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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Commission File No 0-14429

Isco, Inc.
(Exact name of Registrant as specified in its charter)

Registrant's telephone number, including area code: (402) 464-0231

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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value
(Title of Class)

        Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        As of October 11, 2002, 5,673,971 shares of Common Stock of Isco, Inc., were outstanding and the aggregate market value of such Common Stock held by non-affiliates was approximately $22,015,789.

DOCUMENTS INCORPORATED BY REFERENCE

        The information called for by Part III is incorporated by reference to the definitive Proxy Statement for the Annual Meeting of Shareholders to be held December 12, 2002, which will be filed with the Securities and Exchange Commission not later than 120 days after July 26, 2002.

PART I

Item 1. Business.

General

        Isco, Inc. was founded in 1959. We design, manufacture, and market products worldwide. The majority of our revenue comes from sales of products used by industry and government to monitor compliance with water quality regulations, laboratories involved in drug discovery and development, and by laboratories involved in various types of research.

        Robert W. Allington, the founder of Isco, Inc., has been the controlling shareholder, chairman of the board, and chief executive officer since inception. Dr. Allington was president until October 6, 1995. Douglas M. Grant has been our president and chief operating officer since October 6, 1995.

        Our principal offices are located at 4700 Superior Street, Lincoln, Nebraska 68504-1398. Our telephone number is (402) 464-0231. As used herein, "Isco", "we" or "our" refers to Isco, Inc., and its subsidiaries. "Isco-Lincoln" refers to the operational activities and operations conducted by Isco, Inc. primarily in Lincoln, Nebraska excluding any activities focused on directing the subsidiaries and partnership.

        STIP-Isco GmbH (STIP) is a wholly-owned subsidiary located in Groß-Umstadt, Germany. STIP designs, produces, and markets a broad line of process monitoring and control instrumentation designed specifically for municipal and industrial wastewater treatment applications. These process monitoring products assist our wastewater treatment customers in reducing operating costs and in reliably managing the wastewater treatment process. Sales management and distribution of STIP process monitoring products in North and South American are managed by Isco-Lincoln. Late in fiscal year 2000, Isco-Lincoln terminated its relationship with its German distributor for sales of environmental products produced by Isco-Lincoln and transferred the responsibility for the sales and servicing of these products in Germany to STIP.

        Isco, Inc. is a 50 percent partner in Advanced Flow Technologies Partnership, Ltd. (AFTCO), a limited partnership, located in Lakeland, Florida. This partnership was formed during fiscal year 1998. AFTCO designs, produces, and markets electromagnetic flow meters. Isco, Inc. is AFTCO's distribution channel into the wastewater treatment market.

        Geomation, Inc. was a wholly-owned subsidiary of Isco, Inc. from September 17, 1997 through October 16, 2000. Isco, Inc. originally acquired a minority ownership in Geomation in fiscal year 1993. On October 16, 2000, Isco sold certain assets and transferred liabilities of Geomation, Inc. to an investment group led by the management of Geomation. The financial details of this transaction are addressed in Note O of the notes to the financial statements. Subsequent to the asset sale this entity was renamed Isco Holdings, Inc.

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Products and Applications

        Product lines of wastewater samplers, flow meters (including closed pipe flow meters), and liquid chromatography are Isco's largest or core product lines. These lines together represented 77, 77, and 74 percent of Isco's total net sales for the fiscal years of 2002, 2001, and 2000, respectively. The contribution made by each of these core product lines to net sales for fiscal 2002, 2001, and 2000, respectively, was as follows: wastewater samplers 32, 38 and 34 percent; flow meters 21, 19, and 22 percent; and liquid chromatography products 24, 20 and 18 percent.

        Isco's water quality customers use wastewater samplers to collect water samples from surface waters and sewers for subsequent analysis in the laboratory to monitor compliance with environmental regulations. These samplers can range from simple collection devices to complex multi-input data loggers that perform conditional operations to collect samples, store data, and notify users of alarm conditions through telemetry. Intricate sampling devices that collect samples for volatile organic compound (VOC) analysis have also been developed to assist our customers in the pulp and paper industry and other sectors with application specific monitoring requirements.

        Our open channel flow meters are used by our water quality customers to measure and record the flow rate of water in unpressurized pipes and open channels. These flow meters can be linked with wastewater samplers to collect water samples based on flow rate. The combined use of these two products is well suited to conduct storm water runoff studies in compliance with federal regulations. Cities use our flow logging systems and sophisticated Flowlink™ software to store flow, rainfall, and other sample data for later retrieval, analysis, and reporting, as well as to analyze the state of their sewer systems. Our UNIMAG^R electromagnetic flow meters are used by many of our sampler and open channel flow meter customers for closed pipe applications. We believe these flow meters are a reliable, cost-effective alternative to existing electromagnetic and other closed pipe flow meters.

        Isco's liquid chromatography (LC) customers include pharmaceutical company laboratories involved in drug discovery and development, and other laboratories that support the development of chemical compounds as well as those that study disease and basic life functions. Customers in these laboratories use our pumps to deliver solvent through columns packed with special media to separate a sample into its component molecules. They then use our detectors to identify and quantify the component molecules. Our fraction collectors are used to collect the separated compounds as they flow from the column. Our sequential and parallel organic purification CombiFlash™ systems along with RediSep™ disposable columns are used in the drug discovery process to sample, separate, detect, and collect purified fractions. Our SWIFT™ monolithic columns were introduced late in fiscal 2002. We believe these columns have technological advantages over existing media and column technology, and are hopeful that sales of these columns and related hardware will contribute in future years. Other references to SWIFT can be found under Item 3. Legal Proceedings and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

        The remainder of our net sales, approximately 23 percent in fiscal 2002, came from product sales of other product lines, service, and freight billings. The other product lines include: process monitoring, supercritical fluid extraction (SFE), and syringe pumps.

        Wastewater treatment customers use our process monitoring products to continuously monitor and control the treatment process to ensure that it is proceeding efficiently within established parameters. Our on-line process monitors measure broad load parameters or detect the presence and concentration of a variety of compounds. Knowledge of these measurements allows the plant operator to control operating costs and ensures the quality of discharged effluent.

        SFE is a safe, cost-effective, environmentally friendly, and time-saving technique used to separate selected chemical compounds (target analytes) from complex sample matrices. Our food and agri-products customers use SFE to ensure that their products are maintained at a specified level of quality.

        Our syringe pumps are used for specialized applications in the petroleum, chemical and pharmaceutical industries, and for pumping supercritical fluids where high accuracy at high pressures is required.

        The U.S. prices of individual products within our core product lines range from $1,500 to $10,000 for wastewater sampler and flow meter products and $1,500 to $75,000 for LC products.

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Marketing and Sales

        In the United States, independent manufacturers' representatives sell products within our wastewater sampler, flow meter, and process monitoring product lines. Domestic sales of products within our LC, SFE, and syringe pump lines are made by direct sales people assigned to specific product lines and located in the prime domestic market areas. The manufacturers' representatives and our direct sales people are supported with promotional programs, advertising, applications specialists, applications bulletins, technical literature, training, and applications seminars.

        International sales constituted 27, 26, and 26 percent of our net sales during fiscal 2002, 2001, and 2000, respectively. Isco's international sales are made primarily by independent dealers operating in various countries around the world. International dealers receive sales management and local marketing support from regional sales and marketing managers that reside in Lincoln, Nebraska, Belgium, Germany, and the Philippines. To aid international sales, many of our products are offered in multiple language versions. Since both Isco-Lincoln and STIP-Isco sell in their respective functional currencies, we are not significantly impacted by direct foreign currency fluctuations.

Customers

        Isco has a broad customer base. Currently no single customer, including any OEM customer, accounts for more than three percent of our net sales.

Product Warranty

        The majority of our products have a one-year warranty against defective materials and workmanship. Our warranty claims have not been material in the past and are not expected to be material in the future. We provide direct after-market factory service for most products in the United States and Germany with independent dealers providing this type of support in most all other countries. We also provide on-site services in the United States and Germany for process monitoring products along with on-site services in the United States for automated LC and SFE systems. Customers within the United States may purchase an extended warranty for a selected product at the time they purchase a new instrument or while the instrument is still under warranty.

Competition

        We believe we have a strong, competitive position in the markets for wastewater samplers, open channel flow meters, and SFE. We maintain a competitive niche position in the LC market. The factors that contribute to our competitive position include: a reputation for high quality and service, technically advanced products that provide cost-effective operation and unique features, an active research and development program that allows us to maintain technical leadership, a strong position in key markets, efficient production capabilities, and excellent distribution capabilities.

        Isco has several competitors in the wastewater sampler market. In the United States, the major competitor is the Danaher Corporation. We estimate that we have approximately 55 percent of the domestic wastewater sampler market with the Danaher Corporation having approximately 40 percent. Other domestic competitors are small and offer little competition. Significant competitors in Europe include the Danaher Corporation and the Endress + Hauser Group.

        There are numerous suppliers in the United States open channel flow meter market. Based upon market information we believe to be accurate, Isco's major competitors are Marsh-McBirney, Inc., ADS, Siemens Milltronics Process Instruments, Inc., owned by Siemens, and the Danaher Corporation. Significant competitors in Europe include the Danaher Corporation, the Endress + Hauser Group, Marsh-McBirney, Inc., and Siemens Milltronics Process Instruments, Inc. Major competitors in the closed pipe flow meter market include ABB, Krohne, and the Endress + Hauser Group.

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        With respect to LC, we believe we are the major producer of fraction collectors. The largest LC systems competitor is Amershem Biosciences UK Ltd. Our major competitors, in either hardware or disposable columns, are Amersham Biosciences UK Ltd., Argonaut Technologies, Inc., Bio-Rad Laboratories, Inc., Biotage, Inc., owned by the Dyax Corporation, and Gilson Medical Electronics, Inc.

        There are a number of suppliers for the process monitoring markets with market share varying from country to country. While limited information is available, we believe that the primary global competitors are the Danaher Corporation, WTW, LAR Analytik & Umwelt Messtechnik GmbH, and the Endress + Hauser Group.

        In the SFE equipment market we are the market leader with approximately 40 percent of the world market share. Management estimates that its competitors, Applied Separations, Inc. and Leco Corporation, each have a market share of less than 20 percent, with the remaining market served by specialty engineering firms.

        With respect to syringe pumps, market share is difficult to estimate due to the various niche markets we service. In the United States, our major competitor is Quizix, Inc. We believe that we hold a dominant position relative to Quizix, Inc. in all but one niche market.

Research and Engineering

        Isco commits significant resources to ongoing research and engineering activities. A significant amount of our research and engineering activities are focused on new product development targeted to increase our market share of existing product lines. In addition, in the near-term, we will be funding activities related to the new technological advancements in the area of liquid chromatography column media and our process monitoring product line. Over the long-term we will explore present and related markets that could utilize new products developed from our expanding technology base. For fiscal years 2002, 2001, and 2000, we spent approximately $5.6 million or 9 percent of sales, $5.3 million or 9 percent of sales, and, $5.5 million or 10 percent of sales, respectively, on research and engineering.

Patents and Licenses

        We believe we derive a competitive advantage from our patents and have a policy of obtaining patents wherever commercially feasible. We also vigorously assert and defend our patents. Isco, Inc.'s products are covered by 87 United States patents, 82 of which are owned by Isco, Inc. and five under which we are the exclusive licensee. There are also numerous corresponding patents issued by other countries. Isco, Inc. owned patents have been assigned to us by the inventors on a royalty-free basis. We currently have nine patent applications pending at the United States Patent Office.

Regulation

        Management believes Isco is in compliance with current environmental regulations. Therefore, no unfavorable impact on competition or earnings is expected. We have no government contracts that are subject to renegotiation of profits upon contract completion. Although our products are not subject to significant government regulation, the markets for many of our products are regulation driven.

Backlog

        On September 27, 2002, Isco's order backlog was $5.0 million, the majority of which is scheduled for delivery prior to July 25, 2003, the close of fiscal 2003. A year earlier, on September 28, 2001, the order backlog was $5.4 milllion.

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Manufacturing and Sources of Supply

        Isco-Lincoln's manufacturing operations are vertically integrated. We fabricate most of the metal and plastic components used in our products and obtain the required raw materials from several sources. Production planning is handled by a computerized production control system that ensures raw materials and sub-component parts are received on time for final assembly. Since we are not reliant upon outside suppliers for these types of components, we are generally able to produce them at a lower cost and maintain a consistently high level of quality.

        Products manufactured by Isco-Lincoln use a variety of mechanical, electrical, and electronic components. Most of these components are available from several sources. Currently, we are not experiencing any shortage of raw materials or components.

        STIP's manufacturing operations consist mainly of final assembly and testing, with most other processes outsourced. Currently, we have not experienced any shortages. Production planning is handled by computerized production control systems that ensure raw materials and sub-component parts are received on time for final assembly.

Employees

        On September 27, 2002, we had 481 employees. There were 233 employees engaged in production, 67 in research and engineering, 137 in marketing and sales, and 44 in administration. None of our employees are represented by a labor union. We have never experienced a work stoppage.

Item 2. Properties.

        The expansion and renovation of our Superior Street facility was completed in August 1999. We added approximately 56,000 square feet to the existing main building, bringing the total square footage at this location to approximately 168,000 square feet. The layout of the renovated facility, the installation of space saving and more efficient equipment, and an open office environment allow us to perform our operations using less floor space. The Superior Street facility houses our corporate, executive, and administrative offices along with sales, research, engineering, manufacturing, and maintenance activities. The buildings at 4700 Superior Street in Lincoln, Nebraska are located on approximately 30 acres. The Superior Street facility is owned and unencumbered. The building at 531 Westgate Boulevard, Lincoln, Nebraska was sold in February 2000.

        STIP leases 1,424 square meters in a building located in Groß-Umstadt, Germany. The facility houses the engineering, manufacturing, marketing, selling, and administrative activities of STIP. The lease expires December 31, 2003. STIP has the option to extend the lease for an additional three years.

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Item 3.    Legal Proceedings.

        We filed an action in the United States District Court for the District of Nebraska against Cornell Research Foundation, Inc. ("Cornell") on January 24, 2002, seeking to enjoin Cornell from terminating a patent license agreement dated April 30, 1996 ("license"). Our action was precipitated by a notice from Cornell terminating the license and alleging that we had not been diligent in developing a commercial product. The suit in Nebraska has been dismissed and we filed a corresponding action in the United States District Court for the Northern District of New York on September 4, 2002. We joined Advion Biosciences, Inc. ("Advion") another licensee on the same patent as a co-defendant with Cornell. Pursuant to the rights granted in the license, we developed several new high performance liquid chromatography columns utilizing monolithic packing (SWIFT™) and began marketing them in early July 2002.

        In response to our suit, Cornell is demanding arbitration of the dispute. We have moved for a stay of arbitration in the Supreme Court of New York. Both actions are in their preliminary stages and neither court has held any hearings or taken any action to date. We intend to pursue this matter very vigorously, and believe that we will prevail in this matter.

        At the same time, the scope of our license is being arbitrated with a decision expected in December of this year. This arbitration relates to products not yet being sold by us. We intend to continue with its marketing efforts on the new column products.

        In January 2001 we received $425,000 as a result of the settlement of pending litigation regarding the Company's abandoned enterprise resource planning (ERP) system.

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

        During the fourth quarter of fiscal 2002, no issues were submitted to a vote of shareholders.

PART II

Item 5.    Market for the Registrant's Common Equity and Related Stockholders Matters.

        Common stock data: On September 27, 2002 - 5,673,971 shares outstanding and approximately 258 shareholders of record.

        Market: NASDAQ/NMS. Symbol: ISKO

        Stock price: The high and low trade prices of the common stock and the cash dividends declared in each quarter during the last two fiscal years are shown below:

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Item 6.    Selected Financial Data.
Amounts in thousands except per share data.

Notes:

(1)

Fiscal 2001 includes the receipt of $0.4 million from the lawsuit settlement for the enterprise resource planning (ERP) operating system.

(2)

Fiscal 2000 includes charges of $4.5 million associated with the write-off of intangibles and sale of net operating assets of Geomation and the write-off of the ERP operating system.

(3)

Fiscal 1999 includes charges of $1.3 million associated with the settlement of a lawsuit, the Superior Street facility renovation related asset write-off, costs associated with the Y2K computer system conversion, and the write-off of inventory related to Suprex.

(4)

Fiscal 1998 includes impairment charges of $1.6 million associated with the write-off of intangibles and inventory related to the disposition of assets of the Suprex product line.

(5)

The pro forma data presented above removes the impact of the nonrecurring charges listed above in notes (1) through (4), the operations of Geomation since fiscal 1998, and classifies the net gain on sales of capital equipment as a component of income from operations.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

        The following Management's Discussion and Analysis of Financial Condition and Results of Operations contain trend analysis and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those projected in the forward-looking statements throughout this document as a result of the factors set forth below in the section entitled "Factors Affecting Future Results" and elsewhere in this document.

        All references to "years" mean our fiscal year.

        The following table summarizes, for the three years indicated, the percentages that certain components of the Consolidated Statements of Operations bear to net sales and the percentage change of such components (based on actual dollars) compared with the prior year.

        The operating performances from fiscal 1998 through fiscal 2001 have been negatively impacted by significant non-recurring charges. These items are identified under Item 6, Selected Financial Data. Pro forma data has been included in this selected financial data that removes the impact of these nonrecurring charges and the operations of Geomation since fiscal 1998.

Net Sales Analysis and Review

2002 to 2001 Comparison

        Our net sales of $59.2 million for the year ended July 26, 2002 were four percent above fiscal 2001 net sales of $56.8 million. Revenues related to our core product lines (wastewater samplers, flow meters (including closed pipe flow meters), and liquid chromatography) were up three percent, an increase of $1.5 million over last year. Flow meter and liquid chromatography revenues increased by 13 percent or $1.4 million and 28 percent or $3.1 million, respectively over the prior year, while sampler revenues declined by 14 percent or $3.0 million. The year-over-year increases in flow meter and liquid chromatography revenues were due to successful new product introductions. Specifically, new liquid chromatography hardware and disposable columns, focused on the niche market of drug discovery, significantly contributed to the overall increase. The year-over-year decline in sampler revenues was due to the combination of increased competition and declining economic conditions that existed throughout the world markets in the current year. In addition, fiscal 2001 was positively impacted by Isco's ability to generate sampler revenues related to several one-time, domestic, regulatory-driven demands.

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        Other revenues outside of our core product lines (including the product lines of process monitoring, supercritical fluid extraction (SFE), and syringe pumps, along with revenues related to equipment repairs and billed freight) were up by $884,000 or seven percent from last year. The increase was provided by growth in process monitoring and SFE product revenues along with increased freight revenues partially offset by decreased sales of syringe pump products.

        Domestic revenues of $43.3 million for the year were up three percent from the prior year. Domestic revenues related to our core product lines for the year increased four percent over fiscal 2001. Flow meter and liquid chromatography revenues accounted for the increase, partially offset by the decline in sampler related revenues. Our other domestic revenues were flat year-over-year. The revenue increases in the areas of process monitoring, SFE, and freight revenues were offset by a decline in revenues from syringe pumps.

        International revenues of $15.9 million for the year were up seven percent from the prior year. International revenues related to our core product lines for the year increased one percent over last year. Revenues related to liquid chromatography products accounted for the increase, which was offset by the decline in sampler related revenues. Our other international revenues were up 14 percent, with the syringe pump line accounting for the majority of the increase.

        Net orders of $59.1 million were received during fiscal 2002, an increase of three percent compared with fiscal 2001. The order backlog at July 26, 2002 was $5.3 million, down three percent from the beginning of the fiscal year. As of September 27, 2002 our order backlog was $5.0 million, the majority of which is scheduled for delivery prior to July 25, 2003, the close of fiscal 2003.

2001 to 2000 Comparison

        Our net sales for the year ended July 27, 2001 of $56.8 million were three percent above fiscal 2000 sales of $55.2 million. Removing the impact of Geomation from both fiscal years, sales were up four percent. Revenues related to our core product lines (wastewater samplers, flow meters (including closed pipe flow meters), and liquid chromatography) were up seven percent or increased by $3.1 million over fiscal 2000. Sampler and liquid chromatography revenues increased by 17 percent or $3.1 million and 10 percent or $1.0 million, respectively over the prior year while flow meter revenues declined by nine percent or $1.0 million. The under performance in revenues related to flow meters for fiscal year 2001 was the result of a number of factors, including a disruption in product management.

        Other revenues outside of our core product lines (including the product lines of process monitoring, supercritical fluid extraction (SFE), syringe pumps, and Geomation, along with revenues related to equipment repairs and billed freight) were down by $1.4 million or 10 percent from fiscal 2000. Our other revenues were affected by the reduction in Geomation revenues due to the sale of the net assets of this entity at the beginning of fiscal 2001. Removing the revenues associated with Geomation from both fiscal years' results, our other revenues were approximately the same for both fiscal years. While these revenues were flat, we experienced a decline in SFE revenues offset by increased syringe pump revenues along with additional freight revenues. We began to bill for domestic freight in fiscal 2001.

        Domestic revenues for fiscal 2001 were up three percent over fiscal 2000. Domestic revenues related to our core product lines increased eight percent over fiscal 2000. Revenues associated with samplers and liquid chromatography accounted for the increase, offset by a decline related to flow meters. Our other domestic revenues were down 18 percent from fiscal 2000. Removing the impact of Geomation, our other revenues decreased five percent from fiscal 2000. This decline was driven by reduced revenues associated with SFE offset by increased syringe pump revenues along with additional freight revenues.

        International revenues for fiscal 2001were up four percent over fiscal 2000. International revenues related to our core product lines increased five percent over fiscal 2000. All of our core product lines contributed to the year-over-year increase in revenues. Our other international revenues increased by two percent over fiscal 2000. Removing the impact of Geomation, the other international revenues increased by five percent over the previous year. This increase was driven by revenues from the SFE and syringe pump product lines.

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        Net orders of $57.4 million were received during fiscal 2001, an increase of six percent or $3.2 million compared with fiscal 2000. Removing the impact of Geomation from both fiscal years, fiscal year 2001 net orders were up nine percent over the prior year. The order backlog at July 27, 2001 was $5.4 million, up approximately 13 percent from the beginning of the fiscal year. The order backlog at July 28, 2000 included $18,000 for Geomation.

Operating Income Analysis and Review

2002 to 2001 Comparison

        We had income from operations of $2.8 million for fiscal 2002 compared with income from operations of $3.9 million for fiscal 2001, a decline of $1.1 million. Fiscal year 2001 income from operations included a $425,000 benefit from the settlement of the ERP lawsuit. Adjusting for the impact of this settlement, income from operations for fiscal 2002 decreased by 19 percent or $635,000 from the prior year. This decline was due to incremental operating expenses being greater than the incremental gross margin dollars generated on increased net sales.

        The gross margin, as a percentage of sales, declined slightly to 52.2 percent for fiscal 2002 compared with 52.6 percent for the prior year. The decline in the gross margin percentage was due to increased direct manufacturing costs. The impact of increased manufacturing costs was significantly offset by the benefit received from a change in our domestic product line mix from fiscal 2001 to fiscal 2002.

        Operating expenses, excluding the benefit of the previous year's ERP lawsuit settlement discussed above, increased by $1.6 million over fiscal 2001. The selling, general and administrative (SG&A) and engineering expense categories both contributed to the increase. Included in this increase is approximately $400,000 of increased expenses associated with SWIFT; with the majority of costs focused on building sales and marketing infastructure to launch the SWIFT columns in July 2002. Excluding our investment in SWIFT, SG&A increased by approximately $1.0 million. A significant portion of this increase was due to increased sales and marketing personnel costs due to staffing increases along with increases in the cost of the executive compensation program both in cash incentives and non-cash charges related to performance based stock options. These increases were partially offset by reduced domestic advertising and promotion expenses. Engineering expense increased by $335,000 over the prior year due to normal increases in personnel expenses and increased subcontracted development costs.

        In total, other income increased by $178,000 over the previous year. Improved earnings performance from AFTCO, Isco's joint venture, was the primary factor in the increase. While our average investment balances were higher in the current year, lower yield rates resulted in the slightly lower levels of investment income for the current year. Interest expense decreased by $80,000 from the previous year, as average debt outstanding was lower and interest rates on line of credit borrowings declined.

        Our effective income tax rate for the year ended July 26, 2002 was 24.4 percent compared to an effective income tax rate of 31.3 percent for the previous year. The current year's effective rate was significantly lower than the statutory rate due to the implementation of new global tax strategies which allowed for the net operating loss valuation allowance to be removed. The prior year's effective rate was also lower than the statutory rate due to tax benefits associated with Isco's foreign sales corporation and changes in the net operating loss valuation allowance.

2001 to 2000 Comparison

        We had income from operations of $3.9 million for fiscal 2001 compared with a loss of $1.6 million for fiscal 2000, an improvement of $5.4 million. There were several one-time items and a change in classification that impacted the results of both years and impacted the year-over-year improvement. Fiscal year 2000 incurred charges of $2.4 million related to the write-off of the ERP operating system, $2.1 million related to the loss on impairments and disposition of Geomation, and a $0.8 million operating loss from Geomation. Fiscal year 2001 income from operations reflected a $425,000 benefit from the settlement of the ERP lawsuit, a $47,000 operating loss from Geomation, along with a benefit of $571,000 from the change in classification of net gain on sales of capitalized equipment that was reported as other income in fiscal 2000 and prior years. Adjusting for the impact of these items

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to income from operations, fiscal 2001 incurred a decrease in income from operations of approximately $844,000 from fiscal 2000. This decrease was due primarily to increased selling expenses being greater than the incremental gross margin dollars generated on increased sales. Our gross margin as a percentage of sales was 52.6 percent for fiscal year 2001, the same level as in fiscal 2000.

        Operating expenses decreased by $4.6 million in fiscal year 2001 compared with fiscal year 2000. This year-over-year decrease was significantly impacted by the items stated above. Operating expenses actually increased by $2.0 million after removing the net impact of all the above mentioned items. The selling, general and administrative (SG&A) and engineering expense categories both contributed to the increase. Excluding the SG&A expenses of Geomation, SG&A, as a percentage of sales, increased from 35.7 percent to 37.3 percent from fiscal 2000 to fiscal 2001, an increase of $1.7 million. The majority of the increase was attributable to personnel costs associated with planned staffing increases in the sales and marketing area. In addition, sales commissions associated with domestic channel sales increased due to strong sampler product line sales along with other areas such as travel and product promotional expenditures. Excluding the effects of the Geomation operations, research and engineering expenses, as a percentage of sales, remained at 9.2 percent for both fiscal years and increased by $246,000. The increase was attributable to subcontracted product development activities.

        In total, other income declined by $265,000 in fiscal 2001 compared with fiscal 2000. Investment income increased by $243,000 due to a larger average investment balance in fiscal 2001 compared with the prior fiscal year. The increase in investment income was offset by a decrease in other income due to the net proceeds on the sales of used equipment being reported in net sales and costs of sales in fiscal 2001. The other net category included net proceeds on the sale of capitalized equipment of $662,000 in fiscal 2000.

        Our effective income tax rate for the year ended July 27, 2001 was 31.3 percent. Fiscal year 2001's effective rate was lower then the statutory rate due to tax benefits associated with Isco's foreign sales corporation and changes in the net operating loss valuation allowance. The tax benefit for fiscal 2000 realized on the net loss was at an effective tax rate of 11.4 percent. This effective tax rate was significantly reduced due to the non-deductibility on the write-off of the intangible assets related to the disposition of Geomation.

Liquidity and Capital Resources

        The primary sources of liquidity for Isco are cash from operations, various credit facilities, and borrowing capacity. Cash flows from operations for the fiscal years of 2002, 2001, and 2000 were approximately $5.9 million, $7.7 million, and $3.3 million respectively. Net income adjusted for depreciation, changes in deferred taxes, and other miscellaneous non-cash changes provided approximately $5.1 million, $6.3 million, and $5.4 million for fiscal 2002, 2001, and 2000, respectively. Fiscal 2001 included a $0.9 million benefit from the use of net operating loss carry forwards against taxable earnings while fiscal 2000 included a $4.5 million benefit from the non-cash charges associated with the ERP write-off and the loss on impairments and sale of Geomation net assets. The change in net operating assets provided us with approximately $0.9 million and $1.3 million of cash in fiscal years 2002 and 2001, respectively, while the change in operating assets utilized cash of $2.1million in fiscal 2000. The cash provided or used in any given year for operating assets is partially dependent on the timing of orders and shipments. We monitor several utilization measures to manage our key assets and liabilities. Our average days sales outstanding (DSO) were 59 days, 62 days, and 64 days for fiscal 2002, 2001, and 2000, respectively. Our average days of inventory on hand, on a FIFO basis, were 144 days, 147 days, and 150 days for fiscal 2002, 2001, and 2000, respectively. The average days to pay on accounts payables and accrued expenses were 30 days, 27 days, and 29 days for fiscal 2002, 2001, and 2000, respectively.

        Cash and investments totaled $15.6 million, $12.5 million, and $7.3 million for fiscal years 2002, 2001, and 2000, respectively. In addition, we had working capital at July 26, 2002 of $19.1 million and our current ratio was 3.2:1.

        Net capital expenditures were $1.3 million, down from $1.5 million in fiscal 2001 and up from $1.0 million in fiscal 2000. After several years of not paying cash dividends, the Company reinstated these dividends during the fiscal year and distributed total cash dividends of $0.9 million in fiscal 2002.

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        We did not have any material changes to our debt structure within the recent three year period. In fiscal 2002 we made $1.1 million of fixed debt repayments under the various contractual obligations compared to $1.0 million for fiscal 2001 and 2000. At July 26, 2002, our total debt, including borrowings against lines of credit, was $4.0 million with $1.1 million in required repayments due next fiscal year. In addition, at July 26, 2002 we had lines of credit with various banks totaling $7.0 million of which $4.9 million was available for future business needs.

        Our financial condition remains strong. We believe that our cash and short-term investments, operating cash flows, and available borrowing capacity provide adequate resources to fund ongoing operating requirements.

        The following table summarizes our outstanding contractual obligations and other commercial commitments as of July 26, 2002, and the effect such obligations are expected to have on liquidity and cash flow in future periods (amounts in thousands).

New Accounting Pronouncements

        In July 2001 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill, and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. This standard is effective for the Company's fiscal year 2003. The adoption of this standard will not have a significant impact on the consolidated financial statements.

        In June 2001 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143 (SFAS No. 143), Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations related to the retirement of tangible long-lived assets and the related asset retirement costs. SFAS No. 143 is effective for the Company's fiscal year 2003. The adoption of this standard in fiscal 2003 will not have a significant impact on the consolidated financial statements.

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        In August 2001 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 (SFAS No. 144), Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of certain long-lived assets. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The adoption of this standard in fiscal 2003 will not have a significant impact on the consolidated financial statements.

        In June 2002 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146 (SFAS No. 146), Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of this standard in fiscal 2003 to have a significant impact on the consolidated financial statements.

Critical Accounting Policies

Accounts Receivable

        Accounts receivable consist primarily of amounts due to us from normal business activities. We maintain an allowance for doubtful accounts to reflect the expected uncollectibility of accounts receivable based on a combination of past collection history, aging of outstanding accounts receivables, and specific risks identified in the portfolio.

Inventories

        Inventories consist of purchased materials, raw materials, in-process subassemblies, and finished goods. Inventory obsolescence cost has not historically been material and as a result we do not carry a reserve for obsolescence for the majority of our inventory. We review our inventory balances to determine if inventories can be sold at amounts equal to or greater than their carrying amounts. The review includes identification of slow-moving inventories, obsolete inventories, and discontinued products or lines of products. The identification process includes a review of historical performance of the inventory and current operational plans for the inventory. If our actual results differ from our expectations with respect to the inventory sales at amounts equal to or greater than their carrying amounts, we would be required to adjust our inventory balances accordingly. We use the link-chain method for valuing the majority of our inventory on a LIFO basis.

Revenue Recognition

        Revenues are recorded when products are shipped to customers or, in instances where service is performed to customer requirements, upon the successful completion of such service. We are generally not contractually obligated to accept returns, except for defective products. Sales are shown net of returns and discounts.

Stock-Based Compensation

        We have elected to account for fixed award stock options and nonemployee directors' options under the provisions of APB No. 25 "Accounting for Stock Issued to Employees". As such, no compensation cost has been recorded in the financial statements relative to these options. We utilize the Black-Scholes option pricing model to estimate the fair value of these options for disclosure purposes.

        We account for performance based awards granted under our employee stock option plans in accordance with the provisions of APB 25. Options granted under the performance based awards are subject to variable accounting treatment until the number of options that will vest is known. Options not vested at the end of each performance year are cancelled. Compensation expense is recorded based on difference between the closing market price at the date the shares vest and the exercise price as determined at the date the shares were granted.

        Deferred stock units granted to nonemployee directors are accounted for in accordance with Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation." Accordingly, directors deferred stock units are recorded as compensation expense at estimated fair value on the date the units are earned by the director.

Joint Venture

        We account for our investment in the AFTCO joint venture using the equity method of accounting.

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Factors Affecting Future Results

        Looking forward to fiscal 2003, we expect to improve our sales on a year-over-year basis but are uncertain about our ability to increase income from operations on the same basis. This uncertainty for improved income from operations is due to our firm commitment to continued product development activities along with focused sales and marketing efforts to build and expand the business in the areas of process monitoring and the SWIFT monolithic column media for liquid chromatography, which we feel are critical for our long-term success. The majority of the planned increases in operating expenses for fiscal 2003 are due to the introduction of the new SWIFT columns. We anticipate spending between $1.0 million and $1.3 million in this area in fiscal 2003, which represents an increase in operating expenses of between $350,000 and $650,000 in fiscal 2003. While we continually look for opportunities to improve our operational effectiveness, we are uncertain if we can make improvement in our operations that equal or exceed the additional expenditures.

        In addition to the controllable business items stated above, the global economic and political outlook remains decidedly uncertain, and could significantly affect our performance. With approximately 70 percent of our sales coming from the regulatory driven environmental market, we recognize that we may be positively or negatively affected by changes in governmental regulations and the emphasis on program funding. We are concerned that the United States and other countries may need to divert funds from environmental areas into their military and infrastructures due to increased concerns of terrorism and/or war.

        Looking beyond fiscal 2003, we are strategically committed to product and market development as a means to achieve sales growth. Our strong financial position will allow us to selectively increase product development, sales, and marketing expenditures to capitalize on value creating opportunities. The outcome of our current legal proceedings related to SWIFT will have a significant impact on our long-term strategic activities in the area of liquid chromatography. In the event that we are unsuccessful in retaining our license, we will shift focus and resources to ensure continued long term growth in this product area. In our environmental market area, we are experiencing a continuing consolidation of competitors. As a result, we are dealing with the effects of larger, well-financed competitors who also have the organizational resources and breadth of product lines to compete aggressively in the global marketplace. While we feel that we can effectively compete with these larger organizations on the basis of agility, speed, and responsiveness, they do continue to present a potent threat.

Market Risk

        Interest rate risk and currency exchange risks are the primary market risks to which we are exposed. We do not use derivative financial or commodity instruments. Our other financial instruments include cash and cash equivalents, accounts and notes receivable, accounts and notes payable, and long-term debt. Our cash and cash equivalents, accounts and notes receivable, and accounts and notes payable balances are generally short-term in nature and do not expose our company to material market risk. At July 26, 2002, we had approximately $2.1 million of fixed rate debt, along with $7.0 million of variable rate credit facilities, of which approximately $1.9 million was outstanding under these credit facilities. At July 27, 2001, we had approximately $3.1 million of fixed rate debt, along with $7.0 million of variable rate credit facilities, of which approximately $1.5 million was outstanding under these credit facilities. We do not believe that changes in interest rates on the debt and credit facilities would have a material effect on our results of operations, given the amount of our obligations under these debt and credit facilities.

        Related to currency exchange, international sales of our United States based operations are denominated in U.S. dollars and international sales of our German subsidiary are denominated in euros. The currency exchange risk at the current level of activity is not material to our operating results or financial position. Our market risk resulting from the translation of the profit and loss of STIP and from our permanent investment in our foreign subsidiaries is not material.

Inflation

        The effect of inflation on our costs and our ability to pass on cost increases in the form of increased prices is dependent upon market conditions and the competitive environment. The general level of inflation in the U.S. economy has been relatively low for the past several years and has not, to date, had a significant effect on the cost of acquiring materials for production.

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Legal Proceedings

        We filed an action in the United States District Court for the District of Nebraska against Cornell Research Foundation, Inc. ("Cornell") on January 24, 2002, seeking to enjoin Cornell from terminating a patent license agreement dated April 30, 1996 ("license"). Our action was precipitated by a notice from Cornell terminating the license, alleging that we had not been diligent in developing a commercial product. The suit in Nebraska has been dismissed and we filed a corresponding action in the United States District Court for the Northern District of New York on September 4, 2002. We joined Advion Biosciences, Inc. ("Advion") another licensee on the same patent as a co-defendant with Cornell. Pursuant to the rights granted in the license, we developed several new high performance liquid chromatography columns utilizing monolithic packing (SWIFT) and began marketing them in early July 2002.

        In response to our suit, Cornell is demanding arbitration of the dispute. We have moved for a stay of arbitration in the Supreme Court of New York. Both actions are in their preliminary stages and neither court has held any hearings or taken any action to date. We intend to pursue this matter very vigorously, and believe that we will prevail in this matter.

        At the same time, the scope of our license is being arbitrated with a decision expected in December of this year. This arbitration relates to products not yet being sold by us. We intend to continue with its marketing efforts on the new column products.

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Item 8. Financial Statements and Supplementary Data.

Independent Auditors' Report

Board of Directors and Shareholders
Isco, Inc.

        We have audited the accompanying consolidated balance sheets of Isco, Inc. and subsidiaries as of July 26, 2002 and July 27, 2001, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended July 26, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Isco, Inc. and subsidiaries as of July 26, 2002 and July 27, 2001, and the results of their operations and their cash flows for each of the three years in the period ended July 26, 2002 in conformity with accounting principles generally accepted in the United States of America.

Deloitte & Touche LLP

Lincoln, Nebraska
October 4, 2002

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ISCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)

The accompanying notes are an integral part of the consolidated financial statements.

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ISCO, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Columnar amounts in thousands)

The accompanying notes are an integral part of the consolidated financial statements.

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ISCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except per share data)

The accompanying notes are an integral part of the consolidated financial statements.

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ISCO, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Columnar amounts in thousands)

See Note M for supplemental cash flow information.

The accompanying notes are an integral part of the consolidated financial statements.

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ISCO, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended July 26, 2002, July 27, 2001, and July 28, 2000
(Columnar amounts in thousands, except share and per share data)

Note A. Summary of Significant Accounting Policies.

        Description of Business.    Isco, Inc. and its subsidiaries (the Company) design, manufacture, and market products worldwide. The majority of our revenue comes from sales of products used by industry and government to monitor compliance with water quality regulations and by industries in a variety of research and testing laboratories and by industries in the development of new drugs.

        Basis of Presentation.    The consolidated financial statements include the accounts of Isco, Inc. and its wholly owned subsidiaries. All inter-company transactions and accounts have been eliminated. Investments in which the Company exercises significant influence over operating and financial policies are accounted for using the equity method.

        For fiscal reporting purposes, the Company operates under a 52/53-week year, ending on the last Friday of July. Fiscal years 2002, 2001 and 2000 contained 52 weeks.

        Use of Estimates.    The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

        Fair Value of Financial Instruments.    The carrying values of cash, accounts receivable, accounts payable and short-term borrowing approximate fair value. The fair value of long-term debt, which is based on the borrowing rates and terms currently available to the Company, approximates carrying value.

        Cash and Cash Equivalents.    Cash and cash equivalents include all cash balances and highly liquid investments with an original maturity of three months or less.

        Accounts Receivable.    Accounts receivable consist primarily of amounts due from normal business activities. The Company maintains an allowance for doubtful accounts to reflect the expected uncollectibility of accounts receivable.

        Investments.    The Company classifies investments into three categories accounted for as follows: debt securities that the Company has the intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost; debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; debt and equity securities not classified as either held-to-maturity or trading are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, as a component of accumulated other comprehensive income. The Company held no trading securities during the periods reported and generally does not trade securities. Sales of available-for-sale securities are recognized using the first-in, first-out method.

        Inventories.    Inventories are valued at the lower of cost or market, principally on the last-in, first-out (LIFO) basis. Management reviews the inventory balances to determine if inventories can be sold at amounts equal to or greater than their carrying amounts. The review includes identification of slow-moving inventories, obsolete inventories and discontinued products or lines of products. The identification process includes a review of historical performance of the inventory and current operational plans for the inventory. If actual results differ from expectations, inventory balances are adjusted.

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        Long-Lived Assets.    The Company reviews long-lived assets and certain intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In such cases, the expected future cash flows (undiscounted and without interest charges) resulting from the use of the asset are estimated and an impairment loss is recognized if the sum of such cash flows is less than the carrying amount of the asset. Should such an assessment indicate that the value of a long-lived asset or goodwill is impaired; an impairment loss is recognized for the difference between the carrying value of the asset and its estimated fair value. Impairments recognized by the Company during fiscal year 2000 are discussed in Notes E and O.

        Property and Equipment.    Property and equipment are stated at historical costs. Depreciation is provided using the straight-line and declining balance methods over estimated useful asset lives of 10 to 40 years for buildings and improvements and 3 to 20 years for machinery and equipment.

        Other Assets.    Intangible assets are amortized on a straight-line basis over estimated useful lives of 3 to 15 years. Intangibles include intellectual property, engineering drawings, patents, licenses, customer or market lists, and trade names. The Company's investment in the AFTCO joint venture is accounted for under the equity method. The equity method goodwill of approximately $750,000 is being amortized on a straight-line basis over 10 years.

        Revenue Recognition.    Revenues are recorded when products are shipped to customers or, in instances where service is performed to customer requirements, upon the successful completion of such service. The Company is generally not contractually obligated to accept returns, except for defective products.

        Foreign Currency Translation.    The euro (Eu) is the functional currency of the Company's wholly-owned German subsidiary. Exchange gains and losses resulting from transactions denominated in currencies other than the functional currency are included in the results of operations for the year. Assets and liabilities are translated to U.S. dollars at current exchange rates as of each balance sheet date. Income and expense items are translated using average exchange rates during the year. Cumulative currency translation adjustments are presented as a component of accumulated other comprehensive income (loss). Transaction gains and losses and unrealized gains and losses on inter-company receivables have not been material to date.

        Research and Engineering.    Research and engineering costs are expensed as incurred.

        Income Taxes.    Income taxes are recorded using the liability method. This method recognizes the amount of taxes payable or refundable for the current year. Deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts.

        Stock-Based Compensation.    Pursuant to Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation" (SFAS 123), management has elected to account for the employee fixed award stock options and nonemployee directors' stock options under the provisions of APB No. 25 "Accounting for Stock Issued to Employees". As such, no compensation cost has been recorded relative to these options. Management utilizes the Black-Scholes option pricing model to estimate the fair value of these options.

        The Company accounts for performance based awards granted under its employee stock option plans in accordance with the provisions of APB 25. Options granted under the performance based awards are subject to variable accounting treatment until the number of options that will vest is known. Options not vested at the end of each performance year are cancelled. Compensation expense is recorded based on difference between the closing market price at the date the shares vest and the exercise price as determined at the date the shares were granted.

        Deferred stock units granted to nonemployee directors are accounted for in accordance with Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation." Accordingly, directors deferred stock units are recorded as compensation expense at estimated fair value on the date the units are earned by the director.

        Earnings (Loss) Per Share.    Basic earnings (loss) per share is based on the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is based on the weighted average number of common shares outstanding during the period and the dilutive effect of stock options and common stock equivalents outstanding using the treasury stock method.

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        Comprehensive Income (Loss).    Comprehensive income (loss) for all periods presented consists of net earnings (loss), unrealized gain (loss) on securities available for sale, and foreign currency translation adjustments. These results are incorporated into the consolidated statements of shareholders' equity. The accumulated other comprehensive income (loss) related to securities available-for-sale and to foreign currency translation adjustments are ($5,000) and $41,000 at July 26, 2002, ($29,000) and $107,000 at July 27, 2001, respectively.

        Reclassifications.    Certain reclassifications have been made to the prior years' financial statements to conform to the current year's presentation.

        Accounting Pronouncements.    In July 2001 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill, and the identification of reporting units for purposes of assessing potential future impairments of goodwill. SFAS 142 also requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. This standard is effective for the Company's fiscal year 2003. The adoption of this standard will not have a significant impact on the consolidated financial statements.

        In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143 (SFAS No. 143), Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations related to the retirement of tangible long-lived assets and the related asset retirement costs. SFAS No. 143 is effective which is effective for the Company's fiscal year 2003. The adoption of this standard in fiscal 2003 will not have a significant impact on the consolidated financial statements.

        In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 (SFAS No. 144), Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of certain long-lived assets. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The adoption of this standard in fiscal 2003 will not have a significant impact on the consolidated financial statements.

        In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146 (SFAS No. 146), Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of this standard in fiscal 2003 to have a significant impact on the consolidated financial statements.

Note B. Allowance for Doubtful Accounts.

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Note C. Investments.

        No gains or losses were recognized on investments in fiscal 2002, 2001, or 2000, respectively.

        As of July 26, 2002: