**United StatesSecurities and Exchange Commission**

**Washington, DC 20549**

 

**FORM 10–Q**

**(Mark One)**
| **ý** | **Quarterly report  pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|------------|-----------------------------------------------------------------------------------------------|
|       |                                                                                          |
|       | **For  the period ended September 30, 2001 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 0–11915**

**Conductus, Inc.**

(Exact name of registrant as specified inits charter)

 
| **Delaware**                                                    | **77–0162388**                   |
|-----------------------------------------------------------------|---------------------------------------|
| (State  or other jurisdiction of Incorporation or organization) | (I.R.S. Employer  Identification No.) |
|                                                            |                                  |
| **969 W. Maude Ave., Sunnyvale, California**                    | **94085**                             |
| (Address of principal  executive offices)                       | (Zip Code)                            |
|                                                            |                                  |
| **(408) 523–9950**                                         |
| (Registrant's  Telephone Number, including area code)           |

**Not Applicable**

(Former name, former address and formerfiscal year, if changed since last report)

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Sections 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days    Yes ý    No o

As of October 31, 2001, there were 18,715,767shares of the registrant's common stock outstanding.

Total pages: Index to Exhibits to be found on page

 

**Conductus, IncIndex**

 
| **Part  I: Financial Information** |
|------------------------------------|
|                               |   |   |
|                               | *Item  1: Financial Statements* |
|                               |   |   |
|                               |   | Unaudited  Condensed Balance Sheets – September 30, 2001 and December 31, 2000 |
|                               |   |   |
|                               |   | Unaudited Condensed  Statements of Operations – Three and Nine months ended September 30, 2001 and  2000 |
|                               |   |   |
|                               |   | Unaudited Condensed  Statements of Cash Flows – Nine months ended September 30, 2001 and 2000 |
|                               |   |   |
|                               |   | Notes To  Unaudited Condensed Financial Statements |
|                               |   |   |
|                               | *Item  2: Management's Discussion and Analysis of Financial Condition and   Results of Operations* |
|                               |   |   |
|                               | *Item  3: Quantitative and Qualitative Disclosures About Market Risk* |
|                               |   |
| **Part II:  Other Information**    |
|                               |   |   |
|                               | *Item 1:  Legal Proceedings* |
|                               |   |   |
|                               | *Item 2:  Changes in Securities* |
|                               |   |   |
|                               | *Item 3: Default Upon  Senior Securities* |
|                               |   |   |
|                               | *Item  4: Submission of Matters to a Vote of Security Holders* |
|                               |   |   |
|                               | *Item 5:  Other Information* |
|                               |   |   |
|                               | *Item 6: Exhibits and  Reports on Form 8-K* |
|                               |
| **Signatures**                     |

** **

**PartI:  Financial Information**

*Item I:  Financial Statements*

 

