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**UnitedStatesSecurities and Exchange Commission****Washington, DC 20549**

**FORM10–Q****(Mark One)**
| **ý**                                                                                                               | **Quarterly report  pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|--------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                     |                                                                                          |
|                                                                                                                     | **For the period ended June 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 in its 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 former fiscal 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 daysYes    ý    No  o

As of July 31, 2001, there were18,705,899 shares of the registrant's common stock outstanding

Totalpages: Index to Exhibits to be found on page

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**Conductus, IncIndex**

 

| **Part I: Financial  Information** |
|------------------------------------|
|                               |   |   |
|                               | *Item 1: Financial  Statements* |
|                               |   |   |
|                               |   | Unaudited  Condensed Balance Sheets – June 30, 2001 and December 31, 2000 |
|                               |   |   |
|                               |   | Unaudited Condensed  Statements of Operations – Three and Six months ended June 30, 2001 and 2000 |
|                               |   |   |
|                               |   | Unaudited Condensed  Statements of Cash Flows – Six months ended June 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**                     |

** **

 

**Part I:  Financial Information*******Item I:  Financial Statements*

**Conductus, Inc.Condensed Balance Sheets**

(In thousands)(Unaudited)

|                                                       | **June  30, 2001**                                    |       | **December  31, 2000** |           |
|------------------------------------------------------------|-------------------------------------------------------|------------|------------------------|----------------|
|                                                       | ****                                                  | ** ** | ****                   | ** ****** |
| ASSETS                                                     |                                                  |       |                   |           |
| Current assets:                                            |                                                  |       |                   |           |
|                                                       | Cash and cash  equivalents                            | $          | 13,060                 |           | $ | 7,202 |   |
|                                                       | Short-term investments                                | 3,687      |                   | 7,965          |   |
|                                                       | Accounts receivable,  net                             | 1,329      |                   | 563            |   |
|                                                       | Inventories                                           | 4,854      |                   | 3,273          |   |
|                                                       | Prepaid expenses and  other current assets            | 366        |                   | 341            |   |
|                                                       |                                                       |       |                        |                |
|                                                       | Total current assets                                  | 23,296     |                   | 19,344         |   |
| Property and  equipment, net                               | 3,166                                                 |       | 2,135                  |           |
| Restricted cash                                            | 514                                                   |       | 514                    |           |
| Other assets                                               | 281                                                   |       | 390                    |           |
|                                                       |                                                       |       |                        |                |
|                                                       | Total assets                                          | $          | 27,257                 |           | $ | 22,383 |   |
|                                                       |                                                       |       |                        |                |
| LIABILITIES                                                |                                                  |       |                   |           |
| Current liabilities:                                       |                                                  |       |                   |           |
|                                                       | Current portion of  long-term debt and capital leases | $          | 160                    |           | $ | 597 |   |
|                                                       | Accounts payable                                      | 2,974      |                   | 1,477          |   |
|                                                       | Other accrued  liabilities                            | 2,203      |                   | 1,523          |   |
|                                                       |                                                       |       |                        |                |
|                                                       | Total current  liabilities                            | 5,337      |                   | 3,597          |   |
| Long-term debt and  capital leases, net of current portion | 292                                                   |       | —                 |           |
|                                                       |                                                       |       |                        |                |
|                                                       | Total liabilities                                     | 5,629      |                   | 3,597          |   |
|                                                       |                                                       |       |                        |                |
|                                                       |                                                  |       |                   |           |
| STOCKHOLDERS’ EQUITY                                  |                                                  |       |                   |           |
|                                                       | Common stock                                          | 2          |                   | 2              |   |
|                                                       | Additional paid-in  capital                           | 103,316    |                   | 91,161         |   |
|                                                       | Receivable from  stockholder                          | (460       | )                      | (460           | ) |
|                                                       | Accumulated deficit                                   | (81,230    | )                      | (71,917        | ) |
|                                                       | Total stockholders’  equity                      | 21,628     |                   | 18,786         |   |
|                                                       |                                                       |       |                        |                |
|                                                       | Total liabilities and  stockholders’ equity      | $          | 27,257                 |           | $ | 22,383 |   |
|                                                       |                                                       |       |                        |                |
|                                                            |                                                       |            |                        |                |  |  |  |  |

Theaccompanying notes are an integral part of these condensed financialstatements.

