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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)
[X]		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the Year Ended December 31, 2001 OR
[   ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _________ to __________

Commission File Number 0-21074

SUPERCONDUCTOR TECHNOLOGIES INC.

460 Ward Drive, Santa Barbara, California 93111-2310

Registrant’s telephone number, including area code: (805) 690-4500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value per share

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

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

     The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $71.9 million based on the closing price of $4.65 per share of common stock as reported on The NASDAQ Stock Market® on March 15, 2002. For purposes of this determination, shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates of the Registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the Registrant’s common stock as of the close of business on March 15, 2002 was 21,782,509.

DOCUMENTS INCORPORATED BY REFERENCE

     Items 10, 11, 12 and 13 of Part III incorporate information by reference from the definitive proxy statement for the Registrant’s Annual Meeting of Stockholders to be held on May 16, 2002.

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SUPERCONDUCTOR TECHNOLOGIES INC.

FORM 10-K ANNUAL REPORT
Fiscal Year Ended December 31, 2001

PART I				Page
Item 1.		Business			3
Item 2.		Properties			11
Item 3.		Legal Proceedings			12
Item 4.		Submission of Matters to a Vote of Security Holders			12
PART II
Item 5.		Market for the Registrant’s Common Equity and Related Stockholder Matters			13
Item 6.		Selected Financial Data			14
Item 7		Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 7A		Quantitative and Qualitative Disclosures about Market Risk			23
Item 8.		Financial Statements and Supplementary Data			24
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			24
PART III
Item 10.		Directors and Executive Officers of the Registrant			24
Item 11.		Executive Compensation			24
Item 12.		Security Ownership of Certain Beneficial Owners and Management			24
Item 13.		Certain Relationships and Related Transactions			24
PART IV
Item 14.		Exhibits, Financial Statements Schedules, and Reports on Form 8-K			24

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PART  I

ITEM  1.   BUSINESS.

Forward-Looking Statements

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

Overview

     We develop, manufacture and market high performance products to service providers, systems integrators and original equipment manufacturers in the wireless telecommunications industry. Our products, known collectively as SuperLink Solutions, maximize the performance of wireless networks by improving the quality of “uplink” signals from subscriber terminals (wireless handsets or mobile wireless devices) to network base stations and of “downlink” signals from network base stations to subscriber terminals. These premium products work in concert to provide Total Link Enhancement, a combination of complimentary wireless products built around our flagship SuperFilter® System to meet the growing demand of the wireless telecommunications industry for improved capacity, reduced interference, and greater coverage for their network base stations.

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

	•		SuperLinkTM Rx Solutions. In order to receive uplink signals from wireless terminals, base stations require a wireless filter system to eliminate, or filter out, out-of-band interference. To address this need, we offer SuperLink Rx Solutions, which include our flagship product, the SuperFilter System. Deployed in base stations, these solutions combine specialized filters using high-temperature superconducting (HTS) technology with a proprietary cryogenic cooler and a low-noise amplifier. The result is a highly compact and reliable cryogenic receiver front-end that can simultaneously deliver both high selectivity (interference rejection) and high sensitivity (detection of low level signals). SuperLink Rx Solutions thereby offer significant advantages over conventional filter systems.
	•		SuperLinkTM Tx Solutions. Many wireless networks also suffer from insufficient transmit power on the downlink signal path. In this situation, operators benefit from our SuperLink Tx Solutions, a family of compact, robust, and technologically-advanced high-power amplifiers.
	•		SuperPlexTM Solutions. For superior antenna multiplexing functionality, we offer SuperPlex Solutions, a line of multiplexers that provide extremely low insertion loss and excellent cross-band isolation.

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

     Our expanded product line of SuperLink Solutions, combined with our increased sales and marketing activities, has resulted in multiple product orders over the last year. In November we reached a significant milestone, selling our 1,000th

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SuperFilter System, and in December we received a large purchase agreement for a minimum of 1,000 SuperFilter Systems from a “top-five” U.S. cellular carrier. At the close of 2001, over 1,000 SuperFilter Systems were deployed in networks worldwide, with nearly 12 million cumulative hours of operation.

     The recent 1000-unit SuperFilter order has served as a catalyst for further expanding our Santa Barbara manufacturing facilities. In early 2002, we increased our available manufacturing space and are adding to our state-of-the-art equipment to improve capacity. We expect these activities will allow us to increase our production capacity from 200 systems per quarter at the end of 2001 to approximately 600 units per quarter capacity by the end of 2002.

Industry Background

The Wireless Communications Market

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

     New subscribers. According to the Yankee Group, at the end of 2000 there were approximately 625 million cellular and PCS wireless subscribers worldwide. The Yankee Group expects this number to increase to approximately 1.3 billion subscribers by the close of 2005, representing a compound annual growth rate of 16%. The developing world, led by the Peoples Republic of China, is expected to continue to experience the fastest subscriber growth rates.

     Increased usage (minutes of use). We expect that cut-rate prices for wireless calls will lead to significant increases in minutes of use for the average subscriber. We also expect that higher minutes of use will likely come from the emergence of new data and Internet services such as e-mail and instant messaging, as well as from consumers’ gradual shift toward using mobile devices instead of fixed telephones as their primary telecommunications device.

     New air interfaces. Advanced wireless transmission technologies, or “air interfaces,” are finally becoming available to consumers in the United States and other nations. With their faster data speeds and increased bandwidth, these new air interfaces are expected to usher in a broad range of wireless services, from music downloads to video file sharing. One such new wireless transmission technology is CDMA IXRTT, which represents an upgrade to the current technology known as Code Division Multiple Access (commonly referred to as CDMA). We expect the onset of the “data era” in mobile communications will help operators to reverse declining annual revenues per user and move closer to long-term financial health.

Strains on Wireless Networks

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

     Service providers are also expected to face network capacity constraints. For example, wireless carriers are finding it harder to maintain a “guard band” around their frequency allocation in order to reduce interference levels. In particular CDMA operators, whose networks employ the same wide communications channels for both data and voice transmission, are learning that as higher-speed data transmissions proliferate their networks will have less capacity available for voice users.

     In order to reduce the strain on their wireless networks, providers must find a cost-effective means to reduce interference and increase the capacity of their systems. Notably, in light of today’s restricted corporate budgets and tougher zoning laws, operators are less likely to have the option of simply deploying new base stations to achieve these performance goals.

Our Solution

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

	•		6 dB reduction in base station noise figure— effectively doubling base station sensitivity and therefore uplink capacity and coverage;
	•		14 dBm reduction in handset transmit power— prolonging handset battery life and available talk time;
	•		46% reduction of dropped calls (with one site registering a 62% reduction) and 28.5% reduction of access failures— both helping to reduce subscriber churn;
	•		Elimination of interference from Specialized Mobile Radio  handsets and base stations; and
	•		Increased in-building penetration

     We expect that our more recently introduced product lines, Super Link TX Solutions and SuperPlex Solutions, will also provide substantial advantages for wireless networks.