**Conductus,Inc.Condensed Balance Sheets**

(In thousands)(Unaudited)
|                                                       |   | **September 30,  2001** |   | **December 31,  2000** |   |
|------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
| ASSETS                                                     |   |                    |   |                   |   |
| Current  assets:                                           |   |                    |   |                   |   |
| Cash  and cash equivalents                                 |   | $                       | 8,027  |                   | $      | 7,202 |   |
| Short-term  investments                                    |   | 2,691                   |   | 7,965                  |   |
| Accounts  receivable, net                                  |   | 1,438                   |   | 563                    |   |
| Inventories,  net                                          |   | 4,394                   |   | 3,273                  |   |
| Prepaid  expenses and other current assets                 |   | 356                     |   | 341                    |   |
| Total  current assets                                      |   | 16,906                  |   | 19,344                 |   |
|                                                       |   |                    |   |                   |   |
| Property  and equipment, net                               |   | 3,387                   |   | 2,135                  |   |
| Restricted  cash                                           |   | 514                     |   | 514                    |   |
| Other  assets                                              |   | 621                     |   | 390                    |   |
| Total  assets                                              |   | $                       | 21,428 |                   | $      | 22,383 |   |
|                                                       |   |                    |   |                   |   |
| LIABILITIES                                                |   |                    |   |                   |   |
| Current  liabilities:                                      |   |                    |   |                   |   |
| Current  portion of long-term debt and capital leases      |   | $                       | 165    |                   | $      | 597 |   |
| Accounts  payable                                          |   | 1,985                   |   | 1,477                  |   |
| Other  accrued liabilities                                 |   | 2,474                   |   | 1,523                  |   |
|                                                       |   |                    |   |                   |   |
| Total  current liabilities                                 |   | 4,624                   |   | 3,597                  |   |
| Long-term  debt and capital leases, net of current portion |   | 249                     |   | —                 |   |
|                                                       |   |                    |   |                   |   |
| Total  liabilities                                         |   | 4,873                   |   | 3,597                  |   |
|                                                       |   |                    |   |                   |   |
|                                                       |   |                    |   |                   |   |
| STOCKHOLDERS’  EQUITY                                 |   |                    |   |                   |   |
| Common  stock                                              |   | 2                       |   | 2                      |   |
| Additional  paid-in capital                                |   | 103,418                 |   | 91,161                 |   |
| Receivable  from stockholder                               |   | (460                    | )      | (460                   | )      |
| Accumulated  deficit                                       |   | (86,405                 | )      | (71,917                | )      |
| Total  stockholders’ equity                           |   | 16,555                  |   | 18,786                 |   |
|                                                       |   |                    |   |                   |   |
| Total  liabilities and stockholders’ equity           |   | $                       | 21,428 |                   | $      | 22,383 |   |

 

The accompanying notes are an integralpart of these condensed financial statements.

 

**Conductus, Inc.Condensed Statements OfOperations**

 

(In thousands, except per share amounts)(Unaudited)
|                                                       |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                       |   | **2001**                              |   | **2000**                             |   | **2001** |   | **2000** |   |
| Revenues:                                                  |   |                                  |   |                                 |   |   |   |   |   |
| Product                                                    |   | $                                     | 703    |                                 | $      | 192 |   | $ | 1,997 |   | $ | 326 |   |
| Contract                                                   |   | 1,170                                 |   | 397                                  |   | 2,854 |   | 839 |   |
| Total  revenues                                            |   | 1,873                                 |   | 589                                  |   | 4,851 |   | 1,165 |   |
|                                                       |   |                                  |   |                                 |   |   |   |   |   |
| Operating  costs and expenses:                             |   |                                  |   |                                 |   |   |   |   |   |
| Cost  of product revenues                                  |   | 3,049                                 |   | 1,467                                |   | 7,754 |   | 3,520 |   |
| Research  and development                                  |   | 2,212                                 |   | 1,490                                |   | 6,668 |   | 3,778 |   |
| Selling,  general and administrative                       |   | 1,901                                 |   | 1,335                                |   | 5,384 |   | 4,065 |   |
| Total  operating costs and expense                         |   | 7,162                                 |   | 4,292                                |   | 19,806 |   | 11,363 |   |
|                                                       |   |                                  |   |                                 |   |   |   |   |   |
| Loss  from operations                                      |   | (5,289                                | )      | (3,703                               | )      | (14,955 | ) | (10,198 | ) |
| Interest  and other income                                 |   | 140                                   |   | 375                                  |   | 566 |   | 1,190 |   |
| Interest  expense                                          |   | (26                                   | )      | (49                                  | )      | (99 | ) | (170 | ) |
| Net  loss before taxes                                     |   | (5,175                                | )      | (3,377                               | )      | (14,488 | ) | (9,178 | ) |
| Provision  for income taxes                                |   | —                                |   | —                               |   | — |   | (1 | ) |
| Net  loss                                                  |   | (5,175                                | )      | (3,377                               | )      | (14,488 | ) | (9,179 | ) |
| Dividend  accretion and deemed dividend on preferred stock |   | —                                |   | —                               |   | — |   | (8,090 | ) |
| Net  loss attributable to common stockholders              |   | $                                     | (5,175 | )                                    | $      | (3,377 | ) | $ | (14,488 | ) | $ | (17,269 | ) |
| Net  loss per share:                                       |   |                                  |   |                                 |   |   |   |   |   |
| Basic  and diluted                                         |   | $                                     | (0.28  | )                                    | $      | (0.22 | ) | $ | (0.84 | ) | $ | (1.39 | ) |
| Shares  used in per share calculations:                    |   |                                  |   |                                 |   |   |   |   |   |
| Basic  and diluted                                         |   | 18,710                                |   | 15,656                               |   | 17,150 |   | 12,452 |   |

 

The accompanying notes are an integralpart of these condensed financial statements.

