##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|           |  |                                                                                              
|---------- |  | ---------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                              
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934.    
|          
|           |  | For the Year Ended December 31, 2004                                                         
|          
|OR        
|          
|o          |  | 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(Address of principal executive offices) |  | 93111-2310(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


þ o


o


þ o




DOCUMENTS INCORPORATED BY REFERENCE












---










SUPERCONDUCTOR TECHNOLOGIES INC.


FORM 10-K ANNUAL REPORT


Year Ended December 31, 2004


|                                                      |  |                                                                                           |   |      |    |  |  | 
|----------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | - | ---- | -- |  |  | 
|                                                      |  |                                                                                           |   | Page |   
|                                                      |  |                                                                                           |   |      |   
|SPECIAL NOTE REGARDING FORWARD LOOKING
    STATEMENTS |  |                                                                                           | 1 |     
|WHERE YOU CAN FIND MORE INFORMATION                   |  |                                                                                           | 1 |     
|PART I                                               
|Item 1.                                               |  | Business                                                                                  |   |      | 2  | 
|Item 2.                                               |  | Properties                                                                                |   |      | 23 | 
|Item 3.                                               |  | Legal Proceedings                                                                         |   |      | 23 | 
|Item 4.                                               |  | Submission of Matters to a Vote of Security
    Holders                                   |   |      | 24 | 
|PART II                                              
|Item 5.                                               |  | Market for the Registrants Common
    Equity and Related Stockholder Matters             |   |      | 24 | 
|Item 6.                                               |  | Selected Financial Data                                                                   |   |      | 25 | 
|Item 7                                                |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations |   |      | 26 | 
|Item 7A.                                              |  | Quantitative and Qualitative Disclosures
    about Market Risk                            |   |      | 40 | 
|Item 8.                                               |  | Financial Statements and Supplementary
    Data                                           |   |      | 40 | 
|Item 9.                                               |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosures |   |      | 40 | 
|Item 9A                                               |  | Controls and Procedures                                                                   |   |      | 40 | 
|Item 9B                                               |  | Other Information                                                                         |   |      | 41 | 
|PART III                                             
|Item 10.                                              |  | Directors and Executive Officers of the
    Registrant                                    |   |      | 41 | 
|Item 11.                                              |  | Executive Compensation                                                                    |   |      | 41 | 
|Item 12.                                              |  | Security Ownership of Certain Beneficial
    Owners and Management                        |   |      | 41 | 
|Item 13.                                              |  | Certain Relationships and Related
    Transactions                                        |   |      | 41 | 
|Item 14.                                              |  | Principal Accounting Fees and
    Disclosures                                             |   |      | 42 | 
|PART IV                                              
|Item 15.                                              |  | Exhibits and Financial Statement
    Schedules                                            |   |      | 42 | 
|EX-10.46                                             
|EX-10.47                                             
|EX-10.48                                             
|EX-10.49                                             
|EX-10.50                                             
|EX-10.51                                             
|EX-21                                                
|EX-23                                                
|EX-31.1                                              
|EX-31.2                                              
|EX-32.1                                              
|EX-32.2                                              



i



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS




Managements Discussion and Analysis of Financial
Condition and Results of Operations Business  Additional Factors That May Affect
Our Future Results.





WHERE YOU CAN FIND MORE INFORMATION




1



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##### Table of Contents






PART I







|        |         
|------- | --------
|ITEM 1. | BUSINESS

Our Company




Industry Background.




Our Solution.




| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | reduction in base station noise figure;                                                                                      
|
| |  | reduction of dropped calls and network access failures;                                                                      
|
| |  | elimination of interference from other sources such as
    specialized mobile radio handsets and other base
    stations; and
|
| |  | increased in-building penetration.                                                                                           





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | SuperLink Rx. In order to receive uplink signals from
    wireless handsets, base stations require a wireless filter
    system to eliminate, or filter out, out-of-band interference. To
    address this need, we offer the SuperLink Rx product line for
    the receiver front-end of base stations. These products combine
    specialized filters using HTS technology with a proprietary
    cryogenic cooler and a cryogenically cooled low-noise
    amplifiers. The result is 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
    filters and amplifiers.
|
| |  | AmpLink Rx. The recently introduced AmpLink Rx is our
    lower-cost receiver front-end product designed specifically to
    address the sensitivity requirements of wireless base stations.
    The AmpLink Rx is a ground-mounted unit which includes a
    high-performance amplifier and up to six dual duplexers. The
    enhanced uplink provided by AmpLink Rx 1900 improves PCS network
    coverage immediately and avoids the installation and maintenance
    costs associated with tower mounted amplifiers. As                                                                                                                                                                                                                                                                                      

2



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | network interference increases, the AmpLink Rx 1900 is easily
    upgradable to include a SuperLink Rx front-end, which uses HTS
    technology to maintain the same sensitivity improvement while
    eliminating the effects of increasing interference.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | SuperPlex. SuperPlex, our antenna sharing solution, is a
    line of multiplexers that provides extremely low insertion loss
    and excellent cross-band isolation. Products in our SuperPlex
    line of high-performance multiplexers are designed to eliminate
    the need for additional base station antennas and reduce
    infrastructure costs. Relative to competing technologies, these
    products offer increased transmit power delivered to the base
    station antenna, higher sensitivity to subscriber handset
    signals, and fast and cost-effective network overlays. The
    SuperPlex product family offers network performance benefits
    synergistic with SuperLink Rx.



Our Strategy.




| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | expanding domestic and international sales channels to broaden
    our customer base,
|
| |  | enhancing our productivity and lowering our costs,                                   
|
| |  | enhancing and extending our current product offerings,                               
|
| |  | maintaining our focus on technical excellence and
    innovation, and                
|
| |  | pursuing strategic partnerships, alliances and acquisitions.                         

Government Contracts.


Corporate Information.


Our Wireless Products




3



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##### Table of Contents







| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | SuperLink Rx. In order to receive uplink signals from
    wireless handsets, base stations require a filter system to
    eliminate out-of-band interference, and amplification to enhance
    the base stations sensitivity. To address this need, we
    offer the SuperLink Rx product line for the receiver front-end
    of base stations. These products combine specialized filters
    using HTS technology with a proprietary cryogenic cooler and
    cryogenically cooled low-noise amplifiers. The result is 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 and amplifier systems.
|
| |  | AmpLink Rx. The recently introduced AmpLink Rx is our
    lower-cost receiver front-end product designed specifically to
    address the sensitivity requirements of wireless base stations.
    The AmpLink Rx is a ground-mounted unit which includes a
    high-performance amplifier and up to six dual duplexers. The
    enhanced uplink provided by AmpLink Rx 1900 improves PCS network
    coverage immediately and avoids the installation and maintenance
    costs associated with tower mounted amplifiers. As network
    interference increases, the AmpLink Rx 1900 is upgradable to
    include a SuperLink Rx front-end, hence maintaining the same
    sensitivity improvement while eliminating the effects of
    increasing interference.                                                                                          
|
| |  | SuperPlex. SuperPlex, our antenna sharing solution, is a
    line of multiplexers that provides extremely low insertion loss
    and excellent cross-band isolation. Products in our SuperPlex
    line of high-performance multiplexers are designed to facilitate
    base station antenna sharing and reduce infrastructure costs.
    SuperPlex can be used in conjunction with AmpLink Rx 1900 and
    SuperLink Rx products to optimize performance in networks where
    1900 MHz EV-DO capabilities are added to existing
    850 MHz networks. Relative to competing technologies, this
    portfolio of STI products offer increased transmit power
    delivered to the base station antenna, higher sensitivity to
    subscriber handset signals, interference rejection and fast and
    cost-effective network overlays.                  



tm




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:


|                                              |  |                                 |            |  |      |   |            |      |  |   |            | 
|--------------------------------------------- |  | ------------------------------- | ---------- |  | ---- | - | ---------- | ---- |  | - | ---------- | 
|                                              |  | For the Year Ended December 31, |           
|                                              |  |                                 |           
|                                              |  | 2002                            |            |  | 2003 |   |            | 2004 | 
|                                              |  |                                 |            |  |      |   |            |      | 
|SuperLink Rx                                  |  | $                               | 15,195,000 |  |      | $ | 34,544,000 |      |  | $ | 12,599,000 | 
|SuperPlex                                     |  |                                 | 2,262,000  |  |      |   | 3,434,000  |      |  |   | 2,995,000  | 
|AmpLink                                       |  |                                 |           |  |      |   |           |      |  |   | 153,000    | 
|Other  Primarily Parts and Installation Kits |  |                                 | 144,000    |  |      |   | 599,000    |      |  |   | 1,040,000  | 
|                                              |  |                                 |            |  |      |   |            |      | 
|Total                                         |  | $                               | 17,601,000 |  |      | $ | 38,577,000 |      |  | $ | 16,787,000 | 
|                                              |  |                                 |            |  |      |   |            |      | 

Marketing and Sales


















5



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Backlog




Our Technology




| |                           
| | --------------------------
| | Superconducting Technology







| |                              
| | -----------------------------
| | How We Develop Our Technology



6



---



##### Table of Contents





| |              
| | -------------
| | HTS Materials





| |             
| | ------------
| | RF Circuitry





| |                             
| | ----------------------------
| | Cryogenic Cooling Technology





| |                    
| | -------------------
| | Cryogenic Packaging



How We Use Government Contracts to Fund Technology
Development




7



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Our Manufacturing Capabilities








Intellectual Property








8



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| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | 6 patents for technologies directed toward producing thin-film
    materials and structures expiring in 2010 to 2024;
|
| |  | 18 patents for cryogenic microwave circuit designs expiring in
    2010 to 2023;                                     
|
| |  | 20 patents covering cryogenics, packaging and systems expiring
    in 2013 to 2023; and                              
|
| |  | 6 patents covering other superconducting technologies expiring
    in 2013 to 2017.                                  









Competition






Employees




9



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Environmental Issues




Additional Factors That May Affect Our Future Results




Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Forward Looking Statements.


Unless otherwise noted, the terms we,
us, and our, refer to the combined and
ongoing business operations of Superconductor and its
subsidiaries.


Risks Related to Our Business




| |                                                                 
| | ----------------------------------------------------------------
| | We have a history of losses and may never become
    profitable.



10



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| |                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may need to raise additional capital, and if we are
    unable to raise capital our ability to implement our current
    business plan and ultimately our viability as a company could be
    adversely affected.









| |                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely upon a few customers for the majority of our
    commercial revenues and the loss of any one of these customers,
    or a significant loss, reduction or rescheduling of orders from
    any of these customers, would have a material adverse effect on
    our business, results of operations and financial
    condition.







| |   |                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a slowdown or delay in the deployment, upgrading or improvement
    of wireless networks by any one customer could significantly
    reduce demand for our products;                                                                        
|
| |  | reductions in a single customers forecasts and demand
    could result in excess inventories;                                                                                                                                              
|
| |  | each of our customers have significant purchasing leverage over
    us to require changes in sales terms including pricing, payment
    terms and product delivery schedules;                                                               
|
| |  | concentration of accounts receivable credit risk, which could
    have a material adverse effect on our liquidity and financial
    condition if one of our major customers declared bankruptcy or
    delayed payment of their receivables.



11



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| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The wireless communication industry is highly
    concentrated, which limits the number of potential customers,
    and further industry consolidation could result in the loss of
    key customers.





| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | We experience significant fluctuations in sales and
    operating results from quarter to quarter.





| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | the lack of any obligation by our customers to purchase their
    forecasted demand for our products;                                     
|
| |  | variations in the timing, cancellation, or rescheduling of
    customer orders and shipments;                                             
|
| |  | high fixed expenses that may disproportionately impact operating
    expenses, especially during a quarter with a sales
    shortfall; and
|
| |  | discounts given to certain customers for large volume purchases.                                                                          











| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | Our sales cycles are unpredictable and may be long, making
    future performance unpredictable.





12



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| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on the capital spending patterns of wireless
    network operators, and if capital spending is decreased or
    delayed, our business may be harmed.





| |                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our reliance on a limited number of suppliers and the long
    lead time of components for our SuperLink products could impair
    our ability to manufacture and deliver our systems on a timely
    basis.







| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We cannot predict whether our products will be
    commercially accepted, because commercial application of
    superconductive electronics technology has been limited to
    date.



13



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| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We expect decreases in average selling prices, requiring
    us to reduce product costs and introduce new systems in order to
    achieve and maintain profitability.





| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | Changes in the mix of our sales channels could cause
    fluctuations in future operating results.





| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | Our ability to protect our patents and other proprietary
    rights is uncertain, exposing us to possible losses of
    competitive advantage.





| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on specific patents and licenses to
    technologies, and we will likely need additional technologies in
    the future that we may not be able to utilize.





| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | Intellectual property infringement claims against us could
    materially harm results of operations.





14



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| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | We currently rely on specific technologies and may not
    successfully adjust to the rapidly changing superconductive
    electronics market.







| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Other parties may have the right to utilize technology
    important to our business.



15



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| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | Our failure to anticipate and respond to developments in
    the wireless telecommunications market could substantially harm
    our business.





| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to compete effectively in the
    superconductive electronics industry or against alternative
    technologies.







| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend upon government contracts for a substantial
    portion of revenue, and our business may suffer if significant
    contracts are terminated or adversely modified or we are unable
    to win new contracts.







| |   |                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | termination by the government;                                                                                                                                                                                                   
|
| |  | reduction or modification in the event of changes in the
    governments requirements or budgetary constraints;                                                                                                                 
|
| |  | increased or unexpected costs causing losses or reduced profits
    under contracts where prices are fixed or unallowable costs
    under contracts where the government reimburses for costs and
    pays an additional premium;
|
| |  | risks of potential disclosure of confidential information to
    third parties;                                                                                                                                                  
|
| |  | the failure or inability of the main contractor to perform its
    contract in circumstances where either Superconductor or
    Conductus is a subcontractor;                                                                    
|
| |  | the failure of the government to exercise options for additional
    work provided for in the contracts; and                                                                                                                     
|
| |  | the governments right in certain circumstances to freely
    use technology developed under these contracts.                                                                                                                    

16



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| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because competition for target employees is intense, we
    may be subject to claims of unfair hiring practices, trade
    secrets misappropriation or other related claims.





| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The supplier for our SuperLink Tx line of power amplifiers
    was acquired by a competitor in 2003, and the loss of this
    product line could adversely affect the future growth of our
    commercial revenues.





| |                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our failure to successfully develop collaborative
    relationships with government agencies, research institutions
    and other companies could harm our business.





| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | may require us to share control over our development,
    manufacturing and marketing programs and relinquish rights to
    our technology;
|
| |  | may be subject to termination at the discretion of the
    collaborative partners; and                                                     
|
| |  | may restrict our ability to engage in certain areas of product
    development, manufacturing and marketing.                               

17



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| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We need to increase our manufacturing capacity to meet our
    planned production volumes, and our failure to do so would
    hamper our growth and long-term success.









| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We need to simplify our fabrication process for our radio
    frequency filters in order to cost-effectively manufacture the
    SuperLink Rx, our key product, in high volumes.







| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to forecast our inventory needs
    accurately, we may be unable to obtain efficient manufacturing
    capacity or may incur unnecessary costs and produce excess
    inventory.



18



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| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | Our success depends on the attraction and retention of
    senior management and technical personnel with relevant
    expertise.





| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | Regulatory changes negatively affecting wireless
    communications companies could substantially harm our
    business.





| |                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are depending on international sales for a significant
    portion of our future revenue growth, and our international
    business activities will subject us to risks that could cause
    demand for our products to fall short of expectations and
    increase our operating expenses.







| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | different technology standards and design requirements;                                 
|
| |  | difficulty in attracting qualified personnel;                                           
|
| |  | longer payment cycles for and greater difficulties collecting
    accounts receivable;  
|
| |  | export controls, tariffs and other barriers;                                            
|
| |  | fluctuations in currency exchange rates;                                                
|
| |  | nationalization, expropriation and limitations on repatriation
    of cash;             
|
| |  | social, economic, banking and political risks;                                          
|
| |  | taxation;                                                                               
|
| |  | changes in U.S. laws and policies affecting trade, foreign
    investment and loans; and
|
| |  | cultural differences in the conduct of business.                                        



19



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| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | We may acquire or make investments in companies or
    technologies that could cause loss of value to stockholders and
    disruption of business.





| |   |                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | failure to integrate the acquired assets and/or companies with
    current business;                                                                                     
|
| |  | the price paid may exceed the value eventually realized;                                                                                                                 
|
| |  | loss of share value to existing stockholders as a result of
    issuing equity securities as part or the entire purchase price;                                          
|
| |  | potential loss of key employees from either our then current
    business or any acquired business;                                                                      
|
| |  | entering into markets in which we have little or no prior
    experience;                                                                                                
|
| |  | diversion of financial resources and managements attention
    from other business concerns;                                                                            
|
| |  | assumption of unanticipated liabilities related to the acquired
    assets; and                                                                                          
|
| |  | the business or technologies acquired or invested in may have
    limited operating histories and may be subjected to many of the
    same risks to which we are exposed.



| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we acquire any companies or technologies in the future,
    they could prove difficult to integrate, could disrupt business,
    dilute stockholder value or adversely affect our operating
    results.







| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | difficulties in integrating operations, technologies, services
    and personnel;       
|
| |  | diversion of financial and management resources from existing
    operations;           
|
| |  | risk of entering new markets;                                                           
|
| |  | potential loss of key employees; and                                                    
|
| |  | inability to generate sufficient revenues to offset acquisition
    or investment costs.





| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to implement appropriate controls and
    procedures to manage our expected growth, we may not be able to
    successfully offer our products and implement our business
    plan.



20



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| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | Compliance with environmental regulations could be
    especially costly due to the hazardous materials used in the
    manufacturing process.





| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Terrorism and the declaration of war by the United States
    against terrorism may have adversely affected, and may in the
    future adversely affect, our business.





| |                                                                                
| | -------------------------------------------------------------------------------
| | The reliability of market data included in our public
    filings is uncertain.



Risks Related to Our Common Stock




| |                             
| | ----------------------------
| | Our stock price is volatile.





| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | our perceived prospects;                                                                                                
|
| |  | variations in our operating results and whether we have achieved
    key business targets;                              
|
| |  | changes in, or our failure to meet, earnings estimates;                                                                 
|
| |  | changes in securities analysts buy/sell recommendations;                                                               
|
| |  | differences between our reported results and those expected by
    investors and securities analysts;                   
|
| |  | announcements of new contracts by us or our competitors;                                                                
|
| |  | market reaction to any acquisitions, joint ventures or strategic
    investments announced by us or our competitors; and
|
| |  | general economic, political or stock market conditions.                                                                 

21



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| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | Your ability to sell shares of our common stock may depend
    upon us maintaining our Nasdaq listing.





| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are a defendant in several securities class action
    lawsuits, and if any were to result in an unfavorable
    resolution, they could adversely affect our reputation,
    profitability and share price.







| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our corporate governance structure may prevent our
    acquisition by another company at a premium over the public
    trading price of Superconductor shares.







22



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| |                                                                           
| | --------------------------------------------------------------------------
| | We do not anticipate declaring any cash dividends on our
    common stock.








|        |           
|------- | ----------
|ITEM 2. | PROPERTIES








|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS

Patent Litigation










Class Action Lawsuits




23



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|        |                                                        
|------- | -------------------------------------------------------
|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

Market for Common Stock




|                                 |  |      |      |  |     |   |      | 
|-------------------------------- |  | ---- | ---- |  | --- | - | ---- | 
|                                 |  | High |      |  | Low |  
|                                 |  |      |      |  |     |  
|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 | 
|                                
|2004                             |  |      |      |  |     |   |      | 
|Quarter ended April 2, 2004      |  | $    | 7.45 |  |     | $ | 2.00 | 
|Quarter ended July 3, 2004       |  | $    | 2.50 |  |     | $ | 0.78 | 
|Quarter ended October 2, 2004    |  | $    | 1.40 |  |     | $ | 0.80 | 
|Quarter ended December 31, 2004  |  | $    | 1.67 |  |     | $ | 0.79 | 

Holders of Record




Dividends




24



---



##### Table of Contents



Sales of Unregistered Securities




Repurchases of Equity Securities









|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA



|                                                                                            |                                                  |                                       |         |        |      |   |         |        |  |   |         |        |  |      |         |        |  |   |         |        | 
|------------------------------------------------------------------------------------------- | ------------------------------------------------ | ------------------------------------- | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ |  | ---- | ------- | ------ |  | - | ------- | ------ | 
|                                                                                            |                                                  | Year Ended December 31,               |        
|                                                                                            |                                                  |                                       |        
|                                                                                            |                                                  | 2000                                  |         |        | 2001 |   |         | 2002   |  |   | 2003    |        |  | 2004 |        
|                                                                                            |                                                  |                                       |         |        |      |   |         |        |  |   |         |        |  |      |        
|                                                                                            |                                                  | (In thousands, except per share data) |        
|Statement of Operations Data:                                                               |                                                  |                                       |         |        |      |   |         |        |  |   |         |        |  |      |         |        |  |   |         |       
|Net revenues:                                                                               |                                                  |                                       |         |        |      |   |         |        |  |   |         |        |  |      |         |        |  |   |         |       
|Net commercial product revenues                                                             |                                                  | $                                     | 5,303   |        |      | $ | 7,601   |        |  | $ | 17,601  |        |  | $    | 38,577  |        |  | $ | 16,787  |       
|Government contract revenues                                                                |                                                  |                                       | 4,643   |        |      |   | 4,782   |        |  |   | 4,785   |        |  |      | 10,759  |        |  |   | 6,189   |       
|Sub license royalties                                                                       |                                                  |                                       | 10      |        |      |   | 10      |        |  |   | 10      |        |  |      | 58      |        |  |   | 28      |       
|                                                                                            |                                                  |                                       |         |        |      |   |         |        |  |   |         |        |  |      |        
|                                                                                            | Total net revenues                               |                                       |         | 9,956  |      |   |         | 12,393 |  |   |         | 22,396 |  |      |         | 49,394 |  |   |         | 23,004 | 
|Costs and expenses:                                                                         |                                                  |                                       |         |        |      |   |         |        |  |   |         |        |  |      |         |        |  |   |         |       
|                                                                                            | Cost of commercial product revenues              |                                       |         | 15,710 |      |   |         | 10,626 |  |   |         | 19,286 |  |      |         | 28,249 |  |   |         | 23,421 | 
|                                                                                            | Contract research and development                |                                       |         | 4,235  |      |   |         | 3,359  |  |   |         | 2,531  |  |      |         | 6,899  |  |   |         | 4,465  | 
|                                                                                            | Other research and development                   |                                       |         | 2,633  |      |   |         | 4,606  |  |   |         | 4,489  |  |      |         | 4,697  |  |   |         | 5,036  | 
|                                                                                            | Selling, general and administrative              |                                       |         | 8,357  |      |   |         | 11,907 |  |   |         | 14,976 |  |      |         | 20,567 |  |   |         | 16,051 | 
|                                                                                            | Restructuring expenses and impairment charges    |                                       |         |       |      |   |         |       |  |   |         |       |  |      |         |       |  |   |         | 4,128  | 
|                                                                                            | Write off of in-process research and development |                                       |         |       |      |   |         |       |  |   |         | 700    |  |      |         |       |  |   |         |       | 
|                                                                                            |                                                  |                                       |         |        |      |   |         |        |  |   |         |        |  |      |        
|                                                                                            | Total costs and expenses                         |                                       |         | 30,935 |      |   |         | 30,498 |  |   |         | 41,982 |  |      |         | 60,412 |  |   |         | 53,101 | 
|                                                                                            |                                                  |                                       |         |        |      |   |         |        |  |   |         |        |  |      |        
|Loss from operations                                                                        |                                                  |                                       | (20,979 | )      |      |   | (18,105 | )      |  |   | (19,586 | )      |  |      | (11,018 | )      |  |   | (30,097 | )     
|Other income (expense), net                                                                 |                                                  |                                       | 323     |        |      |   | 904     |        |  |   | 73      |        |  |      | (327    | )      |  |   | (1,120  | )     
|                                                                                            |                                                  |                                       |         |        |      |   |         |        |  |   |         |        |  |      |        
|Net loss                                                                                    |                                                  |                                       | (20,656 | )      |      |   | (17,201 | )      |  |   | (19,513 | )      |  |      | (11,345 | )      |  |   | (31,217 | )     
|Less deemed and cumulative preferred stock Dividends                                        |                                                  |                                       | (2,203  | )      |      |   | (2,603  | )      |  |   | (1,756  | )      |  |      |        |        |  |   |        |       
|                                                                                            |                                                  |                                       |         |        |      |   |         |        |  |   |         |        |  |      |        
|Net loss available to common stockholders before cumulative
    effect of accounting change |                                                  |                                       | (22,859 | )      |      |   | (19,804 | )      |  |   | (21,269 | )      |  |      | (11,345 | )      |  |   | (31,217 | )     
|Cumulative effect of accounting change on preferred stock
    beneficial conversion feature |                                                  |                                       | (10,612 | )      |      |   |        |        |  |   |        |        |  |      |        |        |  |   |        |       
|                                                                                            |                                                  |                                       |         |        |      |   |         |        |  |   |         |        |  |      |        
|Net loss available to common stockholders                                                   |                                                  | $                                     | (33,471 | )      |      | $ | (19,804 | )      |  | $ | (21,269 | )      |  | $    | (11,345 | )      |  | $ | (31,217 | )     
|                                                                                            |                                                  |                                       |         |        |      |   |         |        |  |   |         |        |  |      |        
|Basic and diluted net loss per share:                                                       |                                                  |                                       |         |        |      |   |         |        |  |   |         |        |  |      |         |        |  |   |         |       
|Net loss per common share before cumulative effect of accounting
    change                 |                                                  | $                                     | (1.42   | )      |      | $ | (1.10   | )      |  | $ | (0.89   | )      |  | $    | (0.18   | )      |  | $ | (0.37   | )     
|Cumulative effect of accounting change                                                      |                                                  |                                       | (0.67   | )      |      |   |         |        |  |   |         |        |  |      |         |        |  |   |         |       
|                                                                                            |                                                  |                                       |         |        |      |   |         |        |  |   |         |        |  |      |        
|Net loss per common share                                                                   |                                                  | $                                     | (2.09   | )      |      | $ | (1.10   | )      |  | $ | (0.89   | )      |  | $    | (0.18   | )      |  | $ | (0.37   | )     
|                                                                                            |                                                  |                                       |         |        |      |   |         |        |  |   |         |        |  |      |        
|Weighted average number of shares Outstanding                                               |                                                  |                                       | 16,050  |        |      |   | 17,956  |        |  |   | 24,020  |        |  |      | 62,685  |        |  |   | 84,241  |       

25



---



##### Table of Contents



|                                          |  |              |        |  |      |   |        |      |  |   |        |  |  |      |        |  |  |   |        | 
|----------------------------------------- |  | ------------ | ------ |  | ---- | - | ------ | ---- |  | - | ------ |  |  | ---- | ------ |  |  | - | ------ | 
|                                          |  | December 31, |       
|                                          |  |              |       
|                                          |  | 2000         |        |  | 2001 |   |        | 2002 |  |   | 2003   |  |  | 2004 |       
|                                          |  |              |        |  |      |   |        |      |  |   |        |  |  |      |       
|Balance Sheet Data:                       |  |              |        |  |      |   |        |      |  |   |        |  |  |      |        |  |  |   |        | 
|Cash and cash equivalents                 |  | $            | 31,824 |  |      | $ | 15,205 |      |  | $ | 18,191 |  |  | $    | 11,144 |  |  | $ | 12,802 | 
|Working capital                           |  |              | 36,186 |  |      |   | 18,753 |      |  |   | 16,503 |  |  |      | 15,576 |  |  |   | 16,146 | 
|Total assets                              |  |              | 46,761 |  |      |   | 30,161 |      |  |   | 65,326 |  |  |      | 68,123 |  |  |   | 62,358 | 
|Long-term debt, including current portion |  |              | 751    |  |      |   | 509    |      |  |   | 2,123  |  |  |      | 721    |  |  |   | 76     | 
|Total stockholders equity                |  |              | 38,409 |  |      |   | 23,663 |      |  |   | 49,524 |  |  |      | 52,220 |  |  |   | 49,249 | 






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

General








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | SuperLink Rx. In order to receive uplink signals
    from wireless handsets, base stations require a wireless filter
    system to eliminate, or filter out, out-of-band interference. To
    address this need, we offer the SuperLink Rx product line for
    the receiver front-end of base stations. These products combine
    specialized filters using HTS technology with a proprietary
    cryogenic cooler and a cryogenically cooled low-noise amplifier.
    The result is 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.
|
| |  | AmpLink Rx. The recently introduced AmpLink Rx is
    our lower-cost receiver front-end product designed specifically
    to address the sensitivity requirements of wireless base
    stations. The AmpLink Rx is a ground-mounted unit which includes
    a high-performance amplifier and up to six dual duplexers. The
    enhanced uplink provided by AmpLink Rx 1900 improves PCS network
    coverage immediately and avoids the installation and maintenance
    costs associated with tower mounted amplifiers. As network
    interference increases, the AmpLink Rx 1900 is easily
    upgradeable to include a SuperLink Rx front-end, which uses HTS
    technology to maintain the same sensitivity improvement while
    eliminating the effects of increasing interference.         
|
| |  | SuperPlex. SuperPlex, our antenna sharing solution
    is a line of multiplexers that provides extremely low insertion
    loss and excellent cross-band isolation. Products in our
    SuperPlex line of high-performance multiplexers are designed to
    eliminate the need for additional base station antennas and
    reduce infrastructure costs. Relative to competing technologies,
    these products offer increased transmit power delivered to the
    base station antenna, higher sensitivity to subscriber handset
    signals, fast and cost-effective network overlays. The SuperPlex
    product family offers network performance benefits synergistic
    with SuperLink Rx.                                                                                                   



26



---



##### Table of Contents









Critical Accounting Policies and Estimates










27



---



##### Table of Contents















28



---



##### Table of Contents









|                                                                        |  |                                  |             |   |      |   |             |      |  |   |             |  
|----------------------------------------------------------------------- |  | -------------------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                        |  | For the Years Ended December 31, |            
|                                                                        |  |                                  |            
|                                                                        |  | 2002                             |             |   | 2003 |   |             | 2004 | 
|                                                                        |  |                                  |             |   |      |   |             |      | 
|Net loss:                                                               |  |                                  |             |   |      |   |             |      |  |   |             |  
|As reported                                                             |  | $                                | (19,513,000 | ) |      | $ | (11,345,000 | )    |  | $ | (31,217,000 | )
|Stock-based employee compensation included in net loss                  |  |                                  |            |   |      |   |            |      |  |   | 48,000      |  
|Stock-based compensation expense determined under fair value
    method |  |                                  | (4,056,000  | ) |      |   | (5,435,000  | )    |  |   | (5,543,000  | )
|                                                                        |  |                                  |             |   |      |   |             |      | 
|Pro forma                                                               |  | $                                | (23,569,000 | ) |      | $ | (16,780,000 | )    |  |   | (36,712,000 | )
|                                                                        |  |                                  |             |   |      |   |             |      | 
|Basic and Diluted Loss per Share                                        |  |                                  |             |   |      |   |             |      |  |   |             |  
|As reported                                                             |  | $                                | (0.89       | ) |      | $ | (0.18       | )    |  | $ | (0.37       | )
|Stock-based compensation expense determined under fair value
    method |  |                                  | (0.17       | ) |      |   | (0.09       | )    |  |   | (0.07       | )
|                                                                        |  |                                  |             |   |      |   |             |      | 
|Pro forma                                                               |  | $                                | (1.06       | ) |      | $ | (0.27       | )    |  | $ | (0.44       | )
|                                                                        |  |                                  |             |   |      |   |             |      | 



Legal
Proceedings.


Backlog




29



---



##### Table of Contents





Results of Operations




| |                         
| | ------------------------
| | Acquisition of Conductus





| |                      
| | ---------------------
| | 2004 Compared to 2003







|                                                                    |  |                        |        |   |      |   |        |  
|------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                                                    |  | Year Ended             |       
|                                                                    |  | December 31,           |       
|                                                                    |  |                        |       
|                                                                    |  | 2003                   |        |   | 2004 |  
|                                                                    |  |                        |        |   |      |  
|                                                                    |  | (Dollars in thousands) |       
|Gross commercial product sales proceeds                             |  | $                      | 38,964 |   |      | $ | 16,931 |  
|Less allocation of proceeds to warrants issued to
    U.S. Cellular |  |                        | (90    | ) |      |   |       |  
|Less sales discounts                                                |  |                        | (297   | ) |      |   | (144   | )
|                                                                    |  |                        |        |   |      |  
|Net commercial product revenues                                     |  | $                      | 38,577 |   |      | $ | 16,787 |  
|                                                                    |  |                        |        |   |      |  





30



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##### Table of Contents









|                                       |  |                                  |        |  |      |  |       |   |  |   |        |   |  |  |       |   
|-------------------------------------- |  | -------------------------------- | ------ |  | ---- |  | ----- | - |  | - | ------ | - |  |  | ----- | --
|                                       |  | For the Years Ended December 31, |       
|                                       |  |                                  |       
|                                       |  | 2003                             |        |  | 2004 | 
|                                       |  |                                  |        |  |      | 
|                                       |  | (Dollars in thousands)           |       
|Net commercial product sales           |  | $                                | 38,577 |  |      |  | 100.0 | % |  | $ | 16,787 |   |  |  | 100.0 | % 
|Total cost of commercial product sales |  |                                  | 28,249 |  |      |  | 73.2  | % |  |   | 23,421 |   |  |  | 139.5 | % 
|                                       |  |                                  |        |  |      |  |       |   |  |   |        |  
|Gross profit                           |  | $                                | 10,328 |  |      |  | 26.8  | % |  | $ | (6,634 | ) |  |  | (39.5 | )%
|                                       |  |                                  |        |  |      |  |       |   |  |   |        |  











31



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|                                                                             |  |               |           |  |             |   |           |           |  |               |                |  |  |   |        | 
|---------------------------------------------------------------------------- |  | ------------- | --------- |  | ----------- | - | --------- | --------- |  | ------------- | -------------- |  |  | - | ------ | 
|                                                                             |  | Restructuring |           |  | Impairment  |   |           |           |  | Additional to |               
|                                                                             |  | Charges for   |           |  | Charges for |   |           | Total for |  |               | be Incurred In | 
|                                                                             |  | 2004          |           |  | 2004        |   |           | 2004      |  |               | 2005           | 
|                                                                             |  |               |           |  |             |   |           |           |  |               |                | 
|Severance costs                                                              |  | $             | 826,000   |  |             | $ |          |           |  | $             | 826,000        |  |  | $ |       | 
|Fixed assets write offs                                                      |  |               | 803,000   |  |             |   | 403,000   |           |  |               | 1,206,000      |  |  |   |       | 
|Patents, licenses and purchased technology write-off                         |  |               | 1,051,000 |  |             |   | 1,171,000 |           |  |               | 2,222,000      |  |  |   |       | 
|Lease abandonment costs                                                      |  |               | 279,000   |  |             |   |          |           |  |               | 279,000        |  |  |   |       | 
|Facility consolidation costs                                                 |  |               | 268,000   |  |             |   |          |           |  |               | 268,000        |  |  |   |       | 
|Employee relocation cost                                                     |  |               | 382,000   |  |             |   |          |           |  |               | 382,000        |  |  |   | 50,000 | 
|                                                                             |  |               |           |  |             |   |           |           |  |               |                | 
|Total                                                                        |  | $             | 3,609,000 |  |             | $ | 1,574,000 |           |  | $             | 5,183,000      |  |  | $ | 50,000 | 
|Fixed Asset write off and severance costs included in cost of
    goods sold |  |               | 669,000   |  |             |   | 386,000   |           |  |               | 1,055,000      |  |  |   |       | 
|                                                                             |  |               |           |  |             |   |           |           |  |               |                | 
|Expense included in operating expenses                                       |  | $             | 2,940,000 |  |             | $ | 1,188,000 |           |  | $             | 4,128,000      |  |  | $ | 50,000 | 
|                                                                             |  |               |           |  |             |   |           |           |  |               |                | 







32



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##### Table of Contents









| |                      
| | ---------------------
| | 2003 Compared to 2002







|                                                                    |  |                        |        |   |      |   |        |  
|------------------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                                                    |  | Year Ended             |       
|                                                                    |  | December 31,           |       
|                                                                    |  |                        |       
|                                                                    |  | 2002                   |        |   | 2003 |  
|                                                                    |  |                        |        |   |      |  
|                                                                    |  | (Dollars in thousands) |       
|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 |  
|                                                                    |  |                        |        |   |      |  



Non-Cash Charges for
Warrants Issued to U.S. Cellular.


33



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##### Table of Contents





|                                       |  |                                  |        |   |      |  |       |    |  |   |        |  |  |  |       |  
|-------------------------------------- |  | -------------------------------- | ------ | - | ---- |  | ----- | -- |  | - | ------ |  |  |  | ----- | -
|                                       |  | For the Years Ended December 31, |       
|                                       |  |                                  |       
|                                       |  | 2002                             |        |   | 2003 | 
|                                       |  |                                  |        |   |      | 
|                                       |  | (Dollars in thousands)           |       
|Net commercial product sales           |  | $                                | 17,601 |   |      |  | 100.0 | %  |  | $ | 38,577 |  |  |  | 100.0 | %
|Total cost of commercial product sales |  |                                  | 19,286 |   |      |  | 109.6 | %  |  |   | 28,249 |  |  |  | 73.2  | %
|                                       |  |                                  |        |   |      |  |       |    |  |   |        | 
|Gross profit                           |  | $                                | (1,685 | ) |      |  | (9.6  | )% |  | $ | 10,328 |  |  |  | 26.8  | %
|                                       |  |                                  |        |   |      |  |       |    |  |   |        | 

















Liquidity and Capital Resources




| |                   
| | ------------------
| | Cash Flow Analysis







34



---



##### Table of Contents











| |                     
| | --------------------
| | Financing Activities







35



---



##### Table of Contents









| |                                                   
| | --------------------------------------------------
| | Contractual Obligations and Commercial Commitments





| |   |                          
| | - | -------------------------
| |  | Capital Lease Obligations





| |   |                            
| | - | ---------------------------
| |  | Operating Lease Obligations





| |   |                     
| | - | --------------------
| |  | Patents and Licenses





| |   |                     
| | - | --------------------
| |  | Purchase Commitments





| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | Quantitative Summary of Contractual Obligations and
    Commercial Commitments



|                                               |  |                        |            |             |      |   |           |       |  |     |           |  |       |         |           |  |  |   |           | 
|---------------------------------------------- |  | ---------------------- | ---------- | ----------- | ---- | - | --------- | ----- |  | --- | --------- |  | ----- | ------- | --------- |  |  | - | --------- | 
|                                               |  | Payments Due by Period |           
|                                               |  |                        |           
|                                               |  |                        |            | Less than 1 |      |   | 2-3       |       |  | 4-5 |           |  | After |        
|Contractual Obligations                        |  | Total                  |            |             | Year |   |           | Years |  |     | Years     |  |       | 5 Years |          
|                                               |  |                        |            |             |      |   |           |       |  |     |           |  |       |         |          
|Capital lease obligations                      |  | $                      | 89,000     |             |      | $ | 52,000    |       |  | $   | 37,000    |  |       | $       |          |  |  | $ |          | 
|Operating leases                               |  |                        | 10,279,000 |             |      |   | 2,400,000 |       |  |     | 2,640,000 |  |       |         | 2,586,000 |  |  |   | 2,653,000 | 
|Minimum license commitment                     |  |                        | 2,270,000  |             |      |   | 170,000   |       |  |     | 300,000   |  |       |         | 300,000   |  |  |   | 1,500,000 | 
|Fixed asset and inventory purchase commitments |  |                        | 815,000    |             |      |   | 815,000   |       |  |     |          |  |       |         |          |  |  |   |          | 
|                                               |  |                        |            |             |      |   |           |       |  |     |           |  |       |         |          
|Total contractual cash obligations             |  | $                      | 13,453,000 |             |      | $ | 3,437,000 |       |  | $   | 2,977,000 |  |       | $       | 2,886,000 |  |  | $ | 4,153,000 | 
|                                               |  |                        |            |             |      |   |           |       |  |     |           |  |       |         |          

36



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##### Table of Contents





| |                     
| | --------------------
| | Capital Expenditures





| |                 
| | ----------------
| | Future Liquidity











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






37



---



##### Table of Contents













Net Operating Loss Carryforward








38



---



##### Table of Contents





Future Accounting Requirements






Market Risk






Forward-Looking Statements






39



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##### Table of Contents







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

Business  Additional Factors That May Affect
Our Future Results


Inflation









|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK

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







|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA








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








|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures






Managements Report on Internal Control over Financial
Reporting


Internal Control  Integrated Framework,


40



---



##### Table of Contents





Changes in Internal Control over Financial Reporting









ITEM 9B.OTHER
INFORMATION







PART III







|         |                                                       
|-------- | ------------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE
    REGISTRANT

Directors and Executive Officers









|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION

Executive Officer Compensation







|         |                                                                   
|-------- | ------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT

Voting
Securities Of Principal Stockholders And Management







|         |                                                   
|-------- | --------------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED
    TRANSACTIONS

Certain Transactions


41



---



##### Table of Contents










|         |                                          
|-------- | -----------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND DISCLOSURES

Fees Paid to Independent Auditors





PART IV







|         |                                           
|-------- | ------------------------------------------
|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 Registered Public
    Accounting Firm                                                 |  |      | F-1 | 
|Consolidated Balance Sheet as of
    December 31, 2003 and 2004                                             |  |      | F-3 | 
|Consolidated Statement of Operations for
    the years ended December 31, 2002, 2003 and 2004               |  |      | F-4 | 
|Consolidated Statement of
    Stockholders Equity for the years ended December 31,
    2002, 2003 and 2004 |  |      | F-5 | 
|Consolidated Statement of Cash Flows for
    the years ended December 31, 2002, 2003 and 2004               |  |      | F-6 | 
|Notes to Consolidated Financial
    Statements                                                              |  |      | F-7 | 



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | 2. Financial Statement Schedule Covered by the
    Foregoing Report of Independent Registered Public Accounting
    Firm.

|                                                    |  |  |      | 
|--------------------------------------------------- |  |  | ---- | 
|Schedule II  Valuation and
    Qualifying Accounts |  |  | F-31 | 



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)                                                                                                      
|      
|       | 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 | .4                      |  | Registration Rights Agreement to United States Cellular
    Corporation (10)                                                                                        
|      
|       | 4 | .5                      |  | Form of Warrant to United States Cellular Corporation (10)                                                                                                          
|      
|       | 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)                                 

42



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##### Table of Contents



|       |    |     |                         |                                                                                                                                                                         
|------ | -- | --- | ----------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    |     | Description of Document
|       |    |     |                        
|      
|       | 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  | .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  | .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)*                                                      
|      
|       | 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 | .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)                                                                                                             

43



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|       |    |        |                         |                                                                                                                        
|------ | -- | ------ | ----------------------- | -----------------------------------------------------------------------------------------------------------------------
|Number |    |        | Description of Document
|       |    |        |                        
|      
|       | 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 (28)                                                                               
|      
|       | 10 | .40    |                         | Patent License Agreement by and between Lucent Technologies and
    the Company * (28)                                 
|      
|       | 10 | .41    |                         | Executive Incentive Compensation Plan (28)                                                                             
|      
|       | 10 | .42    |                         | Accounts Receivable Purchase Modification Agreement dated
    March 17, 2004 (29)                                      
|      
|       | 10 | .43    |                         | Consulting Agreement with Charles Shalvoy (30)                                                                         
|      
|       | 10 | .44    |                         | License Agreement with Sunpower ** (30)                                                                                
|      
|       | 10 | .45    |                         | Amendment to Change of Control Agreement with M. Peter Thomas
    (30)                                                 
|      
|       | 10 | .46    |                         | Employment Agreement with Jeffrey Quiram (31)                                                                          
|      
|       | 10 | .47    |                         | Option Agreement with Jeffrey Quiram (31)                                                                              
|      
|       | 10 | .48    |                         | Retirement Agreement with M. Peter Thomas (31)                                                                         
|      
|       | 10 | .49    |                         | Management Agreement with Trilogy Enterprises LLC, as amended
    (31)                                                 
|      
|       | 10 | .50    |                         | Undertaking Regarding Advances between Company and M. Peter
    Thomas and Martin S. McDermut (31)                     
|      
|       | 10 | .51    |                         | Form of Option Agreement for 2003 Equity Incentive Plan (31)                                                           
|      
|       | 21 |        |                         | List of Subsidiaries                                                                                                   
|      
|       | 23 |        |                         | Consent of Independent Registered Public Accounting Firm                                                               
|      
|       | 31 | .1     |                         | Statement of CEO Pursuant to 302 of the Sarbanes-Oxley Act of
    2002                                                 
|      
|       | 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                                                 

44



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| |     |                                                                                                                                                                                                                                                    
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.                   

45



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##### Table of Contents





|     |                                                                                                                         
|---- | ------------------------------------------------------------------------------------------------------------------------
|(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).               
|    
|(28) | Incorporated by reference from Registrants Annual Report
    on 10-K for the year ended December 31, 2003.             
|    
|(29) | Incorporated by reference from Registrants Quarterly
    Report on Form 10-Q for the quarter ended April 3,
    2004.  
|    
|(30) | Incorporated by reference from Registrants Quarterly
    Report on Form 10-Q for the quarter ended October 2,
    2004.
|    
|(31) | Filed herewith.                                                                                                         



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| | * | Confidential treatment has been previously granted for certain
    portions of these exhibits.



| |    |                                                                                    
| | -- | -----------------------------------------------------------------------------------
| | ** | Confidential treatment has been requested for certain portions
    of this exhibit.

Exhibits.


46



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##### Table of Contents






Report of Independent Registered Public Accounting Firm








Consolidated financial statements and financial statement
schedule






Internal control over financial reporting


Internal Control  Integrated
Framework Internal Control  Integrated
Framework


F-1



---



##### Table of Contents













F-2



---



##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.





CONSOLIDATED BALANCE SHEET


|                                                 |                                                                                                                                              |                                            |   |              |              |  |   |              |            | 
|------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------------ | ------------ |  | - | ------------ | ---------- | 
|                                                 |                                                                                                                                              | December 31,                               |   |              | December 31, | 
|                                                 |                                                                                                                                              | 2003                                       |   |              | 2004         | 
|                                                 |                                                                                                                                              |                                            |   |              |              | 
|ASSETS                                          
|Current Assets:                                  |                                                                                                                                              |                                            |   |              |              |  |   |             
|                                                 | Cash and cash equivalents                                                                                                                    |                                            | $ | 11,144,000   |              |  | $ | 12,802,000   |           
|                                                 | Accounts receivable, net                                                                                                                     |                                            |   | 8,809,000    |              |  |   | 1,434,000    |           
|                                                 | Inventory, net                                                                                                                               |                                            |   | 8,802,000    |              |  |   | 9,327,000    |           
|                                                 | Insurance settlement receivable                                                                                                              |                                            |   |             |              |  |   | 4,000,000    |           
|                                                 | Prepaid expenses and other current assets                                                                                                    |                                            |   | 760,000      |              |  |   | 906,000      |           
|                                                 |                                                                                                                                              |                                            |   |              |              | 
|                                                 |                                                                                                                                              | Total Current Assets                       |   |              | 29,515,000   |  |   |              | 28,469,000 | 
|                                                 | Property and equipment, net of accumulated depreciation of
    $15,061,000 and $15,189,000, respectively                                     |                                            |   | 12,534,000   |              |  |   | 10,303,000   |           
|                                                 | Patents, licenses and purchased technology, net of accumulated
    amortization of $3,173,000 and $768,000, respectively                     |                                            |   | 5,367,000    |              |  |   | 2,833,000    |           
|                                                 | Goodwill                                                                                                                                     |                                            |   | 20,107,000   |              |  |   | 20,107,000   |           
|                                                 | Other assets                                                                                                                                 |                                            |   | 600,000      |              |  |   | 646,000      |           
|                                                 |                                                                                                                                              |                                            |   |              |              | 
|                                                 |                                                                                                                                              | Total Assets                               |   | $            | 68,123,000   |  |   | $            | 62,358,000 | 
|                                                 |                                                                                                                                              |                                            |   |              |              | 
|                                                
|LIABILITIES AND STOCKHOLDERS EQUITY            
|Current Liabilities:                             |                                                                                                                                              |                                            |   |              |              |  |   |             
|                                                 | Line of credit                                                                                                                               |                                            | $ | 3,308,000    |              |  | $ | 938,000      |           
|                                                 | Accounts payable                                                                                                                             |                                            |   | 5,154,000    |              |  |   | 2,691,000    |           
|                                                 | Accrued expenses                                                                                                                             |                                            |   | 4,832,000    |              |  |   | 4,601,000    |           
|                                                 | Legal settlement liability                                                                                                                   |                                            |   |             |              |  |   | 4,050,000    |           
|                                                 | Current portion of capitalized lease obligations and long term
    debt                                                                      |                                            |   | 645,000      |              |  |   | 43,000       |           
|                                                 |                                                                                                                                              |                                            |   |              |              | 
|                                                 |                                                                                                                                              | Total Current Liabilities                  |   |              | 13,939,000   |  |   |              | 12,323,000 | 
|                                                 | Capitalized lease obligations and long term-debt                                                                                             |                                            |   | 76,000       |              |  |   | 33,000       |           
|                                                 | Other long term liabilities                                                                                                                  |                                            |   | 1,888,000    |              |  |   | 753,000      |           
|                                                 |                                                                                                                                              |                                            |   |              |              | 
|                                                 |                                                                                                                                              | Total Liabilities                          |   |              | 15,903,000   |  |   |              | 13,109,000 | 
|Commitments and contingencies-Notes 9, 10 and 11 |                                                                                                                                              |                                            |   |              |              |  |   |             
|Stockholders Equity:                            |                                                                                                                                              |                                            |   |              |              |  |   |             
|                                                 | Preferred stock, $.001 par value, 2,000,000 shares
    authorized, none issued and outstanding                                               |                                            |   |             |              |  |   |             |           
|                                                 | Common stock, $.001 par value, 125,000,000 shares
    authorized, 68,907,109 and 107,711,026 shares issued and
    outstanding, respectively |                                            |   | 69,000       |              |  |   | 108,000      |           
|                                                 | Capital in excess of par value                                                                                                               |                                            |   | 168,776,000  |              |  |   | 196,983,000  |           
|                                                 | Notes receivable from stockholder                                                                                                            |                                            |   | (820,000     | )            |  |   | (820,000     | )         
|                                                 | Accumulated deficit                                                                                                                          |                                            |   | (115,805,000 | )            |  |   | (147,022,000 | )         
|                                                 |                                                                                                                                              |                                            |   |              |              | 
|                                                 |                                                                                                                                              | Total Stockholders Equity                 |   |              | 52,220,000   |  |   |              | 49,249,000 | 
|                                                 |                                                                                                                                              |                                            |   |              |              | 
|                                                 |                                                                                                                                              | Total Liabilities and Stockholders Equity |   | $            | 68,123,000   |  |   | $            | 62,358,000 | 
|                                                 |                                                                                                                                              |                                            |   |              |              | 



F-3



---



##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.





CONSOLIDATED STATEMENT OF OPERATIONS


|                                                                                       |                                                     |                                |             |            |      |   |             |            |   |   |             |            |  
|-------------------------------------------------------------------------------------- | --------------------------------------------------- | ------------------------------ | ----------- | ---------- | ---- | - | ----------- | ---------- | - | - | ----------- | ---------- | -
|                                                                                       |                                                     | For the Year Ended December 31 |            
|                                                                                       |                                                     |                                |            
|                                                                                       |                                                     | 2002                           |             |            | 2003 |   |             | 2004       |  
|                                                                                       |                                                     |                                |             |            |      |   |             |            |  
|Net revenues:                                                                          |                                                     |                                |             |            |      |   |             |            |   |   |             |           
|                                                                                       | Net commercial product revenues                     |                                | $           | 17,601,000 |      |   | $           | 38,577,000 |   |   | $           | 16,787,000 |  
|                                                                                       | Government and other contract revenues              |                                |             | 4,785,000  |      |   |             | 10,759,000 |   |   |             | 6,189,000  |  
|                                                                                       | Sub license royalties                               |                                |             | 10,000     |      |   |             | 58,000     |   |   |             | 28,000     |  
|                                                                                       |                                                     |                                |             |            |      |   |             |            |  
|Total net revenues                                                                     |                                                     |                                | 22,396,000  |            |      |   | 49,394,000  |            |   |   | 23,004,000  |           
|Costs and expenses:                                                                    |                                                     |                                |             |            |      |   |             |            |   |   |             |           
|                                                                                       | Cost of commercial product revenues                 |                                |             | 19,286,000 |      |   |             | 28,249,000 |   |   |             | 23,421,000 |  
|                                                                                       | Contract research and development                   |                                |             | 2,531,000  |      |   |             | 6,899,000  |   |   |             | 4,465,000  |  
|                                                                                       | Other research and development                      |                                |             | 4,489,000  |      |   |             | 4,697,000  |   |   |             | 5,036,000  |  
|                                                                                       | Selling, general and administrative                 |                                |             | 14,976,000 |      |   |             | 20,567,000 |   |   |             | 16,051,000 |  
|                                                                                       | Restructuring expenses and impairment charges       |                                |             |           |      |   |             |           |   |   |             | 4,128,000  |  
|                                                                                       | Write off of in-process research and development    |                                |             | 700,000    |      |   |             |           |   |   |             |           |  
|                                                                                       |                                                     |                                |             |            |      |   |             |            |  
|Total costs and expenses                                                               |                                                     |                                | 41,982,000  |            |      |   | 60,412,000  |            |   |   | 53,101,000  |           
|                                                                                       |                                                     |                                |             |            |      |   |             |            |  
|Loss from operations                                                                   |                                                     |                                | (19,586,000 | )          |      |   | (11,018,000 | )          |   |   | (30,097,000 | )         
|                                                                                       | Interest income                                     |                                |             | 218,000    |      |   |             | 177,000    |   |   |             | 125,000    |  
|                                                                                       | Interest expense                                    |                                |             | (145,000   | )    |   |             | (504,000   | ) |   |             | (1,245,000 | )
|                                                                                       |                                                     |                                |             |            |      |   |             |            |  
|Net loss                                                                               |                                                     |                                | (19,513,000 | )          |      |   | (11,345,000 | )          |   |   | (31,217,000 | )         
|Less:                                                                                  |                                                     |                                |             |            |      |   |             |            |   |   |             |           
|                                                                                       | Deemed distribution attributable to preferred stock |                                |             | (1,756,000 | )    |   |             |           |   |   |             |           |  
|                                                                                       |                                                     |                                |             |            |      |   |             |            |  
|Net loss available to common stockholders for computation of
    loss per common share |                                                     | $                              | (21,269,000 | )          |      | $ | (11,345,000 | )          |   | $ | (31,217,000 | )         
|                                                                                       |                                                     |                                |             |            |      |   |             |            |  
|Basic and diluted net loss per common share                                            |                                                     | $                              | (0.89       | )          |      | $ | (0.18       | )          |   | $ | (0.37       | )         
|                                                                                       |                                                     |                                |             |            |      |   |             |            |  
|Weighted average number of common shares outstanding                                   |                                                     |                                | 24,019,542  |            |      |   | 62,685,292  |            |   |   | 84,241,447  |           
|                                                                                       |                                                     |                                |             |            |      |   |             |            |  



F-4



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.





CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY


|                                                          |  |                       |         |              |        |   |            |  |  |          |             |  |                 |   |         |             |  |   |             |   |  |         |            |   |       |   |          |   |  |   |              |   |  |   |             |  
|--------------------------------------------------------- |  | --------------------- | ------- | ------------ | ------ | - | ---------- |  |  | -------- | ----------- |  | --------------- | - | ------- | ----------- |  | - | ----------- | - |  | ------- | ---------- | - | ----- | - | -------- | - |  | - | ------------ | - |  | - | ----------- | -
|                                                          |  | Convertible Preferred |         |              |        |   |            |  |  |          |             |  |                 |  
|                                                          |  | Stock                 |         | Common Stock |        |   | Capital in |  |  | Deferred |             |  |                 |   |         |             | 
|                                                          |  |                       |         |              |        |   | Excess of  |  |  | Warrant  |             |  | Receivable from |   |         | Accumulated |  |   |            
|                                                          |  | Shares                |         |              | Amount |   | Shares     |  |  | Amount   |             |  | par Value       |   |         | Charges     |  |   | Stockholder |   |  | Deficit |            |   | Total |  
|                                                          |  |                       |         |              |        |   |            |  |  |          |             |  |                 |   |         |             |  |   |             |   |  |         |            |   |       |  
|Balance at December 31, 2001                              |  |                       | 34,500  |              |        | $ |           |  |  |          | 18,579,160  |  |                 | $ | 19,000  |             |  | $ | 110,871,000 |   |  | $       | (2,280,000 | ) |       | $ |         |   |  | $ | (84,947,000  | ) |  | $ | 23,663,000  |  
|Conversion of convertible preferred stock                 |  |                       | (34,500 | )            |        |   |            |  |  |          | 2,878,351   |  |                 |   | 3,000   |             |  |   | (3,000      | ) |  |         |            |   |       |   |          |   |  |   |              |   |  |   |            |  
|Exercise of stock options                                 |  |                       |         |              |        |   |            |  |  |          | 26,473      |  |                 |   |         |             |  |   | 83,000      |   |  |         |            |   |       |   |          |   |  |   |              |   |  |   | 83,000      |  
|Issuance of common stock for cash                         |  |                       |         |              |        |   |            |  |  |          | 24,811,240  |  |                 |   | 25,000  |             |  |   | 31,801,000  |   |  |         |            |   |       |   |          |   |  |   |              |   |  |   | 31,826,000  |  
|Acquisition of Conductus, Inc.                            |  |                       |         |              |        |   |            |  |  |          | 13,528,329  |  |                 |   | 13,000  |             |  |   | 16,678,000  |   |  |         |            |   |       |   | (820,000 | ) |  |   |              |   |  |   | 15,871,000  |  
|Amortization of deferred warrant charges                  |  |                       |         |              |        |   |            |  |  |          |             |  |                 |   |         |             |  |   |             |   |  |         | 2,280,000  |   |       |   |          |   |  |   |              |   |  |   | 2,280,000   |  
|Payment of convertible preferred stock conversion premium |  |                       |         |              |        |   |            |  |  |          |             |  |                 |   |         |             |  |   | (4,686,000  | ) |  |         |            |   |       |   |          |   |  |   |              |   |  |   | (4,686,000  | )
|Net loss                                                  |  |                       |         |              |        |   |            |  |  |          |             |  |                 |   |         |             |  |   |             |   |  |         |            |   |       |   |          |   |  |   | (19,513,000  | ) |  |   | (19,513,000 | )
|                                                          |  |                       |         |              |        |   |            |  |  |          |             |  |                 |   |         |             |  |   |             |   |  |         |            |   |       |   |         
|Balance at December 31, 2002                              |  |                       |        |              |        |   |           |  |  |          | 59,823,553  |  |                 |   | 60,000  |             |  |   | 154,744,000 |   |  |         |           |   |       |   | (820,000 | ) |  |   | (104,460,000 | ) |  |   | 49,524,000  |  
|Exercise of stock options                                 |  |                       |         |              |        |   |            |  |  |          | 56,687      |  |                 |   |         |             |  |   | 173,000     |   |  |         |            |   |       |   |          |   |  |   |              |   |  |   | 173,000     |  
|Issuance of common stock and warrants for cash            |  |                       |         |              |        |   |            |  |  |          | 5,116,278   |  |                 |   | 5,000   |             |  |   | 10,060,000  |   |  |         |            |   |       |   |          |   |  |   |              |   |  |   | 10,065,000  |  
|Exercise of warrants                                      |  |                       |         |              |        |   |            |  |  |          | 3,910,591   |  |                 |   | 4,000   |             |  |   | 3,618,000   |   |  |         |            |   |       |   |          |   |  |   |              |   |  |   | 3,622,000   |  
|Issuance of options and warrants                          |  |                       |         |              |        |   |            |  |  |          |             |  |                 |   |         |             |  |   | 181,000     |   |  |         |            |   |       |   |          |   |  |   |              |   |  |   | 181,000     |  
|Net loss                                                  |  |                       |         |              |        |   |            |  |  |          |             |  |                 |   |         |             |  |   |             |   |  |         |            |   |       |   |          |   |  |   | (11,345,000  | ) |  |   | (11,345,000 | )
|                                                          |  |                       |         |              |        |   |            |  |  |          |             |  |                 |   |         |             |  |   |             |   |  |         |            |   |       |   |         
|Balance at December 31, 2003                              |  |                       |        |              |        |   |           |  |  |          | 68,907,109  |  |                 |   | 69,000  |             |  |   | 168,776,000 |   |  |         |           |   |       |   | (820,000 | ) |  |   | (115,805,000 | ) |  |   | 52,220,000  |  
|Exercise of stock options                                 |  |                       |         |              |        |   |            |  |  |          | 89,748      |  |                 |   |        |             |  |   | 250,000     |   |  |         |            |   |       |   |          |   |  |   |              |   |  |   | 250,000     |  
|Issuance of common stock                                  |  |                       |         |              |        |   |            |  |  |          | 38,600,000  |  |                 |   | 39,000  |             |  |   | 26,748,000  |   |  |         |            |   |       |   |          |   |  |   |              |   |  |   | 26,787,000  |  
|Exercise of warrants                                      |  |                       |         |              |        |   |            |  |  |          | 114,169     |  |                 |   |        |             |  |   | 236,000     |   |  |         |            |   |       |   |          |   |  |   |              |   |  |   | 236,000     |  
|Issuance of options and warrants                          |  |                       |         |              |        |   |            |  |  |          |             |  |                 |   |         |             |  |   | 973,000     |   |  |         |            |   |       |   |          |   |  |   |              |   |  |   | 973,000     |  
|Net loss                                                  |  |                       |         |              |        |   |            |  |  |          |             |  |                 |   |         |             |  |   |             |   |  |         |            |   |       |   |          |   |  |   | (31,217,000  | ) |  |   | (31,217,000 | )
|                                                          |  |                       |         |              |        |   |            |  |  |          |             |  |                 |   |         |             |  |   |             |   |  |         |            |   |       |   |         
|Balance at December 31, 2004                              |  |                       |        |              |        | $ |           |  |  |          | 107,711,026 |  |                 | $ | 108,000 |             |  | $ | 196,983,000 |   |  | $       |           |   |       | $ | (820,000 | ) |  | $ | (147,022,000 | ) |  | $ | 49,249,000  |  
|                                                          |  |                       |         |              |        |   |            |  |  |          |             |  |                 |   |         |             |  |   |             |   |  |         |            |   |       |   |         



F-5



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.





CONSOLIDATED STATEMENT OF CASH FLOWS


|                                                                                 |                                                                  |                                           |             |             |            |   |             |             |            |   |             |             |            |  
|-------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ----------------------------------------- | ----------- | ----------- | ---------- | - | ----------- | ----------- | ---------- | - | ----------- | ----------- | ---------- | -
|                                                                                 |                                                                  | For the Year Ended December 31            |            
|                                                                                 |                                                                  |                                           |            
|                                                                                 |                                                                  | 2002                                      |             |             | 2003       |   |             | 2004        |           
|                                                                                 |                                                                  |                                           |             |             |            |   |             |             |           
|CASH FLOWS FROM OPERATING ACTIVITIES:                                            |                                                                  |                                           |             |             |            |   |             |             |            |   |             |            
|Net loss                                                                         |                                                                  | $                                         | (19,513,000 | )           |            | $ | (11,345,000 | )           |            | $ | (31,217,000 | )          
|Adjustments to reconcile net loss to net cash used for operating
    activities: |                                                                  |                                           |             |             |            |   |             |             |            |   |             |            
|                                                                                 | Depreciation and amortization                                    |                                           |             | 1,931,000   |            |   |             | 3,277,000   |            |   |             | 3,463,000   |           
|                                                                                 | Non-cash restructuring and impairment charges                    |                                           |             |            |            |   |             |            |            |   |             | 3,659,000   |           
|                                                                                 | Amortization of accrued loss on sales contract                   |                                           |             | (1,998,000  | )          |   |             |            |            |   |             |            |           
|                                                                                 | Warrants and options charges                                     |                                           |             | 2,283,000   |            |   |             | 104,000     |            |   |             | 973,000     |           
|                                                                                 | Provision for excess and obsolete inventories                    |                                           |             | 567,000     |            |   |             | 719,000     |            |   |             | 4,836,000   |           
|                                                                                 | Purchase of in process research and development                  |                                           |             | 700,000     |            |   |             |            |            |   |             |            |           
|                                                                                 | Changes in assets and liabilities, net of effect of acquisition: |                                           |             |             |            |   |             |             |            |   |             |             |           
|                                                                                 |                                                                  | Accounts receivable                       |             |             | (1,655,000 | ) |             |             | (5,404,000 | ) |             |             | 7,375,000  |  
|                                                                                 |                                                                  | Inventory                                 |             |             | (1,180,000 | ) |             |             | (3,174,000 | ) |             |             | (5,361,000 | )
|                                                                                 |                                                                  | Prepaid expenses and other current assets |             |             | 160,000    |   |             |             | (184,000   | ) |             |             | (146,000   | )
|                                                                                 |                                                                  | Patents and licenses                      |             |             | (553,000   | ) |             |             | (531,000   | ) |             |             | (546,000   | )
|                                                                                 |                                                                  | Other assets                              |             |             | (75,000    | ) |             |             | (114,000   | ) |             |             | (46,000    | )
|                                                                                 |                                                                  | Accounts payable and accrued expenses     |             |             | (618,000   | ) |             |             | (1,806,000 | ) |             |             | (4,570,000 | )
|                                                                                 |                                                                  |                                           |             |             |            |   |             |             |           
|                                                                                 | Net cash used in operating activities                            |                                           |             | (19,951,000 | )          |   |             | (18,458,000 | )          |   |             | (21,580,000 | )         
|CASH FLOWS FROM INVESTING ACTIVITIES:                                            |                                                                  |                                           |             |             |            |   |             |             |            |   |             |            
|Purchase of property and equipment                                               |                                                                  |                                           | (5,398,000  | )           |            |   | (3,855,000  | )           |            |   | (1,812,000  | )          
|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                            |                                           |             | (5,453,000  | )          |   |             | (4,355,000  | )          |   |             | (1,812,000  | )         
|CASH FLOW FROM FINANCING ACTIVITIES:                                             |                                                                  |                                           |             |             |            |   |             |             |            |   |             |            
|Proceeds from borrowings                                                         |                                                                  |                                           |            |             |            |   | 7,234,000   |             |            |   | 5,567,000   |            
|Payments on short term borrowings                                                |                                                                  |                                           |            |             |            |   | (3,926,000  | )           |            |   | (7,937,000  | )          
|Payments on long-term obligations                                                |                                                                  |                                           | (519,000    | )           |            |   | (1,402,000  | )           |            |   | (645,000    | )          
|Net proceeds from sale of common stock and exercise of warrants
    and options  |                                                                  |                                           | 31,909,000  |             |            |   | 13,860,000  |             |            |   | 28,065,000  |            
|Payment of preferred stock conversion premium                                    |                                                                  |                                           | (3,000,000  | )           |            |   |            |             |            |   |            |            
|                                                                                 |                                                                  |                                           |             |             |            |   |             |             |           
|                                                                                 | Net cash provided by financing activities                        |                                           |             | 28,390,000  |            |   |             | 15,766,000  |            |   |             | 25,050,000  |           
|                                                                                 |                                                                  |                                           |             |             |            |   |             |             |           
|Net increase (decrease) in cash and cash equivalents                             |                                                                  |                                           | 2,986,000   |             |            |   | (7,047,000  | )           |            |   | 1,658,000   |            
|Cash and cash equivalents at beginning of year                                   |                                                                  |                                           | 15,205,000  |             |            |   | 18,191,000  |             |            |   | 11,144,000  |            
|                                                                                 |                                                                  |                                           |             |             |            |   |             |             |           
|Cash and cash equivalents at end of year                                         |                                                                  | $                                         | 18,191,000  |             |            | $ | 11,144,000  |             |            | $ | 12,802,000  |            
|                                                                                 |                                                                  |                                           |             |             |            |   |             |             |           



F-6



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|         |            
|-------- | -----------
|Note 1  | The Company









|         |                                           
|-------- | ------------------------------------------
|Note 2  | Summary of Significant Accounting Policies

Basis of Presentation












F-7



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)










| |                            
| | ---------------------------
| | Principles of Consolidation





| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |                    
| | -------------------
| | Accounts Receivable





| |                    
| | -------------------
| | Revenue Recognition





F-8



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






| |           
| | ----------
| | Warranties





| |           
| | ----------
| | Guarantees





| |                               
| | ------------------------------
| | Research and Development Costs





| |            
| | -----------
| | Inventories





| |                       
| | ----------------------
| | Property and Equipment



F-9



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




| |                                           
| | ------------------------------------------
| | Patents, Licenses and Purchased Technology





| |         
| | --------
| | Goodwill







| |                  
| | -----------------
| | Long-Lived Assets





| |                       
| | ----------------------
| | Restructuring Expenses





| |                   
| | ------------------
| | Loss Contingencies



F-10



---



##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






| |             
| | ------------
| | Income Taxes





| |                
| | ---------------
| | Marketing Costs





| |                   
| | ------------------
| | Net Loss Per Share





| |                         
| | ------------------------
| | Stock-based Compensation



F-11



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                                                                        |  |                                  |             |   |      |   |             |      |  |   |             |  
|----------------------------------------------------------------------- |  | -------------------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                        |  | For the Years Ended December 31, |            
|                                                                        |  |                                  |            
|                                                                        |  | 2002                             |             |   | 2003 |   |             | 2004 | 
|                                                                        |  |                                  |             |   |      |   |             |      | 
|Net loss:                                                               |  |                                  |             |   |      |   |             |      |  |   |             |  
|As reported                                                             |  | $                                | (19,513,000 | ) |      | $ | (11,345,000 | )    |  | $ | (31,217,000 | )
|Stock-based employee compensation included in net loss                  |  |                                  |            |   |      |   |            |      |  |   | 48,000      |  
|Stock-based compensation expense determined under fair value
    method |  |                                  | (4,056,000  | ) |      |   | (5,435,000  | )    |  |   | (5,543,000  | )
|                                                                        |  |                                  |             |   |      |   |             |      | 
|Pro forma                                                               |  | $                                | (23,569,000 | ) |      | $ | (16,780,000 | )    |  | $ | (36,712,000 | )
|                                                                        |  |                                  |             |   |      |   |             |      | 
|Basic and Diluted Loss per Share                                        |  |                                  |             |   |      |   |             |      |  |   |             |  
|As reported                                                             |  | $                                | (0.89       | ) |      | $ | (0.18       | )    |  | $ | (0.37       | )
|Stock-based compensation expense determined under fair value
    method |  |                                  | (0.17       | ) |      |   | (0.09       | )    |  |   | (0.07       | )
|                                                                        |  |                                  |             |   |      |   |             |      | 
|Pro forma                                                               |  | $                                | (1.06       | ) |      | $ | (0.27       | )    |  | $ | (0.44       | )
|                                                                        |  |                                  |             |   |      |   |             |      | 



| |                 
| | ----------------
| | Use of Estimates





| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments





| |                     
| | --------------------
| | Comprehensive Income





| |                    
| | -------------------
| | Segment Information



F-12



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






|                                            |  |                                  |            |  |      |   |            |      |  |   |            | 
|------------------------------------------- |  | -------------------------------- | ---------- |  | ---- | - | ---------- | ---- |  | - | ---------- | 
|                                            |  | For the Years Ended December 31, |           
|                                            |  |                                  |           
|                                            |  | 2002                             |            |  | 2003 |   |            | 2004 | 
|                                            |  |                                  |            |  |      |   |            |      | 
|SuperLink Rx                                |  | $                                | 15,195,000 |  |      | $ | 34,544,000 |      |  | $ | 12,599,000 | 
|SuperPlex multiplexer                       |  |                                  | 2,262,000  |  |      |   | 3,434,000  |      |  |   | 2,995,000  | 
|Amplink                                     |  |                                  |           |  |      |   |           |      |  |   | 153,000    | 
|Other-primarily parts and installation kits |  |                                  | 144,000    |  |      |   | 599,000    |      |  |   | 1,040,000  | 
|                                            |  |                                  |            |  |      |   |            |      | 
|Total                                       |  | $                                | 17,601,000 |  |      | $ | 38,577,000 |      |  | $ | 16,787,000 | 
|                                            |  |                                  |            |  |      |   |            |      | 



| |                  
| | -----------------
| | Reclassifications





| |                                
| | -------------------------------
| | Certain Risks and Uncertainties











| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements



F-13



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






Note 3  Short Term Borrowings












F-14



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






Note 4  Receivable From Stockholders






Note 5  Income Taxes






|                                               |                                     |                     |      |       |      |  |      |       |   |  |      |       |  
|---------------------------------------------- | ----------------------------------- | ------------------- | ---- | ----- | ---- |  | ---- | ----- | - |  | ---- | ----- | -
|                                               |                                     | For the Year Ending |     
|                                               |                                     | December 31         |     
|                                               |                                     |                     |     
|                                               |                                     | 2002                |      |       | 2003 |  |      | 2004  |  
|                                               |                                     |                     |      |       |      |  |      |       |  
|Tax benefit computed at Federal statutory rate |                                     |                     | 34.0 | %     |      |  | 34.0 | %     |   |  | 34.0 | %    
|Increase (decrease) in taxes due to:           |                                     |                     |      |       |      |  |      |       |   |  |      |      
|                                               | Change in valuation allowance       |                     |      | (39.8 | )    |  |      | (39.8 | ) |  |      | (39.8 | )
|                                               | State taxes, net of federal benefit |                     |      | 5.8   |      |  |      | 5.8   |   |  |      | 5.8   |  
|                                               | Other                               |                     |      |      |      |  |      |      |   |  |      |      |  
|                                               |                                     |                     |      |       |      |  |      |       |  
|                                               |                                     |                     |     | %     |      |  |     | %     |   |  |     | %    
|                                               |                                     |                     |      |       |      |  |      |       |  



|                                     |  |                                 |             |   |      |   |             |      |  |   |              |  
|------------------------------------ |  | ------------------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ------------ | -
|                                     |  | For the Year Ending December 31 |            
|                                     |  |                                 |            
|                                     |  | 2002                            |             |   | 2003 |   |             | 2004 | 
|                                     |  |                                 |             |   |      |   |             |      | 
|Loss carryforwards                   |  | $                               | 59,414,000  |   |      | $ | 78,428,000  |      |  | $ | 90,135,000   |  
|Capitalized research and development |  |                                 | 6,406,000   |   |      |   | 7,373,000   |      |  |   | 6,021,000    |  
|Warrant charges                      |  |                                 | 2,955,000   |   |      |   | 36,000      |      |  |   |             |  
|Depreciation                         |  |                                 | 1,942,000   |   |      |   | 3,365,000   |      |  |   | 2,520,000    |  
|Tax credits                          |  |                                 | 3,013,000   |   |      |   | 4,083,000   |      |  |   | 4,248,000    |  
|Inventory                            |  |                                 | 2,307,000   |   |      |   | 320,000     |      |  |   | 2,152,000    |  
|Purchase accounting adjustments      |  |                                 | 883,000     |   |      |   | 1,146,000   |      |  |   | 1,162,000    |  
|Acquired intellectual property       |  |                                 | (1,553,000  | ) |      |   | (1,346,000  | )    |  |   | (456,000     | )
|Other                                |  |                                 | 991,000     |   |      |   | 1,171,000   |      |  |   | 847,000      |  
|Less: valuation allowance            |  |                                 | (76,358,000 | ) |      |   | (94,576,000 | )    |  |   | (106,629,000 | )
|                                     |  |                                 |             |   |      |   |             |      | 
|                                     |  | $                               |            |   |      | $ |            |      |  | $ |             |  
|                                     |  |                                 |             |   |      |   |             |      | 

F-15



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)













|         |                     
|-------- | --------------------
|Note 6  | Stockholders Equity



| |                
| | ---------------
| | Preferred Stock





| |                            
| | ---------------------------
| | Convertible Preferred Stock





F-16



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)








| |             
| | ------------
| | Common Stock















F-17



---



##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






| |              
| | -------------
| | Stock Options







|                                 |  |           |            |   |                  |   |       | 
|-------------------------------- |  | --------- | ---------- | - | ---------------- | - | ----- | 
|                                 |  | Number of |            |   | Weighted Average |  
|                                 |  | Shares    |            |   | Exercise Price   |  
|                                 |  |           |            |   |                  |  
|Outstanding at December 31, 2001 |  |           | 2,550,488  |   |                  | $ | 10.67 | 
|Granted                          |  |           | 851,975    |   |                  |   | 5.005 | 
|Assumed                          |  |           | 1,673,777  |   |                  |   | 7.610 | 
|Canceled                         |  |           | (253,523   | ) |                  |   | 8.311 | 
|Exercised                        |  |           | (26,473    | ) |                  |   | 3.128 | 
|                                 |  |           |            |   |                  |  
|Outstanding at December 31, 2002 |  |           | 4,796,244  |   |                  |   | 8.761 | 
|Granted                          |  |           | 3,116,007  |   |                  |   | 2.661 | 
|Canceled                         |  |           | (310,243   | ) |                  |   | 10.21 | 
|Exercised                        |  |           | (56,687    | ) |                  |   | 2.703 | 
|                                 |  |           |            |   |                  |  
|Outstanding at December 31, 2003 |  |           | 7,545,321  |   |                  |   | 6.283 | 
|Granted                          |  |           | 3,126,159  |   |                  |   | 3.552 | 
|Canceled                         |  |           | (1,114,455 | ) |                  |   | 5.386 | 
|Exercised                        |  |           | (89,777    | ) |                  |   | 2.780 | 
|                                 |  |           |            |   |                  |  
|Outstanding at December 31, 2004 |  |           | 9,467,248  |   |                  | $ | 5.453 | 
|                                 |  |           |            |   |                  |  

F-18



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                  |  |             |           |           |             |  |          |                |             |   |             |          |  |                |           |  |  |   |        | 
|----------------- |  | ----------- | --------- | --------- | ----------- |  | -------- | -------------- | ----------- | - | ----------- | -------- |  | -------------- | --------- |  |  | - | ------ | 
|                  |  |             |           | Weighted  |             |  |          |                | Exercisable |  
|                  |  |             |           | Average   |             |  |          |                |             |  
|                  |  |             |           | Remaining |             |  | Weighted |                |             |   |             | Weighted | 
|Range of          |  | Number      |           |           | Contractual |  |          | Average        |             |   | Number      |          |  | Average        |          
|Exercise Prices   |  | Outstanding |           |           | Life        |  |          | Exercise Price |             |   | Exercisable |          |  | Exercise Price |          
|                  |  |             |           |           |             |  |          |                |             |   |             |          |  |                |          
|$ 0.830 - $ 2.940 |  |             | 2,636,484 |           |             |  | 8.626    |                |             | $ | 1.209       |          |  |                | 656,568   |  |  | $ | 1.673  | 
|$ 3.000 - $ 3.050 |  |             | 1,885,227 |           |             |  | 8.070    |                |             | $ | 3.049       |          |  |                | 1,032,536 |  |  | $ | 3.049  | 
|$ 3.063 - $ 5.225 |  |             | 1,585,536 |           |             |  | 5.828    |                |             | $ | 4.384       |          |  |                | 1,407,064 |  |  | $ | 4.332  | 
|$ 5.290 - $28.000 |  |             | 3,046,001 |           |             |  | 6.694    |                |             | $ | 8.641       |          |  |                | 1,841,022 |  |  | $ | 9.934  | 
|$29.500 - $49.375 |  |             | 314,000   |           |             |  | 5.289    |                |             | $ | 32.049      |          |  |                | 63,999    |  |  | $ | 37.363 | 
|                  |  |             |           |           |             |  |          |                |             |   |             |          |  |                |          
|                  |  |             | 9,467,248 |           |             |  | 6.773    |                |             | $ | 6.047       |          |  |                | 5,001,189 |  |  | $ | 12.012 | 
|                  |  |             |           |           |             |  |          |                |             |   |             |          |  |                |          





,




| |         
| | --------
| | Warrants



F-19



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                                                        |  |               |           |  |           |   |        |                 |  |  |                      | 
|------------------------------------------------------- |  | ------------- | --------- |  | --------- | - | ------ | --------------- |  |  | -------------------- | 
|                                                        |  | Common Shares |           |  |          
|                                                        |  |               |           |  |          
|                                                        |  | Total and     |           |  |           |   |       
|                                                        |  | Currently     |           |  | Price per |   |        |                
|                                                        |  | Exercisable   |           |  | Share     |   |        | Expiration Date | 
|                                                        |  |               |           |  |           |   |        |                 | 
|Warrant related to issuance of Series E Preferred Stock |  |               | 1,217,966 |  |           | $ | 18.91  |                 |  |  | September 29, 2005** | 
|Warrants related to issuance of common stock            |  |               | 397,857   |  |           |   | 5.50   |                 |  |  | March 10, 2007       | 
|                                                        |  |               | 1,406,581 |  |           |   | 1.19   |                 |  |  | December 17, 2007*   | 
|                                                        |  |               | 1,162,790 |  |           |   | 2.90   |                 |  |  | June 24, 2008*       | 
|Warrants related to April 2004 Bridge Loans             |  |               | 633,562   |  |           |   | 1.46   |                 |  |  | April 28, 2011* **   | 
|                                                        |  |               | 100,000   |  |           |   | 1.85   |                 |  |  | April 28, 2011*      | 
|Warrants assumed in connection with the Conductus, Inc. |  |               | 72,756    |  |           |   | 22.383 |                 |  |  | August 7, 2005       | 
|acquisition                                             |  |               | 1,095,000 |  |           |   | 4.583  |                 |  |  | September 27, 2007   | 
|                                                        |  |               | 6,000     |  |           |   | 31.25  |                 |  |  | September 1, 2007    | 
|                                                        |  |               |           |  |           |   |        |                 | 
|Total                                                   |  |               | 6,092,512 |  |           |   |        |                 |  |  |                      | 
|                                                        |  |               |           |  |           |   |        |                 | 






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



|   |                                                                            
|-- | ---------------------------------------------------------------------------
|** | The terms of these warrants contain antidilution adjustment
    provisions.



|                                             |  |           |         |                      |           |   |                    |          |  |              |            |  |  |  |        | 
|-------------------------------------------- |  | --------- | ------- | -------------------- | --------- | - | ------------------ | -------- |  | ------------ | ---------- |  |  |  | ------ | 
|                                             |  |           |         | Common Shares Issued |          
|                                             |  | Warrants  |         |                      |           |  
|                                             |  |           |         |                      |           |   | In Accordance with |         
|                                             |  | Warrants  |         |                      | Price per |   |                    |          |  | Net Exercise |           
|                                             |  | Exercised |         |                      | Share     |   |                    | For Cash |  |              | Provisions | 
|                                             |  |           |         |                      |           |   |                    |          |  |              |            | 
|Warrants related to bank borrowings          |  |           | 123,525 |                      |           | $ | 3-3.25             |          |  |              |           |  |  |  | 71,312 | 
|Warrants related to issuance of common stock |  |           | 42,857  |                      |           |   | 5.50               |          |  |              | 42,857     |  |  |  |       | 
|                                             |  |           |         |                      |           |   |                    |          |  |              |            | 
|Total                                        |  |           | 166,382 |                      |           |   |                    |          |  |              | 42,857     |  |  |  | 71,312 | 
|                                             |  |           |         |                      |           |   |                    |          |  |              |            | 



|                                             |  |           |           |                      |           |   |                    |          |  |              |            |  |  |  |           | 
|-------------------------------------------- |  | --------- | --------- | -------------------- | --------- | - | ------------------ | -------- |  | ------------ | ---------- |  |  |  | --------- | 
|                                             |  |           |           | Common Shares Issued |          
|                                             |  | Warrants  |           |                      |           |  
|                                             |  |           |           |                      |           |   | In Accordance with |         
|                                             |  | Warrants  |           |                      | Price per |   |                    |          |  | Net Exercise |           
|                                             |  | Exercised |           |                      | Share     |   |                    | For Cash |  |              | Provisions | 
|                                             |  |           |           |                      |           |   |                    |          |  |              |            | 
|Warrants related to bank borrowings          |  |           | 94,340    |                      |           | $ | 1.06               |          |  |              |           |  |  |  | 75,140    | 
|Warrants related to issuance of common stock |  |           | 330,000   |                      |           |   | 5.50               |          |  |              | 330,000    |  |  |  |          | 
|                                             |  |           | 3,867,659 |                      |           |   | 1.19               |          |  |              | 1,254,500  |  |  |  | 2,613,159 | 
|                                             |  |           | 116,279   |                      |           |   | 2.90               |          |  |              | 116,279    |  |  |  |          | 
|                                             |  |           |           |                      |           |   |                    |          |  |              |            | 
|Total                                        |  |           | 4,408,278 |                      |           |   |                    |          |  |              | 1,700,779  |  |  |  | 2,688,299 | 
|                                             |  |           |           |                      |           |   |                    |          |  |              |            | 



|         |                                 
|-------- | --------------------------------
|Note 7  | Warrants Issued to U.S. Cellular



F-20



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)
















|         |                      
|-------- | ---------------------
|Note 8  | Employee Savings Plan



F-21



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|         |                              
|-------- | -----------------------------
|Note 9  | Commitments and Contingencies



| |                 
| | ----------------
| | Operating Leases







| |               
| | --------------
| | Capital Leases





| |                     
| | --------------------
| | Patents and Licenses





|                                   |  |          |           |           |        |   |            |                |  |   |         |  
|---------------------------------- |  | -------- | --------- | --------- | ------ | - | ---------- | -------------- |  | - | ------- | -
|                                   |  |          |           | Operating |        |   |           
|Year Ending December 31,           |  | Licenses |           |           | Leases |   |            | Capital Leases | 
|                                   |  |          |           |           |        |   |            |                | 
|2005                               |  | $        | 170,000   |           |        | $ | 2,400,000  |                |  | $ | 52,000  |  
|2006                               |  |          | 150,000   |           |        |   | 1,406,000  |                |  |   | 22,000  |  
|2007                               |  |          | 150,000   |           |        |   | 1,234,000  |                |  |   | 15,000  |  
|2008                               |  |          | 150,000   |           |        |   | 1,271,000  |                |  |   |        |  
|2009                               |  |          | 150,000   |           |        |   | 1,315,000  |                |  |   |        |  
|Thereafter                         |  |          | 1,500,000 |           |        |   | 2,653,000  |                |  |   |        |  
|                                   |  |          |           |           |        |   |            |                | 
|Total payments                     |  | $        | 2,270,000 |           |        | $ | 10,279,000 |                |  |   | 89,000  |  
|                                   |  |          |           |           |        |   |            |                | 
|Less: amount representing interest |  |          |           |           |        |   |            |                |  |   | (13,000 | )
|                                   |  |          |           |           |        |   |            |                | 
|Present value of minimum lease     |  |          |           |           |        |   |            |                |  |   | 76,000  |  
|Less current portion               |  |          |           |           |        |   |            |                |  |   | (43,000 | )
|                                   |  |          |           |           |        |   |            |                | 
|Long term portion                  |  |          |           |           |        |   |            |                |  | $ | 33,000  |  
|                                   |  |          |           |           |        |   |            |                | 





F-22



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






Note 10  Contractual Guarantees and
Indemnities




| |           
| | ----------
| | Warranties







| |                                  
| | ---------------------------------
| | Intellectual Property Indemnities





| |                                                                
| | ---------------------------------------------------------------
| | Director and Officer Indemnities and Contractual
    Guarantees







| |                                                    
| | ---------------------------------------------------
| | General Contractual Indemnities/ Products Liability



F-23



---



##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






| |                      
| | ---------------------
| | Short Term Borrowings



Note 11  Legal Proceedings


Patent Litigation










Class Action Lawsuits




F-24



---



##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






Note 12  Earnings Per Share




Note 13  Restructuring Expenses and
Impairment Charges






F-25



---



##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                                                                             |  |               |           |  |            |   |           |       |  |   |           | 
|---------------------------------------------------------------------------- |  | ------------- | --------- |  | ---------- | - | --------- | ----- |  | - | --------- | 
|                                                                             |  | Restructuring |           |  | Impairment |   |           |      
|                                                                             |  | Charges       |           |  | Charges    |   |           | Total | 
|                                                                             |  |               |           |  |            |   |           |       | 
|Severance costs                                                              |  | $             | 826,000   |  |            | $ |          |       |  | $ | 826,000   | 
|Fixed assets write offs                                                      |  |               | 803,000   |  |            |   | 403,000   |       |  |   | 1,206,000 | 
|Patents, licenses and purchased technology write-off                         |  |               | 1,051,000 |  |            |   | 1,171,000 |       |  |   | 2,222,000 | 
|Lease abandonment costs                                                      |  |               | 279,000   |  |            |   |          |       |  |   | 279,000   | 
|Facility consolidation costs                                                 |  |               | 268,000   |  |            |   |          |       |  |   | 268,000   | 
|Employee relocation cost                                                     |  |               | 382,000   |  |            |   |          |       |  |   | 382,000   | 
|                                                                             |  |               |           |  |            |   |           |       | 
|Total                                                                        |  | $             | 3,609,000 |  |            | $ | 1,574,000 |       |  | $ | 5,183,000 | 
|Fixed Asset write off and severance costs included in cost of
    goods sold |  |               | 669,000   |  |            |   | 386,000   |       |  |   | 1,055,000 | 
|                                                                             |  |               |           |  |            |   |           |       | 
|Restructuring expenses and impairment charges                                |  | $             | 2,940,000 |  |            | $ | 1,188,000 |       |  | $ | 4,128,000 | 
|                                                                             |  |               |           |  |            |   |           |       | 



|          |                                                                                                                                        
|--------- | ---------------------------------------------------------------------------------------------------------------------------------------
|Note 14  | Details of Certain Financial Statement Components and
    Supplemental Disclosures of Cash Flow Information and Non-Cash
    Activities



| |                    
| | -------------------
| | Balance Sheet Data:

|                     |                                            |              |           |           |              |   |           |           |  
|-------------------- | ------------------------------------------ | ------------ | --------- | --------- | ------------ | - | --------- | --------- | -
|                     |                                            | December 31, |           |           | December 31, |  
|                     |                                            | 2003         |           |           | 2004         |  
|                     |                                            |              |           |           |              |  
|Accounts receivable: |                                            |              |           |           |              |   |           |          
|                     | Accounts receivable-trade                  |              | $         | 6,766,000 |              |   | $         | 1,043,000 |  
|                     | U.S. government accounts receivable-billed |              |           | 2,107,000 |              |   |           | 468,000   |  
|                     | Less: allowance for doubtful accounts      |              |           | (64,000   | )            |   |           | (77,000   | )
|                     |                                            |              |           |           |              |  
|                     |                                            | $            | 8,809,000 |           |              | $ | 1,434,000 |          
|                     |                                            |              |           |           |              |  

|             |                        |              |           |           |              |   |           |            |  
|------------ | ---------------------- | ------------ | --------- | --------- | ------------ | - | --------- | ---------- | -
|             |                        | December 31, |           |           | December 31, |  
|             |                        | 2003         |           |           | 2004         |  
|             |                        |              |           |           |              |  
|Inventories: |                        |              |           |           |              |   |           |           
|             | Raw materials          |              | $         | 1,941,000 |              |   | $         | 3,954,000  |  
|             | Work-in-process        |              |           | 4,803,000 |              |   |           | 3,441,000  |  
|             | Finished goods         |              |           | 2,861,000 |              |   |           | 7,334,000  |  
|             | Less inventory reserve |              |           | (803,000  | )            |   |           | (5,402,000 | )
|             |                        |              |           |           |              |  
|             |                        | $            | 8,802,000 |           |              | $ | 9,327,000 |           
|             |                        |              |           |           |              |  

F-26



---



##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


|                        |                                                 |                        |            |             |              |   |            |             |            | 
|----------------------- | ----------------------------------------------- | ---------------------- | ---------- | ----------- | ------------ | - | ---------- | ----------- | ---------- | 
|                        |                                                 | December 31,           |            |             | December 31, |  
|                        |                                                 | 2003                   |            |             | 2004         |  
|                        |                                                 |                        |            |             |              |  
|Property and Equipment: |                                                 |                        |            |             |              |   |            |            
|                        |                                                 | Equipment              |            | $           | 21,274,000   |   |            | $           | 18,805,000 | 
|                        |                                                 | Leasehold improvements |            |             | 5,891,000    |   |            |             | 6,236,000  | 
|                        |                                                 | Furniture and fixtures |            |             | 430,000      |   |            |             | 451,000    | 
|                        |                                                 |                        |            |             |              |  
|                        |                                                 |                        | 27,595,000 |             |              |   | 25,492,000 |            
|                        | Less: accumulated depreciation and amortization |                        |            | (15,061,000 | )            |   |            | (15,189,000 | )         
|                        |                                                 |                        |            |             |              |  
|                        |                                                 | $                      | 12,534,000 |             |              | $ | 10,303,000 |            
|                        |                                                 |                        |            |             |              |  



|                      |                               |              |           |            |              |   |           |           |  
|--------------------- | ----------------------------- | ------------ | --------- | ---------- | ------------ | - | --------- | --------- | -
|                      |                               | December 31, |           |            | December 31, |  
|                      |                               | 2003         |           |            | 2004         |  
|                      |                               |              |           |            |              |  
|Patents and Licenses: |                               |              |           |            |              |   |           |          
|                      | Patents pending               |              | $         | 848,000    |              |   | $         | 433,000   |  
|                      | Patents issued                |              |           | 1,182,000  |              |   |           | 899,000   |  
|                      | Less accumulated amortization |              |           | (332,000   | )            |   |           | (203,000  | )
|                      |                               |              |           |            |              |  
|                      | Net patents issued            |              |           | 850,000    |              |   |           | 696,000   |  
|                      | Licenses                      |              |           | 3,310,000  |              |   |           | 563,000   |  
|                      | Less accumulated amortization |              |           | (2,322,000 | )            |   |           | (33,000   | )
|                      |                               |              |           |            |              |  
|                      | Net licenses                  |              |           | 988,000    |              |   |           | 530,000   |  
|                      | Purchased technology          |              |           | 3,200,000  |              |   |           | 1,706,000 |  
|                      | Less accumulated amortization |              |           | (519,000   | )            |   |           | (532,000  | )
|                      |                               |              |           |            |              |  
|                      | Net purchased technology      |              |           | 2,681,000  |              |   |           | 1,174,000 |  
|                      |                               |              |           |            |              |  
|                      |                               | $            | 5,367,000 |            |              | $ | 2,833,000 |          
|                      |                               |              |           |            |              |  



F-27



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


|                                                  |                         |              |           |            |              |  |           |            |  
|------------------------------------------------- | ----------------------- | ------------ | --------- | ---------- | ------------ |  | --------- | ---------- | -
|                                                  |                         | December 31, |           |            | December 31, | 
|                                                  |                         | 2003         |           |            | 2004         | 
|                                                  |                         |              |           |            |              | 
|Accrued Expenses and Other Long Term Liabilities: |                         |              |           |            |              |  |           |           
|                                                  | Compensation related    |              | $         | 2,153,000  |              |  | $         | 1,285,000  |  
|                                                  | Warranty reserve        |              |           | 494,000    |              |  |           | 419,000    |  
|                                                  | Unfavorable lease costs |              |           | 823,000    |              |  |           |           |  
|                                                  | Lease abandonment costs |              |           | 1,329,000  |              |  |           | 1,336,000  |  
|                                                  | Product line exit costs |              |           | 913,000    |              |  |           | 885,000    |  
|                                                  | Severance costs         |              |           | 285,000    |              |  |           | 36,000     |  
|                                                  | Other                   |              |           | 723,000    |              |  |           | 1,393,000  |  
|                                                  |                         |              |           |            |              | 
|                                                  |                         |              | 6,720,000 |            |              |  | 5,354,000 |           
|                                                  | Less current portion    |              |           | (4,832,000 | )            |  |           | (4,601,000 | )
|                                                  |                         |              |           |            |              | 
|                                                  | Long term portion       |              | $         | 1,888,000  |              |  | $         | 753,000    |  
|                                                  |                         |              |           |            |              | 

|                                                           |  |                     |           |   |              |   |           |  
|---------------------------------------------------------- |  | ------------------- | --------- | - | ------------ | - | --------- | -
|                                                           |  | For the Year Ended, |          
|                                                           |  |                     |          
|                                                           |  | December 31,        |           |   | December 31, |  
|                                                           |  | 2003                |           |   | 2004         |  
|                                                           |  |                     |           |   |              |  
|Warranty Reserve Activity:                                 |  |                     |           |   |              |   |           |  
|Beginning balance                                          |  | $                   | 351,000   |   |              | $ | 494,000   |  
|Additions                                                  |  |                     | 261,000   |   |              |   | 157,000   |  
|Deductions                                                 |  |                     | (118,000  | ) |              |   | (159,000  | )
|Change in estimate relating to previous warranty accruals  |  |                     |          |   |              |   | (73,000   | )
|                                                           |  |                     |           |   |              |  
|Ending balance                                             |  | $                   | 494,000   |   |              | $ | 419,000   |  
|                                                           |  |                     |           |   |              |  
|Unfavorable Lease Costs:                                   |  |                     |           |   |              |   |           |  
|Beginning balance                                          |  | $                   | 1,140,000 |   |              | $ | 823,000   |  
|Additions                                                  |  |                     |          |   |              |   |          |  
|Deductions                                                 |  |                     | (317,000  | ) |              |   | (265,000  | )
|Transfer to lease abandonment costs                        |  |                     |          |   |              |   | (558,000  | )
|                                                           |  |                     |           |   |              |  
|Ending balance                                             |  | $                   | 823,000   |   |              | $ |          |  
|                                                           |  |                     |           |   |              |  
|Lease Abandonment Costs:                                   |  |                     |           |   |              |   |           |  
|Beginning balance                                          |  | $                   | 1,995,000 |   |              | $ | 1,329,000 |  
|Additions                                                  |  |                     |          |   |              |   | 279,000   |  
|Transfers from unfavorable lease costs                     |  |                     |          |   |              |   | 558,000   |  
|Deductions                                                 |  |                     | (666,000  | ) |              |   | (830,000  | )
|                                                           |  |                     |           |   |              |  
|Ending balance                                             |  | $                   | 1,329,000 |   |              | $ | 1,336,000 |  
|                                                           |  |                     |           |   |              |  
|Product Line Exit Costs:                                   |  |                     |           |   |              |   |           |  
|Beginning balance                                          |  | $                   | 1,042,000 |   |              | $ | 913,000   |  
|Additions                                                  |  |                     |          |   |              |   |          |  
|Deductions                                                 |  |                     | (129,000  | ) |              |   | (73,000   | )
|Change in estimate relating to previous exit costs accrual |  |                     |          |   |              |   | 45,000    |  
|                                                           |  |                     |           |   |              |  
|Ending balance                                             |  | $                   | 913,000   |   |              | $ | 885,000   |  
|                                                           |  |                     |           |   |              |  

F-28



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


|                  |  |                     |            |   |              |   |            |  
|----------------- |  | ------------------- | ---------- | - | ------------ | - | ---------- | -
|                  |  | For the Year Ended, |           
|                  |  |                     |           
|                  |  | December 31,        |            |   | December 31, |  
|                  |  | 2003                |            |   | 2004         |  
|                  |  |                     |            |   |              |  
|Severance Costs:  |  |                     |            |   |              |   |            |  
|Beginning balance |  | $                   | 1,600,000  |   |              | $ | 285,000    |  
|Additions         |  |                     |           |   |              |   | 826,000    |  
|Deductions        |  |                     | (1,315,000 | ) |              |   | (1,075,000 | )
|                  |  |                     |            |   |              |  
|Ending balance    |  | $                   | 285,000    |   |              | $ | 36,000     |  
|                  |  |                     |            |   |              |  

Supplemental Cash Flow Information:


|                                                                       |  |          |            |  |          |   |         |          |  |   |           | 
|---------------------------------------------------------------------- |  | -------- | ---------- |  | -------- | - | ------- | -------- |  | - | --------- | 
|                                                                       |  | Dec. 31, |            |  | Dec. 31, |   |         | Dec. 31, | 
|                                                                       |  | 2002     |            |  | 2003     |   |         | 2004     | 
|                                                                       |  |          |            |  |          |   |         |          | 
|Cash paid for interest                                                 |  | $        | 145,000    |  |          | $ | 471,000 |          |  | $ | 443,000   | 
|Non-cash investing and financing activities:                           |  |          |            |  |          |   |         |          |  |   |           | 
|Unpaid offering expenses                                               |  |          |           |  |          |   |        |          |  |   | 792,000   | 
|Insurance settlement receivable                                        |  |          |           |  |          |   |        |          |  |   | 4,000,000 | 
|Legal settlement liability                                             |  |          |           |  |          |   |        |          |  |   | 4,000,000 | 
|Conversion of preferred shares into common shares                      |  |          | 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 |  |          |   |        |          |  |   |          | 

F-29



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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.


Quarterly Financial Data (Unaudited)


|                                              |  |         |            |   |         |   |            |         |  |   |            |   |  |   |             |  
|--------------------------------------------- |  | ------- | ---------- | - | ------- | - | ---------- | ------- |  | - | ---------- | - |  | - | ----------- | -
|                                              |  | First   |            |   | Second  |   |            | Third   |  |   | Fourth     |  
|                                              |  | Quarter |            |   | Quarter |   |            | Quarter |  |   | Quarter    |  
|                                              |  |         |            |   |         |   |            |         |  |   |            |  
|2004                                          |  |         |            |   |         |   |            |         |  |   |            |   |  |   |             |  
|Net revenues                                  |  | $       | 5,444,000  |   |         | $ | 6,312,000  |         |  | $ | 7,299,000  |   |  | $ | 3,949,000   |  
|Loss from operations(1)(2)                    |  |         | (5,807,000 | ) |         |   | (7,874,000 | )       |  |   | (5,138,000 | ) |  |   | (11,278,000 | )
|Net loss                                      |  |         | (5,910,000 | ) |         |   | (8,884,000 | )       |  |   | (5,155,000 | ) |  |   | (11,268,000 | )
|Basic and diluted loss per common share       |  | $       | (0.09      | ) |         | $ | (0.11      | )       |  | $ | (0.06      | ) |  | $ | (0.11       | )
|Weighted average number of shares outstanding |  |         | 69,042,053 |   |         |   | 78,296,844 |         |  |   | 92,103,424 |   |  |   | 98,177,693  |  
|2003                                          |  |         |            |   |         |   |            |         |  |   |            |   |  |   |             |  
|Net revenues                                  |  | $       | 7,580,000  |   |         | $ | 11,263,000 |         |  | $ | 14,156,000 |   |  | $ | 16,395,000  |  
|(Loss) income from operations                 |  |         | (8,295,000 | ) |         |   | (2,974,000 | )       |  |   | (759,000   | ) |  |   | 1,010,000   |  
|Net (loss) income                             |  |         | (8,343,000 | ) |         |   | (3,061,000 | )       |  |   | (851,000   | ) |  |   | 910,000     |  
|Basic (loss) income per common share          |  | $       | (0.14      | ) |         | $ | (0.05      | )       |  | $ | (0.01      | ) |  | $ | 0.01        |  
|Weighted average number of shares outstanding |  |         | 59,823,553 |   |         |   | 60,048,444 |         |  |   | 64,939,896 |   |  |   | 65,702,315  |  
|Diluted (loss) income per common share        |  | $       | (0.14      | ) |         | $ | (0.05      | )       |  | $ | (0.01      | ) |  | $ | 0.01        |  
|Weighted average number of shares outstanding |  |         | 59,823,553 |   |         |   | 60,048,444 |         |  |   | 64,939,896 |   |  |   | 72,652,146  |  






|    |                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------
|(1) | Includes restructuring expense and impairment charges of
    none, $2,513,000, $785,000 and $1,885,000, respectively.
|   
|(2) | Includes increased reserve for inventory obsolescence of
    $88,000, $90,000, $440,000 and $4,218,000, respectively.

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##### Table of Contents



SUPERCONDUCTOR TECHNOLOGIES INC.





Schedule II- Valuation and Qualifying Accounts


|                                       |  |           |            |           |          |   |            |          |  |           |            |  |  |         |          |   |  |   |             | 
|-------------------------------------- |  | --------- | ---------- | --------- | -------- | - | ---------- | -------- |  | --------- | ---------- |  |  | ------- | -------- | - |  | - | ----------- | 
|                                       |  |           |            | Additions |          |   |            |          | 
|                                       |  |           |            |           |          |   |            |          | 
|                                       |  |           |            | Charge to |          |   | Charge to  |          |  | Charge to |            |  | 
|                                       |  | Beginning |            |           | Costs &  |   |            | Other    |  |           | Other      |  |  | Ending  |         
|                                       |  | Balance   |            |           | Expenses |   |            | Accounts |  |           | Deductions |  |  | Balance |         
|                                       |  |           |            |           |          |   |            |          |  |           |            |  |  |         |         
|Year Ended December 31, 2004           |  |           |            |           |          |   |            |          |  |           |            |  |  |         |          |   |  |   |             | 
|Allowance for Uncollectible Accounts   |  | $         | 64,000     |           |          | $ | 13,000     |          |  | $         |           |  |  | $       |         |   |  | $ | 77,000      | 
|Reserve for Inventory Obsolescence     |  |           | 803,000    |           |          |   | 4,836,000  |          |  |           |           |  |  |         | (237,000 | ) |  |   | 5,402,000   | 
|Reserve for Warranty                   |  |           | 494,000    |           |          |   | 84,000     |          |  |           |           |  |  |         | (159,000 | ) |  |   | 419,000     | 
|Deferred Tax Asset Valuation Allowance |  |           | 94,576,000 |           |          |   | 12,053,000 |          |  |           |           |  |  |         |         |   |  |   | 106,629,000 | 
|Year Ended December 31, 2003           |  |           |            |           |          |   |            |          |  |           |            |  |  |         |          |   |  |   |             | 
|Allowance for Uncollectible Accounts   |  |           | 58,000     |           |          |   | 12,000     |          |  |           |           |  |  |         | (6,000   | ) |  |   | 64,000      | 
|Reserve for Inventory Obsolescence     |  |           | 650,000    |           |          |   | 719,000    |          |  |           |           |  |  |         | (566,000 | ) |  |   | 803,000     | 
|Reserve for Warranty                   |  |           | 351,000    |           |          |   | 261,000    |          |  |           |           |  |  |         | (118,000 | ) |  |   | 494,000     | 
|Deferred Tax Asset Valuation Allowance |  |           | 76,358,000 |           |          |   | 18,218,000 |          |  |           |           |  |  |         |         |   |  |   | 94,576,000  | 
|Year Ended December 31, 2002           |  |           |            |           |          |   |            |          |  |           |            |  |  |         |          |   |  |   |             | 
|Allowance for Uncollectible Accounts   |  |           | 24,000     |           |          |   | 12,000     |          |  |           | 27,000     |  |  |         | (5,000   | ) |  |   | 58,000      | 
|Reserve for Inventory Obsolescence     |  |           | 617,000    |           |          |   | 567,0000   |          |  |           |           |  |  |         | (534,000 | ) |  |   | 650,000     | 
|Reserve for Warranty                   |  |           | 242,000    |           |          |   | 340,000    |          |  |           |           |  |  |         | (231,000 | ) |  |   | 351,000     | 
|Deferred Tax Asset Valuation Allowance |  |           | 41,928,000 |           |          |   | 34,430,000 |          |  |           |           |  |  |         |         |   |  |   | 76,358,000  | 

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##### Table of Contents






SIGNATURES






| |                                 
| | --------------------------------
| | SUPERCONDUCTOR TECHNOLOGIES INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ M. Peter Thomas

| |                                      
| | -------------------------------------
| |                                      
| | M. Peter Thomas                      
| | President and Chief Executive Officer

POWER OF ATTORNEY






|                                               |  |                                                                                       |  |                |  | 
|---------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                      |  | Title                                                                                 |  | Date          
|                                               |  |                                                                                       |  |               
|                                              
|/s/ M. Peter ThomasM.
    Peter Thomas         |  | President, Chief Executive Officer
    and Director
    (Principal Executive Officer) |  | March 16, 2005
|                                              
|/s/ Martin S. McDermutMartin
    S. McDermut   |  | Senior Vice President,
    Chief Financial Officer
    (Principal Financial Officer)  |  | March 16, 2005
|                                              
|/s/ William J. BuchananWilliam
    J. Buchanan |  | Controller
    (Principal Accounting Officer)                                         |  | March 16, 2005
|                                              
|/s/ Robert P. CarenRobert
    P. Caren         |  | Director                                                                              |  | March 16, 2005
|                                              
|/s/ John F. CarlsonJohn
    F. Carlson         |  | Director                                                                              |  | March 16, 2005
|                                              
|/s/ Dennis J. HorowitzDennis
    J. Horowitz   |  | Director                                                                              |  | March 16, 2005

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##### Table of Contents



|                                             |  |                       |  |                |  | 
|-------------------------------------------- |  | --------------------- |  | -------------- |  | 
|Signature                                    |  | Title                 |  | Date          
|                                             |  |                       |  |               
|                                            
|/s/ Martin A. KaplanMartin
    A. Kaplan     |  | Director              |  | March 16, 2005
|                                            
|/s/ John D. LocktonJohn
    D. Lockton       |  | Chairman of the Board |  | March 16, 2005
|                                            
|/s/ Charles E. ShalvoyCharles
    E. Shalvoy |  | Director              |  | March 16, 2005

S-2