specialized manufacturing expertise to create uniform thin layers of these materials, expert designs of circuits optimized for HTS materials, and technologies to maintain an extremely low temperature environment for HTS applications (although the critical temperatures for HTS are "high" compared with traditional superconductors, but they are still extremely cold by other standards).
Our Proprietary Technology
We are focused on research and development to maintain our technological edge. As of March 28, 2009 we had 35 employees in our research and development division; 9 of our employees have Ph.D.s, and 14 others hold advanced degrees, in physics, materials science, electrical engineering and other fields. Our development efforts over the last 21 years have yielded an extensive patent portfolio as well as critical trade secrets, unpatented technology and proprietary knowledge. We enter into confidentiality and nondisclosure agreements with our employees, suppliers and consultants to protect our proprietary information. As of March 28, 2009, we held 58 U.S. patents in the following categories:
• 7 patents for technologies directed toward producing thin-film materials and structures, which expire between 2010 and 2025. We have developed a proprietary state-of-the-art manufacturing process for producing HTS thin-films of the highest quality.

• 30 patents for cryogenic and non-microwave circuit designs, which expire between 2010 and 2026. The expertise of our highly qualified team has allowed us to design and fabricate extremely small, high-performance circuits including RF signal filters.

• 17 patents covering cryogenics, packaging and systems, which expire between 2013 and 2025. Our proprietary and patented cryogenic packaging innovation provides us with a significant competitive advantage in maintaining our HTS materials at their critical temperatures.

• 4 patents covering other superconducting technologies, which expire between 2013 and 2015.

As of March 28, 2009, we also had 17 issued foreign patents, 23 U.S. patent applications pending and 49 foreign applications patents pending.
We are currently focusing our efforts on applications in areas such as:
• Wireless Networks. Our current commercial 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.

• Reconfigurable Handset Filters. The trend in the wireless handset industry is to continually reduce size and cost, while adding more features and making the unit more adaptable to different air interfaces and frequencies throughout the world. This drives the need for more complex and reconfigurable transceivers. We believe our strong intellectual property and expertise in frequency agile and thin film filters position us well to meet this demand.

• Superconducting Power Transmission Lines. We have entered into a collaborative effort and signed a Material Transfer Agreement with the Department of Energy's Los Alamos National Laboratory ("LANL") to apply our HTS expertise to LANL's research initiative to develop HTS coated conductors for power transmission lines. If successfully developed, HTS superconducting cables could replace copper power transmission lines, resulting in higher capacity with less resistive cable losses.

• Government Products. As the worldwide leader in developing tunable HTS filter systems for military applications, we continue to be a crucial partner in the U.S. government's future success. Our high-performance HTS filter systems have been proven to increase the detection range, reduce interference, and in some cases, detect signals that were previously undetectable with conventional technology. Currently, we actively participate in the development of technologies for application in military communications, signals intelligence, and electronic warfare.

Our development efforts can take a significant number of years to commercialize, and we must overcome significant technical barriers and deal with other significant risks, some of which are set out in our public filings, including in particular the "Risk Factors" included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008 (our "2008 Form 10-K").

Our Business Model
To be successful, we must use our expertise and our technology to generate revenues in various ways, including government contracts, commercial operations, joint ventures and licenses:
Government Contracts
We generate significant revenues from government contracts. We typically own the intellectual property developed under these contracts, and grant the U.S. government a royalty-free, non-exclusive and nontransferable license to use it. As a result, our government contracts can not only generate a profit for us, but we can also make additional money through exploiting of the resulting technology in our commercial operations as well as government products, or through licenses or joint ventures.
Commercial Applications
We have chosen to manufacture and sell certain commercial products on our own. To date, our commercial efforts have been focused on the design, manufacture, and sale of high performance infrastructure products for wireless voice and data applications. We have three current product lines, all of which relate to wireless base stations:
• SuperLink®, a highly compact and reliable receiver front-end HTS wireless filter system to eliminate out-of-band interference for wireless base stations, combining filters with a proprietary cryogenic cooler and a cooled low-noise amplifier.