 

**CONDUCTUS, INC.Condensed Statements ofCash Flows**

 

(Inthousands)(Unaudited)

 
|                                                                         |   | **Nine Months Ended September 30,** |    |
|------------------------------------------------------------------------------|--------|-------------------------------------|---------|
|                                                                         |   | **2001**                            |    | **2000** |   |
| Cash  flows from operating activities:                                       |   |                                |    |   |   |
| Net  loss                                                                    |   | $                                   | (14,488 | ) | $ | (9,179 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |   |                                |    |   |   |
| Depreciation  and amortization                                               |   | 603                                 |    | 454 |   |
| Amortization  of discount on long-term debt                                  |   | 15                                  |    | 30 |   |
| Gain  on disposal of equipment                                               |   | (80                                 | )       | (108 | ) |
| Non-cash  charge for warrants vesting upon commercial product sales          |   | 114                                 |    | 96 |   |
| Changes  in operating assets and liabilities:                                |   |                                |    |   |   |
| Accounts  receivable, net                                                    |   | (875                                | )       | 783 |   |
| Inventories,  net                                                            |   | (1,121                              | )       | (1,064 | ) |
| Prepaid  expenses and other assets                                           |   | (310                                | )       | 104 |   |
| Accounts  payable and other accrued liabilities                              |   | 1,459                               |    | (115 | ) |
| Net  cash used in operating activities                                       |   | (14,683                             | )       | (8,999 | ) |
|                                                                         |   |                                |    |   |   |
| Cash  flows from investing activities:                                       |   |                                |    |   |   |
| Maturities  of short-term investments                                        |   | 9,027                               |    | 2,142 |   |
| Purchases  of short-term investments                                         |   | (3,753                              | )       | (314 | ) |
| Acquisition  of property and equipment and deposit on capital lease          |   | (1,277                              | )       | (997 | ) |
| Net  proceeds from disposal of property and equipment                        |   | 80                                  |    | 58 |   |
| Net  cash provided by investing activities                                   |   | 4,077                               |    | 889 |   |
|                                                                         |   |                                |    |   |   |
| Cash  flows from financing activities:                                       |   |                                |    |   |   |
| Net  proceeds from issuance of common stock                                  |   | 12,143                              |    | 16,696 |   |
| Preferred  dividend payments                                                 |   | —                              |    | (502 | ) |
| Principal  payments on long-term debt and capital leases                     |   | (712                                | )       | (582 | ) |
| Net  cash provided by financing activities                                   |   | 11,431                              |    | 15,612 |   |
|                                                                         |   |                                |    |   |   |
| Net  increase in cash and cash equivalents                                   |   | 825                                 |    | 7,502 |   |
| Cash  and cash equivalents at beginning of period                            |   | 7,202                               |    | 11,957 |   |
|                                                                         |   |                                |    |   |   |
| Cash  and cash equivalents at end of period                                  |   | $                                   | 8,027   |   | $ | 19,459 |   |

 

Theaccompanying notes are an integral part of these condensed financialstatements.