     SuperLink Tx Solutions, our line of premium multi-carrier power amplifiers, employ advanced linearization technology and are optimized for CDMA base stations. Relative to competing technologies, we believe that these products offer:

	•		Superior reliability;
	•		Improved peak power handling; and
	•		Lowest cost of ownership

     SuperPlex Solutions, our line of high-performance multiplexers, are designed to eliminate the need for additional base station antennas and thus reduce infrastructure costs. These products provide very low transmit and receive insertion loss and excellent cross-band isolation. Relative to competing technologies, we believe that these products offer:

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

Our Strategy

     We have mastered the use of high-temperature superconducting (HTS) technology to improve the quality of wireless networks. Our strategy is to provide Total Link Enhancement (simultaneously optimizing the performance of the uplink, the downlink and the antenna) by teaming our field-proven HTS solutions with high-performance multiplexers and multi-carrier power amplifiers. With SuperFilter at the core, our SuperLink Solutions provide the only comprehensive package of RF link performance enhancement solutions available today.

     The primary elements of our strategy include:

Enhance and Extend Current Product Offerings. There is a constant demand for more compact, more efficient, and more sophisticated wireless communication technology. In response, we expect to use our technical expertise to expand our primary product lines, as represented by SuperLink Rx Solutions (uplink enhancement), SuperLink Tx Solutions (downlink enhancement), and SuperPlex Solutions (antenna optimization).

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Expand Domestic and International Sales Channels. We intend to continue to expand our sales efforts to domestic wireless communication providers and OEMs. We also expect to expand our international distribution channels, particularly in Asia and Latin America.

Enhance Our Productivity and Lower Our Costs. We intend to continue developing our manufacturing infrastructure and organization to meet our expected production requirements. We plan to continue manufacturing in-house certain key components of our products such as our proprietary HTS filters and cryogenic coolers. We believe that this will enable us to: (1) produce highly reliable, quality products; (2) protect the proprietary nature of our technology and processes; (3) properly control our manufacturing processes; and (4) achieve significant cost reductions.

Maintain Our Focus on Technical Excellence and Innovation. We are committed to maintaining our leadership role in the wireless communication market for link enhancement solutions. In order to expand and protect our technology, we will continue to seek patent protection and/or licenses of key technology owned by others. We also will continue to engage in government research and development contracts to fund our commercial technology and product development.

Pursue Strategic Partnerships, Alliances and Acquisitions. In addition to our internal development efforts, we may acquire new products and technologies that address the complementary issues of uplink enhancement, downlink enhancement, and antenna optimization.

Our Wireless Products

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

     Our SuperLink Solutions are comprised of three unique product families: SuperLink Rx Solutions, SuperLink Tx Solutions, and SuperPlex Solutions.

	•		SuperLink Rx Solutions include our core product line, the SuperFilter System. These uplink solutions combine specialized filters using HTS technology with a proprietary cryogenic cooler and a low-noise amplifier. The result is a highly compact and reliable cryogenic receiver front-end that can simultaneously deliver both high selectivity and high sensitivity.
			The small size and low power consumption of our SuperLink Rx Solutions is largely the result of our choice of cooling technology. In order to incorporate a compact, efficient, and reliable cooling system, we developed a proprietary Stirling cryogenic cooler. Approximately the size of a wine bottle, the cooler utilizes helium gas as both the lubricant and coolant. This eliminates the use of oils and grease as well as the need for scheduled maintenance. Our cooler requires approximately 100 watts of power— far less than other cryogenic systems.
	•		SuperLink Tx Solutions consist of our line of premium multi-carrier power amplifiers. These solutions are geared toward downlink-limited environments and serve as a key element in our Total Link Enhancement strategy.
	•		SuperPlex Solutions are HTS-Ready™ (ready for immediate connection to our HTS filter products), high-performance multiplexers designed to eliminate the need for additional antennas and reduce costs. Their extremely low insertion loss and excellent cross-band isolation make them highly- effective HTS companion products.

     Significantly, in early 2002 we introduced the SuperFilter IMT-2000 Tower Top, our first product for international 3G networks. 3G, or “third generation”, wireless networks use advanced technologies that promise to allow mobile devices to offer high-speed data services such as full Internet access and CD-quality music services. Our SuperFilter IMT-2000 Tower Top product provides the same premium benefits of our rack-mount systems with the addition of a duplexing function, allowing both transmit and receive signals to be carried on the same antenna. The SuperFilter IMT-2000 Tower Top is designed to withstand harsh outside environments, and it can be mounted adjacent to the base station antenna to maximize sensitivity benefits.

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     During the years ended December 31, 1999 and 2000 our net commercial product revenues totaled $2.1 million and $5.3 million, respectively, and related primarily to the sales of our SuperFilter System. For the year ended December 31, 2001 our net commercial product revenues totaled $7.6 million and was comprised of $6.9 million from sales of our SuperFilter System and $635,000 from sales of our multiplexers. Our multi-carrier power amplifier product was introduced in March 2001; however, to date it has not contributed significantly to our revenues.

Marketing and Sales

     We presently sell solutions to wireless communication service providers in the Americas and have plans to expand worldwide. Our earliest experience was with small rural providers who had the most immediate need for the SuperFilter® for range extension and coverage enhancement. We sold our first systems in the fourth quarter of 1997. We sold 83 more systems in 1998, 123 systems in 1999, 393 systems in 2000 and 438 systems in 2001. We continue to increase systems sales in spite of a shift in our sales focus to the large service providers where the sales cycle requires numerous trials and is very long. This shift in focus was undertaken to begin a move to the suburban and urban markets where the majority of base stations are located and where the need for interference rejection is greatest. In mid 1999, we signed a five-year supply agreement with U.S. Cellular Corporation, one of the five largest cellular providers in the country. In March 2000, we signed a supply agreement with ALLTEL, an even larger domestic wireless service provider, designating STI as their supplier of HTS base station receiver solutions. More recently, in December 2001, we signed a follow-on agreement with a major customer for 1,000 SuperFilter Systems, to be delivered over five quarters. U.S. Cellular and ALLTEL are our two largest customers and accounted for 85% of our net commercial revenues in 2001 as compared to 49% in 2000.

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

Backlog

     Our backlog consists of accepted product purchase orders scheduled for delivery within 24 months and consists of purchase orders for both dollar and unit purchase commitments. The exact dollar commitment for unit commitments may vary depending on the exact units purchased. Based on past purchasing patterns and expected purchasing trends of customers with unit commitments, we estimate our backlog at December 31, 2001 to be $21.3 million, as compared to $6.5 million at December 31, 2000. The backlog at December 31, 2001 includes $3.1 million remaining under a $7.8 million purchase order from U.S. Cellular that will be delivered by December 31, 2002. The subsection below entitled “Non-Cash Charges For Warrants Issued to U.S. Cellular” includes a discussion of the accounting for this purchase order. We estimate that $14.5 million of the December 31, 2001 backlog will be delivered in fiscal 2002, with the remainder delivered by the end of the first quarter of 2003.

Our Technology

     Superconducting Technology

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

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microwave frequency applications, new products, such as wireless filters, have been developed that can be extremely small, highly sensitive and highly frequency selective.

