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                     SECURITIES AND EXCHANGE COMMISSION
                           Washington, D.C.  20549

                                 FORM 10-K/A
                        (Amendment No. 1 to Form 10-K)

              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                   OF THE SECURITIES EXCHANGE ACT OF 1934

                 For the fiscal year ended December 31, 1997
                       Commission File Number 0-22302

                     ILLINOIS SUPERCONDUCTOR CORPORATION
           (Exact name of registrant as specified in its charter)

           DELAWARE                                  36-3688459
  (State or other jurisdiction           (I.R.S. Employer Identification No.)
  of incorporation or organization)

             451 KINGSTON COURT, MOUNT PROSPECT, ILLINOIS 60056
             (Address of principal executive offices) (zip code)

     Registrant's telephone number, including area code:  (847) 391-9400

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

         Securities registered pursuant to Section 12(g) of the Act:
                   COMMON STOCK, PAR VALUE $.001 PER SHARE
                              (Title of Class)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2)has been subject to such
filing requirements for the past 90 days.  Yes  X    No
                                              ------   ------
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x

     The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, based upon the last reported sale price of
the registrant's Common Stock on March 27, 1998 was $15,888,263.

     The number of shares outstanding of the registrant's Common Stock, par
value $.001, as of March 27, 1998 was 11,392,543.

                     DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Definitive Proxy Statement in connection with the  
registrant's 1998 Annual Meeting of Stockholders', held on June 11, 1998, are
incorporated by reference into Part III of this Annual Report on Form 10-K.

This Amendment to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 is being provided to amend and restate Items 1 and
7 and the Financial Statements and to include a new auditor's consent as Exhibit
23.
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                                    PART I

ITEM 1.   BUSINESS


     Because Illinois Superconductor Corporation (the "Company") wants to
provide investors with more meaningful and useful information, this Annual
Report on Form 10-K (the "Form 10-K") contains, and incorporates by reference,
certain "forward-looking statements" (as such term is defined in Section 21E of
the Securities Exchange Act of 1934, as amended) that reflect the Company's
current expectations regarding the future results of operations, performance
and achievements of the Company.  These forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995.   The Company has tried, wherever possible, to identify
these forward-looking statements by using words such as "anticipates",
"believes", "estimates", "expects", "plans", "intends" and similar expressions.
These statements reflect the Company's current beliefs and are based on
information currently available to it.  Accordingly, these statements are
subject to certain risks, uncertainties and contingencies, which could cause
the Company's actual results, performance or achievements to differ materially
from those expressed in, or implied by, such statements. These factors include,
among others, the following:  the Company's ability to obtain additional
financing; demand for, and acceptance of, the Company's products; the timing
and receipt of customer orders; the Company's ability to manufacture commercial
quantities on an efficient and cost-effective basis; business conditions in the
wireless telephony industry; the effects of legal proceedings and other factors
described in this Form 10-K or in other filings of the Company with the
Securities and Exchange Commission, including those described under the heading
"Risk Factors" in the Company's Registration Statement on Form S-3, as amended,
initially filed in June 1998.   The Company undertakes no obligation to release
publicly the results of any revisions to any such forward-looking statements
that may be made to reflect events or circumstances after the date of this Form
10-K or to reflect the occurrence of unanticipated events.

GENERAL

     The Company develops, manufactures and markets high performance front-end
equipment products for wireless telephony base stations based upon its
proprietary multi-pole cavity radio frequency ("RF") filter designs which
utilize the Company's proprietary high temperature superconductor ("HTS")
materials and cryogenic packaging technologies to attain superior filter
performance.

     RF filters refine the radio signals by passing  radio waves through a
series of resonators (poles) which allow certain frequencies to pass while
rejecting other frequencies.  The more poles  in the RF filter,  the more
effective the RF filter.  Each pole, however, has electrical resistance  which
causes the loss (insertion loss) of desired radio waves.  Therefore,  the more
poles in a conventional RF filter, the greater the insertion loss.  The
advantage of using superconductors in RF filters is that more poles can be
added without significant  increases in insertion loss.  Adding superconductors
does not, however, change the fundamental fact that filter performance depends
upon the number of poles.  The Company's RF filters have up to 24 poles which
the Company believes is significantly greater  than any other commercially
available filter.

     Filters can be designed with a variety of structures including
stripline, microstrip, cavity, dielectric, and waveguide.  The Company is able
to produce RF filters using any of these technologies, but has focused on
cavity filters because of their high performance and tuning flexibility. The
Company uses its proprietary thick-film superconducting technology for its RF
filters. The Company believes that relative to other superconducting materials
technologies, thick-film provides for higher RF filter performance and lower
distortion levels. In addition, thick-film technology does not require clean
rooms for manufacturing.  Superconductors become superconducting at
temperatures of roughly -200 degrees celcius. These temperature levels can be
maintained using commercially available mechanical cooling systems.  The
Company has developed packaging systems which are highly reliable over longer
durations and minimize operating costs.

     The wireless telephony industry has experienced significant growth in
recent years which has led to rapid growth in base station installations and
increased competition among service providers.  Intensifying competition has
challenged operators to minimize capital expenditures per subscriber, enhance
quality, and improve coverage. The Company's RF front-end equipment products
address these needs by improving system quality, decreasing the number of cell
sites needed, and allowing more flexible placement of new cell sites.



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     The Company's ultra-high performance RF front-end products, which utilize
multi-pole cavity filter technology, offer the following system performance
benefits:

  -  call quality is often improved and the frequency of blocked or dropped
     calls is reduced because adjacent band interference from competing wireless
     service providers and other radio services is reduced;

  -  capital expenditure per subscriber is often reduced because operators
     attain improved coverage with fewer base stations.  Coverage gaps between
     base stations are also often reduced because the radio range of these base
     stations is frequently extended on the uplink (receive) communications
     path;

  -  network capacity is often increased because channels which were previously
     unusable now because available and efficient channel utilization is
     improved;

  -  locating new cell sites is simplified because wireless telephony operators
     can better tolerate RF interference from nearby transmitters;

  -  power amplifier design is expected to be  simplified because of high
     performance, low loss filtering; and

  -  the Company expects improved transmit path  range and capacity through the
     use of high performance combiners, which are currently being developed by
     the Company.

     The Company currently markets three product lines to address the needs 
of wireless telephony service providers.  The SpectrumMaster(R) product line
improves the RF performance of cellular and Personal Communications Services
("PCS") systems in high interference environments, including urban areas and
airport properties. SpectrumMaster(R) is available with up to 24 poles
depending upon specific customer needs.  The RangeMaster(R) product line
combines the superior filtering of SpectrumMaster(R) RF filters with
super-cooled low noise amplifiers ("LNA").  RangeMaster(R) extends system range
for more cost effective coverage in suburban, rural, or small city systems. 
The PowerMasterTM product line brings the benefits of ultra high performance
filtering to the downlink (transmit) side of the communications path. The 
PowerMasterTM duplexer is designed to improve system range, improve system
quality, and allow co-location with other service providers.  The Company is
developing the PowerMasterTM combiner, which it expects to improve the range
and capacity of multi-carrier Code Division Multiple Access ("CDMA") systems. 
All of the Company's currently offered products are available in both domestic
and international frequencies and are offered in a variety of mounting
configurations.

     The Company has received orders from ten wireless telephony service
providers which are located in the United States, Canada and Asia, including
six of the top ten cellular operators in the United States.  The Company has
also sold its products to several smaller U.S. operators.  As of May 15, 1998,
the Company's filters were installed in 36 cell sites in 20 different market
areas across the United States.  In 1997,  commercial orders from service
providers were generally for one or two operational cell sites, with the
largest order having been for five cell sites. The Company expects that the
average size of its commercial orders will increase.  The Company's newest
product line, the PowerMasterTM line of transmit filters, has generated
significant interest from the Original Equipment Manufacturers ("OEM") that
supply cellular and PCS systems to the service providers.  Laboratory testing
and discussion of specifications are ongoing with several major OEMs. The
Company believes its thick-film superconductor technology is unique in its
ability  to handle high powered transmit applications while maintaining very
low levels of intermodulation distortion.

INDUSTRY BACKGROUND

     The wireless telephony industry has experienced significant growth, both
domestically and internationally, in recent years.  This growth appears to be
due to the increasing popularity of wireless telephony, the entry of new
service providers into the market as governments open up new RF spectrum, the
continuing decline in the price of service and wireless telephones, and the
introduction of new service features.  Rapid growth has intensified RF
interference while increasing operators' demand for improved system quality,
lower capital expenditures per subscriber, and co-location of antennas with
other RF transmitters.


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     In the United States, subscribers to wireless telephony services now
frequently have a choice of at least four service providers who are competing
for their allegiance.  New digital technologies such as Global System for
Mobile Telecommunications ("GSM"), CDMA, and Time Division Multiple Access
("TDMA") allow operators to offer such advanced features as short message
service, fax and Internet access.  Wireless systems are also starting to be
marketed as a convenient and economical alternative to regular wireline
telephone service. In addition, service providers are also trying to
differentiate themselves on the basis of quality, price, coverage, and advanced
service features.

     Industry statistics demonstrate the rapid growth of the wireless
telephony industry.  The Cellular Telecommunications Industry Association
("CTIA") reports that as of March 1998 there were over 55 million wireless
subscribers in the United States.  Industry publications indicate that the
worldwide wireless telephony market was approximately  three times the size of
such market in the United States at the end of 1997 for an estimated total
worldwide wireless subscriber base of approximately 150 million subscribers. 
CTIA reports that there  were over 36,000 base stations in the United States at
the end of 1997 and the Company believes there are approximately 90,000 base
stations world wide.  The Company further believes that this number is growing
at a rate of over 35% per year.  For example, industry sources estimate that
over 100,000 new base stations will be built in the United States  over the
next four years.  The Company estimates that the need to provide improved
service on a cost effective basis in an increasingly congested environment will
lead service providers to invest in new infrastructure technologies such as
high performance RF filters.

     The rapid growth and increased competition experienced by the wireless
telephony industry have increased the difficulty of providing quality wireless
services.  Wireless service providers face the challenge of providing quality
services in an environment increasingly characterized by RF interference and
congestion.  In addition, the rapid rate of growth and community concerns have
affected the manner in which service providers locate their base stations.
Many communities are objecting to the proliferation of new towers to provide
wireless services.  Base stations which provide the link between a wireless
user and the telecommunications network are being positioned closer together
and often in the same location, which results in RF interference problems.
There has also been an increase in the use of portable handheld phones which
transmit weaker signals than mobile or car-mounted phones.  As a result,
cellular networks which were laid out based on mobile phone power levels have
in many areas developed coverage gaps which operators must fill in to satisfy
their goals of providing seamless coverage.  Furthermore, in order to compete
with these already broadly deployed cellular networks, new PCS service
providers need to deploy coverage quickly and with the lowest possible capital
investment.

     The Company believes that in order to improve quality and manage
growth, system providers will invest in new infrastructure technologies, such
as high performance RF filters or transmitters.  RF filters are used in
wireless networks to process radio signals received from a base station's
antenna and provide as "clean" and strong a signal as possible to the other
radio equipment in the wireless base station system.  Traditional filters
suffer substantial performance limitations due to energy loss experienced by
the types of materials used.  Wireless service providers therefore have a need
for RF filtering with much higher performance characteristics than are
currently available using conventional technology.  The Company believes that
the changing market conditions, the drive to implement new technologies and the
technical issues faced by wireless service providers creates opportunities for
new equipment suppliers.

THE COMPANY'S SOLUTION

     The Company's products are designed to address the high performance RF
front-end needs of domestic and international commercial wireless telephony
systems by providing the following advantages:

  -  IMPROVED CALL QUALITY.  The Company's RF filter products often improve call
     quality by reducing dropped and blocked calls.  During field trials and
     installations in urban cellular locations, the Company's RF filter products
     have frequently demonstrated a 20 to 40% reduction in dropped calls caused
     by out-of-band interference and base station front-end overloading. During
     these field trials and commercial installations, the Company's RF filter
     products have also demonstrated a similar reduction in blocked calls
     experienced in urban cellular locations.  The Company believes that its RF
     filter products also improve audio fidelity by reducing noise and
     interference.


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  -  IMPROVED BASE STATION RANGE.  Based on comparative field trials in multiple
     rural locations in the United States, and as confirmed by computer
     propagation models conducted by customers of the Company, the Company's RF
     front-end systems (high performance filter and super-cooled LNA) can extend
     the uplink range of a wireless system by up to 30%.  Greater range can
     reduce a service operator's capital expenditure per subscriber in lower
     density areas by filling in coverage gaps in existing systems or by
     reducing the number of required cell sites for new system deployments.

  -  GREATER NETWORK CAPACITY AND UTILIZATION.  The Company's RF front-end
     products can increase the capacity and utilization of a wireless base
     station.  In some cases, capacity increases because channels which were
     previously unusable due to interference are recovered.  In other cases,
     system utilization increases because of lower levels of blocked and dropped
     calls, and increases in the ability of the system to permit weak signals to
     be processed with acceptable call quality.

  -  IMPROVED FLEXIBILITY IN LOCATING BASE STATIONS. The Company's RF front-end
     products can allow wireless telephony service providers to co-locate base
     stations near other RF transmitters.  The Company's products allow the base
     station radio to better tolerate RF interference while reducing out-of-band
     signals that could interfere with other nearby wireless telephony
     operators.

  -  SIMPLER TRANSMITTER SYSTEM  DESIGNS. The Company believes that its line of
     RF transmit filters can allow for simpler less costly transmitters,
     particularly for digital systems.  This should improve performance while
     diminishing system costs.

  -  IMPROVED DIGITAL SYSTEM CAPACITY. The Company believes that the line       
     of transmit combiners currently under development should allow increased
     capacity and range in CDMA systems as system loading increases.  CDMA
     systems appear unable to offer multi-carrier systems without the use of a
     combiner, but traditional combiners reduce the power transmitted from the
     base station antenna.  The Company's high power filter technology should
     allow operators to use combiners with lower loss of desired signals.

PRODUCTS

     The Company currently offers three products lines, SpectrumMaster(R),
RangeMaster(R), and PowerMasterTM to serve a variety of system challenges
faced by wireless telephony system operators.  Each product line is available
in a variety of performance levels to meet the varying needs of different
operators and in several mounting configurations to fit specific customer
situations. All of the Company's currently offered products can be supplied in
domestic and international frequencies for both  cellular (800 Mhz) and PCS
(1.9 Ghz) applications.

     The Company believes that SpectrumMaster(R) is the world's highest
performance commercial receive pre-select RF filter for wireless telephony cell
sites.  SpectrumMaster(R) improves the performance of cellular and PCS systems
in high interference environments such as urban areas and airport properties.
SpectrumMaster(R) is available in two models. SpectrumMaster(R) Ultra is a very
high performance filter with 24 filter poles for extremely congested RF
environments. Ultra provides 10,000 times better rejection of unwanted signals
then conventional filters, while losing very little of the desired signal.
SpectrumMaster(R) Classic is a 16 pole filter and provides 1,000 times better
rejection then conventional filters while having very low loss of desired
signals and extremely linear filter response. Both SpectrumMaster(R) models
meet all analog and digital protocol specifications for cellular and PCS
systems in the United States. SpectrumMaster's(R) modular design allows rapid
design modification to meet other customer requirements.  The Company sold its
first SpectrumMaster(R) product to a cellular service provider in the second
half of 1996 and continued sales of SpectrumMaster(R) in 1997.

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     RangeMaster(R) combines a high performance superconducting cavity filter
with a high performance super-cooled LNA to lower noise resulting from
interference and thermal noise.  Lowering noise extends radio propagation range
by up to 30%. RangeMasterTM is available in two models.  RangeMaster(R) Classic
combines the 16 pole SpectrumMaster Classic with a high performance
super-cooled LNA to reduce signal noise resulting from both interference and
amplifier thermal noise. RangeMaster(R) Omega combines a high performance eight
pole superconducting filter with the Company's high performance super-cooled
LNA to provide range extension for rural locations at an economical price.
RangeMaster(R)  meets all analog and digital protocol specifications for
cellular and PCS systems in the United States  RangeMaster'sTM  modular design
allows rapid design modification to meet other customer requirements.  The
Company shipped its first RangeMaster(R) product to cellular service providers
in the first quarter of 1997.  The Company field tested a PCS version of
RangeMasterTM with a major U.S. PCS operator in the fourth quarter of 1997.

     PowerMasterTM is a family of high performance transmit filter systems for
use in the base stations of wireless telephony operators. The Company began
marketing its two models of PowerMasterTM products -- a transmitter filter and a
duplexer -- in February 1997. These PowerMasterTM products, which incorporate
the Company's new power handling technology, are used in transmit applications.
Unique to the Company, this technology extends the Company's filter applications
to include transmit, in addition to the receive applications already in
commercial use. PowerMasterTM duplexer is expected to improve system quality,
extend range and simplify the location of cell sites for both cellular and PCS
systems. PowerMasterTM technology provides an ultra-high performance duplexer,
which handles continuous power levels of up to 30 watts and is designed for use
in 1.9Ghz PCS service.  The PowerMasterTM duplexer allows a PCS operator to
obtain the benefits of very high performance filtering on both the forward and
reverse paths in a system.  The Company believes these benefits include improved
call quality, extended range, improved transmit/receive isolation, and a
reduction in the transmit amplifier output power required to achieve forward
path coverage. The Company is currently developing a PowerMasterTM combiner,
which is a low-loss transmit combiner with superior separation.  The Company
expects to begin customer testing of the PowerMasterTM combiner in the second
half of 1998.

     International Cellular Products Offerings. The Company is adapting its
SpectrumMaster(R), RangeMasterTM, and PowerMasterTM product lines for
international wireless markets to address their specific interference rejection
and range extension needs.   The Company is developing products for both Asian
and European cellular and PCS markets, including GSM filters in various
configurations.  In December 1997, the Company sold two SpectrumMaster(R) units
to its first international customer, a major Asian cellular operator, as a
basis for potential nationwide deployment in the operator's CDMA networks.

TECHNOLOGY

     The Company possesses proprietary technology in three areas: the design of
high performance RF cavity filters, thick-film superconducting materials
fabrication and cryogenic packaging.

     The Company's products are based on its proprietary RF cavity filter
designs.  The Company believes that cavity filter technology provides superior
filter performance with lower intermodulation distortion when compared with
alternative technologies, such as RF stripline filter technology (which the
Company is also capable of using).  The Company has been able to use its cavity
filter technology to offer filters with up to 24 poles.  The more poles in a
filter, the better its rejection of unwanted signals.  The  Company  believes
its products are superior to other RF filters with regard to rejection of
unwanted signals. 

     The Company is able to offer RF cavity filters with superior filtering,
low loss of unwanted signals, and high power handling because of its
proprietary thick-film superconducting fabrication technology.  The Company's
thick-film fabrication technology allows the Company to utilize a variety of
filter technologies including cavity and strip line designs.  The Company's
superconducting technology is simple and inexpensive to manufacture and offers
superconducting yields well above 90%.  The Company believes the electrical
performance of the Company's products are superior to any alternative
superconducting technology currently being developed for RF devices today.  The
Company's thick-film superconducting technology can handle up to 30 watts of
continuous power at PCS frequencies.


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     High temperature superconductors become superconducting at -200 C.  This
temperature can be attained using widely available mechanical refrigerators.
The Company has developed proprietary technologies which provide an efficient,
low cost cryogenic package with a long life cycle and minimum power
consumption.  Together, the Company believes that its technological excellence
in filter design, superconducting materials and cryogenic packaging provide it
with a unique and well-protected technology lead over its competitors.

SALES AND MARKETING

     The Company has focused its sales and marketing effort on U.S. cellular
service providers for retrofit applications.  To date, the Company has sold its
products to six  of the top ten  cellular operators in the U.S. as well as to
several smaller  U.S. operators.  The Company has also sold filters to two major
international operators and has successfully tested its PCS RangeMasterTM
product with one of the largest U.S. PCS operators.  The Company has also tested
its PowerMasterTM line with two major OEMs and is discussing specifications with
other large OEMs.  The Company primarily uses a direct sales force to sell its
products.

     The Company has recently emerged from the development stage and believes it
has entered the volume purchase stage of commercial development. Until recently,
most purchases were for one or two cell sites, with the largest order having
been for five cell sites. At the end of 1997, the Company began to see an
increase in order size. The Company has begun the stage of commercialization
with a new structure for achieving system-wide orders for its products, whereby
customers, through a corporate purchase agreement, give direct purchase
capabilities to their operating regions.  One major operator recently placed an
order for fifteen cell sites worth of the Company's products. Two major
operators, including Bell Atlantic Mobile, have executed corporate purchase
agreements.  The Company is currently negotiating a third corporate purchase
agreement with another major U.S. operator, and, based on indications from
other major operators, the Company believes it will enter into additional
corporate purchase agreements with other major operators in the future. The
Company believes that it has reached this stage of sales development by a
systematic process of testing, small-scale implementation, and growing
relationships with its customers.

     The Company also believes that the sales cycle of its RF products
shortened dramatically at the end of 1997.   Previously, a period of  six to
nine months was required to complete the sales cycle to first orders.  By the
end of 1997, however, the Company's sales cycle began shortening, in some
cases, to less than two  months from first discussions to the receipt of
commercial orders.  The Company believes that this improvement is due to
increasing customer confidence in the Company's technology and customer
support.

     The Company's marketing and sales personnel work directly with both PCS
service providers and PCS OEMs to enhance the probability of sales success in
this rapidly growing market.  The Company is undergoing technical discussions
with two PCS OEM's regarding integrating the Company's RF filter products into
such OEM's PCS product line.  To date, the Company's PowerMasterTM PCS
transmit filter/duplexer has been tested in the laboratories of two PCS
equipment OEMs.

MANUFACTURING

     The Company's state-of-the-art manufacturing process provides
predictable product yields and can be easily expanded to meet increased
customer demand. Superconducting component yields are now consistently above
90%, with low scrap levels.  Manufacturing costs were reduced by 50% during
1997 due to volume, design and yield efficiencies, and the Company expects
further cost reductions in 1998 and beyond.  The Company has focused its
manufacturing efforts on maintaining control of key technologies while avoiding
the cost and complexities of vertical integration.  The Company's manufacturing
operations consist primarily of the manufacture of superconducting components
from raw materials, and the assembly, tuning, testing and quality verification
of the Company's products.  All of these activities occur at the Company's
manufacturing facility in Mount Prospect, Illinois, which began operations
during 1996.  The Company believes that manufacturing of its RF filter products
requires only moderate capital investments and is scaleable.  The Company also
believes that capacity can be rapidly expanded to meet growing demand without
the need for large, upfront capital investments.  The Company purchases all of
the components for its filter products, except for superconducting components,
from third party suppliers.  The Company believes it has access to adequate
supplies of these purchased components, most of which are produced according to
the Company's proprietary designs and specifications.  The Company is using its
just-in-time manufacturing capability to maximize quality, insure flexibility,
limit management complexity and minimize inventory cost.


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RESEARCH AND DEVELOPMENT

     The Company's research and development ("R&D") efforts have been focused
on developing and improving RF filter products for wireless telephony systems.
Filter performance has been improved, product size has been reduced, costs have
been lowered, reliability has been increased, and packaging has been
streamlined.  The Company expects to continue to invest in R&D to further
improve and adapt its filter products to meet and exceed market expectations.
The Company also intends to develop related products that are synergistic with
its core filter offerings and which utilize the Company's core technical
competencies in RF design, superconducting materials, and cryogenic cooling
systems.

     The Company's total R&D expenses during 1995, 1996 and 1997 were
approximately, $5,205,000, $6,623,000 and $4,132,000, respectively.  R&D costs
reimbursed under government contracts and cooperative agreements during 1995,
1996 and 1997 were approximately $650,000 $200,000, and $0, respectively.

INTELLECTUAL PROPERTY AND PATENTS

     The Company regards certain elements of its product design, fabrication
technology and manufacturing process as proprietary and protects its rights in
them through a combination of patents, trade secrets and nondisclosure
agreements.  The Company also has obtained exclusive and non-exclusive licenses
for technology developed with or by its research partners, Argonne National
Laboratory ("Argonne") and Northwestern University, and expects to continue to
obtain licenses from such research partners and others.  The Company believes
that its success will depend in part upon the protection of its proprietary
information, its patents and licenses of key technologies from third parties,
and its ability to operate without infringing on the proprietary rights of
others.

     As of June 1, 1998, the Company owns 14 U.S. patents and has filed and
is actively pursuing applications for 22 other U.S. patents, and is the
licensee of 9 patents and patent applications held by others.  Such patents and
patent applications relate to various aspects of the Company's superconductor
technology and to its current and proposed products. One of the Company's
patent applications has been filed jointly with Lucent Technologies and relates
to superconducting filters.  Additional inventions are the subject of a group
of patent applications currently under preparation. Furthermore, the Company
expects to pursue foreign patent rights on certain of its inventions and
technologies critical to its products.

     In 1994, the Company purchased from Ceramic Process Systems two additional
patents and the related technical know-how covering a process for producing
Yttrium Barium Copper Oxide (YBCO) powder and manufacturing YBCO electrical
fibers.  In 1994, the Company also purchased technology relating to the
fabrication of HTS thick-film components from the University of Birmingham
(UK).  This thick-film technology complements the Company's existing patented
processes for making thick-film superconducting components.

     Through collaborative relationships with Argonne and Northwestern
University, the Company has licensed patents and patent applications issued or
filed in the United States and in certain foreign countries arising under or
related to such collaborative relationships.  These licenses primarily relate
to the processing and composition of HTS materials, including the preferential
orientation of HTS materials and the processing of YBCO on a variety of metals,
as well as design technology for some of the Company's current and proposed
products.  The Company's licenses from ARCH Development Corporation and
Northwestern University continue for the lives of the patent rights licensed
thereby, subject to termination on certain events, and permit the Company to
retain rights to its patentable improvements to the licensed technology. 
Certain of the Company's research has been or is being funded in part by Small
Business Innovation Research ("SBIR") and other government contracts.  Although
the U.S. Government has or will have certain rights in the technology developed
with this funding, the Company does not believe that these rights will have a
material impact on the Company's current RF filter products.




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                                                                         10-K/A


STRATEGIC RELATIONSHIPS

     During 1997, the Company retained Salomon Brothers to advise and assist it
in establishing strategic industry relationships with one or more major
electronics companies.  The Company believes that such  strategic industry
relationships will benefit it by  (i) providing the Company with access to the
technical and financial resources of its partner(s); (ii) providing the Company
with international distribution channels, and (iii) offering the Company
greater credibility with potential customers.  Such strategic relationships
could include such relationships as joint ventures, mergers, and distribution 
or supply arrangements. To date, no such relationship has been entered into by
the Company.

COMPETITION

     The market for wireless telecommunications products is very competitive.
The Company views its competition as (i) conventional RF filter products,
(ii) RF filters based on new technologies and (iii) other superconductor-based
RF products.

     The Company's RF filter products compete against conventional RF filter
products produced by such companies as Celwave, certain divisions of the Allen
Telecom Group, Inc., Filtronic Comtek, Sinclair Radio Labs, Inc., K&L
Microwave, Inc., Wacom Technology Corp., EMR Corp. and TX-RX Systems, Inc.,
among others.  Although these conventional RF filter products are generally
less expensive than the Company's products, the Company believes its RF filter
products are superior on a cost/benefit basis.

                                      9





<PAGE>   10



     Other competitive RF filter products based on new technologies may
provide competition in the future to the Company's RF filter products.  In
addition to competitive RF filter products, other companies including Hazeltine
Corp., Metawave Communications Corporation, Allen Telecom Group, Inc., Repeater
Technologies, Inc. and Array Com, Inc., among others, are developing products
based on "smart" antenna, digital signal processing technologies, microcells
and repeaters which are also aimed at reducing interference problems or
providing range extension by means other than RF filtering.  The Company does
not believe that these technologies pose a direct competitive threat at
present, but cannot exclude them as competition to the Company's RF filter
products at some point in the future.

     Various filter companies appear to be experimenting with cooled dielectric
filters or with filters that combine dielectric  materials and superconducting
technology.  K&L Microwave, Inc. has been experimenting with a cooled
dielectric filter design.  In addition, COM DEV International, Ltd.  a Canadian
corporation, has published research in which a dielectric  material is mounted
on a superconducting ground plane.  The Company does not believe that either of
these efforts currently pose a competitive threat but cannot exclude them as
competition to the Company's product  lines at some point in the future.

     Two other companies, Conductus, Inc. and Superconducting Technologies,
Inc. are currently attempting to market superconducting filters to the wireless
telephony marketplace.  A previous competitor, Superconducting Core
Technologies, Inc. recently ceased commercial operations. In addition, a number
of large multinational companies are engaged in R&D programs that could lead to
the commercialization of superconducting filters for the wireless telephony
marketplace.  These include, among others, E.I. DuPont de Nemours & Co.,
Fujitsu Corporation, NEC Corporation, Kyocera Corporation, and Matsushita
Electric Industrial Co., Ltd.  The Company believes that all of these companies
are working on RF stripline filters using epitaxial thin film superconducting
technology.  The Company believes that RF stripline superconducting filters,
while smaller, are technically unable to provide equivalent rejection of
unwanted signals, competitively low levels of intermodulation distortion, as
large a number of filter poles, or similar levels of power handling.

     The Company believes that it competes on the basis of product performance,
cost, quality, reliability and focus on the wireless telecommunications market.
Many of the Company's competitors have substantially greater financial
resources, larger R&D staffs and greater manufacturing and marketing
capabilities than the Company.

GOVERNMENT REGULATIONS

     Although the Company believes that its wireless telecommunications
products themselves are not licensed or governed by approval requirements of
the Federal Communications Commission ("FCC"), the operation of base stations
is subject to FCC licensing and the radio equipment into which the Company's
products would be incorporated is subject to FCC approval.  Base stations and
the equipment marketed for use therein must meet specified technical standards.
The Company's ability to sell its RF filter products is dependent on the
ability of wireless base station equipment manufacturers and of wireless base
station operators to obtain and retain the necessary FCC approvals and
licenses.  In order to be acceptable to base station equipment manufacturers
and to base station operators, the characteristics, quality, and reliability of
the Company's base station products must enable them to meet FCC technical
standards.

     The Company uses certain hazardous materials in its research, development
and manufacturing operations.  As a result, the Company is subject to stringent
federal, state and local regulations governing the storage, use and disposal of 
such materials.  It is possible that current or future laws and regulations
could require the Company to make substantial expenditures for preventive or
remedial action, reduction of chemical exposure, or waste treatment or
disposal.  The Company believes it is in material compliance with all
environmental regulations and to date the Company has not had to incur
significant expenditures for preventive or remedial action with respect to the
use of hazardous materials.  However, there can be no assurance that the
operations, business or assets of the Company will not be materially and
adversely affected by the interpretation and enforcement of current or future
environmental laws and regulations.  In addition, although the Company believes
that its safety procedures for handling and disposing of such materials comply
with the standards prescribed by state and federal regulations, there is the
risk of accidental contamination or injury from these materials.  In the event
of an accident, the Company could be held liable for any damages that result.
Furthermore, the use and disposal of hazardous materials involves the risk that
the Company could incur substantial expenditures for such preventive or
remedial actions.  The liability in the event of an accident or the costs of
such actions could exceed the Company's resources or otherwise have a material
adverse effect on the Company's business, results of operations and financial
condition.



                                     10





<PAGE>   11
 

EMPLOYEES

     As of June 30, 1998, the Company had a total of 55 employees, 14 of
whom hold advanced degrees.  Of the employees, 15 are engaged in manufacturing
and production, 17 are engaged in research, development and engineering, and 23
are engaged in general management, marketing, finance and administration.  The
Company also periodically employs a number of consultants and independent
contractors.  The Company considers its relations with its employees to be
satisfactory.






                                     11





<PAGE>   12


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


     The information contained in this Form 10-K contains forward-looking
statements which involve certain risks, uncertainties and contingencies which
could cause the Company's actual results, performance or achievements to differ
materially from those expressed, or implied, by such statements. See the
italicized introductory language in "Item 1.  Business."

     The Company was founded in 1989 by ARCH Development Corporation, an
affiliate of The University of Chicago, to commercialize superconducting
technologies developed initially at Argonne.   The Company  uses its patented
and proprietary HTS materials technologies to develop and manufacture RF
front-end products designed to enhance the quality, capacity, coverage and
flexibility of cellular, PCS and other wireless  telephony services. The
Company has incurred cumulative losses of $38,310,030 from inception to
December 31, 1997.

     During the second half of 1996, the Company made the first commercial
sales of its RF filter products.  The Company continued to sell its RF filter
products during 1997 and into 1998.  Product revenues in 1997 were derived from
commercial sales of the Company's RF  front-end products.  The Company expects
sales of its RF  front-end products to continue to increase in 1998.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1997 AND 1996

     The Company's net revenues increased $828,312 from $209,822 in 1996 to
$1,038,134 in 1997, as a result of increased sales of the Company's RF
front-end  products.  Net revenues from product sales represent gross product
shipments less reserves for potential returns.  Such reserves are based on the
Company's historical product return rates.  A government contract accounted for
$53,122 of the Company's net revenues in 1996, while all of the net revenues in
1997 were from commercial product sales. The Company has concentrated its
efforts on its commercial product development programs and does not expect
revenues to increase dramatically unless and until it ships a significant
amount of its commercial products.

     Cost of revenue was $4,401,077 for the year ended 1997, as compared to
$49,534 for the year ended 1996.  The cost of revenue for 1997 consisted of
direct material, labor and overhead costs associated with the products that
were shipped during the year, plus approximately $529,000 of costs which 
consist primarily of allocated overhead costs, incurred to produce units in
ending finished goods inventory that exceed net realizable value. With the
recent introduction of the SpectrumMaster(R) Ultra product into the Company's
product line, management has determined that there is little marketability for
an early SpectrumMaster(R) filter product model. Management has decided,
therefore, to write down the costs associated with this early SpectrumMaster(R)
inventory.  Consequently, a total of $309,000 has been charged to  cost of
revenue in the fourth quarter of 1997.  The cost of revenue for the year ended
1996 consisted primarily of research and development, material and overhead
expenses associated with a government contract.  Due to low utilization levels
and excess capacity in the Company's manufacturing facility, cost of revenue
exceeded total revenue for the year ending 1997.  The Company expects the cost
of revenues to exceed net revenues until it manufactures and ships a
significantly higher amount of its commercial products.

     The Company's internally funded research and development expenses
decreased $2,290,902 from $6,422,921 in 1996 to $4,132,019 in 1997.  Research
and development costs were reduced during 1997, as compared to 1996, primarily
due to the initiation of full-scale manufacturing activities during 1997. Costs
associated with manufacturing activities during 1997 were recorded as
manufacturing overhead expenses and were charged as cost of revenue.  Costs
associated with the development of manufacturing activities and processes
during 1996 were recorded as research and development expenses during that
period. Additional reductions of research and development costs in 1977 as
compared to 1996 are due to reductions in personnel, materials and other
operating costs.  The

                                      12





<PAGE>   13

Company expects to continue reducing  its research and development expenses
during 1998.

     Selling and marketing expenses increased to   $1,918,044 in 1997 from
$1,834,640 in 1996.  This increase was due to the addition of sales personnel
and expanded product marketing and advertising efforts.  The increase was
partially offset by reduced consulting costs during 1997.

     General and administrative expenses decreased $518,536 from $3,290,810 in
1996, to $2,772,274 in 1997.  The decrease in the general and administrative
expenses was due primarily to lower administrative personnel, consultant and
legal expenses during 1997 as compared to 1996.

     Other income, which consisted of investment income, decreased $249,130
from $503,911 in 1996 to $254,781 in 1997. This decrease was due to a lower
average investment portfolio during the year.

     Other expenses, which included interest expense on long-term debt,
decreased $11,633 from $29,602 in 1996, to $17,969 in 1997.  The decrease is
primarily due to a lower average outstanding debt balance during 1997.

YEARS ENDED DECEMBER 31, 1996 AND 1995

     The Company's revenues increased in 1996 to $209,822 from $27,830 in 1995,
primarily as a result of sales of the Company's RF filter products.  A
government research and development contract begun during the fourth quarter of
1995 generated $53,122 in revenues in 1996.

     Cost of government contract revenue was $49,534 in 1996, as compared to
$19,286 for 1995. The increase of these costs resulted from increased activity
under government contracts.  Costs associated with RF filter products sales
during 1996 were associated with development stage production and were
reflected as research and development expenses.

     The Company's internally funded research and development expenses for 1996
were $6,422,921 compared to $4,554,946 for 1995.  The Company incurred
increased expenditures to expand its RF filter product lines, develop and
implement its manufacturing processes and also to conduct advanced research and
development activities.  These expenditures consisted primarily of personnel
costs, materials and supplies expenses and costs associated with the Company's
product sales.  Under the terms of a government contract entered into in March
1993 and amended in March 1994 and March 1995, the U.S. Government agreed to
share costs of certain of the Company's research and development efforts.  This
contract was completed in March 1996.  Funding of $200,445 for 1996 was offset
against the related research and development costs, as compared to $649,660 for
1995.

     Selling and marketing expenses for 1996 were $1,834,640, as compared to
$469,600 for 1995.  This increase was attributable to the addition of sales,    
marketing and field service personnel, increases in expenditures to conduct
customer field trials and expansion of product marketing and advertising
efforts.

     General and administrative expenses for 1996 were $3,290,810, as compared
to $2,763,615 for 1995.  This increase was attributable to increased
administrative expense necessary to support growth in Company personnel and
increased outside service provider costs.

     Investment income for 1996 increased to $503,911 in 1996 from $487,543 in
1995.  This increase was primarily due to a larger average investment portfolio
during 1996 which was attributable primarily to the Company's private placement
completed in February 1996.


                                      13





<PAGE>   14



     Interest expense decreased to $29,602 from $39,600 in 1995 primarily due
to a lower average debt balance outstanding in 1996 as compared to 1995.


IMPACT OF YEAR 2000
     Based on a recent assessment, the Company has determined that it will
require very little modification to its software to comply with Year 2000
transition requirements.  Most of the software used by the Company in
operational applications has been acquired within the past 18 months and such
software already addresses Year 2000 issues.  The Company expects to complete
any other modifications that may be necessary by December 31, 1998, which is
prior to any anticipated impact to the Company's  operating systems.  The
Company realizes, however, that the failure by it or those with which it
transacts business to address the Year 2000 issue could adversely affect the
Company.

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 1997, the Company's cash, cash equivalents and
investments, including certain restricted investments, were  $3,647,000,
reflecting a decrease of $2,391,000 from $6,038,000 at December 31, 1996.

     During 1995 and 1996, the Company financed a portion of its leasehold
improvements and capital equipment additions through various borrowings
approximating $743,000, of which  $92,000 was outstanding at  December 31,
1997.  This remaining balance is due in monthly installments through May 1999
and bears interest at 8.5% per annum.  Approximately $699,000 in principal
amount of promissory notes, plus approximately $106,000 of accrued interest
thereon, from certain stockholders was outstanding as of June 30, 1998.  This
receivable was due on April 30, 1997.  The Company has filed a lawsuit to
collect on the outstanding balance, but there can be no assurance when and if
such promissory notes will be repaid.  (See "Item 3. Legal Proceedings").

     The Company to date has generated limited revenues from product sales. The
continuing development of and expansion in sales of the Company's RF filter
product lines will require continued commitment of substantial funds to
undertake continued product development and manufacturing activities and to
market and sell its RF front-end products.  The actual amount of the Company's
future funding requirements will depend on many factors, including: the amount
and timing of future revenues, the level of product marketing and sales efforts
to support the Company's commercialization plans, the magnitude of its research
and product development programs, the cost of additional plant and equipment
for manufacturing and the costs involved in protecting the Company's patents or
other intellectual property.  As a result of its funding requirements, on June  
6, 1997, the Company entered into a Preferred Stock Purchase Agreement for up
to an aggregate of $15 million, which is available in up to five tranches (two
of which have been received to date).  Under this Preferred Stock Purchase
Agreement, (i) on June 6, 1997 the Company issued 600 shares of Series B Stock
for $3 million; and (ii) on August 29, 1997 and October 29, 1997 the Company
issued an aggregate of 600 shares of Series C Stock for a total of $3 million.
Cumulative dividends on outstanding Series B Stock and Series C Stock from      
their respective dates of issuance through December 31, 1997, which were paid 
in Common Stock and accrued at the rate of 5% per annum, were $51,958.  The 
Company is not entitled to receive further funding pursuant to this Preferred 
Stock Purchase Agreement.  Also, as a result of its funding requirements, on
October 29, 1997, the Company entered into another Preferred Stock Purchase
Agreement whereby it issued an aggregate of 700 shares of Series G Stock for 
$3.5 million.  The Series G Stock also accrued dividends, which were paid in 
Common Stock, at the rate of 5% per annum and from its date of issuance through
December 31, 1997, cumulative accrued dividends on the Series G Stock equaled 
$30,206.  (See "Item 5. Market for Registrant's Common Equity and Related 
Stockholder Matters".)

     Furthermore, as a result of the above-mentioned factors and the Company's
recent funding requirements, on May 15, 1998, the Company entered into a
Securities Purchase Agreement with a group of investors whereby the Company
issued $10.35 million  principal amount of Senior Convertible Notes, which 
accrue interest, payable in cash or Common Stock, at 2% per annum. In connection
with the Securities Purchase Agreement, the Company also issued warrants to 
purchase 4,140,000 shares of the Company's Common Stock at an exercise price of
$3.75 per share. 

     Without consideration of  proceeds from additional financings, the
Company believes that its available cash, cash equivalents and investments
are sufficient to finance the Company's current operating plans through at 
least December 31, 1998.  The Company's strategy to generate sufficient working
capital to fund its operations and cash requirements in the future includes
advancing market penetration with OEMs and customers in overseas markets,
building strong and enduring relationships with existing customers, expanding
product offerings to meet varying customer needs, and reducing product costs
through economies of scale in material purchases, refinement of the
manufacturing processes, and the implementation of an overhead reduction
program.  In addition, the Company has strengthened its Board of Directors and
management team by adding several industry veterans and experienced businessmen
to assist in implementing the Company's plans.
                                      
                                      
                                      14
                                      
                                      
<PAGE>   15

     While continuously evaluating its needs for capital, the Company may also,
in the future, pursue additional sources of capital it considers appropriate 
based on its requirements and market conditions.  If the Company is unable to
successfully implement its business plan on a timely basis or cannot obtain
adequate funds when needed in the future, the Company may be required to delay,
scale-back or eliminate the manufacturing, marketing or sales of one or more of
its products or some or all of its research and development programs. This
could substantially impair the Company's ability to compete in the marketplace.
                                      
                                      
                                      15
                                      
                                      
                                      
<PAGE>   16
                                                                               
                                                                               
                                                                               
                                                                                
                                       Financial Statements         
                                                                               
                                                                               
                                    Illinois Superconductor Corporation     
                                                                               
                                                                               
                                 Years ended December 31, 1997, 1996, and 1995 
                                   with Report of Independent Auditors         


<PAGE>   17
                     Illinois Superconductor Corporation

                            Financial Statements


                Years ended December 31, 1997, 1996, and 1995

                                  CONTENTS

Report of Independent Auditors........................................... 1

Financial Statements

Balance Sheets as of December 31, 1997 and 1996.......................... 2

Statements of Operations for the Years Ended December 
 31, 1997, 1996, and 1995................................................ 4 

Statements of Stockholders' Equity for the Years Ended 
 December 31, 1997, 1996, and 1995....................................... 5

Statements of Cash Flows for the Years Ended 
 December 31, 1997, 1996, and 1995 ...................................... 6

Notes to Financial Statements............................................ 7   



<PAGE>   18



                       Report of Independent Auditors

The Board of Directors
Illinois Superconductor Corporation

We have audited the accompanying balance sheets of Illinois Superconductor
Corporation as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. Our audits also included the financial      
statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain 
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

Since the date of completion of our audit of the accompanying financial
statements and initial issuance of our report thereon dated February 27, 1998,
which report contained an explanatory paragraph regarding the Company's ability
to continue as a going concern, the Company, as discussed in paragraph 2 of
Note 14, has completed the issuance and sale of $10,350,000 aggregate principal
amount of Senior Convertible Notes.  Therefore, the conditions that raised
substantial doubt about whether the Company will continue as a going concern no
longer exist.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Illinois Superconductor
Corporation at December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation 
to the basic financial statements taken as a whole, presents fairly in all 
material respects the information set forth therein.


                                                /s/ Ernst & Young LLP
Chicago, Illinois

February 27, 1998,
except for paragraph 2 of Note 14, as to
which the date is May 15, 1998
                                                                              1

<PAGE>   19

                     Illinois Superconductor Corporation



                               Balance Sheets
<TABLE>
<CAPTION>

                                                         DECEMBER 31
                                                     1997            1996
                                                  --------------------------

ASSETS 
<S>                                              <C>              <C>
Current assets:
 Cash and cash equivalents                       $2,766,886       $5,188,047
 Investments                                        500,313          500,3l3
 Inventories                                      1,726,141          653,696
 Accounts receivable, net of allowance   
  for doubtful accounts of $68,775 at 
  December 31, l997                                 586,501          130,752
 Prepaid expenses and other                         471,928          436,052
                                                  --------------------------
Total current assets                              6,051,769        6,908,860


Property and equipment:
 Leasehold improvements                           4,215,011        4,172,694
 Lab equipment                                    1,689,381        1,606,594
 Manufacturing equipment                            945,081          864,059
 Office equipment                                   709,324          626,029
 Furniture and fixtures                             618,496          593,961
                                                  --------------------------
                                                  8,177,293        7,863,337
 Less: Accumulated depreciation                  (3,654,239)      (2,120,533)
                                                  --------------------------
                                                  4,523,054        5,742,804

Restricted certificates of deposit                  380,000          350,000
Patents and trademarks, net                         579,486          386,832





                                                ----------------------------
 Total assets                                   $11,534,309      $13,388,496
                                                ============================

</TABLE>
See notes to financial statements



                                                                            2


<PAGE>   20

                     Illinois Superconductor Corporation

                          Balance Sheets (continued)


<TABLE>
<CAPTION>

                                                                             DECEMBER 31               
                                                                         1997          1996            
                                                                    -----------------------------                                   
<S>                                                                 <C>              <C>
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                   
Current liabilities:                                                                                   
 Accounts payable                                                   $   717,425      $ 1,126,009       
 Accrued liabilities                                                    587,285          494,507       
 Current portion of long-term debt                                       78,077           80,421       
                                                                    -----------------------------                                   
Total current liabilities                                             1,382,787        1,700,937       
                                                                                                       
Long-term debt, less current portion                                     13,541           91,618       
Deferred occupancy costs                                                 91,412           75,813       

Stockholders' equity:                          
 Capital stock:                                 
  Preferred stock:                               
    Series B Convertible Preferred Stock at liquidation   
     value; 95 shares issued and outstanding at           
     December 31, 1997 (none at December 31, 1996)                      488,534               --
    Series C Convertible Preferred Stock at liquidation   
     value; 600 shares issued and outstanding at          
     December 31, 1997 (none at December 31, 1996)                    3,038,424               --
    Series G Convertible Preferred Stock at liquidation   
     value; 700 shares issued and outstanding at          
     December 31, 1997 (none at December 31, 1996)                    3,530,206               --
    Common stock ($.001 par value); 15,000,000 shares     
     authorized and 6,001,925 and 5,023,352 shares        
     issued and outstanding at December 31, 1997 and      
     1996, respectively                                                   6,002            5,023
 Additional paid-in capital                                          41,991,941       39,019,421
 Notes receivable from stockholders                                    (698,508)      (1,142,754)
 Accumulated deficit                                                (38,310,030)     (26,361,562)
                                                                    -----------------------------                                   
Total stockholders' equity                                           10,046,569       11,520,128
                                                                    -----------------------------                                   
Total liabilities and stockholders' equity                          $11,534,309      $13,388,496
                                                                    =============================
</TABLE>

See notes to financial statements.
                                                                             3


<PAGE>   21


                      Illinois Superconductor Corporation


                           Statements of Operations


                 Years ended December 31, 1997, 1996, and 1995

<TABLE>
<CAPTION>
                                                          1997                        1996                  1995
                                                     -------------------------------------------------------------    
<S>                                                  <C>                        <C>                    <C>
Revenues:
 Product sales                                       $  1,038,134               $    156,700           $     5,998
 Government contracts                                           -                     53,122                21,832
                                                     -------------------------------------------------------------    
Total revenues                                          1,038,134                    209,822                27,830

Costs and expenses:                  
 Cost of product sales                                  4,401,077                          -                     -
 Cost of government contract revenue                            -                     49,534                19,286
 Research and development                               4,132,019                  6,422,921             4,554,946
 Selling and marketing                                  1,918,044                  1,834,640               469,600
 General and administrative                             2,772,274                  3,290,810             2,763,615
                                                     -------------------------------------------------------------    
Total costs and expenses                               13,223,414                 11,597,905             7,807,447
                                                     -------------------------------------------------------------    
                                                      (12,185,280)               (11,388,083)           (7,779,617)
Other income and (expense):
 Investment income                                        254,781                    503,911               487,543
 Interest expense                                         (17,969)                   (29,602)              (39,600)
                                                     -------------------------------------------------------------    
                                                          236,812                    474,309               447,943
                                                     -------------------------------------------------------------    
Net loss                                             $(11,948,468)              $(10,913,774)          $(7,331,674)
                                                     =============================================================
Preferred Stock dividends                                (143,302)                         -                     -
                                                     -------------------------------------------------------------    
Net loss plus Preferred Stock dividends              $(12,091,770)              $(10,913,774)          $(7,331,674)
                                                     =============================================================

Basic and diluted loss per common share              $     ( 2.34)              $      (2.41)          $     (2.01)
                                                     =============================================================

Weighted average number of common
 shares outstanding                                     5,156,663                  4,536,034             3,641,196
                                                     =============================================================

</TABLE>

See notes to financial statements.

                                                                              4

<PAGE>   22

                     Illinois Superconductor Corporation

                      Statements of Stockholders' Equity

                Years ended December 31, 1997, 1996, and 1995


<TABLE>
<CAPTION>
                                                     SERIES B CONVERTIBLE  SERIES C CONVERTIBLE  SERIES G CONVERTIBLE               
                                                        PREFERRED STOCK     PREFERRED STOCK       PREFERRED STOCK     COMMON STOCK  
                                                     -------------------------------------------------------------------------------
                                                       NUMBER OF           NUMBER OF             NUMBER OF          NUMBER OF       
                                                         SHARES   AMOUNT    SHARES     AMOUNT     SHARES    AMOUNT   SHARES  AMOUNT 
                                                     ===============================================================================
<S>                                                   <C>      <C>    <C>     <C>  <C>          <C>  <C>          <C>        <C>
Balance as of December 31, 1994                           -    $       -       -   $        -     -   $        -   3,578,724 $ 3,579
Exercise of stock options; $.184 - $11.25 per share       -            -       -            -     -            -      50,130      50
Exercise of warrants; $1.4679 per share                   -            -       -            -     -            -      13,625      14
Forfeiture of stock options                               -            -       -            -     -            -        -        -
Issuance of Common Stock - Private placement, net of      -            -       -            -     -            -                    
offering costs; $10.80 per share                          -            -       -            -     -            -     356,473     356
Amortization of deferred compensation                     -            -       -            -     -            -        -        -  
Net loss                                                  -            -       -            -     -            -        -        -  
                                                     -------------------------------------------------------------------------------
Balance as of December 31, 1995                           -            -       -            -     -            -   3,998,952   3,999
                                                                                                                                    
Exercise of stock options; $.184 - $15.25 per share       -            -       -            -     -            -      49,881      50
Exercise of warrants; $1.4679-$13.50 per share            -            -       -            -     -            -     565,993     566
Forfeiture of stock options                               -            -       -            -     -            -        -        -  
Issuance of Common Stock - Private placement, net of      -            -       -            -     -            -                    
offering costs; $21.80 per share                          -            -       -            -     -            -     408,526     408
Amortization of deferred compensation                     -            -       -            -     -            -        -        -  
Net loss                                                  -            -       -            -     -            -        -        -  
                                                     -------------------------------------------------------------------------------
Balance as of December 31, 1996                           -            -       -            -     -            -   5,023,352   5,023
                                                                                                                                    
Exercise of stock options; $.184 - $15.25 per share       -            -       -            -     -            -      17,821      18
Exercise of warrants; $1.4679 - $13.50 per share          -            -       -            -     -            -     138,820     139
Payment of stockholder notes receivable                   -            -       -            -     -            -        -        -
Issuance of Preferred Stock - net of offering costs      600   3,000,000      600   3,000,000    700   3,500,000        -        -
Preferred Stock dividends                                 -       13,534       -       38,424     -       30,206      19,940      20
Conversion of Preferred Stock to Common Stock          (505)  (2,525,000)      -            -     -            -     801,992     802
Net loss                                                  -            -       -            -     -            -        -        -
                                                     -------------------------------------------------------------------------------
Balance as of December 31, 1997                          95    $ 488,534     600   $3,038,424    700  $3,530,206   6,001,925  $6,002
                                                     ===============================================================================

<CAPTION>

                                                                                             NOTES                                  
                                                         ADDITIONAL                        RECEIVABLE                               
                                                          PAID-IN         DEFERRED           FROM        ACCUMULATED                
                                                          CAPITAL       COMPENSATION      SHAREHOLDERS     DEFICIT        TOTAL     
                                                     ----------------------------------------------------------------------------- 
<S>                                                    <C>              <C>             <C>           <C>             <C>
Balance as of December 31, 1994                        $21,096,412       $(162,131)     $        -    $ (8,116,114)   $ 12,821,746  
Exercise of stock options; $.184 - $11.25 per share        105,536               -               -               -         105,586  
Exercise of warrants; $1.4679 per share                     19,986               -               -               -          20,000  
Forfeiture of stock options                               (132,300)         74,164               -               -         (58,136) 
Issuance of Common Stock - Private placement, net of                                                                                
offering costs; $10.80 per share                         3,580,926               -               -               -       3,581,282  
Amortization of deferred compensation                            -          46,575               -               -          46,575  
Net loss                                                         -               -               -      (7,331,674)     (7,331,674) 
                                                     -----------------------------------------------------------------------------
Balance as of December 31, 1995                         24,670,560          41,392               -     (15,447,788)      9,185,379
                                                                                                                                    
Exercise of stock options; $.184 - $15.25 per share        282,903               -               -               -         282,953  
Exercise of warrants; $1.4679-$13.50 per share           5,738,150               -      (1,142,754)              -       4,595,962  
Forfeiture of stock options                                 (5,438)          5,438               -               -               -  
Issuance of Common Stock - Private placement, net of                                                                                
offering costs; $21.80 per share                         8,333,246               -               -               -       8,333,654  
Amortization of deferred compensation                            -          35,954               -               -          35,954  
Net loss                                                         -               -               -     (10,913,774)    (10,913,774) 
                                                     -----------------------------------------------------------------------------
Balance as of December 31, 1996                         39,019,421               -      (1,142,754)    (26,361,562)     11,520,128
                                                                                                                                    
Exercise of stock options; $.184 - $15.25 per share         70,170               -               -               -          70,188  
Exercise of warrants; $1.4679 - $13.50 per share           796,908               -               -               -         797,047  
Payment of stockholder notes receivable                          -               -         444,246               -         444,246  
Issuance of Preferred Stock - net of offering costs       (336,572)              -               -               -       9,163,428  
Preferred Stock dividends                                  (82,184)              -               -               -               -  
Conversion of Preferred Stock to Common Stock            2,524,198               -               -               -               -  
Net loss                                                         -               -               -     (11,948,468)    (11,948,468) 
                                                     -----------------------------------------------------------------------------
Balance as of December 31, 1997                        $41,991,941       $       -      $ (698,508)   $(38,310,030)   $ 10,046,569 
                                                     =============================================================================
</TABLE>


See notes to financial statements

                                                                              5

<PAGE>   23

                     Illinois Superconductor Corporation
                           Statements of Cash Flows
                Years ended December 31, 1997, 1996, and 1995

<TABLE>
<CAPTION>



                                                                                       1997           1996           1995
                                                                                   -------------------------------------------
OPERATING ACTIVITIES                                                                                                
<S>                                                                                <C>            <C>            <C>
Net loss                                                                           $(11,948,468)  $(10,9l3,774)  $(7,331,674)
Adjustments to reconcile net loss to net cash used in operating
  activities:                                              
    Depreciation                                                                      1,533,705      1,157,561       668,859
    Amortization                                                                          6,994          6,639         7,541
    Loss on disposal of property and equipment                                                -              -           499
    Gain on sale of available-for-sale securities                                             -        (43,171)      (54,065)
    Net amortization of bond premiums                                                         -           (939)      (11,454)
    Stock compensation expense                                                                -         35,954        46,575
    Cancellation of stock options                                                             -              -       (58,136)

    Changes in operating assets and liabilities:           
     Accounts receivable                                                               (455,749)       179,777       (28,936)
     Inventories                                                                     (1,072,445)      (653,696)            -
     Prepaid expenses and other                                                         (35,876)        29,246       306,527
     Accounts payable                                                                  (411,584)       249,640      (818,844)
     Accrued liabilities                                                                 92,778        113,201       252,159
     Deferred occupancy costs                                                            15,599         18,760        18,486
                                                                                   -------------------------------------------
Net cash used in operating activities                                               (12,275,046)    (9,820,802)   (7,002,463)


INVESTING ACTIVITIES
Purchases of available-for-sale securities                                                    -    (30,945,246)   (8,060,495)
Sales of available-for-sale securities                                                        -      2,500,000     4,566,564
Maturities of available-for-sale securities                                                   -     33,072,852     9,002,364
(Increase) decrease in restricted certificates of deposit                               (30,000)       512,500       137,500
Payments of patent costs                                                               (199,647)      (156,711)      (97,005)
Acquisitions of property and equipment                                                 (310,956)    (3,706,588)   (1,888,694)
                                                                                   -------------------------------------------
Net cash provided by (used in) investing activities                                    (540,603)     1,276,807     3,660,234


FINANCING ACTIVITIES
Net proceeds from issuances of preferred stock                                        9,163,428              -             -
Net proceeds from issuances of common stock                                                   -      8,333,654     3,581,282
Exercise of stock options                                                                70,188        282,953       105,586
Exercise of warrants                                                                    797,047      4,595,962        20,000
Payments on stockholder notes receivable                                                444,246              -             -
Proceeds from issuance of long-term debt                                                      -         92,182       650,518
Payments on long-term debt                                                              (80,421)      (525,802)      (44,859)
Payments on capital lease obligations                                                         -              -      (107,567)
                                                                                   -------------------------------------------
Net cash provided by financing activities                                            10,394,488     12,778,949     4,204,960
                                                                                   -------------------------------------------
Increase (decrease) in cash and cash equivalents                                     (2,421,161)     4,234,954       862,731
Cash and cash equivalents at beginning of period                                      5,188,047        953,093        90,362
                                                                                   -------------------------------------------
Cash and cash equivalents at end of period                                         $  2,766,886   $  5,188,047   $   953,093
                                                                                   ===========================================

Supplemental cash flow information:
Cash paid for interest                                                             $     17,969   $     29,602   $    39,600
                                                                                   ===========================================
Capital leases                                                                     $          -   $          -   $    59,739
                                                                                   ===========================================
</TABLE>

See notes to financial statements

                                                                              6


<PAGE>   24
                     Illinois Superconductor Corporation
                        Notes to Financial Statements


1. DESCRIPTION OF BUSINESS

Illinois Superconductor Corporation (Company) was founded in 1989 by ARCH       
Development Corporation ("ARCH"), an affiliate of The University of Chicago, to
commercialize superconducting technologies developed initially at Argonne
National Laboratory. The Company uses its patented and proprietary
high-temperature superconducting materials technologies to develop and
manufacture radio frequency front-end products designed to enhance the quality,
capacity, coverage and flexibility of cellular, PCS and other wireless
telephony services located primarily in the United States. In prior years, the
Company was in the developmental stage.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH, CASH EQUIVALENTS AND INVESTMENTS 

Cash and cash equivalents consist of demand deposits, time deposits, money 
market funds, and commercial paper which   have maturities of three months or 
less from the date of purchase. Investments consist of U.S. corporate debt 
securities, U.S. Treasury securities, and other U.S. government obligations. 
Management believes that the financial institutions in which it maintains such 
deposits are financially sound and, accordingly, minimal credit risk exists 
with respect to these deposits.

Management determines the appropriate classification of debt securities at the 
time of purchase and reevaluates such designation as of each balance sheet 
date. All of the Company's investments are classified as available-for-sale. 
Available-for-sale securities are carried at fair value, with unrealized gains 
and losses, net of tax, (if any) reported in a separate component of 
stockholders' equity. The amortized cost of debt securities in this category 
is adjusted for amortization of premiums and accretion of discounts to 
maturity. Such amortization and accretion is included in investment income. 
Realized gains and losses and declines in value judged to be other-than-
temporary on available-for-sale securities are included in investment income.






                                                                              7

<PAGE>   25

                     Illinois Superconductor Corporation
                  Notes to Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The cost of securities sold is based on the specific identification method.     
Interest and dividends on securities classified as available-for-sale are
included in investment income.

INVENTORIES

Inventories are stated at the lower of cost (determined on a first in, first
out basis) or market.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, less accumulated depreciation, and   
are depreciated over the estimated useful lives of the assets using accelerated
methods. Leasehold improvements are amortized using the straight-line method
over the shorter of the useful life of the asset or the term of the lease.
Amortization of leasehold improvements is included in depreciation expense. The
useful lives assigned to property and equipment for the purpose of computing
book depreciation are as follows:

<TABLE>
             <S>                                    <C>
             Lab equipment                          5 years
             Manufacturing equipment                3 to 5 years
             Office equipment                       3 to 5 years
             Furniture and fixtures                 5 years
             Leasehold improvements                 Life of lease
</TABLE>

PATENTS AND TRADEMARKS

Patents and trademarks represent costs, primarily legal fees and expenses, 
incurred in order to prepare and file patent applications related to various 
aspects of the Company's superconductor technology and to its current and 
proposed products.  Patents and trademarks are recorded at cost and are
amortized using the straight-line method over the shorter of their estimated
useful lives or 17 years. The recoverability of the carrying values of patents
and trademarks is evaluated on an ongoing basis. Patents and trademarks are net
of accumulated amortization of $91,230 and $98,223 at December 31, 1997 and
1996, respectively. Capitalized patent costs related to pending patents
are $471,933 and $270,779 at December 31, 1997 and 1996, respectively.

INCOME TAXES

Deferred tax assets and liabilities are determined based on differences between 
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.



                                                                              8

<PAGE>   26

                     Illinois Superconductor Corporation
                  Notes to Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION AND PRODUCT WARRANTY
 
     Revenues from product sales are generally recognized at the time of
shipment. The Company has, under certain conditions, granted customers the right
to return product during a specified time after shipment. In these situations,
the Company establishes a liability for estimated returns and allowances at the
time of shipment. The Company has established a program which, in certain
situations, allows customers or prospective customers to field test the
Company's products for a specified period of time. Revenues from field test
arrangements is recognized upon customer acceptance of the products. The Company
warrants its products against defects in materials and workmanship typically for
a one year period from the date of shipment, except for superconducting
materials contained in the products, which are warranted for ten years from the
date of shipment. A provision for estimated future costs related to warranty
expenses is recorded when products are shipped.  Returns and allowances and
warranty costs were not significant in any period reported.

ADVERTISING COSTS

Advertising costs are charged to expense in the period incurred. Advertising    
expense for the years ended December 31, 1997, 1996, and 1995 was approximately
$176,000, $135,000, and $87,000, respectively.


RESEARCH AND DEVELOPMENT COSTS

Research and development costs related to both present and future products are
charged to expense in the period incurred.

NET LOSS PER COMMON SHARE

In 1997, the Financial Accounting Standards Board issued Statement No. 128,     
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. Basic and diluted net loss per common share are computed based upon the
weighted-average number of common shares outstanding. Common shares issuable
upon the exercise of options and warrants are not included in the per share
calculations since the effect of their inclusion would be antidilutive. All
earnings per share amounts for all periods have been presented and, where
appropriate, restated to conform to the Statement 128 requirements.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.



                                                                              9

<PAGE>   27

                     Illinois Superconductor Corporation
                  Notes to Financial Statements (continued)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

DESCRIPTION OF CERTAIN CONCENTRATIONS AND RISKS

The Company operates in a highly competitive and rapidly changing industry.
Product revenues are currently concentrated with a limited number of customers  
and the supply of certain materials is concentrated among a few providers. The
development and commercialization of new technologies by any competitor could
adversely affect the Company's results of operations.

LONG-LIVED ASSETS

In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to Be Disposed Of ((FASB 121), which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those  
assets are less than the assets' carrying amount. FASB 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company adopted FASB 121 in the first quarter of 1996. The effect of adoption
was not material.





                                                                            10



<PAGE>   28



                     Illinois Superconductor Corporation
                  Notes to Financial Statements (continued)

3. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
             
                                                         DECEMBER 31    
                                                       1997        1996   
                                                   ----------------------
    <S>                                            <C>           <C>
    Raw materials                                  $  704,626    $ 64,524 
    Work-in-process                                   345,956     214,172 
    Finished product                                  675,559     375,000 
                                                   ----------------------
                                                   $1,726,141    $653,696 
                                                   ======================
   </TABLE>

Cost of product sales for the year ending December 31, 1997, includes
approximately $529,000 of costs in excess of the net realizable value of
finished goods inventory.

4. INVESTMENTS

Investments at December 31, 1997 and 1996 consist of a U.S. government  
security, due in March 2001, with a cost and fair value of $500,313. During the
year ended December 31, 1996, available-for sale debt securities with a fair
value at the date of sale of $2,500,000 were sold. The gross realized gains on
such sales were $43,171.

5. CAPITAL STOCK

The Company has an authorized class of undesignated preferred stock consisting
of 100,000 shares. Preferred stock may be issued in series from time to time
with such designations, relative rights, priorities, preferences,       
qualifications, limitations and restrictions thereof, to the extent that such
are not fixed in the Company's certificate of incorporation, as the board of
directors determines.

On February 9, 1996, the board of directors adopted a rights plan (Rights Plan).
In conjunction with the adoption of the Rights Plan, the Company has created one
series of preferred stock, consisting of 10,000 shares of Series A Junior
Participating Preferred Stock (Series A Preferred). Each share of Series A 
Preferred would entitle the holder to receive dividends equal to 1,000 times 
the dividends per share declared with respect to the Company's common stock and
, in the event of liquidation, such holders would receive a preference of 
1,000 times the aggregate amount to be distributed per share to the holders of 
the Company's common stock. Pursuant to the Rights Plan, a Series A Right is 
associated with, and trades with, each share of common stock outstanding. 

                                                                           11


<PAGE>   29

                     Illinois Superconductor Corporation
                  Notes to Financial Statements (continued)

5. CAPITAL STOCK (CONTINUED)

The record date for distribution of such Series A Rights was February 22, 1996,
and for so long as the Series A Rights are associated with the common stock,    
each new share of common stock issued by the Company will include a Series A
Right.

Each Series A Right will entitle its holder to purchase one one-thousandth of a
share of Series A Preferred for $200, subject to adjustment as defined in the
Rights Plan. The Series A Rights are not exercisable until the earlier of (i)   
10 days after any person or group becomes the beneficial owner of 15% or more
of the Company's outstanding common stock, or (ii) 10 business days (unless
extended by the board of directors) after the commencement of a tender offer or
exchange offer that would result in a person or group beneficially owning 15%
or more of the Company's outstanding common stock.

If any person or group (Acquiring Party) acquires 15% or more of the Company's
outstanding common stock (Shares Acquisition Date), each holder of a Series A
Right, except the Acquiring Party, has the right to receive upon exercise (i)   
shares of the Company's common stock having a market value equal to two times
the exercise price of the Series A Right, and (ii) one Series B Right (Series A
Rights and Series B Rights are hereinafter collectively referred to as the
Rights). The board of directors has the option, after the Shares Acquisition
Date but before there has been a 50% acquisition of the Company, to exchange one
share of common stock (or one one-thousandth of a share of preferred stock) and
one Series B Right for each Series A Right (other than Series A Rights held by
the Acquiring Party).

If, after the Series A Rights become exercisable, the Company is involved in a
merger or other business combination, or if the Company sells or transfers more 
than 50% of its assets or earning power, or if an acquiring party engages in
certain "self-dealing" transactions with the Company, as defined in the Rights
Plan, each Right then outstanding (other than Rights held by the Acquiring 
Party) will be exercisable for common stock of the other party to such
transaction having a market value of two times the exercise price of the Right.
The Company has the right to redeem each Series A Right for $0.01 prior to the
Shares Acquisition Date. The Series B Rights, once issued, are not redeemable.
The Rights expire on February 9, 2006.

On November 14, 1995, the Company completed the private placement and issuance
of 356,473 Units, which raised $3,581,282, net of related expenses. Each Unit
consists of one share of common stock and one detachable common stock purchase  
warrant. Each warrant had a term of two years and was exercisable for the
purchase of one share of common stock at $13.00 per share. Warrants for 15,700
of these shares were exercised prior to December 23, 1996. The remaining 340,773
of warrants were redeemed by the Company on December 23, 1996. In conjunction
with the redemption, the Company

                                                                             12


<PAGE>   30

                     Illinois Superconductor Corporation
                  Notes to Financial Statements (continued)

5. CAPITAL STOCK (CONTINUED)

issued 340,773 shares of its common stock in exchange for $3,287,304 in cash    
plus $1,142,754 of notes. The notes bear interest at 8.25% per annum, were due
on April 30, 1997, and are guaranteed by an affiliate of a stockholder.
Payments made during 1997 on the notes receivable totaled $444,246. The
remaining balance due of $698,508, plus accrued interest of $70,470 at December
31, 1997, is currently being disputed by the issuers and is in litigation 
(Note 13).

On February 23, 1996, the Company completed the private placement and issuance
of 408,526 shares of its common stock at $21.80 per share. Proceeds, net of
related expenses, were $8,333,654. 

On June 6, 1997, the Company issued 600 shares of Series B Convertible
Preferred Stock(Series B Stock) for $5,000 per share, or $3,000,000. In
connection with this sale, the Company issued a warrant to purchase 62,500
shares of Common Stock at $14.8125 per share, expiring on June 6, 2001. On each 
of August 29, 1997 and October 29, 1997, the Company issued 300 shares of
Series C Convertible Preferred Stock (Series C Stock) for $5,000 per share, or
$3,000,000 in aggregate. In addition, on October 29, 1997 the Company issued
700 shares of Series G Convertible Preferred Stock (Series G Stock) for $5,000
per share, or $3,500,000. In connection with the sale of Series G Stock, the
Company issued warrants to purchase an aggregate of 34,782 shares of Common
Stock at $10.0625 per share, expiring on October 29, 2001. Total proceeds from
the above issuances, net of related expenses, was $9,163,428. None of the
Preferred Stock has voting rights. The Series B Stock is convertible into
Common Stock at a conversion price equal to the lessor of (a) $11.85, or (b)
101% of the average of the lowest per share market value for the five   
consecutive trading days during the 60 trading days immediately preceding the
date of conversion. The Series C Stock and Series G Stock are convertible into
Common Stock at the conversion price equal to the lesser of (a) $8.05 or (b)
101% of the average of the lowest per share market value for the five
consecutive tradings days during the 60 trading days immediately preceding the
date of conversion. The conversion ratio is subject to adjustment. Dividends on
the Series B, Series C and Series G Convertible Preferred Stock are payable at
the rate of 5% per annum, and are payable in cash or shares of Common Stock, at
the option of the Company. Accrued Preferred Stock dividends at December 31,
1997 totaled $81,164.


                                                                             13

<PAGE>   31

                     Illinois Superconductor Corporation

                  Notes to Financial Statements (continued)

5. CAPITAL STOCK (CONTINUED)

On November 19, 1997, $1,200,000 (240 shares) of Series B Stock was converted
into 259,347 shares of Common Stock. Accrued dividends of $26,958 were also
converted into 5,826 shares of Common Stock. On December 2, 1997, $700,000 (140
shares) of Series B Stock was converted into 251,446 shares of Common Stock.
Accrued dividends of $16,972 were also converted into 6,096 shares of Common    
Stock. On December 23, 1997, $625,000 (125 shares) of Series B Stock was
converted into 291,199 shares of Common Stock. Accrued dividends of $17,208 were
also converted into 8,018 shares of Common Stock.

At December 31, 1997, authorized but unissued shares of common stock have been
reserved for future issuance as follows:

<TABLE>
<S>                                                 <C>
Warrants outstanding (Note 6)                         628,687        
Options outstanding (Note 6)                          683,333        
Conversion of Preferred Stock to Common             
 Stock                                              4,021,462                 
Options reserved for future issuance under the                     
 1993 Stock Option Plan (Note 6)                    1,034,636      
                                                   -----------
                                                    6,368,118      
                                                   ===========

</TABLE>

6. STOCK OPTIONS AND WARRANTS
               
On August 19, 1993, the Board of Directors adopted the 1993 Stock Option Plan
(the Plan) for employees, consultants, and directors who are not also employees
of the Company (outside directors). The maximum number of shares issuable under 
the Plan, as amended in 1997, is 1,705,000, of which 80,000 are reserved for
issuance to outside directors. The Plan is administered by a committee (the
"Committee") consisting of two or more outside directors appointed by the board
of directors of the Company.

For employees and consultants, the Plan provides for granting of Incentive Stock
Options (ISOs) and Nonstatutory Stock Options (NSOs). In the case of ISOs,
the exercise price shall not be less than 100% (110% in certain cases) of the
fair value of the common stock, as determined by the Committee, on the date of
grant. In the case of NSOs, the exercise price shall not be less than  85%
(110% in certain cases) of the fair value of the common stock, as determined by
the Committee, on the date of grant. The term of options granted to employees
and consultants will be for a period not to exceed 10 years (five years in
certain cases). Options granted under the Plan on or before May 31, 1995
generally vest over a five year period (One-fifth of options granted vest after
one year from the grant date and the remaining options vest ratably each month
thereafter). 
                                           
             
                                                                              14


<PAGE>   32

                     Illinois Superconductor Corporation
                  Notes to Financial Statements (continued)

6. STOCK OPTIONS AND WARRANTS (CONTINUED)

Options granted under the Plan subsequent to May 31, 1995 generally vest over a
four year period (One-fourth of options granted vest after one year from the
grant date and the remaining options vest ratably each month thereafter). In
addition, the Committee may authorize option grants with vesting provisions that
are not based solely on employees' rendering of additional service to the       
Company.

For outside directors, NSOs only will be granted with an exercise price of
100% of the fair value of the common stock, as determined by the Committee, on
the date of grant.

The Plan provides that each outside director will be automatically granted
10,000 NSOs on the date of their initial election to the board of directors. On
the date of the annual meeting of the stockholders of the Company each outside
director who is elected, reelected, or continues to serve as a director, shall
be granted 3,000 NSOs, except for those outside directors who  are first
elected to the Board of Directors at the meeting or three months prior. The
options granted vest ratably over three years and expire after seven years from
the grant date.

The Company entered into stock option agreements with certain employees and a
consultant prior to the adoption of the Plan. These stock options generally
become exercisable over a five-year period, commencing from the date of grant,
and expire 10 years from the date of grant. Exercise prices were determined
by the Board of Directors and, for options granted through December 31, 1992,
represented estimated fair values of the Company's common stock at the grant
date.

The Company has elected to follow Accounting Principals Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standards Board No. 123, "Accounting for Stock-Based
Compensation," (FASB 123) requires use of option valuation models that were 
not developed for use in valuing employee stock options. Under APB 25, since 
the exercise price of the Company's employee stock option grants has equaled 
the market price of the underlying stock on the date of grant, no compensation 
expense is recognized.

Pro forma information regarding net income and earnings per share is required   
under FASB 123, and has been determined as if the Company had accounted for its
stock options granted subsequent to December 31, 1994, under the fair value
method of that Statement.

                                                                           15
<PAGE>   33
                     Illinois Superconductor Corporation

                  Notes to Financial Statements (continued)

6. STOCK OPTIONS AND WARRANTS (CONTINUED)

The fair value for these options was estimated at the date of grant using a     
Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended December 31, 1997, 1996 and 1995: risk-free
interest rate of 6.3%, 6.2% and 6.3%, respectively; a dividend yield of 0%;
volatility factor of the expected market price of the Company's common stock of
 .74, .75 and .75, respectively; and expected life of the options of 4.0, 4.1
and 4.1 years, respectively.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. 

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:

                                                 YEAR ENDED DECEMBER 31
                                            1997         1996          1995
                                       ----------------------------------------

Pro forma net loss                     $(13,063,962) $(11,590,957) $(7,428,018)
Pro forma net loss per common share    $      (2.53) $      (2.56) $     (2.04)


Because FASB 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until 1999.



                                                                            16




<PAGE>   34

                     Illinois Superconductor Corporation

                  Notes to Financial Statements (continued)

6. STOCK OPTIONS AND WARRANTS (CONTINUED)

The table below summarizes option activity during the three year period ended
December 31, 1997:

<TABLE>
<CAPTION>
                                            OPTIONS       EXERCISE PRICE
                                           OUTSTANDING       PER SHARE
<S>                                         <C>          <C>
Outstanding at December 31, 1994            457,013      $  .184 - 16.25
Granted                                     190,360         6.75 - 19.25
Exercised                                   (50,130)        .184 - 11.25
Forfeited                                   (71,975)        .184 - 15.25
                                            -------
Outstanding at December 31, 1995            525,268         .184 - 19.25
Granted                                     346,907        17.00 - 27.00
Exercised                                   (49,881)        .184 - 15.25
Forfeited                                   (26,036)        .229 - 26.50
                                            -------
Outstanding at December 31, 1996            796,258         .184 - 27.00
Granted                                     121,000         2.00 - 19.00
Exercised                                   (17,821)        .184 - 18.25
Forfeited                                  (216,104)        6.75 - 27.00
                                            -------
Outstanding at December 31, 1997            683,333      $  .184 - 26.50
                                            =======
</TABLE>

The weighted-average exercise price of options outstanding at December 31, 1997
and 1996, was $12.92 and $13.40, respectively. The weighted-average exercise    
price of options granted, exercised, and forfeited during 1997 was $ 13.18,
$3.94, and $15.32, respectively. The weighted-average fair value of options
granted during 1997, 1996 and 1995, was $7.94, $ 11.35, and $7.08, respectively.


Following is additional information with respect to options outstanding at 
December 31, 1997:
<TABLE>
<CAPTION>

                                   EXERCISE         EXERCISE           EXERCISE          EXERCISE         EXERCISE           
                                  PRICE FROM       PRICE FROM         PRICE FROM        PRICE FROM       PRICE FROM         
                                   $0.18 TO         $2.00 TO          $10.125 TO         $15.50 TO        $19.00 TO          
                                    $0.23            $9.75              $14.75            $18.50           $26.50             

Outstanding at December 31, 1997:
<S>                                  <C>             <C>                <C>                <C>              <C>
 Number of options                   57,822          142,674            143,129            279,628          60,080  
 Weighted-average exercise price      $0.22            $7.49             $10.92             $17.51          $22.35  
 Weighted-average remaining                                                                                         
  contractual life in years           $4.98             7.72               6.56               8.51            8.25  
Exercisable at December 31, 1997:                                                                                   
 Number of options                   46,650           60,983            101,048            102,136          25,567  
 Weighted-average exercise price    $  0.22            $7.32             $10.97             $17.31          $22.33  
 
</TABLE>


                                                                            17

<PAGE>   35
                     Illinois Superconductor Corporation
                  Notes to Financial Statements (continued)

6. STOCK OPTIONS AND WARRANTS (CONTINUED)

The total number of unvested options outstanding at December 31, 1997 was       
346,949, all of which vest based on employees' continued service to the Company.

On January 7, 1998, the Company granted an additional 355,000 options to        
certain executive officers of the company.

In December 1991 and January 1992, the Company issued common stock purchase
warrants for 34,063 and 74,938 shares, respectively, to preferred stockholders
in conjunction with short-term loans from the stockholders. These warrants have 
an exercise price of $1.4679 per share and expire 10 years from the date of
issue. Warrants for 19,869, 34,063 and 13,625 of these shares were exercised in
1997, 1996 and 1995, respectively.

In connection with the July 1992 issuance of Series B convertible preferred
stock, the Company issued common stock purchase warrants for 213,780 shares to
the Series B convertible preferred stockholders. These warrants have an exercise
price of $2.29 (71,260 shares), $2.75 (71,260 shares), and $3.21 (71,260 shares)
per share and expire upon the seventh anniversary of issuance. Warrants for
96,437 of these shares (36,107 shares at $2.29 per share, 36,107 shares at $2.75
per share and 24,223 shares at $3.21 per share) were exercised  during 1996.
Warrants for 54,337 of these shares (17,779 shares at $2.29 per share, 17,779
shares at $2.75 per share, and 18,779 shares at $3.21 per share) were exercised
during 1997.

The Company also issued warrants to purchase 470,589 shares of common stock in
connection with the July 1993 issuance of Series C preferred stock. The warrants
are exercisable at $9.56 per share and expire in November 2000. Warrants for
64,614 and 69,020 of these shares were exercised during 1997 and 1996,
respectively.

In conjunction with the Company's initial public offering in October 1993,
warrants to purchase an aggregate of 100,000 shares of common stock at an
exercise price of $13.50 (120% of the initial public offering price) per share  
were issued for $100 to the managing underwriter of the initial public offering.
The warrants are exercisable through October 26, 1998. Warrants for 10,000 of
these shares were exercised during 1996.

As discussed in Note 5, the Company issued warrants to purchase 62,500 shares of
common stock on June 6, 1997 in connection with the issuance of Series B        
Convertible Preferred Stock and warrants to purchase 34,782 shares of common
stock on October 29, 1997 in connection with the issuance of Series
G Convertible Preferred Stock.                                                 

                                                                             18

<PAGE>   36

                     Illinois Superconductor Corporation

                  Notes to Financial Statements (continued)

7. LONG-TERM DEBT

The Company's long-term debt consists of two equipment financing notes with a   
bank that mature in October 1998 and May 1999, respectively. The notes bear
interest at 8.5% per annum. Payments of principal plus accrued interest are due
monthly in arrears. Borrowings are collateralized by the related equipment
purchased, which has a carrying value of approximately $110,000 at December
31, 1997. The notes require the Company to maintain a minimum net worth and
leverage ratio, as defined. The Company's outstanding obligations under these
notes was $91,618 at December 31, 1997, with aggregate debt maturities of
$78,077 in 1998, and $13,541 in 1999.

8. INCOME TAXES

The Company has net operating loss and research and development credit
carryforwards for tax purposes of approximately $40,027,000 and $881,000,
respectively, at December 31, 1997. The net operating loss carryforwards
expire in the following years:
<TABLE>
<CAPTION>

  Year                          Amount
------------------------------------------
  <S>                          <C>
  2005                         $     7,000
  2006                             638,000
  2007                             974,000
  2008                           1,659,000
  2009                           3,973,000
  2010                           8,199,000
  2011                          12,186,000
  2012                          12,391,000
------------------------------------------
                               $40,027,000
                               ===========
</TABLE>

                                                                             19

<PAGE>   37
                     Illinois Superconductor Corporation

                  Notes to Financial Statements (continued)

8. INCOME TAXES (CONTINUED)

Significant components of the Company's deferred tax assets and liabilities are
as follows: 

<TABLE>
<CAPTION>
                                                                                    DECEMBER 31 
                                                                                1997           1996 
                                                                            ---------------------------
<S>                                                                         <C>            <C>
Deferred tax assets: 
  Net operating loss carryforward                                           $15,210,000    $10,502,000 
  Research and development tax credit                                           881,000        624,000 
   carryforwards                        
  Deferred compensation                                                          79,000         94,000 
                                                                            --------------------------
Total deferred tax assets                                                    16,171,000     11,220,000 

Deferred tax liabilities:                                                                              
  Patent costs                                                                 (215,000)      (142,000)
  Property and equipment                                                       (130,000)       (68,000)
                                                                            --------------------------
                                                                               (345,000)      (210,000)
                                                                            --------------------------
Net deferred tax assets                                                      15,825,000     11,010,000 
Valuation allowance                                                         (15,825,000)   (11,010,000)
                                                                            --------------------------
Net deferred tax assets                                                     $         -   $          -
                                                                            ==========================

</TABLE>                                                                    

The valuation allowance increased during 1997 and 1996 by $4,815,000 and
$4,479,000, respectfully, due primarily to the increase in the net operating
loss carryforward. Based on the Internal Revenue Code and changes in the        
ownership of the Company, utilization of the net operating loss carryforwards
will be subject to annual limitations.

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of cash equivalents, the restricted certificates of deposit,
and the stockholder notes receivable approximates fair value due to the short
maturity of those instruments. The fair value of the Company's investments      
approximates the carrying value based on quoted market prices for those or
similar investments. The fair value of the Company's long-term debt approximates
the carrying value based on current rates available to the Company for debt with
similar remaining maturities.


                                                                           20


<PAGE>   38
                     Illinois Superconductor Corporation

                  Notes to Financial Statements (continued)

10. RESEARCH AND DEVELOPMENT AGREEMENTS

In March 1993, the Company entered into a three-year cost-sharing cooperative
agreement with the U.S. government under the Department of Commerce Advanced
Technology Program. Funding totaling $200,000 and $650,000 for the years ended
December 31, 1996 and 1995, respectively, has been offset against the related
research and development expenses.

11. COMMITMENTS   

OPERATING LEASES

The Company leases its manufacturing and office space. Under the terms of the
lease, which expires October 2004, the Company is responsible for all real      
estate taxes and operating expenses. The lease provides for a security deposit
($300,000 at December 31, 1997) that is secured by a certificate of deposit
owned by the Company.

Future minimum payments under the operating lease consist of the following at
December 31, 1997:

<TABLE>
<CAPTION>
                    YEAR                  AMOUNT
                    ----                 -------
                    <S>                  <C>
                    1998                 227,500 
                    1999                 227,500 
                    2000                 231,300 
                    2001                 249,900 
                    2002                 249,900 
                    Thereafter           453,700
                                      ----------
                                      $1,639,800
                                      ==========
</TABLE>

Rent expense totaled $226,938, $227,334, and $267,991 for the years ended
December 3l, 1997, 1996, and 1995, respectively.

                                                                         21
<PAGE>   39



                     Illinois Superconductor Corporation
                  Notes to Financial Statements (continued)

11. COMMITMENTS (CONTINUED)

CONSULTING AND RESEARCH AGREEMENTS

During 1994, the Company entered into consulting and research agreements related
to the development of certain technology. The consulting agreement requires an 
annual payment of $50,000 in 1998, while the research agreement provides for
annual payments of $140,000 through 1998 with the right to renew for one
additional year at the Company's option. The research agreement was amended in
1997 and again in 1998 and expires at the end of 1998, unless renewed at the
Company's option.

12. 401(K) PLAN

The Company has a 401(k) plan covering all employees who meet prescribed service
requirements. The plan provides for deferred salary contributions by the plan
participants and a Company contribution. Company contributions, if any, are at
the discretion of the Board of Directors and are not to exceed the amount 
deductible under applicable income tax laws. No Company contribution was made
for the years ended December 31, 1997, 1996, and 1995.

13. LEGAL PROCEEDINGS

In 1996, a stockholder filed a complaint against the Company alleging that, in
connection with the Company's private placement of securities in November 1995,
the Company breached and repudiated an oral contract with the stockholder for
the issuance and sale by the Company of 370,370 shares of the Company's common
stock at $10.80 per share, plus warrants (immediately exercisable at $12.96 per
share) to purchase an additional 370,370 shares of the Company's common stock.  
The stockholder is seeking a jury trial and money damages equal to the
difference between $8,800,000 (370,370 shares at $10.80 per share and 370,370
shares at $12.96 per share) and 740,740 shares multiplied by the highest price
at which the Company's stock traded on the NASDAQ Stock Market between November
20, 1995 and the date of judgment. The Company believes that the suit is 
without merit and intends to continue to defend itself vigorously in this 
litigation. 

                                                                            22

<PAGE>   40



                     Illinois Superconductor Corporation

                  Notes to Financial Statements (continued)

13. LEGAL PROCEEDINGS (CONTINUED)

In July 1997, the Company filed a complaint against a group of Borrowers and a  
Guarantor to enforce the terms of loans made by the Company to the Borrowers and
guaranteed by the Guarantor in the aggregate principal amount of $698,508. The
Borrowers' notes were issued to the Company in connection with the Borrowers' 
exercise of warrants to purchase shares of the Company's common stock in
December 1996.

In September 1997, the Borrowers and the Guarantor responded to the Company's
complaint and filed a counterclaim alleging that they exercised the warrants in
reliance on the Company's alleged fraudulent representations to one of the
Borrowers concerning a third-party's future underwriting of a secondary public
offering of the Common Stock. The counterclaim sought an amount of damages
which the Borrowers allege "cannot currently be determined." The Company
regards the fraud claim as without factual or legal merit and the Company
intends to vigorously pursue this litigation.

In November 1997, a Stockholder sued the Company and seven of its former or
current Directors for breaching their duties of loyalty and due care to the
Stockholder by selecting financing for the Company in June 1997 which allegedly
entrenched the Directors, eroded the Company's stock price and diluted the
Stockholder's equity in the Company. The Stockholder's complaint sought an
unspecified amount of compensatory damages in excess of $50,000 . The Company
and the Directors regard the suit as without factual or legal merit and intends
to defend itself vigorously in this litigation.

In January 1998, a Stockholder, individually and on behalf of all other
Stockholders similarly situated, filed a complaint against the Company and
eight of its former or current directors. The complaint alleged that the
Directors breached their duties of loyalty and due care to the putative class
of stockholders by selecting financing for the Company in June 1997 which       
supposedly entrenched the Directors and reduced the Company's stock price. The
complaint also alleged that the Directors breached their duty of disclosure by
not informing the stockholders that the selected financing would erode the
Company's stock price. The Stockholder's complaint sought certification of a
class consisting of all owners of the Company's common stock during the period
from June 6, 1997 through November 21, 1997, excluding the Directors and a
Stockholder. 

                                                                             23


<PAGE>   41

                     Illinois Superconductor Corporation
                  Notes to Financial Statements (continued)

13. LEGAL PROCEEDINGS (CONTINUED)

The complaint also seeks an unspecified amount of compensatory and punitive     
damages, and attorneys' fees. The Company and the Directors regard the suit as  
without factual or legal merit and intends to continue to defend itself
vigorously in this litigation.

The Company believes that the resolution of the matters described above will not
have a material adverse effect on the financial condition or results of
operations of the Company.

14. SUBSEQUENT EVENTS

During the period from January 1, 1998 to March 23, 1998, the following
conversions of Preferred stock have taken place. Series B Convertible Preferred
Stock of $475,000 (95 shares) has been converted into 270,671 shares of common
stock. Accrued dividends of $13,794 were also converted into 7,860 shares of
common stock. Series C Convertible Preferred Stock of $2,475,000 (495 shares)
has been converted into 2,133,331 shares of common stock. Accrued dividends of
$50,885 were also converted into 43,797 shares of common stock. Series G
Convertible Preferred Stock of $2,840,000 (568 shares) has been converted into
2,847,404 shares of common stock. Accrued dividends of $53,747 were also
converted into  53,888 shares of common stock.

On May 15, 1998, the Company entered into a Securities Purchase Agreement
("Agreement") with various parties. Under the terms of the Agreement, the
Company issued and sold $10,350,000 aggregate principal amount of Senior
Convertible Notes ("Notes") and issued warrants to purchase 4,140,000 shares of
the Company's Common Stock ("Warrants"). The Notes bear interest at 2% per
annum, payable in cash or, at the Company's option, in shares of the Company's
Common Stock, and are due on May 15, 2002. Holders of the Notes may convert the
principal amount into shares of the Company's Common Stock at a conversion
price of $1.50 per share. Conversions are not permitted during the first 90 days
following the issuance of the Notes and are limited to one-half of the original
principal amount during the period from 91 to 180 days after issuance of the
Notes. The Company may redeem all or a portion of the Notes at a redemption
price equal to the principal amount plus accrued interest thereon, if any, under
certain conditions. The Warrants have an exercise price of $3.75 per share and
expire on May 15, 2001. The Agreement contains several covenants which limit the
Company's ability to incur additional indebtedness and to create any lien,
pledge, or encumbrance on any assets of the Company. 





                                                                         24



<PAGE>   42
                                 SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the 
registrant has duly caused this Amendment to be signed on its behalf by the 
undersigned, thereunto duly authorized. 
   
                       ILLINOIS SUPERCONDUCTOR CORPORATION


                       By:/s/ EDWARD W. LAVES
                       ----------------------------------
                       Edward W. Laves, Ph.D.
                       President and Chief Executive Officer


Dated: July 31, 1998







<PAGE>   43






                               INDEX TO EXHIBITS


<TABLE>
<CAPTION>


EXHIBIT NUMBER  DESCRIPTION
--------------  -----------
<S>             <C>
            23  Consent of Ernst & Young LLP
</TABLE>