**Conductus, Inc.**

 

**Notes To Condensed FinancialStatements****(Unaudited)**

**1.           Summary ofSignificant Accounting Policies:**

**UNAUDITED INTERIM FINANCIAL INFORMATION:**

             Theaccompanying unaudited interim financial statements have been prepared pursuantto the rules and regulations of the Securities and Exchange Commission. Certaininformation and footnote disclosures normally included in the financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant to suchrules and regulations. These condensed financial statements should be read inconjunction with the audited financial statements and notes thereto included inthe Company's Report on Form 10-K for the year ended December 31, 2000, andfiled with the Securities and Exchange Commission. The unaudited financialstatements as of September 30, 2001, and for the three and nine months endedSeptember 30, 2001 and 2000, reflect, in the opinion of management, alladjustments, consisting only of normal recurring adjustments, necessary topresent fairly the financial information set forth herein. The results ofoperations for the interim periods are not necessarily indicative of theresults to be expected for any subsequent interim period or for an entire year.The December 31, 2000 balance sheet was derived from audited financialstatements, but does not include all disclosures required by accountingprinciples generally accepted in the United States of America.

**RECENT PRONOUNCEMENTS:**

             InAugust 2001, the FASB issued Statement of Financial Accounting Standards No.143 (“SFAS 143”), “Accounting for Asset Retirement Obligations,” which iseffective for fiscal years beginning after June 15, 2002. This statement addresses financial accounting and reportingfor obligations associated with the retirement of tangible long-lived assetsand the associated asset retirement costs. SFAS 143 requires, among otherthings, that the retirement obligations be recognized when they are incurredand displayed as liabilities on the balance sheet. In addition, the asset’sretirement costs are to be capitalized as part of the asset’s carrying amountand subsequently allocated to expense over the asset’s useful life. The Companybelieves that the adoption of SFAS 143 will not have a significant impact onits financial statements.

In October 2001, the FASBissued Statement of Financial Accounting Standards No. 144 (“SFAS 144”),“Accounting for the Impairment or Disposal of Long-Lived Assets”, which iseffective for fiscal years beginning after December 15, 2001 and interimperiods within those fiscal years. The statement develops one accounting modelfor long-lived assets that are to be disposed of by sale, as well as addressingthe principal implementation issues. The Company believes that the adoption of SFAS 144 will not have a significantimpact on its financial statements.

 

**2.             SupplementalSchedule of Non-Cash Investing and Financing Activities:**

** **
|                                                       |   | **Nine Months Ended   September 30,** |   |
|------------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                       |   | **2001**                                   |   | **2000** |   |
| Conversion  of preferred shares to common stock            |   | —                                     |   | $ | 18,417 |   |
|                                                       |   |                                       |   |   |   |
| Conversion  of preferred dividend to common stock          |   | —                                     |   | $ | 517 |   |
|                                                       |   |                                       |   |   |   |
| Dividend  accretion and deemed dividend on preferred stock |   | —                                     |   | $ | 8,090 |   |
|                                                       |   |                                       |   |   |   |
| Equipment  acquired under capital lease                    |   | $                                          | 514    |   | — |   |
|                                                            |        |                                            |        |  |  |  |  |

**3.          Basic and Diluted Net Loss Per Share:**

             Areconciliation of the numerator and denominator of the basic and diluted lossper share is provided as follows (in thousands except per share data):                                        
|                                               |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|----------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                               |   | **2001**                              |   | **2000**                             |   | **2001** |   | **2000** |   |
| Numerator  - basic and diluted net loss per share: |   |                                  |   |                                 |   |   |   |   |   |
| Net  loss attributable to common stockholders      |   | $                                     | (5,175 | )                                    | $      | (3,377 | ) | $ | (14,488 | ) | $ | (17,269 | ) |
|                                               |   |                                  |   |                                 |   |   |   |   |   |
| Denominator  – basic and diluted net loss     |   |                                  |   |                                 |   |   |   |   |   |
| Weighted  average common shares outstanding        |   | 18,710                                |   | 15,656                               |   | 17,150 |   | 12,452 |   |
|                                               |   |                                  |   |                                 |   |   |   |   |   |
| Net  loss per share:                               |   |                                  |   |                                 |   |   |   |   |   |
| Basic  and diluted                                 |   | $                                     | (0.28  | )                                    | $      | (0.22 | ) | $ | (0.84 | ) | $ | (1.39 | ) |
|                                                    |        |                                       |        |                                      |        |  |  |  |  |  |  |  |  |  |

             Inthe above computations, dilutive potential common shares are excluded from thediluted loss per share as their effect is anti-dilutive.  Dilutive potential common shares includingcommon stock options, warrants and convertible preferred stock that couldpotentially dilute basic earnings per share in the future and that were notincluded in the computations of diluted loss per share because of anti-dilutionwere approximately 842,000 and 1,790,000 for the three months ended September30, 2001 and 2000, respectively, and 935,000 and 4,925,000 for the nine monthsended September 30, 2001 and 2000, respectively.

