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

**FORM 10-Q/A**

**(Mark One)**

**ý****    Quarterly reportpursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for thethree month period ended March 31, 2002 or**

**o****    Transition reportpursuant 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) |

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days Yes  ý No  o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicatethe number of shares outstanding of each of the issuer’s classes of CommonStock, as of the latest practicable date.

Commonshares outstanding at June 28, 2002: 22,510,401

 

 

----

 

**Conductus, IncIndex**

 
| **Part I: Financial  Information** |                                                                                                         |
|------------------------------------|--------------------------------------------------------------------------------------------------------------|
|                               |                                                                                                         |
|                               | *Item 1: Financial  Statements*                                                                              |
|                               |                                                                                                         |
|                               | Unaudited  Condensed Balance Sheets — March 31, 2002 and  December 31, 2001                        |
|                               |                                                                                                         |
|                               | Unaudited Condensed  Statements of Operations — Three months ended March 31, 2002 and  2001        |
|                               |                                                                                                         |
|                               | Unaudited Condensed  Statements of Cash Flows                                                                |
|                               |                                                                                                         |
|                               | 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**                     |                                                                                                         |
|                                    |                                                                                                              |  |  |

 

2

----

PartI:  Financial Information*ItemI:  Financial Statements*

**Conductus, Inc.**

**Condensed Balance Sheets**

**(In thousands)**

**(Unaudited)**
|                                             |   | **March 31, 2002** |   | **December 31, 2001** |   |
|--------------------------------------------------|--------|--------------------|--------|-----------------------|--------|
| ASSETS                                           |   |               |   |                  |   |
| Current assets:                                  |   |               |   |                  |   |
| Cash and cash  equivalents                       |   | $                  | 8,549  |                  | $      | 4,201 |   |
| Short-term  investments                          |   | 2,251              |   | 2,696                 |   |
| Accounts  receivable, net                        |   | 1,498              |   | 1,151                 |   |
| Inventories                                      |   | 3,588              |   | 3,835                 |   |
| Prepaid expenses  and other current assets       |   | 361                |   | 349                   |   |
| Total current  assets                            |   | 16,247             |   | 12,232                |   |
| Property and  equipment, net                     |   | 2,830              |   | 3,033                 |   |
| Restricted cash                                  |   | 374                |   | 374                   |   |
| Other assets                                     |   | 563                |   | 587                   |   |
| Total assets                                     |   | $                  | 20,014 |                  | $      | 16,226 |   |
| LIABILITIES                                      |   |               |   |                  |   |
| Current  liabilities:                            |   |               |   |                  |   |
| Current portion  of long-term debt               |   | $                  | 174    |                  | $      | 169 |   |
| Accounts payable                                 |   | 1,368              |   | 725                   |   |
| Accrued  liabilities                             |   | 2,075              |   | 1,909                 |   |
| Total current  liabilities                       |   | 3,617              |   | 2,803                 |   |
| Long-term debt,  net of current portion          |   | 160                |   | 205                   |   |
| Total  liabilities                               |   | 3,777              |   | 3,008                 |   |
|                                             |   |               |   |                  |   |
| STOCKHOLDERS’  EQUITY                       |   |               |   |                  |   |
| Common stock                                     |   | 2                  |   | 2                     |   |
| Additional  paid-in capital                      |   | 110,479            |   | 103,590               |   |
| Receivable from  stockholder                     |   | (460               | )      | (460                  | )      |
| Accumulated  deficit                             |   | (93,784            | )      | (89,914               | )      |
| Total  stockholders’ equity                 |   | 16,237             |   | 13,218                |   |
| Total  liabilities and stockholders’ equity |   | $                  | 20,014 |                  | $      | 16,226 |   |

The accompanying notes are an integral part of theseunaudited condensed financial statements.

 

3

----

 

**Conductus, Inc.**

**Condensed Statements Of Operations**

**(In thousands, except per shareamounts)(Unaudited)**
|                                    |   | **Three Months Ended March 31,** |   |
|-----------------------------------------|--------|----------------------------------|--------|
|                                    |   | **2002**                         |   | **2001** |   |
|                                    |   |                             |   |   |   |
| Revenues:                               |   |                             |   |   |   |
| Product                                 |   | $                                | 1,024  |   | $ | 542 |   |
| Contract                                |   | 943                              |   | 730 |   |
| Total revenues                          |   | 1,967                            |   | 1,272 |   |
|                                    |   |                             |   |   |   |
| Costs and  expenses:                    |   |                             |   |   |   |
| Cost of product  revenues               |   | 1,660                            |   | 2,034 |   |
| Research and  development               |   | 2,061                            |   | 2,261 |   |
| Selling, general  and administrative    |   | 2,147                            |   | 1,662 |   |
| Total costs and  expense                |   | 5,868                            |   | 5,957 |   |
|                                    |   |                             |   |   |   |
| Loss from  operations                   |   | (3,901                           | )      | (4,685 | ) |
| Interest and  other income              |   | 58                               |   | 229 |   |
| Interest expense                        |   | (27                              | )      | (41 | ) |
| Net loss                                |   | $                                | (3,870 | ) | $ | (4,497 | ) |
|                                    |   |                             |   |   |   |
| Net loss per  share:                    |   |                             |   |   |   |
| Basic and  diluted                      |   | $                                | (0.20  | ) | $ | (0.28 | ) |
|                                    |   |                             |   |   |   |
| Shares used in  per share calculations: |   |                             |   |   |   |
| Basic and  diluted                      |   | 19,039                           |   | 16,087 |   |

The accompanying notes are an integral part of theseunaudited condensed financial statements.

 

4

----

 

**CONDUCTUS, INC.**

**Condensed Statements of Cash Flows**

(In thousands)

(Unaudited)
|                                                                         |   | **Three Months Ended March 31,** |   |
|------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                         |   | **2002**                         |   | **2001** |   |
| Cash flows from  operating activities:                                       |   |                             |   |   |   |
| Net loss                                                                     |   | $                                | (3,870 | ) | $ | (4,497 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                             |   |   |   |
| Depreciation and  amortization                                               |   | 260                              |   | 188 |   |
| Amortization of  discount on long term debt                                  |   | 15                               |   | 10 |   |
| Loss/(Gain) on  disposal of equipment                                        |   | 2                                |   | (20 | ) |
| Non-cash charge  for warrants vesting upon commercial product sales          |   | 6                                |   | 40 |   |
| Changes in operating  assets and liabilities:                                |   |                             |   |   |   |
| Accounts  receivable                                                         |   | (347                             | )      | (422 | ) |
| Inventories                                                                  |   | 247                              |   | (1,752 | ) |
| Prepaid expenses  and other assets                                           |   | (11                              | )      | (80 | ) |
| Accounts payable  and accrued liabilities                                    |   | 809                              |   | 2,170 |   |
| Net cash used in  operating activities                                       |   | (2,889                           | )      | (4,363 | ) |
| Cash flows from  investing activities:                                       |   |                             |   |   |   |
| Maturities of  short-term investments                                        |   | 450                              |   | 6,365 |   |
| Purchases of  short-term investments                                         |   | (5                               | )      | — |   |
| Acquisition of  property and equipment                                       |   | (51                              | )      | (238 | ) |
| Net proceeds  from disposal of property and equipment                        |   | —                           |   | 20 |   |
| Net cash  provided by investing activities                                   |   | 394                              |   | 6,147 |   |
| Cash flows from  financing activities:                                       |   |                             |   |   |   |
| Net proceeds  from issuance of common stock                                  |   | 6883                             |   | 27 |   |
| Principal  payments on long-term debt                                        |   | (40                              | )      | (240 | ) |
| Net cash  provided by (used in) financing activities                         |   | 6,843                            |   | (213 | ) |
| Net increase in  cash and cash equivalents                                   |   | 4,348                            |   | 1,571 |   |
| Cash and cash  equivalents at beginning of period                            |   | 4,201                            |   | 7,202 |   |
| Cash and cash  equivalents at end of period                                  |   | $                                | 8,549  |   | $ | 8,773 |   |

The accompanying notes are an integral part of theseunaudited condensed financial statements.

