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

FORM 10-Q

For the transition period from to                             to                             

Commission file number 0-14429

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

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

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 the number of shares outstanding of each of the issuer's classes of common stock as of November 29, 2002.

ISCO, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

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ISCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

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

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ISCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

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

4

ISCO, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See Note 6 for supplemental cash flow information.

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

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ISCO, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

October 25, 2002

(Unaudited)
(Columnar amouts in thousands, except per share data)

Note 1:    In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all of the adjustments necessary for a fair presentation of the financial position of the Company and the results of operations and cash flows for the interim periods presented herein. All such adjustments are of a normal recurring nature. Results of operations and cash flows for the current unaudited interim period are not necessarily indicative of the results that may be expected for the entire fiscal year. Inter-company transactions and accounts have been eliminated.

        While the Company believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended July 26, 2002.

Note 2:    Certain reclassifications have been made to the prior period's financial statements to conform to the current period's presentation.

Note 3:    Inventories are valued at the lower of cost or market, principally on the last-in, first-out (LIFO) basis. The composition of inventories was as follows:

        Had inventories been valued on the first-in, first-out (FIFO) basis, they would have been approximately $2,244,000 and $2,307,000 higher than reported on the LIFO basis at October 25, 2002 and July 26, 2002, respectively.

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Note 4:    Other Assets

Note 5:    Comprehensive income (loss), for the three month periods ended October 25, 2002 and October 26, 2001, was as follows:

Note 6:    Supplemental Cash Flow Information

        The Company made income tax payment of $385,000 and $0 during the three-month periods ended October 25, 2002 and October 26, 2001, respectively.

        The Company made interest payments of $59,000 and $78,000 during the three-month periods ended October 25, 2002 and October 26, 2001, respectively.

Note 7:    Legal Proceedings The Company continues its activities related to its SWIFT column products and to the filed lawsuits by and against Cornell Research Foundation, Inc. ("Cornell") All legal actions are in their preliminary stages. The Company intends to pursue these matters very vigorously and believes that it will prevail whether through court action or through any court-ordered or party-agreed-to arbitration. Details on these lawsuits can be found in Isco's annual report on Form 10-K for fiscal year 2002 under Part I, Item 3, Legal Proceedings.

        The Company began selling the new SWIFT columns late in the in the fourth quarter of fiscal 2002. At this time, the revenues from SWIFT columns are not material to the overall revenues of the Company. The Company continues to invest in infrastructure to build and expand this column business. Details on the Company's investments in this area can be found in Isco's annual report on Form 10-K for fiscal year 2002 under the section entitled "Factors Affecting Future Results" in Part I, Item 2, Management's Discussion and Analysis of Results of Operations and Financial Condition.

Note 8:    New Accounting Pronouncements

        The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, as of the beginning of the current fiscal year. SFAS No. 142 provides that goodwill and other intangible assets with indefinite lives shall not be amortized and shall be tested for

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impairment of value on an annual basis. There was no impairment that resulted from adoption of this standard. The Company discontinued the amortization of equity method goodwill relating to the AFTCO joint venture upon adoption of this standard. Goodwill and other identifiable intangible assets with indefinite lives are not amortized and are tested annually for impairment. Impairment occurs when the fair value of the asset is less than its carrying amount. Identifiable intangible assets with definite lives are amortized over their estimated useful lives and tested for impairment whenever events or changes in circumstances indicate the carrying amount of the asset may be impaired. Impairment occurs when the fair value of the asset is less than its carrying amount. If impaired, the intangible asset is written down to its fair value. The after tax impact of adopting this standard in fiscal 2002 would have been to increase first quarter fiscal 2002 earnings by approximately $19,000. Basic and diluted earnings per share amounts would not have changed on a pro forma basis.

        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.

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Item 2.    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 within this document.

Results of Operations

        The following table sets forth, for the three-month periods indicated, the percentages which certain components of the Condensed Consolidated Statements of Operations bear to net sales and the percentage of change of such components (based on actual dollars) compared with the same periods of the prior year.