**5.             Inventories,net:**

             Inventories,net consist of the following (in thousands):
|             |   | **September 30, 2001** |   | **December 31, 2000** |   |
|------------------|--------|------------------------|--------|-----------------------|--------|
| Raw  materials   |   | $                      | 2,688  |                  | $      | 2,156 |   |
| Work  in process |   | 1,004                  |   | 640                   |   |
| Finished  goods  |   | 702                    |   | 477                   |   |
| Total            |   | $                      | 4,394  |                  | $      | 3,273 |   |

**6.              ****Legal Proceedings:**

OnJuly 17, 2001, ISCO International, Inc. ("ISCO") filed acomplaint in the United District Court for the District of Delaware againstConductus, Inc. (the "Company") alleging that the Company'scurrent base station front-end systems, containing cryogenically cooledsuperconducting filters, infringe ISCO's U.S. Patent No. 6,263,215,entitled "Cryoelectronically Cooled Receiver Front End for Mobile RadioSystems," which was issued on July 17, 2001.  On September 17, 2001, ISCO amended itscomplaint to allege willful infringement and to seek treble damages for thealleged infringement.  The complaintseeks injunctive relief and damages for infringement.  Conductus has denied infringement, denied that the patent isvalid and alleged that the patent was procured through inequitableconduct.  Conductus has filedcounterclaims seeking declarations of invalidity and non-infringement anddamages for unfair competition. Conductus believes that ISCO’s claims are without merit and is defendingitself vigorously.

As the litigation is inan initial stage, we are not able at this time to estimate the possibility ofloss or range of loss, if any that might result. While the outcome of thisclaim cannot be predicted with certainty, we do not believe that the outcomewill have a material adverse effect on our financial position, results ofoperations or cash flows.

*Item 2: Management's Discussion and Analysis ofFinancial Condition and Results of Operations.*

             THISREPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS ANDUNCERTAINTIES. ACTUAL RESULTS OF CONDUCTUS, INC. (THE "COMPANY" OR"CONDUCTUS") MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THEFORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" IN PART 1OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,2000. THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITEDFINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS REPORT ONFORM 10-Q.

**Overview**

             Wedevelop, manufacture and market electronic components and systems based onsuperconductors for applications in the worldwide telecommunications markets.As of September 30, 2001, we had accumulated losses of approximately$86,405,000 and we expect to incur significant additional losses during theremainder of 2001. We, alone or with collaborative partners, must successfullydevelop, manufacture, introduce and market our potential products in order toachieve profitability. We do not expect to recognize meaningful product salesuntil we successfully develop and commercialize superconductive components,systems and subsystems that address significant market needs.

**Results of Operations**

             Totalrevenues consist of contract and product revenues. Our total revenues increasedby 218% to $1,873,000 for the quarter ended September 30, 2001, from $589,000in the comparable period of 2000. Revenues for the nine-month period endedSeptember 30, 2001 were $4,851,000, which represents a 316% increase over thecomparable period of 2000.  Productrevenues for the quarter ended September 30, 2001 increased by 266% to$703,000, compared to product revenues of $192,000 for the comparable period of2000, and for the nine months ended September 30, 2001 product revenuesincreased by 513% to $1,997,000 from $326,000 for the comparable period of2000.  The increase in product revenuesis primarily due to the increase in the number of units sold and the shipmentof products with higher average selling prices during the comparisonperiods.  Product revenues for the quarter and nine months endedSeptember 30, 2001 were offset by non-cash sales discounts in the amountof $4,000 and $114,000, respectively. The non-cash sales discounts related to the fair market value of 2,800and 45,380 warrants, which vested during the three and nine months endedSeptember 30, 2001, respectively.  This compares with non-cash salesdiscounts for the three and nine months ended September 30, 2000 of $96,000, whichrelated to the fair market value of 11,200 warrants.  

Contractrevenues increased by 195% to $1,170,000 for the quarter ended September 30,2001, compared to contract revenues of $397,000 for the third quarter of2000.  For the nine months ended September 30, 2001 contract revenuesincreased 240% from $839,000 in 2000 to $2,854,000 in 2001.  The increase in contract revenues is dueprimarily to an increase in the level of activity related to new contracts,which were awarded in late 2000 and early 2001.

             Costof product revenues was primarily composed of direct costs and overhead costsrelated to our wireless telecommunications products. Cost of product revenueswas $3,049,000 for the quarter ended September 30, 2001, compared to $1,467,000for the comparable period of 2000.  Cost of product revenues was$7,754,000 for the first nine months of 2001 compared to $3,520,000 for thecomparable period of 2000.  The increaseduring the comparison periods is primarily the result of charges related towrite-downs of excess and obsolete inventory, an increase in the level ofproduct shipments and an increase in costs and expenses related to thedevelopment of the Company's manufacturing infrastructure to meet futuredemand.

             Researchand development expenses include both externally and internally fundedprojects. Research and development expenses were $2,212,000 in the quarterended September 30, 2001, compared to $1,490,000 in the comparable period ofthe prior year.   For the nine monthsended September 30, 2001 and 2000, research and development expenses were$6,668,000 and $3,778,000, respectively. Research and development expenses as a percentage of revenue for thenine months ended September 30, 2001 and 2000 were 137% and 324%,respectively.  The increase in researchand development expenses was primarily attributable to an increase in spendingon externally funded research and development contracts as well as an increasein spending on headcount, and other costs to support internally funded projectsrelated to new product development. We expect to continue to incur significantresearch and development expenses on internally funded programs as we seek todevelop additional commercial products.

             Selling,general and administrative expenses include costs associated with marketing,sales, and various administrative activities. Selling, general andadministrative expenses were $1,901,000 and $1,335,000 in the quarters endedSeptember 30, 2001 and 2000, respectively, and $5,384,000 and $4,065,000 forthe nine months ended September 30, 2001 and 2000, respectively. Selling,general and administrative expenses as a percentage of revenue for the ninemonths ended September 30, 2001 and 2000 were 111% and 349%, respectively.  The increase in spending during thecomparison periods was primarily due to increases in personnel related costs,legal expenses associated with the ISCO International, Inc. patent suit and toa lesser extent recruiting, travel and tradeshow expenses.

             Interestand other income were $140,000 and $375,000 for the three months endedSeptember 30, 2001 and 2000, respectively. For the nine months ended September30, 2001 and 2000, interest and other income were $566,000 and $1,190,000respectively.  The decrease in interestincome was primarily the result of lower average cash balances in 2001 comparedto 2000.

             Interestexpense was $26,000 and $49,000 for the three months ended September 30, 2001and 2000, respectively. For the nine months ended September 30, 2001 and 2000,interest charges were $99,000 and $170,000, respectively.  Interest charges related primarily to ourloan from an equipment leasing company. The decrease in interest expense wasprimarily the result of lower average debt levels during the comparison periods.

             Wedo not believe that inflation has had a material effect on our financialcondition or results of operations during the past two fiscal years. However,we cannot assure you that our business will not be affected by inflation in thefuture.

**Liquidity and Capital Resources**

             Asof September 30, 2001, our aggregate cash, cash equivalents and short-terminvestments, excluding $514,000 of restricted cash, totaled $10,718,000,compared to $15,167,000 as of December 31, 2000.  Additionally, wehave a bank line of credit facility that is subject to renewal at the end ofNovember 2001.  We may borrow up to amaximum of $2,000,000 under the bank line of credit based on a limitation of80% of certain eligible receivables.

