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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549




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Form 10-K

(Mark One)

|  |                                                     
|- | ----------------------------------------------------
|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES
EXCHANGE ACT OF 1934


For the fiscal year ended December 31,
2002

or



|  |                                                         
|- | --------------------------------------------------------
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES
EXCHANGE ACT OF 1934


For the transition period
from                to

Commission File Number 0-22302

ISCO INTERNATIONAL, INC.

(Exact name of registrant as specified in its
charter)


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

451 Kingston Court

Mt. Prospect, Illinois 60056


(847) 391-9400


(Address and telephone number of principal
executive offices)


Securities registered pursuant to
Section 12(b) of the Act:

|                                                                                            |  |                                      |  | 
|------------------------------------------------------------------------------------------- |  | ------------------------------------ |  | 
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|                                                                                           
|Title of Class                                                                              |  | Name of Exchange on Which Registered |  | 
|                                                                                           
|                                                                                           
|Common Stock, Par Value $0.001 Per Share and
    associated Preferred Stock Purchase Rights |  | American Stock Exchange              |  | 
|                                                                                           
|                                                                                           

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

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 o

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.     o

Indicate
by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the
Act).     Yes o     No x

On
June 28, 2002, 147,944,927 shares of the registrants
Common Stock, par value $0.001 per share (the Common
Stock) were outstanding. The aggregate market value on
June 28, 2002 of the registrants Common Stock held by
non-affiliates of the registrant was $18.5 million, based
on the closing price per share of the registrants common
stock as quoted on the American Stock Exchange. This amount
excludes more than 109 million shares of common stock held
by affiliates. Exclusion of shares held by any
person should not be construed to indicate that such person
possesses the power, direct or indirect, to direct or cause the
direction of the management or policies of the registrant, or
that such person is controlled by or under common control with,
the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Certain
portions of the registrants definitive proxy statement for
the annual meeting of stockholders to be held during June, 2003
are incorporated by reference in Part III of this Form 10-K
(the 2002 Proxy Statement).



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TABLE OF CONTENTS



|                                                   |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                            
|                                                   | Item 1. Business                                                                             
|                                                   | Item 2. Properties                                                                           
|                                                   | Item 3. Legal Proceedings                                                                    
|                                                   | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                           
|                                                   | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                                   | Item 6. Selected Financial Data                                                              
|                                                   | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                   | Item 7a. Quantitative and Qualitative Disclosures About Market Risk                          
|                                                   | Item 8. Financial Statements and Supplementary Data                                          
|REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
|CONSOLIDATED STATEMENTS OF OPERATIONS             
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY   
|                                                   | 14. Selected Quarterly Financial Data (Unaudited)                                            
|PART III                                          
|                                                   | Item 10. Directors and Executive Officers of the Registrant                                  
|                                                   | Item 11. Executive Compensation                                                              
|                                                   | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                   | Item 13. Certain Relationships and Related Transactions                                      
|PART IV                                           
|                                                   | Item 14. Controls and Procedures                                                             
|                                                   | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|SIGNATURES                                        
|EXHIBIT INDEX                                     
|Consent of Grant Thornton LLP                     
|Certification Pursuant to Section 906             



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TABLE OF CONTENTS

|         |  |                                                                                           |  |  |    | 
|-------- |  | ----------------------------------------------------------------------------------------- |  |  | -- | 
|PART I  
|Item 1.  |  | Business                                                                                  |  |  | 2  | 
|Item 2.  |  | Properties                                                                                |  |  |    | 
|Item 3.  |  | Legal Proceedings                                                                         |  |  |    | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                   |  |  |    | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |  |  | 23 | 
|Item 6.  |  | Selected Financial Data                                                                   |  |  | 24 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results Of Operations |  |  | 25 | 
|Item 7a. |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |  |  | 29 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                               |  |  | 30 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |  |    | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                        |  |  | 50 | 
|Item 11. |  | Executive Compensation                                                                    |  |  | 50 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |  | 50 | 
|Item 13. |  | Certain Relationships and Related Transactions                                            |  |  | 50 | 
|Item 14. |  | Disclosure Controls                                                                       |  |  | 50 | 
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |  |  | 50 | 

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PART I







Item 1.     Business


The Company develops and manufactures advanced
front-end systems for wireless networks using patented and
proprietary technologies including adaptive notch filters
(ANFTM) and high temperature
superconducting filters (HTS or CRFE) to
eliminate in-band and out-of-band interference. Along with
related service products, the Company believes it has assembled
the most comprehensive interference management product, service,
and intellectual property portfolio in the Companys
industry.

The benefits of using the Companys products
include: allowing carriers (channels) to carry traffic in
certain circumstances where they cannot do so, increased cell
site capacity and utilization, easier location of new cell sites
due to tolerance of interference, improved voice quality and
substantial reduction in dropped calls and failed attempts,
culminating in increased revenues for wireless operators. These
benefits have been documented in field trials and commercial
deployments with wireless operators involving existing wireless
systems.

In addition, the Company believes that upgrades
of existing wireless networks to allow for data throughput
(2.5G systems) and further, by the rollout of
the next generation of wireless systems (3G or
3rd Generation), operators will need to manage and
eliminate interference more effectively in order to meet their
performance objectives. The Company believes that with the
increased data bit rates required of these systems and the
increased usage of these systems due to the wireless
internet, that interference levels will increase
substantially while tolerance to interference will decrease
substantially, thereby requiring an improved filtering system in
the base station. The Company believes that its products can be
an effective element of that solution.

ANF
Technology

One of the difficult tasks facing any wireless
operator is the need to resolve interference that is from
multiple sources, sporadic or quickly moving. Often, sources of
interference prove difficult to locate due to their sporadic
nature, and other times are uncontrollable (such as in the case
of border sites). Regardless, in-band interference is a
fast-growing problem, one that can substantially reduce the
ability of the network to carry traffic.

With the acquisition of the ANF (Adaptive Notch
Filter) division of Lockheed Martin Canada Corporation during
2000 and subsequent development efforts, the Company owns
proprietary technologies to produce filters that monitor RF
spectrum and block spontaneous interference occurring within
that spectrum. This allows the Company to offer what it believes
to be the only product in the world that locates and suppresses
in-band interference in a CDMA carrier within 20 milliseconds.

The Company has announced the expansion of the
ANF platform (A-series) to support network-wide deployment in
metropolitan service areas. The expanded platform now has the
capability to scan and clean multiple CDMA carriers in either
A-band or B-band cellular networks, along with a web-based
network management software package to allow operators to
remotely monitor and manage large numbers of sites equipped with
ANF technology. This web-based reporting tool has been
well-received by customers as a valuable tool for their use in
managing their networks, and thus provides a strong competitive
advantage to the ANF, or A-series, product line.

Based on customer feedback, the Company has
further reinvented and refined its ANFTM product line
to include an ANF on wheels. This is a rapidly
deployable solution to combat immediate problems that also
serves as a state-of-the-art reporting tool. Operators can
utilize the reporting features of this product to gain critical
information of interference events within their networks.

HTS
Technology

The Companys patented HTS technology
includes the use of superconducting materials, radio frequency
(RF) filter designs and cryogenic technologies that
are needed to develop, manufacture and market high

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performance RF filter products. These products
are designed to enhance the quality, capacity, coverage and
flexibility of wireless telecommunications services.


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. Generally, 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.

Superconductive materials, when cooled below a
critical temperature, are able to transmit an electric current
with no loss or minimal loss of energy. The advantage of using
superconductors in RF filters is that more poles can be
added without significant increases in insertion loss, thereby
creating a more effective RF filter.

HTS filters can be designed with a variety of
structures and materials, each with different results. The
Company is able to produce RF filters using the two main
HTS filter designs, thin-film and thick-film design. The Company
believes it is the only Company in the world that uses
thick-film design and the Company believes it has an extensive
patent position in the thick-film area that will protect its
proprietary position. One benefit of thick-film technology is
that, according to published data of tests conducted by NTT
DoCoMo, it produces an almost theoretically perfect
RF filter for suppression of out-of-band interference.

Another benefit of thick-film design is already
incorporated in the Companys patented All Temperature
PerformanceTM (ATPTM) feature,
which eliminates the need for certain redundant backup systems
in a wireless base station. One of the hurdles of incorporating
an HTS RF filter in a base station is that the HTS filter
has an active feature, the cryo-cooler, which may be subject to
failure or power loss. Non-HTS filters do not have an active
component and therefore non-HTS filter performance is not
hindered by a lack of power. The incorporation of the
ATPTM function in an HTS RF filter eliminates
the need for a backup system in case of power failure, because
even without power, it has filtering capabilities at least equal
to a non-HTS filter. Thin-film technology requires a back-up
system and a by-pass system to continue to operate the filtering
component of the base station, both of which adds cost and size
to the overall product presentation.

The Company also uses its patented thin-film
superconducting technology for its patented T-series, or
tower-mount RF filters. The Company believes that its
tower-mount products provide a competitive advantage in the
deployment of HTS filters worldwide, as these products offer the
Company additional tools with which to address the needs of its
customers.

Finally, the Company believes that once the
wireless operator accepts a cryo-cooler in a base station for
HTS filter applications, the entire front-end of the base
station will be open to improved performance through the use of
HTS materials, known as the Cryogenic Receiver Front End
(CRFE).

Professional
Services

Over time, the Company has developed expertise in
the area of RF management and interference mitigation. This
expertise is provided to customers in the form of interference
audits and analytical tools, thus allowing customers to focus
their resources on running their networks instead of focusing on
understanding interference problems.

HISTORY

The Company was founded in 1989 by ARCH
Development Corporation, an affiliate of the University of
Chicago, to commercialize superconductor technologies initially
developed by Argonne National Laboratory. The Company was
incorporated as Illinois Superconductor Corporation in Illinois
on October 18, 1989 and reincorporated in Delaware on
September 24, 1993. The Company shifted its focus from that
of a superconductive filter provider to a customer-driven
interference management Company during 2001, changing its name
to ISCO International, Inc. The Companys facilities and
principal executive offices are located at 451 Kingston
Court, Mt. Prospect, Illinois 60056 and its telephone
number is (847) 391-9400. The

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Company maintains a website at
http://www.iscointl.com. The information contained
therein is not incorporated into this annual report.


BUSINESS STRATEGY

The Companys strategic goal is to become
the leading supplier of interference control solutions to
wireless operators. ISCO is seeking to accomplish its goal by:



| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | Marketing its products aggressively to leading
    wireless operators and original equipment manufacturers
    (OEMs);
|
| |  | Providing customers comprehensive
    interference-control solutions;                                                  
|
| |  | Continuing to build on its strong intellectual
    property position and assert its rights therein; and                
|
| |  | Outsourcing product manufacturing and reducing
    product cost.                                                       

The Company is focusing its continuous efforts on
winning the support of the worlds leading wireless
operators for its interference-control solutions. The Company
believes that its ANFTM products and HTS products,
features of which include all-temperature
performanceTM, tower mounted cryogenic RF receiver
and cryogenic equalization technologies, and professional
service support, make it the most comprehensive provider of
wireless interference-solutions in the market, the only HTS
provider to address both in-band and out-of-band interference,
as well as the only supplier capable of addressing both the
uplink and downlink interference problems. In addition, the
Company recently started providing services to operators who
need expert advice on understanding and controlling interference
in their networks.

The Company believes it has the most
comprehensive intellectual property portfolio in CRFE technology
and other areas of interference-management (118 active patents
issued or pending). The Company believes it has the seminal U.S.
patent (issued July 17, 2001) that covers commercially
viable configurations of CRFE applications for commercial
wireless telecommunications. Accordingly, the Company filed a
patent infringement lawsuit against its two domestic
competitors, which have since merged into a single entity
(Superconductor Technologies, Inc., or STI). The
Company is expanding the scope of its patent program, focusing
particularly on broad applications-controlling patents.
Management believes that as interference-control technology
becomes a vital component in wireless networks, the IP portfolio
will become a powerful element of the Companys overall
business strategy.

The Company currently outsources production for
its ANF products and is working with other potential contract
manufacturers to outsource production of the HTS units as well.
Management believes that it can maintain or achieve targeted
product gross margins and minimize capital needs while reducing
product costs. Management believes that offering the lowest
product cost will further strengthen the Companys ability
to achieve its strategic objectives.

RECENT DEVELOPMENTS/SUBSEQUENT
EVENTS

Patent Litigation

As disclosed in the Intellectual Property and
Litigation Summary sections of this document, the Company has
sued its primary HTS competitor for alleged patent infringement.
That competitor has countersued the Company on the basis of
tortious interference. The case went to trial in Delaware on
March 17, 2003. As of the date this document was prepared
that trial was ongoing. The outcome of the trial is expected to
be known at the end of March or beginning of April, 2003.

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RISK FACTORS

The following factors, in addition to other
information contained herein, should be considered carefully in
evaluating the Company and its business.

RISKS RELATED TO THE OPERATIONS AND FINANCING
OF THE COMPANY

History of Losses Raises Doubts About Ability
to Continue as a Going Concern

The Company was founded in October 1989 and
through 1996 was engaged principally in research and
development, product testing, manufacturing, marketing and sales
activities. It has incurred net losses since inception. As of
December 31, 2002, the accumulated deficit was
approximately $142.9 million. The Company has only recently
begun to generate revenues from the sale of its RF filter
products. Prior to the commencement of these sales, the majority
of its revenues were derived from R&D contracts, primarily
from the U.S. government. Management does not expect revenues to
increase dramatically until the Company ships a significantly
larger amount of the Companys RF products. Accordingly,
although management has announced the expectation of reaching
quarterly breakeven during 2003, it is nonetheless possible that
the Company may continue to experience net losses and cannot be
certain if or when the Company will become profitable.

These conditions raise substantial doubt about
the Companys ability to continue as a going concern. The
accompanying consolidated financial statements have been
prepared assuming the Company will continue a going concern and
do not include any adjustments relating to the recoverability of
reported assets or liabilities should the Company be unable to
continue as a going concern.

Future Capital Needs

To date, the Company has financed its operations
primarily through public and private equity and debt financings.
The Company believes that it has sufficient funds to operate its
business as identified herein only into May 2003, provided
that the Company is able to borrow the $1 million remaining
under the uncommitted line of credit with its two largest
shareholders, an affiliate of Elliott Associates, L.P.
(Manchester Securities Corporation and Alexander Finance, L.P.
This line is uncommitted, such that the additional borrowing
under the facility is subject to the approval of the lenders.
The Companys continued existence is therefore dependent
upon its continued ability to raise funds through the issuance
of its securities or borrowings, and its ability to acquire
assets or satisfy liabilities by the issuance of stock.
Managements plans in this regard are to obtain other debt
and equity financing until such time as the Company profitable
operation and positive cash flow are achieved and maintained.

Although management believes, based on the fact
that it has raised funds through sales of common stock and from
borrowings over the past several years, that it will be able to
secure suitable additional financing for the Companys
operations, there can be no guarantee that such financing will
continue to be available on reasonable terms, or at all. As a
result, there is no assurance that the Company will be able to
continue as a going concern.

The actual amount of 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 research and product development programs, the
ability to improve or maintain product margins, the cost of
additional plant and equipment for manufacturing, if needed, and
the costs involved in protecting patents or other intellectual
property.

Limited Experience in Manufacturing, Sales and
Marketing

For the Company to be financially successful, it
must either manufacture its products in substantial quantities,
at acceptable costs and on a timely basis or enter into an
outsourcing arrangement with a qualified manufacturer that will
allow it the same. In the event that it is unable to enter into
a manufacturing arrangement on acceptable terms with a qualified
manufacturer, the Company would have to produce the products in
commercial quantities in its own facilities. Although to date
the Company has produced limited

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quantities of its products for commercial
installations and for use in development and customer field
trial programs, production of large quantities of its products
at competitive costs presents a number of technological and
engineering challenges. The Company may be unable to manufacture
such products in sufficient volume. The Company has limited
experience in manufacturing, and substantial costs and expenses
may be incurred in connection with attempts to manufacture
larger quantities of the Companys products. The Company
may be unable to make the transition to large-scale commercial
production successfully.


The Companys sales and marketing experience
to date is very limited. The Company may be required to further
develop its marketing and sales force in order to effectively
demonstrate the advantages of its products over more traditional
products, as well as competitive HTS products. The Company also
may elect to enter into arrangements with third parties
regarding the commercialization and marketing of its products.
If the Company enters into such agreements or relationships, it
will be substantially dependent upon the efforts of others in
deriving commercial benefits from its products. The Company may
be unable to establish adequate sales and distribution
capabilities, it may be unable to enter into marketing
arrangements or relationships with third parties on financially
acceptable terms, and any such third party may not be successful
in marketing the Companys products. There is no guarantee
that its sales and marketing effort will be successful.

Management of Growth

Growth may cause a significant strain on the
Companys management, operational, financial and other
resources. The ability to manage growth effectively may require
the Company to implement and improve its operational, financial,
manufacturing and management information systems and expand,
train, manage and motivate employees. These demands may require
the addition of new management personnel and the development of
additional expertise by management. Any increase in resources
devoted to product development and marketing and sales efforts
could have an adverse effect on financial performance in future
fiscal quarters. If the Company were to receive substantial
orders, it may have to expand current facilities, which could
cause an additional strain on the Companys management
personnel and development resources. The failure of the
management team to effectively manage growth could have a
material adverse effect on the business, operating results and
financial condition.

RISKS RELATED TO THE COMPANYS COMMON
STOCK AND CHARTER PROVISIONS

Volatility of Common Stock Price

The market price of the Companys common
stock, like that of many other high-technology companies, has
fluctuated significantly and is likely to continue to fluctuate
in the future. Since January 1, 1999 and through December
31, 2002, the closing price of its common stock has ranged from
a low of $0.10 per share to a high of $39.00 per share, but its
common stock has not traded above $0.94 per share during 2002.
Announcements by us or others regarding the receipt of customer
orders, quarterly variations in operating results, acquisitions
or divestitures, additional equity or debt financings, results
of customer field trials, scientific discoveries, technological
innovations, litigation, product developments, patent or
proprietary rights, government regulation and general market
conditions may have a significant impact on the market price of
the common stock. In addition, fluctuations in the price of the
Companys common stock could affect the Companys
ability to maintain the listing of its common stock on the
American Stock Exchange.

Risk of Dilution

As of December 31, 2002, the Company had
(i) outstanding warrants to purchase 10 million shares
of common stock at a weighted average exercise price of
$0.20 per share and (ii) outstanding options to
purchase 7,884,863 shares of common stock at a weighted
average exercise price of $0.96 per share (2,317,165 of
which have not yet vested) issued to employees, directors and
consultants pursuant to the 1993 Stock Option Plan as Amended,
the merger agreement with Spectral Solutions, and individual
agreements with management and directors. In order to attract
and retain key personnel, the Company may issue additional
securities, including stock options, in connection with the
Companys employee benefit plans, or may lower the price of
existing stock options. In addition, if each of the
Companys principal shareholders approve a future draw of
the $1

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million which remains available under the
uncommitted line of credit, warrants to purchase up to
5,000,000 shares of common stock would be issued at an
exercise price of $0.20 per share.


The exercise of options and warrants for common
stock and the issuance of additional shares of common stock
and/or rights to purchase common stock at prices below market
value would be dilutive to existing stockholders and may have an
adverse effect on the market value of the common stock.

Concentration of the Companys Stock
Ownership

At the time of this filing, officers, directors
and principal stockholders (holding greater than 5% of
outstanding shares) together control approximately 74% of the
outstanding voting power. Consequently, these stockholders, if
they act together, would be able to control over all matters
requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. In
addition, this concentration of ownership may delay or prevent a
change of control of the Company, even if a change may be in the
best interests of the Companys stockholders. The interests
of these stockholders may not always coincide with the interests
of the Companys or the interests of other stockholders.
Accordingly, these stockholders could cause the Company to enter
into transactions or agreements that it would not otherwise
consider.

Anti-Takeover Provisions

There exist certain arrangements which may be
deemed to have a potential anti-takeover effect in
that such provisions may delay, defer or prevent a change of
control of the Company. In February 1996, the Board of
Directors adopted a stockholders rights plan. In addition, the
Companys Certificate of Incorporation and By-Laws provide
that (i) the Board of Directors has authority to issue
series of the Companys preferred stock with such voting
rights and other powers as the Board of Directors may determine;
(ii) prior specified notice must be given by a stockholder
making nominations to the Board of Directors or raising business
matters at stockholders meetings; and (iii) the Board of
Directors is divided into three classes, each serving for
staggered three-year terms. The effect of the rights plan and
the anti-takeover provisions in charter documents may be to
deter business combination transactions not approved by the
Companys Board of Directors, including acquisitions that
may offer a premium over market price to some or all
stockholders.

TECHNOLOGY AND MARKET RISKS

The Company is dependent on wireless
telecommunications.

The principal target market for the
Companys products is wireless telecommunications. The
devotion of substantial resources to the wireless
telecommunications market creates vulnerability to adverse
changes in this market. Adverse developments in the wireless
telecommunications market, which could come from a variety of
sources, including future competition, new technologies or
regulatory decisions, could affect the competitive position of
wireless systems. Any adverse developments in the wireless
telecommunications market during the foreseeable future may have
a material adverse effect on the Companys business,
operating results and financial condition.

The Company is dependent on the enhancement of
existing 2G and 2.5G networks and the build-out of
3G networks, and the capital spending patterns of wireless
network operators.

Increased sales of products is dependent on a
number of factors, one of which is the build-out of third
generation, or 3G, enabled wireless communications networks as
well as enhancements of existing infrastructure. Building
wireless networks is capital intensive, as is the process of
upgrading existing second generation, 2G, equipment. Further,
the capital spending patterns of wireless network operators is
beyond managements control and depends on a variety of
factors, including access to financing, the status of federal,
local and foreign government regulation and deregulation,
changing standards for wireless technology, the overall demand
for wireless services, competitive pressures and general
economic conditions. The build-out of 2.5G and 3G enabled
networks may take years to complete. The magnitude and timing of
capital spending by these

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operators for constructing, rebuilding or
upgrading their systems significantly impacts the demand for the
Companys products. Any decrease or delay in capital
spending patterns in the wireless communication industry,
whether because of a general business slowdown or a reevaluation
of the prospective demand for 2.5G and 3G services, would delay
the build-out of these networks and may significantly harm
business prospects.


The Companys success depends on the
markets acceptance of its interference-management
telecommunications products.

The Companys RF filter products, which are
based on its adaptive notch filtering, or ANF, technology, or
high-temperature superconductor, or HTS, technology, have not
been sold in very large quantities and a sufficient market may
not develop for these products. Customers establish demanding
specifications for performance, and although the Company
believes it has met or exceeded these specifications to date,
there is no guarantee that the wireless service providers will
elect to use its ANF or HTS solutions to solve their
interference problems. Although the Company has received several
orders from wireless operators for the Companys products
over the past year, there is no assurance that it will continue
to receive orders from these customers.

Rapid technological change and future
competitive technologies could negatively affect
operations.

The field of telecommunications is characterized
by rapidly advancing technology. The Companys success will
depend in large part upon its ability to keep pace with
advancing its high performance RF filter technology and
efficient, readily available low cost materials technologies.
Rapid changes have occurred, and are likely to continue to
occur, in the development of wireless telecommunications.
Development efforts may be rendered obsolete by the adoption of
alternative solutions to current wireless operator problems or
by technological advances made by others. In addition, other
materials or processes, including other superconducting
materials or fabrication processes, may prove more advantageous
for the commercialization of high performance wireless products
than the materials and processes selected by the Company.

BUSINESS RISKS

Dependence on a Limited Number of
Customers

Sales to three of the Companys customers
accounted for 95% and 72% of the Companys total revenues
for 2002 and 2001, respectively. In addition, a significant
amount of the Companys technical and managerial resources
have been focused on working with these and a limited number of
other operators and OEMs.

The Company expects that if its
interference-management products achieve market acceptance, a
limited number of wireless service providers and OEMs will
account for a substantial portion of revenue during any period.
Sales of many of the Companys RF filter products depend in
significant part upon the decision of prospective customers and
current customers to adopt and expand their use of these
products. Wireless service providers, wireless equipment OEMs
and the Companys other customers are significantly larger
than, and are able to exert a high degree of influence over the
Company. Customers orders are affected by a variety of
factors such as new product introductions, regulatory approvals,
end user demand for wireless services, customer budgeting
cycles, inventory levels, customer integration requirements,
competitive conditions and general economic conditions. The
failure to attract new customers would have a material adverse
effect on the business, operating results and financial
condition.

Lengthy Sales Cycles

Prior to selling products to customers, the
Company may be required to undergo lengthy approval and purchase
processes. Technical and business evaluation by potential
customers can take up to a year or more for products based on
new technologies such as HTS. The length of the approval process
is affected by a number of factors, including, among others, the
complexity of the product involved, priorities of the customers,
budgets and regulatory issues affecting customers. The Company
may not obtain the necessary

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approvals or ensuing sales of such products may
not occur. The length of customers approval process or
delays could make the Companys quarterly revenues and
earnings inconsistent and difficult to trend.


Dependence on Limited Sources of
Supply

Certain parts and components used in the
Companys RF filter products, including substrates and
cryogenic coolers, are only available from a limited number of
sources. The Companys reliance on these limited source
suppliers exposes it to certain risks and uncertainties,
including the possibility of a shortage or discontinuation of
certain key components and reduced control over delivery
schedules, manufacturing capabilities, quality and costs. Any
reduced availability of such parts or components when required
could materially impair the ability to manufacture and deliver
products on a timely basis and result in the cancellation of
orders, which could have a material adverse effect on the
business, operating results and financial condition.

In addition, the purchase of certain key
components involves long lead times and, in the event of
unanticipated increases in demand for its products, the Company
may be unable to manufacture products in quantities sufficient
to meet customers demand in any particular period. The
Company has few guaranteed supply arrangements with its limited
source suppliers, does not maintain an extensive inventory of
parts or components, and customarily purchases parts and
components pursuant to actual or anticipated purchase orders
placed from time to time in the ordinary course of business.

To satisfy customer requirements, the Company may
be required to stock certain long lead time parts in
anticipation of future orders or otherwise commit funds toward
future purchase. The failure of such orders to materialize as
forecasted could limit resources available for other important
purposes or accelerate the requirement for additional funds. In
addition, such excess inventory could become obsolete, which
would adversely affect financial performance. Business
disruption, production shortfalls or financial difficulties of a
limited source supplier could materially and adversely affect
the Company by increasing product costs or reducing or
eliminating the availability of such parts or components. In
such events, the inability to develop alternative sources of
supply quickly and on a cost-effective basis could materially
impair the ability to manufacture and deliver products on a
timely basis and could have a material adverse effect on the
business, operating results and financial condition.

Dependence on Key Personnel

The Companys success will depend in large
part upon its ability to attract and retain highly qualified
management, engineering, manufacturing, marketing, sales and
R&D personnel. Due to the specialized nature of the
Companys business, it may be difficult to locate and hire
qualified personnel. The loss of services of one of the
Companys executive officers or other key personnel, or the
failure to attract and retain other executive officers or key
personnel, could have a material adverse effect on the business,
operating results and financial condition.

Failure of products to perform properly might
result in significant warranty expenses.

In general, products carry a warranty of one or
two years, except in the case of superconducting materials which
carry a five year warranty, limited to replacement of the
product or refund of the cost of the product. In addition, the
Company offers its customers extended warranties. Repeated or
widespread quality problems could result in significant warranty
expenses and/or the loss of customer confidence. The occurrence
of such quality problems could have a material adverse effect on
the business, operating results and financial condition.

Intense competition, and increasing
consolidation in the Companys industry, could create
stronger competitors and harm the business.

The wireless telecommunications equipment market
is very competitive. Many of these companies have substantially
greater financial resources, larger research and development
staffs and greater manufacturing and marketing capabilities than
the Company. Its products compete directly with products which
embody existing

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and future competing commercial technologies.
Other emerging wireless technologies, may also provide
protection from RF interference and offer enhanced range to
wireless communication service providers, potentially at lower
prices and/or superior performance, and may therefore compete
with the Companys products. High performance HTS RF
filters may not become a preferred technology to address the
needs of wireless communication service providers. Failure of
its products to improve performance sufficiently, reliably, or
at an acceptable price or to achieve commercial acceptance or
otherwise compete with conventional and new technologies, will
have a material adverse effect on the business, operating
results and financial condition.


Although the market for superconductive
electronics currently is small, management believes it will
become intensely competitive, especially if products with
significant market potential are successfully developed. In
addition, if the superconducting industry develops, additional
competitors with significantly greater resources are likely to
enter the field. In order to compete successfully, the Company
must continue to develop and maintain technologically advanced
products, reduce production costs, attract and retain highly
qualified personnel, protect and/or obtain additional patent or
other protection for its technology and products and manufacture
and market its products, either alone or with third parties. The
Company may be unable to achieve these objectives. Failure to
achieve these objectives would have a material adverse effect on
the business, operating results and financial condition.

If the worldwide economic slowdown continues,
significant commercialization may be delayed.

Industry analysts predict that the softness
within the telecommunications industry will continue through
2003. If the world-wide economic slowdown continues, the
telecommunications industry will most likely continue to be
adversely affected, which may cause the Companys product
commercialization to be delayed.

LEGAL RISKS

Intellectual Property and Patents

The Companys success will depend in part on
its ability to obtain patent protection for its products and
processes, to preserve trade secrets and to operate without
infringing upon the patent or other proprietary rights of others
and without breaching or otherwise losing rights in the
technology licenses upon which any of the Companys
products are based. As of December 31, 2002, the Company
had been issued 41 U.S. and 12 foreign patents, had filed and
were actively pursuing applications for 25 other U.S. and 40
other patents. The Company acquired patent rights in connection
with the purchase of the Adaptive Notch Filtering business unit
of Lockheed Martin Canada. One of the patents is jointly owned
with Lucent Technologies, Inc. The Company believes that, since
the discovery of HTS materials in 1986, a large number of patent
applications have been filed worldwide, and many patents have
been granted in the U.S. relating to HTS materials. The claims
in those patents often appear to overlap and there have been
interference proceedings pending in the United States Patent and
Trademark Office (not currently involving the Company) regarding
rights to inventions claimed in some of the HTS materials patent
applications. The Company also believes there are a large number
of patents and patent applications covering RF filter products
and other products and technologies that it is pursuing.
Accordingly, the patent positions of companies using HTS
materials technologies and RF technologies, including the
Company, are uncertain and involve complex legal and factual
questions. The patent applications filed by the Company or
others may not result in issued patents or the scope and breadth
of any claims allowed in any patents issued to the Company or
others may not exclude competitors or provide competitive
advantages. In addition, patents issued to the Company, its
subsidiaries or others may not be held valid if subsequently
challenged or others may claim rights in the patents and other
proprietary technologies owned or licensed by the Company.
Others may have developed or may in the future develop similar
products or technologies without violating any of the
Companys proprietary rights. Furthermore, the loss of any
license to technology that the Company might acquire in the
future may have a material adverse effect on the business,
operating results and financial condition.

Some of the patents and patent applications owned
by us are subject to non-exclusive, royalty-free licenses held
by various U.S. governmental units. These licenses permit these
U.S. government units to select vendors other than us to produce
products for the U.S. Government, which would otherwise infringe
the

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Companys patent rights that are subject to
the royalty-free licenses. In addition, the U.S. Government has
the right to require us to grant licenses (including exclusive
licenses) under such patents and patent applications or other
inventions to third parties in certain instances.


Older patent applications in the U.S. are
currently maintained in secrecy until patents are issued. In
foreign countries and for newer U.S. patent applications, this
secrecy is maintained for a period of time after filing.
Accordingly, publication of discoveries in the scientific
literature or of patents themselves or laying open of patent
applications in foreign countries or for newer U.S. patent
applications tends to lag behind actual discoveries and filing
of related patent applications. Due to this factor and the large
number of patents and patent applications related to HTS
materials, RF technologies and other products and technologies
that the Company is pursuing, comprehensive patent searches and
analyses associated with HTS materials, RF technologies and
other products and technologies that the Company is pursuing are
often impractical or not cost-effective. As a result, patent and
literature searches cannot fully evaluate the patentability of
the claims in its patent applications or whether materials or
processes used by the Company for its planned products infringe
or will infringe upon existing technologies described in U.S.
patents or may infringe upon claims in patent applications made
available in the future. Because of the volume of patents issued
and patent applications filed relating to HTS materials, RF
technologies and other products and technologies that it is
pursuing, the Company believes there is a significant risk that
current and potential competitors and other third-parties have
filed or will file patent applications for, or have obtained or
will obtain, patents or other proprietary rights relating to
materials, products or processes used or proposed to be used by
the Company. In any such case, to avoid infringement, it would
have to either license such technologies or design around any
such patents. The Company may be unable to obtain licenses to
such technologies or, if obtainable, such licenses may not be
available on terms acceptable to the Company or the Company may
be unable to successfully design around these third-party
patents.

Participation in litigation or patent office
proceedings in the U.S. or other countries, which could result
in substantial cost to and diversion of effort by the Company,
may be necessary to enforce patents issued or licensed to it, to
defend itself against infringement claims made by others or to
determine the ownership, scope or validity of the proprietary
rights of the Company and others. The parties to such litigation
may be larger, better capitalized than the Company and better
able to support the cost of litigation. An adverse outcome in
any such proceedings could subject the Company to significant
liabilities to third parties, require it to seek licenses from
third parties and/or require it to cease using certain
technologies, any of which could have a material adverse effect
on the business, operating results and financial condition.

The Company believes that a number of patent
applications, including applications filed by International
Business Machines Corporation, Lucent Technologies, Inc., and
other potential competitors of the Company are pending that may
cover the useful compositions and uses of certain HTS materials
including yttrium barium copper oxide (YBCO), a
principal HTS material used by the Company in its present and
currently proposed products. Therefore, there is a substantial
risk that one or more third parties may be granted patents
covering YBCO and other HTS materials and their uses, in which
case the Company could not use these materials without an
appropriate license. As with other patents, there is no
assurance that the Company would be able to obtain licenses to
any such patents for YBCO or other HTS materials, processes for
manufacturing those materials, or their uses or that such
licenses would be available on commercially reasonable terms.
Any of these problems would have a material adverse effect on
the business, operating results and financial condition.

Litigation

The Company has been subject to a number of
lawsuits and currently has ongoing legal proceedings involving
various claims. Ongoing cases exist with respect to a former
employee (Laves) and patent infringement litigation and related
counterclaims raised by the defense. If the Company is not
successful in defending itself against these claims, there may
be a material and adverse effect on the Companys business,
operating results and financial condition.

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Government Regulations

Although the Company believes that its wireless
telecommunications products themselves would not be subject to
licensing by, or approval requirements of, the 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 ability to sell the Companys wireless
telecommunications products is dependent on the ability of
wireless base station equipment manufacturers and wireless base
station operators to obtain and retain the necessary FCC
approvals and licenses. In order for them 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 may be subject to similar
regulations of the Canadian federal and provincial governments.
Any failure to meet such standards or delays by base station
equipment manufacturers and wireless base station operators in
obtaining the necessary approvals or licenses could have a
material adverse effect on the business, operating results and
financial condition. In addition, HTS RF filters are on the U.S.
Department of Commerces export regulation list. Therefore,
exportation of such RF filters to certain countries may be
restricted or subject to export licenses.

The Company is subject to governmental labor,
safety and discrimination laws and regulations with substantial
penalties for violations. In addition, employees and others may
bring suit against it for perceived violations of such laws and
regulations. Defense against such complaints could result in
significant legal costs for us. Although the Company endeavors
to comply with all applicable laws and regulations, it may be
the subject of complaints in the future, which could have a
material adverse effect on the business, operating results and
financial condition.

Environmental Liability

Certain hazardous materials are used in 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 it 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 has not had to incur significant expenditures for
preventive or remedial action with respect to the use of
hazardous materials. However, its operations, business or assets
could 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 available resources or otherwise have a
material adverse effect on the business, results of operations
and financial condition. The Company carries property and
workmans compensation insurances in full force and effect
through nationally known carriers which include pollution
cleanup or removal and medical claims for industrial incidents.

RISKS RELATED TO ACQUISITIONS AND BUSINESS
EXPANSION

Risks of Future Acquisitions

In the future, the Company may pursue
acquisitions to obtain products, services and technologies that
it believes will complement or enhance its current product or
services offerings. At present, no agreements or other
arrangements exist with respect to any such acquisition. An
acquisition may not produce the revenue, earnings or business
synergies as anticipated and may attach significant unforeseen
liabilities, and an acquired product, service or technology
might not perform as expected. If an acquisition is pursued, the
Companys management could spend a significant amount of
time and effort in identifying and completing the acquisition
and may be distracted from the operations of the business. In
addition, management would probably have to

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devote a significant amount of resources toward
integrating the acquired business with the existing business,
and that integration may not be successful.


International Operations

The Company is in discussions and has agreements
in place with companies in non-U.S. markets to form
manufacturing, product development joint ventures and other
marketing, distribution or consulting arrangements.

The Company believes that non-U.S. markets could
provide a substantial source of revenue in the future. However,
there are certain risks applicable to doing business in foreign
markets that are not applicable to companies doing business
solely in the U.S. For example, the Company may be subject to
risks related to fluctuations in the exchange rate between the
U.S. dollar and foreign currencies in countries in which it does
business. In addition, it may be subject to the additional laws
and regulations of these foreign jurisdictions, some of which
might be substantially more restrictive than similar U.S. ones.
Foreign jurisdictions may also provide less patent protection
than is available in the U.S., and the Company may be less able
to protect its intellectual property from misappropriation and
infringement in these foreign markets.

INTERFERENCE AND WIRELESS SYSTEMS

Interference is the dominant physical problem
limiting cell site coverage, capacity and range. It is the root
cause of dropped calls, poor call quality, and other service
problems that lead to subscriber dissatisfaction and turnover
(churn). Interference enters a carriers operating
frequencies from such sources as: home electronic devices such
as portable phones, two-way radios used by commercial
enterprises and governmental agencies, air-to-ground radio,
police, fire and emergency services radio, military radio,
wireless data networking systems, television and radio
broadcasts, radar and other cellular networks. Interference is
also created by electrical sources used to power cellular base
station equipment.

The Company believes the proliferation of
wireless devices and high data rate services will exacerbate the
amount of interference bombarding carriers operating
frequencies. Conventional cellular base station equipment does
not effectively cope with interference issues.

In the face of expanding subscriber bases,
increased minutes of cell phone use, demand for high data rate
services, high customer churn rates, restricted capital budgets
and intense competition, the provisioning and optimization of
wireless system infrastructure is a major challenge for
operators. As a result of these industry conditions, wireless
equipment manufacturers, including independent wireless
technology companies and large original equipment manufacturers
(OEMs) are working intensely to develop technologies that
provide operators the tools necessary to monetize the growing
demand for wireless services.

Using the Companys filtering solutions to
mitigate interference, the Company believes that operators can
capture additional capacity and utilization, expand cell site
range and coverage as well as reduce dropped calls to a fraction
of what they were prior to the addition of the Companys
equipment and to drastically improve overall call quality.
Further, the addition of data has placed a tremendous strain on
wireless networks, and the Company has encountered cases where
its products enabled carriers (channels) to carry traffic
where they could not do so without the Companys solutions.
These issues, capacity and quality, have been presented as
critical wireless operator issues in todays environment.

The Company estimated the economic payback to
operators as a result of the use of the Companys filtering
solutions to often be between 2 and 8 months depending on
cell site traffic levels. The Company believes that the short
economic payback of its equipment as opposed to other
interference control solutions as well as the relatively low
capital cost of the Companys products make its
products the best value of all alternatives to system operators.

The higher data rates of 2.5G systems (that are
expected to begin to come online in 2003) and 3G systems (up to
10 to 100 times faster than current 2G networks), will require
much cleaner signals to support IP protocols (error rates
typically 1,000 to 10,000 times better than current 2G
specifications). As a result,

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management believes that system operators will
eventually utilize HTS and ANF filter technologies in a large
percentage of their base stations. Industry observers believe
that the OEMs will begin to offer their customers
interference control sub-systems (sourced from HTS equipment
manufacturers such as ISCO) integrated with their advanced 2.5G
and 3G base stations.


Target Market

The Company believes demand for its products will
be primarily driven by the following factors:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Existing 2G networks are straining under
    heavy traffic. According to the Cellular Telecommunications
    & Internet Association, minutes per user per month increased
    from 136 minutes in 1998 to 403 minutes in 2002. According to
    industry sources, the worldwide number of subscribers using
    mobile wireless networks is expected to increase from
    308 million in 1998 to almost 1 billion in 2004,
    representing an annual compound growth rate of 21%. Regardless
    of the timing of the introduction of high data rate 2.5G and 3G
    systems, these trends will drive demand for infrastructure
    enhancements.                                        
|
| | 2. As wireless operators install their
    data-oriented 2.5G overlay networks on top of their existing 2G
    network, the Company believes data-networks will further strain
    system capacity resulting in the need for interference-control
    in order to achieve data and error rates specified.                                                                                                                                                                                                                                                                                                                                                                                    
|
| | 3. Interference is a primary cause of poor
    call quality, dropped and lost calls. The Company believes that
    as a result of increasing use of devices such as cellular
    phones, wireless data networking equipment, wireless consumer
    appliances and radar, wireless network operators are coming to
    view interference management technologies as necessary to
    protect against their customer bases migrating to other carriers
    (churn).                                                                                                                                                                                                                            
|
| | 4. The Company believes that 3G wireless
    networks will require smaller operating cells and more base
    stations than existing cellular networks in order to cover the
    same geographic area. This is based on the requirement for high
    data rate transmission capability and cleaner error code
    criterion for 3G networks as well as the fact that transmissions
    at higher frequencies utilized by 3G networks (expected to
    operate in the 2100 MHz range) have shorter transmission waves
    as compared to lower frequency transmissions. Shorter
    transmission waves tend to limit the distance transmissions can
    travel without significant degradation.

The 3G Opportunity: A True Wireless
Internet

Existing wireless networks are based on technical
architectures that were standardized in the late 1980s and early
1990s, and are highly optimized for voice signals. The guiding
principle of 2G systems (including TDMA, GSM, CDMA) is signal
compression to achieve spectrum efficiency. The basic user
data-rate in these networks is typically around 10 kb/s,
which is adequate for telephony voice traffic.

3G standards are being developed to meet the
needs for a true wireless Internet service. [There are several
competing versions of the 3G standard, including W-CDMA which is
favored by most of the Europeans and by NTT DoCoMo, and
cdma2000, promoted by Qualcomm and supported by many existing
IS-95 (2G CDMA) operators. Both standards are broadly
similar. They are based on wideband CDMA architecture, and will
require the same general ultra-clean interference suppression
solutions.] These new standards will allow for user data-rates
of up to 2 MB/s  nearly two hundred times
faster than previous 2G networks. Moreover, 3G networks will
have to support traffic patterns characteristic of Internet
connectivity (always on service that may generate
several hours of connect time per user per day) rather than
todays short voice telephony patterns.

One system element that is especially affected by
3G performance objectives is the receiver front-end, that
acquire the desired signal and block interference from other
sources. Existing 1G and 2G networks are designed around the
less-than-perfect performance characteristics of conventional
front-end systems based. These systems allow for a great deal of
interference to penetrate the desired signal. There is evidence
that even in existing networks (2G CDMA) there are large losses
in system capacity  up to 50% or more of nominal
capacity lost, according to recent tests with major CDMA
carriers  due solely to the imperfections in

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receiver front-end filtering based on
conventional technology. With 3G, extensive testing by NTT
DoCoMo and others indicates that conventional front-end
technology may not deliver adequate performance.


The Company believes it has the broadest
interference mitigation technology of any company in the world.
The Companys goal is to position itself to lead the
industry in interference mitigation applications as HTS
solutions move toward the mainstream with 2.5G and 3G
applications. At the same time ISCO ANF is a unique patented
technology that mitigates in band interference, one of the most
dominant factors in affecting service providers network quality.

TECHNOLOGY OVERVIEW

A wireless base station is divided
(roughly) into two halves: the digital portion, and the
so-called front-end.

The core expertise of ISCO is the application of
filtering technology to wireless front-end systems. The
components in the receiver front-end are designed to acquire the
desired information-bearing signal and pass it through to the
digital portion of the system, where it is processed digitally
and the user information is extracted. Typically, much of the
signal is lost as it passes through the front-end components. As
well, undesired electromagnetic interference (in band and out of
band) also leaks into the system due to imperfections in the
filtering characteristics of the front-end devices.

The use of HTS for wireless front-end systems is
based on the following general concept: by coating the surfaces
of filter elements and other elements of the front-end, it is
possible to create front-end components which introduce very
little signal loss or degradation (no electrical resistance). In
turn, this allows for much more powerful filter architectures to
be employed practically  which results in much better
performance.

Thin-film & Thick-film HTS

There are two ways of designing an HTS component.
So-called thin-film techniques use vacuum deposition
processes to carefully lay down extremely thin layers of HTS
material upon an appropriate substrate. The result is a wafer
which can be etched to create components such as a filter, in a
process similar to semi-conductor chip fabrication. The
advantages of thin-film techniques are a somewhat smaller size
of the filter component, and the potential for integration with
other components in an Integrated Circuit or chip-type
architecture.

Thick-filmtechniques use a series of processes
more similar to the ceramic firing of a coating to create a
somewhat thicker HTS layer on the substrate, and are typically
employed to coat three-dimensional resonator elements and other
larger structures. The manufacturing process is generally much
simpler and less expensive (no clean room required as for
thin-film). The advantages of thick-film HTS are much higher
filter performance (i.e., better selectivity and ultimate
rejection; much better intermodulation characteristics; larger
numbers of poles can be employed.) as well as the ability to
support high-power applications for transmit filters and other
transmitter components.

ISCO is the only company in the world with both
thin-film and thick-film HTS technology. Because of this, ISCO
can design products using the best available HTS technology for
a given application, and is the only company with the ability to
combine thin-film and thick-film solutions in the same front-end
platform.

Front-end Architectures (G-series and T-series
filters)

ISCO has extensive experience in designing and
producing a wide range of RF front-end systems using HTS. The
Company believes that its experience base is greater than any
other company in the world in the application of HTS to wireless
systems. Key platform technologies (all patented by ISCO)
include:



| |   |                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Tower-mounted cryogenic RF receiver front-end
    (plus LNA)  the only patented HTS system designed for
    tower-top installations                                                                     
|
| |  | ATPTM RF filter technology, capable of
    operating at either cryogenic or ambient temperatures
    (eliminating system failure point and need for conventional
    back-up system required by competing

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| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |   | thin-film vendors); ATPTM encompasses
    unique HTS materials as well as frequency-compensation filter
    architectures
|
| |  | Transmit filter designs capable of handling up to
    100 watts of power.                                                

HTS Competition

Other HTS companies are limited to thin-film HTS.
This includes a small publicly-held U.S. based thin-film
company, Superconductor Technologies, Inc. (Conductus, Inc.
having recently merged with Superconductor Technologies, Inc.,
or STI) which has sold systems in the U.S. for
receive filter applications. DuPont, a holder of a number of
patents in the HTS materials area, has also been promoting its
near antennae filter at the recent trade shows. This
product is a thin-film, tower mounted unit which was developed
by Duponts Superconductivity Group. The Company believes
that DuPont has been promoting its product in Japan and the US
but, to date, has not sold any commercial products. A number of
other companies in Japan and Europe have engaged in development
towards thin-film HTS, but to the Companys knowledge have
not delivered commercial HTS systems.

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

The Companys RF filter products compete
against conventional RF filter products produced by such
companies as Radio Frequency Systems (formerly Celwave), certain
divisions of the Allen Telecom Group, 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.

Other competitive RF products based on other
technologies may provide competition in the future to the
Companys RF filter products. In addition to competitive RF
filter products, other companies including 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. Furthermore, various vendors are
offering tower mounted amplifiers (TMAs) which
provide similar range extension benefits to the Companys
filters with cooled LNAs. TMAs are generally less expensive than
the Companys products but require greater maintenance
costs due to their location on top of the operators
antenna tower and do not provide other benefits provided by HTS
products.

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, DuPont has
displayed HTS products on more than one occasion. The Company
does not believe that 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.

The Company believes that it competes on the
basis of product performance, price, breadth of product
portfolio, customer support, 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.

The Company believes it has the broadest HTS
technology base of any company in the world. In addition, the
Company has been granted by the US Patent Office what it
believes is the seminal patent in the HTS wireless systems area.
The patent was issued on July 17, 2001 and ISCO immediately
filed a patent infringement suit against Superconductor
Technologies, Inc. The patent is discussed in greater detail in
other areas of this document.

Adaptive Notch Filters (A-series
filters)

The Company offers adaptive notch filter
products, not based on superconductivity, that continually
scan a segment of RF spectrum for interference and block
that interference within 20 milliseconds per

16



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##### Table of Contents



carrier (channel). The blocking feature is
in place as long as needed for noise suppression. These products
are especially useful in dealing with sporadic in-band
interference as they adapt the Companys
interference-management technology to the fluid environment. The
complementary nature of these products with the Companys
HTS solutions for adjacent-band interference allows the Company
to offer complete interference-management solutions to its
customers, rather than force customers to try to isolate the
primary cause of their interference problems prior to looking
for an effective solution.


ISCOs ANF product substantially reduces or
eliminates altogether the effects of such in-band interference.
Each ANF unit continuously monitors up to four CDMA carriers (or
4 1.25MHz channels) being utilized for service, identifying and
eliminating narrow-band interferers within the channel whenever
and wherever they occur. By dynamically notching out this
in-band interference, the coverage integrity and supportable
capacity of the cell site are maintained as designed during the
network build out. As a direct consequence, the ANF product
thereby recovers lost minutes of use, reduces the number of
dropped calls and failed call attempts. An entire network of ANF
hardware can be managed via the web-based management software
that supports the hardware.

The current product is applicable to 800-MHz band
CDMA networks. A product evolution path is planned to extend the
range of applications to 1900-MHz CDMA systems, and subsequently
to wide-band CDMA systems (W-CDMA). Other items that will be
addressed during future product development include a higher
level of integration and a modular design, resulting in a more
compact and less expensive product with enhanced functionality,
as well as configuration for an outdoor application

ISCOs Adaptive Notch Filter (ANF) unit
dynamically identifies and eliminates direct in-band
interference in the reverse link of a wide-band system such as
CDMA. When such interference is present without being
eliminated, the reverse link of such a system will be
significantly reduced, often to the point of not allowing any
calls on the entire CDMA channel. The ANF unit continuously
monitors the power spectral density across the CDMA carriers in
use and identifies narrow-band interference in the band of
interest. The severity of multiple in-band interferers is
prioritized, and the ANF unit dynamically inserts a highly
selective notch to eliminate up to three interferers with
minimal impact on the desired broadband signal. A single ANF
unit supports both the main and diversity paths of a single
sector within the cell sites.

ISCO has also developed a network-wide, web-based
network management tool (web monitor) to perform management
functions for all ANF units throughout the system. This tool
with a graphical user interface allows the service provider to
control, configure, and monitor the ANF units remotely from the
network management center. This includes:



| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | Remote configuration of parameters within all ANF
    units               
|
| |  | Remote monitoring of alarm status for all ANF
    units                   
|
| |  | Observe interference and notch activity from all
    units                
|
| |  | View on-line event data and reports based on
    measured performance data

ISCO has industry leading expertise in the
design, deployment and optimization of CDMA networks. To
facilitate rapid penetration of ANF, ISCO is offering
professional services to the service providers engineering team
to identify and quantify interference, and, its effects on
network performance. ISCO has already developed the following
custom software and hardware tools to perform interference
analysis and interference audit. iSMART (Interference from
System Metric Analysis Rules Tool): This software tool enables a
service provider to identify potential ANF candidate
sectors/cell sites by analyzing the system performance metrics
data generated in their CDMA network. Automated Test Equipment,
ANF-on-wheels and ANF Web Monitor: This software/ hardware
combination affords us the ability to perform interference audit
at cell sites of service providers regardless of the frequency
band of operation. This service helps quantify interference and
identify new markets (frequency bands) with high interference.

17



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##### Table of Contents



ANF
competition 

ISCO has a proprietary technology on ANF but
there are alternative solutions that can be categorized as
either direct or indirect competition. Direct competition is
defined as products that directly address the problem of the
issue at hand, namely in-band interference. Indirect competition
is categorized as other wireless communication products that do
not directly solve the problem of in-band interference, but may
be perceived as an alternate solution by service providers. For
purposes of this document, the base-station manufacturers will
be referred to as the OEMs, whereas manufacturers of auxiliary
equipment to augment the base station will be referred to as
After-Market Vendors.

Direct
Competition  After-Market Vendors:

Fixed-frequency notch filters are the main form
of direct competition. However, these will only work in a static
interference environment, and hence do not satisfy the need of
dynamic interference detection and elimination as observed in a
vast majority of in-band interference scenarios. Finally, smart
antennas were also developed with the intent of in-band
interference mitigation. However, these solutions have limited
applicability and effectiveness in eliminating in-band
interference, particularly in a CDMA-based network, and are
typically substantially more expensive (in addition to being
less effective) than ISCOs ANF solution.

Direct
Competition  OEMs:

Digital-signal-processing based solutions may be
under development by the various OEMs. Even if the manufacturers
do develop such a solution for in-band interference, it is
expected that they would have limited dynamic range and hence
would only be able to mitigate low-power interference. (This has
been confirmed, through discussions with a major OEM, which was
interested in incorporating ISCOs ANF product in addition
to their own DSP-based solution, so that the ANF product could
eliminate the effects of high-power interference.)

Indirect
Competition  OEMs:

Indirect competition does not directly address
the problem of in-band interference, but could be viewed as a
method for circumventing the problem without addressing the
issues at hand. Some of these are based solely on OEM-based
hardware, such as adding a carrier to the CDMA cell sites (to
increase capacity), cell splitting, or even adding an entirely
new base station so as to add capacity and higher
signal-to-noise in a particularly problematic location. However,
all of these solutions are very costly, and, while providing
more absolute network capacity, do not guarantee increase in
performance due to the limiting effects of in-band interference.

Indirect
Competition  After-Market Vendors:

Other forms of indirect competition include
repeaters, tower-mounted amplifiers, and HTS receiver front
ends. As with the OEM-based solutions, these do not directly
address the problem of in-band interference, but may in general
improve the coverage of the network.

Product Benefits

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

Greater Network Capacity and Utilization.The Companys interference
management solutions can increase capacity and utilization by up
to 70% or more. 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 or dropped calls, and increases in
the ability of the system to permit weak signals to be processed
with acceptable call quality. In CDMA systems, increased
capacity frequently results from lowering the systems
noise floor.

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Improved Base Station Range.The Companys RF front-end
systems can extend the uplink range of a wireless system by up
to 30% or more. Greater range can reduce a service
operators capital expenditure per customer 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.

Improved Flexibility in Locating Base
Stations.The Companys RF
front-end products can allow wireless telecommunications 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
telecommunication operators.

Improved Call Quality.The Companys products improve
call quality by reducing dropped and blocked calls. During
commercial installations, the Companys RF filter products
have demonstrated drastic reduction in dropped calls. The
Companys products also improve audio fidelity by reducing
noise and interference.

Improved Digital System Capacity.Tests conducted by wireless operators
show that on a single base station test, capacity of the base
station increases by as much as 30%. The Company believes that
with a system wide deployment of its products, the capacity of
the system may increase by more than 70%. Additionally, cases
have been presented where a carrier (channel) could not
carry data traffic without an ANFTM solution.

COMPANY HIGHLIGHTS

Sales and Marketing

Until recently, the Company had historically
focused its sales and marketing effort on U.S. wireless service
providers for retrofit applications. To date, the Company has
sold its products to many of the largest cellular operators in
the United States as well as to numerous mid-size and smaller
U.S. wireless operators.

Recently, the Company has also focused on
international customers and OEMs, marketing both its
existing products and presenting the benefits of its
interference-management technology in the design and early
stages of new systems for 2.5G and 3G Systems.

Manufacturing

The Company emphasizes the outsourcing of its
manufacturing processes in order to provide predictable product
yields and can be easily expanded to meet increased customer
demand. Toward that end, the Company currently produces all of
its ANFTM products through a third party manufacturer
located near Toronto, Canada. Additionally, the Company has
worked toward qualifying third party manufacturers for its HTS
RF filter products.

The Companys internal manufacturing
operation can be found in Mount Prospect, IL.

Research and Development

The Companys R&D efforts have been
focused on developing and improving RF filter products for
wireless telecommunications systems. As a result of such
efforts, filter performance has been improved, product size has
been reduced, production costs have been lowered, product
functionality has been increased, and product packaging has been
streamlined. While the Company expects to continue to invest in
R&D to further improve and adapt its filtering products to
meet and exceed market expectations, this is expected to require
significantly less capital than in the past as it is now
primarily a matter of improving existing products as opposed to
the initial development of those products. 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 the
interference-management arena.


The Companys total R&D expenses during
2000, 2001 and 2002 were approximately $3,188,000, $7,132,000,
and $2,737,000 respectively.

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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 non-disclosure
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 December 31, 2002, the Company had
been issued 41 U.S. and 12 foreign patents, had filed and
was actively pursuing applications for 25 other U.S. and 40
other patents, with no licenses of patents and patent
applications held by others. The Company acquired patents,
through assignment of a license from the Canadian government, in
connection with the purchase of the Adaptive Notch Filtering
business unit of Lockheed Martin Canada. One of the
Companys patents is jointly owned with Lucent
Technologies, Inc. The Company believes that, since the
discovery of HTS materials in 1986, a large number of patent
applications have been filed worldwide, and many patents have
been granted in the U.S. relating to HTS materials. The claims
in those patents often appear to overlap and there are
interference proceedings pending in the United States Patent and
Trademark Office (not currently involving the Company) regarding
rights to inventions claimed in some of the HTS materials patent
applications. Furthermore, the Company expects to pursue foreign
patent rights on certain of its inventions and technologies
critical to its products.

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.

Employees

As of January 15, 2003, the Company had a
total of 26 employees, 7 of whom hold advanced degrees. Of the
employees, 5 are engaged in manufacturing and production, 7 are
engaged in research, development and engineering, and 7 are
engaged in marketing and sales, and 7 are engaged in finance and
administration. The Company also periodically employs a number
of consultants and independent contractors. None of the
Companys employees are covered by a collective bargaining
agreement. The Company believes its relationship with its
employees is good.






|        |           
|------- | ----------
|Item 2. | Properties

The Company maintains its corporate headquarters
in a 35,000 square foot building located in Mt. Prospect,
Illinois under a lease which expires in October 2004.
Additionally, it maintains a 6,500 square foot

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##### Table of Contents



facility located in North York, Ontario under a
sublease that expires in August, 2004, which has been further
broken into two segments which have subsequently been subleased
to other entities. The Company also has a small office lease in
Dallas, Texas (expiring February 2005) which it is looking
to eliminate or sublease. The Mount Prospect facility houses the
Companys manufacturing, research, development, engineering
and marketing activities. The Company believes that this
facility is adequate and suitable for its current needs and that
additional space would be available on commercial terms as
necessary to meet any future needs.







|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Patent Litigation

In July 2001, the Company filed suit in the
United States District Court for the District of Delaware
against Conductus, Inc. and Superconductor Technologies, Inc.
alleging infringement of U.S. Patent No. 6,263,215,
entitled Cryoelectronically Cooled Receiver Front End for
Mobile Radio Systems (the 215 patent).
This suit alleges that Conductus and Superconductor
Technologies base station front-end systems containing
cryogenically cooled superconducting filters infringe this
patent. The Company is seeking a permanent injunction enjoining
Conductus and Superconductor Technologies from marketing,
selling or manufacturing these products, as well as triple
damages and attorneys fees. Conductus and Superconductor
Technologies have denied these allegations and asked the court
to enter a judgment that the patent is invalid and not
infringed. Conductus and Superconductor Technologies are also
asserting the defense of inequitable conduct and a counterclaim
for a declaration that the patent is unenforceable. Conductus
and Superconductor Technologies have also asserted federal and
state law counterclaims, including claims of unfair competition.
Conductus and Superconductor Technologies are seeking both
compensatory and punitive damages as well as attorneys fees and
costs. Conductus, Inc. subsequently merged with Superconductor
Technologies, Inc.

On March 26, 2002, the Company replied to
Conductus and Superconductor Technologies Second
Amended Answer and Counterclaims and filed counterclaims
alleging that Conductus and Superconductor Technologies also
infringe U.S. Patent No. 6,104,934 entitled
Cryoelectronic Receiver Front End and U.S. Patent
No. 6,205,340 B1 entitled Cryoelectronic Receiver
Front End For Mobile Radio Systems. On April 17,
2002, the court dismissed these (the Companys)
counterclaims without prejudice to the Companys right to
assert these counterclaims in a separate action.

On February 10, 2003, the court disposed of
various motions for summary judgment filed by each party. The
court denied Superconductor Technologies motion for
summary judgment of invalidity of the 215 patent as well
as Conductus motion for summary judgment limiting
computation of damages to a reasonable royalty for sales to
Dobson Communications, Inc. On Superconductor Technologies
motion for summary judgment of non-infringement, the court
granted the motion with respect to claim 13 of the 215
patent and otherwise denied the motion with respect to each of
the other asserted claims. With regard to Conductus motion
for summary judgment of non-infringement, the court granted the
motion with respect to claim 13 of the 215 patent and
otherwise denied the motion with respect to each of the other
asserted claims. In addition, the court denied Conductus
motion for summary judgment of invalidity of all asserted claims
for causes of action existing prior to the date of issuance of
the certificate of correction and of invalidity of claim 13. The
court also denied the Companys motions for summary
judgment that Superconductor Technologies internal
projects are not prior art to the 215 patent and to
dismiss the defendants counterclaims alleging unfair
competition and interference with business relations. The trial
for this case began on March 17, 2003. At the time of
filing this annual report, the outcome of the trial was unknown.

The Company intends to continue to prosecute
these claims vigorously against Conductus and Superconductor
Technologies and defend against counterclaims in this
litigation. The Company believes the patent to be valid, the
counterclaims asserted against the Company to be without merit,
and that it is in the best interests of the Company and its
shareholders to pursue this matter vigorously.

In November 2001, the Company filed suit
against Dobson Communications, Inc. for allegedly infringing the
215 patent. The action has been stayed, per agreement
between the parties, until resolution of the matter between the
Company and Conductus and Superconductor Technologies. The
parties have agreed that

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Dobson Communications will be bound by any and
all final, non-appealable determinations, holdings or findings
with respect to all liability issues in the Companys case
against Conductus.


Laves Litigation

On July 17, 2000 Edward W. Laves filed an
action (the Complaint) in the Law Division of the
Circuit Court of Cook County, Illinois, against the Company and
three directors charging the Company with constructive
termination under and in breach of plaintiffs employment
agreement, and with violation of the Illinois Wage Payment and
Collection Act. Plaintiff seeks damages estimated to
exceed $12 million. The Company filed an appearance on
behalf of all Defendants on October 3, 2000. On October 6,
2000, the Company filed on Defendants behalf a Motion to
Dismiss the Complaint. On January 22, 2001, the court
issued an order granting the Companys Motion to Dismiss
the claims against the Individual Defendants, but denied the
Companys Motion to Dismiss with respect to claims against
the Company. On February 21, 2001, Plaintiff filed a Motion
to reconsider the courts dismissal of claims against the
Individual Defendants. On March 13, 2001, the Company filed
an Answer to the Complaint and a Memorandum in Opposition to
this Motion to Reconsider. By order dated March 15, 2001,
the court allowed Laves leave to file an amended Motion to
Reconsider, which the Plaintiff filed on April 5, 2001,
along with a motion to dismiss one of the Companys
affirmative defenses. Following a substitution of judges and a
hearing on August 9, 2001, the court granted
Plaintiffs motion to dismiss one of the Companys
affirmative defenses and ordered the case transferred back to
the judge originally assigned to the case for the limited
purposes of ruling on Plaintiffs amended motion to
reconsider the dismissal of claims against the Defendants. On
September 7, 2001, following a hearing, the Judge denied
Plaintiffs amended motion to reconsider and entered an
order retaining jurisdiction of the matter for 30 days. On
November 9, 2001, the Judge granted Plaintiff leave to file
his First Amended Count II. On November 11, 2001, Plaintiff
filed his amended pleading. On January 31, 2002, Plaintiff
filed a corrected Unified Complaint. On February 15,
2002, all Defendants filed their Answers to the Unified
Complaint. On March 5, 2002, the individual defendants
served their answers to Plaintiffs interrogatories and
responses to Plaintiffs discovery requests. On
April 8, 2002, Laves was given leave to amend his Complaint
and add Count III against the individual defendants for tortious
interference with contractual obligations. Laves seeks damages
against these individuals for: (1) an amount to be provided
at trial estimated to exceed $12 million; (2) $500,000 for
Laves anxiety, mental suffering, and humiliation; (3)
$500,000 for punitive damages; and (4) pre- and post-
judgment interest and costs. Oral fact discovery has been
extended to May 15, 2003, while all discovery is to close
by August 1, 2003. Any dispositive motions must
be filed by July 15, 2003. A final pre-trial will be heard
on September 8, 2003, a week after the deadline for
submission of pretrial material. The trial is set to begin
September 15, 2003. ISCO considers these claims without
merit and intends to defend against them vigorously.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

No matters were submitted to a vote of security
holders during the quarter ended December 31, 2002.

22



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PART II







|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

The Common Stock has been quoted since June,
2002, on the American Stock Exchange under the symbol
ISO. Prior to that, and until April 1999, the
stock had been quoted on the OTC Bulletin Board under the symbol
ISCO. From 1993 until April 1999, the Common
Stock was quoted on the NASDAQ National Market. The following
table shows, for the periods indicated, the reported high and
low sale prices for the Common Stock. Such prices reflect prices
between dealers, without retail mark up, mark down, or
commissions and may or may not reflect actual transactions.

|                                     |                |      |   |      |     |  |   |      | 
|------------------------------------ | -------------- | ---- | - | ---- | --- |  | - | ---- | 
|                                     |                | High |   |      | Low | 
|                                     |                |      |   |      |     | 
|FISCAL YEAR ENDING DECEMBER 31, 2001 |                |      |   |      |     |  |   |     
|                                     | First Quarter  |      | $ | 2.50 |     |  | $ | 1.34 | 
|                                     | Second Quarter |      | $ | 2.25 |     |  | $ | 1.19 | 
|                                     | Third Quarter  |      | $ | 1.85 |     |  | $ | 0.90 | 
|                                     | Fourth Quarter |      | $ | 1.19 |     |  | $ | 0.74 | 
|FISCAL YEAR ENDING DECEMBER 31, 2002 |                |      |   |      |     |  |   |     
|                                     | First Quarter  |      | $ | 0.86 |     |  | $ | 0.45 | 
|                                     | Second Quarter |      | $ | 0.94 |     |  | $ | 0.40 | 
|                                     | Third Quarter  |      | $ | 0.54 |     |  | $ | 0.18 | 
|                                     | Fourth Quarter |      | $ | 0.76 |     |  | $ | 0.10 | 

On February 21, 2003, there were
approximately 300 holders of record of the Common Stock. On such
date the closing bid price for the Companys common stock
as reported on the American Stock Exchange was $0.37.

The Company has never paid cash dividends on the
Common Stock and the Company does not expect to pay any
dividends on its Common Stock in the foreseeable future.

23



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##### Table of Contents






Item
6.Selected Financial
Data

The following table presents selected
consolidated financial data with respect to the Company as of
and for the years ended December 31, 1998, 1999, 2000, 2001
and 2002. The selected consolidated financial data for each of
the years in the five-year period ended December 31, 2002
have been derived from the audited consolidated financial
statements of the Company. The information set forth below
should be read in conjunction with Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Item 8.
Financial Statements and Supplementary Data.

|                                                                      |                             |      |             |             |      |   |             |             |   |   |             |             |   |      |             |             |   |   |             |             |  
|--------------------------------------------------------------------- | --------------------------- | ---- | ----------- | ----------- | ---- | - | ----------- | ----------- | - | - | ----------- | ----------- | - | ---- | ----------- | ----------- | - | - | ----------- | ----------- | -
|                                                                      |                             | 1998 |             |             | 1999 |   |             | 2000        |   |   | 2001        |             |   | 2002 |            
|                                                                      |                             |      |             |             |      |   |             |             |   |   |             |             |   |      |            
|CONSOLIDATED STATEMENT OF OPERATIONS DATA:                            |                             |      |             |             |      |   |             |             |   |   |             |             |   |      |             |             |   |   |             |            
|Net sales                                                             |                             | $    | 3,242,930   |             |      | $ | 2,408,604   |             |   | $ | 495,885     |             |   | $    | 1,981,001   |             |   | $ | 3,662,805   |            
|Costs and expenses:                                                   |                             |      |             |             |      |   |             |             |   |   |             |             |   |      |             |             |   |   |             |            
|                                                                      | Cost of revenues            |      |             | 7,047,347   |      |   |             | 5,923,173   |   |   |             | 2,672,578   |   |      |             | 3,978,368   |   |   |             | 3,565,140   |  
|                                                                      | Research and development    |      |             | 2,934,784   |      |   |             | 1,757,214   |   |   |             | 3,187,768   |   |      |             | 7,131,654   |   |   |             | 2,737,084   |  
|                                                                      | Selling and marketing       |      |             | 1,847,680   |      |   |             | 1,581,545   |   |   |             | 1,239,959   |   |      |             | 3,263,813   |   |   |             | 2,201,195   |  
|                                                                      | General and administrative  |      |             | 3,370,058   |      |   |             | 2,617,809   |   |   |             | 5,967,631   |   |      |             | 7,738,458   |   |   |             | 7,972,948   |  
|                                                                      | Goodwill amortization       |      |             |            |      |   |             |            |   |   |             | 704,165     |   |      |             | 2,009,974   |   |   |             |            |  
|                                                                      |                             |      |             |             |      |   |             |             |   |   |             |             |   |      |            
|                                                                      | Operating loss              |      |             | (11,956,939 | )    |   |             | (9,471,137  | ) |   |             | (13,276,216 | ) |      |             | (22,141,266 | ) |   |             | (12,813,562 | )
|Other income (expense):                                               |                             |      |             |             |      |   |             |             |   |   |             |             |   |      |             |             |   |   |             |            
|                                                                      | Interest income             |      |             | 354,738     |      |   |             | 98,194      |   |   |             | 174,919     |   |      |             | 138,696     |   |   |             | 62,954      |  
|                                                                      | Interest expense            |      |             | (10,247,919 | )    |   |             | (12,634,745 | ) |   |             | (5,650,572  | ) |      |             | (229,568    | ) |   |             | (327,224    | )
|                                                                      | Other income (expense), net |      |             |            |      |   |             | 36,623      |   |   |             | (16,017     | ) |      |             | (5,957,465  | ) |   |             |            |  
|                                                                      |                             |      |             |             |      |   |             |             |   |   |             |             |   |      |            
|                                                                      |                             |      | (9,893,181  | )           |      |   | (12,499,928 | )           |   |   | (5,491,670  | )           |   |      | (6,048,337  | )           |   |   | (264,270    | )          
|                                                                      |                             |      |             |             |      |   |             |             |   |   |             |             |   |      |            
|Loss before extraordinary item                                        |                             |      | (21,850,120 | )           |      |   | (21,971,065 | )           |   |   | (18,767,886 | )           |   |      | (28,189,603 | )           |   |   | (13,077,832 | )          
|Extraordinary item-debt extinguishment                                |                             |      |            |             |      |   | (745,197    | )           |   |   | (28,297     | )           |   |      |            |             |   |   |            |            
|                                                                      |                             |      |             |             |      |   |             |             |   |   |             |             |   |      |            
|Net loss                                                              |                             |      | (21,850,120 | )           |      |   | (22,716,262 | )           |   |   | (18,796,183 | )           |   |      | (28,189,603 | )           |   |   | (13,077,832 | )          
|Preferred Stock dividends                                             |                             |      | (61,744     | )           |      |   |            |             |   |   |            |             |   |      |            |             |   |   |            |            
|                                                                      |                             |      |             |             |      |   |             |             |   |   |             |             |   |      |            
|Net loss plus Preferred Stock dividends                               |                             | $    | (21,911,954 | )           |      | $ | (22,716,262 | )           |   | $ | (18,796,183 | )           |   | $    | (28,189,603 | )           |   | $ | (13,077,832 | )          
|                                                                      |                             |      |             |             |      |   |             |             |   |   |             |             |   |      |            
|Basic and diluted loss per common share before
    extraordinary item |                             | $    | (1.93       | )           |      | $ | (1.71       | )           |   | $ | (0.57       | )           |   | $    | (0.26       | )           |   | $ | (0.09       | )          
|Extraordinary item-debt extinguishment                                |                             |      |            |             |      |   | (0.06       | )           |   |   |            |             |   |      |            |             |   |   |            |            
|                                                                      |                             |      |             |             |      |   |             |             |   |   |             |             |   |      |            
|Basic and diluted loss per common share                               |                             | $    | (1.93       | )           |      | $ | (1.77       | )           |   | $ | (0.57       | )           |   | $    | (0.26       | )           |   | $ | (0.09       | )          
|                                                                      |                             |      |             |             |      |   |             |             |   |   |             |             |   |      |            
|Weighted average number of common shares
    outstanding              |                             |      | 11,345,540  |             |      |   | 12,841,497  |             |   |   | 33,037,106  |             |   |      | 107,829,453 |             |   |   | 142,884,921 |            
|                                                                      |                             |      |             |             |      |   |             |             |   |   |             |             |   |      |            
|CONSOLIDATED BALANCE SHEET DATA:                                      |                             |      |             |             |      |   |             |             |   |   |             |             |   |      |             |             |   |   |             |            
|Cash and cash equivalents                                             |                             | $    | 2,152,595   |             |      | $ | 723,711     |             |   | $ | 2,453,845   |             |   | $    | 1,720,697   |             |   | $ | 216,119     |            
|Working capital                                                       |                             |      | 4,190,548   |             |      |   | 831,724     |             |   |   | 3,096,173   |             |   |      | 658,661     |             |   |   | 1,333,827   |            
|Total assets                                                          |                             |      | 10,028,088  |             |      |   | 6,039,159   |             |   |   | 23,750,073  |             |   |      | 20,927,095  |             |   |   | 19,183,000  |            
|Long-term debt/capital lease obligations, less
    current portion    |                             |      | 9,432,026   |             |      |   | 13,650,885  |             |   |   | 198         |             |   |      | 9,425,000   |             |   |   | 2,000,000   |            
|Stockholders equity (net capital deficiency)                         |                             |      | (772,968    | )           |      |   | (9,291,712  | )           |   |   | 21,644,211  |             |   |      | 7,975,219   |             |   |   | 15,380,306  |            

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##### Table of Contents



A NOTE CONCERNING FORWARD-LOOKING
STATEMENTS

Because ISCO International, Inc.
(ISCO or ISCO International or
Company) wants to provide investors with more
meaningful and useful information, this Annual Report on
Form 10-K (Form 10-K) contains, and
incorporates by reference, certain forward-looking statements
that reflect our current expectations regarding its future
results of operations, performance and achievements. The Company
has tried, wherever possible, to identify these forward-looking
statements by using words such as anticipates,
believes, estimates,
expects, designs, plans,
intends and similar expressions. These statements
reflect the Companys current beliefs and are based on
information currently available to the Company. Accordingly,
these statements are subject to certain risks, uncertainties and
contingencies, including the factors set forth under the caption
Risk Factors, which could cause the Companys
actual results, performance or achievements for 2003 and beyond
to differ materially from those expressed in, or implied by, any
of these statements. You should not place undue reliance on any
forward-looking statements. Except as otherwise required by
federal securities laws, 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 prospectus or to reflect
the occurrence of unanticipated events.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Liquidity and Capital Resources

The accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 2, the Company incurred a net
loss of $13,077,832 during the year ended December 31,
2002, and, as of that date, the Companys accumulated
deficit is $142,940,030. In addition, the Company has
consistently used, rather than provided, cash in its operations.
These factors, among others, as discussed in Note 2 to the
financial statements, raise substantial doubt about the
Companys ability to continue as a going concern.
Managements plans in regard to these matters are also
described in Note 2. The financial statements do not
include any adjustments, including any adjustments relating to
the recoverability and classification of recorded asset amounts
or amounts and classification of liabilities that might result
from the outcome of this uncertainty.

In view of the matters described in the preceding
paragraph, recoverability of a major portion of the recorded
asset amounts shown in the accompanying balance sheet is
dependent upon continued operations of the Company, which in
turn is dependent upon the Companys ability to meet its
financing requirements on a continuing basis, to maintain
present financing, and to succeed in its future operations.

At December 31, 2002, the Companys
cash and cash equivalents, excluding restricted certificates of
deposit, were $216,000, a decrease of $1,505,000 from the
December 31, 2001 balance of $1,721,000.

The continuing development of and expansion in
sales of the Companys RF filter product lines, as well as
the continued defense of its intellectual property, may require
a commitment of substantial funds to undertake product line
development and potentially the expansion of manufacturing
capabilities 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 ability of the Company to
improve or maintain product margins, the potential cost of
additional plant and equipment for manufacturing and the costs
involved in protecting the Companys patents or other
intellectual property.

As of the date of this filing, the Company
believes that it has sufficient funds to operate its business as
identified herein without the need for substantial future
capital sources only into May 2003, provided that the Company is
able to borrow the $1 million remaining under the
uncommitted line of credit.

During October 2002, the Company entered
into an Uncommitted Line of Credit with its two largest
shareholders, an affiliate of Elliott Associates, L.P.
(Manchester Securities Corporation and Alexander
Finance, L.P. This line is intended to provide up to
$4 million to the Company, with $1 million of the
total borrowed during October 2002 upon completion of the
transaction and another $1 million during
November 2002.

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##### Table of Contents



Subsequent to December 31, 2002, the Company
borrowed an additional $1 million. This line is
uncommitted, such that each new borrowing under the facility
would be subject to the approval of the lenders. Borrowings on
this line bear an interest rate of 9.5% and are collateralized
by all the assets of the Company. Outstanding loans under this
agreement would be required to be repaid on a priority basis
should the Company receive new funding from other sources.
Additionally, the lenders would be entitled to receive warrants
to the extent funds are drawn down on the line. The warrants
bear a strike price of $0.20 per share of common stock and
expire on April 15, 2004. The credit line matures and is
due, including accrued interest thereon, on March 31, 2004.
Warrants to purchase 10 million shares of common stock were
issued in connection with the borrowings under the line of
credit during the year ended December 31, 2002. No warrants
were issued in connection with March 2003 borrowing under the
line of credit. Up to 5 million warrants may be issued in
the event the Company is authorized to borrow the
$1 million remaining under the facility. Therefore, a
maximum of 15 million warrants may be issued as a result of
this transaction, presuming certain antidilutive features are
not triggered.


According to existing accounting pronouncements
and SEC guidelines, the Company has allocated the proceeds of
these borrowings between their debt and equity components. As a
result of these borrowings during 2002, the Company will record
a non-cash charge of $1.2 million through the outstanding
term of the warrants (April, 2004). $128,000 of that amount was
recorded during 2002.

As part of its overall financing strategy, the
Company filed a $50 million universal shelf offering
registration statement in the first quarter of 2001. The Company
currently may not issue securities registered on this
registration statement and may not issue securities in the
future from this registration statement until the Company files
a post effective amendment to the registration statement on a
form for which the Company is then eligible.

Subject to the uncommitted nature of the line of
credit, the Company believes it has sufficient capital resources
available to meet its obligations and support its operations
forecast through May 2003. There can be no assurance that
other funding mechanisms, whether identified or not, will allow
the Company to access additional funds beyond that date.

Results of Operations

Years
Ended December 31, 2002 and 2001

The Companys net sales increased
$1,682,000, or 85%, from $1,981,000 in 2001 to $3,663,000 in
2002, as a result of higher unit volume of the Companys
radio frequency (RF) front-end products. This
increase was due to stronger sales volume for its
ANFTM product. The Company anticipates its net sales
to continue to increase during 2003 based on existing and/or
anticipated customer orders.

Cost of products sold decreased $413,000, or 10%
from $3,978,000 in 2001 to $3,565,000 in 2002. This occurred
despite an 85% increase in revenue as a result of various cost
control measures adopted during the preceding 15 months and
the continued emphasis on outsourcing manufacturing processes.
The cost of products sold for 2002 and 2001 consisted of direct
material, labor and overhead costs associated with the products
that were shipped during the period, as well as other costs
consisting primarily of allocated overhead costs incurred to
produce units in ending finished goods inventory that exceed net
realizable value. Due to low utilization levels and excess
capacity in the Companys manufacturing facility, cost of
products sold exceeded net sales for 2001 and nearly did so for
2002. The Company expects the cost of products sold as a
percentage of revenue to improve during 2003 due to anticipated
revenue increases and related efficiencies, certain cost control
initiatives, and primarily due to the continued emphasis on
outsourcing the manufacture of its products.

The Companys internally funded research and
development expenses decreased by $4,395,000, or 62%, from
$7,132,000 in 2001 to $2,737,000 during 2002. These reductions
were primarily due to cost-cutting measures, including the
consolidation of the Colorado and Canadian operations into the
Illinois facility. The shift from initial development to product
improvement as the focus of development efforts on products with
a greater probability of commercial sales also were significant
in this reduction.

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##### Table of Contents



Selling and marketing expenses decreased
$1,063,000, or 33%, from $3,264,000 during 2001 to $2,201,000
during 2002. This decrease was due to cost reductions
implemented during the past year.

General and administrative expenses increased
$235,000, or 3%, from $7,738,000 in 2001 to $7,973,000 during
2002. This increase was due to the expenses in the patent
litigation as described elsewhere in this report, which were
$1.9 million higher during 2002 than they were during 2001
as the case approached the March 2003 trial date. If not
for this line item, total general and administrative expenses
would have decreased by $1.6 million, or 21%. The Company
expects general and administrative expenses to remain higher
than their historical levels through the completion of the
patent litigation.

Interest income decreased $76,000, or 55%, from
$139,000 in 2001 to $63,000 during 2002. This decrease was due,
in part, to the timing and magnitude of funding and the vehicles
employed. While operating under its uncommitted line of credit,
the Company does not expect to maintain significant amounts of
cash on which interest may be earned.

Interest expense increased $97,000, or 42%, from
$230,000 in 2001 to $327,000 during 2002. During
February 2002, shareholder notes of $9,425,000, plus
accrued interest, were repaid following the Shareholder Rights
Offering, both of which are described elsewhere in this
document. The Company borrowed $2 million during the fourth
quarter of 2002 under an uncommitted line of credit with
entities affiliated with its two largest shareholders. As a
result of the borrowings on this line, warrants were issued. The
interest expense recorded during 2002 includes $128,000 of
non-cash expense related to these warrants.

Years
Ended December 31, 2001 and 2000

The Companys net sales increased
$1,485,000, or 299%, from $496,000 in 2000 to $1,981,000 in
2001, as a result of higher unit volume of the Companys
radio frequency (RF) front-end products. Net sales
during 2001 consisted of both sales resulting from the
acquisition of SSI and ANF, during August 2000 and
December 2000, respectively, as well as the sale of new
products developed internally. This increase was due to stronger
sales for each of its products, particularly with the
introduction of the ANF product.

Cost of products sold increased to $3,978,000
from $2,673,000, an increase of $1,305,000 or 49%. The cost of
products sold for 2001 and 2000 consisted of direct material,
labor and overhead costs associated with the products that were
shipped during the period, as well as other costs consisting
primarily of allocated overhead costs incurred to produce units
in ending finished goods inventory that exceed net realizable
value. Due to low utilization levels and excess capacity in the
Companys manufacturing facility, cost of products sold
exceeded net sales for 2001 and 2000.

The Companys internally funded research and
development expenses increased to $7,132,000 from $3,188,000, an
increase of $3,944,000 or 124%. These expenses were higher
primarily due to the acquisitions of Spectral Solutions, Inc.
(SSI) in August 2000 and of certain assets of
the ANF business of Lockheed Martin Canada, Inc. (the ANF
Business) in December 2000, as well as substantially
increased prototype development costs, including those for 2.5G
and G wireless systems. Cost-cutting measures, including the
consolidation of the Colorado facility and Canadian facility
into the Illinois facility, are expected to substantially reduce
these costs.

Selling and marketing expenses increased to
$3,264,000 from $1,240,000, an increase of $2,024,000 or 163%.
This increase was due to the expansion of the Companys
sales and marketing efforts beginning in the fourth quarter of
2000 and continuing through 2001.

General and administrative expenses increased to
$7,738,000 from $5,968,000, an increase of $1,770,000 or 30%. In
addition to the two acquisitions, this increase was primarily
due to non-cash compensation charges and an increase in legal
fees and travel costs. These costs may continue to increase
during 2002, particularly with respect to expenses associated
with the ongoing patent litigation.

Interest income decreased $36,000, or 21%, from
$175,000 in 2000 to $139,000 in 2001. This decrease was a result
of the timing of financing events and prevailing market interest
rates during 2001 as compared to 2000.

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##### Table of Contents



Interest expense decreased $5,421,000, or 96%,
from $5,651,000 in 2000 to $230,000 in 2001. This decrease was
primarily due to a decrease in non-cash interest expense related
to the Companys Senior Convertible Notes. As stated
previously, all of the Companys Senior Convertible Notes
were converted to equity during 2000. During 2001, interest
expense was incurred related to the short-term loans in the
aggregate amount of $3.5 million that were repaid in April,
2001 with the proceeds of the settlement, and related to the
shareholder notes of $9,425,000 that were repaid following the
Shareholder Rights Offering, both of which are described
elsewhere in this document.

Extraordinary charges of $0 and $28,000 were
recorded in 2001 and 2000, respectively, as a result of
amendments to the terms of certain of the Companys Senior
Convertible Notes issued in May 1998 and March 1999.

Critical
Accounting Policies

The discussion and analysis of the Companys
financial condition and results of operations are based upon the
Companys consolidated financial statements, which have
been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of
these financial statements requires the Company to make
estimates and judgments that affect the reported amount of
assets and liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities at the date of
the Companys financial statements. Actual results may
differ from these estimates under different assumptions or
conditions.

Critical accounting policies are defined as those
that are reflective of significant judgments and uncertainties,
and potentially result in materially different results under
different assumptions and conditions. The Company believes that
its critical accounting policies are limited to those described
below. For a detailed discussion on the application of these and
other accounting policies, see Note 2 in the notes to the
consolidated financial statements.

Revenue Recognition

Revenues from product sales are generally
recognized at the time of shipment and are recorded net of
estimated returns and allowances. Revenues from services are
generally recognized upon substantial completion of the service
and acceptance by customer. The Company has, under certain
conditions, granted customers the right to return product during
a specified period of time after shipment. In these situations,
the Company establishes a liability for estimated returns and
allowances at the time of shipment and makes the appropriate
adjustment in revenue recognized for accounting purposes. During
the current year, no revenue was recognized on products that
included a right to return at some future date. 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 are recognized upon customer
acceptance of the products. The Company warrants its products
against defects in materials and workmanship typically for a
1-2 year period from the date of shipment, except for
superconducting materials contained in the products, which are
warranted for five years from the date of shipment, though these
terms are negotiated on a case by case basis. A provision for
estimated future costs related to warranty expenses is recorded
when revenues are recognized. At December 31, 2002 and
2001, respectively, the Company has accrued $63,000 and $298,000
for warranty costs. Returns and allowances were not significant
in any period reported.

Goodwill and Other Intangible Assets

On July 20, 2001, the FASB issued Statement
of Financial Accounting Standards No. 141 (SFAS
No. 141), Business Combinations, and
Statement of Financial Accounting Standards No. 142
(SFAS No. 142), Goodwill and Other
Intangible Assets. SFAS No. 141 is effective for all
business combinations completed after June 30, 2001. SFAS
No. 142 is effective for fiscal years beginning after
December 15, 2001; however, certain provisions of such
Statement apply to goodwill and other intangible assets acquired
between

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##### Table of Contents



July 1, 2001, and the effective date of SFAS
No. 142. Major provisions of these Statements and their
effective dates for the Company are as follows:




| |                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. All business combinations initiated after
    June 30, 2001 must use the purchase method of accounting.
    The pooling of interest method of accounting is prohibited
    except for transactions initiated before July 1, 2001.                                                                                                                            
|
| | 2. Intangible assets acquired in a business
    combination must be recorded separately from goodwill if they
    arise from contractual or other legal rights or are separable
    from the acquired entity and can be sold, transferred, licensed,
    rented, or exchanged, either individually or as a part of a
    related contract, assets, or liability.
|
| | 3. Goodwill, as well as intangible assets
    with indefinite lives, acquired after June 30, 2001, will
    not be amortized. Effective January 1, 2002, all previously
    recognized goodwill and intangible assets with indefinite lives
    will no longer be subject to amortization.                                                                      
|
| | 4. Effective January 1, 2002, goodwill
    and intangible assets with indefinite lives will be tested for
    impairment annually and whenever there is an impairment
    indicator.                                                                                                                                                                            
|
| | 5. All acquired goodwill must be assigned to
    reporting units for purposes of impairment testing and segment
    reporting.                                                                                                                                                                                                                                  

As of the reporting date, the Company had
recorded unamortized goodwill assets resulting from the
acquisitions of Spectral Solutions, Inc. and the Adaptive Notch
Filter division of Lockheed Martin Canada, Inc. during 2000.
Beginning January 1, 2002, goodwill is no longer to be
amortized but rather to be tested for impairment on an annual
basis and between annual tests whenever there is an indication
of potential impairment. Impairment losses would be recognized
whenever the implied fair value of goodwill is determined to be
less than its carrying value. During the second quarter of 2002,
the Company completed the process of evaluating goodwill for
impairment under SFAS No. 142. As the fair value, using
quoted market prices for the Company, exceeded the carrying
amount, the goodwill was determined to be not impaired. There
were no material adjustments relating to the classification of
the Companys intangible assets as a result of adopting
SFAS No. 142. During October 2002, the Company
performed its annual evaluation of goodwill for impairment and
no impairment was determined to exist, thus no write-downs were
required.

The Company has concluded that no impairment
exists as of the reporting date. As mentioned elsewhere in this
document, litigation is ongoing with respect to intellectual
property rights between the Company and two primary competitors.
These intellectual property rights were acquired as part of the
Spectral Solutions, Inc. acquisition. While the Company believes
its position in the matter to be both correct and strong, an
adverse ruling in this litigation may cause the Company to
reassess the carrying value of a material portion of the
Companys recorded goodwill asset.

Prior to the 2002 effective date of this
standard, acquired goodwill from the two acquisitions completed
during 2000 had been amortized using the straight-line method
over eight years. The excess of cost over net assets acquired
associated with assets acquired in a purchase business
combination is included in impairment evaluations when events
and circumstances may indicate impairment, management evaluated
the recoverability of acquired goodwill by comparing the
carrying value of the asset to the associated current and
projected annual sales, operating profit, undiscounted annual
cash flows and market value; management also considered business
prospects, market trends and other economic factors in
performing this evaluation. Based on this evaluation, there was
no unrecorded permanent impairment related to acquired goodwill
at December 31, 2001.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7a. | Quantitative and Qualitative Disclosures
    About Market Risk

The Company does not have any material market
risk sensitive instruments.

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##### Table of Contents








|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data






REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS


Board of Directors

ISCO International, Inc.


We have audited the accompanying consolidated
balance sheets of ISCO International, Inc. (a Delaware
corporation) and subsidiaries, as of December 31, 2002 and 2001,
and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the three
years ended December 31, 2002. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. 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.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of ISCO
International, Inc. and subsidiaries as of December 31,
2002, 2001 and 2000, and the consolidated results of their
operations and their cash flows for the three years ended
December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.

The accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 3, the Company incurred a net loss
of $13,077,832 during the year ended December 31, 2002,
and, as of that date, the Companys accumulated deficit is
$142,940,030. In addition, the Company has consistently used,
rather than provided, cash in its operations. These factors,
among others, as discussed in Note 3 to the financial
statements, raise substantial doubt about the Companys
ability to continue as a going concern. Managements plans
in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

As discussed in Note 2 to the consolidated
financial statements, the Company has adopted Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets (SFAS 142) on January 1,
2002.



| |                   
| | ------------------
| | Grant Thornton LLP

Chicago, Illinois

March 8, 2003


(except Note 12 for which the date is
March 17, 2003)


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ISCO INTERNATIONAL

CONSOLIDATED BALANCE SHEETS

|                                   |                                                                                                                                   |                                |            |           |           |   |            |           |           | 
|---------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ---------- | --------- | --------- | - | ---------- | --------- | --------- | 
|                                   |                                                                                                                                   |                               
|                                   |                                                                                                                                   | December 31,                   |           
|                                   |                                                                                                                                   |                                |           
|                                   |                                                                                                                                   | 2002                           |            |           | 2001      |  
|                                   |                                                                                                                                   |                                |            |           |           |  
|ASSETS                             |                                                                                                                                   |                                |            |           |           |   |            |          
|Current assets:                    |                                                                                                                                   |                                |            |           |           |   |            |          
|                                   | Cash and cash equivalents                                                                                                         |                                | $          | 216,119   |           |   | $          | 1,720,697 |          
|                                   | Inventories                                                                                                                       |                                |            | 896,572   |           |   |            | 1,682,669 |          
|                                   | Accounts receivable, net of allowance for
    doubtful accounts of $54,000 and $0 at December 31, 2002
    and 2001, respectively |                                |            | 1,551,912 |           |   |            | 234,850   |          
|                                   | Prepaid expenses and other                                                                                                        |                                |            | 471,918   |           |   |            | 456,818   |          
|                                   |                                                                                                                                   |                                |            |           |           |  
|Total current assets               |                                                                                                                                   |                                | 3,136,521  |           |           |   | 4,095,034  |          
|                                   | Property and equipment:                                                                                                           |                                |            |           |           |   |            |           |          
|                                   |                                                                                                                                   | Property and Equipment         |            |           | 8,968,732 |   |            |           | 9,286,725 | 
|                                   |                                                                                                                                   | Less: Accumulated depreciation |            |           | 7,463,289 |   |            |           | 6,991,050 | 
|                                   |                                                                                                                                   |                                |            |           |           |  
|                                   |                                                                                                                                   |                                | 1,505,443  |           |           |   | 2,295,675  |          
|Restricted certificates of deposit |                                                                                                                                   |                                | 114,508    |           |           |   | 263,094    |          
|Intangible assets, net             |                                                                                                                                   |                                | 14,426,528 |           |           |   | 14,273,292 |          
|                                   |                                                                                                                                   |                                |            |           |           |  
|Total assets                       |                                                                                                                                   | $                              | 19,183,000 |           |           | $ | 20,927,095 |          
|                                   |                                                                                                                                   |                                |            |           |           |  

|                                           |                                                                                                                                                                                                     |              |            |              |      |   |            |              |  
|------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ---------- | ------------ | ---- | - | ---------- | ------------ | -
|                                           |                                                                                                                                                                                                     |             
|                                           |                                                                                                                                                                                                     | December 31, |           
|                                           |                                                                                                                                                                                                     |              |           
|                                           |                                                                                                                                                                                                     | 2002         |            |              | 2001 |  
|                                           |                                                                                                                                                                                                     |              |            |              |      |  
|LIABILITIES AND STOCKHOLDERS
    EQUITY   |                                                                                                                                                                                                     |              |            |              |      |   |            |             
|Current liabilities:                       |                                                                                                                                                                                                     |              |            |              |      |   |            |             
|                                           | Accounts payable                                                                                                                                                                                    |              | $          | 193,458      |      |   | $          | 537,636      |  
|                                           | Accrued liabilities                                                                                                                                                                                 |              |            | 1,609,236    |      |   |            | 2,989,240    |  
|                                           |                                                                                                                                                                                                     |              |            |              |      |  
|Total current liabilities                  |                                                                                                                                                                                                     |              | 1,802,694  |              |      |   | 3,526,876  |             
|Notes                                      |                                                                                                                                                                                                     |              | 2,000,000  |              |      |   | 9,425,000  |             
|Stockholders equity:                      |                                                                                                                                                                                                     |              |            |              |      |   |            |             
|                                           | Preferred Stock; 300,000 and 100,000 shares
    authorized; No shares issued and outstanding at
    December 31, 2002 and 2001, respectively                                                        |              |            |             |      |   |            |             |  
|                                           | Common stock ($.001 par value); 250,000,000
    and 250,000,000 shares authorized and 147,944,927 and
    107,905,231 shares issued and outstanding at December 31,
    2002 and 2001, respectively |              |            | 147,945      |      |   |            | 107,905      |  
|                                           | Additional paid-in capital (net of unearned comp.)                                                                                                                                                  |              |            | 158,172,391  |      |   |            | 137,729,512  |  
|                                           | Accumulated deficit                                                                                                                                                                                 |              |            | (142,940,030 | )    |   |            | (129,862,198 | )
|                                           |                                                                                                                                                                                                     |              |            |              |      |  
|Total stockholders equity                 |                                                                                                                                                                                                     |              | 15,380,306 |              |      |   | 7,975,219  |             
|                                           |                                                                                                                                                                                                     |              |            |              |      |  
|Total liabilities and stockholders equity |                                                                                                                                                                                                     | $            | 19,183,000 |              |      | $ | 20,927,095 |             
|                                           |                                                                                                                                                                                                     |              |            |              |      |  

See the accompanying Notes which are an integral
part of the financial statements.

31



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##### Table of Contents



ISCO INTERNATIONAL






CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                      |                             |                         |             |           |      |   |             |            |   |   |             |            |  
|--------------------------------------------------------------------- | --------------------------- | ----------------------- | ----------- | --------- | ---- | - | ----------- | ---------- | - | - | ----------- | ---------- | -
|                                                                      |                             |                        
|                                                                      |                             | Year Ended December 31, |            
|                                                                      |                             |                         |            
|                                                                      |                             | 2002                    |             |           | 2001 |   |             | 2000       |  
|                                                                      |                             |                         |             |           |      |   |             |            |  
|Net sales                                                             |                             | $                       | 3,662,805   |           |      | $ | 1,981,001   |            |   | $ | 495,885     |           
|Costs and expenses:                                                   |                             |                         |             |           |      |   |             |            |   |   |             |           
|                                                                      | Cost of sales               |                         |             | 3,565,140 |      |   |             | 3,978,368  |   |   |             | 2,672,578  |  
|                                                                      | Research and development    |                         |             | 2,737,084 |      |   |             | 7,131,654  |   |   |             | 3,187,768  |  
|                                                                      | Selling and marketing       |                         |             | 2,201,195 |      |   |             | 3,263,813  |   |   |             | 1,239,959  |  
|                                                                      | General and administrative  |                         |             | 7,972,948 |      |   |             | 7,738,458  |   |   |             | 5,967,631  |  
|                                                                      | Goodwill amortization       |                         |             |          |      |   |             | 2,009,974  |   |   |             | 704,165    |  
|                                                                      |                             |                         |             |           |      |   |             |            |  
|Total costs and expenses                                              |                             |                         | 16,476,367  |           |      |   | 24,122,267  |            |   |   | 13,772,101  |           
|                                                                      |                             |                         |             |           |      |   |             |            |  
|Operating loss                                                        |                             |                         | (12,813,562 | )         |      |   | (22,141,266 | )          |   |   | (13,276,216 | )         
|Other income and (expense):                                           |                             |                         |             |           |      |   |             |            |   |   |             |           
|                                                                      | Interest income             |                         |             | 62,954    |      |   |             | 138,696    |   |   |             | 174,919    |  
|                                                                      | Non-cash interest expense   |                         |             | (128,423  | )    |   |             |           |   |   |             | (5,631,581 | )
|                                                                      | Other interest expense      |                         |             | (198,801  | )    |   |             | (229,568   | ) |   |             | (18,991    | )
|                                                                      | Other income (expense), net |                         |             |          |      |   |             | (5,957,465 | ) |   |             | (16,017    | )
|                                                                      |                             |                         |             |           |      |   |             |            |  
|                                                                      |                             |                         | (264,270    | )         |      |   | (6,048,337  | )          |   |   | (5,491,670  | )         
|                                                                      |                             |                         |             |           |      |   |             |            |  
|Loss before extraordinary item                                        |                             |                         | (13,077,832 | )         |      |   | (28,189,603 | )          |   |   | (18,767,886 | )         
|Extraordinary item  debt extinguishment                              |                             |                         |            |           |      |   |            |            |   |   | (28,297     | )         
|                                                                      |                             |                         |             |           |      |   |             |            |  
|Net loss                                                              |                             | $                       | (13,077,832 | )         |      | $ | (28,189,603 | )          |   | $ | (18,796,183 | )         
|                                                                      |                             |                         |             |           |      |   |             |            |  
|Basic and diluted loss per common share before
    extraordinary item |                             | $                       | (0.09       | )         |      | $ | (0.26       | )          |   | $ | (0.57       | )         
|Extraordinary item  debt extinguishment                              |                             |                         |            |           |      |   |            |            |   |   |            |           
|                                                                      |                             |                         |             |           |      |   |             |            |  
|Basic and diluted loss per common share                               |                             | $                       | (0.09       | )         |      | $ | (0.26       | )          |   | $ | (0.57       | )         
|                                                                      |                             |                         |             |           |      |   |             |            |  
|Weighted average number of common shares
    outstanding              |                             |                         | 142,884,921 |           |      |   | 107,829,453 |            |   |   | 33,037,106  |           
|                                                                      |                             |                         |             |           |      |   |             |            |  

See the accompanying Notes which are an integral
part of the financial statements.

32



---



##### Table of Contents



ISCO INTERNATIONAL






CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


Years Ended December 31, 2000, 2001, and
2002


|                                |                                                                          |        |             |            |        |   |         |            |  |   |              |            |   |             |          |         |              |   |              |             |   |   |            |            |   |   |            |             |  
|------------------------------- | ------------------------------------------------------------------------ | ------ | ----------- | ---------- | ------ | - | ------- | ---------- |  | - | ------------ | ---------- | - | ----------- | -------- | ------- | ------------ | - | ------------ | ----------- | - | - | ---------- | ---------- | - | - | ---------- | ----------- | -
|                                |                                                                          |        |             |            |        |   |         | Notes      |  |   |              |            |   |             |         
|                                |                                                                          | Common |             |            | Common |   |         | Additional |  |   | Receivable   |            |   |             |          |         |              |  
|                                |                                                                          | Stock  |             |            | Stock  |   |         | Paid-In    |  |   | From         |            |   | Accumulated |          |         | Unearned     |   |              |            
|                                |                                                                          | Shares |             |            | Amount |   |         | Capital    |  |   | Stockholders |            |   | Deficit     |          |         | Compensation |   |              | Total       |  
|                                |                                                                          |        |             |            |        |   |         |            |  |   |              |            |   |             |          |         |              |   |              |             |  
|Balance as of December 31, 1999 |                                                                          |        | 15,753,001  |            |        | $ | 15,753  |            |  | $ | 74,249,643   |            |   | $           | (680,696 | )       |              | $ | (82,876,412  | )           |   | $ |           |            |   | $ | (9,291,712 | )          
|                                | Exercise of stock options; $.48  $1.81
    per share                    |        |             | 362,812    |        |   |         | 363        |  |   |              | 219,565    |   |             |          |        |              |   |              |            |   |   |            |           |   |   |            | 219,928     |  
|                                | Conversion of senior convertible notes to common
    stock               |        |             | 75,894,430 |        |   |         | 75,894     |  |   |              | 19,110,980 |   |             |          |        |              |   |              |            |   |   |            |           |   |   |            | 19,186,874  |  
|                                | Conversion of warrants to common stock                                   |        |             | 7,950,356  |        |   |         | 7,950      |  |   |              | 4,007,072  |   |             |          |        |              |   |              |            |   |   |            |           |   |   |            | 4,015,022   |  
|                                | Conversion of senior convertible notes                                   |        |             |           |        |   |         |           |  |   |              | 4,000,000  |   |             |          |        |              |   |              |            |   |   |            |           |   |   |            | 4,000,000   |  
|                                | Acquisition of Spectral Solutions, Inc.                                  |        |             | 3,440,526  |        |   |         | 3,441      |  |   |              | 14,324,800 |   |             |          |        |              |   |              |            |   |   |            | (108,915   | ) |   |            | 14,219,326  |  
|                                | Acquisition of ANF division of LMC                                       |        |             | 2,500,000  |        |   |         | 2,500      |  |   |              | 2,653,750  |   |             |          |        |              |   |              |            |   |   |            |           |   |   |            | 2,656,250   |  
|                                | Equity Issuance                                                          |        |             | 1,818,182  |        |   |         | 1,818      |  |   |              | 4,998,182  |   |             |          |        |              |   |              |            |   |   |            |           |   |   |            | 5000,000    |  
|                                | Litigation Settlement                                                    |        |             |           |        |   |         |           |  |   |              | (822,766   | ) |             |          | 680,696 |              |   |              |            |   |   |            |           |   |   |            | (142,070    | )
|                                | Dfd Stock Units Granted, net of amort                                    |        |             |           |        |   |         |           |  |   |              | 1,925,000  |   |             |          |        |              |   |              |            |   |   |            | (1,693,175 | ) |   |            | 231,825     |  
|                                | Comp. Exp. for non-employee stock options                                |        |             |           |        |   |         |           |  |   |              | 344,951    |   |             |          |        |              |   |              |            |   |   |            |           |   |   |            | 344,951     |  
|                                | Net loss                                                                 |        |             |           |        |   |         |           |  |   |              |           |   |             |          |        |              |   |              | (18,796,183 | ) |   |            |           |   |   |            | (18,796,183 | )
|                                |                                                                          |        |             |            |        |   |         |            |  |   |              |            |   |             |          |         |              |   |              |             |  
|Balance as of December 31, 2000 |                                                                          |        | 107,719,307 |            |        | $ | 107,719 |            |  | $ | 125,011,177  |            |   | $           |         |         |              | $ | (101,672,595 | )           |   | $ | (1,802,090 | )          |   | $ | 21,644,211 |            
|                                |                                                                          |        |             |            |        |   |         |            |  |   |              |            |   |             |          |         |              |   |              |             |  
|                                | Exercise of stock options and vested DSUs;
    $0.00 to $0.75 per share |        |             | 185,924    |        |   |         | 186        |  |   |              | 80,667     |   |             |          |        |              |   |              |            |   |   |            |           |   |   |            | 80,853      |  
|                                | Settlement proceeds received, net                                        |        |             |           |        |   |         |           |  |   |              | 13,750,000 |   |             |          |        |              |   |              |            |   |   |            |           |   |   |            | 13,750,000  |  
|                                | Dfd Stock Units Granted, net of amort                                    |        |             |           |        |   |         |           |  |   |              | (393,750   | ) |             |          |        |              |   |              |            |   |   |            | 919,442    |   |   |            | 525,692     |  
|                                | Comp. Exp. for non-employee stock options                                |        |             |           |        |   |         |           |  |   |              | 164,066    |   |             |          |        |              |   |              |            |   |   |            |           |   |   |            | 164,066     |  
|                                | Net loss                                                                 |        |             |           |        |   |         |           |  |   |              |           |   |             |          |        |              |   |              | (28,189,603 | ) |   |            |           |   |   |            | (28,189,603 | )
|                                |                                                                          |        |             |            |        |   |         |            |  |   |              |            |   |             |          |         |              |   |              |             |  
|Balance as of December 31, 2001 |                                                                          |        | 107,905,231 |            |        | $ | 107,905 |            |  | $ | 138,612,160  |            |   | $           |         |         |              | $ | (129,862,198 | )           |   | $ | (882,648   | )          |   | $ | 7,975,219  |            
|                                |                                                                          |        |             |            |        |   |         |            |  |   |              |            |   |             |          |         |              |   |              |             |  
|                                | Exercise of stock options and vested DSUs;
    $0.00 to $0.18 per share |        |             | 109,725    |        |   |         | 110        |  |   |              | 201        |   |             |          |        |              |   |              |            |   |   |            |           |   |   |            | 311         |  
|                                | Rights Offering proceeds received, net                                   |        |             | 39,929,971 |        |   |         | 39,930     |  |   |              | 19,725,055 |   |             |          |        |              |   |              |            |   |   |            |           |   |   |            | 19,764,985  |  
|                                | Deferred Stock Unit Amortization                                         |        |             |           |        |   |         |           |  |   |              |           |   |             |          |        |              |   |              |            |   |   |            | 382,800    |   |   |            | 382,800     |  
|                                | Compensation Expense for Non-Employee Options                            |        |             |           |        |   |         |           |  |   |              | 26,400     |   |             |          |        |              |   |              |            |   |   |            |           |   |   |            | 26,400      |  
|                                | Compensation Expense for Discount on Employee
    Options                |        |             |           |        |   |         | 180,000    |  |   |              |           |   |             |          |        |              |   |              |            |   |   |            | 180,000    |   |   |            |             |  
|                                | Issuance of Warrants, net                                                |        |             |           |        |   |         |           |  |   |              | 128,423    |   |             |          |        |              |   |              |            |   |   |            |           |   |   |            | 128,423     |  
|                                | Net Loss                                                                 |        |             |           |        |   |         |           |  |   |              |           |   |             |          |        |              |   |              | (13,077,832 | ) |   |            |           |   |   |            | (13,077,832 | )
|                                |                                                                          |        |             |            |        |   |         |            |  |   |              |            |   |             |          |         |              |   |              |             |  
|Balance as of December 31, 2002 |                                                                          |        | 147,944,927 |            |        | $ | 147,945 |            |  | $ | 158,672,239  |            |   | $           |         |         |              | $ | (142,940,030 | )           |   | $ | (499,848   | )          |   | $ | 15,380,306 |            
|                                |                                                                          |        |             |            |        |   |         |            |  |   |              |            |   |             |          |         |              |   |              |             |  

See the accompanying Notes which are an integral
part of the financial statements.

33



---



##### Table of Contents



ISCO INTERNATIONAL

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                |                                                           |                          |             |            |      |   |             |           |   |   |             |           |  
|------------------------------------------------------------------------------- | --------------------------------------------------------- | ------------------------ | ----------- | ---------- | ---- | - | ----------- | --------- | - | - | ----------- | --------- | -
|                                                                                |                                                           |                         
|                                                                                |                                                           | Years Ended December 31, |            
|                                                                                |                                                           |                          |            
|                                                                                |                                                           | 2002                     |             |            | 2001 |   |             | 2000      |  
|                                                                                |                                                           |                          |             |            |      |   |             |           |  
|OPERATING ACTIVITIES                                                            |                                                           |                          |             |            |      |   |             |           |   |   |             |          
|Net loss                                                                        |                                                           | $                        | (13,077,832 | )          |      | $ | (28,189,603 | )         |   | $ | (18,796,183 | )        
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                           |                          |             |            |      |   |             |           |   |   |             |          
|                                                                                | Depreciation                                              |                          |             | 744,188    |      |   |             | 870,354   |   |   |             | 759,210   |  
|                                                                                | Amortization                                              |                          |             | 83,656     |      |   |             | 2,109,559 |   |   |             | 744,493   |  
|                                                                                | Extraordinary item                                        |                          |             |           |      |   |             |          |   |   |             | 28,297    |  
|                                                                                | Non-cash interest expense on senior convertible
    notes |                          |             |           |      |   |             |          |   |   |             | 5,631,673 |  
|                                                                                | Gain on sale of property and equipment                    |                          |             |           |      |   |             |          |   |   |             |          |  
|                                                                                | Non-cash compensation charges                             |                          |             | 589,200    |      |   |             | 689,758   |   |   |             | 576,778   |  
|                                                                                | Non-cash warrant issuance-related expense                 |                          |             | 128,423    |      |   |             |          |   |   |             |          |  
|                                                                                | Write-off of capitalized patent costs                     |                          |             |           |      |   |             |          |   |   |             | 176,472   |  
|Changes in operating assets and liabilities:                                    |                                                           |                          |             |            |      |   |             |           |   |   |             |          
|                                                                                | Accounts receivable                                       |                          |             | (1,317,062 | )    |   |             | (42,555   | ) |   |             | (2,525    | )
|                                                                                | Inventories                                               |                          |             | 786,097    |      |   |             | 245,678   |   |   |             | 515,176   |  
|                                                                                | Prepaid expenses and other                                |                          |             | 66,330     |      |   |             | 228,623   |   |   |             | (200,063  | )
|                                                                                | Accounts payable                                          |                          |             | (344,180   | )    |   |             | (272,008  | ) |   |             | (761,670  | )
|                                                                                | Accrued liabilities                                       |                          |             | (1,289,432 | )    |   |             | 1,491,629 |   |   |             | 456,910   |  
|                                                                                |                                                           |                          |             |            |      |   |             |           |  
|Net cash used in operating activities                                           |                                                           |                          | (13,630,612 | )          |      |   | (22,868,565 | )         |   |   | (10,871,432 | )        
|INVESTING ACTIVITIES                                                            |                                                           |                          |             |            |      |   |             |           |   |   |             |          
|Decrease (increase) in restricted
    certificates of deposit                   |                                                           |                          | 148,586     |            |      |   | (59,916     | )         |   |   | 88,397      |          
|Payments of patent costs                                                        |                                                           |                          | (236,892    | )          |      |   | (462,736    | )         |   |   | (164,295    | )        
|Payment of Deferred Acquisition Costs                                           |                                                           |                          |            |            |      |   |            |           |   |   | (343,560    | )        
|Acquisitions of property and equipment                                          |                                                           |                          | (125,956    | )          |      |   | (589,086    | )         |   |   | (203,528    | )        
|                                                                                |                                                           |                          |             |            |      |   |             |           |  
|Net cash used in investing activities                                           |                                                           |                          | (214,262    | )          |      |   | (1,111,738  | )         |   |   | (622,986    | )        
|FINANCING ACTIVITIES                                                            |                                                           |                          |             |            |      |   |             |           |   |   |             |          
|Proceeds from issuance of common
    stock  net of offering costs              |                                                           |                          |            |            |      |   |            |           |   |   | 5,000,000   |          
|Proceeds from settlement                                                        |                                                           |                          |            |            |      |   | 13,750,000  |           |   |   |            |          
|Proceeds from Rights Offering, net                                              |                                                           |                          | 19,764,985  |            |      |   |            |           |   |   |            |          
|Exercise of stock options                                                       |                                                           |                          | 311         |            |      |   | 80,853      |           |   |   | 219,926     |          
|Exercise of warrants                                                            |                                                           |                          |            |            |      |   |            |           |   |   | 4,015,022   |          
|Proceeds from issuance of notes                                                 |                                                           |                          | 2,000,000   |            |      |   | 9,425,000   |           |   |   | 4,000,000   |          
|Payment of notes                                                                |                                                           |                          | (9,425,000  | )          |      |   |            |           |   |   |            |          
|Payments on other long-term lease obligation                                    |                                                           |                          |            |            |      |   | (8,698      | )         |   |   | (10,396     | )        
|                                                                                |                                                           |                          |             |            |      |   |             |           |  
|Net cash provided by financing activities                                       |                                                           |                          | 12,340,296  |            |      |   | 23,247,155  |           |   |   | 13,224,552  |          
|                                                                                |                                                           |                          |             |            |      |   |             |           |  
|(Decrease)/ Increase in cash and cash equivalents                               |                                                           |                          | (1,504,578  | )          |      |   | (733,148    | )         |   |   | 1,730,134   |          
|Cash and cash equivalents at beginning of period                                |                                                           |                          | 1,720,697   |            |      |   | 2,453,845   |           |   |   | 723,711     |          
|                                                                                |                                                           |                          |             |            |      |   |             |           |  
|Cash and cash equivalents at end of period                                      |                                                           | $                        | 216,119     |            |      | $ | 1,720,697   |           |   | $ | 2,453,845   |          
|                                                                                |                                                           |                          |             |            |      |   |             |           |  
|Supplemental cash flow information:                                             |                                                           |                          |             |            |      |   |             |           |   |   |             |          
|Cash paid for interest                                                          |                                                           | $                        | 208,000     |            |      | $ | 30,000      |           |   | $ | 19,000      |          
|                                                                                |                                                           |                          |             |            |      |   |             |           |  

See the accompanying Notes which are an integral
part of the financial statements

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ISCO INTERNATIONAL

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                        
|-- | -----------------------
|1. | Description of Business

ISCO International and its subsidiaries, Spectral
Solutions, Inc., and Illinois Superconductor Canada Corporation,
(the Company) address interference issues within
wireless communications. The Company uses patented and
proprietary products, including ANF (Adaptive Notch Filters) and
HTS (high-temperature superconducting products) solutions, as
well as service expertise, in mitigating the impact of
interference on wireless communications systems. These solutions
are designed to enhance the quality, capacity, coverage and
flexibility of cellular, PCS and other wireless
telecommunications services. The Company has historically
marketed its products to cellular, PCS and wireless
telecommunications service providers and OEMs located both
in the United States and in international markets.

2. Summary of Significant Accounting
Policies

Cash and Cash Equivalents

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. 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.

Accounts receivable

The majority of the Companys accounts
receivable are due from companies in the telecommunications
industry. Credit is extended based on evaluation of a
customers financial condition and, generally, collateral
is not required. Accounts receivable are due within 30 days
and are stated at amounts due from customers, net of an
allowance for doubtful accounts. Accounts outstanding longer
than the contractual payment terms are considered past due. The
Company determines its allowance by considering a number of
factors, including the length of time trade accounts receivable
are past due, the Companys previous loss history, the
customers current ability to pay its obligation to the
Company, and the condition of the general economy and the
industry as a whole. The Company writes-off accounts receivable
when they become uncollectible, and payments subsequently
received on such receivables are credited to the allowance for
doubtful accounts.

The Company establishes a reserve for customer
accounts receivable balances that are potentially uncollectible.
The reserve could be materially different if economic conditions
change or actual results deviate from historical trends.

Inventories

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

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. During 2002 and 2001, the
Company wrote off no patent-related costs. Total capitalized
patent and trademark costs are $1,057,000 and $998,000 at
December 31, 2002 and 2001, respectively. Capitalized
patent costs related to pending patents are $595,000 and
$554,000 at December 31, 2002 and 2001, respectively.
Patents and trademarks are net of accumulated amortization of
$133,000 and $94,000 at December 31, 2002 and 2001,
respectively.

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

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ISCO INTERNATIONAL


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

included in depreciation expense. The useful
lives assigned to property and equipment for the purpose of
computing book depreciation are as follows:

|                        |  |              
|----------------------- |  | -------------
|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

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.

Revenue Recognition and Product
Warranty

Revenues from product sales are generally
recognized at the time of shipment and are recorded net of
estimated returns and allowances. Revenues from services are
generally recognized upon substantial completion of the service
and acceptance by customer. The Company has, under certain
conditions, granted customers the right to return product during
a specified period of time after shipment. In these situations,
the Company establishes a liability for estimated returns and
allowances at the time of shipment and makes the appropriate
adjustment in revenue recognized for accounting purposes. During
the current year, no revenue was recognized on products that
included a right to return at some future date. 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 are recognized upon customer
acceptance of the products. The Company warrants its products
against defects in materials and workmanship typically for
1-2 years from the date of shipment, except for
superconducting materials contained in the products, which are
warranted for five years from the date of shipment, though these
terms are negotiated on a case by case basis. A provision for
estimated future costs related to warranty expenses is recorded
when revenues are recognized. At December 31, 2002 and
2001, respectively, the Company has accrued $63,000 and $238,000
for warranty costs. Returns and allowances were not significant
in any period reported.

Advertising Costs

Advertising costs are charged to expense in the
period incurred.

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

Basic and diluted net loss per common share are
computed based upon the weighted average number of common shares
outstanding. Approximately 17.9 million common shares
issuable as of December 31, 2002 upon the exercise of
options and warrants are not included in the per share
calculations since the effect of their inclusion would be
antidilutive.

Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets

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ISCO INTERNATIONAL


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.

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.

Goodwill and Other Intangible Assets

On July 20, 2001, The FASB issued Statement
of Financial Accounting Standards No. 141 (SFAS
No. 141), Business Combinations, and
Statement of Financial Accounting Standards No. 142
(SFAS No. 142), Goodwill and Other
Intangible Assets. SFAS No. 141 is effective for all
business combinations completed after June 30, 2001. SFAS
No. 142 is effective for fiscal years beginning after
December 15, 2001; however, certain provisions of such
Statement apply to goodwill and other intangible assets acquired
between July 1, 2001, and the effective date of SFAS
No. 142. Major provisions of these Statements and their
effective dates for the Company are as follows:



| |                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. All business combinations initiated after
    June 30, 2001 must use the purchase method of accounting.
    The pooling of interest method of accounting is prohibited
    except for transactions initiated before July 1, 2001.                                                                                                                            
|
| | 2. Intangible assets acquired in a business
    combination must be recorded separately from goodwill if they
    arise from contractual or other legal rights or are separable
    from the acquired entity and can be sold, transferred, licensed,
    rented, or exchanged, either individually or as a part of a
    related contract, assets, or liability.
|
| | 3. Goodwill, as well as intangible assets
    with indefinite lives, acquired after June 30, 2001, will
    not be amortized. Effective January 1, 2002, all previously
    recognized goodwill and intangible assets with indefinite lives
    will no longer be subject to amortization.                                                                      



| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4. Effective January 1, 2002, goodwill
    and intangible assets with indefinite lives will be tested for
    impairment annually and whenever there is an impairment
    indicator.



| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | 5. All acquired goodwill must be assigned to
    reporting units for purposes of impairment testing and segment
    reporting.

As of the reporting date, the Company had
recorded unamortized goodwill assets resulting from the
acquisitions of Spectral Solutions, Inc. and the Adaptive Notch
Filter division of Lockheed Martin Canada, Inc. during 2000.
Beginning January 1, 2002, goodwill is no longer to be
amortized but rather to be tested for impairment on an annual
basis and between annual tests whenever there is an indication
of potential impairment. Impairment losses would be recognized
whenever the implied fair value of goodwill is determined to be
less than its carrying value. During the second quarter of 2002,
the Company completed the process of evaluated goodwill for
impairment under SFAS No. 142. As the fair value, using
quoted market prices for the Company, exceeded the carrying
amount, the goodwill was determined to be not impaired. There
were no material adjustments relating to the classification of
the Companys intangible assets as a result of adopting
SFAS No. 142. During October 2002, the Company
performed its annual evaluation of goodwill for impairment and
no impairment was determined to exist, thus no write-downs were
required.

The Company has concluded that no impairment
exists as of the reporting date. As mentioned elsewhere in this
document, litigation is ongoing with respect to intellectual
property rights between the Company and two primary competitors.
These intellectual property rights were acquired as part of the
Spectral Solutions, Inc. acquisition. While the Company believes
its position in the matter to be both correct and strong, an
adverse ruling in this litigation may cause the Company to
reassess the carrying value of a material portion of the
Companys recorded goodwill asset.

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ISCO INTERNATIONAL


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Prior to the 2002 effective date of this
standard, acquired goodwill from the two acquisitions during
2000 had been amortized using the straight-line method over
eight years. The excess of cost over net assets acquired
associated with assets acquired in a purchase business
combination was included in impairment evaluations when events
and circumstances may indicate impairment, management evaluated
the recoverability of acquired goodwill by comparing the
carrying value of the asset to the associated current and
projected annual sales, operating profit, undiscounted annual
cash flows and market value; management also considered business
prospects, market trends and other economic factors in
performing this evaluation. Based on this evaluation, there was
no unrecorded permanent impairment related to acquired goodwill
at December 31, 2001.

The following presents results of operations as
though SFAS No. 142 had been in effect:

|                               |                                     |                                  |        |        |      |   |        |        |  |   |        |        | 
|------------------------------ | ----------------------------------- | -------------------------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                               |                                     |                                 
|                               |                                     | For the Years Ended December 31, |       
|                               |                                     |                                  |       
|                               |                                     | 2002                             |        |        | 2001 |   |        | 2000   | 
|                               |                                     |                                  |        |        |      |   |        |        | 
|                               |                                     |                                 
|                               |                                     | (in thousands of dollars)        |       
|Net losses as reported         |                                     | $                                | 13,078 |        |      | $ | 28,190 |        |  | $ | 18,796 |       
|Amortization, net of tax       |                                     |                                  |       |        |      |   | 2,010  |        |  |   | 704    |       
|                               |                                     |                                  |        |        |      |   |        |        | 
|                               | Adjusted net losses                 |                                  | $      | 13,078 |      |   | $      | 26,180 |  |   | $      | 18,092 | 
|                               |                                     |                                  |        |        |      |   |        |        | 
|Basic net loss per share:      |                                     |                                  |        |        |      |   |        |        |  |   |        |       
|As reported                    |                                     | $                                | .09    |        |      | $ | .26    |        |  | $ | .57    |       
|Change in amortization expense |                                     |                                  |       |        |      |   | (0.02  | )      |  |   | (0.02  | )     
|                               |                                     |                                  |        |        |      |   |        |        | 
|                               | Adjusted basic net loss per share   |                                  | $      | .09    |      |   | $      | .24    |  |   | $      | .55    | 
|                               |                                     |                                  |        |        |      |   |        |        | 
|Diluted net loss per share:    |                                     |                                  |        |        |      |   |        |        |  |   |        |       
|As reported                    |                                     | $                                | .09    |        |      | $ | .26    |        |  | $ | .57    |       
|Change in amortization expense |                                     |                                  |       |        |      |   | (0.02  | )      |  |   | (0.02  | )     
|                               |                                     |                                  |        |        |      |   |        |        | 
|                               | Adjusted diluted net loss per share |                                  | $      | .09    |      |   | $      | .24    |  |   | $      | .55    | 
|                               |                                     |                                  |        |        |      |   |        |        | 

The Companys balances of other intangibles
were as follows:

|                                             |  |                           |        |   |      |   |        |  
|-------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | -
|                                             |  |                          
|                                             |  | As of December 31,        |       
|                                             |  |                           |       
|                                             |  | 2002                      |        |   | 2001 |  
|                                             |  |                           |        |   |      |  
|                                             |  |                          
|                                             |  | (in thousands of dollars) |       
|Other amortizable intangibles, gross         |  | $                         | 1,190  |   |      | $ | 998    |  
|Accumulated amortization                     |  |                           | (133   | ) |      |   | (94    | )
|                                             |  |                           |        |   |      |  
|Other amortizable intangibles, net           |  | $                         | 1,057  |   |      | $ | 904    |  
|                                             |  |                           |        |   |      |  
|Other intangibles with indefinite lives, net |  | $                         | 13,370 |   |      | $ | 13,370 |  
|                                             |  |                           |        |   |      |  

Fair Value of Financial Instruments

The carrying values of financial instruments
approximates fair value.

Long Lived Assets

The Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets effective January 1, 2002. SFAS No. 144
addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This statement supersedes SFAS
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and
the accounting and reporting provisions of Accounting Principles
Board Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business. This adoption did not have
a material effect on its results of operations or financial
position.

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ISCO INTERNATIONAL


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock-Based Employee Compensation

The Company has a stock-based employee
compensation plan, which is described more fully in Note 6.
The Company applies APB Opinion 25, Accounting for Stock
Issued to Employees, and related Interpretations in accounting
for its plans. Stock expense in 2002, 2001, and 2000 is the
result of options issued with an exercise price below the
underlying stocks market price. The following table
illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of
FASB Statement 123, Accounting for Stock-Based
Compensation, using the assumptions described in Note 6, to
its stock-based employee plans.

|                                                                                                                                                                            |                       |                         |        |      |      |   |        |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ----------------------- | ------ | ---- | ---- | - | ------ | ---- | 
|                                                                                                                                                                            |                       |                        
|                                                                                                                                                                            |                       | Year Ended December 31, |       
|                                                                                                                                                                            |                       |                         |       
|                                                                                                                                                                            |                       | 2002                    |        |      | 2001 |  
|                                                                                                                                                                            |                       |                         |        |      |      |  
|Net loss, as reported                                                                                                                                                       |                       | $                       | 13,078 |      |      | $ | 28,190 |     
|Add: Stock-based employee compensation expense
    included in reported net loss, net of related tax effects                                                                |                       |                         | 589    |      |      |   | 690    |     
|Less: Total stock-based employee compensation
    expense determined under fair value based method for awards
    granted, modified, or settled, net of related tax effects |                       |                         | 2,260  |      |      |   | 1,984  |     
|                                                                                                                                                                            |                       |                         |        |      |      |  
|Pro forma net loss                                                                                                                                                          |                       | $                       | 14,749 |      |      | $ | 29,484 |     
|                                                                                                                                                                            |                       |                         |        |      |      |  
|Earnings per share:                                                                                                                                                         |                       |                         |        |      |      |   |        |     
|                                                                                                                                                                            | Basic  as reported   |                         | $      | 0.09 |      |   | $      | 0.26 | 
|                                                                                                                                                                            | Basic  pro forma     |                         | $      | 0.10 |      |   | $      | 0.27 | 
|                                                                                                                                                                            | Diluted  as reported |                         | $      | 0.09 |      |   | $      | 0.26 | 
|                                                                                                                                                                            | Diluted  pro forma   |                         | $      | 0.10 |      |   | $      | 0.27 | 

New Accounting Standards

In April 2002, the FASB issued SFAS
No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145 addresses a
variety of accounting practices. The provisions of this
statement related to the rescission of SFAS No. 4
(Reporting Gains and Losses from Extinguishment of Debt) are
effective for fiscal years beginning after May 15, 2002.
The provisions of this statement related to SFAS No. 13
(Accounting for Leases) are effective for transactions occurring
after May 15, 2002. All other provisions of this statement
are effective for financial statements issued on or after
May 15, 2002. SFAS No. 44 was entitled
Accounting for Intangible Assets of Motor Carriers
and SFAS No. 64 was entitled Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements.

The Company adopted those provisions of SFAS
No. 145 that were effective as of May 15, 2002.
Adoption of those provisions did not have a material effect on
the Companys results of operations or financial position.
For those provisions that are to be effective for fiscal years
beginning after May 15, 2002, the Company does not expect
that adoption of those provisions will have a material effect on
its results of operations or financial position.

In June 2002, the FASB issued SFAS
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities. This statement requires recognition
of costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit
or disposal plan. This new statement is effective for exit or
disposal activities that are initiated after December 31,
2002. The Company does not expect that adoption of this
statement will have a material effect on its results of
operations or financial position.

In November 2002, the FASB issued
Interpretation No. 45 (FIN No. 45),
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. This is an interpretation of FASB Statements
No. 5, 57, and 107 and rescission of FASB Interpretation
No. 34. FIN No. 45 elaborates on the disclosures to be made
by a guarantor in its interim and annual financial statements
about its obligations under certain

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ISCO INTERNATIONAL


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of FIN No. 45 are applicable
on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantors
fiscal year-end. The disclosure requirements in FIN No. 45
are effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company does
not expect that adoption of this interpretation will have a
material effect on its results of operations or financial
position.

In January 2003, the FASB issued
Interpretation No. 46 (FIN No. 46),
Consolidation of Variable Interest Entities. This is
an interpretation of Accounting Research Bulletin No. 51,
and addresses consolidation by business enterprises of variable
interest entities, which have certain characteristics. FIN
No. 46 applies immediately to variable interest entities
created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that
it acquired before February 1, 2003. FIN No. 46 applies to
public enterprises as of the beginning of the applicable interim
or annual period, and it applies to nonpublic enterprises as of
the end of the applicable annual period. FIN No. 46 may be
applied prospectively with a cumulative-effect adjustment as of
the date on which it is first applied or by restating previously
issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first
year restated. The Company does not expect that adoption of this
interpretation will have a material effect on its results of
operations or financial position.

In December 2002, The FASB SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of FASB Statement No. 123. This Statement
amends SFAS No. 123, Accounting for Stock-based
Compensation, to provide alternative methods of transition
for a voluntary change to the fair value method of accounting
for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of SFAS
No. 123 to require more prominent disclosures in both the
annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method on reported amounts. The amendments to
SFAS 123 in paragraphs 2(a)-2(e) of this Statement are
effective for financial statements for fiscal years ending after
December 15, 2002. The Company does not expect that
adoption of this statement will have a material effect on its
results of operations or financial position.

3. Realization of Assets

The accompanying financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States of America, which contemplate
continuation of the company as a going concern. However, the
company has sustained substantial losses from operations in
recent years, and such losses have continued through the
unaudited quarter ended March 31, 2003. In addition, the
company has used, rather than provided, cash in its operations.

In view of the matters described in the preceding
paragraph, recoverability of a major portion of the recorded
asset amounts shown in the accompanying balance sheet is
dependent upon continued operations of the company, which in
turn is dependent upon the companys ability to meet its
financing requirements on a continuing basis, to maintain
present financing, and to succeed in its future operations. The
financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts
or amounts and classification of liabilities that might be
necessary should the company be unable to continue in existence.

The Company has incurred, and continues to incur,
losses from operations. For the years ended December 31,
2002, 2001, and 2000, the Company incurred net losses of
$13,077,832, $28,189,603, and $18,796,183, respectively. During
2002 and 2001, the Company implemented strategies to reduce its
cash used in operating activities. The Companys strategy
included the consolidation of its manufacturing and research and
development facilities and a targeted reduction of the employee
workforce, increasing the efficiency of the Companys
processes, focusing development efforts on products with a
greater probability of commercial sales, reducing professional
fees and discretionary expenditures, and negotiating favorable
payment arrangements with suppliers and service providers.

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ISCO INTERNATIONAL


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

To date, the Company has financed its operations
primarily through public and private equity and debt financings.
Subject to the uncommitted nature of the credit line, the
Company believes that it has sufficient funds to operate its
business as identified herein and to meet its obligations
through May 2003, provided that the Company is able to
borrow the $1 million remaining under the uncommitted line
of credit. The Company intends to augment its existing capital
position by utilizing the credit line as identified and through
other sources of capital.

4. Inventories

Inventories consist of the following:

|                 |  |              |         |  |      |   |           | 
|---------------- |  | ------------ | ------- |  | ---- | - | --------- | 
|                 |  |             
|                 |  | December 31, |        
|                 |  |              |        
|                 |  | 2002         |         |  | 2001 |  
|                 |  |              |         |  |      |  
|Raw materials    |  | $            | 631,285 |  |      | $ | 768,042   | 
|Work-in-process  |  |              | 39,695  |  |      |   | 659,127   | 
|Finished product |  |              | 225,592 |  |      |   | 255,500   | 
|                 |  |              |         |  |      |  
|                 |  | $            | 896,572 |  |      | $ | 1,682,669 | 
|                 |  |              |         |  |      |  

Cost of product sales for the years ending
December 31, 2002 and 2001 includes approximately $295,000
and $605,000, respectively, of costs in excess of the net
realizable value of inventory.

5. Capital Stock

The Company has an authorized class of
undesignated preferred stock consisting of 300,000 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 shareholder rights plan (the Rights Plan).
In conjunction with the adoption of the Rights Plan, the Company
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. 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

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ISCO INTERNATIONAL


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 February 13, 2002, the Company executed
an amendment to the Rights Agreement. to provide that neither
Elliott Associates, L.P. and Elliott International, L.P.
(collectively referred to herein as Elliott and with
their affiliates, the Elliott Entities) nor
Alexander Finance, LP (Alexander) shall be an
acquiring person under the Rights Agreement (i) on account
of any acquisition of additional common shares purchased
directly from ISCO which has been approved in advance by its
board of directors, or (ii) so long as the acquisition of
any additional shares not purchased directly from ISCO, in the
aggregate, does not exceed one (1%) percent of the total issued
and outstanding ISCO common stock. Additionally, none of the
Elliot Entities nor Alexander will be an acquiring person by
reason of direct transfers between any of the Elliott Entities
or from Alexander to any of its affiliates.

At December 31, 2002, authorized but
unissued shares of common stock have been reserved for future
issuance as follows:

|                              |  |  |            | 
|----------------------------- |  |  | ---------- | 
|Warrants outstanding (Note 7) |  |  | 10,000,000 | 
|Options outstanding (Note 7)  |  |  | 7,885,000  | 
|                              |  |  |           
|                              |  |  | 17,885,000 | 
|                              |  |  |           

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 2002 was 14,011,468. 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 Companys 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 25% (110% in certain
cases) of the fair value of the Companys 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 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 stock,
as determined by the Committee, on the date of grant. The Plan
provides that each outside director will be automatically
granted 40,000 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 40,000 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 two
years and expire after ten 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 expire 10 years from the date
of grant. Exercise prices were determined by the Board of
Directors and represented estimated fair values of the
Companys common stock at the grant date.

On May 10, 1999, the Board of Directors
granted to each employee of the Company (other than the
executive officers of the Company) (collectively, the
Non-Executive Employees) the option to
(i) reduce the exercise prices of

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ISCO INTERNATIONAL


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

up to a maximum of 15,000 of the unexercised
stock options previously granted to such Non-Executive Employee
under the Plan to $.5625 per share (the closing price of the
Companys Common Stock on May 10, 1999) and
(ii) cause all of such stock options not otherwise
scheduled to become fully vested on or before May 10, 2000
to become fully vested on such date. As a result thereof, an
aggregate of 279,550 stock options previously granted under the
Plan were amended as described in the preceding sentence. In
addition, on May 10, 1999 the Board of Directors granted to
the executive officers and certain Non-Executive Employees of
the Company additional non-statutory stock options to purchase
an aggregate of 343,575 shares of the Companys Common
Stock under the Plan. Such stock options became fully vested on
the first anniversary of the date of grant, with exercise prices
of $.5625 per share and expire 10 years from the date of
grant.

On July 1, 2000, Financial Accounting
Standards Board Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25
(FIN 44) was adopted by the Company.
FIN 44 requires that stock options that have been modified
to reduce the exercise price be subject to variable accounting.
The Company accounts for employee stock options under APB
Opinion No. 25 and non-employee stock options under
Statement of Financial Accounting Standards No. 123,
Accounting for Stock Based Compensation (SFAS
No. 123).

On May 10, 1999, as described above, the
Company re-priced certain stock options granted to employees and
in accordance with US GAAP, at that time, the Company accounted
for the re-priced stock options as fixed. As a
result of adopting FIN 44, the Company is required to apply
variable accounting to these options. If the market price of the
Companys common stock increases above the July 1,
2000 market price, the Company will have to recognize additional
compensation expense equal to the increase in stock price
multiplied by the number of re-priced options. No additional
expense will be recognized if the stock does not exceed the
July 1, 2000 value. However, the impact cannot be
determined as it is dependent on the change in the market price
of the common stock from July 1, 2000 until the stock
options are exercised, forfeited, or expire unexercised. Because
the stock price on December 31, 2002 was below that of
July 1, 2000, no expense has been recognized during the
period.

On February 5, 2001, the Companys
board of directors authorized the re-pricing of certain
out of the money stock options granted to employees
during the calendar year of 2000 to the closing share price on
such date, or $1.9375 per share. Options for a total of
2,676,000 shares of common stock were affected. This re-pricing
causes these options to be subject to variable accounting as
described in FIN 44. Because the stock price on
December 31, 2002, was lower than the re-priced strike
price no gain or loss was recognized during the period.

On April 1, 2002, the Companys board
of directors authorized the re-pricing of certain out of
the money stock options granted to employees. A new strike
price of $0.81 per share was established, provided the
respective employees remain with the Company for at least six
months following the re-pricing date. In addition, certain stock
options granted to directors were repriced, with a new strike
price of $1.00 per share. As the stock price on
December 31, 2002, was lower than the re-priced strike
price no gain or loss was recognized during the period.

On July 17, 2000, the Company granted an
option to a non-Company advisor in connection with the
establishment of a sales office in Japan to purchase 200,000
shares of common stock at $4.9375 per share, the price of the
common stock on the date of the grant. According to the
Black-Scholes valuation model, the value of the option was $4.53
per share. The option vested 25% immediately, with the balance
vesting pro-rata over a three-year period. $906,000 of non-cash
compensation expense was to be amortized during the life of the
options. This arrangement was terminated during
December 2001, as a result of a change in the structure of
the Japanese sales office. The cumulative compensation expense
charged for these services through termination was $545,000.

On February 15, 2000, the Companys
board of directors granted to certain executive level employees
an aggregate of 440,000 deferred stock units (DSUs)
under the Companys 1993 Amended and Restated Stock Option
Plan (the Plan). The DSUs represent the right
to receive an equivalent number of restricted shares of the
Companys common stock. On the date of the grant, the
DSUs were set to vest at the rate of 10% on the first
anniversary of the date of the grant, with the balance vesting
at a rate of 20%, 30%, and 40% at the second, third, and fourth
anniversary dates, respectively. The executive level employees
had the right to elect to defer receipt of the common stock
subject to the

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ISCO INTERNATIONAL


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

DSUs to a later date. In the third quarter
of 2000, the Company began to recognize compensation expense for
the DSUs over the vesting period (4 years) based on
their intrinsic value of $1,925,000, which was the number of
DSUs multiplied by the closing price of the Companys
common stock on July 18, 2000, the measurement date ($4.38
per share).

During 2002, the Companys Board of
Directors granted 2,172,000 new stock options to the
Companys employees, including officers (option prices are
generally, but not always, set at the closing price of the
Companys common stock as of the date of each respective
grant). Those grants include the issuance of 900,000 stock
options to the CEO during December, 2002 that vest immediately
and are priced at a $0.20 discount to the closing price of the
Companys common stock as of the date of grant.
Consequently, $180,000 of compensation expense was recognized
during December, 2002, in order to account for this discount. On
January 2, 2003, the Companys Board of Directors
granted 2,800,000 new stock options to six of the Companys
employees, including officers. 950,000 of these options vested
immediately, while the remaining 1,850,000 vest monthly in 12
installments. All of the options granted on January 2, 2003
were granted at a $0.22 discount to the closing price of the
Companys common stock as of the date of the grant.

On February 15, 2002, the Company completed
a Shareholder Rights Offering. Approximately $20 million
was raised from existing shareholders as of the recording date
in exchange for the issuance of approximately 40 million
shares of the Companys common stock. A portion of the
proceeds were then used to repay in full $9.8 million of
debt and related accrued interest, as well as the payment of
various other accrued expenses.

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. 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, 2002, 2001 and 2000:
risk-free interest rate of 2.9%, 4.2%, and 5.1%, respectively; a
dividend yield of 0%; volatility factor of the expected market
price of the Companys common stock of 0.15, 0.56, and
2.33, respectively; and expected life of the options of
4.0 years.

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.

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ISCO INTERNATIONAL


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The table below summarizes all option activity
during the three year period ended December 31, 2002:

|                                 |           |             |           |            |                |  |               |              | 
|-------------------------------- | --------- | ----------- | --------- | ---------- | -------------- |  | ------------- | ------------ | 
|                                 |           | Options     |           |            | Exercise Price | 
|                                 |           | Outstanding |           |            | Per Share      | 
|                                 |           |             |           |            |                | 
|Outstanding at December 31, 1999 |           |             | 1,914,847 |            |                |  | $ .18  26.50 |             
|                                 |           |             |           |            |                | 
|                                 | Granted   |             |           | 3,986,561  |                |  |               | .00   6.60  | 
|                                 | Exercised |             |           | (362,812   | )              |  |               | .48   1.81  | 
|                                 | Forfeited |             |           | (96,000    | )              |  |               | .48   4.94  | 
|                                 |           |             |           |            |                | 
|Outstanding at December 31, 2000 |           |             | 5,442,596 |            |                |  | $ .00  26.50 |             
|                                 |           |             |           |            |                | 
|                                 | Granted   |             |           | 6,507,500  |                |  |               | .76   2.44  | 
|                                 | Exercised |             |           | (185,924   | )              |  |               | 1.30   2.41 | 
|                                 | Forfeited |             |           | (2,124,859 | )              |  |               | .30   2.05  | 
|                                 |           |             |           |            |                | 
|Outstanding at December 31, 2001 |           |             | 9,639,313 |            |                |  | $ .00  26.50 |             
|                                 |           |             |           |            |                | 
|                                 | Granted   |             |           | 2,171,757  |                |  |               | .11   1.45  | 
|                                 | Exercised |             |           | (109,725   | )              |  |               | .00   0.18  | 
|                                 | Forfeited |             |           | (3,816,482 | )              |  |               | .18  26.50  | 
|                                 |           |             |           |            |                | 
|Outstanding at December 31, 2002 |           |             | 7,884,863 |            |                |  | $ .00  21.50 |             
|                                 |           |             |           |            |                | 

The weighted-average exercise price of options
outstanding at December 31, 2002, 2001 and 2000, was $0.96,
1.64, and 2.97, respectively. The weighted-average exercise
price of options granted, exercised, and forfeited during 2002
was $0.40, $0.00 and $1.20, respectively. The weighted-average
fair value of options granted during 2002, 2001 and 2000 was
$0.18, $1.52, and $3.86, respectively.

Following is additional information with respect
to options (including DSUs) outstanding at
December 31, 2002:

|                                                         |  |            |           |  |            |   |         |            |  |   |            |  |  |   |           | 
|-------------------------------------------------------- |  | ---------- | --------- |  | ---------- | - | ------- | ---------- |  | - | ---------- |  |  | - | --------- | 
|                                                         |  | Exercise   |           |  | Exercise   |   |         | Exercise   |  |   | Exercise   | 
|                                                         |  | Price from |           |  | Price from |   |         | Price from |  |   | Price from | 
|                                                         |  | $0.00 to   |           |  | $0.53 to   |   |         | $0.76 to   |  |   | $1.03 to   | 
|                                                         |  | $0.48      |           |  | $0.75      |   |         | $1.00      |  |   | $26.50     | 
|                                                         |  |            |           |  |            |   |         |            |  |   |            | 
|OUTSTANDING AT DECEMBER 31, 2002:                        |  |            |           |  |            |   |         |            |  |   |            |  |  |   |           | 
|Number of options                                        |  |            | 2,064,041 |  |            |   | 600,268 |            |  |   | 3,763,200  |  |  |   | 1,457,354 | 
|Weighted-average exercise price                          |  | $          | 0.23      |  |            | $ | 0.64    |            |  | $ | 0.86       |  |  | $ | 2.40      | 
|Weighted-average remaining contractual life in
    years |  |            | 8.0       |  |            |   | 6.8     |            |  |   | 8.1        |  |  |   | 8.0       | 
|EXERCISABLE AT DECEMBER 31, 2002:                        |  |            |           |  |            |   |         |            |  |   |            |  |  |   |           | 
|Number of options                                        |  |            | 1,607,541 |  |            |   | 310,193 |            |  |   | 2,273,693  |  |  |   | 1,376,271 | 
|Weighted-average exercise price                          |  | $          | 0.26      |  |            | $ | 0.59    |            |  | $ | 0.89       |  |  | $ | 1.49      | 

The total number of unvested options outstanding
at December 31, 2002 was 2,317,165, which will vest based
on employees continued service to the Company.

The above-referenced DSUs are included in table
above.

During the fourth quarter of 2002, in accordance
with the terms of the credit line provided by the Companys
two largest shareholders, 10 million warrants were issued
to purchase common stock of the Company at an exercise price of
$0.20 per share and an expiration date of April 15, 2004.
To the extent the remaining amount available under the credit
line is drawn by the Company, these entities would be entitled
to receive an additional 5 warrants for every dollar borrowed,
with the same terms as those described above.

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ISCO INTERNATIONAL


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

7. Long-Term Debt

As of the reporting date, the Company had drawn
$2 million of debt financing under a credit line. During
October 2002, the Company entered into an Uncommitted Line
of Credit with its two largest shareholders, an affiliate of
Elliott Associates, L.P. (Manchester Securities Corporation and
Alexander Finance, L.P. This line is intended to provide up to
$4 million to the Company. This line is uncommitted, such
that each new borrowing under the facility would be subject to
the approval of the lenders. Borrowings on this line bear an
interest rate of 9.5% and are collateralized by all the assets
of the Company. Outstanding loans under this agreement would be
required to be repaid on a priority basis should the Company
receive new funding from other sources. Additionally, the
lenders are entitled to receive warrants to the extent funds are
drawn down on the line. The warrants bear a strike price of
$0.20 per share of common stock and expire on April 15,
2004. The credit line matures and is due, including accrued
interest thereon, on March 31, 2004. Warrants to purchase
10 million shares of common stock were issued in connection
with the borrowings under the line of credit during the year
ended December 31, 2002.

According to existing accounting pronouncements
and SEC guidelines, the Company has allocated the proceeds of
these borrowings between their debt and equity components. As a
result of these borrowings during 2002, the Company will record
a non-cash charge of $1.2 million through the outstanding
term of the warrants (April, 2004). $128,000 of that amount was
recorded during 2002.

Subject to its ability to draw the remaining
$1 million from the uncommitted line of credit, the Company
believes that it has sufficient funds to operate its business as
identified herein and to meet its obligations without the need
for substantial future capital through May 2003. There can be no
assurance that any funding mechanisms, whether identified or
not, will allow the Company to access additional funds beyond
that date.

8. Income Taxes

The Company has net operating loss and research
and development credit carryforwards for tax purposes of
approximately $115,088,000 and $332,000, respectively, at
December 31, 2002. The net operating loss carryforwards
expire in the following years:

|     |  |        |             | 
|---- |  | ------ | ----------- | 
|Year |  | Amount |            
|     |  |        |            
|2005 |  | $      | 7,000       | 
|2006 |  |        | 638,000     | 
|2007 |  |        | 974,000     | 
|2008 |  |        | 1,658,000   | 
|2009 |  |        | 3,973,000   | 
|2010 |  |        | 8,199,000   | 
|2011 |  |        | 11,953,000  | 
|2012 |  |        | 11,922,000  | 
|2018 |  |        | 11,146,000  | 
|2019 |  |        | 10,726,000  | 
|2020 |  |        | 15,501,000  | 
|2021 |  |        | 24,904,000  | 
|2022 |  |        | 13,487,000  | 
|     |  |        |            
|     |  | $      | 115,088,000 | 
|     |  |        |            

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ISCO INTERNATIONAL


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The research and development credit carryforwards
expire in the following years:

|     |  |        |         | 
|---- |  | ------ | ------- | 
|Year |  | Amount |        
|     |  |        |        
|2003 |  | $      | 146,000 | 
|2004 |  |        | 85,000  | 
|2005 |  |        | 101,000 | 
|     |  |        |        
|     |  | $      | 332,000 | 
|     |  |        |        

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

|                          |                                                   |              |             |            |      |   |             |            |  
|------------------------- | ------------------------------------------------- | ------------ | ----------- | ---------- | ---- | - | ----------- | ---------- | -
|                          |                                                   |             
|                          |                                                   | December 31, |            
|                          |                                                   |              |            
|                          |                                                   | 2002         |             |            | 2001 |  
|                          |                                                   |              |             |            |      |  
|Deferred tax assets:      |                                                   |              |             |            |      |   |             |           
|                          | Net operating loss carryforward                   |              | $           | 43,733,000 |      |   | $           | 38,608,000 |  
|                          | Research and development tax credit carryforwards |              |             | 332,000    |      |   |             | 545,000    |  
|                          | Accrued liabilities                               |              |             | 376,000    |      |   |             | 582,000    |  
|                          | Inventories                                       |              |             | 105,000    |      |   |             | 154,000    |  
|                          | Property, Equipment, and Goodwill                 |              |             | 363,000    |      |   |             | 340,000    |  
|                          |                                                   |              |             |            |      |  
|Total deferred tax assets |                                                   |              | 44,909,000  |            |      |   | 40,229,000  |           
|Deferred tax liabilities: |                                                   |              |             |            |      |   |             |           
|                          | Patent costs                                      |              |             | (401,000   | )    |   |             | (343,000   | )
|                          |                                                   |              |             |            |      |  
|                          |                                                   |              | (401,000    | )          |      |   | (343,000    | )         
|                          |                                                   |              |             |            |      |  
|Net deferred tax assets   |                                                   |              | 44,508,000  |            |      |   | 39,886,000  |           
|Valuation allowance       |                                                   |              | (44,205,000 | )          |      |   | (39,886,000 | )         
|                          |                                                   |              |             |            |      |  
|Net deferred tax assets   |                                                   | $            |            |            |      | $ |            |           
|                          |                                                   |              |             |            |      |  

The valuation allowance increased during 2002 and
2001 by $4,622,000 and $9,433,000, respectively, 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. Leases

The Company leases its manufacturing and office
space. Under the terms of the lease in Mount Prospect, IL, which
expires October 2004, the Company is responsible for all
real estate taxes and operating expenses. The lease provides for
a security deposit($50,000 at December 31, 2002) that is
secured by a certificate of deposit owned by the Company. In
addition, the Company had lease commitments for its Canadian
facility expiring August, 2004, which was subsequently broken
into two parts and successfully subleased to third parties as of
March 1, 2003. The Company also had leased office
facilities in Dallas, through February, 2005, as of
December 31, 2002. The Company is actively seeking
conclusion of this Dallas lease.

Future minimum payments under the operating
leases consist of the following at December 31, 2002:

|     |  |        |         | 
|---- |  | ------ | ------- | 
|Year |  | Amount |        
|     |  |        |        
|2003 |  | $      | 352,000 | 
|2004 |  |        | 239,000 | 
|2005 |  |        | 10,000  | 
|2006 |  |        |        | 
|2007 |  |        |        | 

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ISCO INTERNATIONAL


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Rent expense totaled $450,000, $690,000, and
$312,000, for the years ended December 31, 2002, 2001, and
2000, respectively.

10. 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, 2002, 2001, and 2000.

11. Litigation

Patent Litigation

In July 2001, the Company filed suit in the
United States District Court for the District of Delaware
against Conductus, Inc. and Superconductor Technologies, Inc.
alleging infringement of U.S. Patent No. 6,263,215,
entitled Cryoelectronically Cooled Receiver Front End for
Mobile Radio Systems (the 215 patent).
This suit alleges that Conductus and Superconductor
Technologies base station front-end systems containing
cryogenically cooled superconducting filters infringe this
patent. The Company is seeking a permanent injunction enjoining
Conductus and Superconductor Technologies from marketing,
selling or manufacturing these products, as well as triple
damages and attorneys fees. Conductus and Superconductor
Technologies have denied these allegations and asked the court
to enter a judgment that the patent is invalid and not
infringed. Conductus and Superconductor Technologies are also
asserting the defense of inequitable conduct and a counterclaim
for a declaration that the patent is unenforceable. Conductus
and Superconductor Technologies have also asserted federal and
state law counterclaims, including claims of unfair competition.
Conductus and Superconductor Technologies are seeking both
compensatory and punitive damages as well as attorneys fees and
costs.

On March 26, 2002, the Company replied to
Conductus and Superconductor Technologies Second
Amended Answer and Counterclaims and filed counterclaims
alleging that Conductus and Superconductor Technologies also
infringe U.S. Patent No. 6,104,934 entitled
Cryoelectronic Receiver Front End and U.S. Patent
No. 6,205,340 B1 entitled Cryoelectronic Receiver
Front End For Mobile Radio Systems. On April 17,
2002, the court dismissed these (the Companys)
counterclaims without prejudice to the Companys right to
assert these counterclaims in a separate action.

On February 10, 2003, the court disposed of
various motions for summary judgment filed by each party. The
court denied Superconductor Technologies motion for
summary judgment of invalidity of the 215 patent as well
as Conductus motion for summary judgment limiting
computation of damages to a reasonable royalty for sales to
Dobson Communications, Inc. On Superconductor Technologies
motion for summary judgment of non-infringement, the court
granted the motion with respect to claim 13 of the
215 patent and otherwise denied the motion with respect to
each of the other asserted claims. With regard to
Conductus motion for summary judgment of non-infringement,
the court granted the motion with respect to claim 13 of
the 215 patent and otherwise denied the motion with
respect to each of the other asserted claims. In addition, the
court denied Conductus motion for summary judgment of
invalidity of all asserted claims for causes of action existing
prior to the date of issuance of the certificate of correction
and of invalidity of claim 13. The court also denied the
Companys motions for summary judgment that Superconductor
Technologies internal projects are not prior art to the
215 patent and to dismiss the defendants
counterclaims alleging unfair competition and interference with
business relations. The trial for this case is scheduled to
begin on March 17, 2003. At the time of filing this
statement, the outcome of the trial was unknown.

The Company intends to continue to prosecute
these claims vigorously against Conductus and Superconductor
Technologies and defend against counterclaims in this
litigation. The Company believes the patent to be valid, the
counterclaims asserted against the Company to be without merit,
and that it is in the best interests of the Company and its
shareholders to pursue this matter vigorously.

48



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ISCO INTERNATIONAL


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In November 2001, the Company filed suit
against Dobson Communications, Inc. for allegedly infringing
this patent. The action has been stayed, per agreement between
the parties, until resolution of the matter between the Company
and Conductus and Superconductor Technologies. The parties have
agreed that Dobson Communications will be bound by any and all
final, non-appealable determinations, holdings or findings with
respect to all liability issues in the Companys case
against Conductus.

Laves Litigation

On July 17, 2000 Edward W. Laves filed an
action (the Complaint) in the Law Division of the
Circuit Court of Cook County , Illinois, against the Company and
three directors charging the Company with constructive
termination under and in breach of plaintiffs employment
agreement, and with violation of the Illinois Wage Payment and
Collection Act. Plaintiff seeks damages estimated to
exceed $12 million. The Company filed an appearance
on behalf of all Defendants on October 3, 2000. On
October 6, 2000, the Company filed on Defendants
behalf a Motion to Dismiss the Complaint. On January 22,
2001, the court issued an order granting the Companys
Motion to Dismiss the claims against the Individual Defendants,
but denied the Companys Motion to Dismiss with respect to
claims against the Company. On February 21, 2001, Plaintiff
filed a Motion to reconsider the courts dismissal of
claims against the Individual Defendants. On March 13,
2001, the Company filed an Answer to the Complaint and a
Memorandum in Opposition to this Motion to Reconsider. By order
dated March 15, 2001, the court allowed Laves leave to file
an amended Motion to Reconsider, which the Plaintiff filed on
April 5, 2001, along with a motion to dismiss one of the
Companys affirmative defenses. Following a substitution of
judges and a hearing on August 9, 2001, the court granted
Plaintiffs motion to dismiss one of the Companys
affirmative defenses and ordered the case transferred back to
the judge originally assigned to the case for the limited
purposes of ruling on Plaintiffs amended motion to
reconsider the dismissal of claims against the Defendants. On
September 7, 2001, following a hearing, the Judge denied
Plaintiffs amended motion to reconsider and entered an
order retaining jurisdiction of the matter for 30 days. On
November 9, 2001, the Judge granted Plaintiff leave to file
his First Amended Count II. On November 11, 2001,
Plaintiff filed his amended pleading. On January 31, 2002,
Plaintiff filed a corrected Unified Complaint. On
February 15, 2002, all Defendants filed their Answers to the
Unified Complaint. On March 5, 2002, the individual
defendants served their answers to Plaintiffs
interrogatories and responses to Plaintiffs discovery
requests. On April 8, 2002, Laves was given leave to amend
his Complaint and add Count III against the individual
defendants for tortious interference with contractual
obligations. Laves seeks damages against these individuals for:
(1) an amount to be provided at trial estimated to exceed
$12 million; (2) $500,000 for Laves anxiety,
mental suffering, and humiliation; (3) $500,000 for
punitive damages; and (4) pre-and post-judgment interest
and costs. Oral fact discovery has been extended to May 15,
2003, while all discovery is to close by August 1, 2003.
Any dispositive motions must be filed by
July 15, 2003. A final pre-trial will be heard on
September 8, 2003, a week after the deadline for submission
of pretrial material. The trial is set to begin
September 15, 2003. ISCO considers these claims without
merit and intends to defend against them vigorously.

12. Subsequent Events

The above-referenced patent suit went to trial in
Delaware on March 17, 2003. The outcome of that trial was
unavailable at the time this document was prepared, but is
expected at the end of March or beginning of April, 2003.

In March 2003, the Company borrowed an additional
$1 million under the uncommitted line of credit. No
warrants were issued in connection with March 2003 borrowing. Up
to 5 million warrants may be issued in the event the
Company is authorized to borrow the $1 million remaining
under the facility. Therefore, a maximum of 15 million
warrants may be issued as a result of the line of credit,
presuming certain antidilutive features are not triggered.

13. Segment Reporting

The Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information SFAS No. 131 requires a business
enterprise, based upon a management approach, to disclose
financial and descriptive information about its operating
segments. Operating segments are components of an enterprise
about which separate

49



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ISCO INTERNATIONAL


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

financial information is available and regularly
evaluated by the chief operating decision maker(s) of an
enterprise. Under this definition, the Company operated as a
single segment for all periods presented.






14. Selected Quarterly Financial Data
(Unaudited)


A summary of selected quarterly information for
2002 and 2001 is as follows:

|                                                |  |                                                         |        |   |         |   |        |         |  |   |         |   |  |   |        |  
|----------------------------------------------- |  | ------------------------------------------------------- | ------ | - | ------- | - | ------ | ------- |  | - | ------- | - |  | - | ------ | -
|                                                |  |                                                        
|                                                |  | 2002 Quarter Ended                                      |       
|                                                |  |                                                         |       
|                                                |  | March 31                                                |        |   | June 30 |   |        | Sep. 30 |  |   | Dec. 31 |  
|                                                |  |                                                         |        |   |         |   |        |         |  |   |         |  
|                                                |  |                                                        
|                                                |  | (in thousands of U.S. dollars except per share amounts) |       
|Net Sales                                       |  | $                                                       | 1,563  |   |         | $ | 134    |         |  | $ | 430     |   |  | $ | 1,536  |  
|Gross Profit                                    |  |                                                         | 25     |   |         |   | (454   | )       |  |   | (112    | ) |  |   | 639    |  
|Net Earnings before Extraordinary Item          |  |                                                         | (3,780 | ) |         |   | (4,009 | )       |  |   | (2,806  | ) |  |   | (2,483 | )
|Net Earnings                                    |  |                                                         | (3,780 | ) |         |   | (4,009 | )       |  |   | (2,806  | ) |  |   | (2,483 | )
|Earnings per Share excluding Extraordinary Item |  | $                                                       | (0.03  | ) |         | $ | (0.03  | )       |  | $ | (0.02   | ) |  | $ | (0.01  | )
|Earnings per Share                              |  | $                                                       | (0.03  | ) |         | $ | (0.03  | )       |  | $ | (0.02   | ) |  | $ | (0.01  | )

|                                                |  |                                                         |        |   |         |   |        |         |  |   |         |   |  |   |        |  
|----------------------------------------------- |  | ------------------------------------------------------- | ------ | - | ------- | - | ------ | ------- |  | - | ------- | - |  | - | ------ | -
|                                                |  |                                                        
|                                                |  | 2001 Quarter Ended                                      |       
|                                                |  |                                                         |       
|                                                |  | March 31                                                |        |   | June 30 |   |        | Sep. 30 |  |   | Dec. 31 |  
|                                                |  |                                                         |        |   |         |   |        |         |  |   |         |  
|                                                |  |                                                        
|                                                |  | (in thousands of U.S. dollars except per share amounts) |       
|Net Sales                                       |  | $                                                       | 512    |   |         | $ | 1,374  |         |  | $ | 90      |   |  | $ | 5      |  
|Gross Profit                                    |  |                                                         | (292   | ) |         |   | (264   | )       |  |   | (394    | ) |  |   | (1,097 | )
|Net Earnings before Extraordinary Item          |  |                                                         | (4,747 | ) |         |   | (5,529 | )       |  |   | (10,689 | ) |  |   | (7,225 | )
|Net Earnings                                    |  |                                                         | (4,747 | ) |         |   | (5,529 | )       |  |   | (10,689 | ) |  |   | (7,225 | )
|Earnings per Share excluding Extraordinary Item |  | $                                                       | (0.04  | ) |         | $ | (0.05  | )       |  | $ | (0.10   | ) |  | $ | (0.07  | )
|Earnings per Share                              |  | $                                                       | (0.04  | ) |         | $ | (0.05  | )       |  | $ | (0.10   | ) |  | $ | (0.07  | )

50



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PART III







Item
10.     Directors and Executive
Officers of the Registrant


Information in response to this item is
incorporated by reference from the Election of
Directors, Executive Officers, and
Section 16(a) Beneficial Ownership Reporting
Compliance sections of the 2003 Proxy Statement.






Item
11.     Executive
Compensation


Information in response to this item is
incorporated by reference from the section of the 2003 Proxy
Statement captioned Executive Compensation and Certain
Transactions.






Item
12.     Security Ownership of
Certain Beneficial Owners and Management


Information in response to this item is
incorporated by reference from the section of the 2003 Proxy
Statement captioned Security Ownership of Management and
Principal Stockholders.






Item
13.     Certain Relationships and
Related Transactions


Information in response to this item is
incorporated by reference from the section of the 2003 Proxy
Statement captioned Executive Compensation and Certain
Transactions and Interests of Certain Persons in the
Matters to be Acted Upon at the Meeting.






PART IV







Item
14.     Controls and
Procedures


Under the supervision and with the participation
of our management, including our chief executive officer and
principal financial officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined
under Rule 13a-14(c) promulgated under the Securities
Exchange Act of 1934, as amended (the Exchange Act),
within 90 days of the filing date of this Report. Based on
their evaluation, our principal executive officer and principal
accounting officer concluded that our disclosure controls and
procedures are effective.

There have been no significant changes (including
corrective actions with regard to significant deficiencies or
material weaknesses) in our internal controls or in other
factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in paragraph
(a) above.






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a) The following documents are filed as
part of this Form 10-K:



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | 1. The following financial statements of the
    Company, with the report of independent auditors, are filed as
    part of this Form 10-K:



| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | Reports of Independent Certified Public
    Accountants                                                                              
|
| | Consolidated Balance Sheets as of
    December 31, 2002 and 2001                                                                     
|
| | Consolidated Statements of Operations for the
    Years Ended December 31, 2002, 2001, and 2000                                      
|
| | Consolidated Statements of Stockholders
    Equity (Net Capital Deficiency) for the Years Ended
    December 31, 2002, 2001 and 2000
|
| | Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2002, 2001, and 2000                                      
|
| | Notes to Consolidated Financial Statements                                                                                           

51



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##### Table of Contents





| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | 2. The following financial statement
    schedules of the Company are filed as part of this
    Form 10-K:



| |                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All financial schedules are omitted because such
    schedules are not required or the information required has been
    presented in the aforementioned financial statements.



| |                                                                   
| | ------------------------------------------------------------------
| | 3. Exhibits are listed in the
    Exhibit Index to this Form 10-K.

(b) The following current reports on
Form 8-K were filed during the quarterly period ended
December 31, 2002:



| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. On October 24, 2002, the Company
    filed a report on Form 8-K announcing that its had secured
    a $4 million line of credit from its two largest
    shareholders.
|
| | 2. On November 20, 2002, the Company
    filed a report on Form 8-k announcing that it had accessed
    the line of credit agreement.                                    

52



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SIGNATURES


Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 31st day of
March, 2003.



| |                   
| | ------------------
| | ISCO INTERNATIONAL





| |     |                   
| | --- | ------------------
| | By: | /s/ AMR ABDELMONEM

| |                        
| | -----------------------
| |                        
| | Amr Abdelmonem         
| | Chief Executive Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the registrant and in the
capacities indicated on the 31st day of March, 2003.

|                                         |  |                                                                                    
|---------------------------------------- |  | -----------------------------------------------------------------------------------
|Signature                                |  | Title                                                                              
|                                         |  |                                                                                    
|/s/ AMR ABDELMONEMAmr Abdelmonem         |  | Chief Executive Officer and Director (Principal
    Executive Officer and Director)
|                                        
|/s/ FRANK CESARIOFrank Cesario           |  | Chief Financial Officer (Principal Financial and
    Accounting Officer)           
|                                        
|/s/ STUART CHASEStuart Chase Van Wagenen |  | Director and Chairman of the Board                                                 
|                                        
|/s/ MARK D. BRODSKYMark D. Brodsky       |  | Director                                                                           
|                                        
|Howard Hoffmann                          |  | Director                                                                           
|                                        
|/s/ DAN GROPPERDan Gropper               |  | Director                                                                           
|                                        
|/s/ THOMAS L. POWERSThomas L. Powers     |  | Director                                                                           
|                                        
|Daniel Spoor                             |  | Director                                                                           
|                                        
|/s/ GEORGE CALHOUNGeorge Calhoun         |  | Director                                                                           

53



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##### Table of Contents



CERTIFICATIONS

I, Amr Abdelmonem, certify that:

1. I have reviewed this annual report on
Form 10-K of ISCO International, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b. evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c. presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b. any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                        
| | -----------------------
| | /s/ AMR ABDELMONEM     
| |                        
| | Amr Abdelmonem         
| | Chief Executive Officer

Date: March 31, 2003

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##### Table of Contents



I, Frank Cesario, certify that:

1. I have reviewed this annual report on
Form 10-K of ISCO International, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b. evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c. presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent functions):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b. any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other
factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                        
| | -----------------------
| | /s/ FRANK CESARIO      
| |                        
| | Frank Cesario          
| | Chief Financial Officer

Date: March 31, 2003

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ISCO INTERNATIONAL




EXHIBIT INDEX

|        |      |  |                         |                                                                                                                                                                                                                                                                                                                                                                           
|------- | ---- |  | ----------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |  |                        
|Number  |      |  | Description of Exhibits
|        |      |  |                        
|        | 3.1  |  |                         | Certificate of Incorporation of the Company,
    incorporated by reference to Exhibit 3.1 to the
    Companys Registration Statement on Form S-3/ A, filed
    with the Securities and Exchange Commission (SEC) on
    August 13, 1998, Registration No. 333-56601 (the
    August 1998 S-3).                                                                       
|        | 3.2  |  |                         | By-Laws of the Company, incorporated by reference
    to Exhibit 3.2 to Amendment No. 3 to the
    Companys Registration Statement on Form S-1, filed with
    the SEC on October 26, 1993, Registration No. 33-67756 (the
    IPO Registration Statement) .                                                                                                           
|        | 3.3  |  |                         | Certificate of Amendment of Certificate of
    Incorporation of the Company, incorporated by reference to
    Exhibit 3.3 to the IPO Registration Statement.                                                                                                                                                                                                              
|        | 3.4  |  |                         | Certificate of Amendment of Certificate of
    Incorporation of the Company, incorporated by reference to
    Exhibit 4.3 to the Companys Registration Statement on
    Form S-3/ A, filed with the SEC on July 1, 1999,
    Registration No. 333-77337.                                                                                                                 
|        | 3.5  |  |                         | Certificate of Amendment of Certificate of
    Incorporation of the Company filed July 18, 2000,
    incorporated by reference to the Companys registration
    statement on Form S-8 filed August 7, 2000 (the August
    2000 S-8).                                                                                                                                   
|        | 3.6  |  |                         | Certificate of Amendment to Certificate of
    Incorporation filed with the Secretary of State of the State of
    Delaware on June 25, 2001, incorporated by reference to
    Exhibit 3.1 to the Companys Current Report on
    Form 8-K filed on June 27, 2001.                                                                                                        
|        | 4.1  |  |                         | Specimen stock certificate representing Common
    Stock, incorporated by reference to Exhibit 4.1 to the IPO
    Registration Statement.                                                                                                                                                                                                                                 
|        | 4.2  |  |                         | Form of Series B Warrants, incorporated by
    reference to Exhibit 4.2 to the IPO Registration Statement.                                                                                                                                                                                                                                                                
|        | 4.3  |  |                         | Form of Series C Warrants, incorporated by
    reference to Exhibit 4.3 to the IPO Registration Statement.                                                                                                                                                                                                                                                                
|        | 4.4  |  |                         | Form of Representative Warrant, incorporated by
    reference to Exhibit 4.4 to the IPO Registration Statement.                                                                                                                                                                                                                                                           
|        | 4.5  |  |                         | Rights Agreement dated as of February 9,
    1996 between the Company and LaSalle National Trust, N.A.,
    incorporated by reference to the Exhibit to the Companys
    Registration Statement on Form 8-A, filed with the SEC on
    February 12, 1996.                                                                                                                
|        | 4.6  |  |                         | Registration Rights Agreement dated as of
    June 6, 1997, by and between the Company and Southbrook
    International Investments, Ltd., incorporated by reference to
    Exhibit 4.5 to the June 1997 S-3.                                                                                                                                                             
|        | 4.7  |  |                         | Warrant dated June 6, 1997 issued to
    Southbrook International Investments, Ltd., incorporated by
    reference to Exhibit 4.5 to the June 1997 S-3.                                                                                                                                                                                                                   
|        | 4.8  |  |                         | Registration Rights Agreement dated as of
    October 29, 1997, by and between the Company and Elliott
    Associates, L.P. and Westgate International, L.P., incorporated
    by reference to Exhibit 4.10 to the December 1997 S-3.                                                                                                                                     
|        | 4.9  |  |                         | Agreement dated as of October 29, 1997, by
    and between the Company and Brown Simpson Strategic Growth Fund,
    L.P. and Southbrook International Investments, Ltd.,
    incorporated by reference to Exhibit 4.11 to the December
    1997 S-3.                                                                                                                      
|        | 4.10 |  |                         | Form of Warrant dated May 15, 1998,
    incorporated by reference to Exhibit 4.3 to the August
    1998 S-3.                                                                                                                                                                                                                                                              
|        | 4.11 |  |                         | Securities Purchase Agreement dated as of
    May 15, 1998, by and between the Company and Elliott
    Associates, L.P., Westgate International, L.P., Alexander
    Finance, LP, State Farm Mutual Automobile Insurance Company,
    Spring Point Partners, L.P. and Spring Point Offshore Fund,
    incorporated by reference to Exhibit 4.5 to the August
    1998 S-3.

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|        |      |  |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------- | ---- |  | ----------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |  |                        
|Number  |      |  | Description of Exhibits
|        |      |  |                        
|        | 4.12 |  |                         | Registration Rights Agreement dated as of
    May 15, 1998, by and between the Company and Elliott
    Associates, L.P., Westgate International, L.P., Alexander
    Finance, LP, State Farm Mutual Automobile Insurance Company,
    Spring Point Partners, L.P. and Spring Point Offshore Fund,
    incorporated by reference to Exhibit 4.6 to the August 1998
    S-3.                                                                              
|        | 4.13 |  |                         | Form of Warrant dated March 31, 1999
    incorporated by reference to Exhibit 4.19 to the
    Companys Annual Report on Form 10-K for the year
    ended December 31, 1998.                                                                                                                                                                                                                                                                            
|        | 4.14 |  |                         | Securities Purchase Agreement dated as of
    March 31, 1999, by and between the Company and Elliott
    Associates, L.P., Westgate International, L.P., Alexander
    Finance, LP and State Farm Mutual Automobile Insurance Company,
    incorporated by reference to Exhibit 4.20 to the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 1998.                                                                          
|        | 4.15 |  |                         | Registration Rights Agreement dated as of
    March 31, 1999, by and between the Company and Elliott
    Associates, L.P., Westgate International, L.P., Alexander
    Finance, LP and State Farm Mutual Automobile Insurance Company,
    incorporated by reference to Exhibit 4.21 to the
    Companys Annual Report on Form 10-K for the year
    ended December 31, 1998.                                                                          
|        | 4.16 |  |                         | Amendment to Securities Purchase Agreement dated
    as of March 31, 1999, by and between the Company and
    Elliott Associates, L.P., Westgate International, L.P.,
    Alexander Finance, LP, State Farm Mutual Automobile Insurance
    Company, Spring Point Partners, L.P. and Spring Point Offshore
    Fund, incorporated by reference to Exhibit 4.22 to the
    Companys Annual Report on Form 10-K for the year
    ended December 31, 1998.
|        | 4.17 |  |                         | The SSI Replacement Nonqualified Stock Option
    Plan, incorporated by reference to Exhibit 4.1 to the
    Companys Registration Statement on Form S-8, filed
    with the SEC on November 3, 2000, Registration
    No. 333-49268.*                                                                                                                                                                                                                  
|        | 4.18 |  |                         | Letter Agreement dated October 20, 2000 by
    and between the Company and Elliott Associates, L.P. and
    Westgate International, incorporated by reference to
    Exhibit B to the Schedule 13D filed with the SEC by
    Elliott Associates, L.P. on November 13, 2000.                                                                                                                                                                             
|        | 4.19 |  |                         | Amendment No. 1 to the Rights Agreement
    between ISCO International, Inc. (formerly Illinois
    Superconductor Corporation) and LaSalle National Trust
    Association (formerly known as LaSalle National Trust Company)
    dated as of February 9, 1996, incorporated by reference to
    Exhibit 4.1 to the Companys Current Report on
    Form 8-K filed with the SEC on February 22, 2002.                                                   
|        | 10.1 |  |                         | 1993 Amended and Restated Stock Option Plan, as
    amended, incorporated by reference to Exhibit 4.6 to the
    August 2000 S-8.                                                                                                                                                                                                                                                                                                                       
|        | 10.2 |  |                         | Form of Amended and Restated Director
    Indemnification Agreement, incorporated by reference to
    Exhibit 10 to the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended September 30,
    1998.                                                                                                                                                                                                                              
|        | 10.3 |  |                         | Third Amended and Restated Registration Rights
    Agreement dated as of July 14, 1993, as amended,
    incorporated by reference to Exhibit 10.4 to the IPO
    Registration Statement.                                                                                                                                                                                                                                                                
|        | 10.4 |  |                         | Public Law Agreement dated February 2, 1990
    between Illinois Department of Commerce and Community Affairs
    and the Company, incorporated by reference to Exhibit 10.5
    to the IPO Registration Statement.                                                                                                                                                                                                                                     
|        | 10.5 |  |                         | Public Law Agreement dated December 30, 1991
    between Illinois Department of Commerce and Community Affairs
    and the Company, amended as of June 30, 1992, incorporated
    by reference to Exhibit 10.6 to the IPO Registration
    Statement.                                                                                                                                                                                                   
|        | 10.6 |  |                         | Representative Warrant Agreement, incorporated by
    reference to Exhibit 10.7 to the IPO Registration Statement.                                                                                                                                                                                                                                                                                                                                      
|        | 10.7 |  |                         | Subcontract and Cooperative Development Agreement
    dated as of June 1, 1993 between American Telephone and
    Telegraph Company and the Company, incorporated by reference to
    Exhibit 10.9 to the IPO Registration Statement.                                                                                                                                                                                                                   

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|        |       |  |                         |                                                                                                                                                                                                                                                                                                                                          
|------- | ----- |  | ----------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |                        
|Number  |       |  | Description of Exhibits
|        |       |  |                        
|        | 10.8  |  |                         | Intellectual Property Agreement dated as of
    June 1, 1993 between American Telephone and Telegraph
    Company and the Company, incorporated by reference to
    Exhibit 10.10 to the IPO Registration Statement.                                                                                                                     
|        | 10.9  |  |                         | License Agreement dated January 31, 1990
    between the Company and Northwestern University, incorporated by
    reference to Exhibit 10.13 to the IPO Registration
    Statement.                                                                                                                                                      
|        | 10.10 |  |                         | License Agreement dated February 2, 1990
    between the Company and ARCH Development Corporation,
    incorporated by reference to Exhibit 10.14 to the IPO
    Registration Statement.                                                                                                                                                 
|        | 10.11 |  |                         | License Agreement dated August 9, 1991
    between the Company and ARCH Development Corporation,
    incorporated by reference to Exhibit 10.15 to the IPO
    Registration Statement.                                                                                                                                                   
|        | 10.12 |  |                         | License Agreement dated October 11, 1991
    between the Company and ARCH Development Corporation,
    incorporated by reference to Exhibit 10.16 to the IPO
    Registration Statement.                                                                                                                                                 
|        | 10.13 |  |                         | Public Law Agreement dated August 18, 1993
    between Illinois Department of Commerce and Community Affairs
    and the Company, incorporated by reference to Exhibit 10.17
    to the IPO Registration Statement.                                                                                                                      
|        | 10.14 |  |                         | Form of Officer Indemnification Agreement
    incorporated by reference to Exhibit 10.17 to the
    Companys Annual Report on Form 10-K for the year
    ended December 31, 1998.                                                                                                                                                       
|        | 10.15 |  |                         | Employment Agreement dated November 9, 1998
    between the Company and Dennis Craig incorporated by reference
    to Exhibit 10.18 to the Companys Annual Report on
    Form 10-K for the year ended December 31, 1998.                                                                                                                
|        | 10.16 |  |                         | Employment Agreement dated April 12, 1999
    between the Company and Amr Abdelmonem, incorporated by
    reference to the Companys Registration Statement on
    Form S-2A, filed with the SEC on July 9, 1999,
    Registration Number 333-77337.                                                                                     
|        | 10.17 |  |                         | Single-Tenant Industrial building Lease between
    Teachers Retirement System of the State of Illinois,
    landlord, and ISCO International, tenant, dated June 24,
    1994, incorporated by reference to Exhibit 10.1 to the
    Companys Form 10-Q for the quarterly period ending
    June 30, 1994.                             
|        | 10.18 |  |                         | Letter Agreement, dated November 5, 1999, by
    and among the Company and the Investors, incorporated by
    reference to Exhibit 10(a) to the Companys Current
    Report on Form 8-K filed with the SEC on November 15,
    1999.                                                                                                    
|        | 10.19 |  |                         | Letter Agreement re Modification of Covenants,
    dated November 5, 1999, by and among the Company and the
    Investors, incorporated by reference to Exhibit 10(b) to
    the Companys Current Report on Form 8-K filed with
    the SEC on November 15, 1999.                                                                       
|        | 10.20 |  |                         | Security Agreement, dated November 5, 1999,
    by and among the Company and the Investors, incorporated by
    reference to Exhibit 10(c) to the Companys Current
    Report on Form 8-K filed with the SEC on November 15,
    1999.                                                                                                  
|        | 10.21 |  |                         | Letter Agreement dated November 12, 1999,
    amending the Letter Agreement filed as Exhibit 10.18,
    incorporated by reference to Exhibit 4.26 to the
    Companys Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2000, filed with the SEC on
    May 12, 2000 (the First Quarter 2000 10-Q).                   
|        | 10.22 |  |                         | Securities Purchase Letter Agreement dated
    December 28, 1999, by and among the Company, Elliott
    Associates, Westgate and Alexander, incorporated by reference to
    Exhibit 4.27 to the First Quarter 2000 10-Q.                                                                                                                
|        | 10.23 |  |                         | Securities Purchase Letter Agreement dated
    March 27, 2000, by and among the Company, Elliott
    Associates, Westgate and Alexander, incorporated by reference to
    Exhibit 4.28 to the First Quarter 2000 10-Q.                                                                                                                   
|        | 10.24 |  |                         | Agreement and Plan of Merger, dated May 17,
    2000 among the Company, SSI Acquisition, Corp., Spectral
    Solutions, Inc., Russell Scott, III, and Certain Other
    Stockholders of Spectral Solutions, Inc., incorporated by
    reference to Annex A to the Companys definitive
    additional proxy materials filed June 9, 2000.

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|        |       |  |                         |                                                                                                                                                                                                                                                                                                                                                                             
|------- | ----- |  | ----------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |                        
|Number  |       |  | Description of Exhibits
|        |       |  |                        
|        | 10.25 |  |                         | Escrow Agreement dated August 8, 2000 among
    the Company, Russell Scott, III, as stockholder
    representative, and American National Bank and Trust Company, as
    escrow agent, incorporated by reference to Exhibit 10.25 to
    the Companys registration statement on Form S-2 filed
    September 7, 2000, Registration No. 333-45406 (the
    September S-2).
|        | 10.26 |  |                         | Employment Agreement dated August 2, 2000
    between the Company and Richard Herring, incorporated by
    reference to Exhibit 10.26 to the September S-2.                                                                                                                                                                                                                 
|        | 10.27 |  |                         | Management Services Agreement, dated
    July 17, 2000, by and between the Company and CTR Ventures,
    K.K., incorporated by reference to Exhibit 10.27 to the
    September S-2.                                                                                                                                                                                         
|        | 10.28 |  |                         | Transaction Agreement, dated November 1,
    2001, by and among the Company, Illinois Superconductor Canada
    Corporation and Lockheed Martin Canada, Inc., incorporated by
    reference to Exhibit 2.1 to the Companys Current
    Report on Form 8-K filed on January 4, 2001.                                                                                        
|        | 10.29 |  |                         | Common Stock Purchase Agreement with Paul Revere
    Capital Partners, Ltd. dated March 21, 2000, incorporated
    by reference to Exhibit 10.1 to the Companys Registration
    Statement on Form S-3 filed on April 20, 2001.                                                                                                                                            
|        | 10.30 |  |                         | Escrow Agreement with Paul Revere Capital
    Partners, Ltd. and Epstein Becker & Green, P.C. dated
    March 21, 2001, incorporated by reference to
    Exhibit 10.2 to the Companys Registration Statement
    on Form S-3 filed on April 20, 2001.                                                                                                                      
|        | 10.31 |  |                         | Placement Agreement with Ladenburg Thalmann &
    Co. Inc. dated December 12, 2000, incorporated by reference
    to Exhibit 10.3 to the Companys Registration
    Statement on Form S-3 filed on April 20, 2001.                                                                                                                                                          
|        | 10.32 |  |                         | Waiver Letter by Ladenburg Thalmann & Co.
    Inc. dated March 19, 2001, incorporated by reference to
    Exhibit 10.4 to the Companys Registration Statement
    on Form S-3 filed on April 20, 2001.                                                                                                                                                                     
|        | 10.33 |  |                         | Employment Agreement with Amr Abdelmonem dated
    January 1, 2001, incorporated by reference to
    Exhibit 10.5 to the Companys Registration Statement
    on Form S-3 filed on April 20, 2001.                                                                                                                                                                          
|        | 10.34 |  |                         | ISCO International, Inc. Amended and Restated
    1993 Stock Option Plan, incorporated by reference to
    Appendix C and D of the Companys Definitive Proxy
    materials filed on May 22, 2001.                                                                                                                                                                          
|        | 10.35 |  |                         | Note Purchase Agreement dated November 6,
    2001 between ISCO International, Inc., Elliott Associates, L.P.
    and Alexander Finance, L.P., incorporated by reference to
    Exhibit 10.35 to the Companys Current Report on
    Form 8-K filed on November 7, 2001.                                                                                                    
|        | 10.36 |  |                         | Security Agreement dated November 6, 2001
    between ISCO International, Inc., Elliott Associates, L.P. and
    Alexander Finance, L.P., incorporated by reference to
    Exhibit 10.36 to the Companys Current Report on
    Form 8-K filed on November 7, 2001.                                                                                                         
|        | 10.37 |  |                         | Promissory Note dated November 6, 2001 in
    favor of Alexander Finance, L.P. in the principal amount of
    $2,000,000, incorporated by reference to Exhibit 10.37 to
    the Companys Current Report on Form 8-K filed on
    November 7, 2001.                                                                                                                         
|        | 10.38 |  |                         | Promissory Note dated November 6, 2001 in
    favor of Elliott Associates, L.P. in the principal amount of
    $5,236,112, incorporated by reference to Exhibit 10.38 to
    the Companys Current Report on Form 8-K filed on
    November 7, 2001.                                                                                                                        
|        | 10.39 |  |                         | Promissory Note dated November 8, 2001 in
    favor of Alexander Finance, L.P. in the principal amount of
    $2,188,888, incorporated by reference to Exhibit 10.39 to
    the Companys Current Report on Form 8-K filed on
    November 7, 2001.                                                                                                                         
|        | 10.40 |  |                         | Guaranty of Illinois Superconductor Canada
    Corporation, incorporated by reference to Exhibit 10.40 to
    the Companys Current Report on Form 8-K filed on
    November 7, 2001.                                                                                                                                                                                       
|        | 10.41 |  |                         | Guaranty of Spectral Solutions, Inc.,
    incorporated by reference to Exhibit 10.41 to the
    Companys Current Report on Form 8-K filed on
    November 7, 2001.                                                                                                                                                                                                         

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|        |       |   |                         |                                                                                                                                                                                                                                                                                                                                                      
|------- | ----- | - | ----------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |   |                        
|Number  |       |   | Description of Exhibits
|        |       |   |                        
|        | 10.42 |   |                         | Settlement Agreement and Release dated
    November 6, 2001 between ISCO International, Inc. and Craig
    M. Siegler, incorporated by reference to Exhibit 10.42 to
    the Companys Current Report on Form 8-K filed on
    November 7, 2001.                                                                                                     
|        | 10.43 |   |                         | Employment Agreement with Charles F. Willes,
    incorporated by reference to Exhibit 10.43 to the
    Companys Quarterly Report on Form 10-Q filed on
    November 14, 2001.                                                                                                                                                                       
|        | 10.44 |   |                         | Employment Agreement with Roger Boivin,
    incorporated by reference to Exhibit 10.44 to the
    Companys Quarterly Report on Form 10-Q filed on
    November 14, 2001.                                                                                                                                                                            
|        | 10.45 |   |                         | Employment Agreement with Dennis Craig,
    incorporated by reference to Exhibit 10.45 to the
    Companys Quarterly Report on Form 10-Q filed on
    November 14, 2001.                                                                                                                                                                            
|        | 10.46 |   |                         | Loan Agreement dated October 23, 2002
    between ISCO International, Inc., Manchester Securities
    Corporation, and Alexander Finance L.P., incorporated by
    reference to Exhibit 10.1 to the Companys Current
    Report on Form 8-K filed on October 24, 2002.                                                                              
|        | 10.47 |   |                         | Security Agreement dated October 23, 2002
    between ISCO International, Inc., Spectral Solutions, Inc.,
    Illinois Superconductor Canada Corporation, Manchester
    Securities Corporation, and Alexander Finance L.P., incorporated
    by reference to Exhibit 10.2 to the Companys Current
    Report on Form 8-K filed on October 24, 2002.
|        | 10.48 |   |                         | Secured Grid Note dated October 23, 2002
    between ISCO International, Inc. and Alexander Finance L.P. in
    the principal amount of $1,752,400, incorporated by reference to
    Exhibit 10.3 to the Companys Current Report on
    Form 8-K filed on October 24, 2002.                                                                         
|        | 10.49 |   |                         | Secured Grid Note dated October 23, 2002
    between ISCO International, Inc. and Manchester Securities
    Corporation in the principal amount of $2,247,600, incorporated
    by reference to Exhibit 10.4 to the Companys Current
    Report on Form 8-K filed on October 24, 2002.                                                              
|        | 10.50 |   |                         | Guaranty of Spectral Solutions, Inc.,
    incorporated by reference to Exhibit 10.5 to the
    Companys Current Report on Form 8-K filed on
    October 24, 2002.                                                                                                                                                                                   
|        | 10.51 |   |                         | Guaranty of Illinois Superconductor Canada
    Corporation, incorporated by reference to Exhibit 10.6 to
    the Companys Current Report on Form 8-K filed on
    October 24, 2002.                                                                                                                                                                 
|        | 10.52 |   |                         | Registration Rights Agreement dated
    October 23, 2002 between ISCO International, Inc.
    Manchester Securities Corporation, and Alexander Finance L.P.,
    incorporated by reference to Exhibit 10.7 to the
    Companys Current Report on Form 8-K filed on
    October 24, 2002.                                                            
|        | 10.53 |   |                         | Common Stock Purchase Warrant Agreement dated
    October 23, 2002 between ISCO International, Inc. and
    Alexander Finance L.P., incorporated by reference to
    Exhibit 10.8 to the Companys Current Report on
    Form 8-K filed on October 24, 2002.                                                                                         
|        | 10.54 |   |                         | Common Stock Purchase Warrant Agreement dated
    October 23, 2002 between ISCO International, Inc. and
    Manchester Securities Corporation, incorporated by reference to
    Exhibit 10.9 to the Companys Current Report on
    Form 8-K filed on October 24, 2002.                                                                              
|        | 10.55 |   |                         | Common Stock Purchase Warrant Agreement dated
    November 18, 2002 between ISCO International, Inc. and
    Alexander Finance L.P., incorporated by reference to
    Exhibit 10.8 to the Companys Current Report on
    Form 8-K filed on November 20, 2002.                                                                                       
|        | 10.56 |   |                         | Common Stock Purchase Warrant Agreement dated
    November 18, 2002 between ISCO International, Inc. and
    Manchester Securities Corporation, incorporated by reference to
    Exhibit 10.9 to the Companys Current Report on
    Form 8-K filed on November 20, 2002.                                                                            
|        | 23.1* | * |                         | Consent of Grant Thornton LLP                                                                                                                                                                                                                                                                                                                        
|        | 99.1* | * |                         | Certification Pursuant to 18 U.S.C.
    Section 1350, as Adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                       




|  |                                                                                                                      
|- | ---------------------------------------------------------------------------------------------------------------------
|* | Management contract or compensatory plan or
    arrangement required to be filed as an exhibit on this
    Form 10-K.



|   |               
|-- | --------------
|** | Filed herewith

60