**Conductus, Inc.Condensed Statements Of Operations**

(In thousands except per share amounts)(Unaudited)

** **

|                                    | **Three  Months Ended June 30,**                           |   | **Six  Months Ended June 30,** |   |
|-----------------------------------------|------------------------------------------------------------|--------|--------------------------------|--------|
|                                    | ****                                                       |   | ****                           |   |
|                                    | **2001**                                                   |   | **2000**                       |   | **2001** |   | **2000** | ** ** |
|                                    | ****                                                       |   | ****                           |   | **** |   | **** |   |
| Revenues:                               |                                                       |   |                           |   |   |   |   |   |
|                                    | Product                                                    | $      | 752                            |   | $ | 46 |   | $ | 1,294 |   | $ | 134 |   |
|                                    | Contract                                                   | 954    |                           | 191    |   | 1,684 |   | 442 |   |
|                                    |                                                            |   |                                |   |  |   |  |   |
|                                    | Total revenues                                             | 1,706  |                           | 237    |   | 2,978 |   | 576 |   |
|                                    |                                                            |   |                                |   |  |   |  |   |
| Operating costs and  expenses:          |                                                       |   |                           |   |   |   |   |   |
|                                    | Cost of product  revenue                                   | 2,671  |                           | 1,352  |   | 4,705 |   | 2,053 |   |
|                                    | Research and  development                                  | 2,195  |                           | 1,207  |   | 4,456 |   | 2,288 |   |
|                                    | Selling, general and  administrative                       | 1,821  |                           | 1,520  |   | 3,483 |   | 2,730 |   |
|                                    |                                                            |   |                                |   |  |   |  |   |
|                                    | Total operating costs  and expense                         | 6,687  |                           | 4,079  |   | 12,644 |   | 7,071 |   |
|                                    |                                                            |   |                                |   |  |   |  |   |
|                                    |                                                       |   |                           |   |   |   |   |   |
|                                    | Loss from operations                                       | (4,981 | )                              | (3,842 | ) | (9,666 | ) | (6,495 | ) |
|                                    | Interest and other  income                                 | 197    |                           | 456    |   | 425 |   | 815 |   |
|                                    | Interest expense                                           | (32    | )                              | (57    | ) | (72 | ) | (121 | ) |
|                                    |                                                       |        |                           |        |   |  |   |  |   |
|                                    | Net loss before taxes                                      | (4,816 | )                              | (3,443 | ) | (9,313 | ) | (5,801 | ) |
|                                    | Provision for income  taxes                                | — |                           | (1     | ) | — |   | (1 | ) |
|                                    |                                                            |   |                                |   |  |   |  |   |
|                                    | Net loss                                                   | (4,816 | )                              | (3,444 | ) | (9,313 | ) | (5,802 | ) |
|                                    | Dividend accretion and  deemed dividend on preferred stock | — |                           | (5,075 | ) | — |   | (8,090 | ) |
|                                    |                                                            |   |                                |   |  |   |  |   |
|                                    | Net loss attributable  to common stockholders              | $      | (4,816                         | )      | $ | (8,519 | ) | $ | (9,313 | ) | $ | (13,892 | ) |
|                                    |                                                       |        |                           |        |   |  |   |  |   |
| Net loss per share:                     |                                                       |   |                           |   |   |   |   |   |
|                                    | Basic and diluted                                          | $      | (0.29                          | )      | $ | (0.70 | ) | $ | (0.57 | ) | $ | (1.28 | ) |
|                                    |                                                            |   |                                |   |  |   |  |   |
| Shares used in per  share calculations: |                                                       |   |                           |   |   |   |   |   |
|                                    | Basic and diluted                                          | 16,626 |                           | 12,126 |   | 16,358 |   | 10,831 |   |
|                                    |                                                            |   |                                |   |  |   |  |   |
|                                         |                                                            |        |                                |        |  |  |  |  |  |  |  |  |  |  |  |

Theaccompanying notes are an integral part of these condensed financialstatements.