             Netcash used in operations was $14,683,000 during the nine months ended September30, 2001.  This was primarily the resultof the net loss of $14,488,000 and an increase in accounts receivable andinventories of $875,000 and $1,121,000, respectively, offset by the effect ofnon-cash charges of $732,000 for depreciation, amortization and warrantsvesting upon commercial product sales and an increase in accounts payable of$1,459,000. The increase in accounts payable is principally a result ofinventory purchases of approximately $4,527,000 of inventory made to supportour projected sales during 2001 and 2002 and to secure volumediscounts.   Should actual sales for 2001 be less than ourprojections, the carrying value of inventory may be adversely affected.

We anticipate that we will incursignificant additional net losses during 2001, and accordingly we anticipatethe use of additional cash in operating activities during the remainder of2001.

             Netcash provided by investing activities was $4,077,000 during the nine monthsended September 30, 2001. This was primarily related to the proceeds from salesof short-term investments during the period, partially offset by investments inadditional property and equipment of $1,277,000. We do not anticipatesignificant spending on capital expenditures during the remainder of 2001.

             Netcash provided by financing activities was $11,431,000 during the nine monthsended September 30, 2001.  This wasprimarily the result of  $12,780,000received from the issuance of 2,556,000 shares of common stock at $5.00 pershare in June 2001, less offering expenses of approximately $857,000, partiallyoffset by principal payments on long-term debt of $712,000.

             Ourcredit arrangements contain reporting and financial covenants that we arerequired to satisfy. We cannot assure you that we will satisfy all such covenantsin the future. We cannot assure you that if we default on any of the covenants,we could obtain a waiver of the default from the lender. In the event ofdefault on any of these covenants, no further amounts would be advanced to usunder any facility, the entire amounts outstanding could become due and payableimmediately, and those assets that are collateral could be seized, unless thelender waives such default.

             Todate, we have received limited revenues from product sales. The continueddevelopment of our products will require a commitment of substantial funds toconduct further research and development and testing, to establishcommercial-scale manufacturing and to market these products. We expect to usesignificant amounts of cash for capital equipment and to support operationsuntil product revenues increase. Our future capital requirements will depend onmany factors, including:

•continued progress in our research and development programs,

•the magnitude of these programs,

•the time and cost involved in obtaining any required regulatory approvals,

•the costs involved in preparing, filing, prosecuting, maintaining and enforcingpatents,

•successful completion of technological, manufacturing and market requirements,

•changes in existing research relationships,

•the availability of funding under government contracts,

•our ability to establish collaborative arrangements, and

•the cost of manufacturing scale-up and the amount and timing of futurerevenues.

             Weanticipate that existing sources of liquidity and anticipated revenue,primarily from government contracts, will satisfy our projected working capitaland other cash requirements through the first half of 2002. However, there canbe no assurance that changes in our plans or other events affecting Conductuswill not result in depletion of our cash balances and other sources ofliquidity before then.  Based on ourexpected cash usage, we anticipate that we will require additional funds tosupport operations beyond the first half of 2002 and we are currently reviewingvarious funding alternatives.

**Recent Pronouncements:**

             InAugust 2001, the FASB issued Statement of Financial Accounting Standards No.143 (“SFAS 143”), “Accounting for Asset Retirement Obligations”, which iseffective for fiscal years beginning after June 15, 2002. This statement addresses financial accounting and reportingfor obligations associated with the retirement of tangible long-lived assetsand the associated asset retirement costs. SFAS 143 requires, among other things,that the retirement obligations be recognized when they are incurred anddisplayed as liabilities on the balance sheet. In addition, the asset’sretirement costs are to be capitalized as part of the asset’s carrying amountand subsequently allocated to expense over the asset’s useful life. The Companybelieves that the adoption of SFAS 143 will not have a significant impact onits financial statements.

In October 2001, the FASB issued Statement of Financial AccountingStandards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal ofLong-Lived Assets”, which is effective for fiscal years beginning afterDecember 15, 2001 and interim periods within those fiscal years. The statementdevelops one accounting model for long-lived assets that are to be disposed ofby sale, as well as addressing the principal implementation issues.  The Company believes that the adoption ofSFAS 144 will not have a significant impact on its financial statements.