Net Sales Analysis and Review

        Our net sales for the first quarter of fiscal 2003 of $15.5 million were slightly above first quarter fiscal 2002 net sales of $15.4 million. Revenues related to our core products lines (wastewater samplers, flow meters, and liquid chromatography) were $12.0 million for the first quarter of fiscal 2003 compared with $11.6 million for the same period last year, an increase of 3.0 percent. Revenues from our liquid chromatography line continue to provide double digit growth and accounted for the year-over-year increase, while revenues from samplers and flow meters were down slightly from the first quarter of fiscal 2002. Our major product lines of samplers and flow meters continue to be negatively affected by the continuing economic and competitive conditions that were present in the prior fiscal year. Revenues outside of our core product lines (including the product lines of process monitoring,

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supercritical fluid extraction (SFE), syringe pumps, along with revenues related to equipment repairs and billed freight) were $3.5 million for the current fiscal year compared with $3.8 million for the same period last year, a 7.4 percent decrease. While syringe pump revenues increased, revenues from all other areas were either flat or lower than the prior year.

        Domestic revenues for the first quarter of fiscal 2003 of $11.8 million were 2.7 percent above first quarter fiscal 2002 revenues of $11.5 million. Domestic revenues related to our core product lines for the three months were up 2.0 percent from last year, with liquid chromatography revenues accounting for the increase, offset by declines in sampler and flow meter revenues. Domestic revenues outside of our core product lines were up 6.4 percent compared with the same period last year. Revenues from the syringe pump line accounted for the year-over-year improvement.

        International revenues for the first quarter of fiscal 2003 of $3.7 million were 6.0 percent below first quarter fiscal 2002 revenues of $4.0 million. First quarter revenues from our core product lines increased by 8.1 percent compared with last year's first quarter. The sampler product line accounted for this revenue increase, partially offset by a decline in liquid chromatography related sales. International revenues outside of our core product lines were down 19.4 percent, with all areas contributing to the decrease.

        Net orders of $15.1 million were received during the first quarter of fiscal 2003, a decrease of 1.0 percent from the first quarter of fiscal 2002. The order backlog at October 25, 2002 was $4.9 million, down approximately eight percent from the beginning of the fiscal year.

Net Income Analysis and Review

        Our net income for the first quarter of fiscal 2003 was $0.4 million, down approximately $0.6 million or 58 percent from the prior year. The primary factor in the decline was lower income from operations. Income from operations for the first quarter of fiscal 2003 was $0.5 million, down approximately $1.0 million or 68 percent compared with the first quarter of fiscal 2002. Positive shifts in the mix of our product lines resulted in a gross margin, as a percentage of sales, of 55.2 percent compared with 53.4 percent for the same period last year, and provided additional gross margin dollars of $0.3 million. This benefit was offset by operating expenses which increased by approximately $1.3 million.

        The increase in operating expenses was driven by increases in both sales, general and administrative (SG&A) expenses and engineering expenses. The majority of the increase was in SG&A, which increased by approximately $1.0 million from the prior year. Increased staffing for the chromatography line, general wage increases, increased exhibition expenses, and the replacement of an international dealer were drivers in the SG&A increase. Approximately $300,000 of the increase is attributed to marketing, sales, and legal expenditures for the new SWIFT chromatography media. Beginning in the second quarter of the prior fiscal year, and continuing through the first quarter of fiscal 2003, we increased the expenditure level for SG&A. This was due to our commitment to build the marketing and sales infrastructure to capitalize on market and technology opportunities in process monitoring, SWIFT columns, and drug discover applications of liquid chromatography. These commitments are discussed in detail in our annual report on Form 10-K under the section titled "Factors affecting future results." Engineering expenses increased by $0.3 million primarily from higher levels of outsourced product development activities.

        Other income increased by $125,000, for the first quarter of fiscal 2003 compared with the same period of last year. This improvement was driven by improved earnings from AFTCO, Isco's joint venture. While our average investment balances were higher in the current year, lower yield rates resulted in a slight decrease in investment income for the three-month period compared with last year. Interest expense also decreased slightly for the three-month comparison due to our continued ability to drive down our outstanding fixed debt. Our effective income tax rate for the first quarter of fiscal 2003

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was 33.1 percent compared with an effective income tax rate for the same period last year of 32.2 percent.