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

     How We Develop Our Technology

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

     HTS Materials

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

     RF Circuitry

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

     Cryogenic Cooling Technology

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     The availability of a low-cost, highly reliable, compact cooling technology is critical to the successful commercialization of our superconducting products. Prior to the Company’s efforts no such cryogenic cooler has been commercially available. In response to this lack of availability, we developed a low-cost, highly reliable low-power cooler designed to cool to 77K (-196°C) with sufficient cooling capacity for our superconducting applications. Our cryogenic cooler, with over 10,000,000 hours of operation in wireless base stations worldwide, has demonstrated a mean time between failure of greater than 850,000 hours. Its development was based in part on patents licensed by us from Sunpower, Inc. We believe that our internally developed cooler that is both compact and reliable enough to meet the most demanding wireless industry standards and provide us with a significant and unique competitive advantage.

     Cryogenic Packaging

     Cooling to cryogenic temperatures requires proper thermal isolation and packaging. Any superconducting or other cryogenically cooled device must be maintained at its optimal operating temperature, and its interaction with higher temperature components must be controlled. We have developed a variety of proprietary and patented cryogenic packaging innovations to satisfy this requirement.

How we use Government Contracts to fund technology development

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

     Since our inception in 1987, 77% of our net revenues have been from research and development contracts, sales directly with the U.S. government or resellers to the U.S. government. Nearly all of these revenues were paid under contracts with the U.S. Department of Defense. We have marketed to various government agencies to identify opportunities and actively solicit partners for product development proposals. Since 1988, we have successfully obtained a number of classified and non-classified government contracts for superconductor research, including one of the largest non-classified HTS awards from DARPA through the Office of Naval Research. In addition to actively soliciting government contracts, we have participated in the Small Business Innovative Research, or SBIR, program. We have been awarded 32 Phase I SBIR contracts, each of which typically generates from $70,000 to $100,000 of revenues. We have been successful in converting eight of these Phase I contracts into Phase II programs, each of which typically generates $500,000 to $750,000 in revenues, and we converted one of these contracts into a Phase III program valued at $2.2 million. Since our formation, government contracts have provided us over $65 million of revenue, and remain a significant source of revenue today, supporting our research and development programs.

Our Manufacturing Capabilities

     We currently manufacture all of our SuperFilter Systems and multiplexer products at our facilities in Santa Barbara, California. In 1998, we opened a new 18,000 square foot state-of-the-art manufacturing facility in Santa Barbara. As the demand for our products grows in 2002 we intend to increase our internal manufacturing capacity by three fold expanding manufacturing into an additional 12,800 square feet (within the existing site). The expansion will include additional class “100” clean rooms, semi-automated assembly and test area, along with new customer service and quality assurance functions. We also have plans in place to expand our manufacturing capacity through subcontractors as volumes increase.

     Some of our manufacturing processes, including thin-film production, are performed in “clean rooms.” Other manufacturing stages, including system assembly, are conducted in a standard manufacturing environment. We have demonstrated a proprietary manufacturing process for thin-film TBCCO materials that we believe is scaleable for high volume production. We have established a production operation, which we use to produce TBCCO thin films on wafers for wireless electronics applications. We currently purchase wafers for growth of our HTS thin films from a single supplier. Our radio frequency circuitry is designed, modeled and tested by internal engineering resources. We have in-house capabilities to pattern the superconducting material and all other aspects of radio frequency component production, including packaging the

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filters. We also have in-house capabilities to manufacture our cryogenic coolers at a pace consistent with current quantity requirements.

     Our multi-carrier power amplifier is purchased from a third party manufacturer.

Intellectual Property

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

     We have focused our HTS materials development efforts on TBCCO. We have an exclusive worldwide license (including the right to sublicense) under several U.S. patents which have been issued to the University of Arkansas covering TBCCO, subject to the University of Arkansas’ right to conduct research related to the patents.

     In January 1993, as part of our strategy to stimulate the development and use of TBCCO, we granted DuPont a non-exclusive worldwide sublicense to develop processes and market TBCCO thin-films. DuPont pays us royalties on sales of TBCCO thin-films or devices containing TBCCO thin-films. In the event that we grant another sublicense to a third party on more favorable terms, we will be obligated to extend those terms to DuPont. DuPont and their customers are current or potential competitors of ours, and we can give no assurance that these sublicenses will not materially and adversely affect our financial condition.

     As of December 31, 2001, we held 32 U.S. patents. Twelve of these patents are for technologies directed toward producing thin-film materials, including our proprietary thin-film process for TBCCO production, expiring in 2008 to 2016. In addition, we currently hold nine U.S. patents for circuit designs expiring in 2010 to 2017 and eleven U.S. patents covering cryogenics and packaging expiring in 2012 to 2020. As of December 31, 2001, we had 19 U.S. patents pending, including twelve covering our designs and seven related to cryogenics and packaging.

     As of December 31, 2001, we held 25 foreign patents. Eleven of these patents are for technologies directed toward producing thin-film materials, including our proprietary thin-film process for TBCCO production, expiring in 2009 to 2015. In addition, we currently hold five foreign patents for circuit designs expiring in 2014 to 2021 and nine foreign patents covering cryogenics and packaging expiring in 2015 to 2019. As of December 31, 2001, we had 15 foreign patents pending, including seven covering our designs and four related to cryogenics and packaging and four related to thin film development. We also have license rights to 13 issued patents in the United States and to 57 patents issued or pending internationally.

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

     We own a federally registered trademark to the name SuperFilter. We own other registered and unregistered trademarks, and have certain trademark rights in foreign jurisdictions. We intend to aggressively protect our trademarks.

Competition

     The wireless communication market is intensely competitive. We face competition in various aspects of our technology and product development and in each of our targeted markets. Our current and potential competitors include conventional RF filter manufacturers and both established and newly emerging companies developing similar or competing HTS technologies. We also compete with companies that design, manufacture, or market conventional downlink enhancement products such as power amplifiers, as well as with companies that sell antenna-optimizing multiplexers. With respect to our HTS filter systems we compete primarily with Conductus, Inc. and ISCO International, Inc., formerly Illinois Superconductor Corporation. We also compete against companies that seek to enhance base station range and selectivity by means other than a superconducting filter. The primary competition from alternative means comes from tower mount and ground mount amplifiers and “smart” antennas. Tower mount and ground mount amplifiers pass an RF signal received by an antenna through a broad, low-level filter, which then amplifies the signal. These units are produced by a number of

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companies, which include most of the base station original equipment manufacturers (OEMs) such as Motorola, Lucent, Nortel and Nokia. Filter manufacturers, including Allen Telecom and Radio Frequency Systems (formerly Celwave), also produce these units. “Smart antennas” allow base stations to focus energy more directly on individual wireless devices in order to improve capacity. Metawave and Arraycom are among the leading companies that produce these systems.

     In addition, we currently supply components and license technology to several companies that may eventually decide to manufacture or design their own HTS components, rather than simply purchasing or licensing our technology. With respect to our HTS materials, we compete here with DuPont and Amtel, a Japanese consortium, among others. In the government sector, we compete with universities, national laboratories and both large and small companies for research and development contracts. We expect increased competition both from existing competitors and a number of companies that may enter the wireless communications market.

Employees

     We employed a total of 189 persons as of December 31, 2001: 104 in manufacturing, 41 in research and development, 23 in sales and marketing and 21 in administration. Nine of our employees have Ph.D.s, and twenty-six others hold advanced degrees in physics, materials science, electrical engineering and other fields. Our employees are not represented by a labor union, and we believe that our employee relations are good.

