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, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

     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 15,612,77517,612,775 shares of the common stock outstanding as of the close of business on MayAugust 1, 2008.

     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. We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. We caution investors that any forward-looking statements presented in this Report, or which we may make orally or in writing from time to time, are based on the beliefs of, assumptions made by, and information currently available to, us. Such statements are based on assumptions and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our actual future results can be expected to differ from our expectations, and those differences may be material. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.

     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; limited number of potential customers; limited number of suppliers for some of our components; no significant backlog from quarter to quarter; and our market is characterized by 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 2007 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.

     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. (together with our subsidiaries, “we” or “us”) was incorporated in Delaware on May 11, 1987 and we maintain our headquarters in Santa Barbara, California. We are a leading company in high temperature superconductor (HTS) and related technologies. We operate in a single industry segment, the research, development, manufacture and marketing of high-performance infrastructure products for wireless voiceutilizing our HTS materials science and data applications. Our commercial products are divided into three product offerings: SuperLink (high-temperature superconducting filters), AmpLink (high performance, ground-mounted amplifiers) and SuperPlex (high performance multiplexers).manufacturing expertise. Our research and development contracts are used as a source of funds for our commercial technology development. From 1987 to 1997, we were engaged primarily in research and development and generated revenues primarily from government research contracts.

     We 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 us.revenues. For the threesix months ended March 29,June 28, 2008 and March 31,June 30, 2007, government related contracts accountaccounted for 43%48% and 16%19%, respectively, of our 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 our Form 10-K for the year ended December 31, 2007. The results of operations for the three and six months ended March 29,June 28, 2008 are not necessarily indicative of the results for all of 2008.

     In 2007,Our consolidated financial statements have been prepared assuming that we incurredwill continue as a net lossgoing concern. At June 28, 2008, we had cash and cash equivalents of $9.1$13.0 million and negative cash flows from operationsworking capital of $5.4$18.6 million. For the quarter ended March 29, 2008, we incurred a net loss of $2.3 million and negative cash flows from operations of $3.1 million.

     We cannot assure you that if we need additional financing (public or private) that it 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.

     Our financial statements have been prepared assuming thatIn the first six months of 2008, we will continue asincurred a going concern. The factors described above raise substantial doubt about our ability to continue asnet loss of $5.7 million and negative cash flows from operations of $6.9 million. In 2007, we incurred a going concern. Our financial statements do not include any adjustments that might resultnet loss of $9.1 million and negative cash flows from this uncertainty.operations of $5.4 million.

cash equivalents are maintained with quality financial institutions and from time to time exceed FDIC limits.

     We sell predominantly to entities in the wireless communications industry and to entities of the United States government. We grant uncollateralized credit to our customers. We perform ongoing credit evaluations of our 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. We determine the allowance based on historical write-off experience. Past due balances are reviewed for collectibility. Accounts balances are charged off against the allowance when we deem it is probable the receivable will not be recovered. We do not have any off balance sheet credit exposure related to our customers.

     Commercial revenues are principally derived from the sale of our 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.

     ��    We generate almost all of our revenue from two different types of contractual arrangements: cost-plus-fee contracts, and fixed-price contracts. Revenue on cost-plus-fee contracts is recognized to the extent of allowable costs incurred plus an estimate of the applicable fees earned. We consider fixed fees under cost-plus-fee contracts to be earned in proportion to the allowable costs incurred in performance of the contract.

     Our fixed price contracts have historically been fixed unit price type contracts. Revenue on fixed unit price contracts, where specified units of output under service arrangements are delivered, is recognized as units and are delivered based on the specified price per unit.

     All payments to us for work performed on contracts with agencies of the United States 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 our financial position, results of operations or cash flows. The Defense Contract Audit Agency audits of us are complete through 2003.

     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. We review inventory quantities on hand and on order and record, on a quarterly basis, a provision for excess and obsolete inventory and/or vendor cancellation charges related to purchase commitments. If the results of the review determine that a write-down is necessary, we recognize a loss in the period in which the loss is identified, whether or not the inventory is retained or disposed. Our inventory reserves establish a new cost basis for inventory and are not reversed until the related inventory is sold or otherwise disposed. Such provisions are established based on historical usage, adjusted for known changes in demands for such products, or the estimated forecast of product demand and production requirements. Costs associated with idle capacity are expensed immediately.

     Property and equipment are recorded at cost. Equipment is depreciated using the straight-line method over theirits estimated useful liveslife 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. During the quarter ending March 29,three and six months ended June 28, 2008, we disposed of $592,000$6,000 and $598,000 respectively, of older, fully depreciated equipment. There was no gain or loss on said disposition.these dispositions.

     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. in 2002 was recorded at our 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 us. Long livedLong-lived assets that will continue to be used by us are periodically 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 areis written down to theirits estimated fair value. We tested our long lived assets for recoverability during 2007 and did not believe that there was any impairment.

     In the normal course of our business we are subject to claims and litigation, including allegations of patent infringement. Liabilities relating to these claims are recorded when it is determined that a loss is probable and the amount of the loss can be reasonably estimated. The costs of our defense in such matters are expensed as incurred. Insurance proceeds recoverable are recorded when deemed probable.

     We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109,Accounting for Income Taxes(“SFAS 109”), which requires that we recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities, using enacted tax rates in effect in the years the differences are expected to reverse. Deferred income tax benefit (expense) results from the change in net deferred tax assets or deferred tax liabilities. A valuation allowance is recorded when it is more likely than not that some or all deferred tax assets will not be realized.

     In July 2006, the FASB issued Interpretation (“FIN”) No. 48,Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109(“FIN 48”). FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with SFAS 109. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. We adopted FIN 48 effective January 1, 2007, and the provisions of FIN 48 have been applied to all income tax positions commencing from that date. There was no material impact from this adoption. As of December 31, 2007, we had net operating loss carryforwards for federal and state income tax purposes of approximately $285.1 million and $154.7 million, respectively. We are currently evaluatingSection 382 of the potential limitationsInternal Revenue Code imposes an annual limitation on our ability to utilize ourthe 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 had changes in ownership in August 1999, December 2002, and as a result of equity sales in the recent investment by BAOLI.past year. Conductus, from whom we acquired some of our net operating losses, underwent three ownership changes, which occurred in February 1999, February 2001 and December 2002. Our ability to utilize net operating loss carryforwards incurred prior to each ownership change will be subject in future periods to future annual limitations which we are currently evaluating. 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 our products are expensed as incurred or at the time the advertising takes place. Advertising costs were not material in each of the quartersthree and six month periods ended March 29,June 28, 2008 and March 31,June 30, 2007.

     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.

     For the quartersthree and six months ended March 29,June 28, 2008 and March 31,June 30, 2007, the weighted average fair value of options we granted was estimated as ofat 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:

     We currently rely 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 our products. The loss of any of these suppliers could have a material adverse effect on our business, financial condition, results of operations and cash flows.

     In connection with the sales of our commercial products, we indemnify, without limit or term, our 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 our products or other claims arising from our products. We cannot reasonably develop an estimate of the maximum potential amount of payments that might be made under our guaranteeindemnity because of the uncertainty as to whether a claim might arise and how much it might total.

     In FebruaryMay 2008, the FASB issued FSP 157-2 “Partial DeferralSFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS No. 162). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS No. 162 is effective 60 days following the SEC’s approval of the Effective DatePublic Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Statement 157” (FSP 157-2)Present Fairly in Conformity with Generally Accepted Accounting Principles”. FSP 157-2 delaysWe do not expect that the effective dateimplementation of SFAS No. 157, for all non-financial assets and non-financial liabilities, except those

in the first quartersix months of 2008 was $5.00$3.59 per share versus $1.30 per share in the first quartersix months of 2007. The total compensation cost related to non-vested awards not yet recognized is $1.8 million and the weighted-average period over which the cost is expected to be recognized is 3.8was 3.6 years in the first quarter ofat June 28, 2008 versus $190,000$158,000 and 1.2 years in the first quarter of 2007.at June 30, 2007

     The following is a summary of stock option transactions under our stock option plans at March 29,June 28, 2008:

     The computation of per share amounts for the three month periods ended March 29,June 30, 2007 and June 28, 2008 and March 31, 2007 is based on the average number of common shares outstanding for the period. Options and warrants to purchase 1,703,4341,916,710 and 1,935,9081,951,738 shares of common stock during the quartersthree and six month periods ended March 29,June 30, 2007 and June 28, 2008, and March 31, 2007, respectively, were not considered in the computation of diluted earnings per share because their inclusion would be anti-dilutive.

     We lease our offices and production facilities under a non-cancelable operating lease that expires in November 2011. This lease contains an annual escalation clauses for increases in annual renewal optionsclause and requires us to pay utilities, insurance, taxes and other operating expenses.

     ForRent expenses totaled $279,000 and $562,000 for the three monthsand six month periods ended March 29,June 28, 2008, and March 31,$273,000 and $548,000 for the three and six month periods ended June 30, 2007, rent expense was $282,000 and $273,000, respectively.

     We leased certain property and equipment under a capital lease arrangement that expired in 2007.

     We 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 we fail to pay minimum annual royalties, these licenses may automatically become non-exclusive or be terminated. These royalty obligations terminate at various times from 2009 to 2020. For the three and six months ended March 29,June 28, 2008, and March 31, 2007, royalty expense totaled $38,000 and $59,000,$75,000, respectively. For the three and six months ended June 30, 2007, royalty expense totaled $33,000 and $87,000, respectively. Under the terms of certain royalty agreements, royalty payments made may be subject to audit. There have been no audits to date and we do not expect any future audit adjustments to be significant.

     The minimum lease payments under operating and capital leases and license obligations are as follows:

     We indemnify certain customers and our contract manufacturers against liability arising from third-party claims of intellectual property rights infringement related to our products. These indemnities appear in development and supply agreements with our customers as well as manufacturing service agreements with our contract manufacturers, are not limited in amount or duration and generally survive the expiration of the contract. Given that the amount of any potential liabilities related to such indemnities cannot be determined until an infringement claim has been made, we are unable to determine the maximum amount of losses that it could incur related to such indemnifications.

     We have entered into indemnification agreements with our directors and executive officers which require us to indemnify such individuals to the fullest extent permitted by Delaware law. Our indemnification obligations under such agreements are not limited in amount or duration. Certain costs incurred in connection with such indemnifications may be recovered under certain circumstances under various insurance policies. Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed against a director or executive officer, we are unable to determine the maximum amount of losses that we could incur relating to such indemnifications. Historically, any amounts payable pursuant to such director and officer indemnifications have not had a material negative effect on our business, financial condition or results of operations.

     We have also entered into severance and change in control agreements with certain of our executives. These agreements provide for the payment of specific compensation benefits to such executives upon the termination of their employment with us.us under specific conditions.

     During the normal course of business, we enter into contracts with customers where we agree to indemnify the other party for personal injury or property damage caused by our products. Our indemnification obligations under such agreements are not generally limited in amount or duration. Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed against a director or executive officer, we are unable to determine the maximum amount of losses that itwe could incur relating to such indemnifications. Historically, any amounts payable pursuant to such guarantees have not had a material negative effect on our business, financial condition or results of operations. We maintain general and product liability insurance as well as errors and omissions insurance which may provide a source of recovery to us in the event of an indemnification claim.

     We have aAdvances under our line of credit with a bank. Advances under the line of creditbank are collateralized by all our assets. Under the terms of the agreement, we continue to service the sold receivables and are subject to recourse provisions. Under the terms of the agreement, if the bank determines that there is a material adverse change in our business, it may declare a default andthey can exercise all ourtheir rights and remedies under the agreement. There was no amount outstanding under this facility at March 29,June 28, 2008.See Note 3—3—Short Term Borrowings.Borrowings.

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

     We have chosen to manufacture and sell certain commercial products on our own. To date, our commercial efforts have been focused on thedesign, manufacture, market and sellsale of high performance infrastructure products for wireless voice and data applications. Our products are utilized in major wireless networks which support voice and data communications by use of cell phones and other wireless communication devices.

     Our discussion and analysis of our historical financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements in conformity with those principles requires us to make estimates of certain items and judgments as to certain future events including for example those related to bad debts, inventories, recovery of goodwill and long-lived assets (including intangible assets), income taxes, warranty obligations, and contingencies. These determinations, even though inherently subjective and subject to change, affect the reported amounts of our assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. While we believe that our estimates are based on reasonable assumptions and judgments at the time they are made, some of our assumptions, estimates and judgments will inevitably prove to be incorrect. As a result, actual outcomes will likely differ from our accruals, and those differences—positive or negative—could be material. Some of our accruals are subject to adjustment, as we believe appropriate, based on revised estimates and reconciliation to the actual results when available.

     In addition, we identified certain critical accounting policies which affect certain of our more significant estimates and assumptions used in preparing our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2007. We have not made any material changes to these policies.

     Our commercial backlog consists of accepted product purchase orders with scheduled delivery dates during the next twelve months. We had commercial backlog of $192,000$12,000 at March 29,June 28, 2008, as compared to $352,000 at December 31, 2007.

     NetTotal net revenues decreased by $711,000,$1.8 million, or 17%38%, to $2.9 million in the second quarter of 2008 from $4.2$4.7 million in the second quarter of 2007. Total net revenues decreased by $2.5 million, or 28%, to $6.4 million in the first quartersix months of 2007 to $3.52008 from $8.9 million in the first quarter of 2008. Netsame period last year. Total net revenues consist primarily of commercial product revenues and government contract revenues.

     Net commercial product revenues decreased to $2.0$1.4 million in the firstsecond quarter of 2008 from $3.5$3.7 million in the firstsecond quarter of 2007, a decrease of $1.5$2.3, or 63%. For the first six months of 2008, net commercial product revenues decreased $3.8 million or 44%to $3.4 million from $7.2 million in the same period last year, a decrease of 53%. The decrease is primarily the result of lower sales volume forof both our SuperLink product due to customer program delays. The average sales prices for our products were unchanged.and AmpLink products. Our three largest customers accounted for 97%95% of our total net commercial product revenues in the first quarterhalf of 2008, compared to 95% in the first quarter of 2007.2008. 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 by $830,000, or 128% to $1.5$1.6 million in the firstsecond quarter of 2008 from $649,000$1.0 million in the firstsecond quarter of 2007. This2007, an increase of $569,000, or 55%. For the first six months of 2008, government contract revenues increased to $3.1 million from $1.6 million in the same period last year, an increase of $1.4, or 83%. The increase is primarily attributable to an increased numbera new larger contract received in the second quarter of government contracts.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 decreased by $1.9 million or 49% to $2.0totaled $2.2 million for the firstsecond quarter of 2008 compared to $3.9$3.2 million for the second quarter of 2007, a decrease of $1.0, or 33%. For the first six months of 2008, the cost of commercial product revenues totaled $4.2 million compared to $7.1 million for the first six months of 2007, a decrease of $2.9, or 41%. For the quarter of 2007. The lowerand year to date, decreased costs resulted principallyprimarily from lower production as a resultcommercial sales of lower sales.both our SuperLink and AmpLink products. There was no additional provision for obsolete inventories in the firstsecond quarter ofor six months ended June 28, 2008 as compared to $90,000$70,000 and $160,000 in the firstsecond quarter ofand six months ended June 30, 2007. There was a

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:

     Cash used in operations totaled $3.1$5.7 million in the first quarterhalf of 2008. We used $1.82008, including $4.5 million to fund the cash portion of our net loss. We also used cashloss and $2.8 million to fund a $2.0 million increaseincreases in inventory, partially offset by cash generated from a $761,000 decrease in accounts receivable, prepaid expenses and other assets, as well as an increase in accounts payable and accrued expenses.inventory.

     Net cash used in investing activities totaled $62,000$496,000 in the first quarterhalf of 2008 as compared to $27,000$71,000 in the first quarterhalf of last year. The expenditure relates2008 expenditures related primarily to purchases of property and equipment.

     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.

     Under an agreement entered intoNet cash provided by financing activities totaled $16.5 million in the first half of 2008. The cash was provided by net $10.9 million, net of $89,000 in expenses, from the $15.0 million August 2007 on February 27, 2008, we issued to BAOLI investment and two associated purchasers a totalnet $5.6 million, net of (a) 3,101,361$442,000 in expenses, from the sale of 2,000,000 shares of our common stock (of which 953,065 must be votedat $3.00 per share in accordance withMay 2008. Net cash used in financing activities totaled $10,000 in the votesfirst half of our other shares, effectively giving the holder no voting power over such shares) and (b) 611,523 shares of our Series A Convertible Preferred Stock (convertible under certain conditions into 6,115,230 shares of our common stock). We received $15.0 million in cash, of which $4.0 million was funded in 2007 and the $11.0 million balance was funded in January 2008.used to pay down our long term debt.

     We also have an existing line of credit from a bank. It is a material source of funds for our business. The line of credit was renewed in July 2008 for a term of one year. The line of credit expires in July 2008.2009. The loan agreement is structured as a sale of our accounts receivable and provides for the sale of up to $5.0 million of eligible accounts receivable, with advances to us totaling 80% of the receivables sold. Advances bear interest at the prime rate (5.25%(5.00% at March 29,June 28, 2008) plus 2.50% per annum subject to a minimum monthly charge. There was no amount outstanding under this borrowing facility at March 29, 2008 or December 31, 2007.June 28, 2008. Advances are collateralized by a lien on all of our assets. Under the terms of the agreement, we continue to service the sold receivables and are subject to recourse provisions.

     During the first quarter ofthree and six months ended June 28, 2008, there were no material changes outside the ordinary course of our business in the information regarding specified contractual obligations contained in our Annual Report on Form 10-K for the year ended December 31, 2007.

     We plan to invest approximately $600,000less than $150,000 in fixed assets during the remainder of 2008.

     Our principal sources of liquidity consist of existing cash balances and funds expected to be generated from future operations. We believe one of the key factors to our liquidity 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 onquarter as well as 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.

     For the quartersix months ended March 29,June 28, 2008, we incurred a net loss of $2.3$5.7 million and had negative cash flows from operations of $3.1$6.9 million. In 2007, we incurred a net loss of $9.1 million and had negative cash flows from operations of

     Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit, is recorded, processed, summarized and reported, within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures..

     Our Chief Executive Officer and Controller have evaluated our disclosure controls and procedures and have concluded, as of March 29,June 28, 2008, that they are effective as described above.

     There have been no changes in our internal control over financial reporting during the first quarterhalf of 2008 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

     Because of our inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     We may be involved in routine litigation arising in the ordinary course of our business, and, while the results of the proceedings cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse effect on our financial position, operating results or cash flows.

     A description of the risk factors associated with our business is contained in Item 1A, “Risk Factors,” of our 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 27, 2008 and incorporated herein by reference.2008. We are not aware of any material changes to thosethese risk factors.

     We did not conduct any offerings of equity securities during the firstsecond quarter of this year that were not registered under the Securities Act of 1933. However, on February 27, 2008 we consummated the previously discussed issuances of common stock and Series A Convertible Preferred Stock pursuant to a private placement that was not registered under the Securities Act