 

5

----

 

**Conductus, Inc.**

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

**1.         Summary of Significant Accounting Policies:**

**UNAUDITED INTERIM FINANCIAL INFORMATION:**

            The accompanying unaudited interim condensed financial statements have beenprepared pursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosures normally included inthe financial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to such rules and regulations. These unaudited condensed financialstatements should be read in conjunction with the audited financial statementsand notes thereto included in the Company’s Report on Form 10-K for the yearended December 31, 2001, and filed with the Securities and Exchange Commission.The unaudited condensed financial statements as of March 31, 2002, and for thethree months ended March 31, 2002 and 2001, include, in the opinion ofmanagement, all adjustments, consisting of normal recurring adjustments,necessary to present fairly the financial information set forth herein. Theunaudited condensed results of operations for the interim periods are notnecessarily indicative of the results to be expected for an entire year. TheDecember 31, 2001 balance sheet included in this unaudited interim report was derivedfrom audited financial statements, but does not include all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica.

**Substantial Future Capital Needs**

In March 2002, the Company received gross proceeds of$7.3 million upon the completion of the private placement of 3,650,000 sharesof common stock at a price of $2.00 per share. In connection with thetransaction, the Company also issued warrants to purchase an additional1,825,000 shares of its common stock at an exercise price of $2.75 pershare.  After deducting commissions andexpenses, the Company received proceeds of approximately $6.9 million from thistransaction.

The Company’s future capitalrequirements will depend, generally, on its levels of revenue and spending. TheCompany believes its cash balance at March 31, 2002, together with its $2million bank credit facility, should be sufficient to fund anticipated cashrequirements through December 2002. 

Based on current revenue,cost and expense expectations, the Company believes it will need to raiseadditional capital through equity or other financing transactions in order tofund operations beyond 2002.  TheCompany currently expects to raise additional capital through equityfinancing.  The terms of any futureequity financing are presently uncertain, as they depend upon its financialperformance through the time of the financing, as well as the general conditionof the market for equity financing for companies such as Conductus, but itexpects that they may be similar to the terms of the March 2002transaction.  

Should the terms of aprospective equity financing be unattractive, or should equity financing beunavailable on any terms, the Company has several options designed to forestallits inability to continue as a going concern and, it hopes, allow it tocomplete an equity financing at a later date on more attractive terms.   These options include reducing currentoperating costs and deferring planned discretionary expenditures, such ascapital expenditures, sales of assets, or a strategic transaction involving ourintellectual property.

Because its future needs forcash and its future ability to raise financing involve significantuncertainties regarding future events, including its level of operatingperformance and the general condition of the market for equity financing, theCompany’s planned course of action could change rapidly.  It is continually reevaluating its plans andexpects to be prepared to take action promptly when appropriate.  However, there can be no assurance thatunforeseen events will not deplete its cash resources sooner than it expects orthat additional financing will become available on acceptable terms or atall.  Unless it is able to raisesignificant additional funds through issuance of new equity or debt, it may berequired to obtain funds through a strategic transaction on unfavorable termsor to delay, reduce or eliminate one or more of our research and developmentprograms.

                Thefinancial statements have been prepared assuming that the Company will continueas a going concern. The financial statements do not include any adjustmentsthat might be necessary if it is unable to continue as a going concern or thatmay result from the outcome of any of these uncertainties.

**2.         Supplemental Schedule of Non-Cash Investing and Financing Activities:**
|                                    |   | **Three Months Ended March 31,** |   |
|-----------------------------------------|--------|----------------------------------|--------|
|                                    |   | **2002**                         |   | **2001** |   |
| Equipment  acquired under capital lease |   | —                           |   | 514 |   |
|                                    |   |                             |   |   |   |

** **

6

----

 

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

            A reconciliation 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 March 31,** |   |
|---------------------------------------------------------|--------|----------------------------------|--------|
|                                                    |   | **2002**                         |   | **2001** |   |
| Numerator —  basic and diluted net loss per share: |   |                             |   |   |   |
| Net loss                                                |   | $                                | (3,870 | ) | $ | (4,497 | ) |
|                                                    |   |                             |   |   |   |
| Denominator —  basic and diluted net loss          |   |                             |   |   |   |
| Weighted average  common shares outstanding             |   | 19,039                           |   | 16,087 |   |
|                                                    |   |                             |   |   |   |
| Net loss per  share:                                    |   |                             |   |   |   |
| Basic and  diluted                                      |   | $                                | (0.20  | ) | $ | (0.28 | ) |

In the above computations, dilutive potential commonshares are excluded from the diluted loss per share as their effect isanti-dilutive.  Dilutive potentialcommon shares including common stock options, warrants and convertible preferredstock that could potentially dilute basic earnings per share in the future andthat were not included in the computations of diluted loss per share because ofanti-dilution were 194,000and 1,133,000 for the three months ended March 31, 2002 and 2001, respectively.

**4.         Inventories:**

            Inventories consist of the following (in thousands):
|            |   | **March 31,** |   | **December 31,** |   |
|-----------------|--------|---------------|--------|------------------|--------|
|            |   | **2002**      |   | **2001**         |   |
|            |   |          |   |             |   |
| Raw materials   |   | $             | 1,746  |             | $      | 2,349 |   |
| Work in process |   | 1,237         |   | 888              |   |
| Finished goods  |   | 605           |   | 598              |   |
| Total           |   | $             | 3,588  |             | $      | 3,835 |   |

**5.             LegalProceedings:**

On July 17, 2001, ISCOInternational, Inc. (“ISCO”) filed a complaint in the United DistrictCourt for the District of Delaware against us, alleging that our current basestation front-end systems containing cryogenically cooled superconductingfilters infringe ISCO’s U.S. Patent No. 6,263,215, entitled“Cryoelectronically Cooled Receiver Front End for Mobile Radio Systems,” whichwas 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 complaint seeks injunctive relief and damages forinfringement. We denied infringement, denied that the patent is valid andalleged that the patent was procured through inequitable conduct. We filedcounterclaims seeking declarations of invalidity and non-

7

----

infringement and damages for unfair competition. Webelieve that ISCO’s claims are without merit and are defending ourselvesvigorously.

                On March 26, 2002, ISCO attemptedto add claims of infringement of two additional patents to its complaint by wayof an amended Answer and Counterclaim. U.S. Patent No. 6,203,340 for“Cryoelectronic Receiver Front End For Mobile Radio Systems,” issuedMarch 20, 2001, and U.S. Patent No. 6,104,934 for “Cryogenic ReceiverFront End,” issued August 15, 2000, direct their claims to tower-mountedapplications of cryogenic receiver front-end systems. Both we and co-defendantSuperconductor Technologies, Inc. objected to the addition of the newclaims and asked the court to strike or dismiss them.

                On April 17, 2002, the courtdismissed the additional claims. The effect of this dismissal is that thelitigation will proceed on its original schedule, and will not address claimsdirected to the additional patents.

                Anadverse outcome in the pending litigation, or in litigation of otherintellectual property claims could subject us to significant liabilities orrequire us to cease using such technology. The cost of defending a patentlawsuit will likely constitute a major financial burden for us. As thelitigation is in an initial stage, we are not able at this time to estimate thepossibility of loss or range of loss, if any that might result. While theoutcome of this claim cannot be predicted with certainty, we do not believethat the outcome will have a material adverse effect on our financial position,results of operations or cash flows.

*Item2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.*

            THIS REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKSAND UNCERTAINTIES. CONDUCTUS, INC.’S (THE “COMPANY” OR “CONDUCTUS” OR “OUR”)ACTUAL RESULTS 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 1 OF OURANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001. THE FOLLOWINGDISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS ANDNOTES THERETO APPEARING ELSEWHERE IN THIS REPORT ON FORM 10-Q.

**Overview**

            We develop, manufacture and market electronic components and systems based onsuperconductors for applications in the worldwide telecommunications markets.As of March 31, 2002, we had accumulated losses of approximately $93,784,000and we expect to incur significant additional losses during the remainder of2002. We, alone or with collaborative partners, must successfully develop,manufacture, introduce and market our potential products in order to achieveprofitability. Though our product line is commercially available and doesgenerate material sales, we do not expect to recognize revenue equal to orgreater than our costs and expenses until we successfully develop andcommercialize superconductive components, systems and subsystems that addresssignificant market needs.

**CriticalAccounting Policies and Estimates**

 

**General**

                Discussionand analysis of our financial condition and results of operations are basedupon our financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires us make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities. On an on-going basis,we evaluate estimates, including those 

8

----

related to revenue, contracts, inventories,contingencies and litigation. Estimates are based on historical experience andon various other assumptions that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ materially from these estimatesunder different assumptions or conditions.

                Webelieve the following critical accounting policies affect our more significantjudgments and estimates used in the preparation of our financial statements:

# **RevenueRecognition**

                Ourrevenue recognition policy is significant because our revenue is a keycomponent of our results of operations. We follow very specific and detailedguidelines in measuring revenue; however, certain judgments affect theapplication of our revenue policy. Revenue results are difficult to predict,and any shortfall in revenue or delay in recognizing revenue could cause ouroperating results to vary significantly from quarter to quarter.

                Werecognize revenue upon the shipment of our products to the customer providedthat we have received a purchase order, the price is fixed, title hastransferred, collection of the resulting receivable is probable and there areno remaining obligations. We provide for future returns and warranty claimsbased on historical experience at the time revenue is recognized.

                Whenwe issue warrants or other equity instruments in connection with salestransactions, the fair value of the equity instrument, as calculated using theBlack–Scholes option pricing model, is treated as a reduction in theamount of revenue recognized in the period, unless the reduction results innegative revenue for that specific customer on a cumulative basis, in whichcase the remainder, if any, increases cost of goods sold in our financialstatements.

# **Research andDevelopment Contracts**

                Wehave entered into contracts to perform research and development for the U.S.government. Revenues from these contracts are recognized utilizing thepercentage-of-completion method measured by the relationship of costs incurredto total contract costs. Estimates of costs-to-complete on contracts are basedon significant management judgments including assessing the progress of thecontract and estimating remaining tasks and associated costs. We haveexperienced managers who prepare these estimates, which are subject to levelsof review. We also have an eleven year history of making such estimates.Management assessments of costs to complete determine the amount of revenue andprofit (or loss) that we recognize in an accounting period. Accordingly, actualrevenues may differ materially from our estimates with different conditions orassumptions. Historically, we have not incurred significant unexpected contractlosses.

Cost of U.S. governmentcontract revenues for the years ended December 31, 1999, 2000 and 2001 was$2,477,000, $1,920,000 and $6,939,000, respectively, allocated between researchand development, and selling, general and administrative expenses. Costsinclude direct engineering and development costs and applicable overhead. Thecompany accrues contract losses when they become reasonably estimable.

# **Inventories**

                Inventories are stated at the lower of cost(determined on a first-in, first-out basis) or market. We validate ourperpetual inventory balances against a quarterly physical count makingadjustments to the perpetual balance as necessary. We write down our inventoryfor estimated obsolescence or unmarketable inventory equal to the differencebetween the cost of inventory and the estimated market value based uponassumptions about future demand and market conditions. If actual marketconditions are less favorable than those projected by management, additionalinventory write–downs may be required. Appropriate 

 

9

----

consideration is given toobsolescence, excessive levels, deterioration and other factors in evaluatingnet realizable value.

**Results of Operations for the Three Months Ended March 31,2002 and 2001**

            Total revenues consist of contract and product revenues. Substantially allproduct sales comprise sales of superconductive products.  Our total revenues increased by 55% to$1,967,000 for the quarter ended March 31, 2002, from $1,272,000 in thecomparable period of 2001. The increase in total revenues from the prior yearis primarily due to increases in both product and contract revenues. Product revenues increased by 89% to $1,024,000 for the quarter ended March 31,2002, compared to product revenues of $542,000 for the comparable period of2001, and contract revenues increased by 29% to $943,000, compared to contractrevenues of $730,000 for the first quarter of 2001.  The increase inproduct revenues is primarily due to increased unit shipments under one majorcontract during the comparison periods.  Product revenues for the quartersended March 31, 2002 and 2001, were offset by non-cash sales discounts inthe amount of $5,000 and $40,000, respectively. The non-cash sales discountsrelate to the fair market value of 23,460 and 15,760 warrants which vestedduring the quarters ended March 31, 2002 and 2001, respectively.  Theincrease in contract revenues is due primarily to an increase in the level ofactivity related to new contracts, which were awarded in late 2000 and early2001.

            Cost of product revenues was primarily composed of costs of products related toour wireless telecommunications products. Cost of product revenues decreased140% to  $1,660,000 for the period endedMarch 31, 2002, compared to $2,034,000 for the comparable period of 2001 andrepresented 84% and 160% of revenue, respectively.  This decrease in costand corresponding increase in gross margin is primarily the result of thewrite-off of $343,000 of obsolete inventory and changes in product coststandards recorded in the first quarter of 2001 and a reduction in overallindirect manufacturing costs in 2002 partially offset by an increase in directproduct costs in 2002 related to the increased shipment volume.  The decrease in the cost of product revenuesas a percentage of revenue was primarily due to the decrease in indirectmanufacturing spending and inventory write offs.  We expect product costs, as a percentage of productrevenues, to decrease and margins to improve as the volume of shipments of ourwireless communications products grows. However, we cannot assure you thatmargins will improve in the future.

            Research and development expenses include both externally and internally fundedprojects. Research and development expenses decreased 9% to  $2,061,000 in the quarter ended March 31,2002, compared to $2,261,000 in the comparable period of the prior year.Research and development, as a percentage of revenue, represented 105% and 178%in the quarters ended March 31, 2002 and 2001, respectively. The decrease inresearch and development expenses in 2002, was primarily attributable to adecrease in spending for material and sub-contractors on internally fundedprojects related to new product development and on externally funded researchand development contracts. The decrease was partially offset by an increase inpersonnel related spending due to increased head count. The decrease inresearch and development expense as a percentage of revenue was primarily dueto the increase in revenues during the comparison periods and to a lesserextent the decrease in research and development spending. We expect to continue to incur significant research and developmentexpenses on internally funded programs as we seek to develop additionalcommercial products and, as a result, anticipate increases in research anddevelopment expenses compared to the prior year.

            Selling, general and administrative expenses include costs associated withmarketing, sales, and various administrative activities. Selling, general andadministrative expenses increased 29% to $2,147,000 from $1,662,000 in the quarters ended March 31, 2002 and2001, respectively. Selling, general and administrative expenses as apercentage of revenue for the three months ended March 31, 2002 and 2001 were109% and 131%, respectively. The increase in spending in 2002 compared to 2001was primarily due to a $486,000 increase in legal expenses related to the ISCOInternational, Inc. patent suit and to a lesser extent increases in personnelrelated costs, travel and tradeshow expenses. The decrease in selling, general and administrative expenses as apercentage of revenue was primarily due to the increase in 

10

----

 

revenues during the comparison periods and partiallyoffset by the increase in selling, general and administrative spending. We expect to continue to incur increased legal costs related to the ISCOInternational, Inc. patent litigation and we expect sales and marketingexpenses to continue to increase during 2002 to the extent we increase sales ofcommercial products.

            Interest expensedecreased 37% to $27,000 from $41,000 for the periods ended March 31, 2002 and2001, respectively. Interest charges related primarily to our loan from anequipment leasing company. The decrease in interest expense was primarily theresult of lower average debt levels during the comparison periods.

            Interest and other income decreased 75% to $58,000 from $229,000 for theperiods ended March 31, 2002 and 2001, respectively. The decrease in interestincome was primarily the result of lower average cash balances in 2002 comparedto 2001 and, to a lesser extent, interest rate movements during the comparisonperiods.

            We do 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**

            As of March 31, 2002, our aggregate cash, cash equivalents and short-terminvestments, excluding $374,000 of restricted cash, totaled $10,800,000,compared to $6,897,000 as of December 31, 2001.  Additionally, wehave entered into a bank line of credit facility that is subject to renewal inNovember 2002.  We may borrow up to a maximum of $2,000,000 under the bankline of credit based on a limitation of 80% of certain eligiblereceivables.  As of March 31, 2002, theCompany did not have any amounts outstanding against the bank line of credit,however, based on our eligible accounts receivable balances on March 31, 2002,the Company had $706,000 available to borrow.

            Net cash used in operations was $2,889,000 during the quarter ended March 31,2002. Net cash used in operations was primarily the result of the net loss of$3,870,000, and an increase in accounts receivable of $347,000.  Net cashfrom operations was partially offset by the effect of non-cash charges of$283,000, a decrease of $247,000 in inventories and an increase in accountspayable and accrued liabilities of $809,000 during the quarter. The decrease ininventories was related to the increase in shipments during the three monthsended March 31, 2002, and the increase in accounts payable was related to thetiming of  invoices received.  We anticipate that we will incur significantadditional net losses during 2002 and anticipate that our accounts receivablebalance may increase during 2002. As a result, we anticipate the use ofadditional cash in operating activities during the remainder of 2002.  Wehave purchased inventory during the quarter to support our projected salesduring 2002.  Should actual sales for 2002 be less than our projections,the carrying value of inventory may be adversely affected.

            Net cash provided by investing activities was $394,000 during the quarter endedMarch 31, 2002. The balance was primarily related to the proceeds from sales ofshort-term investments during the quarter of $450,000, partially offset byinvestments in additional property and equipment of $51,000. We anticipatesignificant spending on capital expenditures during the remainder of 2002.

            Net cash provided by financing activities was $6,843,000 during the quarterended March 31, 2002, and was primarily the result of $6,883,000 from netproceeds received from a financing transaction we completed in March 2002,partially offset by $40,000 of principal payments on long-term debt.  We received gross proceeds of$7.3 million upon the completion of the private placement of 3,650,000 sharesof common stock at a price of $2.00 per share. In connection with thetransaction, we also issued to the purchasers, warrants to purchase anadditional 1,825,000 shares of our common stock at an exercise price of $2.75per share.

 

11

----

                All of our credit facilitiescontain financial, reporting and other covenants, which we are required tosatisfy. We were in compliance with all such covenants at March 31, 2002,and are currently in compliance with all such covenants. We cannot assure youthat we will continue to satisfy all such covenants in the future. We cannotassure you that if we default on any of such covenants, we could obtain awaiver of the default from the lender. In the event of default on any of thesecovenants, the party providing the financing under the applicable creditfacility would not be obligated to advance further amounts to us under thatfacility, the entire amount outstanding, if any, under that facility could bedeclared to be immediately due and payable, and the party providing thefinancing under the applicable credit facility could exercise its legalremedies against those assets that are collateral for that facility.

Our line of Clearsiteproducts currently generate material revenues and we expect these revenues toincrease significantly in the future. However, we do not expect to recognizerevenue equal to or greater than our costs and expenses until we furtherdevelop our products.  The continueddevelopment of our products will require a commitment of substantial funds toconduct further research and development and testing, to establish commercial–scalemanufacturing and to market these products. We expect to use significantamounts of cash for these purposes and to support losses from operations untilproduct revenue increases.

        Our projections of product revenues are uncertain.  While we believe our products will becommercially successful, the timing of increases in product revenues willdepend on many factors, including:

•                  Continuedprogress in our research and development programs;

•                  The magnitudeof these programs;

•                  The time andcost involved in obtaining any required regulatory approvals;

•                  The costsinvolved in preparing, filing, prosecuting, maintaining and enforcing patents;

•                  Successfulcompletion of technological, manufacturing and market requirements;

•                  Changes inexisting research relationships; 

•                  Theavailability of funding under government contracts;

•                  Our ability toestablish collaborative arrangements; and

•                  The cost ofmanufacturing scale-up and the amount and timing of future revenue.

                Our futurecapital requirements will depend, generally, on our levels of revenue andspending. We believe our cash balance at March 31, 2002, together with our $2million bank credit facility, should be sufficient to fund anticipated cashrequirements through December 2002.

Based on current revenue,cost and expense expectations, we believe we will need to raise additionalcapital through equity or other financing transactions in order to fundoperations beyond 2002.  We currentlyexpect to raise additional capital through equity financing.  The terms of any future equity financing arepresently uncertain, as they depend upon our financial performance through thetime of the financing, as well as the general condition of the market forequity financing for companies such as ours, but we expect that they may besimilar to the terms of the March 2002 transaction.

Should the terms of aprospective equity financing be unattractive, or should equity financing beunavailable on any terms, we have several options designed to forestall ourinability to continue as a going concern and, we hope, allow us to complete anequity financing at a later date on more attractive terms.   These options include reducing currentoperating costs and deferring planned discretionary expenditures, such ascapital expenditures, sales of assets, or a strategic transaction involving ourintellectual property.

Because our future needs forcash and our future ability to raise financing involve significantuncertainties regarding future events, including our level of operatingperformance and the general 

12

----

condition of the market for equity financing, ourplanned course of action could change rapidly. We are continually reevaluating our plans and expect to be prepared totake action promptly when appropriate. However, there can be no assurance that unforeseen events will notdeplete our cash resources sooner than we expect or that additional financingwill become available on acceptable terms or at all.  Unless we are able to raise significant additional funds throughissuance of new equity or debt, we may be required to obtain funds through astrategic transaction on unfavorable terms or to delay, reduce or eliminate oneor more of our research and development programs.

Our financial statementshave been prepared assuming that we will continue as a going concern. Thefinancial statements do not include any adjustments that might be necessary ifwe are unable to continue as a going concern or that may result from theoutcome of any of these uncertainties.

*Item3: Quantitative and Qualitative Disclosures About Market Risk*

            Our general policy is to limit the risk of principal loss and ensure the safetyof invested 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*

            The primary 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 one year.  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*

            Our outstanding debt consists of term loan obligations that are primarily basedon fixed 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.

 

13

----

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

**Part II: Other Information****
| *Item 1**:*  | *Legal  Proceedings*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         | On July 17, 2001,  ISCO International, Inc. (“ISCO”) filed a complaint in the United  District Court for the District of Delaware against us alleging our current  base station front-end systems containing cryogenically cooled  superconducting filters infringe ISCO’s U.S. Patent No. 6,263,215,  entitled “Cryoelectronically Cooled Receiver Front End for Mobile Radio  Systems,” which was issued on July 17, 2001.  On September 17, 2001, ISCO amended its complaint to allege  willful infringement and to seek treble damages for the alleged  infringement.  The complaint seeks  injunctive relief and damages for infringement.  We have denied infringement, denied that the patent is valid  and alleged that the patent was procured through inequitable conduct.  We have filed counterclaims seeking  declarations of invalidity and non-infringement and damages for unfair  competition.  We believe that ISCO’s  claims are without merit and are defending ourself vigorously. |
| *Item  2*    | *Changes in Securities and Use of  Proceeds*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|         | On March 21, 2002, we  sold and issued an aggregate of 3,650,000 shares of common stock at $2.00 per  share and issued warrants to purchase an additional 1,825,000 shares of  common stock at $2.75 per share in a private placement of our equity.The offering was not underwritten and  raised approximately $6,900,000 after expenses.  Certain institutional and accredited investors purchased shares  of common stock in the offering, which sales were exempt from the requirements  of the Securities Act of 1933, as amended (the “Act”) pursuant to Rule 506 of  Regulation D under the Act.  The  warrants we issued and sold in the offering do not include a ``net  exercise’’ provision, are first exercisable on September 21, 2002, may be called by us if the market  price of our common stock exceeds $4.75 per share for twenty consecutive  trading days and expire on September 21, 2007.  The proceeds from the offering will be used for general  operating expenses.                                                  |
| *Item  3:*   | *Default Upon Senior Securities*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         | Not Applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| *Item  4:*   | *Submission of Matters to a Vote of  Security Holders*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|         | Not Applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| *Item  5:*   | *Other  Information*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|         |  Not Applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| *Item  6:*   | *Exhibits and Reports on Form 8-K*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (A) Exhibits |
| 10.37        | Amendment 1 to the License  Agreement dated May 4, 1999 between General Dynamics Information Systems,  Inc. (“GDIS”) and Conductus, Inc. (“Conductus”)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.38        | Amendment 2 to the  License Agreement dated May 4, 1999 between General Dynamics Information  Systems, Inc. (“GDIS”) and Conductus, Inc. (“Conductus”)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.39+       | Patent License  Agreement between Lucent Technologies GRL Corporation and Conductus, Inc.  effective as of April 1, 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|         |

----

+ Confidential treatment has been requested for portions of thisExhibit.

 
| (B) Reports on Form 8-K.  |
|--------------------------------|
|                           | On  April 17, 2002, we filed a report on Form 8-K reporting, under Item 5, that the Federal  District Court for the District of Delaware had dismissed claims of  infringement of U.S.  Patent No. 6,203,340 for “Cryoelectronic Receiver Front End For Mobile  Radio Systems,” issued March 20, 2001 and U.S. Patent No. 6,104,934  for “Cryogenic Receiver Front End,” issued August 15, 2000, from the  previously-reported patent infringement lawsuit filed on July 17, 2001.

 On  March 26, 2002, ISCO attempted to add additional claims of infringement  on the two patents to its complaint by way of an amended Answer and  Counterclaim. The two patents direct their claims to tower-mounted  applications of cryogenic receiver front-end systems. Both we and  co-defendant Superconductor Technologies, Inc. objected to the addition  of the new claims and asked the court to strike or dismiss them.

The effect of  this dismissal is that the  litigation will proceed on its original schedule, and will not address claims  directed to the additional patents. |

 

14

----

**SIGNATURES**

            Pursuant to the requirements of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|                       | CONDUCTUS, INC.                              |
|----------------------------|----------------------------------------------|
|                       | Registrant                                   |
|                       |                                         |
| Dated:  July 12, 2002 | /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                 |

15

----