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

Environmental Issues

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

ITEM 2. PROPERTIES-

     We lease all of our properties. Most of our operations, including our manufacturing facility, are located in an industrial complex in Santa Barbara, California. We occupy approximately 59,000 square feet under a lease that expires in 2010; 24,000 square feet of this space was leased in the fourth quarter of 2001. We plan to use the additional space to expand our manufacturing capability and for general office space. We also lease small regional sales offices in Illinois, Texas and Washington on annual terms. We believe that our facilities are adequate to meet current and reasonably anticipated needs for approximately the next year.

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ITEM  3.   LEGAL PROCEEDINGS

     We are currently engaged in a patent dispute with ISCO International, Inc. relating to U.S. Patent No. 6,263,215 entitled “Cryoelectronically Cooled Receiver Front End for Mobile Radio Systems.” ISCO filed a complaint on July 17, 2001 in the United States District Court for the District of Delaware against us and Conductus, Inc., another company involved in the high-temperature superconducting industry. The ISCO complaint alleges that our SuperFilter product and Conductus’ ClearSite® product infringe ISCO’s patent.

     After conducting separate investigations into the allegations, we and Conductus both filed responses denying ISCO’s allegations and asking the court to declare the ISCO patent invalid and not infringed. We are cooperating with Conductus in the defense of this lawsuit.

     On October 3, 2001, we amended our response to add allegations that ISCO failed to disclose relevant prior art to the U.S. Patent Office during the patent application process. At the same time, we also sued ISCO for threatening some of our customers. Our standard terms and conditions of sale include an indemnity against any patent infringement claims, and we have informed our customers that we will defend them against any action brought by ISCO for any alleged infringement related to our products. We are seeking both compensatory and punitive damages from ISCO, as well as attorneys’ fees, arising from their threats against our customers.

     The trial is scheduled to start January 13, 2003. The judge has instructed the parties to complete the discovery process by June 28, 2002 and scheduled a “Markman hearing” for September 10, 2002. At the Markman hearing, the judge will receive evidence and then decide the scope and meaning of the patent claims asserted by ISCO.

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

     We did not submit any matters to a vote of the Company’s stockholders during the quarter ended December 31, 2001.

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PART  II

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

Market for Common Stock

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

Holders of Record

     As of March 19, 2002, we had approximately 225 holders of record of our common stock. We estimate that there are more than 14,000 round lot beneficial owners of our common stock.

Dividends

     The Company intends to employ all available funds in the development of its business and does not expect to pay any cash dividends for the foreseeable future. Furthermore, the Company may not pay any cash dividends on its common stock, until all dividends due and payable on its preferred stock have been declared and paid and without the written consent of its equipment leasing line provider and its lender.

Sales of Unregistered Securities

     During the fourth quarter of 2001, we did not issue any equity securities that were not registered under the Securities Act of 1933.

     On March 11, 2002, we received binding commitments totaling $13.0 million in a new equity private placement. The transaction is expected to generate net proceeds of $12.4 million. We closed commitments totaling $11.2 million on March 12, 2002 and expect to close the remaining commitment for $1.8 million pending a response to our request for guidance from Nasdaq. The Company may decline to accept the additional investment if Nasdaq concludes that shareholder approval is required. In that event, the net proceeds of the transaction would be $10.6 million. If the remaining commitment is accepted, we will have issued a total of 3,714,286 shares of common stock at $3.50 per share and 5-year warrants to purchase an additional 557,143 shares of the common stock at $5.50 per share.

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The investors provided us with written representations confirming their status as “accredited investors” under Regulation D and their intent to acquire the securities for their own accounts and not with a view to resale or distribution in violation of the Securities Act of 1933. We did not engage in general solicitation or advertising, and the securities issued in the transaction bear appropriate restrictive legends concerning the registration requirements of the Securities Act of 1933. We agreed to file a registration statement covering public resales by the investors of the shares of common stock issued at the closing and issuable upon exercise of the warrants. We believe this transaction was exempt from the registration requirements of the Securities Act of 1933 based on Regulation D and Section 4(2) of the Securities Act of 1933.

ITEM  6.   SELECTED FINANCIAL DATA.

     The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with the Company’s Financial Statements and Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Item 14 of Part IV of this Report.

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

General

     We develop, manufacture and market high performance products to service providers, systems integrators and original equipment manufacturers in the wireless telecommunications industry. Our products, known collectively as SuperLink Solutions, maximize the performance of wireless networks by improving the quality of “uplink” signals from subscriber terminals (wireless handsets or mobile wireless devices) to network base stations and of “downlink” signals from network base stations to subscriber terminals. These premium products work in concert to provide Total Link Enhancement, a combination of complimentary wireless products built around our flagship SuperFilter System to meet the growing demand of the wireless telecommunications industry for improved capacity, reduced interference, and greater coverage for their network base stations.

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

	•		SuperLink Rx Solutions. In order to receive uplink signals from wireless terminals, base stations require a wireless filter system to eliminate, or filter out, out-of-band interference. To address this need, we offer SuperLink Rx Solutions, which include our flagship product, the SuperFilter System. Deployed in base stations, these solutions combine specialized filters using high-temperature superconducting (HTS) technology with a proprietary cryogenic cooler and a low-noise amplifier. The result is a highly compact and reliable cryogenic receiver front-end that can simultaneously deliver both high selectivity (interference rejection) and high sensitivity (detection of low level signals). SuperLink Rx Solutions thereby offer significant advantages over conventional filter systems.
	•		SuperLink Tx Solutions. Many wireless networks also suffer from insufficient transmit power on the downlink signal path. In this situation, operators benefit from our SuperLink Tx Solutions, a family of compact, robust, and technologically-advanced high-power amplifiers.
	•		SuperPlex Solutions. For superior antenna multiplexing functionality, we offer SuperPlex Solutions, a line of multiplexers that provide extremely low insertion loss and excellent cross-band isolation.

     From 1987 to 1997, the Company was engaged primarily in research and development and generated revenues primarily from government research contracts. The Company began full-scale commercial production of the SuperFilter in 1997 and shipped 438 units in 2001. As the Company continues to focus on its commercial products, commercial revenues are expected to

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increase as a percentage of revenues. The Company has incurred cumulative losses of $85 million from inception to December 31, 2001.

Critical Accounting Policies

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

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

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

     As described in Note 8 to the December 31, 2001 financial statements, in September 2000 the Company received a $7.8 million non-cancelable purchase order from U.S. Cellular for SuperFilter systems to be shipped over the next nine quarters. In consideration for the purchase order, the Company amended the August 1999 warrant agreement and vested 312,000 warrants to U.S. Cellular.

     After the allocation of sales proceeds to the related warrants, the estimated cost of providing products under the purchase order exceeded related revenue by $5.3 million. The resulting loss was reflected in the results of operations for the year ended December 31, 2000 and a loss reserve established. Through December 31, 2000 and 2001, $1,059,000 and $2,243,000, respectively, of this reserve was reversed against the cost of product delivered under this purchase order. The reserve is based on estimated future product and warranty costs and should these future cost differ from those estimated this reserve will be adjusted.