 

 

**CONDUCTUS, INC.Condensed Statements of Cash Flows**

(In thousands)(Unaudited)

|                                              | **Six  Months Ended June 30,**                                               |   |
|---------------------------------------------------|------------------------------------------------------------------------------|--------|
|                                              | ****                                                                         |   |
|                                              | **2001**                                                                     |   | **2000** | ** ** |
|                                              | ****                                                                         |   | **** |   |
| Cash flows from  operating activities:            |                                                                         |   |   |   |
|                                              | Net loss                                                                     | $      | (9,313 | ) | $ | (5,802 | ) |
|                                              | Adjustments to  reconcile net loss to net cash used in operating activities: |   |   |   |   |
|                                              | Depreciation and  amortization                                               | 378    |   | 303 |   |
|                                              | Amortization of  discount on long term debt                                  | 14     |   | 20 |   |
|                                              | Gain on disposal of  equipment                                               | (80    | ) | — |   |
|                                              | Non-cash charge for  warrants vesting upon commercial product sales          | 110    |   | — |   |
| Changes in operating  assets and liabilities:     |                                                                         |   |   |   |
|                                              | Accounts receivable                                                          | (766   | ) | 1,079 |   |
|                                              | Inventories                                                                  | (1,581 | ) | (1,627 | ) |
|                                              | Prepaid expenses and  other current assets                                   | 44     |   | 126 |   |
|                                              | Accounts payable and  other accrued liabilities                              | 2,177  |   | (103 | ) |
|                                              |                                                                              |   |  |   |
|                                              | Net cash used in  operating activities                                       | (9,017 | ) | (6,004 | ) |
|                                              |                                                                         |        |   |  |   |
| Cash flows from  investing activities:            |                                                                         |   |   |   |
|                                              | Maturities of  short-term investments                                        | 8,027  |   | 2,142 |   |
|                                              | Purchases of short-term  investments                                         | (3,750 | ) | (21 | ) |
|                                              | Acquisition of  property and equipment                                       | (852   | ) | (495 | ) |
|                                              | Net proceeds from  disposal of property and equipment                        | 80     |   | — |   |
|                                              |                                                                              |   |  |   |
|                                              | Net cash provided by  investing activities                                   | 3,505  |   | 1,626 |   |
|                                              |                                                                              |   |  |   |
| Cash flows from  financing activities:            |                                                                         |   |   |   |
|                                              | Net proceeds from  issuance of common stock                                  | 12,044 |   | 15,364 |   |
|                                              | Principal payments on  long-term debt and capital leases                     | (674   | ) | (381 | ) |
|                                              |                                                                         |        |   |  |   |
|                                              | Net cash provided by  financing activities                                   | 11,370 |   | 14,983 |   |
|                                              |                                                                              |   |  |   |
|                                              | Net increase in cash and  cash equivalents                                   | 5,858  |   | 10,605 |   |
| Cash and cash  equivalents at beginning of period | 7,202                                                                        |   | 11,957 |   |
|                                              |                                                                              |   |  |   |
| Cash and cash  equivalents at end of period       | $                                                                            | 13,060 |   | $ | 22,562 |   |
|                                              |                                                                              |   |  |   |
|                                                   |                                                                              |        |  |  |  |  |  |  |

The accompanying notes are an integral part of thesecondensed financial statements.

**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 June 30, 2001, and for the three and six months ended June 30,2001 and 2000, reflect, in the opinion of management, all adjustments,consisting only of normal recurring adjustments, necessary to present fairlythe financial information set forth herein. The results of operations for theinterim periods are not necessarily indicative of the results to be expectedfor any subsequent interim period or for an entire year. The December 31, 2000,balance sheet was derived from audited financial statements, but does notinclude all disclosures required by generally accepted accounting principles.

**RECENT PRONOUNCEMENTS:**

             InJuly 2001, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards No. 141 (“SFAS 141”), “BusinessCombinations.” SFAS 141 requires the purchase method of accounting for businesscombinations initiated after June 30, 2001 and eliminates thepooling-of-interests method. The Company believes that the adoption of SFAS 141will not have a significant impact on its financial statements.

             InJuly 2001, the FASB issued Statement of Financial Accounting Standards No. 142(“SFAS 142”), “Goodwill and Other Intangible Assets”, which is effective forfiscal years beginning after March 15, 2001. SFAS 142 requires, among otherthings, the discontinuance of goodwill amortization. In addition, the standardincludes provisions upon adoption for the reclassification of certain existingrecognized intangibles as goodwill, reassessment of the useful lives ofexisting recognized intangibles, reclassification of certain intangibles out ofpreviously reported goodwill and the testing for impairment of existinggoodwill and other intangibles. The Company believes that the adoption of SFAS141 will not have a significant impact on its financial statements.

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

** **

|                                                       |   | **Six  Months Ended   June 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   June 30,**            |   | **Six  Months Ended   June 30,** |   |
|----------------------------------------------------|-----------------------------------------------|--------|----------------------------------|--------|
|                                               | **2001**                                      |   | **2000**                         |   | **2001** |   | **2000** |   |
|                                               | ****                                          |   | ****                             |   | **** |   | **** |   |
| Numerator - basic and  diluted net loss per share: |                                          |   |                             |   |   |   |   |   |
|                                               | Net loss attributable  to common stockholders | $      | (4,816                           | )      | $ | (8,519 | ) | $ | (9,313 | ) | $ | (13,892 | ) |
|                                               |                                               |   |                                  |   |  |   |  |   |
|                                               |                                          |   |                             |   |   |   |   |   |
| Denominator – basic  and diluted net loss     |                                          |   |                             |   |   |   |   |   |
|                                               | Weighted average  common shares outstanding   | 16,626 |                             | 12,126 |   | 16,358 |   | 10,831 |   |
|                                               |                                               |   |                                  |   |  |   |  |   |
|                                               |                                          |   |                             |   |   |   |   |   |
| Net loss per share:                                |                                          |   |                             |   |   |   |   |   |
|                                               | Basic and diluted                             | $      | (0.29                            | )      | $ | (0.70 | ) | $ | (0.57 | ) | $ | (1.28 | ) |
|                                               |                                               |   |                                  |   |  |   |  |   |

             Inthe above computations, potentially dilutive common equivalent shares areexcluded from the diluted loss per share as their effect is anti-dilutive.Common equivalent shares including common stock options, warrants andconvertible preferred stock that could potentially dilute basic earnings pershare in the future and that were not included in the computations of dilutedloss per share because of anti-dilution were approximately 925,000 and5,235,000 for the three months ended June 30, 2001 and 2000, respectively and1,016,000 and 6,494,000 for the six months ended June 30, 2001 and 2000,respectively.

**5.          Inventories:**

             Inventoriesconsist of the following (in thousands):

|            | **June  30,** **2001** |   | **December  31,   2000** |   |
|-----------------|-----------------------------|--------|--------------------------|--------|
|            | ****                        |   | ****                     |   |
| Raw materials   | $                           | 2,986  |                     | $      | 2,156 |   |
| Work in process | 1,201                       |   | 640                      |   |
| Finished goods  | 667                         |   | 477                      |   |
|            |                             |   |                          |   |
|            | Total                       | $      | 4,854                    |   | $ | 3,273 |   |
|            |                             |   |                          |   |
|                 |                             |        |                          |        |  |  |  |

**6.          Stockholders Equity:**

             InJune, 2001 the Company completed a private placement of 2,556,000 at $5.00 pershare.  After deducting commissions andexpenses the company received proceeds of $11.9 million.

**7.          SubsequentEvent:**

             OnJuly 17, 2001, ISCO International filed a complaint in U.S. District Court forthe District of Delaware alleging that Conductus’ ClearSite products infringeits U.S. patent 6,263,215.  Thecomplaint seeks a preliminary and permanent injunction, unspecified damages andattorneys’ fees.  On August 6, 2001,Conductus answered the complaint and filed counterclaims for declaratoryjudgments of non-infringement and invalidity. After review of the patent andother relevant facts, Conductusbelieves that it does not infringe any valid claim of the patent.  However, the outcome of complex litigationis uncertain and cannot be predicted. Any adverse result in this litigation could have a material adverseeffect on our financial condition and results of operations.

*Item 2: Management'sDiscussion and Analysis of Financial Condition and Results of Operations**.*

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

**Overview**

             Wedevelop, manufacture and market electronic components and systems based onsuperconductors for applications in the worldwide telecommunications markets.As of June 30, 2001, we had accumulated losses of approximately $81,230,000 andwe expect to incur significant additional losses during the remainder of 2001.We, alone or with collaborative partners, must successfully develop, manufacture,introduce and market our potential products in order to achieve profitability.We do not expect to recognize meaningful product sales until we successfullydevelop and commercialize superconductive components, systems and subsystemsthat address significant market needs.**Resultsof Operations**
             Totalrevenues consist of contract and product revenues. Our total revenues increasedby 620% to $1,706,000 for the quarter ended June 30, 2001, from $237,000 in thecomparable period of 2000. Revenues for the six-month period ended June 30,2001 were $2,978,000, which represents a 417% increase over the comparableperiod of 2000.  Product revenues forthe quarter ended June 30, 2001 increased by 1535% to $752,000, compared toproduct revenues of $46,000 for the comparable period of 2000, and for the sixmonths ended June 30, 2001 product revenues increased by 866% to $1,294,000from $134,000 for the comparable period of 2000.  The increase in product revenues is primarily due to increasedunit shipments during the comparison periods.  Product revenues for thequarter and six months ended June 30, 2001, were offset by non-cash salesdiscounts in the amount of $70,000 and $110,000, respectively.  The non-cash sales discounts related to thefair market value of 26,820 and 42,580 warrants, which vested during the secondquarter and first half of 2001, respectively.  Contract revenues increasedby 399% to $954,000, compared to contract revenues of $191,000 for the secondquarter of 2000.  For the six months ended June 30, 2001 contract revenuesincreased 281% to $1,684,000 over the comparable period of 2000.  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 sales was primarily composed of costs of products related to ourwireless telecommunications products. Cost of product sales was $2,671,000 forthe quarter ended June 30, 2001, compared to $1,352,000 for the comparableperiod of 2000.  Cost of product sales was $4,705,000 for the first sixmonths of 2001 compared to $2,053,000 for the comparable period of 2000.  This increase in cost and correspondingdecrease in gross margin is primarily attributable to an increase in expensesrelating to continued development of the Company's manufacturing infrastructureto meet future demand, increased product shipments, and to a lesser extent to awrite-off of obsolete inventory.

             Researchand development expenses include both externally and internally fundedprojects. Research and development expenses were $2,195,000 in the quarterended June 30, 2001, compared to $1,207,000 in the comparable period of theprior year.   For the six months endedJune 30, 2001 and 2000 research and development expenses were $4,456,000 and$2,288,000, respectively.  Research anddevelopment as a percentage of revenue for the six months ended June 30, 2001and 2000 were 150% and 397%, respectively. The increase in research and development expenses was primarilyattributable to an increase in personnel related spending due to increasedheadcount, increased spending on internally funded projects related to newproduct development and an increase in spending on externally funded researchand development contracts. We expect to continue to incur significant researchand development expenses on internally funded programs as we seek to developadditional commercial products and, as a result, anticipate increases inresearch and development expenses compared to the prior year.

             Selling,general and administrative expenses include costs associated with marketing,sales, and various administrative activities. Selling, general andadministrative expenses were $1,821,000 and $1,520,000 in the quarters endedJune 30, 2001 and 2000, respectively and $3,483,000 and $2,730,000 for thesix-month period ended June 30, 2001 and 2000, respectively. The increase inspending was primarily due to increases in sales, marketing and administrativeheadcount, recruiting costs, travel and tradeshow expenses compared to theprior year. We expect sales and marketing expenses to continue to increaseduring 2001 to the extent we increase sales of commercial products.

             Interestand other income were $197,000 and $456,000 for the three months ended June 30,2001 and 2000, respectively. For the six months ended June 30, 2001 and 2000interest and other income were $425,000 and $815,000 respectively.  The decrease in interest income wasprimarily the result of lower average cash balances in 2001 compared to 2000.

             Interestexpense was $32,000 and $57,000 for the three months ended June 30, 2001 and2000, respectively. For the six months ended June 30, 2001 and 2000 interestcharges were $72,000 and $121,000, respectively.  Interest charges related primarily to our loan from a leasingcompany. The decrease in interest expense was primarily the result of loweraverage 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 June 30, 2001, our aggregate cash, cash equivalents and short-terminvestments, excluding $514,000 of restricted cash, totaled $16,748,000,compared to $15,167,000 as of December 31, 2000.  Additionally, wehave entered into a bank line of credit facility.  The bank line of creditis subject to renewal in November 2001. We may borrow up to a maximum of $2,000,000 under the bank line ofcredit based on a limitation of 80% of certain eligible receivables.

             Netcash used in operations was $9,017,000 during the six months ended June 30,2001. Net cash used in operations was primarily the result of the net loss of$9,313,000 and an increase in accounts receivable and inventories of $766,000and $1,581,000, respectively.  Net cash from operations was partiallyoffset by the effect of non-cash charges of $502,000 for depreciation, amortizationand warrants vesting upon commercial product sales and an increase in accountspayable of  $2,177,000 during the first six months of 2001. We anticipatethat we will incur significant additional net losses during 2001 and anticipatethat our accounts receivable may increase during 2001. As a result, weanticipate the use of additional cash in operating activities during theremainder of 2001.  We have purchased inventory during the first sixmonths of 2001 to support our projected sales during 2001 and 2002 and tosecure volume discounts.  The increase in accounts payable is principallya result of inventory purchases.  Should actual sales for 2001 be lessthan our projections, the carrying value of inventory may be adverselyaffected.

             Netcash provided by investing activities was $3,505,000 during the six monthsended June 30, 2001. The balance was primarily related to the proceeds fromsales of short-term investments during the period partially offset byinvestments in additional property and equipment of $852,000. We anticipatesignificant spending on capital expenditures during the remainder of 2001.

             Netcash provided  by financing activitieswas $11,370,000 during the six months ended June 30, 2001, and was primarilythe result of  $12,700,000 less offeringexpenses of approximately $857,000 received from the issuance of 2,540,000shares of common stock at $5.00 per share in June 2001 partially offset byprincipal payments on long-term debt.

             Ourcredit arrangements contain reporting and financial covenants that we arerequired to satisfy. We cannot assure you that we will satisfy all suchcovenants in the future. We cannot assure you that if we default on any of thecovenants, we could obtain a waiver of the default from the lender. In theevent of default on any of these covenants, no further amounts would beadvanced to us under any facility, the entire amounts outstanding could becomedue and payable immediately, and those assets that are collateral could beseized, unless the lender 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 next 12 months. However, there can beno assurance that changes in our plans or other events affecting Conductus willnot result in the expenditure of our resources before then.

**Recent Prouncements:**

             InJuly 2001, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards No. 141 (“SFAS 141”), “BusinessCombinations.” SFAS 141 requires the purchase method of accounting for businesscombinations initiated after June 30, 2001 and eliminates thepooling-of-interests method. The Company believes that the adoption of SFAS 141will not have a significant impact on its financial statements.

             InJuly 2001, the FASB issued Statement of Financial Accounting Standards No. 142(“SFAS 142”), “Goodwill and Other Intangible Assets”, which is effective forfiscal years beginning after March 15, 2001. SFAS 142 requires, among otherthings, the discontinuance of goodwill amortization. In addition, the standardincludes provisions upon adoption for the reclassification of certain existing recognizedintangibles as goodwill, reassessment of the useful lives of existingrecognized intangibles, reclassification of certain intangibles out ofpreviously reported goodwill and the testing for impairment of existinggoodwill and other intangibles. The Company believes that the adoption of SFAS141 will not have a significant impact on its financial statements.

*Item3: Quantitative and Qualitative Disclosures 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 is limitedbecause any increase or decrease in interest rates would not significantlyincrease or decrease interest expense on our debt obligations.

 

**Part II:  OtherInformation** 

*Item 1:              LegalProceedings. *

             Not applicable.

*Item 2:              Changesin Securities**and useof Proceeds.*

On June 13, 2001, theCompany completed a privateplacement of 2,556,000 shares of its common stock to selected institutional and otheraccredited investors.  Such issuance wasexempt from registration under the Security Act of 1933, as amended, pursuantto Rule 506 of Regulation D thereof because there were no more than 35purchasers and the terms and conditions of Rules 501 and 502 were met.  No underwriters were involved and nounderwriter discount or commissions were involved.  The aggregate offering price was $12,780,000.  Commissions and finders fees totaled$585,000, resulting in a net to the Company of approximately $12 million.  On July 6, 2001, the Company filed aregistration statement on Form S-3 to register the shares sold in the privateplacement, as well as shares that would issue from the exercise of a warrantissued in a separate transaction.  Theregistration statement became effective on July 17, 2001.

*Item3:*             *Default Upon Senior Securities*.

             Not Applicable.

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

             The Annual Meeting of Stockholders was held on May 24,2001.

 (a) The meeting included the election of the Board of Directors, submittedas Proposal No. 1, whose names are as follows:

John F. Shoch, Ph.D.Robert M. JanowiakMartin A. KaplanCharles E. ShalvoyDavid L. Short

 (b) Other matters voted upon at the stockholders meeting were:

Proposal No. 2:  Approval of amendment to and restatement ofthe Company's Restated Certificate of Incorporation to increase the number ofshares of Common Stock authorized to be issued from 25,000,000 to 40,000,000;

Proposal No. 3:  Adoption of the Company's 2001 StockOption/Stock Issuance Plan

Proposal No. 4:  Ratification of the selection ofPricewaterhouseCoopers LLP as the Company's independent auditors for the yearended December 31, 2001.

Shares of common stockvoted as follows:

 
   **Votes  For** **Votes  Withheld**    **** ****  Proposal  No. 1      (Election  of Board of Directors)       John  F. Shoch14,999,028 255,275   Robert  M. Janowiak14,995,878 258,425   Martin  A. Kaplan14,997,378 256,925   Charles  E. Shalvoy14,820,978 433,325   David  L. Short14,993,678 260,625 
 

 
    **Votes For****Votes Against****Abstaining**      Proposal No. 2      (Amendment and restatement of the Company’s  Restated Certificate of Incorporation to increase the number of shares of common stock authorized to be issued from 25,000,000 to  40,000,000) 14,039,0991,206,0059,199         Proposal No. 3      (Adoption  of the Company's 2001 Stock Option/Stock Issuance Plan): 6,03,6711,912,0877,226,875         ProposalNo. 4      (Approval of the selection of  PriceWatershouse-Coopers to serve as the Company's independent auditors for  the fiscal year ending December 31, 2001) 15,175,14868,77910,376
 

*Item5:              Other Information*.

             Not Applicable.

 

*Item6:*             *Exhibits and Reports 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. 

             TheCompany filed no reports on Form 8-K during the quarter for which this reportis filed.

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