ILLINOIS SUPERCONDUCTOR CORPORATION, S-3/A, 1997-04-01

ILLINOIS SUPERCONDUCTOR CORPORATION
S-3/A, 1997-04-01
COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH

Previous: MAFCO CONSOLIDATED GROUP INC, SC 13E3, 1997-04-01

Next: CARBIDE GRAPHITE GROUP INC /DE/, 8-K, 1997-04-01

<PAGE> 1

As filed with the Securities and Exchange Commission on April 1, 1997

Registration No. 333-23863

================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------

AMENDMENT NO. 1 TO

FORM S-3

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

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

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

451 KINGSTON COURT, MT. PROSPECT, ILLINOIS 60056, (847) 391-9400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

ORA E. SMITH
President and Chief Executive Officer
Illinois Superconductor Corporation
451 Kingston Court, Mt. Prospect, Illinois 60056, (847) 391-9400
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

------------------------
COPIES TO:

<TABLE>
<S> <C> <C>
LAWRENCE D. LEVIN, ESQ. BRUCE A. ZIVIAN, ESQ. PATRICK A. POHLEN, ESQ.
Katten Muchin & Zavis Eilenberg & Zivian Cooley Godward LLP
525 West Monroe Street 30 North LaSalle Street, Suite Five Palo Alto Square
Chicago, Illinois 60661 2900 3000 El Camino Real
(312) 902-5200 Chicago, Illinois 60602 Palo Alto, California 94306
(312) 917-9900 (415) 843-5000
</TABLE>

------------------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ].

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [ ].

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.

================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED APRIL 1, 1997

1,000,000 SHARES

ILLINOIS
SUPERCONDUCTOR
CORPORATION
[ISC LOGO]

COMMON STOCK
-------------------------

All of the 1,000,000 shares of Common Stock offered hereby (the "Offering")
are being sold by Illinois Superconductor Corporation (the "Company"). The
Company's Common Stock is traded on the Nasdaq National Market under the symbol
"ISCO." On March 31, 1997, the last reported sale price of the Company's Common
Stock on the Nasdaq National Market was $17.25 per share. See "Price Range of
Common Stock."

-------------------------

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED BY PROSPECTIVE
INVESTORS IN PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY.

-------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
========================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................ $ $ $
- --------------------------------------------------------------------------------------------------------
Total (3)................................ $ $ $
========================================================================================================
</TABLE>

(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.

(2) Before deducting expenses payable by the Company estimated at $500,000.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 150,000 additional shares of Common Stock on the same terms and
conditions as set forth above solely to cover over-allotments, if any. If
the Underwriters exercise this option in full, the total Price to Public,
Underwriting Discount and Proceeds to the Company will be $ ,
$ and $ , respectively. See "Underwriting."

-------------------------

The shares of Common Stock are offered by the several Underwriters named
herein subject to receipt and acceptance by them, and subject to their right to
reject any order in whole or in part. It is expected that delivery of
certificates representing such shares will be made against payment therefor at
the offices of Gruntal & Co., L.L.C., 14 Wall Street, New York, New York 10005
on or about , 1997.

-------------------------

GRUNTAL & CO., L.L.C.

THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 3

[SCHEMATIC OF WIRELESS NETWORK FROM PORTABLE TELEPHONE THROUGH BASE STATION TO
PUBLICLY-SWITCHED TELEPHONE NETWORK]

Illinois Superconductor Corporation's wireless telecommunications products are
installed within a cellular or Personal Communications Services service
provider's base station and improve the link between mobile and portable
telephones and the base station.

[PICTURE OF RADIO FREQUENCY FILTER UNIT]

SpectrumMaster(TM) and RangeMaster(TM)
filters are solutions to a service
provider's network, quality, coverage,
capacity and flexibility needs.

[PICTURE OF THE COMPANY'S RADIO FREQUENCY FILTER UNIT
INSTALLED IN A RACK]

Illinois Superconductor Corporation's
radio frequency
filter products are designed to be
integrated into

standard equipment racks within a cellular
service

provider's base stations.
------------------------

SpectrumMaster(TM), RangeMaster(TM) and the Company's circle/sphere logo
are trademarks of the Company. All other trade names and trademarks appearing in
this Prospectus are the property of their respective holders.

------------------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
<PAGE> 4

PROSPECTUS SUMMARY

This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective investors are cautioned that such statements are only predictions
and that actual events or results may differ materially. In evaluating such
statements, prospective investors should specifically consider the various
factors identified in this Prospectus, including the matters set forth under the
caption "Risk Factors," which could cause actual results to differ materially
from those indicated in such forward-looking statements.

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus or incorporated by reference herein. Unless otherwise indicated,
the information in this Prospectus assumes no exercise of the Underwriters'
over-allotment option.

THE COMPANY

Illinois Superconductor Corporation (the "Company") develops, manufactures
and markets high performance products for wireless telecommunications markets
based on its proprietary high temperature superconductor ("HTS") materials,
radio frequency ("RF") filter design and cryogenic technologies. Superconductor
materials, when cooled below a critical temperature, are able to transmit an
electric current with either no or minimal loss of energy. Because of this
minimal energy loss, superconductors are attractive for a wide range of
commercial applications.

The wireless telecommunications industry has experienced significant growth
in recent years, which has led to increased competition among service providers,
rapid growth in base station installations and significant increases in RF
interference. By reducing the effects of this interference, the Company's RF
filter products enable cellular and Personal Communications Services ("PCS")
service providers to improve the quality and increase the coverage, capacity and
flexibility of their networks in an economical manner. The Company's RF filter
products, which are based on superconductor technology, offer the following
performance benefits:

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

- coverage gaps between base stations are reduced because the radio range
of these base stations is extended, thereby minimizing the number of base
stations required in a wireless network;

- network call carrying capacity is increased because channels which were
previously unusable due to adjacent band interference now become
available; and

- flexibility in the location of base stations is improved because wireless
service providers can locate base stations in areas where RF interference
or other restrictions currently inhibit operations.

The Company currently offers two product lines to address the needs of
cellular and PCS service providers. The SpectrumMaster(TM) product line is
designed primarily to improve the RF performance of cellular and PCS systems in
high interference environments, including urban areas and near airports. The
RangeMaster(TM) product line combines the interference rejection advantages of a
SpectrumMaster(TM) filter with a cryogenically-cooled low-noise amplifier.
RangeMaster(TM) is designed to serve the range extension needs of rural,
suburban or small city cellular and PCS operators. In addition, the Company is
developing other products based on its core technologies, including adapting
current products to meet the specific needs of international wireless markets
and developing RF transmitter products.

The Company has completed 14 field trials with several major cellular
service providers. As a result of these field trials and other marketing
initiatives, the Company has received orders from certain of these service
providers for commercial units. In the third quarter of 1996, the Company began
shipping its first RF filter products to the cellular market, which were
installed and accepted into customers' commercially operational base stations.
In addition, the Company has received orders for its products from certain other
customers who have not participated in field trials.
3
<PAGE> 5

According to the Cellular Telecommunications Industry Association ("CTIA"),
there are in excess of 30,000 cellular base stations in the U.S., and the
Company believes that there are currently in excess of 60,000 cellular base
stations worldwide. Furthermore, industry sources estimate that there were
approximately 6,000 PCS base stations in service at the end of 1996 and forecast
that over 100,000 PCS base stations will be built in the U.S. over the next four
years.

The Company's objective is to be the global leader in supplying high
performance RF filter products to these growing markets. Key elements of the
Company's strategy include: (i) offering the highest performance filter systems
in the industry; (ii) pursuing cellular and PCS markets; (iii) focusing on key
service provider relationships; (iv) developing original equipment manufacturer
("OEM") customer relationships; (v) developing manufacturing expertise and
capacity; and (vi) building on its technology leadership position. The Company
believes it is strongly positioned to execute its strategy and capitalize on the
growth in the wireless telecommunications industry.

The Company was founded in 1989 by ARCH Development Corporation ("ARCH"),
an affiliate of the University of Chicago, to commercialize superconductor
technologies initially developed by Argonne National Laboratory ("Argonne"). The
Company was incorporated in Illinois on October 18, 1989 and reincorporated in
Delaware on September 24, 1993. 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 OFFERING

<TABLE>
<S> <C>
Common Stock to be offered........................ 1,000,000 shares
Common Stock to be outstanding after the
Offering........................................ 6,023,352 shares(1)
Use of proceeds................................... For product development, expansion of sales
and marketing efforts, working capital,
acquisition of manufacturing equipment and
general corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol..................... ISCO
</TABLE>

- -------------------------

(1) Excludes as of February 28, 1997 (i) 670,225 shares of Common Stock issuable
upon the exercise of outstanding warrants, (ii) 802,228 shares of Common
Stock issuable upon the exercise of previously granted options and (iii)
283,562 shares of Common Stock reserved for future issuance of options under
the Company's Amended and Restated 1993 Stock Option Plan (the "1993 Stock
Option Plan"). See "Description of Capital Stock" and Notes 6 and 7 of Notes
to Financial Statements.

4
<PAGE> 6

SUMMARY FINANCIAL INFORMATION

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................... $ 202,348 $ 251,977 $ 208,168 $ 27,830 $ 209,822
Costs and expenses:
Cost of government contract
revenue............................ 149,303 234,191 194,098 19,286 49,534
Research and development............. 230,895 608,373 1,962,678 4,554,946 6,422,921
Selling and marketing................ 87,943 48,587 454,968 469,600 1,834,640
General and administrative........... 718,789 1,102,576 2,199,597 2,763,615 3,290,810
--------- ----------- ----------- ----------- ------------
(984,582) (1,741,750) (4,603,173) (7,779,617) (11,388,083)
Other income (expense):
Investment income.................... 15,586 102,260 496,392 487,543 503,911
Interest expense..................... (25,182) (10,136) (8,582) (39,600) (29,602)
--------- ----------- ----------- ----------- ------------
(9,596) 92,124 487,810 447,943 474,309
--------- ----------- ----------- ----------- ------------
Net loss............................... $(994,178) $(1,649,626) $(4,115,363) $(7,331,674) $(10,913,774)
========= =========== =========== =========== ============
Net loss per common share(1)........... $(1.15) $(2.01) $(2.41)
Weighted average number of common
shares outstanding(1)................ 3,578,485 3,641,196 4,536,034
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------
ACTUAL AS ADJUSTED(2)
------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 5,188,047 $20,816,797
Working capital............................................. 5,207,923 20,836,673
Total assets................................................ 13,388,496 29,017,246
Long-term debt, less current portion........................ 91,618 91,618
Stockholders' equity........................................ 11,520,128 27,148,878
</TABLE>

- -------------------------

(1) Excludes as of December 31, 1996 (i) 670,225 shares of Common Stock issuable
upon the exercise of outstanding warrants, (ii) 796,258 shares of Common
Stock issuable upon the exercise of previously granted options and (iii)
289,532 shares of Common Stock reserved for future issuance of options under
the 1993 Stock Option Plan. See "Description of Capital Stock" and Notes 6
and 7 of Notes to Financial Statements.

(2) As adjusted to give effect to the sale of the 1,000,000 shares of Common
Stock offered hereby at an assumed public offering price of $17.25 per share
and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company.

5
<PAGE> 7

RISK FACTORS

Because the Company wants to provide investors with more meaningful and
useful information, this Prospectus contains, and incorporates by reference,
certain forward-looking statements (as such term is defined in the rules
promulgated pursuant to the Securities Act of 1933, as amended (the "Securities
Act")) that reflect the Company's current expectations regarding the future
results of operations and performance and achievements of the Company. Such
forward-looking statements are subject to the safe harbor created by the Private
Securities Litigation Reform Act of 1995. The Company has tried, wherever
possible, to identify these forward-looking statements by using words such as
"anticipate," "believe," "estimate," "expect" and similar expressions. These
statements reflect the Company's current beliefs and are based on information
currently available to it. Accordingly, these statements are subject to certain
risks, uncertainties and assumptions, including the factors set forth in the
following Risk Factors, which could cause the Company's future results,
performance or achievements to differ materially from those expressed in, or
implied by, any of these statements. 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.

In addition to the other information in this Prospectus, prospective
investors should carefully consider the following Risk Factors before purchasing
any of the shares of Common Stock offered hereby.

UNCERTAIN MARKET ACCEPTANCE OF SUPERCONDUCTING TELECOMMUNICATIONS PRODUCTS

The Company's RF filter products have not been sold in significant
quantities and there is no assurance that a substantial market will develop for
the Company's products. The Company's customers require demanding specifications
for performance and reliability. There can be no assurance that the Company's RF
filter products will continue to pass product performance and reliability tests
established by cellular and PCS service providers. There can also be no
assurance that the Company's products will operate reliably on a long-term
basis, that the Company will be able to manufacture adequate quantities of any
products it develops at commercially acceptable costs or on a timely basis or
that any of the Company's current or future products will achieve market
acceptance. Failure to successfully develop, manufacture and commercialize
products on a timely and cost-effective basis will have a material adverse
effect on the Company's business, operating results and financial condition.

LIMITED OPERATING HISTORY; HISTORY OF LOSSES; AND UNCERTAINTY OF FINANCIAL
RESULTS

The Company was founded in October 1989 and to date has been engaged
principally in research and development ("R&D"), product testing, manufacturing
and marketing activities. Most of the Company's revenues to date have been
derived from R&D contracts. The Company has not yet begun to generate
significant revenues from the sale of its RF filter products and only recently
recognized any revenues from the sale of such products. Accordingly, the Company
has only a limited operating history upon which an evaluation of the Company and
its prospects can be based. The Company must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stages of development.

The Company has incurred substantial net losses in each year since its
inception and expects to continue to incur operating losses through at least
early 1998 as it continues to devote significant financial resources to its
product development, manufacturing, marketing and sales efforts. Even if the
Company is able to overcome the significant remaining manufacturing and
marketing hurdles necessary to sell significant quantities of its RF filter
products, there can be no assurance that the Company will ever achieve a
profitable level of operations or, if profitability is achieved, that it can be
sustained.

LIMITED EXPERIENCE IN MANUFACTURING, MARKETING AND SALES

For the Company to be financially successful, it must manufacture its
products in substantial quantities, at acceptable costs and on a timely basis.
Although the Company has produced limited quantities of products for its first
orders and for use in development and customer field trial programs, production
of large quantities at competitive costs presents a number of technological and
engineering challenges for the Company, and

6
<PAGE> 8

there can be no assurance that the Company will be able 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 substantial quantities of the Company's products.
No assurance can be given that the Company will be able to make the transition
to full commercial production successfully.

In addition, the Company will 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 superconductive
products. The Company's marketing and sales experience to date is very limited.
The Company may also elect to enter into agreements or relationships with third
parties regarding the commercialization or 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. There can be no assurance that the Company will be able to establish
adequate sales and distribution capabilities, that it will be able to enter into
marketing agreements or relationships with third parties on financially
acceptable terms or that any third parties with whom it enters into such
arrangements will be successful in marketing the Company's products.

COMPETITION

The wireless telecommunications equipment market is very competitive. The
Company's products compete directly with products which embody existing and
future competing commercial technologies. In particular, in cellular
telecommunications applications, the Company competes with conventional RF
component manufacturers whose products are currently in use by the Company's
potential customers. Many of these companies have substantially greater
financial resources, larger R&D staffs and greater manufacturing and marketing
capabilities than the Company. Other emerging wireless technologies, such as
"smart" antennas, may also provide protection from RF interference and offer
enhanced range to cellular and PCS service providers and may therefore compete
with the Company's products. There can be no assurance that high performance RF
filters will become a preferred technology to address these needs of cellular
and PCS service providers. Failure of the Company's products to improve
performance sufficiently or to do so at an acceptable price or to achieve
commercial acceptance or otherwise compete with conventional technologies will
have a material adverse effect on the Company's business, operating results and
financial condition.

Although the market for superconductive electronics currently is small and
in the early stages of development, the Company 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 develop
and maintain technologically advanced products, attract and retain highly
qualified personnel, obtain additional patent or other protection for its
technology and products and manufacture and market its products, either alone or
with third parties. There can be no assurance that the Company will be able to
achieve these objectives. Failure to do so would have a material adverse effect
on the Company's business, operating results and financial condition.

MANAGEMENT OF GROWTH

The Company's growth to date has caused, and will continue to cause, a
significant strain on its management, operational, financial and other
resources. The Company's ability to manage its growth effectively will require
it to implement and improve its operational, financial, manufacturing and
management information systems and expand, train, manage and motivate its
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 the Company's performance in the next several
quarters. If the Company were to receive substantial orders, the Company may
have to expand its current facility, which could cause an additional strain on
the Company's management personnel and development resources. The failure of the
Company's management team to effectively manage growth could have a material
adverse effect on the Company's business, operating results and financial
condition.

7
<PAGE> 9

RAPID TECHNOLOGICAL CHANGE; POSSIBLE PURSUIT OF OTHER MARKET OPPORTUNITIES

The field of superconductivity is characterized by rapidly advancing
technology. The success of the Company will depend in large part upon its
ability to keep pace with advancing superconducting technology, high performance
RF filter design and efficient, low cost cryogenic technologies. Rapid changes
have occurred, and are likely to continue to occur, in the development of
superconducting materials and processes. The Company will have to continue to
improve its ability to fabricate thick-film HTS devices, design high performance
RF filters and efficient cryogenic subsystems and produce significant quantities
of products based on these improvements. There can be no assurance that the
Company's development efforts will not be rendered obsolete by the adoption of
alternative solutions to current wireless operator problems or by technological
advances made by others, or that other materials or processes, including other
superconducting materials or fabrication processes, will not prove more
advantageous for the commercialization of high performance wireless products
than the materials and processes selected by the Company.

Because HTS product development is a new and emerging field, there may in
the future be new opportunities that are more attractive than those initially
identified by the Company for its targeted markets. As a result, there can be no
assurance that the Company will not elect in the future to commit its resources
to such other potentially more attractive market opportunities. Such election
may require the Company to limit or abandon its current focus on developing,
manufacturing, marketing and selling HTS products for cellular, PCS and other
telecommunications markets. The risks associated with other markets may be
different from the risks associated with the cellular, PCS and other wireless
telecommunications markets.

FOCUS ON WIRELESS TELECOMMUNICATIONS MARKET; CURRENT AND FUTURE COMPETITIVE
TECHNOLOGIES

The Company has selected the wireless telecommunications market, in
particular the cellular and PCS markets, as the first principal target market
for its superconductor-based products. The devotion of substantial resources to
the wireless telecommunications market makes the Company vulnerable 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 would have a material adverse effect on the
Company's business, operating results and financial condition.

The Federal Communications Commission ("FCC") has adopted rules that
provide preferential licensing treatment for parties that develop new
communications services and technologies. These developments and further
technological advances may make available other alternatives to cellular or PCS
service, thereby creating additional sources of competition. There can be no
assurance that competition to cellular or PCS technologies will not adversely
affect the market for the Company's products, or result in changes in the
Company's development and manufacturing programs.

DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS

To date, the Company's marketing and sales efforts have focused on major
cellular service providers in retrofit applications and to a lesser extent on
PCS operators and cellular and PCS OEMs. The Company expects that if its RF
filter products achieve market acceptance, a limited number of wireless service
providers and OEMs will account for a substantial portion of its 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 the Company's products. Wireless
service providers 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 loss of one or more
of the Company's customers or failure to attract new customers would have a
material adverse effect on the Company's business, operating results and
financial condition.

8
<PAGE> 10

LENGTHY SALES CYCLES

Wireless service providers and the Company's other customers are
significantly larger than, and are able to exert a high degree of influence
over, the Company. Prior to selling its products to these customers, the Company
must generally undergo lengthy approval and purchase processes. Technical and
business evaluation can take up to a year or more for products based on new
technologies such as HTS. Accordingly, the Company is continually submitting its
current products as well as new products to its customers for approval. 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. There can be no
assurance that the Company will obtain the necessary approvals or that ensuing
sales of such products will occur. There can also be no assurance that the
length of its customers' approval process or delays will not have a material
adverse effect on the Company's business, operating results and financial
condition.

DEPENDENCE ON LIMITED SOURCES OF SUPPLY

Certain parts and components used in the Company's RF filter products,
including substrates and cryogenic refrigerators, are purchased from a single
source or are only currently available from a limited number of sources. The
Company's reliance on these sole or limited source suppliers exposes the Company
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 Company's ability to manufacture and deliver its products on a timely basis
and result in the cancellation of orders, which could have material adverse
effect on the Company's 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 the Company's products,
the Company may not be able to manufacture products in a quantity sufficient to
meet its customers' demand in any particular period. The Company has no
guaranteed supply arrangements with its sole or limited source suppliers, does
not maintain an extensive inventory of parts or components, and customarily
purchases parts and components pursuant to purchase orders placed from time to
time in the ordinary course of business. Business disruption, production
shortfalls or financial difficulties of a sole or 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 of the Company to develop alternative sources of supply
quickly and on a cost-effective basis could materially impair the Company's
ability to manufacture and deliver its products on a timely basis and could have
a material adverse effect on its business, operating results and financial
condition.

FUTURE CAPITAL NEEDS

To date, the Company has financed its operations primarily through public
and private equity financings that have raised approximately $39 million, net of
related expenses. Although the Company believes that its current funds, together
with the net proceeds from the Offering, are sufficient to finance the Company's
operations as planned for at least the next 12 months, the Company may require
funds to finance its product development, manufacturing and marketing activities
thereafter. There can be no assurance that such funds will be available, or
available on terms satisfactory to the Company. If additional funds are raised
by issuing equity securities, further dilution to existing or future
stockholders is likely to result. If adequate funds are not available on
acceptable terms when needed, or if the Offering is not completed, the Company
may be required to delay, scale-back or eliminate the manufacturing, marketing
or sales of one or more of its products or research and development programs, or
to obtain funds through arrangements with collaborative partners or others that
may require the Company to relinquish rights to certain of its technologies,
product candidates or potential products that the Company would not otherwise
relinquish. Inadequate funding also could impair the Company's ability to
compete in the marketplace. The Company regularly examines opportunities to
expand its technology base and product line through means such as licenses,
joint ventures and acquisitions of assets or ongoing businesses, and may issue
securities in connection with such transactions. However, no commitments to
enter into or pursue any such transaction have been made at this time, and there
can be no assurance that any such discussions will result in any such
transaction being concluded.

9
<PAGE> 11

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 its 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 Company products are based. As of March 31, 1997, the Company has been
issued six U.S. patents, purchased two U.S. patents from another company and has
filed and is actively pursuing applications for 23 other U.S. patents, and is
the exclusive or non-exclusive licensee of 11 patents and patent applications
held by others. 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. The Company also believes there are a large
number of patents and patent applications covering RF filter products and other
products and technologies that the Company 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. No assurance can be given that the patent applications filed by the
Company or by the Company's licensors will result in issued patents or that the
scope and breadth of any claims allowed in any patents issued to the Company or
its licensors will exclude competitors or provide competitive advantages to the
Company. In addition, there can be no assurance that any patents issued to the
Company or its licensors will be held valid if subsequently challenged or that
others will not claim rights in the patents and other proprietary technologies
owned or licensed by the Company or that others have not developed or will not
develop similar products or technologies without violating any of the Company's
proprietary rights. Furthermore, the Company's loss of any license to technology
that it now has or acquires in the future may have a material adverse effect on
the Company's business, operating results and financial condition.

Some of the patents and patent applications owned or licensed by the
Company are subject to non-exclusive, royalty-free licenses held by various
governmental units. These licenses permit these U.S. government units to select
vendors other than the Company to produce products for the U.S. Government which
would otherwise infringe the Company's patent rights which are subject to the
royalty-free licenses. In addition, the U.S. Government has the right to require
the Company to grant licenses (including exclusive licenses) under such patents
and patent applications or other inventions to third parties in certain
instances.

Patent applications in the U.S. are currently maintained in secrecy until
patents are issued and in foreign countries 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 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, the Company's patent and
literature searches cannot fully evaluate the patentability of the claims in the
Company's 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 the Company 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, the Company would have to either license
such technologies or design around any such patents. There can be no assurance
that the Company will be able to obtain licenses to such technologies or that,
if obtainable, such licenses would be available on terms acceptable to the
Company or that the Company could successfully design around these third-party
patents.

10
<PAGE> 12

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
the Company, to defend the Company against infringement claims made by others or
to determine the ownership, scope or validity of the proprietary rights of the
Company and others. An adverse outcome in any such proceedings could subject the
Company to significant liabilities to third parties, require the Company to seek
licenses from third parties and/or require the Company to cease using certain
technologies, any of which could have a material adverse effect on the Company's
business, operating results and financial condition.

The Company believes that a number of patent applications, including
applications filed by International Business Machines Corporation ("IBM"),
Lucent Technologies, Inc. ("Lucent"), formerly a subsidiary of AT&T, 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"), the 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, the Company has
no assurance that it will be able to obtain licenses to any such patents for
YBCO or other HTS 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 Company's business, operating results and
financial condition.

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 Company's ability to sell
its wireless telecommunications products will be 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. 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
Company's business, operating results and financial condition. In addition, HTS
RF filters are on the U.S. Department of Commerce's export regulation list and
therefore exportation of such RF filters to certain countries may be restricted
or subject to export licenses.

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

11
<PAGE> 13

DEPENDENCE ON KEY PERSONNEL

The Company's success will depend in large part upon its ability to attract
and retain highly qualified management, 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
its executive officers or other key personnel, or the failure of the Company to
attract and retain other executive officers or key personnel, could have a
material adverse effect on the Company's business, operating results and
financial condition.

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. Announcements by the Company or others
regarding the receipt of customer orders, timing of product shipments, changes
in recommendations of securities analysts, 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.

BUSINESS INTERRUPTIONS AND DEPENDENCE ON A SINGLE U.S. FACILITY

The Company's primary operations, including engineering, manufacturing,
research, distribution and general administration, are housed in a single
facility in Mount Prospect, Illinois. Any material disruption in the Company's
operations, whether due to fire, natural disaster, power loss or otherwise,
could have a material adverse effect on the Company's business, operating
results and financial condition.

SUBSTANTIAL NUMBER OF SHARES ELIGIBLE FOR FUTURE SALE

The sale of a substantial number of shares of Common Stock by the Company
or any of its significant stockholders, or the perception that such sales could
occur, could adversely affect the prevailing market price of the Common Stock.
The Company is unable to make any prediction as to the effect, if any, that
future sales of Common Stock or the availability of Common Stock for sale may
have on the market price of the Common Stock prevailing from time to time. In
addition, any such sale or such perception could make it more difficult for the
Company to sell equity securities in the future at a time and price that the
Company deems appropriate. Upon completion of the Offering, the Company will
have 6,023,352 shares of Common Stock outstanding, assuming no exercise of
options or warrants after February 28, 1997. An aggregate of 5,954,379 of these
shares of Common Stock, including the 1,000,000 shares of Common Stock offered
hereby, will be either (i) freely tradable without restriction or further
registration under the Securities Act, unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 of the Securities Act, which shares
will be subject to the resale limitations of Rule 144, or (ii) eligible for
resale in the public market, pursuant to a currently effective registration
statement. In addition, 670,225 shares underlying currently exercisable warrants
will also be eligible for resale in the public market upon exercise of the
warrants, pursuant to such registration statement. The remaining 68,973 shares
outstanding upon completion of the Offering will be "restricted securities" as
that term is defined under Rule 144 (the "Restricted Shares"). Certain of the
outstanding shares of Common Stock are, and for a period of 90 days following
the Offering will be, subject to restrictions on transfer or sale.

As of February 28, 1997, the Company had outstanding warrants to purchase
670,225 shares of Common Stock at a weighted average exercise price of $8.17 per
share and options to purchase 802,228 shares of Common Stock at a weighted
average exercise price of $13.46 per share (560,566 of which have not yet
vested) issued to employees, directors and consultants pursuant to the 1993
Stock Option Plan and individual agreements with management and directors of the
Company. The Company has previously filed a registration statement under the
Securities Act covering shares of Common Stock underlying the options. As a
result, shares of Common Stock underlying these options, other than shares held
by affiliates, are immediately eligible for resale in the public market without
restriction, subject to certain vesting provisions and the terms of lock-up
agreements, if applicable.

12
<PAGE> 14

The Company may issue additional capital stock, warrants and/or other
securities to raise capital in the future. In order to attract and retain key
personnel, the Company may also issue additional securities, including stock
options, in connection with its employee benefit plans. During the terms of such
options and warrants, the holders thereof are given the opportunity to benefit
from a rise in the market price of the Common Stock. The exercise of such
options and warrants, as well as the sale by the Company of additional
securities and/or rights to purchase such securities, may have an adverse or
dilutive effect on the market value of the Common Stock, including the shares of
Common Stock being offered hereby. Also, the existence of such options and
warrants may adversely affect the terms on which the Company can obtain
additional equity financing. The Company also may in the future offer equity
participation in connection with the obtaining of non-equity financing, such as
debt or leasing arrangements. This could also have a dilutive effect upon the
holders of Common Stock.

ANTI-TAKEOVER PROVISIONS

The Company has certain provisions 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 of
the Company (the "Board of Directors") adopted a stockholders rights plan (the
"Rights Plan"). By causing substantial dilution to a person or group that
attempts to acquire the Company on terms not approved by the Board of Directors,
the Series A Rights and Series B Rights of the Rights Plan may interfere with
certain acquisitions, including acquisitions that may offer a premium over
market price to some or all of the Company's stockholders. In addition, the
Company's Certificate of Incorporation and Bylaws contain provisions that
include (i) a requirement that stockholder action may be taken only at
stockholder meetings; (ii) the authority of the Board of Directors to issue
series of Preferred Stock with such voting rights and other powers as the Board
of Directors may determine; (iii) notice requirements in the Bylaws relating to
nominations to the Board of Directors and to the raising of business matters at
stockholders meetings; and (iv) the classification of the Board of Directors
into three classes, each serving for staggered three year terms.

13
<PAGE> 15

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$15,628,750 ($18,048,062 if the Underwriters' over-allotment option is exercised
in full), based on an assumed public offering price of $17.25 per share and
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company. The Company intends to use the net
proceeds primarily for funding of its product development programs, expansion of
its sales and marketing efforts, working capital, capital expenditures,
acquisition of manufacturing equipment and other general corporate purposes. The
Company has not identified precisely the amounts it plans to spend for each
purpose. The amounts actually expended for each purpose will vary significantly
depending upon numerous factors, including the progress of the Company's product
development and testing programs, and timing and extent of commercial orders for
and shipments of the Company's products, and the status of competitive products.
In addition, a portion of the net proceeds may be used to finance strategic
acquisitions or corporate alliances. The Company considers such acquisitions on
an ongoing basis, but has no current commitments for any acquisitions which
would have a material impact on the Company's results of operations or financial
condition. Pending such uses, the Company will invest the net proceeds in
investment grade short or medium term interest bearing instruments.

PRICE RANGE OF COMMON STOCK

The Common Stock is traded on the Nasdaq National Market under the symbol
"ISCO." The following table sets forth, for the periods indicated, the high and
low sale prices for the Common Stock on the Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995:
First Quarter............................................. $ 8.50 $ 6.00
Second Quarter............................................ 11.50 7.00
Third Quarter............................................. 11.75 7.50
Fourth Quarter............................................ 21.25 10.00
1996:
First Quarter............................................. $34.00 $15.50
Second Quarter............................................ 27.25 19.75
Third Quarter............................................. 27.25 15.75
Fourth Quarter............................................ 22.25 14.75
1997:
First Quarter............................................. $19.25 $15.38
</TABLE>

On March 31, 1997, the last reported sale price of the Common Stock on the
Nasdaq National Market was $17.25, and the Common Stock was held by 222 holders
of record.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying cash dividends on its Common Stock in the
foreseeable future, but intends instead to retain future earnings for
reinvestment in its business. Any future determination to pay cash dividends
will be at the discretion of the Board of Directors and will be dependent upon
the Company's financial condition, results of operations, capital requirements
and such other factors as the Board of Directors deems relevant.

14
<PAGE> 16

CAPITALIZATION

The following table sets forth, at December 31, 1996, the capitalization of
the Company and the capitalization as adjusted to give effect to the issuance
and sale by the Company of 1,000,000 shares of Common Stock offered hereby (at
an assumed public offering price of $17.25 per share and after deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by the Company). This table should be read in conjunction with the
Financial Statements of the Company and the Notes thereto included elsewhere in
this Prospectus.

<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------
ACTUAL AS ADJUSTED
------ -----------
<S> <C> <C>
Long term debt, less current portion........................ $ 91,618 $ 91,618
Stockholders' equity:
Preferred Stock, $.001 par value, 100,000 shares
authorized, no shares issued or outstanding, actual;
and no shares issued and outstanding, as adjusted...... -- --
Common Stock, $.001 par value, 15,000,000 shares
authorized, 5,023,352 shares issued and outstanding,
actual; and 6,023,352 shares issued and outstanding, as
adjusted(1)............................................ 5,023 6,023
Additional paid-in capital................................ 39,019,421 54,647,171
Notes receivable from stockholders(2)..................... (1,142,754) (1,142,754)
Deficit accumulated during the development stage.......... (26,361,562) (26,361,562)
------------ ------------
Total stockholders' equity............................. $ 11,520,128 $ 27,148,878
------------ ------------
Total capitalization................................. $ 11,611,746 $ 27,240,496
============ ============
</TABLE>

- -------------------------

(1) Excludes as of December 31, 1996 (i) 670,225 shares of Common Stock issuable
upon the exercise of outstanding warrants at a weighted average exercise
price of $8.17 per share, (ii) 796,258 shares of Common Stock issuable upon
the exercise of previously granted stock options at a weighted average
exercise price of $13.40 per share, and (iii) 289,532 shares of Common Stock
reserved for future issuance of options under the 1993 Stock Option Plan.
See "Description of Capital Stock" and Notes 6 and 7 of Notes to Financial
Statements.

(2) As of March 31, 1997, the aggregate outstanding principal amount of these
notes was $716,319.

15
<PAGE> 17

SELECTED FINANCIAL DATA

The following table sets forth selected financial data of the Company. The
statement of operations data for each of the years ended December 31, 1994, 1995
and 1996, and the balance sheet data at December 31, 1995 and 1996, are derived
from the Company's Financial Statements included elsewhere in this Prospectus
which have been audited by Ernst & Young LLP, independent auditors. The
statement of operations data for the years ended December 31, 1992 and 1993 and
the balance sheet data at December 31, 1992, 1993 and 1994 are derived from the
Company's financial statements not included herein. The data should be read in
conjunction with the Financial Statements, related notes, and "Management's
Discussion and Analysis of the Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................... $ 202,348 $ 251,977 $ 208,168 $ 27,830 $ 209,822
Costs and expenses:
Cost of government contract
revenue................... 149,303 234,191 194,098 19,286 49,534
Research and development..... 230,895 608,373 1,962,678 4,554,946 6,422,921
Selling and marketing........ 87,943 48,587 454,968 469,600 1,834,640
General and administrative... 718,789 1,102,576 2,199,597 2,763,615 3,290,810
--------- ----------- ----------- ----------- ------------
(984,582) (1,741,750) (4,603,173) (7,779,617) (11,388,083)
Other income (expense):
Investment income............ 15,586 102,260 496,392 487,543 503,911
Interest expense............. (25,182) (10,136) (8,582) (39,600) (29,602)
--------- ----------- ----------- ----------- ------------
(9,596) 92,124 487,810 447,943 474,309
--------- ----------- ----------- ----------- ------------
Net loss....................... $(994,178) $(1,649,626) $(4,115,363) $(7,331,674) $(10,913,774)
========= =========== =========== =========== ============
Net loss per common share(1)... $(1.15) $(2.01) $(2.41)
Weighted average number of
common shares
outstanding(1)............... 3,578,485 3,641,196 4,536,034

<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1992 1993 1994 1995 1996
--------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...... $ 705,943 $16,739,861 $ 90,362 $ 953,093 $ 5,188,047
Working capital................ 687,484 16,597,042 9,806,670 5,458,474 5,207,923
Total assets................... 996,909 17,632,020 14,732,501 11,105,766 13,388,496
Long-term debt/capital lease
obligations, less current
portion...................... 40,101 47,971 8,355 509,079 91,618
Stockholders' equity........... 875,817 16,843,855 12,821,746 9,185,379 11,520,128
</TABLE>

- -------------------------

16
<PAGE> 18

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The discussion below contains certain forward-looking statements that are
based on the beliefs of the Company's management, as well as assumptions made
by, and information currently available to, the Company's management. The
Company's future results, performance or achievements could differ materially
from those expressed in, or implied by, any such forward-looking statements. See
"Risk Factors" for a discussion of factors that could cause or contribute to
such material differences. The following presentation of management's discussion
and analysis of the Company's financial condition and results of operations
should be read in conjunction with the Company's Financial Statements and notes
thereto and other financial information included herein.

The Company was founded in 1989 by ARCH, an affiliate of The University of
Chicago, to commercialize superconducting technologies developed initially at
Argonne. Since its inception, the Company has been in the development stage,
primarily engaging in research and product development activities, both
internally funded and under government-funded contracts and cooperative
agreements, recruiting technical and administrative personnel, and raising
capital. Throughout its development stage, the Company's primary focus has been
to use its proprietary HTS materials technologies to develop RF filter products
designed to enhance the quality, coverage, capacity and flexibility of cellular
and PCS wireless telecommunications services. To date, the Company has received
a majority of its revenue from government research contracts. While these
contracts have historically provided the Company's primary source of revenue,
the Company believes that they will not be a significant source of revenue in
the future. The Company has incurred cumulative losses of $26,361,562 from
inception to December 31, 1996.

During the second half of 1996, the Company made the first commercial sales
of its RF filter products. The Company has received orders for its products
which were delivered in the first quarter of 1997 and additional orders which
are scheduled for delivery during the second quarter of 1997. Product revenues
have been derived from sales of the Company's RF filter products and to a lesser
extent other development stage products. The Company expects sales of its RF
filter products to increase.

RESULTS OF OPERATIONS

Years Ended December 31, 1996 and 1995

The Company's revenues increased in 1996 to $209,822 from $27,830 in 1995,
primarily as a result of sales of the Company's RF filter products. A government
research and development contract begun during the fourth quarter of 1995
generated $53,122 in revenues in 1996. The Company has concentrated its efforts
on its commercial product development programs and does not expect revenues to
increase dramatically unless and until it ships a significant amount of its
commercial products.

Cost of government contract revenue was $49,534 in 1996, as compared to
$19,286 for 1995. Cost of government contract revenue consists primarily of
research and development expenses associated with government contracts,
including engineering personnel, engineering materials and other overhead costs.
The increase of these costs resulted from increased activity under government
contracts. Costs associated with development stage product sales are reflected
as research and development expenses.

The Company's internally funded research and development expenses for 1996
were $6,422,921 compared to $4,554,946 for 1995. The Company incurred increased
expenditures to expand its RF filter product lines, develop and implement its
manufacturing processes and also to conduct advanced research and development
activities. These expenditures consisted primarily of personnel costs, materials
and supplies expenses and costs associated with the Company's product sales.
Under the terms of a government contract entered into in March 1993 and amended
in March 1994 and March 1995, the U.S. Government agreed to share costs of
certain of the Company's research and development efforts. This contract was
completed in March 1996. Funding of $200,445 for 1996 has been offset against
the related research and development costs, as compared to $649,660 for 1995.
The Company anticipates it will maintain a similar level of research and
development expenses during 1997 to expand its existing product lines.

17
<PAGE> 19

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

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

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

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

Years Ended December 31, 1995 and 1994

The Company's revenues decreased in 1995 to $27,830 from $208,168 in 1994,
primarily as a result of completing several government contracts in 1994. A new
government contract begun during the fourth quarter of 1995 generated $21,832 in
government contract revenue, and the balance of $5,998 in revenues was the
result of development stage non-RF filter product sales.

Cost of government contract revenue was $19,286 in 1995, as compared to
$194,098 for 1994. Cost of government contract revenue consists primarily of
research and development expenses associated with government contracts,
including engineering personnel, engineering materials and other overhead costs.
The decrease in these costs resulted from decreased activity under government
contracts. Costs associated with development stage product sales are reflected
as research and development expenses.

The Company's internally funded research and development expenses for 1995
were $4,554,946 compared to $1,962,678 for 1994. This increase reflects the
Company's increased commitment of resources to the commercialization of its RF
filter product lines. To support field tests of these products, the Company
continued to expand its internal research and development activities through the
hiring of additional personnel and increasing expenditures for materials and
services needed to produce field test units. Under the terms of a government
contract entered into in March 1993, and amended in March 1994 and March 1995,
the U.S. Government agreed to share costs of certain of the Company's research
and development efforts. Funding of $649,660 for 1995 has been offset against
the related research and development costs, as compared to $619,028 for 1994.

Selling and marketing expenses for 1995 were $469,600, as compared to
$454,968 for 1994. This increase was attributable to the hiring of additional
marketing and administrative personnel, and increased expenditures for product
marketing and advertising efforts.

General and administrative expenses for 1995 were $2,763,615, as compared
to $2,199,597 for 1994. This increase was primarily attributable to increased
occupancy costs as a result of the Company's move to its new facility and
additional Company personnel.

Investment income decreased to $487,543 in 1995 from $496,392 in 1994. This
decrease was primarily due to a smaller average investment portfolio in 1995.

Interest expense increased to $39,600 in 1995 from $8,582 in 1994 primarily
due to a higher average debt balance outstanding in 1995 as compared to 1994.

LIQUIDITY AND CAPITAL RESOURCES

To date, the Company has financed its operations primarily through public
and private equity financings which have raised approximately $39,000,000, net
of related expenses. In February 1996, the Company completed a private placement
which raised approximately $8,334,000, net of expenses. At December 31, 1996,
the Company's cash, cash equivalents and investments, including certain
restricted investments, was

18
<PAGE> 20

approximately $6,038,000, reflecting a decrease of approximately $861,000, from
$6,899,000 at December 31, 1995. In December 1996, the Company received an
aggregate of approximately $4,400,000 from the exercise of warrants that were
issued in the Company's private placement completed in November 1995,
approximately $1,100,000 of which was in the form of promissory notes.
Approximately $716,000 in principal amount of these promissory notes is
currently outstanding and is due on April 30, 1997. The Company had provided
notice of its intent to redeem the warrants in November 1996.

During 1995 and 1996, the Company financed a portion of its leasehold
improvements and capital equipment additions through various borrowings
approximating $743,000, approximately $172,000 of which was outstanding at
December 31, 1996. The remaining balance is due in monthly installments through
May 1999 and bears interest at 8.5% per annum.

The Company to date has generated limited revenues from product sales. The
Company invested approximately $3,000,000 during 1996 in the build-out of its
manufacturing facility and other manufacturing equipment. The development and
expansion of the Company's RF filter product lines will require continued
commitment of substantial funds to conduct product development and field trial
activities to establish commercial-scale manufacturing and to market its RF
filter products. The Company currently estimates that additional investments
aggregating approximately $500,000 for machinery, equipment and improvements
associated with expansion of its manufacturing operations will be made over the
next 12 months. 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 needed to support the
Company's commercialization efforts, the magnitude of its research and product
development programs, the cost of additional plant and equipment for
manufacturing and the costs involved in protecting the Company's patents or
other intellectual property. Without consideration of any funds under new
government contracts or cooperative agreements, or from the sale of its
products, the Company believes that its available cash, cash equivalents and
investments, together with the net proceeds from the Offering, provide
sufficient funds to meet the Company's current operating plans and debt service
requirements for at least the next 12 months. If adequate funds are not
available on acceptable terms when needed, or if the Offering is not completed,
the Company may be required to delay, scale-back or eliminate the manufacturing,
marketing or sales of one or more of its products or research and development
programs. The Company will continue to evaluate its needs for capital and may
pursue additional sources of capital it considers appropriate based upon Company
requirements and market conditions.

19
<PAGE> 21

BUSINESS

GENERAL

Illinois Superconductor Corporation develops, manufactures and markets high
performance products for wireless telecommunications markets based on its
proprietary HTS materials, RF filter design and cryogenic technologies.
Superconductor materials, when cooled below a critical temperature, are able to
transmit an electrical current with either no or minimal loss of energy. Because
of this minimal energy loss, superconductors are attractive for a wide range of
commercial applications.

The wireless telecommunications industry has experienced significant growth
in recent years, which has led to increased competition among service providers,
rapid growth in base station installations and significant increases in RF
interference. By reducing the effects of this interference, the Company's RF
filter products enable cellular and PCS service providers to improve the quality
and increase the coverage, capacity and flexibility of their networks in an
economical manner. The Company's RF filter products, which are based on
superconductor technology, offer the following performance benefits:

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

- coverage gaps between base stations are reduced because the radio range
of these base stations is extended, thereby minimizing the number of base
stations required in a wireless network;

- network call carrying capacity is increased because channels which were
previously unusable due to adjacent band interference now become
available; and

INDUSTRY BACKGROUND

The wireless telecommunications industry has experienced significant
growth, both domestically and internationally, in recent years. This growth has
been attributable primarily to the widespread availability of wireless services,
continued decreases in the price of service and equipment, deregulation,
introduction of new technologies and increased RF spectrum availability. This
growth in the popularity of wireless services has led to significant increases
in competition among service providers, numbers of base stations and RF
interference.

20
<PAGE> 22

In addition to the growth of the wireless communications market, new
digital technologies are rapidly being introduced into the marketplace,
including Time Division Multiple Access, Global System for Mobile
Telecommunications ("GSM") and Code Division Multiple Access ("CDMA"). Although
analog technology represents the most widely deployed cellular protocol, it has
several limitations, including inconsistent service quality and inefficient use
of the radio spectrum. Digital cellular technologies are being implemented or
deployed in cellular networks to address some of the shortcomings of analog
technology. Digital technologies, however, do not fully resolve these
shortcomings and have their own limitations.

To date, cellular telephone has been the largest segment of the wireless
communications market. According to the CTIA, as of December 1996, there were
over 44 million cellular subscribers in the U.S. In addition, industry
publications indicate that the current worldwide market for wireless services is
in excess of 100 million subscribers. According to the CTIA, there are in excess
of 30,000 cellular base stations in the U.S. The Company believes that there are
currently in excess of 60,000 cellular base stations worldwide and that this
number is increasing rapidly as cellular service providers increase capacity to
meet subscriber growth. PCS represents the most significant new wireless service
currently being deployed in the U.S. PCS is based on digital technologies and is
designed to provide subscribers with additional choices of carriers, improved
signal quality, increased services and greater data transmission capabilities.
Industry sources estimate that there were approximately 6,000 PCS base stations
in service at the end of 1996 and forecast that over 100,000 PCS base stations
will be built in the U.S. over the next four years. PCS services are also being
implemented in other countries around the world.

The Company believes that competition for subscribers will continue to
intensify as the U.S. and foreign governments continue deregulating the
telecommunications industry, allocating more spectrum and allowing additional
service providers to enter markets with new services. Increased competition is
causing service providers to differentiate themselves on the basis of quality,
price and coverage. The intensity of competition is evidenced by an ongoing
movement of customers among carriers. This customer movement can reduce service
providers' revenues while increasing their marketing costs.

The rapid growth and increased competition experienced by the wireless
telecommunications industry have increased the difficulty of providing quality
wireless services. Wireless service providers face the challenge of providing
quality services in this environment which is increasingly characterized by RF
interference and congestion. In addition, the rapid rate of growth and community
concerns have affected where service providers locate their base stations. Base
stations provide the link between a wireless user and the telecommunications
network and are being positioned closer together, often in the same location,
which results in RF interference problems. There has also been an increase in
the use of portable handheld phones which transmit weaker signals than mobile,
or car-mounted, phones and therefore base stations do not receive their signals
as well as those from mobile phones. As a result, cellular networks which were
laid out based on mobile phone power levels have in many areas developed
coverage gaps which operators must fill in to satisfy their goals of providing
seamless coverage. Furthermore, in order to compete with these already broadly
deployed cellular networks, PCS service providers need to deploy coverage
quickly and with the lowest possible capital investment.

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

21
<PAGE> 23

THE COMPANY'S SOLUTION

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

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

- Increased Base Station Range. The Company's RF filter products extend the
uplink range (the distance from which a base station can receive a signal
from a portable unit) of cellular and PCS base stations. The Company
believes that cellular service providers will be able to use its filters
to fill coverage gaps without having to install additional base stations.
The Company also believes that PCS service providers can lower capital
costs by reducing the number of base stations required to build out new
wireless networks.

- Greater Network Capacity and Utilization. The Company's RF filter
products increase the capacity and utilization of a wireless base station.
In some cases, capacity increases because channels which were previously
unusable due to interference are recovered. In other cases, system
utilization increases result from reductions in the number of blocked and
dropped calls and increases in the ability of the system to permit weak
signals to be processed with acceptable call quality.

- Improved Flexibility of Base Station Location. The Company's RF filter
products allow wireless service providers to locate base stations in areas
where RF interference or other restrictions currently inhibit operations.
For example, the Company's RF filter products enable base stations to be
located in close proximity to a number of other RF signal transmitters.
Because of the performance characteristics of the Company's RF filter
products, base stations can also be located in less than optimal sites due
to zoning or other governmental restrictions.

STRATEGY

The Company's objective is to be the global leader in supplying high
performance RF filter products to the growing wireless telecommunications
market. Key elements of the Company's strategy include the following:

- Offering the Highest Performance Filter Systems in the Industry. The
Company's proprietary HTS thick-film technology permits the Company to
build filters with an extremely high level of adjacent band interference
rejection coupled with a very low level of desired signal loss. The
Company believes that product performance leadership is key to solving the
broadest range of wireless service provider needs.

- Pursuing Cellular and PCS Markets. Among the broad range of wireless
telecommunications services, the Company believes that the most important
markets for its products are cellular and PCS. The Company is developing
relationships with several major cellular operators through its marketing
efforts, completion of field trials and sales for retrofit applications.
The Company has also begun testing its products for the PCS market.

- Focusing on Key Service Provider Relationships. The Company currently
markets its high performance RF filter products primarily to large
domestic and international wireless service providers which deploy these
systems in their networks. The Company targets existing cellular service
providers for retrofit applications and new PCS wireless service providers
for build out applications. For retrofit customers, the Company's strategy
is to conduct field trials with service providers to confirm the benefits
of its products, gain service provider acceptance, and then expand its
sales effort to the service providers' regional operators. The Company
works closely with these key customers to shorten the sales cycle. The
Company also works closely with major PCS service providers to minimize
infrastructure costs during build out.

22
<PAGE> 24

- Developing OEM Customer Relationships. Wireless service providers
typically engage an OEM infrastructure equipment provider to install new
base stations. The Company is developing relationships with several major
wireless infrastructure OEMs to integrate the Company's RF filter products
into their product offerings and ensure that wireless service providers
can install the Company's products in their new base stations.

- Developing Manufacturing Expertise and Capacity. The Company has
developed a scaleable product manufacturing process based on its
thick-film HTS technology. Although the Company purchases certain
components which are built to its detailed specifications, it retains
control of the highest value-added portions of its manufacturing process,
such as producing the HTS resonator elements for its filters. The Company
believes that it has built, equipped and staffed a manufacturing facility
which has sufficient capacity to satisfy near term market demand for its
products.

- Building on Its Technology Leadership Position. To date, the Company has
devoted significant R&D resources to establish itself as a leading
provider of superconductor-based products for the wireless
telecommunications industry. The Company plans to build upon its strong
technological foundation to capture an increasing share of the wireless
equipment market.

PRODUCTS

The Company currently offers two product lines to address the multiple
needs of cellular and PCS service providers. The SpectrumMaster(TM) product line
is designed primarily to improve the RF performance of cellular and PCS systems
in high interference environments, including urban areas and near airports. The
RangeMaster(TM) product line combines the interference rejection advantages of a
SpectrumMaster(TM) filter with a cryogenically-cooled low-noise amplifier.
RangeMaster(TM) is designed to serve the range extension needs of rural,
suburban or small city cellular and PCS operators. All of the Company's products
are designed to be smoothly integrated into a service provider's base station
equipment. Service requirements for its SpectrumMaster(TM) and RangeMaster(TM)
products are minimal and can be performed by either a wireless service provider
or the Company's personnel. The Company's products are currently being sold to
U.S. cellular service providers, have been tested with a PCS service provider
and are being adapted and marketed to international cellular and PCS service
providers. See "Risk Factors -- Uncertain Market Acceptance of Superconducting
Telecommunications Products."

SpectrumMaster(TM). The Company currently markets three models of its
SpectrumMaster(TM) filter for the cellular market. These products address the
interference rejection needs of wireless service providers with U.S. A or B
frequency band allocations and meet all analog and digital protocol
specifications in the U.S. The Company shipped the first of these products in
the third quarter of 1996.

The Company has developed its first filter products specifically targeted
to satisfy the needs of PCS service providers to increase call quality by
reducing the RF signal noise in PCS systems due to interference and radio system
noise. These products are intended to address the high performance filter needs
of service providers with PCS frequency band allocations and will be compatible
with all PCS digital protocol specifications in the U.S.

RangeMaster(TM). The Company currently markets two models of its
RangeMaster(TM) receiver front end for the cellular market. These products
address the range extension needs of cellular service providers with U.S. A or B
frequency band allocations and meet all analog and digital protocol
specifications in the U.S. The RangeMaster(TM) products permit operators to fill
coverage gaps in their networks caused by insufficient RF uplink range without
adding new base stations. The first field trials using these products have been
completed, and the Company received its first orders for these products in the
first quarter of 1997.

The Company also offers RangeMaster(TM) products specifically designed to
enable PCS service providers to minimize their infrastructure costs and
deployment times by lowering the number of base stations needed to provide
continuous wireless coverage over a given area. These products address the need
for greater base station range of service providers with PCS frequency band
allocations and are compatible with all PCS digital protocol specifications in
the U.S. The Company completed prototype testing of its RangeMaster(TM) receiver

23
<PAGE> 25

front end products with a PCS service provider and expects to begin operational
field trials during the second quarter of 1997.

International Cellular Products Offerings. The Company is adapting its
SpectrumMaster(TM) and RangeMaster(TM) products for international cellular
markets to address their specific interference rejection and range extension
needs. For example, along with the adaptation of its products for various Asian
cellular and PCS markets, the Company is developing products for the Japanese
Personal Digital Cellular market that will address its unique growing
interference protection needs. In addition, the Company is developing products
for European cellular and PCS markets, including GSM filters in various
configurations.

SUPERCONDUCTIVITY AND TECHNOLOGY

Superconductor materials, when cooled below a critical temperature, are
able to transmit an electrical current with either no or minimal loss of energy.
Because of this extremely low energy loss, superconductors are attractive for a
wide range of commercial applications. In the case of direct currents,
superconductors are perfect conductors, with no energy loss at all. In the case
of alternating currents, including RF currents, some slight energy losses occur
due to the superconductor's interaction with changing magnetic fields. Until
1986, most known superconductors operated at temperatures very near absolute
zero (0 degrees K or -459 degrees Fahrenheit). The difficulty and expense
required to maintain these temperatures limited the commercial application of
these low temperature superconductors. In 1986, researchers discovered a class
of materials which become superconducting at temperatures greater than 77
degrees K (-320 degrees Fahrenheit). These high temperature superconductors can
be cooled with economical and reliable mechanical refrigerators.

The Company's products are based upon its proprietary and patented
technologies, which provide several strategic advantages in the development,
manufacturing and marketing of its products. The Company considers its
technology strengths to include its thick-film HTS fabrication technology, its
high performance RF filter design technology and its cryogenics technology. See
"Risk Factors -- Rapid Technological Change; Possible Pursuit of Other Market
Opportunities" and "-- Focus on Wireless Telecommunications Market; Current and
Future Competitive Technologies."

Thick-Film HTS Fabrication Technology. A number of HTS compounds have been
discovered in the last ten years. The most significant of these compounds to the
Company is YBCO. The Company focuses its product application efforts on this
compound for two main reasons. First, YBCO materials are readily manufacturable
using the Company's thick-film fabrication technology. Second, this material
offers superior RF electrical performance at commercial wireless frequencies.

The Company's exploitation of HTS materials is based on thick-film
fabrication technology. The Company's technology position in thick-film HTS
fabrication is based on owned and licensed patents, as well as extensive
know-how and trade secrets. In addition, the Company has acquired HTS thick-film
fabrication technology from other parties, primarily the University of
Birmingham (UK). The Company believes that its HTS thick-film fabrication
technology overcomes many of the drawbacks of using alternative HTS fabrication
technologies (thin-film or bulk) to fabricate superconducting RF filters for
cellular, PCS and other wireless markets.