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

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

     Our valuation allowance against the deferred tax assets is based on our assessments of historical losses and projected operating results in future periods. If and when we generate future taxable income in the U.S. against which these tax assets

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may be applied, some portion or all of the valuation allowance would be reversed and an increase in net income would consequently be reported in future years.

     We are currently engaged in a patent dispute with ISCO International, Inc. This case is discussed above under Item 3 entitled “Legal Proceedings”. We have not recorded any liability relating to this litigation but may be required to do so if we are unsuccessful in defending ourselves.

Backlog

     Our backlog consists of accepted product purchase orders scheduled for delivery within 24 months and consists of purchase orders for both dollar and unit purchase commitments. The exact dollar commitment for unit commitments may vary depending on the exact units purchased. Based on past purchasing patterns and expected purchasing trends of customers with unit commitments we estimate our backlog at December 31, 2001 to be $21.3 million, as compared to $6.5 million at December 31, 2000. The backlog at December 31, 2001 includes $3.1 million remaining under a $7.8 million purchase order from U.S. Cellular that will be delivered by December 31, 2002. The subsection below entitled “Non-Cash Charges For Warrants Issued to U.S. Cellular” includes a discussion of the accounting for this purchase order. We estimate that $14.5 million of the December 31, 2001 backlog will be delivered in fiscal 2002, with the remainder delivered by the end of the first quarter of 2003.

Results of Operations

2001 as Compared to 2000

     Total net revenues increased by $2.4 million, or 24%, from $10.0 million in 2000 to $12.4 million in 2001. The increase is primarily due to higher commercial product sales.

     Our commercial revenues are generated from (i) the sales of our SuperFilter product line which combines specialized superconducting RF filters with a proprietary cryogenic cooler (and, in most cases, a low noise amplifier) in highly compact systems and (ii) starting in February 2001, from the sales of our new multiplexer product line. We also introduced our multi-carrier power amplifier product in March 2001, but it has not yet contributed significantly to our revenues. Net commercial product revenues consist of gross commercial product sales proceeds less sales discounts and the allocation of certain sales proceeds to a warrant issued to one customer in 1999 under a long-term supply agreement. For a discussion of the allocation to warrants, please read the discussion under the caption “Non-Cash Charges for Warrants Issued To U.S. Cellular.” The following table summarizes the calculation of net commercial product revenues for 2000 and 2001:

     Net commercial product revenues in 2001 increased to $7.6 million from $5.3 million in the same period last year, an increase of $2.3 million, or 43%. This increase is the result of higher sales of our SuperFilter products, a shift in the product mix toward higher-priced SIX-Pak units and sales of our new duplexer product introduced in 2001. Multiplexer sales in 2001 totaled $635,000. The increase in gross commercial product sales proceeds was partially offset by $2.3 million in 2001 and $2.2 million in 2000 to reflect an allocation of sales proceeds to warrants issued to U.S. Cellular in connection with those sales. Our two largest customers accounted for 85% of our net commercial revenues in 2001 as compared to 49% in 2000.

     In 2001, government contract revenue totaled $4.8 million as compared to $4.6 million last year. These revenues included government subcontract revenue which totaled $1.4 million in 2001 as compared to $689,000 in 2000. Excluding the

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impact of subcontract revenues, government contract revenues declined this last year as we focused more of our research and development resources on our commercial business. We plan to focus our future government contract work on projects that have applications to our commercial product business and expect government revenues to increase slightly in the future.

     Cost of commercial product revenues includes all direct costs, manufacturing overhead and related start-up costs. The cost of commercial product revenues totaled $10.6 million for 2001 and was reduced by the amortization of $2.2 million, relating to the accrual for non-cash contract loss on the purchase order received from U.S. Cellular. The cost of commercial product revenues was $15.7 million for 2000 and included an accrued non cash loss of $4.2 million relating to the purchase order received from U.S. Cellular and other non-cash warrant charges relating to U.S. Cellular of $482,000. Please read the subsection below entitled “Non-Cash Charges for Warrants Issued To U.S. Cellular.” Excluding these non-cash charges and credits relating to the supply agreement with U.S. Cellular, cost of commercial revenues increased to $12.9 million in 2001, or 17%, from $11.0 million in 2000. This increase was the result of increased unit shipments and higher costs associated with ramping up the Company’s manufacturing capacity, partially offset by lower material and labor costs per unit and the effect of increased manufacturing efficiencies.

     We generate negative gross margins on our commercial products at current sales levels primarily due to fixed manufacturing overhead costs. Based on current prices and forecasted product mix and costs, we expect to achieve positive commercial gross margins in the second quarter of 2002.

     Contract research and development expenses totaled $3.4 million in 2001 as compared to $4.2 million in the prior year and included subcontract expenses of $1.4 million and $689,000, respectively. Excluding subcontract expenses, contract research and development expenses decreased to $2.0 million in 2001, as compared to $3.5 million last year. This decrease results from the increased focus on commercial research efforts.

     Other research and development expenses relate to development of our commercial products. These expenses totaled $4.6 million in 2001, as compared to $2.6 million in 2000. This increase is due to increased spending on product line expansion, further development of the SuperFilter product line, including product pilots, and product line cost reduction efforts.

     Selling, general and administrative expenses totaled $11.9 million in 2001 as compared to $8.2 million in the same period last year, an increase of $3.7 million, or 45%. This increase results primarily from increased corporate development, domestic and international marketing and sales efforts, management recruitment activities, insurance premiums and ISCO litigation expenses. ISCO litigation expenses totaled $976,000 for the last six months in 2001 and are expected to, increase throughout 2002 as we approach the trial which is scheduled for January 2003.

     Interest income increased to $1.1 million in 2001 as compared to $806,000, in the prior year, due to higher levels of cash available for investment.

     Interest expense decreased by $337,000 to $146,000 in 2001 as compared to $483,000 in the prior year and resulted from decreased borrowings in the current year.

     We had a net loss of $17.2 million in 2001, as compared to $20.7 million in 2001.

     The net loss available to common shareholders totaled $19.8 million in 2001, or $1.10 per common share, as compared to $33.5 million, or $2.09 per common share, in the same period last year. The amounts for 2001 include a $2.6 million non-cash deemed distribution on preferred stock. The amounts for 2000 included $10.6 million for the non-cash cumulative effect of an accounting change and $2.2 million of non-cash deemed dividends on preferred stock.

     2000 as Compared with 1999

     Net revenues increased by $2.9 million, or 40%, from $7.1 million in 1999 to $10.0 million in 2000. The increase is due to higher commercial product revenues, partially offset by lower government contract revenues.

     Net commercial product revenues consist of gross commercial product sales proceeds less discounts and an allocation of proceeds to a warrant issued to one customer in 1999 under a long-term supply agreement. For a discussion of the allocation to warrants, please read the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and

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Results of Operations — Non-Cash Charges for Warrants Issued To U.S. Cellular.” The following table summarizes the calculation of net commercial product revenues for 1999 and 2000:

     Net commercial product revenues increased by $3.2 million, or 158%, from $2.1 million in 1999 to $5.3 million in 2000. This increase is the result of increased sales of our SuperFilter products and a shift in the product mix toward higher-priced SIX-Pak units. The increase in gross commercial product sales proceeds was partially offset by $2.3 million in 2000 and $124,000 in 1999 to reflect an allocation of sales proceeds to warrants issued to U.S. Cellular in connection with those sales. The warrant charges increased because of growing product shipments to U.S. Cellular and a dramatic increase in our stock price during 2000. Our two largest customers accounted for 49% of our net commercial revenues in 2001 as compared to 69% in 2000.

     Government contract revenues decreased by $416,000, or 8%, from $5.1 million in 1999 to $4.6 million in 2000. We expect government contract revenues to decline as we focus more of our research and development resources on our commercial business.

     Cost of commercial product revenues includes all direct costs, manufacturing overhead and related start-up costs. The cost of commercial product revenues was $15.7 million for 2000, including an accrued non-cash loss of $4.2 million relating to the purchase order received from U.S. Cellular and other non-cash warrant charges relating to U.S. Cellular of $482,000. Please read the subsection below entitled “Non-Cash Charges for Warrants Issued To U.S. Cellular.” Excluding the non-cash charges relating to the supply agreement with U.S. Cellular, cost of commercial revenues increased $4.1 million, or over 60%, from $6.9 million for 1999. This increase results from increased units shipments and higher costs associated with ramping up the Company’s manufacturing abilities, partially offset by lower material costs and the effect of increased manufacturing efficiencies.

     We generate negative gross margins on our SuperFilter products at current sales levels primarily due to fixed manufacturing overhead costs.

     Contract research and development expenses increased by $808,000, or 24%, from $3.4 million in 1999 to $4.2 million in 2000. Contract research and development expenses as a percentage of related revenues totaled 91% for 2000, as compared with 68% last year. The percentage increase is due to higher expenses associated with a completed contract, the effect of spreading fixed expenses over a lower revenue base and the increased use of subcontractors.

     Other research and development expenses increased by $886,000, or 51%, from $1.7 million in 1999 to $2.6 million in 2000. This increase is due to increased spending on product line expansion, further development of the SuperFilter product line and product cost reduction efforts.

     Selling, general and administrative expenses increased by $2.6 million, or 45%, from $5.7 million in fiscal 1999 to $8.2 million in fiscal 2000. This increase results primarily from increased corporate development, domestic and international marketing and sales efforts, management recruitment activities, occupancy expenses, the implementation of a management incentive program, liability insurance premiums and expenses associated with distributing annual meeting information to a larger shareholder base.

     Non-recurring charges of $132,000 consist of the write off of deferred offering expenses in the second quarter of 2000.

     Interest income increase to $806,000 in 2000, as compared to $21,000 in the prior year, due to higher levels of cash available for investment.

     Interest expense increased by $151,000, or 45%, from $332,000 in 1999 to $483,000 in 2000 and resulted from new financing agreements in 1999 and 2000.

     We had a net loss of $20.7 million for the year ended December 31, 2000, as compared to $10.9 million for the prior year. Excluding the effect of the allocation of sales proceeds to warrants and loss accrual relating to the long-term sales

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contract with U.S. Cellular, we would have had a net loss of $13.6 million in 2000 as compared to $10.8 million in the prior year.

     The net loss available to common shareholders of $33.5 million, or $2.09 per share, for 2000 included $10.6 million for the non-cash cumulative effect of an accounting change and $2.2 million of non-cash deemed dividends on preferred stock. The net loss available to common shareholders of $12.2 million, or $1.58 per share, for 1999 included $1.4 million for non-cash dividends and other deemed distributions to preferred stockholders. Excluding the effect of these non-cash items and those in the preceding paragraph, the loss per share for 2000 totaled $0.85 per share as compared to $1.39 per share last year.

Liquidity and Capital Resources

     Cash and cash equivalents decreased by approximately $16.6 million from $31.8 million on December 31, 2000 to $15.2 million on December 31, 2001. The decrease results from cash used in operations and investing activities.

     Cash used in operations totaled $14.7 million in 2001. We used $15.1 million to fund the cash portion of our net losses. We also used cash to fund a $2.0 million increase in inventory. Cash generated from the decrease in accounts receivable totaled $2.2 million. Cash used in operations in 2000 totaled $14.5 million and was used primarily to fund operating losses of $11.8 million net of non-cash adjustments, $2.1 million for the increase in accounts receivable and $1.0 million for the increase in inventory.

     Net cash used in investing activities totaled $1.9 million in 2001 and $2.2 million in 2000 and related to the purchase of manufacturing equipment.

     Net cash used by financing activities totaled $24,000 in 2001. Cash received from the exercise of outstanding stock options totaled $218,000 and was offset by the net reduction in borrowings of $242,000. In the same period of 2000, cash provided by financing operations totaled $48.4 million and primarily resulted from issuance of convertible preferred shares and warrants and the exercise of stock options and warrants, partially offset by payments on borrowings.

     We also have a revolving line of credit available that matures on June 20, 2002. The line of credit cannot exceed the lesser of (i) $2.5 million or (ii) 80% of eligible accounts receivable. The line of credit bears interest at prime rate (4.75% at December 31, 2001) plus 1%, requires that certain financial and business covenants be maintained and is collateralized by substantially all of the Company’s assets. Upon maturity, we plan on replacing this facility with one from a new institution.

     On March 11, 2002 we had binding commitments totaling $13.0 million in a new equity private placement. The transaction is expected to generate net proceeds of $12.4 million. The Company closed commitments totaling $11.2 million on March 12, 2002 and expects to close the remaining commitment for $1.8 million pending a response to our request for guidance from Nasdaq. The Company may decline to accept the additional investment if Nasdaq concludes that shareholder approval is required. In that event, the net proceeds of the transaction would be $10.6 million.

     If the remaining commitment is accepted, the Company will have issued a total of 3,714,286 shares of common stock at $3.50 per share and 5-year warrants to purchase an additional 557,143 shares of the common stock at $5.50 per share. The common stock was priced on February 27, 2002 when the term sheet was signed, and the Company’s common stock closed at $4.02 per share on that date. The underlying warrants were priced on March 6, 2002 when the definitive purchase agreement was signed, and the Company’s common stock closed at $4.45 per share on that date.

     The securities sold in this private placement have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements of the Securities Act. The Company has agreed to file a registration statement by April 11, 2001 covering the shares of common stock issued at the closing and upon exercise of the warrants.

     At December 31, 2001, we had the following cash commitments:

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						Payments Due by
						Period
Contractual
Obligations		Total				Less than 1 year				2-3 years				4-5 years				After 5 years
Capital Lease Obligations		$	563,000			$	337,000			$	226,000				—				—
Operating Leases			11,295,000				1,318,000				2,210,000			$	2,285,000			$	5,482,000
Minimum License Commitment			712,000				100,000				200,000				200,000				212,000
Fixed asset purchase commitments			972,000				972,000				—				—				—
Total Contractual Cash Obligations		$	13,542,000			$	2,727,000			$	2,636,000			$	2,485,000			$	5,694,000

     Additionally, we plan to invest an additional $7.0-$9.0 million in fixed assets during 2002 to expand manufacturing space by 60 percent. With our present SuperFilter product mix, we expect to increase our manufacturing capacity to 600 systems per quarter and then have the ability to easily expand that capacity to 1,000 units per quarter. In addition, we expect that sales will continue to increase which will result in higher inventory and accounts receivable balances being maintained. Although revenues are expected to increase in 2002, through March 2002 the Company has continued to incur losses and expects to incur losses for the remainder of the year, although at a decreasing rate. Our long-term prospects are dependent upon the continued and increased market acceptance for our products.

