              |            | 4,832,000    |           
|                                                                                                                       | Current portion of capitalized lease obligations and long term debt                                                                 |                                            |                                      | 1,550,000    |            |              |            | 645,000      |           
|                                                                                                                       |                                                                                                                                     |                                            |                                      |              |            |              |            |             
|                                                                                                                       |                                                                                                                                     | Total Current Liabilities                  |                                      |              | 11,995,000 |              |            |              | 13,939,000 | 
|Capitalized lease obligations and long term-debt                                                                       |                                                                                                                                     |                                            | 573,000                              |              |            |              | 76,000     |             
|Other long term liabilities                                                                                            |                                                                                                                                     |                                            | 3,234,000                            |              |            |              | 1,888,000  |             
|                                                                                                                       |                                                                                                                                     |                                            |                                      |              |            |              |            |             
|                                                                                                                       |                                                                                                                                     | Total Liabilities                          |                                      |              | 15,802,000 |              |            |              | 15,903,000 | 
|Commitments and contingencies-Note 10 and 11                                                                           |                                                                                                                                     |                                            |                                      |              |            |              |            |             
|Stockholders Equity:                                                                                                  |                                                                                                                                     |                                            |                                      |              |            |              |            |             
|                                                                                                                       | Preferred stock, $.001 par value, 2,000,000 shares authorized,
none issued and outstanding                                          |                                            |                                      |             |            |              |            |             |           
|                                                                                                                       | Common stock, $.001 par value, 125,000,000 shares
authorized, 59,823,553 and 68,907,109 shares issued and outstanding, respectively |                                            |                                      | 60,000       |            |              |            | 69,000       |           
|                                                                                                                       | Capital in excess of par value                                                                                                      |                                            |                                      | 154,744,000  |            |              |            | 168,776,000  |           
|                                                                                                                       | Notes receivable from stockholder                                                                                                   |                                            |                                      | (820,000     | )          |              |            | (820,000     | )         
|                                                                                                                       | Accumulated deficit                                                                                                                 |                                            |                                      | (104,460,000 | )          |              |            | (115,805,000 | )         
|                                                                                                                       |                                                                                                                                     |                                            |                                      |              |            |              |            |             
|                                                                                                                       |                                                                                                                                     | Total Stockholders Equity                 |                                      |              | 49,524,000 |              |            |              | 52,220,000 | 
|                                                                                                                       |                                                                                                                                     |                                            |                                      |              |            |              |            |             
|                                                                                                                       |                                                                                                                                     | Total Liabilities and Stockholders Equity |                                      | $            | 65,326,000 |              |            | $            | 68,123,000 | 
|                                                                                                                       |                                                                                                                                     |                                            |                                      |              |            |              |            |             

See accompanying notes to the consolidated financial statements

F-2



---



##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.

CONSOLIDATED STATEMENT OF OPERATIONS

|                                                                                   |                                                     |    |                                |            |      |    |             |            |   |    |             |            |  
|---------------------------------------------------------------------------------- | --------------------------------------------------- | -- | ------------------------------ | ---------- | ---- | -- | ----------- | ---------- | - | -- | ----------- | ---------- | -
|                                                                                   |                                                     |    | For the Year Ended December 31
|                                                                                   |                                                     |    |                               
|                                                                                   |                                                     |    | 2001                           |            | 2002 |    | 2003       
|                                                                                   |                                                     |    |                                |            |      |    |            
|Net revenues:                                                                      |                                                     |    |                                |            |      |    |             |            |   |    |             |           
|                                                                                   | Net commercial product revenues                     |    | $                              | 7,601,000  |      |    | $           | 17,601,000 |   |    | $           | 38,577,000 |  
|                                                                                   | Government and other contract revenues              |    |                                | 4,782,000  |      |    |             | 4,785,000  |   |    |             | 10,759,000 |  
|                                                                                   | Sub license royalties                               |    |                                | 10,000     |      |    |             | 10,000     |   |    |             | 58,000     |  
|                                                                                   |                                                     |    |                                |            |      |    |             |            |   |    |             |           
|Total net revenues                                                                 |                                                     |    | 12,393,000                     |            |      |    | 22,396,000  |            |   |    | 49,394,000  |           
|Costs and expenses:                                                                |                                                     |    |                                |            |      |    |             |            |   |    |             |           
|                                                                                   | Cost of commercial product revenues                 |    |                                | 10,626,000 |      |    |             | 19,286,000 |   |    |             | 28,249,000 |  
|                                                                                   | Contract research and development                   |    |                                | 3,359,000  |      |    |             | 2,531,000  |   |    |             | 6,899,000  |  
|                                                                                   | Other research and development                      |    |                                | 4,606,000  |      |    |             | 4,489,000  |   |    |             | 4,697,000  |  
|                                                                                   | Selling, general and administrative                 |    |                                | 11,907,000 |      |    |             | 14,976,000 |   |    |             | 20,567,000 |  
|                                                                                   | Write off of in-process research and development    |    |                                |           |      |    |             | 700,000    |   |    |             |           |  
|                                                                                   |                                                     |    |                                |            |      |    |             |            |   |    |             |           
|Total costs and expenses                                                           |                                                     |    | 30,498,000                     |            |      |    | 41,982,000  |            |   |    | 60,412,000  |           
|Loss from operations                                                               |                                                     |    | (18,105,000                    | )          |      |    | (19,586,000 | )          |   |    | (11,018,000 | )         
|                                                                                   | Interest income                                     |    |                                | 1,050,000  |      |    |             | 218,000    |   |    |             | 177,000    |  
|                                                                                   | Interest expense                                    |    |                                | (146,000   | )    |    |             | (145,000   | ) |    |             | (504,000   | )
|                                                                                   |                                                     |    |                                |            |      |    |             |            |   |    |             |           
|Net loss                                                                           |                                                     |    | (17,201,000                    | )          |      |    | (19,513,000 | )          |   |    | (11,345,000 | )         
|Less:                                                                              |                                                     |    |                                |            |      |    |             |            |   |    |             |           
|                                                                                   | Deemed distribution attributable to
preferred stock |    |                                | (2,603,000 | )    |    |             | (1,756,000 | ) |    |             |           |  
|                                                                                   |                                                     |    |                                |            |      |    |             |            |   |    |             |           
|Net loss available to common stockholders for
computation of loss per common share |                                                     | ($ | 19,804,000                     | )          |      | ($ | 21,269,000  | )          |   | ($ | 11,345,000  | )         
|                                                                                   |                                                     |    |                                |            |      |    |             |            |   |    |             |           
|Basic and diluted net loss per common share                                        |                                                     | ($ | 1.10                           | )          |      | ($ | 0.89        | )          |   | ($ | 0.18        | )         
|                                                                                   |                                                     |    |                                |            |      |    |             |            |   |    |             |           
|Weighted average number of common shares outstanding                               |                                                     |    | 17,955,553                     |            |      |    | 24,019,542  |            |   |    | 62,685,292  |           
|                                                                                   |                                                     |    |                                |            |      |    |             |            |   |    |             |           

See accompanying notes to the consolidated financial statements

F-3



---



##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

|                                                          |  | Convertible Preferred |         |              |  |            |   |          |  |            |            |             |  |             |        |         |  |       |             |   |  |   |            |   |  |   |          |   |  |  
|--------------------------------------------------------- |  | --------------------- | ------- | ------------ |  | ---------- | - | -------- |  | ---------- | ---------- | ----------- |  | ----------- | ------ | ------- |  | ----- | ----------- | - |  | - | ---------- | - |  | - | -------- | - |  | -
|                                                          |  | Stock                 |         | Common Stock |  | Capital in |   | Deferred |  | Receivable |            |             |  |             |        |         |  |      
|                                                          |  |                       |         |              |  | Excess of  |   | Warrant  |  | From       |            | Accumulated |  |             |        |        
|                                                          |  | Shares                |         | Amount       |  | Shares     |   | Amount   |  | Par Value  |            | Charges     |  | Stockholder |        | Deficit |  | Total
|                                                          |  |                       |         |              |  |            |   |          |  |            |            |             |  |             |        |         |  |      
|Balance at December 31, 2000                              |  |                       | 37,500  |              |  | $          |  |          |  |            | 17,823,164 |             |  | $           | 18,000 |         |  | $     | 110,654,000 |   |  | $ | (4,517,000 | ) |  | $ |         |   |  | $
|Conversion of convertible
preferred stock                 |  |                       | (3,000  | )            |  |            |   |          |  |            | 676,305    |             |  |             | 1,000  |         |  |       | (1,000      | ) |  |   |            |   |  |   |          |   |  |  
|Exercise of stock options                                 |  |                       |         |              |  |            |   |          |  |            | 79,691     |             |  |             |        |         |  |       | 218,000     |   |  |   |            |   |  |   |          |   |  |  
|Amortization of deferred warrant
charges                  |  |                       |         |              |  |            |   |          |  |            |            |             |  |             |        |         |  |       |             |   |  |   | 2,237,000  |   |  |   |          |   |  |  
|Net loss                                                  |  |                       |         |              |  |            |   |          |  |            |            |             |  |             |        |         |  |       |             |   |  |   |            |   |  |   |          |   |  |  
|                                                          |  |                       |         |              |  |            |   |          |  |            |            |             |  |             |        |         |  |       |             |   |  |   |            |   |  |   |          |   |  |  
|Balance at December 31, 2001                              |  |                       | 34,500  |              |  |            |  |          |  |            | 18,579,160 |             |  |             | 19,000 |         |  |       | 110,871,000 |   |  |   | (2,280,000 | ) |  |   |         |   |  |  
|Conversion of convertible
preferred stock                 |  |                       | (34,500 | )            |  |            |   |          |  |            | 2,878,351  |             |  |             | 3,000  |         |  |       | (3,000      | ) |  |   |            |   |  |   |          |   |  |  
|Exercise of stock options                                 |  |                       |         |              |  |            |   |          |  |            | 26,473     |             |  |             |        |         |  |       | 83,000      |   |  |   |            |   |  |   |          |   |  |  
|Issuance of common stock for cash                         |  |                       |         |              |  |            |   |          |  |            | 24,811,240 |             |  |             | 25,000 |         |  |       | 31,801,000  |   |  |   |            |   |  |   |          |   |  |  
|Acquisition of Conductus, Inc.                            |  |                       |         |              |  |            |   |          |  |            | 13,528,329 |             |  |             | 13,000 |         |  |       | 16,678,000  |   |  |   |            |   |  |   | (820,000 | ) |  |  
|Amortization of deferred warrant
charges                  |  |                       |         |              |  |            |   |          |  |            |            |             |  |             |        |         |  |       |             |   |  |   | 2,280,000  |   |  |   |          |   |  |  
|Payment
of convertible preferred stock conversion premium |  |                       |         |              |  |            |   |          |  |            |            |             |  |             |        |         |  |       | (4,686,000  | ) |  |   |            |   |  |   |          |   |  |  
|Net loss                                                  |  |                       |         |              |  |            |   |          |  |            |            |             |  |             |        |         |  |       |             |   |  |   |            |   |  |   |          |   |  |  
|                                                          |  |                       |         |              |  |            |   |          |  |            |            |             |  |             |        |         |  |       |             |   |  |   |            |   |  |   |          |   |  |  
|Balance at December 31, 2002                              |  |                       |        |              |  |            |  |          |  |            | 59,823,553 |             |  |             | 60,000 |         |  |       | 154,744,000 |   |  |   |           |   |  |   | (820,000 | ) |  |  
|Exercise of stock options                                 |  |                       |         |              |  |            |   |          |  |            | 56,687     |             |  |             |        |         |  |       | 173,000     |   |  |   |            |   |  |   |          |   |  |  
|Issuance of common stock and
warrants for cash            |  |                       |         |              |  |            |   |          |  |            | 5,116,278  |             |  |             | 5,000  |         |  |       | 10,060,000  |   |  |   |            |   |  |   |          |   |  |  
|Exercise of warrants                                      |  |                       |         |              |  |            |   |          |  |            | 3,910,591  |             |  |             | 4,000  |         |  |       | 3,618,000   |   |  |   |            |   |  |   |          |   |  |  
|Issuance of options and warrants                          |  |                       |         |              |  |            |   |          |  |            |            |             |  |             |        |         |  |       | 181,000     |   |  |   |            |   |  |   |          |   |  |  
|Net loss                                                  |  |                       |         |              |  |            |   |          |  |            |            |             |  |             |        |         |  |       |             |   |  |   |            |   |  |   |          |   |  |  
|                                                          |  |                       |         |              |  |            |   |          |  |            |            |             |  |             |        |         |  |       |             |   |  |   |            |   |  |   |          |   |  |  
|Balance at December 31, 2003                              |  |                       |        |              |  | $          |  |          |  |            | 68,907,109 |             |  | $           | 69,000 |         |  | $     | 168,776,000 |   |  | $ |           |   |  | $ | (820,000 | ) |  | $
|                                                          |  |                       |         |              |  |            |   |          |  |            |            |             |  |             |        |         |  |       |             |   |  |   |            |   |  |   |          |   |  |  

See accompanying notes to the consolidated financial statements.

F-4



---



##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.
CONSOLIDATED STATEMENT OF CASH FLOWS

|                                                                             |                                                                 |                                           |              |                                |            |      |              |             |            |   |              |             |            |  
|---------------------------------------------------------------------------- | --------------------------------------------------------------- | ----------------------------------------- | ------------ | ------------------------------ | ---------- | ---- | ------------ | ----------- | ---------- | - | ------------ | ----------- | ---------- | -
|                                                                             |                                                                 |                                           |              | For the Year Ended December 31
|                                                                             |                                                                 |                                           |              |                               
|                                                                             |                                                                 |                                           |              | 2001                           |            | 2002 |              | 2003       
|                                                                             |                                                                 |                                           |              |                                |            |      |              |            
|CASH FLOWS FROM OPERATING ACTIVITIES:                                        |                                                                 |                                           |              |                                |            |      |              |             |            |   |              |            
|Net loss                                                                     |                                                                 |                                           | ($17,201,000 | )                              |            |      | ($19,513,000 | )           |            |   | ($11,345,000 | )          
|Adjustments to reconcile net loss to net cash used for
operating activities: |                                                                 |                                           |              |                                |            |      |              |             |            |   |              |            
|                                                                             | Depreciation and amortization                                   |                                           |              | 2,141,000                      |            |      |              | 1,931,000   |            |   |              | 3,277,000   |           
|                                                                             | Accrued loss and amortization of accrued loss on sales
contract |                                           |              | (2,243,000                     | )          |      |              | (1,998,000  | )          |   |              |            |           
|                                                                             | Warrants and options charges                                    |                                           |              | 2,237,000                      |            |      |              | 2,283,000   |            |   |              | 104,000     |           
|                                                                             | Purchase of in process research and development                 |                                           |              |                               |            |      |              | 700,000     |            |   |              |            |           
|                                                                             | Changes in assets and liabilities:                              |                                           |              |                                |            |      |              |             |            |   |              |             |           
|                                                                             |                                                                 | Accounts receivable                       |              |                                | 2,241,000  |      |              |             | (1,655,000 | ) |              |             | (5,404,000 | )
|                                                                             |                                                                 | Inventory                                 |              |                                | (1,959,000 | )    |              |             | (613,000   | ) |              |             | (2,455,000 | )
|                                                                             |                                                                 | Prepaid expenses and other current assets |              |                                | (95,000    | )    |              |             | 160,000    |   |              |             | (184,000   | )
|                                                                             |                                                                 | Patents and licenses                      |              |                                | (259,000   | )    |              |             | (553,000   | ) |              |             | (531,000   | )
|                                                                             |                                                                 | Other assets                              |              |                                | (190,000   | )    |              |             | (75,000    | ) |              |             | (114,000   | )
|                                                                             |                                                                 | Accounts payable and accrued expenses     |              |                                | 631,000    |      |              |             | (618,000   | ) |              |             | (1,806,000 | )
|                                                                             |                                                                 |                                           |              |                                |            |      |              |             |            |   |              |            
|                                                                             | Net cash used in operating activities                           |                                           |              | (14,697,000                    | )          |      |              | (19,951,000 | )          |   |              | (18,458,000 | )         
|CASH FLOWS FROM INVESTING ACTIVITIES:                                        |                                                                 |                                           |              |                                |            |      |              |             |            |   |              |            
|Purchase of property and equipment                                           |                                                                 |                                           | (1,898,000   | )                              |            |      | (5,398,000   | )           |            |   | (3,855,000   | )          
|Decrease in restricted cash                                                  |                                                                 |                                           |             |                                |            |      | 374,000      |             |            |   |             |            
|Payment of up front license fee                                              |                                                                 |                                           |             |                                |            |      |             |             |            |   | (500,000     | )          
|Cash used in acquisition of Conductus, Inc.                                  |                                                                 |                                           |             |                                |            |      | (429,000     | )           |            |   |             |            
|                                                                             |                                                                 |                                           |              |                                |            |      |              |             |            |   |              |            
|                                                                             | Net cash used in investing activities                           |                                           |              | (1,898,000                     | )          |      |              | (5,453,000  | )          |   |              | (4,355,000  | )         
|CASH FLOW FROM FINANCING ACTIVITIES:                                         |                                                                 |                                           |              |                                |            |      |              |             |            |   |              |            
|Proceeds from borrowings                                                     |                                                                 |                                           |             |                                |            |      |             |             |            |   | 7,234,000    |            
|Payments on short term borrowings                                            |                                                                 |                                           |             |                                |            |      |             |             |            |   | (3,926,000   | )          
|Payments on long-term obligations                                            |                                                                 |                                           | (242,000     | )                              |            |      | (519,000     | )           |            |   | (1,402,000   | )          
|Net proceeds from sale of common stock and exercise of
warrants and options  |                                                                 |                                           | 218,000      |                                |            |      | 31,909,000   |             |            |   | 13,860,000   |            
|Payment of preferred stock conversion premium                                |                                                                 |                                           |             |                                |            |      | (3,000,000   | )           |            |   |             |            
|                                                                             |                                                                 |                                           |              |                                |            |      |              |             |            |   |              |            
|                                                                             | Net cash provided by (used in) financing activities             |                                           |              | (24,000                        | )          |      |              | 28,390,000  |            |   |              | 15,766,000  |           
|                                                                             |                                                                 |                                           |              |                                |            |      |              |             |            |   |              |            
|Net increase (decrease) in cash and cash equivalents                         |                                                                 |                                           | (16,619,000  | )                              |            |      | 2,986,000    |             |            |   | (7,047,000   | )          
|Cash and cash equivalents at beginning of year                               |                                                                 |                                           | 31,824,000   |                                |            |      | 15,205,000   |             |            |   | 18,191,000   |            
|                                                                             |                                                                 |                                           |              |                                |            |      |              |             |            |   |              |            
|Cash and cash equivalents at end of year                                     |                                                                 | $                                         | 15,205,000   |                                |            | $    | 18,191,000   |             |            | $ | 11,144,000   |            
|                                                                             |                                                                 |                                           |              |                                |            |      |              |             |            |   |              |            

See accompanying notes to the consolidated financial statements.

F-5



---



##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  The Company

Superconductor Technologies Inc. was incorporated in Delaware on May 11,
1987 and maintains its headquarters in Santa Barbara, California. The Company
has operated in a single industry segment, the research, development,
manufacture and marketing of high-performance filters to service providers and
original equipment manufacturers in the mobile wireless communications
industry. The Companys principal commercial product, the
SuperLink Rx®,
combines high-temperature superconductors with cryogenic cooling technology to
produce a filter with significant advantages over conventional filters. From
1987 to 1997, the Company was engaged primarily in research and development and
generated revenues primarily from government research contracts. The Company
began full-scale commercial production of the SuperLink
Rx® in 1997 and shipped
438 units in 2001, 927 units in 2002 and 1,838 units in 2003.

The Company continues to be involved as either contractor or subcontractor
on a number of contracts with the United States government. These contracts
have been and continue to provide a significant source of revenues for the
Company. For the years ended December 31, 2001, 2002, and 2003, government
related contracts account for 39%, 21%, and 22% respectively, of the Companys
net revenues.

On December 18, 2002, the Company acquired 100 percent of the outstanding
shares of Conductus, Inc. The results of Conductus, Inc. are included in the
2002 consolidated financial statements for 13 days following its acquisition
through December 31, 2002 and for the entire year of 2003.

Note 2  Summary of Significant Accounting Policies

Basis of Presentation

During 2003, the Company incurred a net loss of $11,345,000 and negative
cash flows from operations of $18,458,000. The Company is also are
experiencing lower than expected revenues in the first quarter of 2004. In
response, the Company is currently adjusting its inventory build plan, reducing
direct labor, cutting certain fixed costs and implementing a reduced work week.
The Company plans to pursue a financing transaction in 2004.

The Company cannot give assurance that additional financing (public or
private) will be available on acceptable terms or at all. If the Company
issues additional equity securities to raise funds, the ownership percentage of
its existing stockholders would be reduced. New investors may demand rights,
preferences or privileges senior to those of existing holders of common stock.
If the Company cannot raise any needed funds, it would be forced to make
further substantial reductions in its operations which could adversely affect
the Companys ability to implement its current business plan and ultimately its
viability as a company.

The Companys financial statements have been prepared assuming that the
Company will continue as a going concern. The factors described above raise
substantial doubt about the Companys ability to continue as a going concern.
These financial statements do not include any adjustments that might result
from this uncertainty.

Principles of Consolidation

The consolidated financial statements include the accounts of
Superconductor Technologies Inc. and its wholly owned subsidiaries (the
Company). All significant intercompany transactions have been eliminated from
the consolidated financial statements.

Cash and Cash Equivalents

Cash and cash equivalents consist of highly liquid investments with
original maturities of three months or less. Cash and cash equivalents are
maintained with quality financial institutions and from time to time exceed
FDIC limits.

Accounts Receivable

The Company sells predominantly to entities in the wireless communications
industry and to entities of the United States government. The Company grants
uncollateralized credit to its customers. The Company performs ongoing credit
evaluations of

F-6



---



##### Table of Contents



its customers before granting credit. Credit risk related to accounts
receivable arising from such contracts is considered minimal.

Revenue Recognition

Commercial revenues are principally derived from the sale of the Companys
SuperLink Rx® products and are recognized once all of the following conditions
have been met: a) an authorized purchase order has been received in writing, b)
customers credit worthiness has been established, c) shipment of the product
has occurred, d) title has transferred, and e) if stipulated by the contract,
customer acceptance has occurred and all significant vendor obligations, if
any, have been satisfied.

Contract revenues are principally generated under research and development
contracts. Contract revenues are recognized utilizing the
percentage-of-completion method measured by the relationship of costs incurred
to total estimated contract costs. If the current contract estimate were to
indicate a loss, utilizing the funded amount of the contract, a provision would
be made for the total anticipated loss. Revenues from research related
activities are derived primarily from contracts with agencies of the United
States Government. Credit risk related to accounts receivable arising from
such contracts is considered minimal. These contracts include cost-plus, fixed
price and cost sharing arrangements and are generally short-term in nature.

All payments to the Company for work performed on contracts with agencies
of the U.S. Government are subject to adjustment upon audit by the Defense
Contract Audit Agency. Based on historical experience and review of current
projects in process, management believes that the audits will not have a
significant effect on the financial position, results of operations or cash
flows of the Company.

Warranties

The Company offers warranties generally ranging from one to five years,
depending on the product and negotiated terms of purchase agreements with its
customers. Such warranties require the Company to repair or replace defective
product returned to the Company during such warranty period at no cost to the
customer. An estimate by the Company for warranty related costs is recorded by
the Company at the time of sale based on its actual historical product return
rates and expected repair costs. Such costs have been within managements
expectations.

Guarantees

In connection with the sales of its commercial products, the Company
indemnifies, without limit or term, its customers against all claims, suits,
demands, damages, liabilities, expenses, judgments, settlements and penalties
arising from actual or alleged infringement or misappropriation of any
intellectual property relating to its products or other claims arising from its
products. The Company cannot reasonably develop an estimate of the maximum
potential amount of payments that might be made under its guarantee because of
the uncertainty as to whether a claim might arise and how much it might total.

Research and Development Costs

Research and development costs are expensed as incurred and include
salary, facility, depreciation and material expenses. Research and development
costs incurred solely in connection with research and development contracts are
charged to contract research and development expense. Other research and
development costs are charged to other research and development expense.

Inventories

Inventories are stated at the lower of cost or market, with costs
primarily determined using standard costs, which approximate actual costs
utilizing the first-in, first-out method. Provision for potentially obsolete
or slow moving inventory is made based on managements analysis of inventory
levels and sales forecasts.

Property and Equipment

Property and equipment are recorded at cost. Equipment is depreciated
using the straight-line method over their estimated useful lives ranging from
three to five years. Leasehold improvements and assets financed under capital
leases are amortized over the shorter of their useful lives or the lease term.
Furniture and fixtures are depreciated over seven years. Expenditures for
additions and major improvements are capitalized. Expenditures for minor
tooling, repairs and maintenance and minor improvements are charged to expense
as incurred. When property or equipment is retired or otherwise disposed of,
the related cost and accumulated depreciation are removed from the accounts.
Gains or losses from retirements and disposals are recorded as other income or
expense.

Patents, Licenses and Purchased Technology

F-7



---



##### Table of Contents



Patents and licenses are recorded at cost and are amortized using the
straight-line method over the shorter of their estimated useful lives or
approximately seventeen years. Purchased technology acquired through the
acquisition of Conductus, Inc. is recorded at its estimated fair value and is
amortized using the straight-line method over seven years.

Goodwill

Goodwill represents the excess of purchase price over fair value of net
assets acquired. Goodwill is tested for impairment annually in the fourth
quarter after the annual planning process, or earlier if events occur which
require an impairment analysis be performed. The first step of the impairment
test, used to identify potential impairment, compares the fair value of a
reporting unit with its carrying value, including goodwill. If the fair value
of a reporting unit exceeds its carrying value, goodwill of the reporting unit
is considered not impaired. If the carrying amount of a reporting unit exceeds
its fair value, the second step of the goodwill impairment test shall be
performed to measure the amount of impairment loss. The second step of the
goodwill impairment test, used to measure the amount of impairment loss,
compares the implied fair value of the reporting unit goodwill with the
carrying amount of that goodwill. If the carrying amount of the reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss
shall be recognized in an amount equal to that excess.

Long-Lived Assets

The realizability of long-lived assets is evaluated periodically as events
or circumstances indicate a possible inability to recover the carrying amount.
Such evaluation is based on various analyses, including cash flow and
profitability projections. The analyses necessarily involve significant
management judgment. In the event the projected undiscounted cash flows are
less than net book value of the assets, the carrying value of the assets will
be written down to their estimated fair value.

Loss Contingencies

In the normal course of business the Company is subject to claims and
litigation, including allegations of patent infringement. Liabilities relating
to these claims are recorded when it is determined that a loss is probable and
the amount of the loss can be reasonably estimated. The costs of defending the
Company in such matters are expensed as incurred.

Income Taxes

The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income
Taxes. SFAS 109 utilizes an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Companys financial
statements or tax returns. In estimating future tax consequences, SFAS 109
generally considers all expected future events other than enactments of changes
in the tax laws or rates. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.

Marketing Costs

All costs related to marketing and advertising the Companys products are
expensed as incurred or at the time the advertising takes place. Advertising
costs were not material in each of the three years in the period ended December
31, 2003.

Net Loss Per Share

Basic and diluted net loss per share is computed by dividing net loss
available to common stockholders by the weighted average number of common
shares outstanding in each year. Net loss available to common stockholders is
computed after deducting accumulated dividends on cumulative preferred stock,
deemed dividends and accretion of redemption value on redeemable preferred
stock for the period and beneficial conversion features on issuance of
convertible preferred stock. Common stock equivalents are not included in the
calculation of diluted loss per share because their effect is antidilutive.

Stock-based Compensation

As permitted under Statement of Financial Accounting Standards No. 123
(SFAS 123), Accounting for Stock-Based Compensation, the Company has
elected to follow Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees in accounting for its stock options and other
stock-based employee awards. Pro forma information regarding net loss and loss
per share, as calculated under the provisions of SFAS 123, are disclosed in the
notes to the financial statements. The Company accounts for equity securities
issued to non-employees in accordance with the provision of SFAS 123 and
Emerging Issues Task Force 96-18.

If the Company had elected to recognize compensation expense for employee
awards based upon the fair value at the grant date consistent with the
methodology prescribed by SFAS 123, the Companys net loss and net loss per
share would have been increased to the pro forma amounts indicated below:

F-8



---



##### Table of Contents



|                                                       |                                                                     |                                                                     |   |                                 |            |      |   |            |            |   |   |            |            |  
|------------------------------------------------------ | ------------------------------------------------------------------- | ------------------------------------------------------------------- | - | ------------------------------- | ---------- | ---- | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                                       |                                                                     |                                                                     |   | For the year ended December 31,
|                                                       |                                                                     |                                                                     |   |                                
|                                                       |                                                                     |                                                                     |   | 2001                            |            | 2002 |   | 2003      
|                                                       |                                                                     |                                                                     |   |                                 |            |      |   |           
|Net Loss:                                              |                                                                     |                                                                     |   |                                 |            |      |   |            |            |   |   |           
|                                                       |                                                                     | As reported                                                         |   | ($                              | 17,201,000 | )    |   | ($         | 19,513,000 | ) |   | ($         | 11,345,000 | )
|Stock-based
employee compensation included in net loss |                                                                     |                                                                     |  |                                 |            |      |  |            |            |   |  |           
|                                                       | Stock-based
compensation expense determined under fair value method |                                                                     |   | (3,970,000                      | )          |      |   | (4,056,000 | )          |   |   | (5,435,000 | )         
|                                                       |                                                                     |                                                                     |   |                                 |            |      |   |            |            |   |   |            |            |  
|                                                       |                                                                     | Pro forma                                                           |   | ($                              | 21,171,000 | )    |   | ($         | 23,569,000 | ) |   | ($         | 16,780,000 | )
|                                                       |                                                                     |                                                                     |   |                                 |            |      |   |            |            |   |   |            |            |  
|Basic and Diluted
Loss per Share:                      |                                                                     |                                                                     |   |                                 |            |      |   |            |            |   |   |           
|                                                       |                                                                     | As reported                                                         |   | ($                              | 1.10       | )    |   | ($         | 0.89       | ) |   | ($         | 0.18       | )
|                                                       |                                                                     | Stock-based
compensation expense determined under fair value method |   |                                 | (0.22      | )    |   |            | (0.17      | ) |   |            | (0.09      | )
|                                                       |                                                                     |                                                                     |   |                                 |            |      |   |            |            |   |   |            |            |  
|                                                       |                                                                     | Pro forma                                                           |   | ($                              | 1.32       | )    |   | ($         | 1.06       | ) |   | ($         | 0.27       | )
|                                                       |                                                                     |                                                                     |   |                                 |            |      |   |            |            |   |   |            |            |  

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. The significant estimates in the preparation of the
financial statements relate to the assessment of the carrying amount of
accounts receivable, inventory, intangibles, estimated provisions for warranty
costs, accruals for restructuring and lease abandonment costs in connection
with the Conductus acquisition, income taxes and disclosures related to the
litigation with ISCO International, Inc. Actual results could differ from those
estimates and such differences may be material to the financial statements.

Fair Value of Financial Instruments

The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value due to the
short-term nature of these instruments. The Company estimates that the
carrying amount of the debt approximates fair value based on the Companys
current incremental borrowing rates for similar types of borrowing
arrangements.

Comprehensive Income

The Company has no items of other comprehensive income in any period and
consequently does not report comprehensive income.

Segment Information

The Company operates in a single business segment, the development,
manufacture and marketing of high performance products to service providers,
systems integrators and original equipment manufacturers in the commercial
wireless telecommunications industry. The Companys principal commercial
product, the SuperLink Rx® combines high-temperature superconductors with
cryogenic cooling technology to produce a filter with significant advantages
over conventional filters. We currently sell most of our product directly to
wireless network operators in the United States. Net revenues derived
principally from government research and development contracts are presented
separately on the statement of operations for all periods presented. Management
views its government research and development contracts as a supplementary
source of revenue to fund its development of high temperature superconducting
products.

Net commercial product revenues are derived from the following products:

F-9



---



##### Table of Contents



|                      |  |                                 |           |      |  |      |            |  |  |   |            | 
|--------------------- |  | ------------------------------- | --------- | ---- |  | ---- | ---------- |  |  | - | ---------- | 
|                      |  | For the year ended December 31,
|                      |  |                                
|                      |  | 2001                            |           | 2002 |  | 2003
|                      |  |                                 |           |      |  |     
|SuperLink Rx product  |  | $                               | 6,966,000 |      |  | $    | 15,195,000 |  |  | $ | 34,544,000 | 
|SuperPlex multiplexer |  |                                 | 635,000   |      |  |      | 2,262,000  |  |  |   | 3,434,000  | 
|SuperLink Tx          |  |                                 |          |      |  |      |           |  |  |   | 88,000     | 
|Other                 |  |                                 |          |      |  |      | 144,000    |  |  |   | 511,000    | 
|                      |  |                                 |           |      |  |      |            |  |  |   |            | 
|Total                 |  | $                               | 7,601,000 |      |  | $    | 17,601,000 |  |  | $ | 38,577,000 | 
|                      |  |                                 |           |      |  |      |            |  |  |   |            | 

Reclassifications

Certain reclassifications have been made to the 2001 and 2002 financial
statements to conform to the 2003 presentation.

Certain Risks and Uncertainties

During the three year period ended December 31, 2003, the Company sold
3,203 SuperFilter® units, but the Company has continued to incur operating
losses. The Companys long-term prospects are dependent upon the continued and
increased market acceptance for the product.

The Company currently sells most of its products directly to wireless
network operators in the United States. In 2001 U.S. Cellular and ALLTEL
accounted for 44% and 41% of our net commercial revenues, respectively. In 2002
U.S. Cellular and ALLTEL accounted for 8% and 84% of our net commercial
revenues, respectively, and 19% and 24% of accounts receivable, respectively.
In 2003 ALLTEL and Verizon Wireless our two largest customers accounted for 70%
and 15% of our net commercial revenues, respectively, and 21% and 25% of
accounts receivable, respectively.

The Company currently relies on two suppliers for purchases of high
quality substrates for growth of high-temperature superconductor films.

In connection with the sales of its commercial products, the Company
indemnifies, without limit or term, its customers against all claims, suits,
demands, damages, liabilities, expenses, judgements, settlements and penalties
arising from actual or alleged infringement or misapporpriation of any
intellectual property relating to its products or other claims arising from its
products. The Company cannot reasonably develop an estimate of the maximum
potential amount of payments that might be made under its guarantee because of
the uncertainty as to whether a claim might arise and how much it might total.

Recent Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities(SFAS 146), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities and supersedes Emerging Issues Task Force (EITF) Issue 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF Issue 94-3,
a liability for an exit cost as defined in EITF Issue 94-3 was recognized at
the date of an entitys commitment to an exit plan. SFAS 146 also establishes
that the liability should initially be measured and recorded at fair value. The
Company adopted the provisions of SFAS 146 effective January 1, 2003 and such
adoption did not have a material impact on the consolidated financial
statements.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees and Indebtedness of Others(FIN 45). FIN 45 elaborates on the
disclosures to be made by the guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The Company adopted the disclosure provisions of FIN 45 during the
fourth

F-10



---



##### Table of Contents



quarter of fiscal 2002 and the recognition provisions of FIN 45 effective
January 1, 2003. Such adoption did not have a material impact on the
consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities(FIN 46). In general, a variable interest entity
is a corporation, partnership, trust or any other legal structure used for
business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of the
entity if the investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The Company adopted
the provisions of FIN 46 effective February 1, 2003 and such adoption did not
have an impact on its consolidated financial statements since it currently has
no variable interest entities. In December 2003, the FASB issued FIN 46R with
respect to variable interest entities created before January 31, 2003, which
among other things, revised the implementation date to the first fiscal year or
interim period ending after March 15, 2004, with the exception of Special
Purpose Entities (SPE). The consolidation requirements apply to all SPEs in
the first fiscal year or interim period beginning after December 15, 2003. The
adoption of the provisions of FIN 46R is not expected to have have an impact
on the Companys consolidated financial statements since it currently has no
SPEs.

In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities(SFAS 149). SFAS 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS 133. SFAS 149 is
effective for contracts and hedging relationships entered into or modified
after June 30, 2003. The Company adopted the provisions of SFAS 149 effective
June 30, 2003 and such adoption did not have an impact on its consolidated
financial statements since the Company has not entered into any derivative or
hedging transactions.

In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity(SFAS 150). SFAS 150 establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both debt and equity and requires an issuer to classify the
following instruments as liabilities in its balance sheet:



| |  |  | a financial instrument issued in the form of shares that
is mandatorily redeemable and embodies an unconditional obligation
that requires the issuer to redeem it by transferring its assets
at a specified or determinable date or upon an event that is
certain to occur;                                                                                                                                                                 
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a financial instrument, other than an outstanding share,
that embodies an obligation to repurchase the issuers equity
shares, or is indexed to such an obligation, and requires the
issuer to settle the obligation by transferring assets; and                                                                                                                                                                                            
|
| |  |  | a financial instrument that embodies an unconditional
obligation that the issuer must settle by issuing a variable
number of its equity shares if the monetary value of the
obligation is based solely or predominantly on (1) a fixed
monetary amount, (2) variations in something other than the fair
value of the issuers equity shares, or (3) variations inversely
related to changes in the fair value of the issuers equity
shares.

In November 2003, FASB issued FASB Staff Position No. 150-3 which deferred
the effective dates for applying certain provisions of SFAS 150 related to
mandatorily redeemable financial instruments of certain non-public entities and
certain mandatorily redeemable non-controlling interests for public and
non-public companies. For public entities, SFAS 150 is effective for
mandatorily redeemable financial instruments entered into or modified after May
31, 2003 and is effective for all other financial instruments as of the first
interim period beginning after June 15, 2003. For mandatorily redeemable
non-controlling interests that would not have to be classified as liabilities
by a subsidiary under the exception in paragraph 9 of SFAS 150, but would be
classified as liabilities by the parent, the classification and measurement
provisions of SFAS 150 are deferred indefinitely. The measurement provisions
of SFAS 150 are also deferred indefinitely for other mandatorily redeemable
non-controlling interests that were issued before November 4, 2003. For those
instruments, the measurement guidance for redeemable shares and non-controlling
interests in other literature shall apply during the deferral period.

The Company adopted the provisions of SFAS 150 effective June 30, 2003 and
such adoption did not have an impact on its consolidated financial statements.

F-11



---



##### Table of Contents



Note 3-Acquisition of Conductus, Inc.

On December 18, 2002, the Company acquired 100 percent of the outstanding
shares of Conductus, Inc. (Conductus). Conductus was a competing supplier of
high-temperature superconducting technology for wireless networks. The results
of Conductus operations have been included in the 2002 consolidated financial
statements for the 13-day period following its acquisition through December 31,
2002 and for the entire year of 2003. Concurrent with the acquisition and
contingent upon completion of the acquisition, the Company also raised
approximately $20 million in a private placement of its common stock (see Note
7). The primary reasons for the acquisition of Conductus and the primary
factors that contributed to a purchase price that results in recognition of
goodwill, are:



| |  |  | The combined company presented a more attractive investment
opportunity and enabled it to raise needed capital on more favorable
terms than either company could individually.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Addition of Conductus to the combined entity would help the
Company compete more effectively.                                                                                 
|
| |  |  | The resulting Company will have the talents, technologies and
assets of the two pioneers of commercial wireless and government
applications of superconducting technologies.  
|
| |  |  | Conductus operations would deliver accelerated earnings prospects and potential strategic and other benefits.                                                                 
|
| |  |  | The combined Company would have a stronger balance sheet, improving its access to capital.                                                                                    
|
| |  |  | Combining the two companys operations would produce significant cost savings.                                                                                                

The aggregate purchase price was $17,620,000 consisting of 13,528,000
shares of common stock valued at $15,286,000, assumption of warrants to
purchase 1,464,749 shares of common stock valued at $805,000, assumption of
options to purchase 1,673,582 shares of common stock valued at $600,000 and
acquisition costs of $928,000. The value of the common stock was determined
based on the average market price of the Companys common stock over the 3-day
period before and after the terms of the acquisition were agreed to and
announced. The fair value of the common stock options and warrants assumed was
determined using a Black-Scholes option pricing model with the following
assumptions: volatility ranging from 80% to 128% , expected life ranging from 3
months to 10 years, dividend rate of 0% and risk free rate ranging from 1% to
4%.

The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition of Conductus.

|                                  |  |   |            | 
|--------------------------------- |  | - | ---------- | 
|Current assets                    |  | $ | 921,000    | 
|Property and equipment            |  |   | 1,867,000  | 
|Intangible assets                 |  |   | 3,900,000  | 
|Goodwill                          |  |   | 20,107,000 | 
|Notes receivable                  |  |   | 820,000    | 
|Other assets                      |  |   | 516,000    | 
|                                  |  |   |            | 
|Total assets acquired             |  |   | 28,131,000 | 
|                                  |  |   |            | 
|Current liabilities               |  |   | 4,717,000  | 
|Long term debt                    |  |   | 17,000     | 
|Unfavorable lease commitment      |  |   | 1,140,000  | 
|Accrued costs for exit activities |  |   | 4,637,000  | 
|                                  |  |   |            | 
|Total liabilities assumed         |  |   | 10,511,000 | 
|                                  |  |   |            | 
|Net assets acquired               |  | $ | 17,620,000 | 
|                                  |  |   |            | 

Current assets primarily consisted of cash, accounts receivable and
prepaid expenses and were value at stated value. Property and equipment was
valued at estimated replacement cost.

Of the $3,900,000 of acquired intangible assets, $3,200,000 was assigned
to completed technology, which is being amortized over 7 years, and $700,000
was assigned to in-process research and development (IPR&D), which was written
off

F-12



---



##### Table of Contents



at the date of acquisition. The amount of the purchase price allocated to
purchased IPR&D was expensed upon acquisition, because the technological
feasibility of products under development has not been established and no
alternative future uses existed. The IPR&D relates to technologies representing
processes and expertise employed to make new high temperature superconducting
materials technology and device design and cryopackaging and systems
integration technology. At the time of the acquisition, the products under
development were about 50% complete and it was expected that the remaining
efforts would be completed by the end of 2004 at a cost of approximately $2.5
million. During 2003 we spent approximately $1.4 million completing this
technology. It is now expected that development of the products will be
completed by the end of 2005 at additional cost of $1.4 million.

The remaining efforts include completion of development processes,
manufacturing processes, final product integration and testing. All of the
IPR&D projects are subject to the normal risks and uncertainties. The fair
value of the acquired intangible assets and IPR&D was estimated by management,
with the assistance of an independent appraisal firm, using the cost approach
or the the cost savings approach.

Goodwill represents the excess of the fair value of acquired net assets
over cost and is not expected to be deductible for tax purposes.

Other assets consisted primarily of restricted cash and other
miscellaneous assets and were value at stated value. Current liabilities
consisted of accounts payable and the present value of the current portion of
long term debt. Accounts payable was value at its stated value. Long term debt
was valued at its present value.

The Company also assumed an unfavorable operating lease totaling
$1,140,000. This amount represents the present value of the difference between
the stated rental rate and the estimated fair market value rental rate over the
remaining term of the lease discounted at 6.75%. In connection with the
acquisition, the Company incurred $4,637,000 of restructuring costs as a result
of severance of Conductus workforce, the elimination of excess facilities and
product line exit costs.

These restructuring costs consisted of employee termination benefits of
$1,600,000, lease abandonment costs of $1,995,000, and product line exits costs
of $1,042,000. Accrued employee termination benefits represent severance and
benefits to be paid to involuntarily terminated employees of Conductus and was
estimated to be paid within 150 days following the acquisition. Lease
abandonment costs represent the present value of minimum rentals and estimated
executory costs due under noncancellable facility and equipment lease
commitments of Conductus, entered into prior to the merger, that had no further
economic benefit to the combined entity. Product line exit costs represent the
present value of estimated costs, to be incurred under a contractual obligation
with a customer to support commercial product units previously purchased from
Conductus for a period of five years. The Company has recognized such costs as
a liabilities assumed as of the acquisition date, resulting in additional
goodwill. These accrued liabilities amounted to $285,000, $1,329,000 and
$913,000, respectively at December 31, 2003 (see Note 14).

The following unaudited proforma information presents certain operating
results as if the acquisition had taken place on January 1, 2001:

|                                          |  |      |            |      |  |   |            | 
|----------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | 
|                                          |  | 2001 |            | 2002
|                                          |  |      |            |     
|Revenue                                   |  | $    | 19,017,000 |      |  | $ | 27,742,000 | 
|Net loss                                  |  | $    | 35,134,000 |      |  | $ | 36,306,000 | 
|Net loss available to common stockholders |  | $    | 37,737,000 |      |  | $ | 38,062,000 | 
|Net loss per share                        |  | $    | 1.20       |      |  | $ | 1.03       | 

These proforma results have been prepared for comparative purposes only
and include certain adjustments such as additional amortization expense as a
result of purchased technology and lower depreciation expense resulting from
lower fixed assets costs. The proforma results are not necessarily indicative
of the results of operations that actually would have resulted had the
acquisition been in effect at January 1, 2001 or those of future periods.

Note 4-Short Term Borrowings

On March 28, 2003, the Company entered into an accounts receivable
purchase agreement with a bank. The agreement provides for the sale of up to $5
million of eligible accounts receivable, with advances to the Company totaling
80% of the receivables sold. Advances bear interest at the prime rate (4.00% at
December 31, 2003) plus 2.50% subject to a minimum monthly charge. The
agreement terminates on March 17, 2005. Outstanding amounts under this
borrowing facility at December 31, 2003 totaled $3,308,000 and are repayable
upon collection of the underlying receivables sold.

F-13



---



##### Table of Contents



Advances under the agreement are collateralized by all the Companys
assets. Under the terms of the agreement, the Company continues to service the
sold receivables and is subject to recourse provisions. In connection with this
agreement the Company issued seven year warrants for the purchase of 94,340
shares of common stock at $1.06 per share and were valued at $78,000. The fair
value of the warrants issued in connection with this agreement was calculated
using the Black-Scholes option-pricing model utilizing a volatility factor of
115%, risk-free interest rate of 3.46% and expected life of 7 years. The value
is accounted for as debt issuance costs and amortized over the term of the
agreement.

Note 5-Receivable From Stockholders

The Company made a 5-year, interest-free loan of $150,000 to the Companys
Chief Executive Officer, in connection with his compensation during 2001 and is
included in Other assets.

Conductus made two (2) loans to its President and Chief Executive Officer,
in connection with his compensation and exercise of stock options during 2002
and 2001. The outstanding principal balance of $820,000 plus any accrued
interest on his two loans with Conductus are to be paid in full in December
2005 and August 2006. These notes bear interest at 5.87% and 4.99%, are full
recourse and are collateralized by 151,761 shares of the Companys common stock
and are included in Stockholders Equity.

Note 6  Income Taxes

The Company has incurred a net loss in each year of operation since
inception resulting in no current or deferred tax expense for the years ended
December 31, 2001, 2002 and 2003.

The benefit for income taxes differs from the amount obtained by applying
the federal statutory income tax rate to loss before benefit for income taxes
for the years ended December 31, 2001, 2002 and 2003 as follows:

|                                               |                                     |  |                                 |       |      |  |      |       |   |  |      |       |  
|---------------------------------------------- | ----------------------------------- |  | ------------------------------- | ----- | ---- |  | ---- | ----- | - |  | ---- | ----- | -
|                                               |                                     |  | For the Year Ending December 31
|                                               |                                     |  |                                
|                                               |                                     |  | 2001                            |       | 2002 |  | 2003
|                                               |                                     |  |                                 |       |      |  |     
|Tax benefit computed at Federal statutory rate |                                     |  | 34.0                            | %     |      |  | 34.0 | %     |   |  | 34.0 | %    
|Increase (decrease) in taxes due to:           |                                     |  |                                 |       |      |  |      |       |   |  |      |      
|                                               | Change in valuation allowance       |  |                                 | (41.3 | )    |  |      | (39.8 | ) |  |      | (39.8 | )
|                                               | State taxes, net of federal benefit |  |                                 | 7.0   |      |  |      | 5.8   |   |  |      | 5.8   |  
|                                               | Other                               |  |                                 | 0.3   |      |  |      |      |   |  |      |      |  
|                                               |                                     |  |                                 |       |      |  |      |       |   |  |      |      
|                                               |                                     |  |                                | %     |      |  |     | %     |   |  |     | %    
|                                               |                                     |  |                                 |       |      |  |      |       |   |  |      |      

The significant components of deferred tax assets (liabilities) at
December 31 are as follows:

|                                     |  |                                 |             |      |  |      |             |   |  |   |             |  
|------------------------------------ |  | ------------------------------- | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                     |  | For the Year Ending December 31
|                                     |  |                                
|                                     |  | 2001                            |             | 2002 |  | 2003
|                                     |  |                                 |             |      |  |     
|Loss carryforwards                   |  | $                               | 31,008,000  |      |  | $    | 59,414,000  |   |  | $ | 78,428,000  |  
|Capitalized research and development |  |                                 | 4,475,000   |      |  |      | 6,406,000   |   |  |   | 7,373,000   |  
|Warrant charges                      |  |                                 | 2,047,000   |      |  |      | 2,955,000   |   |  |   | 36,000      |  
|Accrued loss on contract             |  |                                 | 796,000     |      |  |      |            |   |  |   |            |  
|Depreciation                         |  |                                 | 1,762,000   |      |  |      | 1,942,000   |   |  |   | 3,365,000   |  
|Tax credits                          |  |                                 | 1,330,000   |      |  |      | 3,013,000   |   |  |   | 4,083,000   |  
|Inventory                            |  |                                 | 246,000     |      |  |      | 2,307,000   |   |  |   | 320,000     |  
|Purchase accounting adjustments      |  |                                 |            |      |  |      | 883,000     |   |  |   | 1,146,000   |  
|Acquired intellectual property       |  |                                 |            |      |  |      | (1,553,000  | ) |  |   | (1,346,000  | )
|Other                                |  |                                 | 264,000     |      |  |      | 991,000     |   |  |   | 1,171,000   |  
|Less: valuation allowance            |  |                                 | (41,928,000 | )    |  |      | (76,358,000 | ) |  |   | (94,576,000 | )
|                                     |  |                                 |             |      |  |      |             |   |  |   |             |  
|                                     |  | $                               |            |      |  | $    |            |   |  | $ |            |  
|                                     |  |                                 |             |      |  |      |             |   |  |   |             |  

F-14



---



##### Table of Contents



The valuation allowance increased by $7,468,000, $35,983,000 and $8,934,000
in 2001, 2002 and 2003, respectively. As of December 31, 2003, the Company has net operating loss carryforwards
for federal and state income tax purposes of approximately $215.1 million and
$90.6 million, respectively, which expire in the years 2003 through 2023. Of
these amounts $93.9 million and $30.2 million, respectively resulted from the
acquisition of Conductus. Included in the net operating loss carryforwards are
deductions related to stock options of approximately $24.0 million and $13.0
million for federal and California income tax purposes. To the extent net
operating loss carryforwards are recognized for accounting purposes the
resulting benefits related to the stock options will be credited to
stockholders equity. In addition, the Company has research and development and
other tax credits for federal and state income tax purposes of approximately
$2.6 million and $2.3 million, respectively, which expire in the years 2003
through 2023. Of these amounts $972,000 and $736,000, respectively resulted
from the acquisition of Conductus. Due to the uncertainty surrounding their realization, the Company has
recorded a full valuation allowance against its net deferred tax assets.
Accordingly, no deferred tax asset has been recorded in the accompanying
balance sheet. Section 382 of the Internal Revenue Code imposes an annual limitation on
the utilization of net operating loss carryforwards based on a statutory rate
of return (usually the applicable federal funds rate, as defined in the
Internal Revenue Code) and the value of the corporation at the time of a
change of ownership as defined by Section 382. Recently the Company completed
an analysis of its equity transactions and determined that it had a change in
ownership in August 1999 and December 2002. Therefore, the ability to utilize
net operating loss carryforwards incurred prior to the change of ownership
totaling $101.6 million will be subject in future periods to an annual
limitation of $1.3 million. In addition, the Company acquired the right to
Conductus net operating losses, which are also subject to the limitations
imposed by Section 382. Conductus underwent three ownership changes which
occurred in February 1999, February 2001 and December 2002. Therefore, the
ability to utilize Conductus net operating loss carryforwards of $93.9 million
incurred prior to the ownership changes will be subject in future periods to
annual limitation of $700,000. Net operating losses incurred by the Company
subsequent to the ownership changes totaled $19.5 million and are not subject
to this limitation. Note 7  Stockholders Equity Preferred Stock Pursuant to the Companys Certificate of Incorporation, the Board of
Directors is authorized to issue up to 2,000,000 shares of preferred stock (par
value $.001 per share) in one or more series and to fix the rights,
preferences, privileges, and restrictions, including the dividend rights,
conversion rights, voting rights, redemption price or prices, liquidation
preferences, and the number of shares constituting any series or the
designation of such series. Convertible Preferred Stock On September 29, 2000, the Company issued in a private placement 37,500
shares of a newly created Series E Convertible Preferred Stock and warrants to
purchase up to an additional 1,044,568 shares of common stock. Proceeds, net
of issuance costs, totaled approximately $35,155,000. The preferred stock is non-voting, has a stated value and a liquidation
preference of $1,000 per share, and is convertible into common stock at the
lower of $17.95 per common share or the market price of the common stock at the
time of conversion, subject to an implicit floor. The preferred stock
automatically converts into common stock on the third anniversary of the
closing and has no antidilution features. The optional and automatic
conversions of preferred stock are limited to an aggregate maximum of 3,554,656
shares of common stock. Any preferred shares not converted through optional
and the automatic conversions due to the limit on the number of shares that can
be issued will be cancelled without any other obligation except to pay any
accumulated conversion premium through the automatic conversion date. The
preferred stock carries a 7% conversion premium, payable upon conversion in
cash or common stock subject to certain limitations, at the Companys option.
The conversion premium is being included in the calculation of net loss
available to common shareholders over the period it is earned by the preferred
stockholder. During 2001, 3,000 Series E preferred shares were converted into 625,093
shares of common stock and 51,212 shares of common stock were issued in
connection with the conversion premium. During 2002 the remaining 34,500 shares
were F-15




---



##### Table of Contents



converted into 2,878,351 shares of common stock. The associated conversion
premium totaled $4,686,000 and was paid with $3.0 million in cash and an eighteen-month $1.7 million subordinated note. The
subordinated note carries eight percent interest with interest only payable for
the first six months and monthly amortization of principal and interest for the
remaining twelve months. In connection with the sale of the preferred stock, the Company also
issued two five-year warrants to purchase shares of common stock at an exercise
price of $21.54 per share. The first warrant is for the purchase of 313,370
shares and the second warrant is for the purchase of up to 731,198 additional
shares of common stock. Both warrants are currently exercisable and contain
weighted average antidilution provisions which adjust the warrant exercise
price and number of shares in the event the Company sells equity securities at
a discount to then prevailing market prices. The amount of the adjustment
depends on the size of the below-market transaction and the amount of the
discount to the market price. The warrant exercise price cannot be reduced
below a minimum of $18.91 as the result of adjustments under this provision. As
a result of the issuance of common shares during 2002 and 2003 the exercise
price and the number of shares issuable under the warrant was adjusted to
$19.28 and 1,166,477, respectively. Common Stock In June 2003 the Company raised net proceeds of $10,065,000 from the
private sale of 5,116,278 shares of common stock at $2.15 per share based on a
negotiated discount to market and 5-year warrants to purchase an additional
1,279,069 shares of common stock exercisable at $2.90 per share. The warrants
became exercisable on December 24, 2003. The common shares issued and
underlying the warrants were subsequently registered. In March 2002 the Company raised net proceeds of $12,122,000 from the
private sale of 3,714,286 shares of common stock at $3.50 per share based on a
negotiated discount to market and 5-year warrants to purchase an additional
557,143 shares of common stock exercisable at $5.50 per share. In conjunction
with this equity issuance, the Company also issued to the placement agent
5-year warrants to purchase up to 213,571 shares of common stock at an exercise
price of $5.50 per share. These warrants became exercisable on September 10,
2002. The common shares issued and underlying the warrants were subsequently
registered. In connection with the acquisition of Conductus, Inc. in December 2002 the
Company raised net proceeds of $19,704,000 from the private sale of 21,096,954
shares of common stock at $0.95 per share based on a negotiated discount to
market and 5-year warrants to purchase an additional 5,274,240 shares of common
stock exercisable at $1.19 per share. The warrants became exercisable on June
17, 2003. The common shares issued and underlying the warrants were
subsequently registered. Stock Options The Company has five stock option plans, the 1992 Stock Option Plan, the
nonstatutory 1992 Directors Stock Option Plan, 1998 and 1999 Stock Option Plans
and the 2003 Equity Incentive Plan (collectively, the Stock Option Plans).
The 1988 Stock Option Plan expired in 1998 and the 1992 Stock Option Plan and
the nonstatutory 1992 Directors Stock Option Plan expired in 2002. During 2003
the 1998 and 1999 Stock Option Plans were replaced by the 2003 Equity Incentive
Plan. Under the 2003 Equity Incentive Plan, stock awards may consist of stock
options, stock appreciation rights, restricted stock awards, performance
awards, and performance share awards. Stock awards may be made to directors,
key employees, consultants, and non-employee directors of the Company. Stock
options granted under these plans must be granted at prices no less than 100%
of the market value on the date of grant. Only stock options have been granted
under these plans. Generally, stock options become exercisable in installments
over a minimum of four years, beginning one year after the date of grant, and
expire not more than ten years from the date of grant, with the exception of
10% or greater stockholders which may have options granted at prices no less
than the market value on the date of grant, and expire not more than five years
from the date of grant. The original grant provisions for 2,000,000 options
issued during 2003 allowed for accelerated vesting if certain performance
criteria were met during 2003. In January 2004, the Companys Board of
Directors determined that the performance criteria were met and that 50% of
these options vest on January 1, 2004 and 50% on January 1, 2005. In connection with the acquisition of Conductus, Inc., each Conductus
option holder received an equivalent option to purchase the Companys common
shares on the same terms and conditions. The number of shares of the Companys
common stock was adjusted by multiplying the number of Conductus securities
times the exchange ratio of 0.6 and dividing the exercise price by the exchange
ratio of 0.6. F-16




---



##### Table of Contents



At December 31, 2003, 3,670,561 shares of common stock were available for
future grants and 7,545,321 options had been granted but not yet exercised.
Option activity during the three years ended December 31, 2003 was as follows: Number of
    
    Weighted AverageShares
    
    Exercise PriceOutstanding at December 31, 2000
    
    
    1,889,101
    
    
    $
    12.40Granted
    
    
    853,500
    
    
    
    5.783Canceled
    
    
    (112,422
    )
    
    
    7.834Exercised
    
    
    (79,691
    )
    
    
    3.392Outstanding at December 31, 2001
    
    
    2,550,488
    
    
    
    10.67Granted
    
    
    851,975
    
    
    
    5.005Assumed
    
    
    1,673,777
    
    
    
    7.610Canceled
    
    
    (253,523
    )
    
    
    8.311Exercised
    
    
    (26,473
    )
    
    
    3.128Outstanding at December 31, 2002
    
    
    4,796,244
    
    
    
    8.761Granted
    
    
    3,116,007
    
    
    
    2.6611Canceled
    
    
    (310,243
    )
    
    
    10.21Exercised
    
    
    (56,687
    )
    
    
    2.703Outstanding at December 31, 2003
    
    
    7,545,321
    
    
    $
    6.283
 The following table summarizes information concerning currently outstanding
and exercisable stock options at December 31, 2003: WeightedAverage
    
    
    
    
    
    ExercisableRemaining
    
    Weighted
    
    
    
    
    
    WeightedRange of
    
    Number
    
    Contractual
    
    Average
    
    Number
    
    AverageExercise Prices
    
    Outstanding
    
    Life
    
    Exercise Price
    
    Exercisable
    
    Exercise Price$0.830 -
    
    $
    2.940
    
    
    
    1,120,454
    
    
    
    8.160
    
    
    $
    1.500
    
    
    
    297,256
    
    
    $
    2.351$3.000 -
    
    $
    3.050
    
    
    
    2,189,227
    
    
    
    9.380
    
    
    $
    3.050
    
    
    
    9,918
    
    
    $
    3.00$3.063 -
    
    $
    5.225
    
    
    
    1,856,108
    
    
    
    6.928
    
    
    $
    4.374
    
    
    
    1,250,728
    
    
    $
    4.289$5.290 -
    
    $
    28.000
    
    
    
    2,039,732
    
    
    
    6.420
    
    
    $
    9.812
    
    
    
    1,632,324
    
    
    $
    10.198$29.500 -
    
    $
    49.375
    
    
    
    339,800
    
    
    
    6.320
    
    
    $
    32.129
    
    
    
    78,668
    
    
    $
    36.4937,545,321
    
    
    
    7.313
    
    
    $
    6.342
    
    
    
    3,268,894
    
    
    $
    8.120
 The number of options exercisable and weighted average exercise price at
December 31, 2001 and 2002 totaled 1,036,812 and $7.56 and 2,463,945 and
$8.384, respectively. The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, (SFAS 123), Accounting for
Stock-Based Compensation. Accordingly, no compensation cost has been
recognized for the stock-based compensation other than for non-employees. The fair value of these options for purposes of the pro forma amounts in
Note 2 was estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions for the
years ended December 31, 2001, 2002 and 2003, respectively: dividend yields of
zero percent each year; expected volatilities of 65%, 65% and 65 %; risk-free
interest rates of 4.375%, 3.46% and 2.80%; and expected life of 4.0, 4.0, and
4.0 years. The weighted average fair value of options granted in 2001, 2002 and
2003 for which the exercise price equals the market price on the grant date was
$3.05, $2.60 and $1.37 respectively. Warrants F-17




---



##### Table of Contents



In connection with the acquisition of Conductus, Inc., each Conductus
warrant holder received an equivalent warrant to purchase the Companys common
shares on the same terms and conditions. The number of shares of the Companys
common stock was adjusted by multiplying the number of Conductus securities
times the exchange ratio of 0.6 and dividing the exercise price by the exchange
ratio of 0.6. Certain warrants contain call provisions on behalf of the
Company. The following is a summary of outstanding warrants at December 31, 2003: Common SharesCurrently
    
    Price perTotal
    Exercisable
    Share
    Expiration DateWarrant related to issuance of Series E Preferred Stock
    
    
    1,166,477
    
    
    
    1,166,477
    
    
    $
    19.28
    
    
    September 29, 2005Warrants related to issuance of common stock
    
    
    440,714
    
    
    
    440,714
    
    
    
    5.50
    
    
    March 10, 20071,406,581
    
    
    
    1,406,581
    
    
    
    1.19
    
    
    December 17, 2007*1,162,790
    
    
    
    1,162,790
    
    
    
    2.90
    
    
    June 24, 2008*Warrants related to bank borrowings
    
    
    62,500
    
    
    
    62,500
    
    
    
    3.00
    
    
    June 18, 2004*33,333
    
    
    
    33,333
    
    
    
    3.00
    
    
    December 1, 2004*27,692
    
    
    
    27,692
    
    
    
    3.25
    
    
    January 12, 2005*Warrants related to sales agreements
    
    
    1,000,000
    
    
    
    475,068
    
    
    
    4.00
    
    
    August 27, 2004Warrants assumed in connection with the Conductus,
Inc. acquisition
    
    
    219,690
    
    
    
    219,690
    
    
    
    6.667
    
    
    December 10, 2004*72,756
    
    
    
    72,756
    
    
    
    22.383
    
    
    August 7, 20051,095,000
    
    
    
    1,095,000
    
    
    
    4.583
    
    
    September 27, 20076,000
    
    
    
    6,000
    
    
    
    31.25
    
    
    September 1, 2007Total
    
    
    6,693,533
    
    
    
    6,168,601
  *
    
    The terms of these warrants contain net exercise provisions, wherein
investors 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 preceeding the exercise date and call
provisions. During 2003 the following warrants were exercised: Common SharesWarrants
    
    IssuedIn Accordance WithWarrants
    
    Price per
    
    
    
    
    
    Net ExerciseExercised
    
    Share
    
    For Cash
    
    ProvisionsWarrants related to bank borrowings
    
    
    94,340
    
    
    
    1.06
    
    
    
    
    
    
    
    75,140Warrants related to issuance of common stock
    
    
    330,000
    
    
    
    5.50
    
    
    
    330,000
    
    
    
    3,867,659
    
    
    
    1.19
    
    
    
    1,254,500
    
    
    
    2,613,159116,279
    
    
    
    2.90
    
    
    
    116,279
    
    
    
    Total
    
    
    4,408,278
    
    
    
    
    
    
    
    1,700,779
    
    
    
    2,688,299
 Note 8  Warrants Issued to U.S. Cellular In August 1999, the Company entered into a warrant agreement with United
States Cellular Corporation (U.S. Cellular) where the exercise of a warrant
to purchase up to 1,000,000 shares of common stock was conditioned upon future
product purchases by U.S. Cellular. Under the terms of the warrant, U.S.
Cellular vests in the right to purchase one share of common stock at $4 per
share for every $25 of SuperFilter systems purchased from the Company. The
warrant is immediately exercisable with respect to any vested shares and
expires August 27, 2004. For accounting purposes proceeds from sales to U.S.
Cellular under this agreement are allocated between commercial product revenue
and the estimated value of the warrants vesting using the Black-Scholes
option-pricing model. The estimated fair value of the warrants in excess of
the related sales, when applicable is recorded in cost of commercial product
revenues. F-18




---



##### Table of Contents



In September 2000, the Company received a $7.8 million non-cancelable
purchase order from U.S. Cellular for SuperFilter systems to be shipped over
the next nine quarters. In consideration for the purchase order, the Company
amended the August 1999 warrant agreement and vested 312,000 warrants to U.S.
Cellular. The vested warrants are immediately exercisable, not subject to
forfeiture, and U.S. Cellular has no other obligations to the Company. The estimated fair value of the warrants vesting upon receipt of this
order was calculated to be $5,635,000 using the Black-Scholes option-pricing
model and has been recorded as a deferred warrant charge in the statement of
stockholders equity. As SuperFilter systems are shipped under this purchase
order, the related sales proceeds will be allocated between stockholders
equity and commercial product revenue using the percentage relationship which
existed between the fair value of the warrants as recorded in September 2000
and the amount of the non-cancelable purchase order. The fair value of the
warrants was calculated utilizing a volatility factor of 85%, risk-free
interest rate of 6.01%, and an expected life of 3.92 years. During fiscal
2001and 2002 sales proceeds of $2,237,000 and $2,280,000, respectively, for
shipments pursuant to this purchase order were allocated to the deferred
warrant charge and proceeds of $879,000 and $967,000, respectively, were
recorded as commercial product revenues under this purchase order. After the allocation of sales proceeds under the $7.8 million purchase
order to the related warrants, the estimated cost of providing products under
the purchase order exceeded related revenue by $5.3 million. The resulting loss
was reflected in the results of operations for the year ended December 31,
2000. During the years ending December 31, 2001 and 2002, $2,243,000 and
$1,998,000, respectively, of this reserve was reversed against the cost of
product delivered under this purchase order. During the fourth quarter of 2002, deliveries under the $7.8 million
purchase order were completed. For accounting purposes, proceeds from
subsequent sales to U.S. Cellular under this agreement are again being
allocated between commercial product revenue and the estimated value of the
warrants vesting using the Black-Scholes option-pricing model. For subsequent
product sales, in the fourth quarter of 2002 and the year ended December 31,
2003, U.S. Cellular vested in the right to exercise the warrant and purchase a
total of 22,540 and 38,088 shares of common stock, respectively, and sales
proceeds allocated to warrants vesting in 2002 and 2003 totaled $3,000 and
$90,000, respectively. As of December 31, 2003, U.S. Cellular has 524,932 unvested warrants that
can be earned from future product orders through August 27, 2004. Note 9  Employee Savings Plan In December 1989, the Board of Directors approved a 401(k) savings plan
(the 401(k) Plan) for the employees of the Company that became effective in
1990. Eligible employees may elect to make contributions under the terms of
the 401(k) Plan; however, contributions by the Company are made at the
discretion of management. The Company has made no contributions to the Plan. Note 10  Commitments and Contingencies Operating Leases The Company leases its offices and production facilities under
non-cancelable operating leases that expire at various times over the next ten
years. Generally leases contain escalation clauses for increases in annual
renewal options and require the Company to pay utilities, insurance, taxes and
other operating expenses. For the years ended December 31, 2001, 2002, and 2003, rent expense was
$1,064,000, $1,350,000 and $ 2,288,000, respectively. Capital Leases The Company leases certain property and equipment under capital lease
arrangements that expire at various dates through 2007. The leases bear
interest at various rates ranging from 8.56% to 14.95%. Patents and Licenses The Company has entered into various licensing agreements requiring
royalty payments ranging from 0.13% to 2.5% of F-19




---



##### Table of Contents



specified product sales. Certain of these agreements contain provisions for the
payment of guaranteed or minimum royalty amounts. In the event that the Company
fails to pay minimum annual royalties, these licenses may automatically become
non-exclusive or be terminated. These royalty obligations terminate in 2009 to
2020. Royalty expenses totaled $179,000 in 2001, $294,000 in 2002 and
$572,000
in 2003. Under the terms of certain royalty agreements , royalty payments made
may be subject to audit. There have been no audits to date and the Company does
not expect any possible future audit adjustments to be significant. The minimum lease payments under operating and capital leases and license
obligations are as follows: Year ending December 31,
    
    Licenses
    
    Operating Leases
    
    Capital Leases2004
    
    $
    270,000
    
    
    $
    2,466,000
    
    
    $
    85,0002005
    
    
    270,000
    
    
    
    2,383,000
    
    
    
    52,0002006
    
    
    270,000
    
    
    
    1,494,000
    
    
    
    22,0002007
    
    
    270,000
    
    
    
    1,345,000
    
    
    
    15,0002008
    
    
    270,000
    
    
    
    1,385,000
    
    
    
    Thereafter
    
    
    1,800,000
    
    
    
    4,326,000
    
    
    
    Total payments
    
    $
    3,150,000
    
    
    $
    13,399,000
    
    
    
    174,000Less: amount representing
interest
    
    
    
    
    
    
    
    
    
    
    (30,000
    )Present value of minimum lease
    
    
    
    
    
    
    
    
    
    
    144,000Less current portion
    
    
    
    
    
    
    
    
    
    
    (68,000
    )Long term portion
    
    
    
    
    
    
    
    
    
    $
    76,000
 In connection with the acquisition of Conductus, Inc. as of December 31,
2002 operating leases with remaining commitments totaling $2,044,000 and
$1,758,000 have been abandoned or are considered unfavorable, respectively. A
liability totaling $1,995,000 representing the present value of the minimum
lease payments and executory costs was recorded at December 18, 2002 relating
to the abandoned leases. A liability totaling $1,140,000 representing the
present value of the difference between the fair market rental and lease
commitment was recorded at December 31, 2002 relating to unfavorable leases. As
of December 31, 2003 the remaining commitments on these operating leases total
$1,422,000 and $1,205,000, respectively. At December 31, 2003, the present
value of the remaining liability related to the abandoned leases and
unfavorable leases totaled $1,329,000 and 823,000, respectively. These amounts
are included in accrued liabilities. Note 11  Contractual Guarantees and Indemnities Warranties The Company establishes reserves for future product warranty costs that
are expected to be incurred pursuant to specific warranty provisions with its
customers. The Companys warranty reserves are generally established at the
time of sale and updated throughout the warranty period based upon numerous
factors including historical warranty return rates and expenses over various
warranty periods. During its normal course of business, the Company makes certain
contractual guarantees and indemnities pursuant to which the Company may be
required to make future payments under specific circumstances. The Company has
not recorded any liability for these contractual guarantees and indemnities in
the accompanying consolidated financial statements. A description of
significant contractual guarantees and indemnities existing as of December 31,
2003 is included below: Intellectual Property Indemnities F-20




---



##### Table of Contents



The Company indemnifies certain customers and its contract manufacturers
against liability arising from third-party claims of intellectual property
rights infringement related to the Companys products. These indemnities
appear in development and supply agreements with our customers as well as
manufacturing service agreements with our contract manufacturers, are not
limited in amount or duration and generally survive the expiration of the
contract. Given that the amount of any potential liabilities related to such
indemnities cannot be determined until an infringement claim has been made, the
Company is unable to determine the maximum amount of losses that it could incur
related to such indemnifications. Director and Officer Indemnities and Contractual Guarantees The Company has entered into indemnification agreements with certain
directors and executive officers which require the Company to indemnify such
individuals to the fullest extent permitted by Delaware law. The Companys
indemnification obligations under such agreements are not limited in amount or
duration. Certain costs incurred in connection with such indemnifications may
be recovered under certain circumstances under various insurance policies.
Given that the amount of any potential liabilities related to such indemnities
cannot be determined until a lawsuit has been filed against a director or
executive officer, the Company is unable to determine the maximum amount of
losses that it could incur relating to such indemnifications. Historically,
any amounts payable pursuant to such director and officer indemnifications have
not had a material negative effect on the Companys business, financial
condition or results of operations. The Company has also entered into severance and change in control
agreements with certain of its executives. These agreements provide for the
payment of specific compensation benefits to such executives upon the
termination of their employment with the Company. General Contractual Indemnities/Products Liability During the normal course of business, the Company enters into contracts with
customers where it has agreed to indemnify the other party for personal injury
or property damage caused by the Companys products. The Companys
indemnification obligations under such agreements are not limited in duration
and are generally not limited in amount. Historically, any amounts payable
pursuant to such contractual indemnities have not had a material negative
effect on the Companys business, financial condition or results of operations.
The Company maintains product liability insurance as well as errors and
omissions insurance which may provide a source of recovery to the Company in
the event of an indemnification claim. Note 12-Legal Proceedings We are engaged in a patent dispute with ISCO International, Inc. relating
to U.S. Patent No. 6,263,215 entitled Cryoelectronically Cooled Receiver Front
End for Mobile Radio Systems. ISCO filed a complaint on July 17, 2001 in the
United States District Court for the District of Delaware against us and our
wholly-owned subsidiary, Conductus, Inc. The ISCO complaint alleged that our
SuperFilter product and Conductus ClearSite® product infringe ISCOs patent.
The matter went to trial on March 17, 2003. On April 3, 2003, the jury returned a unanimous verdict that our
SuperFilter III product does not infringe the patent in question, and that
ISCOs patent is invalid and unenforceable. The jury also awarded us $3.8
million in compensatory damages based upon a finding that ISCO engaged in
unfair competition and acted in bad faith by issuing press releases and
contacting our customers asserting rights under this patent. On April 17, 2003, we filed a Motion for Attorneys Fees and
Disbursements, in which we asked the court to award us our attorneys fees and
other litigation expenses. On the same date, ISCO filed a motion, asking the
court to overturn the verdict and grant a new trial. In August 2003, the court
rejected ISCOs request to overturn the jurys verdict that the patent is
invalid and not infringed by the SuperFilter III product, and accepted the
jurys verdict that the patent is unenforceable because of inequitable conduct
committed by one of the alleged inventors. ISCO subsequently filed a notice of
appeal as to this portion of the courts decision. The court overturned the
jurys verdict of unfair competition and bad faith on the part of ISCO and the
related $3.8 million compensatory damage award to us, and also denied our
request for reimbursement of our legal fees associated with the case. We have
filed a notice of appeal as to this portion of the courts decision. Litigation expenses on the ISCO matter totaled $3.2 million and $4.8
million for the years ended December 31, 2002 and 2003, respectively. F-21




---



##### Table of Contents



Note 13- Earnings Per Share The computation of per share amounts for 2001, 2002 and 2003 is based on
the average number of common shares outstanding for the period. Options and
warrants to purchase 4,718,581, 14,592,194 and 14,238,854 shares of common
stock during 2001, 2002, and 2003 respectively, were not considered in the
computation of diluted earnings per share because their inclusion would have
been antidilutive. Also, the preferred stock convertible into 2,929,563 shares
of common stock at December 31, 2001 was not considered in the computation of
diluted earnings per share because inclusion would also have been antidilutive. F-22




---



##### Table of Contents



Note 14  Details of Certain Financial Statement Components and Supplemental
Disclosures of Cash Flow Information and Non-Cash Activities Balance sheet data: December 312002
    
    2003Accounts receivable:Accounts receivable-trade
    
    $
    1,592,000
    
    
    $
    6,766,000U.S. government accounts receivable-billed
    
    
    1,692,000
    
    
    
    2,107,000U.S. government accounts receivable-unbilled
    
    
    179,000
    
    
    
    Less: allowance for doubtful accounts
    
    
    (58,000
    )
    
    
    (64,000
    )$
    3,405,000
    
    
    $
    8,809,000
 Unbilled accounts receivable represent costs and profits in excess of billed amounts on contracts-in-progress at year-end. Such amounts are billed based upon the terms of the contractual agreements. Such amounts are substantially collected within one year. December 312002
    
    2003Inventories:Raw materials
    
    $
    1,841,000
    
    
    $
    1,941,000Work-in-process
    
    
    3,143,000
    
    
    
    4,803,000Finished goods
    
    
    2,013,000
    
    
    
    2,861,000Less inventory reserves
    
    
    (650,000
    )
    
    
    (803,000
    )$
    6,347,000
    
    
    $
    8,802,000Property and Equipment:Equipment
    
    $
    18,315,000
    
    
    $
    21,274,000Leasehold improvements
    
    
    5,016,000
    
    
    
    5,891,000Furniture and fixtures
    
    
    408,000
    
    
    
    430,00023,739,000
    
    
    
    27,595,000Less: accumulated depreciation and amortization
    
    
    (12,648,000
    )
    
    
    (15,061,000
    )$
    11,091,000
    
    
    $
    12,534,000
 At December 31, 2002 and 2003, equipment includes $1,448,000 and $1,430,000 of assets financed under capital lease arrangements, net of $1,090,000 and $1,220,000 of accumulated amortization, respectively. Depreciation expense amounted to $1,674,000,
$1,609,000 and $2,413,000 for the years ended December 31, 2001, 2002 and 2003, respectively. December 312002
    
    2003Patents and Licenses:Patents pending
    
    $
    599,000
    
    
    $
    848,000Patents issued
    
    
    964,000
    
    
    
    1,182,000Less accumulated amortization
    
    
    (268,000
    )
    
    
    (332,000
    )Net patents issued
    
    
    696,000
    
    
    
    850,000Licenses
    
    
    2,746,000
    
    
    
    3,310,000Less accumulated amortization
    
    
    (2,081,000
    )
    
    
    (2,322,000
    )
 F-23




---



##### Table of Contents



December 312002
    
    2003Net licenses
    
    
    665,000
    
    
    
    988,000Purchased technology
    
    
    3,200,000
    
    
    
    3,200,000Less accumulated amortization
    
    
    (19,000
    )
    
    
    (519,000
    )Net purchased technology
    
    
    3,181,000
    
    
    
    2,681,000$
    5,141,000
    
    
    $
    5,367,000
 Amortization expense related to these items was $314,000, $293,000 and $805,000 in 2001, 2002 and 2003, respectively, and is expected to total $788,000 in 2004, $805,000 in 2005, $825,000 in 2006, $825,000 in 2007 and $825,000 in 2008. December 312002
    
    2003Accrued Expenses and Other Long Term Liabilities:Compensation related
    
    $
    1,053,000
    
    
    $
    2,153,000Warranty reserve
    
    
    351,000
    
    
    
    494,000Unfavorable lease costs
    
    
    1,140,000
    
    
    
    823,000Lease abandonment costs
    
    
    1,995,000
    
    
    
    1,329,000Product line exit costs
    
    
    1,042,000
    
    
    
    913,000Severance costs
    
    
    1,600,000
    
    
    
    285,000Other
    
    
    610,000
    
    
    
    723,0007,791,000
    
    
    
    6,720,000Less, current portion
    
    
    (4,557,000
    )
    
    
    (4,832,000
    )Long term portion
    
    $
    3,234,000
    
    
    $
    1,888,000
 For the years endedDecember 31, 2002
    
    December 31, 2003Warranty Reserve Activity:Beginning balance
    
    $
    242,000
    
    
    $
    351,000Additions
    
    
    340,000
    
    
    
    261,000Deductions
    
    
    (231,000
    )
    
    
    (118,000
    )Ending balance
    
    $
    351,000
    
    
    $
    494,000Unfavorable Lease Costs:Beginning balance
    
    $
    
    
    
    $
    1,140,000Additions
    
    
    1,140,000
    
    
    
    Deductions
    
    
    
    
    
    
    (317,000
    )Ending balance
    
    $
    1,140,000
    
    
    $
    823,000Lease Abandonment Costs:Beginning balance
    
    $
    
    
    
    $
    1,995,000Additions
    
    
    1,995,000
    
    
    
    
 F-24




---



##### Table of Contents



For the years endedDecember 31, 2002
    
    December 31, 2003Deductions
    
    
    
    
    
    
    (666,000
    )Ending balance
    
    $
    1,995,000
    
    
    $
    1,329,000Product Line Exit Costs:Beginning balance
    
    $
    
    
    
    $
    1,042,000Additions
    
    
    1,042,000
    
    
    
    Deductions
    
    
    
    
    
    
    (129,000
    )Ending balance
    
    $
    1,042,000
    
    
    $
    913,000Severance Costs:Beginning balance
    
    $
    
    
    
    $
    1,600,000Additions
    
    
    1,600,000
    
    
    
    Deductions
    
    
    
    
    
    
    (1,315,000
    )Ending balance
    
    $
    1,600,000
    
    
    $
    285,000
 F-25




---



##### Table of Contents



Supplemental Cash Flow Information: Dec. 31, 2001
    
    Dec. 31, 2002
    
    Dec. 31, 2003Cash paid for interest
    
    $
    146,000
    
    
    $
    145,000
    
    
    $
    471,000Non-cash investing and financing activities:Issuance of warrants in connection with debt and lease agreements
    
    
    
    
    
    
    
    
    
    
    78,000Conversion of preferred shares into common shares
    
    
    3,000,000
    
    
    
    34,500,000
    
    
    
    Issuance of note for payment of preferred stock conversion premium
    
    
    
    
    
    
    1,686,000
    
    
    
    Non cash items related to the acquisition of Conductus, Inc.Estimated fair value of tangible assets acquired
    
    
    
    
    
    
    3,625,000
    
    
    
    Goodwill and identifiable intangibles assets acquired
    
    
    
    
    
    
    24,007,000
    
    
    
    Liabilities assumed or created
    
    
    
    
    
    
    10,511,000
    
    
    
    Value of common stock issued and option and warrants assumed
    
    
    
    
    
    
    16,691,000
    
    
    
    
 Quarterly Financial Data (Unaudited) First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth Quarter2003Net revenues
    
    $
    7,580,000
    
    
    $
    11,263,000
    
    
    $
    14,156,000
    
    
    $
    16,395,000Loss from operations
    
    
    (8,295,000
    )
    
    
    (2,974,000
    )
    
    
    (759,000
    )
    
    
    1,010,000Net (loss) income
    
    
    (8,343,000
    )
    
    
    (3,061,000
    )
    
    
    (851,000
    )
    
    
    910,000Basic loss per common shareNet loss per common share
    
    
    ($0.14
    )
    
    
    ($0.05
    )
    
    
    ($0.01
    )
    
    $
    0.01Weighted average number of
shares outstanding
    
    
    59,823,553
    
    
    
    60,048,444
    
    
    
    64,939,896
    
    
    
    65,702,315Diluted loss per common
share
    
    
    ($0.14
    )
    
    
    ($0.05
    )
    
    
    ($0.01
    )
    
    $
    0.01Weighted average number of
shares outstanding
    
    
    59,823,553
    
    
    
    60,048,444
    
    
    
    64,939,896
    
    
    
    72,652,1462002Net revenues
    
    $
    4,616,000
    
    
    $
    6,070,000
    
    
    $
    4,739,000
    
    
    $
    6,971,000Loss from operations
    
    
    (5,820,000
    )
    
    
    (6,044,000
    )
    
    
    (4,858,000
    )
    
    
    (2,864,000
    )Net loss
    
    
    (5,779,000
    )
    
    
    (5,982,000
    )
    
    
    (4,827,000
    )
    
    
    (2,925,000
    )Basic and diluted loss per
common share
 F-26




---



##### Table of Contents



First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth QuarterNet loss per common share
    
    
    ($0.33
    )
    
    
    ($0.29
    )
    
    
    ($0.23
    )
    
    
    ($0.09
    )Weighted average number of
shares outstanding
    
    
    19,427,091
    
    
    
    22,318,526
    
    
    
    23,043,009
    
    
    
    30,867,500
 F-27




---



##### 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, 2003Allowance for Uncollectible Accounts
    
    $
    58,000
    
    
    $
    12,000
    
    
    
    
    
    
    $
    (6,000
    )
    
    $
    64,000Reserve for Inventory Obsolescence
    
    
    650,000
    
    
    
    719,000
    
    
    
    
    
    
    
    (566,000
    )
    
    
    803,000Reserve for Warranty
    
    
    351,000
    
    
    
    261,000
    
    
    
    
    
    
    
    (118,000
    )
    
    
    494,000Deferred Tax Asset Valuation Allowance
    
    
    77,911,000
    
    
    
    8,934,000
    
    
    
    
    
    
    
    
    
    
    
    86,845,000Year Ended December 31, 2002Allowance for Uncollectible Accounts
    
    
    24,000
    
    
    
    12,000
    
    
    
    27,000
    
    
    
    (5,000
    )
    
    
    58,000Reserve for Inventory Obsolescence
    
    
    617,000
    
    
    
    567,0000
    
    
    
    
    
    
    
    (534,000
    )
    
    
    650,000Reserve for Warranty
    
    
    242,000
    
    
    
    340,000
    
    
    
    
    
    
    
    (231,000
    )
    
    
    351,000Deferred Tax Asset Valuation Allowance
    
    
    41,928,000
    
    
    
    35,983,000
    
    
    
    
    
    
    
    
    
    
    
    77,911,000Year Ended December 31, 2001Allowance for Uncollectible Accounts
    
    
    12,000
    
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    24,000Reserve for Inventory Obsolescence
    
    
    403,000
    
    
    
    617,000
    
    
    
    
    
    
    
    (403,000
    )
    
    
    617,000Reserve for Warranty
    
    
    250,000
    
    
    
    102,000
    
    
    
    
    
    
    
    (110,000
    )
    
    
    242,000Deferred Tax Asset Valuation Allowance
    
    
    34,460,000
    
    
    
    7,468,000
    
    
    
    
    
    
    
    
    
    
    
    41,928,000
 F-28




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, on this
11 day of
March 2004. SUPERCONDUCTOR TECHNOLOGIES INCBy:
/s/ M. Peter
Thomas
M. Peter ThomasPresident and Chief Executive Officer
 POWER OF ATTORNEY KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints M. Peter Thomas and Martin S. McDermut
and each of them, jointly and severally, his attorneys-in-fact, each with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each said attorneys-in-fact or his
substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated: Signature
/s/ M. Peter Thomas
M. Peter Thomas
    
    Title
President, Chief Executive Officer and
Director
(Principal Executive Officer)
    
    Date
March 11, 2004/s/ Martin S. McDermut
Martin S. McDermut
    
    Senior Vice President, Chief Financial
Officer
(Principal Financial Officer)
    
    March 11, 2004/s/ William J. Buchanan
William J. Buchanan
    
    Controller (Principal Accounting Officer)
    
    March 11, 2004/s/ H. Vaughan Blaxter, III
H. Vaughan Blaxter, III
    
    Director
    
    March 11, 2004/s/ Robert P. Caren
Robert P. Caren
    
    Director
    
    March 11, 2004/s/ John F. Carlson
John F. Calrson
    
    Director
    
    March 11, 2004/s/ Dennis J. Horowitz
Dennis J. Horowitz
    
    Director
    
    March 11, 2004/s/ Martin A. Kaplan
Martin A. Kaplan
    
    Director
    
    March 11, 2004/s/ John D. Lockton
John D. Lockton
    
    Chairman of the Board
    
    March 11, 2004
 S-1




---



##### Table of Contents



Signature
    
    Title
    
    Date/s/ Robert J. Majteles
Robert J. Majteles
    
    Director
    
    March 11, 2004/s/ Joseph C. Manzinger
Joseph C. Manzinger
    
    Director
    
    March 11, 2004/s/ Charles E. Shalvoy
Charles E. Shalvoy
    
    Director
    
    March 11, 2004/s/ David L. Short
David L. Short
    
    Director
    
    March 11, 2004
 S-2