• AmpLink®, a ground-mounted unit for wireless base stations that includes a high-performance amplifier and up to six dual duplexers.

• SuperPlex, a high-performance multiplexer that provides extremely low insertion loss and excellent cross-band isolation designed to eliminate the need for additional base station antennas and reduce infrastructure costs.

We sell most of our current commercial products to a small number of wireless carriers in the United States, including ALLTEL, AT&T, Sprint Nextel, T-Mobile and Verizon Wireless. Verizon Wireless and AT&T each accounted for more than 10% of our commercial revenues in the three months ended March 28, 2009 and for all of 2008. We are seeking to expand our customer base by selling directly to other wireless network operators and manufacturers of base station equipment, including internationally. Demand for wireless communications equipment fluctuates dramatically and unpredictably. The wireless communications infrastructure equipment market is extremely competitive and is characterized by rapid technological change, new product development, product obsolescence, evolving industry standards and price erosion over the life of a product. We face constant pressures to reduce prices. Consequently, we expect the average selling prices of our products will continue decreasing over time. We expect these trends to continue and may cause significant fluctuations in our quarterly and annual revenues. Our commercial operations are subject to a number of significant risks, some of which are set out in our public filings, including in particular the "Risk Factors" included in Item 1A of our 2008 Form 10-K. Joint Ventures
From time to time we may pursue joint ventures with other entities to commercialize our technology. In particular, we have agreed to license certain technology for our SuperLink®interference elimination solution for the China market to a joint venture where we own 45 percent of the equity. In the fourth quarter of 2008, we successfully completed lab and field trials for our new TD-SCDMA solution in China and in the first quarter of 2009, we successfully completed a field trial in the existing China 2G market using our SuperLink® solution. The commencement of manufacturing and the transfer of our processes to the joint venture will be driven by product demand from the China market. The joint venture's activities remain subject to successful product marketing efforts in addition to a number of other conditions, including certain critical approvals from the Chinese and United States governments. In particular, we have been in discussions with the United States government concerning the national security implications of our joint venture and investment from Hunchun BaoLi Communications ("BAOLI"). There continues to be no assurance that these conditions will be met, or that all required approvals (if obtained) will be obtained on a timely basis. Even if these conditions are met and the approvals received, the results from our joint venture will be subject to a number of significant risks associated with international operations and new ventures, some of which are set forth in our public filings, including in particular the "Risk Factors" included in Item 1A of our 2008 Form 10-K. Licenses

From time to time we grant licenses for our technology to other companies. Specifically, we have granted licenses to, among others, (1) Bruker for Nuclear Magnetic Resonance application, (2) General Dynamics for government applications and (3) Star Cryoelectronics for Superconducting Quantum Interference Device applications.
Recent Developments
In April 2009, we signed a letter of intent to participate with a major wireless original equipment manufacturer (OEM) in a long-term evolution (LTE) field trial with a tier-one U.S. wireless operator for its new 700 megahertz (MHz) network. The trial is scheduled to be completed in the fourth quarter of 2009.
Backlog
Our commercial backlog consists of accepted product purchase orders with scheduled delivery dates during the next twelve months. We had commercial backlog of $434,000 at March 28, 2009 compared to $272,000 at December 31, 2008. Results of Operations
Quarter Ended March 28, 2009 compared to the Quarter Ended March 29, 2008 Net revenues decreased by $1.8 million, or 52%, from $3.5 million in the first quarter of 2008 to $1.7 million in the first quarter of 2009. Net revenues consist primarily of commercial product revenues and government contract revenues.
Net commercial product revenues decreased to $1.1 million in the first quarter of 2009 from $2.0 million in the first quarter of 2008, a decrease of $862,000, or 43%. The decrease is primarily the result of lower sales volume for our SuperLink® product due to customer program delays. The average sales prices for our products were unchanged. Our three largest customers accounted for 98% of our total net commercial product revenues in the first quarter of 2009, compared to 97% in the first quarter of 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 decreased $933,000, or 63%, to $546,000 in the first quarter of 2009 from $1.5 million in the first quarter of 2008. This decrease was due to a funding delay on a current contract. In March, that contract was funded for an additional twelve months and provides for progress billing of up to $4.1 million.
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 $222,000, or 11%, to $1.8 million for the first quarter of 2009 compared to $2.0 million for the first quarter of 2008. The lower costs resulted principally from lower production as a result of lower sales. There was a $74,000 reduction in a specific warranty provision in the first quarter of 2008 on the expiration of a warranty. There was no such warranty expense reduction in the first quarter of 2009.
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:

                                                        For the quarters ended
                                               March 28, 2009           March 29, 2008
                                                        (Dollars in thousands)

    Net commercial product sales             $ 1,131       100.0 %    $ 1,993       100.0 %
    Total cost of commercial product sales     1,797       158.9 %      2,019       101.3 %

    Gross profit                             $  (666 )     (58.9 %)   $   (26 )      (1.3 %)

We had a negative gross profit of $666,000 in the first quarter of 2009 from the sale of our commercial products compared to a negative gross profit of $26,000 in the first quarter of 2008. We experienced negative gross profit in the first quarters of 2009 and 2008 because the reduced level of commercial sales was insufficient to cover our fixed manufacturing overhead costs. We regularly review inventory quantities on hand and provide an allowance for excess and obsolete inventory based on numerous factors including sales backlog, historical inventory usage, forecasted product demand and production requirements for the next twelve months. Gross margin in the first quarter of 2008 and 2009 was not impacted by the sale of previously written-off inventory.
Contract research and development expenses totaled $569,000 in the first quarter of 2009 compared to $1.2 million in the first quarter of 2008. This decrease was the result of lower expenses associated with performing a fewer number of government contracts.
Other research and development expenses relate principally to development of new wireless commercial products and other products related to our expertise. We also incur design expenses associated with reducing the cost and improving the manufacturability of our existing products. These expenses totaled $1.1 million in the first quarter of 2009 compared to $408,000 in the same quarter of the prior year. This increase is due to fewer government contracts using relatively less of our limited engineering resources.
Selling, general and administrative expenses totaled $1.7 million in the first quarter of 2009 compared to $2.2 million in the first quarter of the prior year. The lower expenses in 2009 resulted primarily from a reduction in employees in the fourth quarter of 2008 as well as lower expenses for insurance premiums, fewer repairs and maintenance charges, and lower consulting expenses.
Interest income decreased in the first quarter of 2009 compared to the prior year period, because of lower interest rates in 2009, and we had less cash available for investment.
Interest expense in both the first quarter of 2009 and 2008 was $9,000. We had a net loss of $3.5 million for the quarter ended March 28, 2009, compared to a net loss of $2.3 million in the same period last year.
The net loss available to common stockholders totaled $0.20 per common share in the first quarter of 2009 compared to a net loss of $0.17 per common share in the same period last year.
Liquidity and Capital Resources
Cash Flow Analysis
As of March 28, 2009, we had working capital of $9.4 million, including $5.1 million in cash and cash equivalents, compared to working capital of $12.3 million at December 31, 2008, which included $7.6 million in cash and cash equivalents. We currently invest our excess cash in short-term, investment-grade, money-market instruments with maturities of three months or less. We do not own any auction rate securities. We believe that all of our cash investments would be readily available to us should the need arise.
Cash and cash equivalents decreased by $2.5 million from $7.6 million at December 31, 2008 to $5.1 million at March 28, 2009. Cash was used principally in operations and for the purchase of property and equipment.
Net cash used in operations totaled $2.5 million in the first quarter of 2009. We used $2.8 million to fund the cash portion of our net loss. We also used cash to fund a $213,000 increase in accounts receivable and patents, offset by cash provided by a $549,000 decrease in inventory and prepaid expenses and other assets, as well as an increase in accounts payable and accrued expenses.
Net cash used in investing activities totaled $11,000 in the first quarter of 2009 compared to $62,000 in the first quarter of last year. In the first quarter of 2009 we used $25,000 to purchase property and equipment, offset by a $14,000 net reduction in our joint venture investment.
We had no financing activities in the first quarter of 2009 compared to cash provided by $11.0 million from the $15.0 million BAOLI investment, net of $89,000 in expenses, in the first quarter of 2008. Financing Activities
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 Securities and Exchange Commission covering the public resale by investors of common stock issued in our private placements, as well as any common stock acquired upon exercise of their warrants.
We did not complete any financing activities in the first quarter of 2009.

We also have an existing line of credit from a bank. The line of credit expires in July, 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 (3.25% at March 28, 2009) plus 2.50% subject to a minimum monthly charge. There was no amount outstanding under this borrowing facility at March 28, 2009 or December 31, 2008. Advances are collateralized by a lien on all of our assets. Under the terms of the agreement, we would continue to service the sold receivables and are subject to recourse provisions.
Contractual Obligations and Commercial Commitments In February 2009, we amended our office and production facilities lease. The base rent and the minimum annual escalation clause were reduced and the term of the lease was extended five years to November 2016. Except for that change, we have not had any material changes outside the ordinary course of business in the contractual obligations as specified in our 2008 Form 10-K. Capital Expenditures
We plan to invest approximately $200,000 in fixed assets during the remainder of 2009.
Future Liquidity
For the quarter ended March 28, 2009, we incurred a net loss of $3.5 million and had negative cash flows from operations of $2.5 million. In 2008, we incurred a net loss of $12.7 million and had negative cash flows from operations of $12.1 million. Our independent registered public accounting firm has included in its audit reports for 2008 and 2007 an explanatory paragraph expressing doubt about our ability to continue as a going concern.
At March 28, 2009, we had $5.1 million in cash. Our cash resources, together with our line of credit and a planned inventory reduction, may not be sufficient to fund our business through the end of 2009. 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 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. Because of the uncertainty of these many factors, we may need to raise funds in the next few months to meet our working capital needs.
We cannot assure you that additional financing 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 ultimately our viability as a company. Net Operating Loss Carryforward
As of December 31, 2008, we had net operating loss carryforwards for federal and state income tax purposes of approximately $291.4 million and $168.8 million, respectively, which expire in the years 2009 through 2028. Of these amounts $88.3 million and $23.5 million, respectively, resulted from the acquisition of Conductus, Inc. Included in the net operating loss carryforwards are deductions related to stock options of approximately $24.1 million and $13.1 million for federal and California income tax purposes, respectively. To the extent net operating loss carryforwards are recognized for accounting purposes, the resulting benefits related to the stock options will be credited to stockholders' equity. In addition, we had research and development and other tax credits for federal and state income tax purposes of approximately $3.0 million and $1.4 million, respectively, which expire in the years 2009 through 2028. Of these amounts $661,000 and $736,000, respectively resulted from the acquisition of Conductus.
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 sheets.
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 had changes in ownership in August 1999 and December 2002. In addition, we acquired the right to Conductus' net operating losses, which are also subject to the limitations imposed by
Section 382. Conductus underwent three ownership changes, which occurred in February 1999, February 2001 and December 2002. Therefore, the ability to utilize our net operating loss carryforwards of $94.3 million incurred prior to the ownership changes and Conductus' net operating loss carryforwards of $83.7 million incurred prior to the ownership changes will be subject in future periods to an annual limitation of $1.3 million and $700,000, respectively. Net operating losses incurred by us subsequent to the ownership changes totaled $113.4 million and are not subject to this limitation. Critical Accounting Policies and Estimates

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 that affect certain of our more significant estimates and assumptions used in preparing our consolidated financial statements in our 2008 Form 10-K. We have not made any material changes to these policies.
Recent Accounting Pronouncements
In April 2009 the FASB issued FSP No. 141R-1 Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, or FSP 141R-1. FSP 141R-1 amends the provisions in Statement 141R for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. The FSP eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in Statement 141R and instead carries forward most of the provisions in SFAS 141 for acquired contingencies. FSP 141R-1 is effective for contingent . . .