     We expect our existing cash resources on hand at December 31, 2001, together with the cash raised through the recently completed private placement, will be sufficient to fund our planned operations into 2003. Thereafter, we may be required to raise additional capital, which may not be available on acceptable terms, if at all. Any inability to obtain needed financing could have a material adverse effect on our business and operating results.

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

     In August 1999, the Company entered into a warrant agreement with United States Cellular Corporation (“U.S. Cellular”) where the exercise of a warrant to purchase up to 1,000,000 shares of common stock was conditioned upon future product purchases by U.S. Cellular. Under the terms of the warrant, U.S. Cellular vests in the right to purchase one share of common stock at $4 per share for every $25 of SuperFilter systems purchased from the Company. The warrant is immediately exercisable with respect to any vested shares and expires August 27, 2004. For accounting purposes, we are allocating proceeds from sales under this agreement between commercial product revenues and the estimated value of the warrants vesting in connection with those sales. The estimated fair value of the warrants in excess of the related sales, when applicable, is recorded in cost of commercial product revenues. U.S. Cellular vested in the right to exercise 48,980 shares of common stock for product purchases in 1999 and 53,460 shares of common stock for product purchases in 2000. As a result, we allocated $124,000 of sales proceeds to vesting warrants in 1999 and $1,660,000 of sales proceeds to vesting warrants in 2000. We also allocated $482,000 to cost of commercial product revenues in the second quarter of 2000 for the estimated value of vesting warrants in excess of related sales to U.S. Cellular.

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

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     We estimated the fair value of the warrants vesting upon receipt of this order at $5,635,000 using the Black-Scholes option-pricing model and recorded this amount as a deferred warrant charge in the statement of stockholders’ equity. As SuperFilter systems are shipped under this purchase order, the related sales proceeds will be allocated between stockholders equity and commercial product revenue using the percentage relationship which existed between the fair value of the warrants as recorded in September 2000 and the amount of the non-cancelable purchase order. In 2000 and 2001, we allocated sales proceeds of $1,118,000 and $2,238,000, respectively, for shipments under this purchase order to the deferred warrant charge and recorded $1,765,000 and $3,116,000, respectively, as gross commercial product sales proceeds.

     After the allocation of sales proceeds to the related warrants, the estimated cost of providing products under the purchase order exceeds related revenue by $5.3 million. We included the resulting loss in the results of operations for the year ended December 31, 2000. In addition, in 2000 and 2001, we amortized $1,059,000 and $2,243,000, respectively, of this reserve against the cost of product delivered under this purchase order.

     The following table summarizes the allocation of sales proceeds to warrants issued under the U.S. Cellular agreement and the contract loss reserve for the years indicated:

Dollars in thousands			Year Ended December 31,
			1999				2000				2001
Warrants issued to U.S. Cellular allocated from gross commercial product sales proceeds through September 14, 2000			$	124			$	1,177			$	—
Warrants issued to U.S. Cellular allocated from gross commercial product sales proceeds subsequent to September 14, 2000				—				1,118				2,238
	Total		$	124			$	2,295			$	2,238
Warrants issued to U.S. Cellular included in cost of commercial product revenue			$	—			$	482			$	—
Non-cash loss included in cost of commercial product revenues in September 2000			$	—			$	5,300			$	—
Amortization of non-cash loss against cost of commercial product revenues delivered to U.S. Cellular				—				(1,059	)			(2,243	)
Non-cash loss remaining at December 31, 2000 to be amortized against cost of commercial product revenues based on future products deliverable to U.S Cellular			$	—			$	4,241			$	1,998

     As of December 31, 2001, U.S. Cellular had 585,560 unvested warrants that can be earned from future product orders through August 27, 2004.

Net Operating Loss Carryforward

     At December 31, 2001, we had a federal net operating loss carryforward of approximately $84.6 million. Section 382 of the Internal Revenue Code imposes an annual limitation on the utilization of net operating loss carryforwards based on a statutory rate of return (usually the “applicable federal funds rate”, as defined in the Internal revenue Code) and the value of the corporation at the time of a “change of ownership” as defined by Section 382. We recently completed an analysis of our equity transactions and determined that we had a change in ownership in 1999. Therefore, the ability to utilize net operating loss carryforwards incurred prior to the change of ownership totaling $32.6 million will be subject in future periods to an annual limitation of $2.3 million. Net operating losses incurred subsequent to the change totaled $52.0 million are not subject to this limitation. However, they may be subject to limitation should a subsequent change in ownership occur.

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Future Accounting Requirements

     In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144, which supercedes SFAS No. 121, Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed Of, provides a single accounting model for long-lived assets to be disposed of. The statement is effective January 1, 2002 and the Company does not believe it will have a material impact on its financial position or results of its operations.

     In June 2001, the FASB issued SFAS No. 141, Accounting for Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company does not believe that adoption of these statements will have a material impact on its financial position of results of operations.

Market Risk

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

     We rely on short-term variable rate debt obligations. As of December 31, 2001, we had no amounts outstanding under a variable rate revolving line of credit. The variable rate obligations are based on the lenders’ prime rate plus 1%. Assuming $2.5 million borrowings against the revolving line of credit, an increase of one-half of a percentage point in the lenders’ prime rate on January 1, 2002, and no principal payments for the remainder of the year, our total interest expense would increase by less than $13,000 for 2001 as compared to 2000.

     At December 31, 2001, we had approximately $15 million invested in a money market account yielding approximately 2.01%. Assuming a 1% decrease in the yield on this money market account and no liquidation of principal for the year, our total interest income would decrease by $150,000 per annum.

Forward-Looking Statements

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

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

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

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

Inflation

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     The Company does not foresee any material impact on its operations from inflation.

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

     See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk.”

ITEM  8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     All information required by this item is listed in the Index to Financial Statements in Part IV, Item 14(a) 1.

     Not applicable.

PART  III

ITEM  10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     Information regarding the executive officers and directors of the Company is incorporated by reference to the information set forth under the caption “Business— Executive Officers and Directors” and under the caption “Proposal One: Election of Directors” in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of the Company’s year ended December 31, 2001.

ITEM  11.   EXECUTIVE COMPENSATION.

     Information regarding executive compensation is incorporated by reference to the information set forth under the caption “Executive Compensation” in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of the Company’s year ended December 31, 2001.

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

     Information regarding security ownership of certain beneficial owners and management is incorporated by reference to the information set forth under the caption “Voting Securities of Principal Stockholders and Management” in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of the Company’s year ended December 31, 2001.

ITEM  13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Information regarding certain relationships and related transactions is incorporated by reference to the information set forth under the caption “Executive Compensation -Certain Transactions” in the Company’s Proxy Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days after the end of the Company’s year ended December 31, 2001.

PART  IV

ITEM  14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

	(a)	The following documents are filed as part of this Report:
		1.	Index to Financial Statements. The following financial statements of the Company and the Report of PricewaterhouseCoopers LLP, Independent Accountants, are included in Part IV of this Report on the pages indicated:
					Page
			Report of Independent Accountants			F-1

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			Balance Sheet as of December 31, 2000 and 2001			F-2
			Statement of Operations for the years ended December 31, 1999, 2000 and 2001			F-3
			Statement of Stockholders’ Equity for the years ended December 31, 1999, 2000 and 2001			F-4
			Statement of Cash Flows for the years ended December 31, 1999, 2000 and 2001			F-5
			Notes to Financial Statements			F-6
		2.	Financial Statement Schedule Covered by the Foregoing Report of Independent Public Accounts Statement.
			Schedule II — Valuation and Qualifying Accounts			F-21
			All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or the notes thereto.
		3.	Exhibits

Number		Description of Document
3.1		Amended and Restated Certificate of Incorporation of the Company(8)
3.2		Certificate of Amendment of Restated Certificate of Incorporation(15)
3.3		Bylaws of the Registrant(9)
3.4		Certificate of Amendment of Bylaws dated May 17, 2001(15)
3.5		Certificate of Amendment of Bylaws dated August 8, 2001(15)
4.1		Form of Common Stock Certificate(1)
4.2		Third Amended and Restated Stockholders Rights Agreement (9)
4.3		Warrant Issued to PNC Bank, National Association in connection with Credit Agreement(9)
4.4		Registration Rights Agreement to United States Cellular Corporation(10)
4.5		Form of Warrant to United States Cellular Corporation(10)
4.6		Warrant Purchase Agreement dated December 1, 1999 with PNC Bank(12)
4.7		Warrant Purchase Agreement dated January 12, 2000 with PNC Bank(12)
4.8		Certificate of Designations, Preferences and Rights of Series E Convertible Stock(13)
4.9		Securities Purchase Agreement dated as of September 29, 2000 between the Company and RGC International Investors, LDC. (Exhibits and Schedules Omitted)(13)
4.10		Registration Rights Agreement dated as of September 29, 2000 between the Company and RGC International Investors, LDC.(13)
4.11		Initial Stock Purchase Warrant dated as of September 29, 2000 between the Company and RGC International Investors, LDC.(13)
4.12		Incentive Stock Purchase Warrant dated as of September 29, 2000 between the Company and RGC International Investors, LDC.
4.13		Registration Rights Agreement, dated March 6, 2002(16)
4.14		Warrants to Purchase Shares of Common Stock, dated March 11, 2002(16)
4.15		Form of Series E Preferred Stock Certificate(16)
10.1		Technical Information Exchange Agreement between the Registrant and Philips dated September 1989(2)
10.2		1992 Director Option Plan(2)
10.3		Form of Indemnification Agreement(2)
10.4		License Agreement between the Registrant and the University of Arkansas dated April 9, 1992, as amended(2)
10.5		1992 Stock Option Plan(2)
10.6		Proprietary Information & Patents Inventions Agreement among the Registrant, E-Systems, Inc. and various other parties; Purchase Order dated October 10, 1991(2)
10.7		Joint Venture Company (JDC) Agreement between the Registrant and Sunpower Incorporated dated April 2, 1992(2)*
10.8		Government Contract issued to Registrant by the Defense Advanced Research Projects Agency through the Office of Naval Research dated September 4, 1991(2)
10.9		License Agreement between the Registrant and E.I. DuPont de Nemours and Company dated December 1992(2)*
10.10		Superconductor Technologies Inc. Purchase Agreement(3)*

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Number		Description of Document
10.11		Form of Distribution Agreement(4)
10.12		Amended and Restated 1988 Stock Option Plan, as amended, with form of stock option agreement(4)
10.13		Joint Venture Agreement between Registrant and Analeptic Technologies (S) Pet Ltd., dated May 20, 1996(5) *
10.14		Employment Offer Letter to M. Peter Thomas dated April 3, 1997(6)
10.15		Employment Agreement with E. Ray Cotten dated July 1, 1997(7)
10.16		PNC Bank, National Association Credit Agreement(9)
10.17		1999 Stock Option Agreement(11)
10.18		Second Amendment to Credit Agreement dated January 12, 2000 between Registrant and PNC Bank(12)
10.19		Third Amendment to Credit Agreement dated March 29, 2000 between Registrant and PNC Bank(17)
10.20		Fourth Amendment to Credit Agreement dated December 21, 2000 between Registrant and PNC Bank(17)
10.21		1998 Stock Option Plan(14)
10.22		Employment Agreement with M. Peter Thomas dated January 1, 2001 (15)
10.23		Promissory Note with M. Peter Thomas dated April 9, 2001 (15)
10.24		Securities Purchase Agreement, dated March 6, 2002(16)
10.25		Agreement Concerning Additional Investors, dated March 8, 2002(16)
23		Consent of Independent Accountants
24		Power of Attorney (included on signature page hereto)
99		Disclosure Regarding Forward-Looking Statements

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 22nd day of March 2002.

		SUPERCONDUCTOR TECHNOLOGIES INC.
	By:	/s/ M. Peter Thomas M. Peter Thomas President and Chief Executive Officer

POWER OF ATTORNEY

     KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints M. Peter Thomas and Martin S. McDermut and each of them, jointly and severally, his attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorneys-in-fact or his substitute or substitutes, may do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

Signature		Title		Date
/s/ M. Peter Thomas M. Peter Thomas		President, Chief Executive Officer and Director (Principal Executive Officer)		March 22, 2002
/s/ Martin S. McDermut Martin S. McDermut		Senior Vice President, Chief Financial Officer (Principal Financial Officer)		March 22, 2002
/s/ William J. Buchanan William J. Buchanan		Controller (Principal Accounting Officer)		March 22, 2002
/s/ Robert P. Caren Robert P. Caren		Director		March 22, 2002
/s/ E. Ray Cotten E. Ray Cotten		Director, Senior Vice President, Business Development and Chief Marketing Officer		March 22, 2002
/s/ Dennis J. Horowitz Dennis J. Horowitz		Director		March 22, 2002
/s/ John D. Lockton John D. Lockton		Chairman of the Board		March 22, 2002
/s/ Joseph C. Manzinger Joseph C. Manzinger		Director		March 22, 2002
/s/ J. Robert Schrieffer J. Robert Schrieffer		Director		March 22, 2002
/s/ H. Vaughan Blaxter, III H. Vaughan Blaxter, III		Director		March 22, 2002

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REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the financial statements listed in the index appearing under Item 14(a)(1) on page 24, present fairly, in all material respects, the financial position of Superconductor Technologies Inc. at December 31, 2000 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 24 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements and financial statement schedule in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 3 to the financial statements, in 2000 the Company changed its method of calculating the beneficial conversion feature associated with the issuance of convertible preferred stock.

/s/   PRICEWATERHOUSECOOPERS LLP

Los Angeles, California
February 18, 2002, except
for Note 13 “Subsequent Event”
for which the date is March 12,2002

F-1

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SUPERCONDUCTOR TECHNOLOGIES, INC.
Balance Sheet

See accompanying notes to the financial statements

F-2

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SUPERCONDUCTOR TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS