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.

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso or Noþ

     The registrant had 12,483,367 shares of the common stock outstanding as of the close of business on MayOctober 1, 2007.

     This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans” “would,” “may” or other similar expressions in this Report. 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.

     Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include the following: limited assets and a history of losses; needs for additional capital; limited number of potential customers; limited number of suppliers for some of our components; no significant backlog from quarter to quarter; our market is characterized bysignificant fluctuations in product demand from quarter to quarter; and rapidly advancing technology. For further discussion of these and other factors see Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A.” Risk Factors” in this Report and in our 2006 Annual Report onForm 10-K.

     This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Report .Report.

          As a public company, we are required to file annual,annually, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any of our materials on file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Judiciary Plaza, Washington, DC 20549, as well as at the SEC’s regional office at 5757 Wilshire Boulevard, Suite 500, Los Angeles, California 90036. Our filings are available to the public over the Internet at the SEC’s website at http:\\.www.sec.gov.//www.sec.gov. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. We also provide copies of our Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at no charge to investors upon request and make electronic copies of our most recently filed reports available through our website at www.suptech.com as soon as reasonably practicable after filing such material with the SEC.

     Superconductor Technologies Inc. (the “Company”) was incorporated in Delaware on May 11, 1987 and maintains its headquarters in Santa Barbara, California. The Company operatesWe operate in a single industry segment, the research, development, manufacture and marketing of high-performance infrastructure products for wireless voice and data applications. The Company’sOur commercial products are divided into three product offerings: SuperLink (high-temperature superconducting filters), AmpLink (high performance, ground-mounted amplifiers) and SuperPlex (high performance multiplexers). The Company’sOur research and development contracts are used as a source of funds for itsour commercial technology development. From 1987 to 1997, the Company waswe were engaged primarily in research and development and generated revenues primarily from government research contracts.

     The Company continuesWe continue to be involved as either contractor or subcontractor on a number of contracts with the United States government. These contracts have been and continue to provide us a significant source of revenues for the Company.revenues. For the threenine months ended March 31,September 29, 2007 and April 1,September 30, 2006, government related contracts account for 16%27% and 7%15%, respectively, of the Company’sour net revenues.

     The unaudited consolidated financial information furnished herein has been prepared in accordance with generally accepted accounting principles and reflects all adjustments, consisting only of normal recurring adjustments, which in the opinion of management, are necessary for a fair statement of the results of operations for the periods presented.

     The preparation of financial statements in conformity with generally accepted accounting principles requires managementus to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates and such differences may be material to the financial statements. This quarterly report on Form 10-Q should be read in conjunction with the Company’sour Form 10-K for the year ended December 31, 2006. The results of operations for the three and nine months ended March 31,September 29, 2007 are not necessarily indicative of results for the entire fiscal year ending December 31, 2007.

     In 2006, the Companyfirst nine months of 2007, we incurred a net loss of $29,624,000$6.9 million and negative cash flows from operations of $7,283,000.$3.9 million. In the first quarter of 2007, the Company2006, we incurred a net loss of $2,937,000$28.3 million and negative cash flows from operations of $2,306,000.$7.4 million.

     Our principal sources of liquidity consist of existing cash balances and funds expected to be generated from future operations. Based on our current forecasts, our cash resources may not be sufficient to fund our planned operations for the remainder of 2007. We believe one of the key factors to our liquidity in the remainder of 2007 will be our ability to successfully execute on our plans to increase sales levels in a highly concentrated industry where we experience significant fluctuations in sales from quarter to quarter. Our cash requirements will also depend on numerous other variable factors, including the rate of growth of sales, the timing and levels of products purchased, payment terms and credit limits from manufacturers, and the timing and level of accounts receivable collections. As a result of the uncertainty of these many factors, the Company cannot give assurances that it will be able to continue operations in the absence of raising additional capital. Accordingly, the Company intends to raise funds in the next six months to continue operations in the absence of an improvement in its sales.

     We cannot assure you that additional financing (public or private) will be available on acceptable terms or at all. If we issue additional equity securities to raise funds, the ownership percentage of our existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise any needed funds, we might be forced to make further substantial reductions in our operating expenses, which could adversely affect our ability to implement our current business plan and our viability as a company.

     The interim condensed consolidated financial statements include the accounts of Superconductor Technologies Inc. and itsour wholly owned subsidiaries. All significant intercompany transactions have been eliminated from the consolidated financial statements.

     Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. Cash and cash equivalents are maintained with quality financial institutions and from time to time exceed FDIC limits.

     The Company sellsWe sell predominantly to entities in the wireless communications industry and to entities of the United States government. The Company grantsGovernment. We grant uncollateralized credit to itsour customers. The Company performsWe perform ongoing credit evaluations of itsour customers before granting credit. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. The Company determinesWe determine the allowance based on historical write-off experience. Past due balances are reviewed for collectibility.collectability. Accounts balances are charged off against the allowance when the Company deemswe deem it is probable the receivable will not be recovered. The Company doesWe do not have any off balance sheet credit exposure related to itsour customers.

     Commercial revenues are principally derived from the sale of the Company’sour SuperLink, AmpLink, and SuperPlex products and are recognized once all of the following conditions have been met: a) an authorized purchase order has been received in writing, b) customer‘s credit worthiness has been established, c) shipment of the product has occurred, d) title has transferred, and e) if stipulated by the contract, customer acceptance has occurred and all significant vendor obligations, if any, have been satisfied.

     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 Companyus 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 believeswe believe that the audits will not have a significant effect on theour financial position, results of operations or cash flows of the Company.flows. The Defense Contract Audit Agency has completed audits of the Companyus through 2003.

     The Company offersWe offer warranties generally ranging from one to five years, depending on the product and negotiated terms of purchase agreements with itsour customers. Such warranties may require the Companyus to repair or replace defective product returned to the Companyus during such warranty period at no cost to the customer. An estimate by the Companyus for warranty related costs is recorded by the Companyus at the time of sale based on itsour actual historical product return rates and expected repair costs. Such costs have been within management’sour expectations. See “Use of Estimates”in this note.

     In connection with the sales and manufacturing of itsour commercial products, the Company indemnifies,we indemnify, without limit or term, itsour customers and contract manufacturers against all claims, suits, demands, damages, liabilities, expenses, judgments, settlements and penalties arising from actual or alleged infringement or misappropriation of any intellectual property relating to itsour products or other claims arising from itsour products. The CompanyWe cannot reasonably develop an estimate of the maximum potential amount of payments that might be made under itsour guarantees because of the uncertainty as to whether a

     Research and development costs are expensed as incurred and include salary, facility, depreciation and material expenses. Research and development costs incurred solely in connection with research and development contracts are charged to contract research and development expense. Other research and development costs are charged to other research and development expense.

     Inventories are stated at the lower of cost or market, with costs primarily determined using standard costs, which approximate actual costs utilizing the first-in, first-out method. Provision for potentially obsolete or slow moving inventory is made based on management’sour analysis of inventory levels and sales forecasts. Costs associated with idle capacity are expensed immediately.

     Property and equipment are recorded at cost. Equipment is depreciated using the straight-line method over their estimated useful lives ranging from three to five years. Leasehold improvements and assets financed under capital leases are amortized over the shorter of their useful lives or the lease term. Furniture and fixtures are depreciated over seven years. Expenditures for additions and major improvements are capitalized. Expenditures for minor tooling, repairs and maintenance and minor improvements are charged to expense as incurred. When property or equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts. Gains or losses from retirements and disposals are recorded in selling, general and administration expenses. For the most recent quarter and year to date, we disposed of $1.3 million of older, fully depreciated equipment. There was no gain or loss on said disposition.

     Patents and licenses are recorded at cost and are amortized using the straight-line method over the shorter of their estimated useful lives or approximately seventeen years. Purchased technology acquired through the acquisition of Conductus, Inc. is recorded at itsour estimated fair value and is amortized using the straight-line method over seven years.

     The realizability of long-lived assets is evaluated periodically as events or circumstances indicate a possible inability to recover the carrying amount. Long-lived assets that will no longer be used in business are written off in the period identified since they will no longer generate any positive cash flows for the Company.us. Periodically, long livedlong-lived assets that will continue to be used by the Company areus need to be evaluated for recoverability. Such evaluation is based on various analyses, including cash flow and profitability projections. The analyses necessarily involve significant management judgment. In the event the projected undiscounted cash flows are less than net book value of the assets, the carrying value of the assets will be written down to their estimated fair value. The CompanyWe completed such an analysis during fiscalthe fourth quarter of 2006 and determined that no write down was necessary.

income tax purposes of approximately $275.1 million and $143.4 million, respectively. We are currently evaluating the potential limitations on our ability to utilize our net operating loss carryforwards as a result of our recent financing transaction with BAOLI. Due to the uncertainty surrounding their realization, we have recorded a full valuation allowance against our net deferred tax assets. Accordingly, no deferred tax asset has been recorded in the accompanying balance sheet.

     All costs related to marketing and advertising the Company’sour products are expensed as incurred or at the time the advertising takes place. Advertising costs were not material in each of the quartersthree and nine month periods ended March 31,September 29, 2007 and April 1, 2006 .September 30, 2006.

     Basic and diluted net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding in each period. Potentially dilutive shares are not included in the calculation of diluted loss per share because their effect is anti-dilutive.

     Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(revised123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”). Under this provision, the share-based compensation cost recognized beginning January 1, 2006 includes compensation cost for (i) all share-based payments granted prior to, but not vested as of January 1, 2006, based on the grant date fair value originally estimated in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”)and (ii) all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Compensation cost under SFAS No. 123(R) is recognized ratably using the straight-line attribution method over the expected vesting period. Prior periods are not restated under this transition method.

     For the quartersthree and nine months ended April 1,September 29, 2007 and September 30, 2006 and March 31, 2007 the weighted average fair value hasvalues have been estimated at the date of the grant using the Black-Scholes option-pricing model. The following are the significant weighted average assumptions used for estimating the fair value under our stock option plans:

approximates fair value based on the Company’sour current incremental borrowing rates for similar types of borrowing arrangements.

     The Company hasWe have no items of other comprehensive income (loss) in any period other than itsour net loss.

     The Company operatesWe operate in a single business segment, the research, development, manufacture and marketing of high performance products used in cellular base stations to maximize the performance of wireless telecommunications networks by improving the quality of uplink signals from mobile wireless devices. Net commercial product revenues are primarily derived from the sales of the Company’sour SuperLink, AmpLink and SuperPlex products. We currently sell most of our productsproduct directly to wireless network operators in the United States. Net revenues derived principally from government research and development contracts are presented separately on the statement of operations for all periods presented.

     The Company hasWe have continued to incur operating losses. The Company’sOur long-term prospects and execution of itsour business plan are dependent upon the continued and increased market acceptance for the product.our products.

     The CompanyWe currently sellssell most of itsour products directly to wireless network operators in the United States and itsour product sales have historically been concentrated in a small number of customers. In the nine months ended September 29, 2007, we had two customers that represented 56% of total net revenues. At September 29, 2007, these customers represented 42% of accounts receivable. In 2006, the Companywe had three customers that represented 44%, 20% and 16% of total net revenues. At December 31, 2006, these three customers together represented 66% of accounts receivable. In the three months ended March 31, 2007, the Company had one customer that represented 70% of total net revenues. At March 31, 2007, this customer represented 73% of accounts receivable. The loss of or reduction in sales, or the inability to collect outstanding accounts receivable, from any of these customers could have a material adverse effect on the Company’sour business, financial condition, results of operations and cash flows.

     The CompanyWe currently reliesrely on one supplier for purchases of high quality substrates for growth of high-temperature superconductor films and a limited number of suppliers for other key components of itsour products. The loss of any of these suppliers could have a material adverse effect on the Company’sour business, financial condition, results of operations and cash flows.

recourse provisions. Advances bear interest at the prime rate (8.25%(7.75% at March 31,September 29, 2007) plus 2.50% subject to a minimum monthly charge. There was no amount outstanding under this borrowing facility at March 31,September 29, 2007.

     The agreement relating to this line of credit contains representations and warranties, affirmative and negative covenants and events of default customary for financings of this type. The failure to comply with these provisions, or the occurrence of any one of the events of default, would prevent any further borrowings and would generally require the repayment of any outstanding borrowings. Such representations, warranties and events of default include (a) non-payment of debt and interest thereunder,hereunder, (b) non-compliance with terms of the agreement covenants, (c) insolvency or bankruptcy, (d) material adverse change, (e) merger or consolidation where the Company’sour shareholders do not hold a majority of the voting rights of the surviving entity, (f) transactions outside the normal course of business, or (g) payment of dividends.

     In July 2006, the Company,we issued restricted stock awards for the first time, issued restricted stock awards.time. A total of 331,000 shares were granted and will fully vest in one single installment on the second anniversary of the grant date in July 2008. The per share weighted average grant-date fair value was $1.50. A 10% forfeiture rate was assumed. At September 29, 2007, 318,000 of these shares were outstanding.

     The impact to the Consolidated Statement of Operations for the quarterthree and nine months ended March 31,September 29, 2007 was an expense of $56,000 and $0.004$168,000 and zero and $0.01 on both basic and diluted earnings per share. No stock compensation cost was capitalized during the period. The total compensation cost related to non-vested awards not yet recognized is $298,000$186,000 and the weighted-average period over which the cost is expected to be recognized is 1.3 years.10 months. For the three and nine months ended September 30, 2006 the expense was $37,000 and zero on both basic and diluted earnings per share.

     The Company hasWe have entered into various licensing agreements requiring royalty payments ranging from 0.13% to 2.5% of specified product sales. Certain of these agreements contain provisions for the payment of guaranteed or minimum royalty amounts. In the event that the Company failswe fail to pay minimum annual royalties, these licenses may automatically become non-exclusive or be terminated. These royalty obligations terminate in 2009 to 2020. For the three and nine months ended April 1, 2006 and March 31,September 29, 2007, royalty expense totaled $38,000$43,000 and $59,000,$129,000, respectively. For the three and nine months ended September 30, 2006, royalty expense totaled $40,000 and $117,000, respectively. Under the terms of certain royalty agreements,

     In connection with the sales of itsour commercial products, the Company indemnifies,we indemnify, without limit or term, itsour customers against all claims, suits, demands, damages, liabilities, expenses, judgments, settlements and penalties arising from actual or alleged infringement or misappropriation of any intellectual property relating to itsour products or other claims arising from itsour products. The CompanyWe cannot reasonably develop an estimate of the maximum potential amount of payments that might be made under its guaranteeour indemnity because of the uncertainty as to whether a claim might arise and how much it might total.

     Advances under theour line of credit with the bank are collateralized by all the Company’sour assets. Under the terms of the agreement, the Company continueswe continue to service the sold receivables and isare subject to recourse provisions. Under the terms of the agreement, if the bank determines that there is a material adverse change in the Company’sour business, it may declare a default andthey can exercise all itstheir rights and remedies under the agreement. There was no amount outstanding under this facility at March 31,September 29, 2007.

     The Company hasWe have a contract to deliver several custom products to a government contractor. The Company isWe are unable to manufacture the products for technical reasons. The Company hasWe have discussed the problem with the contractor and itsour government customer. They are considering the problem, and further discussions are expected. The Company doesWe do not believe that a loss, if any, is reasonably estimable at this time and therefore has not recorded any liability relating to this matter. The CompanyWe will periodically reassess itsour potential liability as additional information becomes available. If itwe later determinesdetermine that a loss is probable and the amount reasonably estimable, the Companywe will record a liability for the potential loss. All costs have been expensed and no revenues recognized on this contract.

Balance Sheet Data:

     We develop, manufacture and market high performance infrastructure products for wireless voice and data applications. Wireless carriers face many challenges in today’s competitive marketplace. Minutes of use per user continue to groware skyrocketing, and wireless users now expect the same quality of service from their mobile devices as from their landline phones. We help wireless carriers meet these challenges by “doing more with less.”

     Our products help maximize the performance of wireless telecommunications networks by improving the quality of uplink signals from mobile wireless devices. Our products increase capacity utilization, lower dropped and blocked calls, extend coverage, and enable higher wireless data throughput — all while reducing capital and operating costs. SuperLink incorporates patented high-temperature superconductor (HTS) technology to create a receiver front-end that enhances network performance. Today, we are leveraging our expertise and proprietary technology in radio frequency (RF) engineering to expand our product line beyond HTS technology. We believe our RF engineering expertise provides us with a significant competitive advantage in the development of high performance, cost-effective solutions for the front end of wireless telecommunications networks.

          We have three product offerings:

          •SuperLink. In order to receive uplink signals from wireless handsets, base stations require a wireless filter system to eliminate, or filter out, out-of-band interference. SuperLink combines HTS filters with a proprietary cryogenic cooler and a cooled low-noise amplifier. The result is a highly compact and reliable receiver front-end that can simultaneously deliver both high selectivity (interference rejection) and high sensitivity (detection of low level signals). SuperLink delivers significant performance advantages over conventional filter systems.

          •AmpLink. AmpLink is designed specifically to address the sensitivity requirements of wireless base stations. AmpLink is a ground-mounted unit which includes a high-performance amplifier and up to six dual duplexers. The enhanced uplink provided by AmpLink improves network coverage immediately and avoids the installation and maintenance costs associated with tower mounted alternatives.

          •SuperPlex. SuperPlex is our line of multiplexers that provides extremely low insertion loss and excellent cross-band isolation. SuperPlex high-performance multiplexers are designed to eliminate the need for additional base station

expect further cost reductions over the next twelve months. However, we cannot predict whether our costs will decline at a rate sufficient to keep pace with the competitive pricing pressures.

     On March 2,August 17, 2007, we entered into a Settlement Agreement and Mutual Release of All Claimsan agreement with Mr. Shalvoy to settle the lawsuitHunchun BaoLi Communication Co. Ltd. (“BAOLI”) under which BAOLI has agreed to invest $15.0 million in exchange for 9,216,590 shares of our common stock. The purchase price is $1.6275 per share, based on a five percent premium over the average closing price of our common stock on the NASDAQ stock exchange for the 30 days ending August 17, 2007. The investment is scheduled to be made in several installments through the end of 2007; as of November 9, 2007, we had received $610,000 in April 2007 and rescinded Mr. Shalvoy’s second purported option exercise including cancellationan aggregate of $4.0 million of the related note. Accordingly,total of $15.0 million. Some of the Company reversed $610,000payments have been somewhat delayed from their original schedule by Chinese currency control regulations, but all are expected before the end of 2007. On November 9, 2007, we revised the terms of the transaction. As revised the transaction will involve the issuance of only 2,148,296 shares of common stock, with BAOLI receiving the remainder of its investment in reserves innon voting preferred stock with essentially the same economics as, and convertible into, 7,068,290 shares of common stock. This restructuring is not intended to change the substantive economic terms of the transaction. We are also currently evaluating the potential limitations on our ability to utilize our net operating loss carryforwards as a result of this first quarter of 2007, reducing our operating expenses by that amount.transaction.

     On April 20,November 9, 2007, we entered intosigned a $4.7 million contractbinding definitive agreement for a joint venture with Hunchun BaoLi Communications Co. Ltd. (BAOLI) to manufacture and market our SuperLink interference elimination solution for the U. S. Air ForceChina market. Under the terms of the agreement, we will provide an exclusive license in the China market of the enabling technology and BAOLI will provide the manufacturing expertise and financing. BAOLI holds 55 percent of the equity in the joint venture. We hold 45 percent and will receive a royalty on sales. The joint venture still needs to develop Semiconductor-Tuned High Temperature Superconducting Filtersobtain certain governmental approvals before it can become operational.

     On October 30, 2007, we announced a sales agreement with China Corporate Credit Assurance Co. Ltd. (CCAC) for Ultra-Sensitive Radio Frequency Receivers (SURF). During this initial twelve month contract, which providesour SuperLinksolution, thereby establishing a mechanism for progress billings,us to supply our products to China while the U.S. Air Force has an option to extendprocess of forming the contract for an additional $5.4 million to develop a prototype rack-mountable system.BAOLI joint venture proceeds.

     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, recovery of goodwill and long-lived assets, including intangible assets, income taxes, warranty obligations, and contingencies. 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 theseWhile we believe that our estimates under differentare based on reasonable assumptions or conditions.

     NetTotal net revenues decreased by $657,000,$1.8, or 14%30%, to $4.1 million in the third quarter of 2007 from $4.8$5.9 million in the third quarter of 2006. Total net revenues decreased by $2.8 million, or 18%, to $13.0 million in the first quarternine months of 2006 to $4.22007 from $15.8 million in the first quarter of 2007. Netsame period last year. Total net revenues consist primarily of commercial product revenues and government contract revenues. We also generate some additional revenues from sublicensing our technology.

     Net commercial product revenues decreased to $3.6$2.3 million in the firstthird quarter of 2007 from $4.5$4.9 million in the firstthird quarter of 2006, a decrease of $956,000,$2.6 million, or 21%54%. For the first nine months of 2007, net commercial product revenues decreased $3.8 million to $9.5 million from $13.3 million in the same period last year, a decrease of 29%. The decrease is primarily the result of lower sales of our AmpLink products, partially offset by increased sales of our SuperLink product.SuperPlex products. Our three largest customers accounted for 95%63% of our total net commercial product revenues in the first quarternine months of 2007, compared to 90% in the first quarter of 2006.2007. These customers generally purchase products through non-binding commitments with minimal lead-times. Consequently, our commercial product revenues can fluctuate dramatically from quarter to quarter based on changes in our customers’ capital spending patterns.

     Government contract revenues increased to $649,000$1.8 million in the firstthird quarter of 2007 from $342,000$1.0 million in the firstthird quarter of 2006, an increase of $307,000,$842,000, or 90%84%. ThisFor the first nine months of 2007, government contract revenues increased to $3.5 million from $2.4 million in the same period last year, an increase of $1.1 million, or 45%. The increase is primarily attributable to an increased numberthe addition of government contracts.new and larger contracts in 2007.

     Cost of commercial product revenues includes all direct costs, manufacturing overhead, provision for excess and obsolete inventories and restructuring and impairment charges relating to the manufacturing operations. The cost of commercial product revenue totaled $3.9$2.7 million for the third quarter of 2007 compared to $4.2 million for the third quarter of 2006, a decrease of $1.5 million, or 36%. For the first nine months of 2007, the cost of commercial product revenues totaled $9.8 million as compared to $11.7 million for the first quarternine months of 20072006, a decrease of $1.9 million or 16%. For the year to date, decreased costs resulted primarily from lower production as a result of lower sales. There was also a reversal of a $319,000 product line exit cost accrual year to date. This accrual was established in 2002 in the amount of $1,042,000 and 2006. No change in theserepresented the estimated costs to be incurred with decreaseda customer to support commercial product revenue is primarily the resultunits previously purchased from Conductus for a period of the fixed expenses at this level of production.five years.

     Our cost of sales includes both variable and fixed cost components. The variable component consists primarily of materials, assembly and test labor, overhead, which includes equipment and facility depreciation, transportation costs and warranty costs. The fixed component includes test equipment and facility depreciation, purchasing and procurement expenses and quality assurance costs. Given the fixed nature of such costs, the absorption of our production overhead costs into inventory decreases and the amount of production overhead variances expensed to cost of sales increases as production volumes decline since we have fewer units to absorb our overhead costs against. Conversely, the absorption of our production overhead costs into inventory increases and the amount of production overhead variances expensed to cost of sales decreases as production volumes increase since we have more units to absorb our overhead costs against. As a result, our gross profit margins generally decrease as revenue and production volumes decline due to lower sales volume and higher amounts of production overhead variances expensed to cost of sales; and our gross profit margins generally increase as our revenue and production volumes increase due to higher sales volume and lower amounts of production overhead variances expensed to cost of sales.

     The following is an analysis of our commercial product gross profit and margins:

     We had a negative gross profitloss of $368,000$420,000 in the firstthird quarter of 2007 from the sale of our commercial products as compared to a gross profit of $632,000$677,000 in the firstthird quarter of 2006. We experienced negativeFor the nine months ended September 29, 2007, we had a gross profit in the first quarterloss of 2007 because the reduced level of commercial sales was insufficient to cover our fixed manufacturing overhead costs. In contrast, our positive gross profit in the first quarter of 2006 was due to lower direct costs and higher commercial sales which covered our fixed manufacturing overhead costs. Gross margin in the first quarter of 2007 was also favorably impacted $126,000$364,000 from the sale of previously written-off inventory.our commercial products as compared to a gross profit of $1.6 million in the nine months ended September 30, 2006. Our gross margins were alsoadversely impacted by lower sales volume as well as charges for excess and obsolete inventory of approximately $90,000$160,000 and $270,000 in the first quarternine months of 2007 and 2006.2006, respectively. We regularly review inventory quantities on hand and

factors including sales backlog, historical inventory usage, forecasted product demand and production requirements for the next twelve months.

     Contract research and development expenses totaled $445,000$963,000 in the firstthird quarter of 2007 as compared to $304,000$651,000 in the third quarter of 2006 and represented 52% and 65% of government revenue, respectively. These expenses totaled $2.0 million in the first quarternine months of 2006. This2007 and $1.7 million in the first nine months of 2006 and represented 57% and 68% of government revenue, respectively. The expense increase was the result of higher expenses associated with performing our government contracts in the first quarter and two new contracts added in the second quarter. The expenses in 2007 represented a greater numberlower percent of government contracts.revenue for both the quarter and year to date due to greater overhead absorption associated with increased government revenues.

     Other research and development expenses relate to development of new wireless commercial products. We also incur design expenses associated with reducing the cost and improving the manufacturability of our existing products. These expenses totaled $913,000$528,000 in the firstthird quarter of 2007 as compared to $1.3 million$767,000 in the same quarter of the prior year. Thisyear and totaled $2.3 million in the first nine months of 2007 and $2.7 million in the first nine months of 2006. The decrease isin the third quarter expenses was due to decreased commercial products development.increased efforts on new government contracts consuming more of our engineering resources, which were included in contract research and development expenses.

     Selling, general and administrative expenses totaled $1.9$2.0 million in the firstthird quarter of 2007, as compared to $2.7$2.4 million in the firstthird quarter of the prior year. In the first nine months of 2007, these expenses totaled $5.9 million as compared to $7.8 million in the same period last year. The lower expenses in 2007 for the quarter resulted primarily from lower insurance premiums and lower selling costs. The lower expenses in 2007 year to date resulted primarily from lower insurance premiums and lower selling costs combined with the second quarter reversal of a $610,000 reserve (see “Settlement of Litigation”under Legal Proceedings Note to the Financial Statements) and lower insurance premiums.

     Interest expense in the first quarter ofthree months and nine months ended September 29, 2007 decreasedamounted to $11,000,$9,000 and $30,000, as compared to $13,000$11,000 and $35,000 in the prior year, because of lower borrowings.three months and nine months ended September 30, 2006.

     We had a net loss of $2.9$2.0 million for the quarter ended March 31,September 29, 2007, as compared to a net loss of $3.2$2.1 million in the same period last year. For the nine months ended September 29, 2007, our loss totaled $6.9 million as compared to a net loss of $28.0 million in the same period last year.

     The net loss available to common shareholders totaled $0.24$0.16 per common share in the firstthird quarter of 2007, as compared to a net loss of $0.26$0.17 per common share in the same period last year. The net loss available to common shareholders totaled $0.56 per common share in the first nine months of 2007, as compared to a net loss of $2.24 per common share in the same period last year.

     As of March 31,September 29, 2007, we had working capital of $7.8$5.0 million, including $3.1$2.5 million in cash and cash equivalents, as compared to working capital of $10.2 million at December 31, 2006, which included $5.5 million in cash and cash equivalents. In August 2007 our cash position was increased by the first installment of $1.0 million from BAOLI. An additional $3.0 million was received in October, 2007 and is not included in these third quarter financials. We currently invest our excess cash in short-term, investment-grade, money-market instruments with maturities of three months or less. We believe that all of our cash investments would be readily available to us should the need arise.

     Cash and cash equivalents decreased by $2.3$3.0 million to $2.5 million at September 29, 2007 from $5.5 million at December 31, 2006 to $3.1 million at March 31, 2007.2006. Cash during this period was used primarily in operations and to a lesser extent for the purchase of property and equipment and for the payment of long-term borrowings. Cash and cash equivalents decreased by $3.7 million to $9.3 million in the three month period ended April 1, 2006. Cash was used in operations, for the purchase of property and equipment, for the payment of short and long-term borrowings.

     Cash used in operations totaled $2.3$3.9 million in the first quarternine months of 2007. We used $2.1$4.9 million to fund the cash portion of our net loss. We also used cash to fund a $1.5$1.0 million increase in accounts receivable patents and licenses, accounts payable prepaid expenses and other assets.payments. These uses were partially offset by cash generated from a $1.3 million reduction in inventory.the sale of inventory, prepaid expenses and other assets totaling $2.0 million. Cash used in operations totaled $3.6$7.4 million in the first quarternine months of 2006. We used $2.4$5.6 million to fund the cash portion of our net loss. We also used cash to fund a $2.0$2.1 million increase in inventory, patents and licenses,accounts receivable and accounts payable payments. These uses were partially offset by cash generated from the collectionreduction of accounts receivable, prepaid expenses and other assets totaling $821,000.$259,000.

     Net cash used inprovided by investing activities totaled $27,000$935,000 in the first quarternine months of 2007 as compared to $159,000$211,000 used in investing activities in the first quarternine months of last year. TheseWe received the first $1.0 million from our financing with BAOLI on August 31, 2007. The financing payment was partially off set by $91,000 expenditures related primarily to purchases of manufacturing equipment and facilities improvements to increase our production capacity. The first quarternine months 2007 investing activity is net of $18,000$26,000 in equipment sales.

     Net cash used in financing activities totaled $5,000$14,000 in the first quarternine months of 2007. The cash was used to pay down our long term debt. Net cash used in financing activities totaled $4,000 in the first quarter of2007 and 2006, and was also used to pay down our long term debt.

     We have historically financed our operations through a combination of cash on hand, cash provided from operations, equipment lease financings, available borrowings under bank lines of credit and both private and public equity offerings. We have effective registration statements on file with the SEC covering the public resale by investors of all the common stock issued in our private placements, as well as any common stock acquired upon exercise of their warrants.