The Company's HTS thick-film fabrication process uses conventional ceramic
deposition techniques. The simplicity of the HTS thick-film fabrication process
and its reliance on proven industrial production techniques is expected to
result in a reduction in processing and materials costs over those of thin-film
and bulk HTS fabrication processes. For example, the Company has developed a
patented technique to form superconducting thick-films on cost-effective
substrates.

The Company believes that its HTS thick-film fabrication technology
presents the most feasible way to fabricate economical RF devices in the
frequency range used in cellular, PCS and other wireless telecommunications
systems when compared to other HTS fabrication technologies. The Company
believes its HTS thick-film technology allows the design of higher performing RF
filters, handles greater levels of RF power and introduces lower levels of RF
distortion. The Company also believes its HTS thick-film technology permits
greater flexibility in RF filter design due to the ability to economically
manufacture the three-dimensional shapes required to produce very high levels of
RF performance. In addition, the Company believes that RF

24
<PAGE> 26

products produced by its HTS thick-film fabrication process cost less to
manufacture. The Company's HTS thick-film process, unlike HTS thin-film
processes which are based on semiconductor fabrication processes, do not require
clean room facilities and require lower capital investments for a production
facility.

RF Filter Design Technology. The technology and tools for designing,
constructing and testing conventional RF filters are well established. However,
with the introduction of HTS materials, a new set of customized design tools and
techniques has been developed by the Company to support filter product
development. These customized design tools, which include electrical circuit
design and analysis software, engineering design rules and filter assembly and
testing procedures, are important competitive advantages to the Company and are
protected mainly as trade secrets. They enable the rapid design and
implementation of the Company's RF filter products.

Cryogenics Technology. Since HTS materials have to be maintained at
cryogenic temperatures (below -300 degrees Fahrenheit) in order to function, the
Company must incorporate efficient and economical cryogenic technologies into
its products. The cryocooling systems used in the Company's products consist of
two parts: the cryostat or insulating vessel, which houses the superconducting
electronic components, and the cryogenic refrigerator, which maintains the
required temperatures within the cryostat package. The Company has created a
substantial base of technology in the design, assembly and operation of these
cryogenic systems. The Company works closely with the vendors of the
refrigerator systems to design smaller, lower cost and more reliable components.
In order for the Company to produce commercially successful products, it must
design into its products cryogenic systems which offer long life, low
maintenance, high reliability and low cost.

SALES AND MARKETING

To date, the Company's sales and marketing efforts have focused on major
cellular service providers in retrofit applications. The Company expects to
continue such efforts, as well as build on its experience to establish OEM
channels and a PCS market presence. The Company currently uses a direct sales
force to sell its products. The Company also makes selective use of consultants
and agents to facilitate its sales efforts. See "Risk Factors -- Limited
Experience in Manufacturing, Marketing and Sales," "-- Lengthy Sales Cycles" and
"-- Dependence on Limited Number of Customers."

Although the Company believes that with increasing market acceptance of its
products it will be able to shorten the sales cycle, in general, sales of the
Company's RF filter products to larger cellular service providers in retrofit
applications have consisted of the following three steps:

- Conduct an Operational Field Trial Program. The initial step in the
Company's sales process consists of coordination with, and active
involvement of, a service provider's central engineering organization and
an appropriate regional service area. The process includes identifying
candidate cell sites which suffer performance degradation due to high
levels of RF interference and range limitation, measuring cell site
performance before installation of the Company's RF filter products,
installing the Company's RF filter products for a number of weeks while
collecting cell site performance data, and then compiling and interpreting
the data to measure the benefits provided by the Company's RF filter
products.

- Obtain Corporate Engineering Approval for Installation in Service
Provider Sites. Upon review of the products' performance during the field
trials, the wireless service provider's engineering staff provides an
approval so that managers in regional service areas can purchase the
Company's RF filter products for commercial deployment in their networks.

- Sell Products Directly to Service Providers' Regional Service Areas. Once
approval is obtained from the corporate organization, the Company sells
its products directly to decision makers within a service provider's
regional service area.

25
<PAGE> 27

Commercial field trials of the Company's cellular RF filter products in
operational base stations began in November 1995. The Company has completed 14
trials in eight regional markets with five major cellular service providers.
During field trials, the Company's RF filter products have demonstrated several
benefits for the cellular market, including reduced dropped calls, improved
uplink range, improved call quality and increased capacity. Certain details of
field trial experience to date are contained in the following table:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
SERVICE PROVIDER CLASS CELL SITE ENVIRONMENT NUMBER OF TRIALS STATUS
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SPECTRUMMASTER(TM)
U.S. B-Band Cellular Urban High Interference 3 Completed
U.S. A-Band Cellular Urban High Interference 2 Completed
U.S. B-Band Cellular Adjacent to Airport 2 Completed
U.S. A-Band Cellular Adjacent to Airport 2 Completed
U.S. B-Band Cellular Antenna Farm 1 Completed
----------------------------------------------------------------------------------------------------

RANGEMASTER(TM)
U.S. B-Band Cellular Rural Range Extension 1 Completed
U.S. A-Band Cellular Rural Range Extension 2 Completed
U.S. B-Band Cellular Suburban Range Extension 2 One Completed/
One Underway
----------------------------------------------------------------------------------------------------
</TABLE>

Completed field trials have enabled the Company to begin shortening the
sales cycle with its customers. As the Company's products have become more
accepted, new customers are beginning to rely on the results of extensive
testing that other service providers have conducted. Because these field trial
results have demonstrated several benefits to the cellular market, some cellular
service provider customers have elected not to engage in their own trials, but
to purchase the units based on certain proven performance criteria.

The Company has also established marketing efforts to begin qualification
testing with OEM customers who serve as the major suppliers to cellular and PCS
service providers. As part of its field trials with cellular service providers,
the Company involves the staff of the OEM vendor that provided the cellular
infrastructure system to the service provider. This allows the Company to
demonstrate the benefits of its RF filter products to the OEM, to demonstrate
the products' compatibility with the OEM's equipment and to cause the OEM to
design the Company's products into their system product offerings. As a result,
the Company's cellular products are beginning to undergo evaluation at a major
OEM's test facilities.

The Company began tests of its RF filter products with a PCS service
provider in late 1996. The Company's marketing and sales personnel are working
directly with both PCS service providers and PCS OEMs to enhance the probability
of sales success in this market. The Company is undergoing technical discussions
with a PCS OEM regarding integrating the Company's RF filter products into its
PCS product line.

MANUFACTURING

The Company has focused its manufacturing efforts on maintaining control of
key technologies while avoiding the cost and complexities of vertical
integration. The Company's manufacturing operations consist primarily of the
manufacture of superconducting components from raw materials, and the assembly,
tuning, testing, quality verification and shipping of the Company's products.
All of these activities occur at the Company's manufacturing facility in Mt.
Prospect, Illinois, which began operations during the third quarter of 1996. The
Company believes that manufacturing of its RF filter products requires only
moderate capital investments and is scaleable. The Company also believes that
capacity can be rapidly expanded to meet growing demand without the need for
large, upfront capital investments. The Company purchases all of the components,
except for superconducting components, for its filter products from third party
suppliers. The Company believes it has access to adequate supplies of these
purchased components, most of which are produced to the Company's proprietary
designs and specifications. The Company is using its just-in-time

26
<PAGE> 28

manufacturing capability to maximize quality, insure flexibility, limit
management complexity and minimize inventory cost. See "Risk Factors -- Limited
Experience in Manufacturing, Marketing and Sales" and "-- Dependence on Limited
Sources of Supply."

RESEARCH AND DEVELOPMENT

The Company's research and development efforts to date have been focused on
developing and improving cellular and PCS RF filter products. These efforts have
resulted in products with improved interference rejection, reduced desired
signal loss, decreased size, lower cost and enhanced operational reliability.
The Company plans to devote significant resources in the future to continue to
develop and improve these products and expand its product lines. See "Risk
Factors -- Rapid Technological Change; Possible Pursuit of Other Market
Opportunities."

The Company has evaluated and will continue to evaluate other markets for
product opportunities using its HTS technology. The Company has conducted, and
plans to continue, R&D into the technology for superconducting fault current
limiters which would act in electrical power distribution applications much more
rapidly than mechanical circuit breakers. The majority of the Company's
development efforts devoted to this technology have to date been supported by
R&D contracts from the U.S. Government. The Company has also entered into a
cooperative development agreement with a major provider of electrical power
distribution products. The goal of this program is to determine if
superconducting fault current limiters have applications in commercial markets,
including electrical grid protection, industrial machinery protection, and
protection of electrical and electronic components such as high power radio
amplifier tubes and transistors.

A key component of the Company's R&D strategy is to develop relationships
with domestic and international research groups to leverage its internal R&D
investments. The Company believes it enjoys many benefits from these research
relationships including accelerated introduction of new technologies into its
product lines, early indications of new technology developments which could
enhance or compete with its products, and high value improvements in its current
key technologies.

Another part of the Company's R&D strategy has been to contract with and
receive funding under government contracts and cooperative agreements.
Government programs under which the Company has received R&D funding include the
Advanced Technology Program ("ATP") with the U.S. Department of Commerce and
Small Business Innovation Research ("SBIR") contracts with a number of defense
and non-defense government agencies. The Company has pursued, and will continue
to pursue, government contract opportunities in areas which are directly
applicable to its core technologies and offer attractive commercial
opportunities. The Company believes that it receives benefits from these
contracts through leveraging of its internal R&D investments, and also by
developing longer range, more speculative technology areas.

The Company's total R&D expenses during 1994, 1995 and 1996 were
approximately $2,582,000, $5,205,000 and $6,623,000, respectively, with total
R&D expenses from inception through December 31, 1996 of approximately
$16,195,000. R&D costs reimbursed under government contracts and cooperative
agreements during 1994, 1995 and 1996 were approximately $619,000, $650,000 and
$200,000, respectively, and approximately $1,980,000 from inception through
December 31, 1996.

STRATEGIC RELATIONSHIPS

In addition to its own research staff, the Company has from time to time
entered into research relationships to leverage its internal resources by
seeking assistance in solving specific problems and providing awareness of
technical trends that influence its business. As a result, the Company has
relationships with institutions which have significant superconductivity
research programs. The Company's initial research relationship was with Argonne,
which currently conducts one of the largest superconductivity R&D programs in
the U.S. In addition to a number of formal joint R&D projects that the Company
has had with Argonne in the past, it is currently engaged in a two year
Collaborative Research and Development Agreement with Argonne aimed at the
development of fault current limiters for utility applications.

27
<PAGE> 29

The Company has also entered into agreements with Lucent through which the
Company and Lucent have jointly designed and developed technology for use in
products for cellular, PCS and other wireless telecommunications applications.
The development work with Lucent was funded from March 1993 through March 1996
primarily through an ATP cooperative agreement awarded to the Company by the
U.S. Department of Commerce, which the Company used to offset R&D expenses. The
Company's ATP agreement with Lucent was completed in March 1996. The Company and
Lucent entered into a joint development agreement to continue joint research
efforts to further the development of superconducting filters for cellular and
PCS communications systems using CDMA technology.

The Company has also entered into a technology transfer agreement with the
University of Birmingham (UK), by which the Company purchased certain
intellectual property rights as well as design information relating to the
production of HTS thick-films. The Company is currently funding research at the
University of Birmingham's (UK) Interdisciplinary Research Centre over a
four-year period and has procured additional consulting services from
researchers involved in the program. The agreement covering these activities
ends in December 1998 and is subject to renewal.

The Company also participates in the Science and Technology Center for
Superconductivity, a superconductivity R&D center which is operated by the
University of Illinois under funding from the National Science Foundation, and
the Company is currently funding superconductor research activities at the
University of Illinois.

INTELLECTUAL PROPERTY AND PATENTS

The Company regards certain elements of its product design, fabrication
technology and manufacturing process as proprietary and protects its rights in
them through a combination of patents, trade secrets and nondisclosure
agreements. The Company also has obtained exclusive and non-exclusive licenses
for technology developed with or by its research partners, Argonne 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. See "Risk Factors --
Intellectual Property and Patents."

As of March 31, 1997, the Company has been issued six U.S. patents and has
filed and is actively pursuing applications for 23 other U.S. patents, and is
the licensee of 11 patents and patent applications held by others. Such patents
and patent applications relate to various aspects of the Company's
superconductor technology and to its current and proposed products. One of the
Company's patent applications has been filed jointly with Lucent and relates to
superconducting filters. Additional inventions are the subject of a group of
patent applications currently under preparation. Furthermore, the Company
expects to pursue foreign patent rights on certain of its inventions and
technologies critical to its products.

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

Through collaborative relationships with Argonne and Northwestern
University, the Company has licensed patents and patent applications issued or
filed in the U.S. and in certain foreign countries arising under or related to
such collaborative relationships. These licenses primarily relate to the
processing and composition of HTS materials, including the preferential
orientation of HTS materials and the processing of YBCO on a variety of metals,
as well as design technology for some of the Company's current and proposed
products. The Company's licenses from ARCH and Northwestern University continue
for the lives of the patent rights licensed thereby, subject to termination on
certain events, and permit the Company to retain rights to its patentable
improvements to the licensed technology. Certain of the Company's research has
been or is being funded in part by SBIR and other government contracts. Although
the U.S. Government has or

28
<PAGE> 30

will have certain rights in the technology developed with this funding, the
Company does not believe that these rights will have a material impact on the
Company's current RF filter products.

COMPETITION

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

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

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

The existing market for high temperature superconductor-based products is
very small and in the early stages of development. The Company believes that the
market for superconducting products will become intensely competitive,
especially if products with significant market potential are developed. In
addition, the Company believes the superconducting products market will continue
to be characterized by rapid technological change.

A number of large multinational companies are engaged in R&D programs that
could lead to the commercialization of superconducting products, including
products for the wireless telecommunications market. These include, among
others, E.I. DuPont de Nemours & Co., IBM, TRW Inc. and Westinghouse Electric
Corp. in the U.S. and Fujitsu Ltd., Hitachi Ltd., NEC Corp., Siemens A.G., and
Thomson S.A. in Japan and Europe. The Company also believes that a number of
smaller companies are engaged in various aspects of the development and
commercialization of superconducting electronics products, including products
for the cellular, PCS and other wireless telecommunications markets. These
include, among others, Conductus, Inc., Superconductor Technologies Inc., and
Superconducting Core Technologies, Inc.

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

GOVERNMENT REGULATIONS

Although the Company believes that its wireless telecommunications products
themselves are not licensed or governed by 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 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. See "Risk Factors -- Government Regulations."

29
<PAGE> 31

EMPLOYEES

As of February 28, 1997, the Company had a total of 76 employees, 23 of
whom hold advanced degrees. Of the employees, 19 are engaged in manufacturing
and production, 36 are engaged in research, development and engineering, and 21
are engaged in general management, marketing, finance and administration. The
Company also employs a number of consultants and independent contractors. The
Company considers its relations with its employees to be satisfactory. See "Risk
Factors -- Dependence on Key Personnel."

FACILITIES

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. This facility also 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. See "Risk Factors -- Business Interruptions and Dependence on Single U.S.
Facility."

LEGAL PROCEEDINGS

On June 5, 1996, Craig M. Siegler filed a complaint against the Company in
the Circuit Court of Cook County, Illinois, County Department, Chancery
Division. The complaint alleged that, in connection with the Company's private
placement of securities in November 1995, the Company breached and repudiated an
oral contract with Mr. Siegler for the issuance and sale by the Company to Mr.
Siegler of 370,370.37 shares of Common Stock, plus warrants (immediately
exercisable at $12.96 per share) to purchase an additional 370,370.37 shares of
Common Stock, for a total price of $4,000,000. The remedy sought by Mr. Siegler
was a sale to him of such securities on the terms of the November 1995 private
placement.

On August 16, 1996, the Company's motion to dismiss Mr. Siegler's complaint
was granted with leave to amend. On September 19, 1996, Mr. Siegler's motion for
reconsideration was denied. On October 9, 1996, Mr. Siegler filed his First
Amended Verified Complaint and Jury Demand, seeking a jury trial and money
damages equal to the difference between $8,800,000 (370,370.37 shares at $10.80
per share and 370,370.37 shares at $12.96 per share) and 740,740.74 multiplied
by the highest price at which the Common Stock traded on The Nasdaq Stock Market
between November 20, 1995 and the date of judgment. Mr. Siegler also preserved
his claim for specific performance for purposes of appeal. On November 1, 1996,
the case was transferred to the Circuit Court of Cook County, Illinois, County
Department, Law Division. The Company's Answer was filed on November 21, 1996
and discovery has commenced. The Company believes that the suit is without merit
and intends to continue to defend itself vigorously in this litigation. However,
if Mr. Siegler prevails in this litigation and is awarded damages in accordance
with the formula described above, such judgment would have a material adverse
effect on the Company's operating results and financial condition.

30
<PAGE> 32

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company, their ages as of
February 28, 1997 and their positions in the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ora E. Smith(1)........................... 49 President, Chief Executive Officer and Director
Edward W. Laves, Ph.D..................... 49 Executive Vice President and Chief Operating
Officer
Stephen G. Wasko.......................... 37 Vice President, Chief Financial Officer, Treasurer
and Secretary
James D. Hodge, Ph.D...................... 43 Vice President and Chief Scientist
Dennis M. Craig........................... 38 Vice President, Manufacturing
James C. DeBelina......................... 45 Vice President, Sales and Marketing
Benjamin Golant........................... 46 Vice President, Product Development
James Pajcic.............................. 45 Vice President, Human Resources
Steven Lazarus(1)(2)...................... 65 Chairman of the Board of Directors
Leonard A. Batterson(1)(2)................ 52 Director
Michael J. Friduss(3)..................... 54 Director
Peter S. Fuss(3).......................... 63 Director
Tom L. Powers(2).......................... 60 Director
Paul G. Yovovich(1)(2).................... 43 Director
</TABLE>

- -------------------------
(1) Member of Executive Committee

(2) Member of Compensation Committee

(3) Member of Audit Committee

Mr. Smith has served as the President and Chief Executive Officer and a
director of the Company since October 1990. From 1989 until joining the Company,
Mr. Smith was the Vice President and Chief Marketing Officer of Conductus, Inc.,
a superconducting electronics company. From 1979 to 1989, Mr. Smith served in a
number of executive positions with Rockwell International Corporation, including
Corporate Director of External Technology Development. Between 1984 and 1985,
Mr. Smith served as the Industrial Research Institute Fellow in The White House
Science Office. Mr. Smith holds S.B. and S.M. degrees in Mechanical Engineering
from the Massachusetts Institute of Technology and a J.D. degree from Harvard
Law School.

Dr. Laves joined the Company in December 1994 as its Executive Vice
President and Chief Operating Officer. Dr. Laves is responsible for the
Company's manufacturing functions, the continuing development of its high
temperature superconducting products for the wireless telecommunications
markets, other corporate research and development activities and the Company's
marketing and sales activities. From 1985 until joining the Company, Dr. Laves
was at Motorola, Inc. where he was Director of Wireless Local Loop Products.
From 1991 to 1993, he served as General Manager of the Cellular Infrastructure
Division of Nippon Motorola, Ltd. From 1988 to 1990, Dr. Laves managed the
development and introduction to the market of Motorola, Inc.'s CoveragePLUS wide
area Special Mobile Radio System (SMRS). Dr. Laves holds Ph.D. and M.B.A.
degrees from the University of Chicago, and received his B.A. degree from
Cornell University.

Mr. Wasko joined the Company in November 1990, and has served as Vice
President and Treasurer since 1992. He was elected Secretary of the Company in
April 1993 and Chief Financial Officer in August 1993. Mr. Wasko is responsible
for the Company's financial and administrative operations. Prior to joining the
Company's management team, he was Manager of Commercial Development in the Space
Station Division of McDonnell Douglas Corporation. Additionally, Mr. Wasko
served as Program Manager for Technology Development on the Rockwell
International Corporation National Aerospace Plane Program and managed external
technology development activities for Rockwell from 1986 to 1988. Mr. Wasko
holds a B.S. degree in

31
<PAGE> 33

aerospace engineering from the University of Michigan, an M.S. in the same field
from the University of Southern California and an M.B.A. degree from the Harvard
Graduate School of Business Administration.

Dr. Hodge joined the Company in December 1990 as its Vice President,
Engineering and Chief Technical Officer. He has served as Vice President and
Chief Scientist since June 1995. Dr. Hodge possesses experience in the synthesis
and processing of a wide variety of ceramic materials. Additionally, he has
expertise in commercial application of materials in areas such as electronics
packaging, high intensity discharge lamps and certain fast-ion conductors. Dr.
Hodge joined the Company after serving from 1988 to 1990 as Vice President of
Engineering at CPS Superconductor Corporation, a superconducting electronics
company, where he was Principal Investigator on CPS Superconductor Corporation's
contract to produce high strength high temperature superconducting wire with the
U.S. Government. Dr. Hodge was also a member of the technical staff at General
Electric Company's Corporate Research and Development Center. He holds a B.S.
degree from the University of Utah and a Ph.D. from the Massachusetts Institute
of Technology, both in Materials Science. He currently holds nine patents and is
the author of thirty papers in refereed journals.

Mr. Craig joined the Company in December 1996 as Vice President,
Manufacturing. Before joining the Company, Mr. Craig worked for eight years at
Motorola, Inc., where he most recently served as manufacturing operations
manager in the Component Products Group. During his career at Motorola, Inc.,
his responsibilities included production management, new product implementation,
cost reduction and capacity analysis and planning. Prior to joining Motorola,
Inc., Mr. Craig served as a manufacturing process development engineer at
Northrop Corporation in its defense systems division. He received an M.B.A.
degree from Lake Forest Graduate School of Management and a B.S. degree in
mechanical engineering from the University of Illinois at Chicago.

Mr. DeBelina joined the Company in October 1995 as Vice President, Sales
and Marketing. Before joining the Company, Mr. DeBelina was North American Sales
Director for DataTAC(R) network products for Motorola, Inc. From 1985 until
joining the Company, Mr. DeBelina held several other sales and marketing
management positions at Motorola, Inc. Previously, Mr. DeBelina served both as
Product Manager and Planning Manager for FMC Corporation. He holds a B.S. degree
in math and computer science from Illinois Institute of Technology and an M.B.A.
degree from the Harvard Graduate School of Business Administration.

Mr. Golant joined the Company in January 1996 as Vice President, Product
Development. From 1989 until joining the Company, Mr. Golant was at E.F. Johnson
Company where he served as Director of Engineering, Chief Engineer and Director
of Product Marketing. His responsibilities included managing the development of
mobile, portable and base station equipment for wireless land mobile radio
systems. From 1976 to 1989, Mr. Golant was employed by Motorola, Inc.'s
communications sector, leading teams to develop and commercialize a variety of
radio component and system products. He received a B.S. degree in electrical
engineering from Lehigh University. He holds one patent in the area of RF filter
technology.

Mr. Pajcic joined the Company in January 1995 as Human Resource Director.
He has served as Vice President, Human Resources since January 1997. Before
joining the Company, Mr. Pajcic spent 15 years at Morton International where he
most recently served as Director Employment and Human Resource Development on
the corporate staff. Prior to his employment with Morton International, Mr.
Pajcic held Human Resource positions at General Foods Corporation and American
Hospital Supply Corporation. He holds a B.S. degree in psychology from
Northwestern University and a Masters Degree in Management from Northwestern
University's Kellogg School of Management, with emphases in Industrial
Relations, Organizational Behavior and Finance.

Mr. Lazarus has served as a director of the Company since January 1992 and
as Chairman of the Board since August 1993. He is a Managing General Partner of
Arch Venture Fund L.P. and served previously as President and Chief Executive
Officer of ARCH, an affiliate of the University of Chicago. The Company was
founded by ARCH in 1989. As President of ARCH, he also served as Associate Dean
of the University of Chicago's Graduate School of Business. Before joining ARCH
in 1987, he was the Group Vice President of the Health Care Services Group of
Baxter Travenol Laboratories, Inc., the predecessor of Baxter Healthcare
Corporation. During his 13 years at Baxter, he was also Senior Vice President
for Technology, with

32
<PAGE> 34

responsibilities for manufacturing, materials management, R&D and engineering.
Mr. Lazarus is a director of Amgen Corporation and Primark Corporation, both
public companies.

Mr. Batterson has served as a director of the Company since February 1990.
He is the Chairman and Chief Executive Officer of Batterson Venture Partners,
L.L.C., a venture capital management company founded in 1995. Since 1987, he has
been the Managing General Partner of Batterson Johnson & Wang Venture Partners,
a partnership formed with Donald Johnson and Sona Wang. The Batterson Johnson &
Wang L.P. fund, a stockholder of the Company, invests in the following
industries: publishing, communications, telecommunications, medical,
biotechnology, materials, retailing, consumer products, manufacturing, computers
and software. As Managing General Partner, Mr. Batterson manages its daily
operations, investor relationships, reporting and investment strategy. Prior to
co-founding Batterson Johnson & Wang Venture Partners, Mr. Batterson was
director of the Venture Capital Division of the Allstate Insurance Companies. He
is Chairman of the Board of LinksCorp, Inc., a golf course management company,
as well as Nanophase Technologies Corporation, a material science company. Mr.
Batterson holds a B.A. degree from Washington University (St. Louis), a J.D.
degree from Washington University Law School and an M.B.A. degree from the
Harvard Graduate School of Business Administration.

Mr. Friduss has served as a director of the Company since October 1996. Mr.
Friduss is president of MJ Friduss & Associates, telecommunications consultants
to some of the largest carriers and suppliers in the telecommunications
industry. From 1992 until 1993, Mr. Friduss served as vice president of customer
service and information technology for Ameritech Corporation. From 1989 until
joining Ameritech Corporation, he served as vice president of operations at
Michigan Bell. In 1991, he founded the Telecommunications Industry Benchmarking
Consortium, a collaboration of local, long distance and alternate access
companies, whose mission is to identify and replicate the communications
industry's best practices. Mr. Friduss received a B.S. degree in industrial
engineering from Illinois Institute of Technology and a master's degree in
management from Northwestern University. He currently serves on the Board of
Trustees of Harris Associates Investment Trust (The Oakmark Funds) and is the
editor of The Friduss Report, a newsletter focused on the purchasing practices
of the Regional Bell Operating Companies.

Mr. Fuss has served as a director of the Company since June 1995. Mr. Fuss
is a management consultant, primarily for Tellabs, Inc. ("Tellabs") as a member
of the International Executive Committee of Tellabs International, Inc. Prior to
his retirement from Tellabs in 1993, Mr. Fuss was President of Tellabs
International, Inc., which he founded in 1987 as a subsidiary. Tellabs
International, Inc. is responsible for all Tellabs operations outside of North
America. From 1986 to 1987, he was Senior Vice President, Technical Marketing
and Business Development of Tellabs. Mr. Fuss joined Tellabs as Vice President,
Engineering in 1979. From 1977 to 1979, he was Director of R&D at Teletype
Corporation and from 1958 to 1977 he held engineering and management positions
at AT&T Bell Laboratories. Mr. Fuss holds a B.S. degree in electrical
engineering from the University of Michigan and an M.S.E.E. from New York
University. He served two years as an officer in the U.S. Air Force. He holds
ten patents, primarily in the area of digital signal processing. He is also a
director of Clear Communications, Inc., NetEdge Systems, Inc., Process Control
Technologies, Inc. and Batterson Venture Partners, LLC.

Mr. Powers has served as a director of the Company since October 1996. Mr.
Powers is a professor and associate director of the Advanced Manufacturing
Center at New Mexico State University in Las Cruces, New Mexico, as well as a
consultant to a number of companies. From 1989 to 1991, he was president of the
cellular systems business unit of AT&T Network Systems Group, now known as
Lucent. Under his leadership, the business unit became the market leader in
wireless infrastructure equipment in the U.S., opened markets internationally
and introduced the industry's first digital cellular system. In 1983, he became
vice president of AT&T and Philips Telecommunications B.V., a joint venture
located in the Netherlands. He joined AT&T in 1958 as a member of the technical
staff of Bell Laboratories and went on to management positions in consumer
products, customer switching systems engineering and network planning. Mr.
Powers holds a B.S. degree in electrical engineering with high honors from the
University of Arkansas and a master's degree in electrical engineering from New
York University. He also is a graduate of the Wharton Advanced Marketing Program
and the Stanford Executive Program.

33
<PAGE> 35

Mr. Yovovich has served as a director of the Company since its initial
public offering in October 1993. He is a private investor and corporate
director. From 1993 until May 1996 he was President of Advance Ross Corporation,
a public company, which through a merger in January 1996 became a wholly-owned
subsidiary of CUC International, Inc., a public company. From 1982 through 1992,
Mr. Yovovich held a number of executive positions at Centel Corporation, a major
national telecommunications company, most recently serving as President of its
Central Telephone Company subsidiary. He is also a director of U.S. Robotics
Corporation, Comarco, Inc. and APAC TeleServices, Inc., each a public company.
He holds B.A. and M.B.A. degrees from the University of Chicago and is a C.P.A.
Mr. Yovovich has advised the Company that he will not stand for re-election when
his term expires at the Company's 1997 annual meeting of stockholders.

34
<PAGE> 36

PRINCIPAL STOCKHOLDERS

The following table sets forth, as of February 28, 1997, certain
information with respect to the beneficial ownership of Common Stock by (i) each
person known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each Company director, (iii) the chief executive
officer and each of the four other most highly compensated (based on combined
salary and bonus) executive officers of the Company whose total salary and bonus
exceeded $100,000 during 1996 and (iv) all Company executive officers and
directors as a group.

<TABLE>
<CAPTION>
PERCENT OF SHARES
NUMBER OF BENEFICIALLY OWNED
SHARES -------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OWNED(1) OFFERING OFFERING
---------------- ------------ -------- --------
<S> <C> <C> <C>
Batterson Johnson & Wang L.P.(2)............................ 598,018 11.4% 9.6%
Sheldon Drobny(3)........................................... 426,313 8.3 7.0
Aaron Fischer(4)............................................ 376,302 7.3 6.1
State of Illinois(5)........................................ 360,944 6.7 5.7
Stewart Shiman(6)........................................... 335,485 6.6 5.5
Ora E. Smith(7)............................................. 115,952 2.3 1.9
James D. Hodge, Ph.D.(8).................................... 52,249 1.0 *
Stephen G. Wasko(9)......................................... 29,202 * *
Edward W. Laves, Ph.D.(9)................................... 25,417 * *
Paul G. Yovovich(10)........................................ 13,000 * *
James C. DeBelina(11)....................................... 8,117 * *
Peter S. Fuss(9)............................................ 3,333 * *
Tom L. Powers............................................... 2,400 * *
Leonard A. Batterson(12).................................... 2,000 * *
Steven Lazarus(9)........................................... 2,000 * *
Michael J. Friduss.......................................... 1,000 * *
All executive officers and directors as a group (14
persons)(13).............................................. 266,477 5.1 4.3
</TABLE>

- -------------------------
* Denotes beneficial ownership less than one percent.

(1) Unless otherwise indicated below, the persons in the above table have sole
voting and investment power with respect to all shares shown as
beneficially owned by them.

(2) Includes 221,515 shares issuable upon exercise of warrants presently
exercisable. The address of the stockholder is 303 West Madison Street,
Chicago, Illinois 60606.

(3) Includes 84,603 shares issuable upon exercise of warrants presently
exercisable. Includes 73,402 shares held by Drobny/Fischer General
Partnership ("DFGP"). Mr. Drobny is a general partner of DFGP and in such
capacity he shares voting and investment power with respect to shares held
by DFGP and therefore may be deemed the beneficial owner of the shares of
Common Stock directly held by DFGP. Includes 7,688 shares held by Paradigm
Venture Investors, L.L.C. ("Paradigm"). Mr. Drobny is the managing director
of Paradigm and in such capacity he shares voting and investment power with
respect to shares held by Paradigm and therefore may be deemed the
beneficial owner of the shares of Common Stock directly held by Paradigm.
The address of the stockholder is 95 Revere Drive, Suite A, Northbrook,
Illinois 60062.

(4) Includes 117,149 shares issuable upon exercise of warrants presently
exercisable. Includes 73,402 shares held by DFGP. Mr. Fischer is a general
partner of DFGP and in such capacity he shares voting and investment power
with respect to shares held by DFGP and therefore may be deemed the
beneficial owner of the shares of Common Stock directly held by DFGP.
Includes 7,688 shares held by Paradigm. Mr. Fischer shares voting and
investment power with respect to shares held by Paradigm and therefore may
be deemed the beneficial owner of the shares of Common Stock directly held
by Paradigm. The address of the stockholder is 95 Revere Drive, Suite A,
Northbrook, Illinois 60062.

35
<PAGE> 37

(5) Includes 69,080 shares issuable upon exercise of warrants presently
exercisable. The Company has been advised by the Illinois Department of
Commerce and Community Affairs ("DCCA") that because of Illinois state law
and regulations, DCCA cannot exercise its voting rights with respect to the
shares of common stock it holds. As a result, pursuant to a written proxy
dated June 8, 1994, DCCA has given its irrevocable proxy for all of the
voting securities of the Company it now or hereafter owns to the individual
who is the chief executive officer of the Company. The address of the
stockholder is Illinois Department of Commerce and Community Affairs, 100
West Randolph, Chicago, Illinois 60601.

(6) Includes 93,642 shares issuable upon exercise of warrants presently
exercisable. Includes 7,688 shares held by Paradigm. Mr. Shiman shares
voting and investment power with respect to shares held by Paradigm and
therefore may be deemed the beneficial owner of the shares of Common Stock
directly held by Paradigm. The address of the stockholder is 95 Revere
Drive, Suite A, Northbrook, Illinois 60062.

(7) Includes 46,979 shares issuable upon exercise of options exercisable
currently or within 60 days of February 28, 1997. Excludes 291,864 shares
held by the State of Illinois and 69,080 shares issuable upon exercise of
warrants presently exercisable and held by the State of Illinois. Mr.
Smith, as the chief executive officer of the Company, has an irrevocable
proxy to vote these shares. Therefore, Mr. Smith may be deemed the
beneficial owner of the shares of Common Stock directly owned by the State
of Illinois. Mr. Smith disclaims this beneficial ownership.

(8) Includes 52,224 shares issuable upon exercise of options exercisable
currently or within 60 days of February 28, 1997.

(9) Represents shares issuable upon exercise of options exercisable currently
or within 60 days of February 28, 1997.

(10) Includes 12,000 shares issuable upon exercise of options exercisable
currently or within 60 days of February 28, 1997.

(11) Includes 7,917 shares issuable upon exercise of options exercisable
currently or within 60 days of February 28, 1997.

(12) Represents shares issuable upon exercise of options exercisable currently
or within 60 days of February 28, 1997. Excludes 376,503 shares held by
Batterson Johnson & Wang L.P. ("BJ&W") and 221,515 shares issuable upon
exercise of warrants presently exercisable and held by BJ&W. Mr. Batterson
is the managing general partner of BJ&W and in such capacity he shares
voting and investment power with respect to shares held by BJ&W and
therefore may be deemed the beneficial owner of the shares of Common Stock
directly owned by BJ&W. Mr. Batterson disclaims this beneficial ownership.

(13) Includes 192,529 shares issuable upon exercise of options exercisable
currently or within 60 days of February 28, 1997.

36
<PAGE> 38

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 15,000,000 shares
of Common Stock, $.001 par value per share, and 100,000 shares of Preferred
Stock, $.001 par value per share.

COMMON STOCK

Of the 15,000,000 shares of Common Stock authorized, 5,023,352 shares were
outstanding as of February 28, 1997, and 6,023,352 shares will be outstanding
upon consummation of the Offering, assuming completion of the sale of 1,000,000
shares of Common Stock. Subject to the rights of holders of Preferred Stock, the
holders of outstanding shares of Common Stock are entitled to share ratably in
dividends declared out of assets legally available therefor at such time and in
such amounts as the Board of Directors may from time to time lawfully determine.
Each holder of Common Stock is entitled to one vote for each share held. Subject
to the rights of holders of any outstanding Preferred Stock, upon liquidation,
dissolution or winding up of the Company, any assets legally available for
distribution to stockholders as such are to be distributed ratably among the
holders of the Common Stock at that time outstanding. All shares of Common Stock
currently outstanding are and all shares of Common Stock offered hereby, when
duly issued and paid for will be, fully paid and nonassessable, not subject to
redemption and assessment and without conversion, preemptive or other rights to
subscribe for or purchase any proportionate part of any new or additional issues
of any class or of securities convertible into stock of any class.

Pursuant to the adoption of the Rights Plan by the Board of Directors, the
holders of Common Stock, including the shares offered hereby, have certain
rights to purchase Series A Junior Participating Preferred Stock or Common Stock
under certain circumstances. See "-- Preferred Stock" and "-- Stockholder Rights
Plan."

PREFERRED STOCK

The Company has an authorized class of undesignated Preferred Stock
consisting of 100,000 shares. Preferred Stock may be issued in series from time
to time with such designations, relative rights, priorities, preferences,
qualifications, limitations and restrictions thereof, to the extent that such
are not fixed in the Company's Certificate of Incorporation, as the Board of
Directors determines. The rights, preferences, limitations and restrictions of
different series of Preferred Stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions and other matters. The Board of Directors
may authorize the issuance of Preferred Stock which ranks senior to the Common
Stock with respect to the payment of dividends and the distribution of assets on
liquidation. In addition, the Board of Directors is authorized to fix the
limitations and restrictions, if any, upon the payment of dividends on Common
Stock to be effective while any shares of Preferred Stock are outstanding. The
Board of Directors, without stockholder approval, can issue Preferred Stock with
voting and conversion rights which could adversely affect the voting power of
the holders of Common Stock. The issuance of Preferred Stock may have the effect
of delaying, deferring or preventing a change in control of the Company. Upon
consummation of the Offering, no shares of Preferred Stock will be outstanding.

In connection with the adoption of the Rights Plan, the Board of Directors
has created one series of Preferred Stock, consisting of 10,000 shares of Series
A Junior Participating Preferred Stock (the "Series A Preferred"). No shares of
Series A Preferred have been issued as of the date of this Registration
Statement. Each share of the Series A Preferred, when and if issued, would
entitle the holder thereof to receive dividends equal to 1,000 times the
dividends per share declared with respect to the Common Stock. Holders of the
Series A Preferred would be entitled to exercise 1,000 votes per share on all
matters submitted to a vote of stockholders and, except as otherwise required by
law, would vote together with the holders of Common Stock as a single class. 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 Common Stock.
In general, each share of the Series A Preferred is intended to have a value and
voting rights equal to 1,000 shares of Common Stock, and appropriate
anti-dilutive adjustments will be made in accordance with the terms of such
Series A Preferred in the event of certain changes in Common Stock. Except as
contemplated in connection with the Rights Plan

37
<PAGE> 39

described below, the Company has no present plans to issue any of the Preferred
Stock. See "-- Stockholder Rights Plan."

WARRANTS

The Company has issued and outstanding warrants to purchase a total of
670,225 shares of Common Stock, including warrants to purchase 61,313 shares of
Common Stock exercisable at $1.47 per share, warrants to purchase 35,153 shares
of Common Stock exercisable at $2.29 per share, warrants to purchase 35,153
shares of Common Stock exercisable at $2.75 per share, warrants to purchase
47,037 shares of Common Stock exercisable at $3.21 per share, warrants to
purchase 401,569 shares of Common Stock exercisable at $9.56 per share and
warrants to purchase 90,000 shares of Common Stock exercisable at $13.50 per
share. The warrants expire on various dates between October 1998 and January
2002. The number of shares issuable upon exercise of the warrants is subject to
proportionate adjustment in the event of stock splits, stock dividends and
similar events.

REGISTRATION RIGHTS

Pursuant to registration rights held by certain holders of Common Stock and
Common Stock underlying currently exercisable warrants (collectively, the
"Registrable Securities"), such holders may require the Company to register the
Registrable Securities under the Securities Act. In addition, whenever the
Company proposes to register any of its securities under the Securities Act, the
holders of Registrable Securities are entitled, subject to certain restrictions,
to include their Registrable Securities in such registration. In May 1996, all
of the approximately 1,900,000 Registrable Securities were registered for resale
in the public market pursuant to a registration statement that is currently
effective. These registration rights, however, terminate with respect to any
Registrable Securities when such Registrable Securities have been registered
under the Securities Act and sold by the holder in accordance with such
registration or sold to the public pursuant to Rule 144 of the Securities Act.
The Company is unable to estimate the number of Registrable Securities which
have been sold in accordance with the currently effective registration statement
or pursuant to Rule 144.

DELAWARE LAW AND CERTAIN CHARTER PROVISIONS

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, the statute prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.

The Company's Certificate of Incorporation and Bylaws contain a number of
provisions relating to corporate governance and to the rights of stockholders.
Certain of these provisions 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. These provisions include (i) a requirement that stockholder
action may be taken only at stockholder meetings; (ii) the authority of the
Board of Directors to issue series of Preferred Stock with such voting rights
and other powers as the Board of Directors may determine; (iii) notice
requirements in the Bylaws relating to nominations to the Board of Directors and
to the raising of business matters at stockholders meetings; and (iv) the
classification of the Board of Directors into three classes, each serving for
staggered three year terms.

STOCKHOLDER RIGHTS PLAN

In February 1996, the Board of Directors of the Company adopted the Rights
Plan. 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 (the "Record Date")
and, for

38
<PAGE> 40

so long as the Series A Rights are associated with the Common Stock, each new
share of Common Stock issued by the Company (including the shares offered
hereby) will include one Series A Right.

Each Series A Right will entitle its holder to purchase one-thousandth of a
share of Series A Preferred of the Company for $200 (subject to adjustment). The
Series A Rights are not exercisable until the earlier of (i) ten days after any
person or group becomes the beneficial owner of 15% or more of the 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 Common Stock.

If any person or group acquires 15% or more of the Common Stock outstanding
(the "Shares Acquisition Date"), each holder of a Series A Right (except the
acquiring party) has the right to receive, upon exercise, (i) shares of Common
Stock of the Company having a market value of 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 both (i) one share of Common
Stock (or one-thousandth of a share of preferred stock) and (ii) one Series B
Right, for each Series A Right (other than Series A Rights held by an acquiring
party). If, after the Series A Rights become exercisable, the Company is
involved in a merger or other business combination, or if the Company sells or
transfers more than 50% of its assets or earning power, or if an acquiring party
engages in certain "self-dealing" transactions with the Company, each Series A
Right and Series B Right then outstanding (other than Rights held by an
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 the Series A Rights for $.01 per Series A
Right (the "Redemption Price") prior to the Shares Acquisition Date. The Series
B Rights, once issued, are not redeemable. The Rights expire on February 9,
2006. See "Risk Factors -- Anti-Takeover Provisions."

The Rights have certain anti-takeover effects. The Rights should not
interfere with any merger or business combination approved by the Board of
Directors since the Series A Rights may be redeemed by the Company at the
Redemption Price prior to the time that a person or group has acquired
beneficial ownership of 15% or more of the Common Stock. However, by causing
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Board of Directors, the Rights may interfere with
certain acquisitions, including acquisitions that may offer a premium over
market price to some or all of the Company's stockholders. The Rights are not
intended to prevent an acquisition of the Company on terms that are favorable
and fair to all stockholders.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is LaSalle National
Trust, Chicago, Illinois.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have 6,023,352 shares of
Common Stock outstanding, assuming no exercise of options or warrants after
February 28, 1997. An aggregate of 5,954,379 of these shares of Common Stock,
including the 1,000,000 shares of Common Stock offered hereby, will be either
(i) freely tradable without restriction or further registration under the
Securities Act, unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 of the Securities Act, which shares will be subject to the
resale limitations of Rule 144, or (ii) eligible for resale in the public
market, pursuant to a currently effective registration statement. In addition,
670,225 shares underlying currently exercisable warrants will also be eligible
for resale in the public market upon exercise of the warrants, pursuant to such
registration statement. The remaining 68,973 shares outstanding upon completion
of the Offering will be Restricted Shares. The availability or sales of such
Restricted Shares in the public market, could adversely affect the market price
of the Common Stock.

39
<PAGE> 41

All directors and executive officers, holding an aggregate of 73,948 shares
and 192,529 shares issuable upon exercise of options exercisable currently or
within 60 days of February 28, 1997, and certain other stockholders of the
Company have agreed with the Underwriters that, for a period of 90 days after
the date of this Prospectus, they will not directly or indirectly sell or
otherwise transfer their shares of Common Stock, now owned by such holders or
with respect to which they have the power of disposition, otherwise than with
the prior written consent of Gruntal & Co., L.L.C. As a result of these
contractual restrictions, notwithstanding possible earlier eligibility for sale,
shares subject to lock-up agreements will not be salable until the agreements
expire. See "Underwriting."

Taking into account the lock-up agreements, all 68,973 additional
Restricted Shares will be eligible for public sale beginning 90 days after the
effective date of the registration statement, subject to certain volume
limitations.

Beginning 90 days after the effective date of the registration statement,
certain shares issued or issuable upon exercise of options granted by the
Company prior to the effective date of the registration statement will also be
eligible for sale in the public market pursuant to Rule 701 under the Securities
Act, subject to pre-existing lockup agreements. In general, Rule 701 permits
resales of shares issued pursuant to certain compensatory benefit plans and
contracts commencing 90 days after the issuer becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended, in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirements, contained in Rule 144.

In general, under Rule 144 as in effect after April 29, 1997, a person (or
persons whose shares are aggregated) who has beneficially owned Restricted
Shares for at least one year, including persons who may be deemed "affiliates"
of the Company, would be entitled to sell within any three-month period a number
of shares that does not exceed the greater of one percent of the number of
shares of Common Stock then outstanding or the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the filing of a Form
144 with respect to such sale. Sales under Rule 144 are also subject to certain
manner of sale provisions and notice requirements and to the availability of
current public information about the Company. In addition, a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned for at least two years the
shares proposed to be sold, would be entitled to sell such shares under Rule
144(k) without regard to the requirements described above. The Company is unable
to estimate accurately the number of Restricted Shares that will be sold under
Rule 144 since this will depend in part on the market price for the Common
Stock, the personal circumstances of the seller and other factors.

40
<PAGE> 42

UNDERWRITING

The underwriters named below (the "Underwriters"), for whom Gruntal & Co.,
L.L.C. is acting as Representative, have severally agreed, subject to the terms
and conditions contained in the Underwriting Agreement, to purchase from the
Company the number of shares of Common Stock indicated below opposite their
respective names at the public offering price less the underwriting discount set
forth on the cover page of this Prospectus. The Underwriting Agreement provides
that the obligations of the Underwriters are subject to certain conditions
precedent, and that the Underwriters are committed to purchase all of such
shares if any are purchased.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Gruntal & Co., L.L.C........................................

---------
Total..................................................... 1,000,000
=========
</TABLE>

The Underwriters have advised the Company that they propose initially to
offer the Common Stock to the public on the terms set forth on the cover page of
this Prospectus. The Underwriters may allow selected dealers a concession of not
more than $ per share; and the Underwriters may allow, and such dealers
may reallow, a concession of not more than $ per share to certain other
dealers. After the public offering, the offering price and other selling terms
may be changed by the Underwriters. The Common Stock is offered subject to
receipt and acceptance by the Underwriters, and to certain other conditions,
including the right to reject orders in whole or in part.

The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 150,000
additional shares of Common Stock to cover over-allotments, if any, at the
public offering price less the underwriting discount set forth on the cover page
of this Prospectus. To the extent that this option is exercised, the
Underwriters will be committed, subject to certain conditions, to purchase such
additional shares in approximately the same proportion as set forth in the above
table. The Underwriters may purchase such shares only to cover over-allotments
made in connection with the Offering.

The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.

All directors and executive officers and certain other stockholders of the
Company have agreed that they will not, without the prior written consent of
Gruntal & Co., L.L.C., directly or indirectly, sell, offer, contract or grant
any option to sell (including without limitation any short sale) pledge,
transfer, establish an open "put equivalent position" within the meaning of Rule
16a-1(h) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or otherwise dispose of any shares of Common Stock, options or warrants
to acquire shares of Common Stock, or securities exchangeable or exercisable for
or convertible into shares of Common Stock currently owned either of record or
beneficially (as defined in Rule 13d-3 under the Exchange Act) by such party, or
publicly announce such party's intention to do any of the foregoing, for a
period commencing on the date hereof and continuing to a date 90 days after the
date of this Prospectus. Gruntal & Co., L.L.C. may, in its sole discretion, at
any time without prior notice, release all or any portion of the

41
<PAGE> 43

securities held by the Company's directors and executive officers from the
aforementioned restrictions. The Company has agreed in the Underwriting
Agreement that, without the prior written consent of Gruntal & Co., L.L.C., for
a period of 90 days after the date of this Prospectus, the Company shall not
issue, sell or register with the Commission (other than on Form S-8 or on any
successor form), or otherwise dispose of, directly or indirectly, any equity
securities of the Company (or any securities convertible into or exercisable or
exchangeable for equity securities of the Company), except for the issuance of
the shares offered hereby, the issuance of shares or grant of options pursuant
to the Company's 1993 Stock Option Plan and the issuance of shares pursuant to
the exercise of currently outstanding warrants.

In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering then
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the Offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 150,000 shares of Common Stock, by
exercising the Underwriters' over-allotment option referred to above. In
addition, Gruntal & Co., L.L.C., on behalf of the Underwriters, may impose
"penalty bids" under contractual arrangements with the Underwriters whereby it
may reclaim from an Underwriter (or dealer participating in the Offering) for
the account of the other Underwriters, the selling concession with respect to
Common Stock that is distributed in the Offering but subsequently purchased for
the account of the Underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
Common Stock at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph is required, and,
if they are undertaken, they may be discontinued at any time.

LEGAL MATTERS

Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Katten Muchin & Zavis,
Chicago, Illinois, a partnership including professional corporations. Certain
legal matters in connection with patents and proprietary rights will be passed
upon for the Company by Marshall, O'Toole, Gerstein, Murray & Borun, Chicago,
Illinois. Certain legal matters in connection with the Offering will be passed
upon for the Underwriters by Cooley Godward LLP, Palo Alto, California.

EXPERTS

The financial statements of the Company as of December 31, 1995 and 1996
and for each of the three years in the period ended December 31, 1996 and the
cumulative period from October 18, 1989 (date of inception) to December 31,
1996, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.

Certain matters dealing with patents and proprietary rights set forth under
"Risk Factors -- Intellectual Property and Patents" and "Business --
Intellectual Property and Patents" have been included in this Prospectus in
reliance upon the written opinion of Marshall, O'Toole, Gerstein, Murray &
Borun, Chicago, Illinois, as experts in such matters. See "Legal Matters."

42
<PAGE> 44

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Company may be
inspected and copied at the public reference facilities maintained by the
Commission at the Commission's Public Reference Room, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, and at the Commission's Regional
Offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and at 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of such material can be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549 at prescribed rates. Copies of reports, proxy and information statements
and other information regarding registrants that file electronically are
available on the Commission's Web site at http://www.sec.gov. The Company's
Common Stock is listed on the Nasdaq National Market, and such reports, proxy
statements and other information can also be inspected at the offices of The
Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006.

The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act, with respect to the
shares offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. Any statements contained herein
concerning the provisions of any document filed as an Exhibit to the
Registration Statement or otherwise filed with the Commission are not
necessarily complete and, in each instance, reference is made to the copy of
such document so filed. Each such statement is qualified in its entirety by such
reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected without charge at the Commission's principal office at
450 Fifth Street, N.W., Washington, D.C. 20549 and copies of either of them or
any part thereof may be obtained from such office, upon payment of the fees
prescribed by the Commission. The Registration Statement, including the exhibits
and schedules thereto, is also available on the Commission's Web site at
http://www.sec.gov.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents previously filed by the Company with the Commission
pursuant to the Exchange Act are incorporated herein by reference:

1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996; and

2. The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A filed August 23, 1993 pursuant to
Section 12 of the Exchange Act and all amendments thereto and reports filed
for the purpose of updating such description.

All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering made hereby shall be deemed to be incorporated
by reference in this Prospectus and to be a part hereof from the date of filing
of such documents. Any statement contained herein or in a document incorporated
or deemed to be incorporated herein by reference shall be deemed to be modified
or superseded for purposes of this prospectus to the extent that a statement
contained in any subsequently filed document which is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.

The Company will provide, without charge, to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of such person, a
copy of any or all of the documents incorporated herein by reference (other than
exhibits thereto, unless such exhibits are specifically incorporated by
reference into the information that this Prospectus incorporates). Written or
telephone requests for such copies should be directed to the Company's principal
executive office: Illinois Superconductor Corporation, 451 Kingston Court, Mt.
Prospect, Illinois 60056, Attention: Secretary (telephone: (847) 391-9400).

43
<PAGE> 45

ILLINOIS SUPERCONDUCTOR CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Financial Statements
Balance Sheets as of December 31, 1995 and 1996............. F-3
Statements of Operations for the Years Ended December 31,
1994, 1995, and 1996 and the Cumulative Period From
October 18, 1989 (Date of Inception) to December 31,
1996...................................................... F-4
Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995, and 1996 and the Cumulative
Period From October 18, 1989 (Date of Inception) to
December 31, 1996......................................... F-5
Statements of Cash Flows for the Years Ended December 31,
1994, 1995, and 1996 and the Cumulative Period From
October 18, 1989 (Date of Inception) to December 31,
1996...................................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>

F-1
<PAGE> 46

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Illinois Superconductor Corporation

We have audited the accompanying balance sheets of Illinois Superconductor
Corporation as of December 31, 1995 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996, and the cumulative period from October 18,
1989 (date of inception) to December 31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Illinois Superconductor
Corporation at December 31, 1995 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, and the cumulative period from October 18, 1989 (date of inception) to
December 31, 1996, in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Chicago, Illinois
January 29, 1997, except for
paragraph 8 of Note 6,
for which the date is
March 7, 1997.

F-2
<PAGE> 47

ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31
--------------------------
1995 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 953,093 $ 5,188,047
Investments............................................... 5,083,809 500,313
Inventories............................................... -- 653,696
Accounts receivable....................................... 310,529 130,752
Prepaid expenses and other................................ 465,298 436,052
----------- -----------
Total current assets........................................ 6,812,729 6,908,860
Property and equipment, net................................. 3,193,777 5,742,804
Restricted certificates of deposit.......................... 862,500 350,000
Patents and trademarks, net................................. 236,760 386,832
----------- -----------
Total assets................................................ $11,105,766 $13,388,496
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 876,369 $ 1,126,009
Accrued liabilities....................................... 381,306 494,507
Current portion of long-term debt......................... 96,580 80,421
----------- -----------
Total current liabilities................................... 1,354,255 1,700,937
Long-term debt, less current portion........................ 509,079 91,618
Deferred occupancy costs.................................... 57,053 75,813
Stockholders' equity:
Capital stock:
Preferred stock ($.001 par value); 100,000 shares
authorized and none issued and outstanding............ -- --
Common stock ($.001 par value); 15,000,000 shares
authorized and 3,998,952 and 5,023,352 shares issued
and outstanding at December 31, 1995 and 1996,
respectively.......................................... 3,999 5,023
Additional paid-in capital................................ 24,670,560 39,019,421
Deferred compensation..................................... (41,392) --
Notes receivable from stockholders........................ -- (1,142,754)
Deficit accumulated during the development stage.......... (15,447,788) (26,361,562)
----------- -----------
Total stockholders' equity.................................. 9,185,379 11,520,128
----------- -----------
Total liabilities and stockholders' equity.................. $11,105,766 $13,388,496
=========== ===========
</TABLE>

See notes to financial statements.

F-3
<PAGE> 48

ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
CUMULATIVE FROM
YEARS ENDED DECEMBER 31 OCTOBER 18, 1989
---------------------------------------- (DATE OF INCEPTION) TO
1994 1995 1996 DECEMBER 31, 1996
---- ---- ---- ----------------------
<S> <C> <C> <C> <C>
Revenues:
Development stage product sales... $ 2,787 $ 5,998 $ 156,700 $ 194,412
Government contracts.............. 205,381 21,832 53,122 800,215
----------- ----------- ------------ ------------
Total revenues...................... 208,168 27,830 209,822 994,627
Costs and expenses:
Cost of government contract
revenue........................ 194,098 19,286 49,534 675,226
Research and development.......... 1,962,678 4,554,946 6,422,921 14,215,011
Selling and marketing............. 454,968 469,600 1,834,640 3,068,684
General and administrative........ 2,199,597 2,763,615 3,290,810 10,940,405
----------- ----------- ------------ ------------
Total costs and expenses............ 4,811,341 7,807,447 11,597,905 28,899,326
----------- ----------- ------------ ------------
(4,603,173) (7,779,617) (11,388,083) (27,904,699)
Other income (expense):
Investment income................. 496,392 487,543 503,911 1,658,250
Interest expense.................. (8,582) (39,600) (29,602) (115,113)
----------- ----------- ------------ ------------
487,810 447,943 474,309 1,543,137
----------- ----------- ------------ ------------
Net loss............................ $(4,115,363) $(7,331,674) $(10,913,774) $(26,361,562)
=========== =========== ============ ============
Net loss per common share........... $ (1.15) $ (2.01) $ (2.41)
=========== =========== ============
Weighted average number of common
shares outstanding................ 3,578,485 3,641,196 4,536,034
=========== =========== ============
</TABLE>

See notes to financial statements.

F-4
<PAGE> 49

ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE PERIOD FROM INCEPTION (OCTOBER 18, 1989) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>

PREFERRED STOCK COMMON STOCK NOTES
----------------------- -------------------- ADDITIONAL RECEIVABLE
NUMBER OF NUMBER OF PAID-IN DEFERRED FROM
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS
---------- ------ --------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
October 18, 1989 to December 31,
1990:
Issuance of common stock; October
20, 1989 -- $.0007 per share.... -- $ -- 136,250 $ 100 $ -- $ -- $ --
Issuance of preferred stock --
Series A, $1.00 per share....... 1,000,000 1,000,000 -- -- -- -- --
Issuance of common shares;
September 10, 1990; $.0184 per
share........................... -- -- 105,973 1,944 -- -- --
Net loss.......................... -- -- -- -- -- -- --
---------- ---------- --------- -------- ----------- --------- -----------
Balance at December 31, 1990....... 1,000,000 1,000,000 242,223 2,044 -- -- --
Issuance of preferred stock --
Series A; $1.00 per share......... 500,000 500,000 -- -- -- -- --
Net loss........................... -- -- -- -- -- -- --
---------- ---------- --------- -------- ----------- --------- -----------
Balance as of December 31, 1991.... 1,500,000 1,500,000 242,223 2,044 -- -- --
Issuance of preferred stock --
Series B; $1.25 per share......... 926,000 1,157,500 -- -- -- -- --
Conversion of notes payable to
stockholder into shares of
preferred stock -- Series B; $1.25
per share......................... 440,000 550,000 -- -- -- -- --
Conversion of accrued interest to
common stock: $1.4679 per share... -- -- 11,851 17,398 -- -- --
Net loss -- -- -- -- -- -- --
---------- ---------- --------- -------- ----------- --------- -----------
Balance as of December 31, 1992.... 2,866,000 3,207,500 254,074 19,442 -- -- --
Issuance of stock options.......... -- -- -- -- 488,600 (488,600) --
Exercise of stock options; $.0184
per share......................... -- -- 9,634 177 -- -- --
Issuance of preferred stock --
Series C; $1.50 per share......... 1,500,000 2,250,000 -- -- -- -- --
Stock split of .5450 to 1.......... -- -- -- (19,355) 19,355 -- --
Conversion of preferred stock into
common shares..................... (4,366,000) (5,457,500) 1,761,971 1,762 5,455,738 -- --
Issuance of common stock -- Initial
public offering, net of offering
costs; $11.25 per share........... -- -- 1,350,000 1,350 13,083,011 -- --
Issuance of warrants............... -- -- -- -- 100 -- --
Issuance of common stock --
Exercise of underwriter's option
on overallotment shares; $11.25
per share......................... -- -- 202,500 202 2,095,673 -- --
Amortization of deferred
compensation...................... -- -- -- -- -- 187,151 --
Net loss........................... -- -- -- -- -- -- --
---------- ---------- --------- -------- ----------- --------- -----------
Balance as of December 31, 1993.... -- -- 3,578,179 3,578 21,142,477 (301,449) --
Additional costs of initial public
offering.......................... -- -- -- -- (46,189) -- --
Exercise of stock options; $.229
per share......................... -- -- 545 1 124 -- --
Amortization of deferred
compensation...................... -- -- -- -- -- 139,318 --
Net loss........................... -- -- -- -- -- -- --
---------- ---------- --------- -------- ----------- --------- -----------
Balance as of December 31, 1994.... -- -- 3,578,724 3,579 21,096,412 (162,131) --
Exercise of stock options; $.184 --
$11.25 per share.................. -- -- 50,130 50 105,536 -- --
Exercise of warrants; $1.4679 per
share............................. -- -- 13,625 14 19,986 -- --
Forfeiture of stock options........ -- -- -- -- (132,300) 74,164 --
Issuance of common stock -- Private
placement, net of offering costs;
$10.80 per share.................. -- -- 356,473 356 3,580,926 -- --
Amortization of deferred
compensation...................... -- -- -- -- -- 46,575 --
Net loss........................... -- -- -- -- -- -- --
---------- ---------- --------- -------- ----------- --------- -----------
Balance as of December 31, 1995.... -- -- 3,998,952 3,999 24,670,560 (41,392) --
Exercise of stock options; $.184 --
$15.25 per share.................. -- -- 49,881 50 282,903 -- --
Exercise of warrants; $1.4679 --
$13.50 per share.................. -- -- 565,993 566 5,738,150 -- (1,142,754)
Forfeiture of stock options........ -- -- -- -- (5,438) 5,438 --
Issuance of common stock -- Private
placement, net of offering costs;
$21.80 per share.................. -- -- 408,526 408 8,333,246 -- --
Amortization of deferred
compensation...................... -- -- -- -- -- 35,954 --
Net loss........................... -- -- -- -- -- -- --
---------- ---------- --------- -------- ----------- --------- -----------
Balance as of December 31, 1996.... -- $ -- 5,023,352 $ 5,023 $39,019,421 $ -- $(1,142,754)
========== ========== ========= ======== =========== ========= ===========

<CAPTION>
DEFICIT
ACCUMULATED
DURING
DEVELOPMENT
STAGE TOTAL
----------- -----
<S> <C> <C>
October 18, 1989 to December 31,
1990:
Issuance of common stock; October
20, 1989 -- $.0007 per share.... $ -- $ 100
Issuance of preferred stock --
Series A, $1.00 per share....... -- 1,000,000
Issuance of common shares;
September 10, 1990; $.0184 per
share........................... -- 1,944
Net loss.......................... (469,177) (469,177)
------------ -----------
Balance at December 31, 1990....... (469,177) 532,867
Issuance of preferred stock --
Series A; $1.00 per share......... -- 500,000
Net loss........................... (887,770) (887,770)
------------ -----------
Balance as of December 31, 1991.... (1,356,947) 145,097
Issuance of preferred stock --
Series B; $1.25 per share......... -- 1,157,500
Conversion of notes payable to
stockholder into shares of
preferred stock -- Series B; $1.25
per share......................... -- 550,000
Conversion of accrued interest to
common stock: $1.4679 per share... -- 17,398
Net loss (994,178) (994,178)
------------ -----------
Balance as of December 31, 1992.... (2,351,125) 875,817
Issuance of stock options.......... -- --
Exercise of stock options; $.0184
per share......................... -- 177
Issuance of preferred stock --
Series C; $1.50 per share......... -- 2,250,000
Stock split of .5450 to 1.......... -- --
Conversion of preferred stock into
common shares..................... -- --
Issuance of common stock -- Initial
public offering, net of offering
costs; $11.25 per share........... -- 13,084,361
Issuance of warrants............... -- 100
Issuance of common stock --
Exercise of underwriter's option
on overallotment shares; $11.25
per share......................... -- 2,095,875
Amortization of deferred
compensation...................... -- 187,151
Net loss........................... (1,649,626) (1,649,626)
------------ -----------
Balance as of December 31, 1993.... (4,000,751) 16,843,855
Additional costs of initial public
offering.......................... -- (46,189)
Exercise of stock options; $.229
per share......................... -- 125
Amortization of deferred
compensation...................... -- 139,318
Net loss........................... (4,115,363) (4,115,363)
------------ -----------
Balance as of December 31, 1994.... (8,116,114) 12,821,746
Exercise of stock options; $.184 --
$11.25 per share.................. -- 105,586
Exercise of warrants; $1.4679 per
share............................. -- 20,000
Forfeiture of stock options........ -- (58,136)
Issuance of common stock -- Private
placement, net of offering costs;
$10.80 per share.................. -- 3,581,282
Amortization of deferred
compensation...................... -- 46,575
Net loss........................... (7,331,674) (7,331,674)
------------ -----------
Balance as of December 31, 1995.... (15,447,788) 9,185,379
Exercise of stock options; $.184 --
$15.25 per share.................. -- 282,953
Exercise of warrants; $1.4679 --
$13.50 per share.................. -- 4,595,962
Forfeiture of stock options........ -- --
Issuance of common stock -- Private
placement, net of offering costs;
$21.80 per share.................. -- 8,333,654
Amortization of deferred
compensation...................... -- 35,954
Net loss........................... (10,913,774) (10,913,774)
------------ -----------
Balance as of December 31, 1996.... $(26,361,562) $11,520,128
============ ===========
</TABLE>

See notes to financial statements.

F-5
<PAGE> 50

ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
CUMULATIVE FROM
OCTOBER 18,
1989 (DATE OF
YEARS ENDED DECEMBER 31 INCEPTION) TO
----------------------------------------- DECEMBER 31,
1994 1995 1996 1996
---- ---- ---- ---------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................ $ (4,115,363) $(7,331,674) $(10,913,774) $(26,361,562)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation...................................... 202,525 668,859 1,157,561 2,234,786
Amortization...................................... 15,667 7,541 6,639 52,572
Loss on disposal of property and equipment........ 15,070 499 -- 15,569
Loss (gain) on available-for-sale securities...... 124,000 (54,065) (43,171) 26,764
Net (amortization) accretion of bond (premiums)
discounts....................................... (7,963) (11,454) (939) (20,356)
Note receivable from officer...................... -- -- -- 179,400
Provision for interest on notes payable........... -- -- -- 17,398
Payments of patent costs.......................... (91,141) (97,005) (156,711) (404,756)
Stock compensation expense........................ 139,318 46,575 35,954 408,998
Cancellation of stock options..................... -- (58,136) -- (58,136)
Changes in operating assets and liabilities:
Accounts receivable............................. 65,345 (28,936) 179,777 (130,752)
Inventories..................................... -- -- (653,696) (653,696)
Prepaid expenses and other...................... (532,388) 306,527 29,246 (436,052)
Accounts payable................................ 1,143,035 (818,844) 249,640 1,126,009
Accrued liabilities............................. (11,535) 252,159 113,201 494,507
Deferred occupancy costs........................ 38,567 18,486 18,760 75,813
------------ ----------- ------------ ------------
Net cash used in operating activities............... (3,014,863) (7,099,468) (9,977,513) (23,433,494)
INVESTING ACTIVITIES
Purchases of available-for-sale securities.......... (15,691,459) (8,060,495) (30,945,246) (54,697,200)
Sales of available-for-sale securities.............. 2,987,121 4,566,564 2,500,000 10,053,685
Maturities of available-for-sale securities......... 2,061,578 9,002,364 33,072,852 44,136,794
(Increase) decrease in certificates of deposit,
net............................................... (989,000) 137,500 512,500 (350,000)
Acquisitions of property and equipment.............. (1,912,835) (1,888,694) (3,706,588) (7,751,926)
Decrease (increase) in notes receivable from
officers.......................................... 3,500 -- -- (179,400)
------------ ----------- ------------ ------------
Net cash provided by (used in) investing
activities........................................ (13,541,095) 3,757,239 1,433,518 (8,788,047)
FINANCING ACTIVITIES
Payments of organization costs...................... -- -- -- (64,495)
Proceeds from notes payable to stockholders......... -- -- -- 550,000
Proceeds from issuance of preferred stock........... -- -- -- 4,907,500
Proceeds from issuance of common stock -- net of
offering costs.................................... (46,189) 3,581,282 8,333,654 27,051,304
Exercise of stock options........................... 125 105,586 282,953 388,664
Exercise of warrants................................ -- 20,000 4,595,962 4,615,962
Proceeds from issuance of long-term debt............ -- 650,518 92,182 742,700
Payments on long-term debt.......................... -- (44,859) (525,802) (570,661)
Payments under capital lease obligations............ (47,477) (107,567) -- (211,386)
------------ ----------- ------------ ------------
Net cash provided by (used in) financing
activities........................................ (93,541) 4,204,960 12,778,949 37,409,588
------------ ----------- ------------ ------------
Increase (decrease) in cash and cash equivalents.... (16,649,499) 862,731 4,234,954 5,188,047
Cash and cash equivalents at beginning of period.... 16,739,861 90,362 953,093 --
------------ ----------- ------------ ------------
Cash and cash equivalents at end of period.......... $ 90,362 $ 953,093 $ 5,188,047 $ 5,188,047
============ =========== ============ ============
Supplemental cash flow information:
Cash paid for interest............................ $ 8,582 $ 39,600 $ 29,602 $ 96,369
============ =========== ============ ============
Equipment capitalized under lease agreements...... $ -- $ 59,739 $ -- $ 211,386
============ =========== ============ ============
Conversion of notes payable and accrued interest
to preferred and common stock................... $ -- $ -- $ -- $ 567,398
============ =========== ============ ============
</TABLE>

See notes to financial statements.

F-6
<PAGE> 51

ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

Illinois Superconductor Corporation (Company) was founded in 1989 to
commercialize superconducting technologies primarily for the wireless
telecommunications industry. Since its inception, the Company has been in the
development stage, engaging in research and product development activities, both
internally funded and under government-funded contracts and cooperative
agreements, recruiting technical and administrative personnel, and raising
capital. The Company's primary focus has been on developing radio frequency
component products for the cellular and other wireless telecommunications
markets located mainly in the United States.

In the course of its development activities, the Company has experienced
net losses and negative cash flows from operations. Historically, the Company
has funded its operations primarily through the issuance of equity securities,
government contracts and debt. The Company intends to offer additional equity
securities during 1997. In the event the equity offering is not successful, the
Company believes that it is capable of sustaining operations throughout 1997
under plans which could include a reduction in the Company's operating levels.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH, CASH EQUIVALENTS AND INVESTMENTS

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

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

INVENTORIES

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

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost, less accumulated depreciation,
and is 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

F-7
<PAGE> 52

ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
leasehold improvements is included in depreciation expense. The useful lives
assigned to property and equipment for the purpose of computing book
depreciation are as follows:

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

PATENTS AND TRADEMARKS

Patents and trademarks 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 a recurring basis. Patents and trademarks are net of accumulated
amortization of $11,285 and $17,924 at December 31, 1995 and 1996, respectively.

INCOME TAXES

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

REVENUE RECOGNITION

Revenues from research and development contracts are recognized utilizing
the percentage-of-completion method measured by the relationship of costs
incurred to total contract costs. When the current contract estimate indicates a
loss, provision is made for the total anticipated loss. Revenues from
research-related activities are derived primarily from contracts and
cost-sharing agreements with agencies of the U.S. government (see Note 8).

All payments to the Company for work performed on contracts with agencies
of the U.S. government are subject to adjustment upon audit by agencies of the
U.S. government. Management believes that any such audits will not have a
significant effect on the financial position or results of operations of the
Company.

Revenues from product sales are recognized at the time of shipment.

ADVERTISING COSTS

Advertising costs are charged to expense in the period incurred.
Advertising expense for the years ended December 31, 1994, 1995, 1996, and the
cumulative period from October 18, 1989 (date of inception) to December 31,
1996, was approximately $119,000, $87,000, $135,000, and $341,000, respectively.

RESEARCH AND DEVELOPMENT COSTS

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

F-8
<PAGE> 53

ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER COMMON SHARE

Net loss per common share and pro forma net loss per common share (Note 7)
are computed based upon the weighted-average number of common shares
outstanding. Common equivalent shares are not included in the per share
calculations since the effect of their inclusion would be antidilutive.

USE OF ESTIMATES

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

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.

ADOPTION OF FASB 121

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

RECLASSIFICATIONS

Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.

3. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1995 1996
---- ----
<S> <C> <C>
Raw materials............................................ $ -- $ 64,524
Work-in-process.......................................... -- 214,172
Finished product......................................... -- 375,000
-------- --------
$ -- $653,696
======== ========
</TABLE>

F-9
<PAGE> 54

ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. INVESTMENTS

The following is a summary of available-for-sale debt securities at
December 31, 1995 and 1996:

<TABLE>
<CAPTION>
1995 1996
-------------------------- ------------------------
AVAILABLE-FOR-SALE AVAILABLE-FOR-SALE
DEBT SECURITIES DEBT SECURITIES
-------------------------- ------------------------
COST FAIR VALUE COST FAIR VALUE
---- ---------- ---- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S.
government agencies.......... $3,456,281 $3,456,281 $500,313 $500,313
U.S. corporate debt
securities................... 1,627,528 1,627,528 -- --
---------- ---------- -------- --------
$5,083,809 $5,083,809 $500,313 $500,313
========== ========== ======== ========
</TABLE>

During the years ended December 31, 1995 and 1996, available-for-sale debt
securities with a fair value at the date of sale of $4,566,564 and $2,500,000,
respectively, were sold. The gross realized gains on such sales were $59,480 and
$43,171 in 1995 and 1996, respectively, and the gross realized losses were
$5,415 in 1995.

The available-for-sale debt security held at December 31, 1996, is due
after three years.

5. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1995 1996
---- ----
<S> <C> <C>
Leasehold improvements................................ $1,959,276 $4,172,694
Lab equipment......................................... 1,352,786 1,606,594
Manufacturing equipment............................... -- 864,059
Office equipment...................................... 435,646 626,029
Furniture and fixtures................................ 409,041 593,961
---------- ----------
4,156,749 7,863,337
Less: Accumulated depreciation........................ 962,972 2,120,533
---------- ----------
$3,193,777 $5,742,804
========== ==========
</TABLE>

6. CAPITAL STOCK

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

In conjunction with the adoption of the Rights Plan (as discussed below),
the Company has created one series of preferred stock, consisting of 10,000
shares of Series A Junior Participating Preferred Stock (Series A Preferred).
Each share of Series A Preferred would entitle the holder to receive dividends
equal to 1,000 times the dividends per share declared with respect to the
Company's common stock and, in the event of liquidation, such holders would
receive a preference of 1,000 times the aggregate amount to be distributed per
share to the holders of the Company's common stock.

F-10
<PAGE> 55

ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. CAPITAL STOCK (CONTINUED)
On February 9, 1996, the board of directors adopted a shareholder rights
plan (Rights Plan). Pursuant to such 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 certain "self-dealing" transactions with the Company, as defined in the
Rights Plan, each Right then outstanding (other than Rights held by the
Acquiring Party) will be exercisable for common stock of the other party to such
transaction having a market value of two times the exercise price of the Right.

The Company has the right to redeem each Series A Right for $0.01 prior to
the Shares Acquisition Date. The Series B Rights, once issued, are not
redeemable. The Rights expire on February 9, 2006.

On November 14, 1995, the Company completed the private placement and
issuance of 356,473 Units, which raised $3,581,282, net of related expenses.
Each Unit consists of one share of common stock and one detachable common stock
purchase warrant. Each warrant had a term of two years and was exercisable for
the purchase of one share of common stock at $13.00 per share. Warrants for
15,700 of these shares were exercised prior to December 1996. The remaining
340,773 warrants were called for redemption by the Company in November 1996 and
were exercised in December 1996. In conjunction with the exercise, the Company
issued 340,773 shares of its common stock in exchange for $3,287,304 in cash
plus $1,142,754 of notes. The notes bear interest at 8.25% per annum, were due
on February 21, 1997, and are guaranteed by an affiliate of a stockholder. On
March 7, 1997, $716,319 of these notes were extended to April 30, 1997. If any
of the balance remains outstanding after April 30, 1997, the interest rate
defaults to 10.25% per annum.

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

F-11
<PAGE> 56

ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. CAPITAL STOCK (CONTINUED)
At December 31, 1996, authorized but unissued shares of common stock have
been reserved for future issuance as follows:

<TABLE>
<S> <C>
Warrants.................................................... 670,225
Options outstanding......................................... 796,258
Options reserved for future issuance under the 1993 Stock
Option Plan (Note 7)...................................... 289,532
---------
1,756,015
=========
</TABLE>

7. STOCK OPTIONS AND WARRANTS

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

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 1996, is 1,055,000, of which 80,000 are
reserved for issuance to outside directors. The Plan is administered by a
committee (Committee) consisting of two or more outside directors appointed by
the board of directors of the Company.

For employees and consultants, the Plan provides for granting of Incentive
Stock Options (ISOs) and Nonstatutory Stock Options (NSOs). In the case of ISOs,
the exercise price shall not be less than 100% (110% in certain cases) of the
fair value of the common stock, as determined by the committee, on the date of
grant. In the case of NSOs, the exercise price shall not be less than 85% (110%
in certain cases) of the fair value of the common stock, as determined by the
Committee, on the date of grant. The term of options granted to employees and
consultants will be for a period not to exceed 10 years (five years in certain
cases). Options granted under the Plan on or before May 31, 1995, generally vest
over a five year period (One-fifth of options granted vest after one year from
the grant date. The remaining options vest ratably each month thereafter).
Options granted under the Plan subsequent to May 31, 1995, generally vest over a
four year period (One-fourth of options granted vest after one year from the
grant date. 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 10,000 NSOs on the date of their initial election to the board of
directors. On the date of the annual meeting of the stockholders of the Company,
commencing with the 1994 meeting, each outside director who is elected,
reelected, or continues to serve as a director, shall be granted 2,000 NSOs
(3,000 NSOs for the 1996 meeting and all future annual meetings), except for
those outside directors who are first elected to the Board of Directors at the
meeting or three months prior. The options granted vest ratably over three years
and expire after seven years from the grant date.

F-12
<PAGE> 57

ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

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

For the year ended December 31, 1993, the Company recorded an increase to
additional paid-in capital and a corresponding charge to deferred compensation
of approximately $489,000 to recognize the difference between the estimated fair
value of the Company's common stock at the date of grant and the exercise price
for 107,638 options granted in the year ended December 31, 1993. The deferred
compensation is being amortized over the five-year vesting period of the
options. During 1995 and 1996, 29,430 and 1,090 of these options were forfeited,
resulting in a reduction in compensation expense of $58,136 in 1995.
Amortization of compensation expense of $139,318, $46,575 and $35,954 was
recorded for the years ended December 31, 1994, 1995, and 1996, respectively.

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, 1995 and
1996: risk-free interest rate of 6.3% and 6.2%, respectively; a dividend yield
of 0%; volatility factor of the expected market price of the Company's common
stock of .75; and expected life of the options of 4.0 and 4.1 years,
respectively.

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

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

<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
1995 1996
---- ----
<S> <C> <C>
Pro forma net loss................................... $7,428,018 $11,590,957
Pro forma net loss per common share.................. 2.04 2.56
</TABLE>

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

F-13
<PAGE> 58

ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. STOCK OPTIONS AND WARRANTS (CONTINUED)
The table below summarizes all option activity through December 31, 1996:

<TABLE>
<CAPTION>
EXERCISE
OPTIONS PRICE
OUTSTANDING PER SHARE
----------- ---------
<S> <C> <C>
Period October 18, 1989 (date of inception) to December 31,
1990:
Granted................................................... 25,984 $ .0184 - .184
-------
Outstanding at December 31, 1990.......................... 25,984 .0184 - .184
Granted................................................... 2,725 .184
-------
Outstanding at December 31, 1991.......................... 28,709 .0184 - .184
Granted................................................... 39,513 .0184 - .229
-------
Outstanding at December 31, 1992.......................... 68,222 .0184 - .229
Granted................................................... 132,638 .229 - 11.25
Exercised................................................. (9,634) .0184
-------
Outstanding at December 31, 1993.......................... 191,226 .184 - 11.25
Granted................................................... 271,012 6.75 - 16.25
Exercised................................................. (545) .229
Forfeited................................................. (4,680) .229 - 16.25
-------
Outstanding at December 31, 1994.......................... 457,013 .184 - 16.25
Granted................................................... 190,360 6.75 - 19.25
Exercised................................................. (50,130) .184 - 11.25
Forfeited................................................. (71,975) .184 - 15.25
-------
Outstanding at December 31, 1995.......................... 525,268 .184 - 19.25
Granted................................................... 346,907 17.00 - 27.00
Exercised................................................. (49,881) .184 - 15.25
Forfeited................................................. (26,036) .229 - 26.50
-------
Outstanding at December 31, 1996.......................... 796,258 $ .184 - 27.00
=======
</TABLE>

The weighted-average exercise price of options outstanding at December 31,
1995 and 1996, was $8.93 and $13.40, respectively. The weighted-average exercise
price of options granted, exercised, and forfeited during 1996 was $18.93,
$5.67, and $11.76, respectively. The weighted-average fair value of options
granted during 1996 was $11.35.

Following is additional information with respect to options outstanding at
December 31, 1996:

<TABLE>
<CAPTION>
EXERCISE EXERCISE EXERCISE EXERCISE EXERCISE
PRICE FROM PRICE FROM PRICE FROM PRICE FROM PRICE FROM
$0.18 TO $6.75 TO $10.50 TO $16.00 TO $23.50 TO
$0.23 $9.13 $15.50 $22.13 $27.00
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31, 1996:
Number of options........................ 68,536 124,664 213,356 339,942 49,760
Weighted-average exercise price.......... $0.22 $7.37 $11.37 $17.83 $25.07
Weighted-average remaining contractual
life in years......................... 6.0 8.0 7.7 9.6 9.3
Exercisable at December 31, 1996:
Number of options........................ 39,380 41,916 109,068 14,825 --
Weighted-average exercise price.......... $0.22 $7.32 $11.84 $17.58 --
</TABLE>

F-14
<PAGE> 59

ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. STOCK OPTIONS AND WARRANTS (CONTINUED)
The total number of unvested options outstanding at December 31, 1996, was
591,069, of which 451,069 will vest based on employees' continued service to the
Company and 140,000 will vest based on employees' continued service to the
Company and the Company's attainment of certain performance objectives
established by the Committee.

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

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

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

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

8. RESEARCH AND DEVELOPMENT AGREEMENTS

In March 1993, the Company entered into a three-year cost-sharing
cooperative agreement with the U.S. government under the Department of Commerce
Advanced Technology Program. Funding totaling $619,000, $650,000, $200,000, and
$1,980,000 for the years ended December 31, 1994, 1995, and 1996, and for the
period from March 1993 to December 31, 1996, respectively, has been offset
against the related research and development expenses.

The Company is party to a number of research and development contracts,
generally short-term in nature, which provided approximately $205,000, $22,000,
and $53,000 of revenues for the years ended December 31, 1994, 1995, and 1996,
respectively. These contracts include cost-plus and fixed-price arrangements.

Research and development expenses include the costs associated with
development stage product sales.

F-15
<PAGE> 60

ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. INCOME TAXES

The Company has net operating loss and research and development credit
carryforwards for tax purposes of approximately $27,636,000 and $624,000,
respectively, at December 31, 1996, the net operating losses expire as follows:

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

<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward................... $ 5,716,000 $10,502,000
Research and development tax credit
carryforwards.................................. 744,000 624,000
Deferred compensation............................. 120,000 94,000
Property and equipment............................ 19,000 --
Development stage losses.......................... 17,000 --
----------- -----------
Total deferred tax assets........................... 6,616,000 11,220,000
Deferred tax liabilities:
Patent costs...................................... (85,000) (142,000)
Property and equipment............................ -- (68,000)
----------- -----------
(85,000) (210,000)
----------- -----------
Net deferred tax assets............................. 6,531,000 11,010,000
Valuation allowance................................. (6,531,000) (11,010,000)
----------- -----------
Net deferred tax assets............................. $ -- $ --
=========== ===========
</TABLE>

The valuation allowance increased during 1996 by $4,479,000 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.

10. LONG-TERM DEBT

The Company's long-term debt consists of two equipment financing notes with
a bank that mature in October 1998 and May 1999, respectively. The notes bear
interest at 8.5% per annum. Payments of principal plus accrued interest are due
monthly in arrears. Borrowings are collateralized by the related equipment
purchased, which has a carrying value of approximately $146,000 at December 31,
1996. The notes require the Company to maintain a minimum net worth and leverage
ratio, as defined. The Company's outstanding obligations under these notes was
$172,039 at December 31, 1996, with aggregate debt maturities of $80,421 in
1997, $78,074 in 1998, and $13,544 in 1999.

F-16
<PAGE> 61

ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

12. COMMITMENTS

OPERATING LEASES

The Company leases its manufacturing and office space. Under the terms of
the lease, which expires October 2004, the Company is responsible for all real
estate taxes and operating expenses. The lease provides for a security deposit
($350,000 at December 31, 1996) that is secured by a certificate of deposit
owned by the Company.

Future minimum payments under the operating lease consist of the following
at December 31, 1996:

<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1997........................................................ $ 211,700
1998........................................................ 227,500
1999........................................................ 227,500
2000........................................................ 231,300
2001........................................................ 249,900
Thereafter.................................................. 699,900
----------
$1,847,800
==========
</TABLE>

Rent expense totaled $174,994, $267,991, and $227,334, for the years ended
December 31, 1994, 1995, and 1996, respectively.

CONSULTING AND RESEARCH AGREEMENTS

During 1994, the Company entered into consulting and research agreements
related to the development of certain technology. The consulting agreement
requires annual payments of $50,000 through 1998, while the research agreement
provides for annual payments of $100,000 through 1997 with the right to renew
for one additional year at the Company's option.

13. 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, 1994, 1995, and 1996.

14. LEGAL PROCEEDINGS

In 1996, a stockholder filed a complaint against the Company alleging that,
in connection with the Company's private placement of securities in November
1995, the Company breached and repudiated an oral contract with the stockholder
for the issuance and sale by the Company of 370,370 shares of the Company's

F-17
<PAGE> 62

ILLINOIS SUPERCONDUCTOR CORPORATION
(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

14. LEGAL PROCEEDINGS (CONTINUED)
common stock at $10.80 per share, plus warrants (immediately exercisable at
$12.96 per share) to purchase an additional 370,370 shares of the Company's
common stock. The stockholder is seeking a jury trial and money damages equal to
the difference between $8,800,000 (370,370 shares at $10.80 per share and
370,370 shares at $12.96 per share) and 740,740 shares multiplied by the highest
price at which the Company's stock traded on the Nasdaq Stock Market between
November 20, 1995 and the date of judgment.

The Company believes that the suit is without merit and intends to continue
to defend itself vigorously in this litigation. As such, the Company believes
that the resolution of this matter will not have a material adverse effect on
the financial condition or results of operations of the Company.

F-18
<PAGE> 63

[INSIDE BACK COVER]

[PICTURE OF THE COMPANY'S MANUFACTURING FACILITIES]

Manufacturing of Illinois Superconductor Corporation's radio frequency
filter products does not require clean room facilities and requires only
moderate capital investment for production facilities.

[PICTURE OF THE COMPANY'S CORPORATE HEADQUARTERS
IN MT. PROSPECT, ILLINOIS]

Illinois Superconductor Corporation's executive offices as well as its
manufacturing, research and development, and administrative operations are
located in its Mt. Prospect, Illinois facility.

<PAGE> 64

======================================================

NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.

-------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 14
Price Range of Common Stock........... 14
Dividend Policy....................... 14
Capitalization........................ 15
Selected Financial Data............... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 20
Management............................ 31
Principal Stockholders................ 35
Description of Capital Stock.......... 37
Shares Eligible for Future Sale....... 39
Underwriting.......................... 41
Legal Matters......................... 42
Experts............................... 42
Available Information................. 43
Incorporation of Certain Documents by
Reference........................... 43
Index to Financial Statements......... F-1
</TABLE>

======================================================
======================================================
1,000,000 SHARES
[ISC LOGO]

ILLINOIS
SUPERCONDUCTOR
CORPORATION

COMMON STOCK

-------------------------
PROSPECTUS
-------------------------

GRUNTAL & CO., L.L.C.

, 1997
======================================================
<PAGE> 65

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

Set forth below is the approximate amount of fees and expenses (other than
underwriting commissions and discounts) payable by the Registrant in connection
with the issuance and distribution of the Common Stock pursuant to the
Prospectus contained in this Registration Statement. All amounts are estimates
except the Securities and Exchange Commission registration fee, the NASD filing
fee and the Nasdaq National Market listing fee.

<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT
-----------
<S> <C>
Securities and Exchange Commission registration fee......... $ 5,642
NASD filing fee............................................. 2,362
Nasdaq National Market listing fee.......................... 17,500
Accountants' fees and expenses.............................. 75,000
Legal fees and expenses..................................... 250,000
Transfer Agent and Registrar fees and expenses.............. 10,000
Printing and engraving...................................... 100,000
Blue Sky fees and expenses.................................. 2,500
Miscellaneous expenses...................................... 36,996
--------
Total................................................ $500,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article 9 of the Company's Certificate of Incorporation provides that the
Company shall indemnify its directors to the full extent permitted by the
General Corporation Law of the State of Delaware and may indemnify its officers
and employees to such extent, except that the Company shall not be obligated to
indemnify any such person (i) with respect to proceedings, claims or actions
initiated or brought voluntarily by any such person and not by way of defense,
or (ii) for any amounts paid in settlement of an action indemnified against by
the Company without the prior written consent of the Company. The Company has
entered into indemnity agreements with each of its directors. These agreements
may require the Company, among other things, to indemnify such directors against
certain liabilities that may arise by reason of their status or service as
directors, to advance expenses to them as they are incurred, provided that they
undertake to repay the amount advanced if it is ultimately determined by a court
that they are not entitled to indemnification and to obtain directors' liability
insurance if available on reasonable terms.

In addition, Article 8 of the Company's Certificate of Incorporation
provides that a director of the Company shall not be personally liable to the
Company or its stockholders for monetary damages for breach of his or her
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for willful or negligent conduct in paying dividends or
repurchasing stock out of other than lawfully available funds or (iv) for any
transaction from which the director derives an improper personal benefit.

Reference is made to Section 145 of the General Corporation Law of the
State of Delaware which provides for indemnification of directors and officers
in certain circumstances.

The Company has obtained a directors' and officers' liability insurance
policy which entitles the Company to be reimbursed for certain indemnity
payments it is required or permitted to make to its directors and officers.

II-1
<PAGE> 66

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

<TABLE>
<S> <C>
1** Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Company.
3.2* Bylaws of the Company.
3.3* Certificate of Amendment of Certificate of Incorporation of
the Company.
4.1* Specimen stock certificate representing Common Stock.
4.2 Rights Agreement dated as of February 9, 1996 between the
Company and LaSalle National Trust, N.A., filed as the
Exhibit to the Company's Registration Statement on Form 8-A,
filed February 12, 1996, incorporated herein by reference.
5** Opinion of Katten Muchin & Zavis as to the legality of the
securities being registered (including consent).
23.1 Consent of Ernst & Young LLP.
23.2** Consent of Katten Muchin & Zavis (contained in its opinion
previously filed as Exhibit 5).
23.3 Consent of Marshall, O'Toole, Gerstein, Murray & Borun.
24** Power of Attorney.
</TABLE>

- ------------------------
* Incorporated by reference from the Company's Registration Statement on Form
S-1 dated August 20, 1993, Reg. No. 33-67756, with the same exhibit number.

** Previously filed

ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes:

(1) For purposes of determining any liability under the Securities Act of
1933 (the "Securities Act"), each filing of the Company's annual report pursuant
to Section 13(a) or Section 15(d) of the Exchange Act that is incorporated by
reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(2) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

(3) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(4) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

II-2
<PAGE> 67

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment to this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Mt. Prospect, State of Illinois on the 31st day
of March, 1997.

ILLINOIS SUPERCONDUCTOR CORPORATION

By: /s/ ORA E. SMITH

------------------------------------
Ora E. Smith,
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to this Registration Statement has been signed below by the following persons on
March 31, 1997 in the capacities indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>

/s/ ORA E. SMITH President, Chief Executive Officer
- ----------------------------------------------------- (Principal Executive Officer) and a Director
Ora E. Smith

* Vice President, Chief Financial Officer,
- ----------------------------------------------------- Treasurer and Secretary (Principal Financial
Stephen G. Wasko and Accounting Officer)

* Director
- -----------------------------------------------------
Leonard A. Batterson

* Director
- -----------------------------------------------------
Michael J. Friduss

* Director
- -----------------------------------------------------
Peter S. Fuss

* Chairman of the Board and Director
- -----------------------------------------------------
Steven Lazarus

* Director
- -----------------------------------------------------
Tom L. Powers

* Director
- -----------------------------------------------------
Paul G. Yovovich
</TABLE>

*By: /s/ ORA E. SMITH

-------------------------------

Ora E. Smith,

As Attorney-in-Fact

II-3
<PAGE> 68

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
23.1 Consent of Ernst & Young LLP.
23.3 Consent of Marshall, O'Toole, Gerstein, Murray & Borun.
</TABLE>

<PAGE> 1
EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated January 29,
1997, except for paragraph 8 of Note 6, for which the date is March 7, 1997, in
Amendment No. 1 to the Registration Statement (Form S-3) and related Prospectus
of Illinois Superconductor Corporation for the registration of 1,000,000 shares
of its common stock.

/s/ Ernst & Young LLP
------------------------
Ernst & Young LLP

Chicago, Illinois
April 1, 1997

<PAGE> 1
EXHIBIT 23.3

[MARSHALL, O'TOOLE, GERSTEIN, MURRAY & BORUN LETTERHEAD]

March 31, 1997

We hereby consent to be named as an expert in the "Legal Matters" and
"Experts" section of Amendment No. 1 of the Registration Statement on Form S-3
filed with the Securities and Exchange Commission by Illinois Superconductor
Corporation.

Very truly yours,

MARSHALL, O'TOOLE, GERSTEIN
MURRAY & BORUN

By: /s/ Robert M. Gerstein
------------------------
Robert M. Gerstein

RMG/mjm