*Item3: Quantitative and QualitativeDisclosures About Market Risk*

             Conductus’general policy is to limit the risk of principal loss and ensure the safety ofinvested funds by limiting market and credit risk.  Our exposure tofinancial market risks relates primarily to our exposure to the impact ofchanges in interest rates on our fixed income investment portfolio andlong-term debt obligations.

*Fixed Income Investments*

             Theprimary objective of our investment activities is to preserve our principalwhile maximizing yields without significantly increasing risk.  To achievethis objective, we maintain a portfolio that consists primarily of short-term,high-quality commercial paper and foreign debt.  All of our fixed incomeinvestments have maturities of less than two years.  Hence, our exposurerelated to changes in interest rates is somewhat limited due to the short-termnature of our portfolio.  We do not use derivative financial instrumentsin our investment portfolio.

*Debt Obligations*

             Conductus’outstanding debt consists of term loan obligations that are primarily based onfixed rates.  Therefore, our exposure to changes in interest rates islimited because any increase or decrease in interest rates would notsignificantly increase or decrease interest expense on our debt obligations.

**Part II:  Other Information**

*Item 1:             Legal Proceedings.*

             OnJuly 17, 2001, ISCO International, Inc. ("ISCO") filed acomplaint in the United District Court for the District of Delaware againstConductus, Inc. (the "Company") alleging that the Company'scurrent base station front-end systems, containing cryogenically cooledsuperconducting filters, infringe ISCO's U.S. Patent No. 6,263,215,entitled "Cryoelectronically Cooled Receiver Front End for Mobile RadioSystems," which was issued on July 17, 2001.  On September 17, 2001, ISCO amended itscomplaint to allege willful infringement and to seek treble damages for thealleged infringement.  The complaintseeks injunctive relief and damages for infringement.  Conductus has denied infringement, denied that the patent isvalid and alleged that the patent was procured through inequitableconduct.  Conductus has filedcounterclaims seeking declarations of invalidity and non-infringement anddamages for unfair competition. Conductus believes that ISCO’s claims are without merit and is defendingitself vigorously.

*Item 2:             Changes in Securities and use ofProceeds.*

Notapplicable.

*Item 3:*             *Default Upon Senior Securities*.

             Not Applicable.

*Item 4:*             *Submission of Matters to a Vote of Security Holders.*

             NotApplicable. 

*Item 5:             OtherInformation*.

             Not Applicable.

*Item6:*             *Exhibits andReports on Form 8-K*

(A) Exhibits 10.1      Form of Common Stock PurchaseAgreement, dated as of June 13, 2001, between the Company and the investors setforth on the signature page thereto, which is incorporated herein by referenceto the Company's report on form 8-K filed with the SEC on July 3, 2001.

(B) Reports on Form 8-K. 

             On July 3, 2001, the Company filed areport on Form 8-K, announcing under Item 5, that it had received a new equityfinancing in the amount of $12.7 million to further support thecommercialization of its Clearsite(r) products for the growing wirelesscommunications market.

             On July 23, 2001, the Company fileda report on Form 8-K, reporting that on July 17, 2001, ISCOInternational, Inc. ("ISCO") had filed a complaint in the UnitedDistrict Court for the District of Delaware against the Company, alleging thatthe Company's current base station front-end systems, containing cryogenicallycooled superconducting filters, infringe ISCO's U.S. Patent No. 6,263,215,entitled "Cryoelectronically Cooled Receiver Front End for Mobile RadioSystems.”

**SIGNATURES**

             Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                            | CONDUCTUS,  INC.                                                     |
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|                            | Registrant                                                           |
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| Dated:   November 13, 2001 | /s/  Ron Wilderink                                                   |
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|                            | Ron  Wilderink                                                       |
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|                            | Vice  President of Finance  Chief Financial Officer  and Secretary   |
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|                            | /s/  Charles E. Shalvoy                                              |
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|                            | Charles  E. Shalvoy                                                  |
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|                            | President  and Chief Executive Officer   and Duly Authorized Officer |
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