Financial Condition and Liquidity

        Our overall cash and investments decreased to $14.3 million at October 25, 2002 from $15.6 million at the end of fiscal year 2002, a decrease of $1.3 million. Operating activities utilized $0.2 million of cash during the first quarter of fiscal 2003 compared with generating $1.4 million during the same period last year. The major factor in the decline was a change in operating assets and liabilities that resulted in a net reduction of approximately $1.1 million in operating cash flow, primarily driven by a change in income taxes. During fiscal 2002, we received the benefits of net operating loss carry forwards to offset that year's tax liabilities. These benefits were fully utilized in fiscal 2002. The decline in net income accounted for approximately $0.6 million of the $1.6 million decline, with the adjustments for depreciation and amortization and other non operating assets and liabilities being at approximately the same level.

        We invested the cash generated from maturities of investments of $4.9 million into long-term and short-term investments of $2.8 million. We utilized the remaining cash available from investment maturities to fund the cash required for operations, purchase a net of $0.3 million in equipment, used cash of $0.5 million for the repayment of long and short term bank obligations and used $0.3 million for dividends. Our net cash and cash equivalents position increased by $0.8 million for the first quarter of fiscal 2003 compared to a net decrease of $0.4 million in the first quarter of fiscal 2002.

        At October 25, 2002, we had working capital of $21.1 million and a current ratio of 3.7:1. At period-end, our total long-term debt was $1.9 million with $1.1 million payable within the next year. In addition, we had lines of credit with various banks totaling $7.0 million of which approximately $5.0 million was available for future business needs.

New Accounting Pronouncements

        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.

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

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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.

Factors Affecting Future Results

        As stated in our annual report on Form 10-K for fiscal 2002, we expected fiscal year 2003 to be a challenging year related to growth in the areas of net sales, net income, and cash flow. During this first quarter our sales in the area of water quality have been adversely affected by the economic and political conditions we mentioned in our Form 10-K for fiscal 2002. We anticipate that these negative conditions will continue into the next quarter and potentially throughout the fiscal year. In addition, we have begun to see signs that the strong sales growth rate of liquid chromatography products for drug discovery applications will slow due to pressure upon pharmaceutical firms to reduce spending and increase profits.

        Our net income will also be affected as we maintain the marketing and sales infrastructure to capitalize on market and technology opportunities in process monitoring, SWIFT columns, and drug discovery applications of liquid chromatography. We believe we can deliver greater long-term value for our shareholders by maintaining these investments rather than reducing our commitment to strive for a year-over-year increase in net income.

        In addition to the downward pressure from potentially lower net sales and operating income, our cash flows from operations for the year will be negatively impacted by our return to remitting income

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taxes. Cash flows in the prior two fiscal years benefited from the utilization of net operating losses carry forwards. While we are committed to improving our working capital management, we do not believe these improvements will offset the effect of the above items. In the aggregate, we anticipate that our overall cash and investments will remain flat, or decline slightly from the current level, over the remainder of the fiscal year.

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 October 25, 2002, we had approximately $1.9 million of fixed rate debt. In addition, we had $7.0 million of variable rate credit facilities, of which approximately $1.7 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 our current 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.

        There have been no material changes during the first quarter of fiscal 2003 with respect to the Company's contractual obligations. Details of the Company's contractual obligations can be found in the Management's Discussion and Analysis of Results of Operations and Financial Condition section of the Company's fiscal 2002 Annual Report on Form 10-K.

Inflation

        Inflation has not had, and is not expected to have, a material impact upon the Company's operations. 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.

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The information required by this item is included in the section entitled "Market Risk" in Part I, Item 2, Management's Discussion and Analysis of Results of Operations and Financial Condition.

Item 4.    CONTROLS AND PROCEDURES

(a)

Evaluation of disclosure controls and procedures.

        As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), within the 90 days prior to the filing date of this report, the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer along with the Company's Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer along with the Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits

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under the Exchange Act is recorded, processed, summarized and reported with the time periods specified in Securities and Exchange Commission rules and forms.

(b)

Changes in Internal Control.

        There are no significant changes in the Company's internal controls or, to the Company's knowledge, in other factors that could significantly affect such internal controls subsequent to the date of the Company's evaluation of its internal controls.

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PART II—OTHER INFORMATION

Item 3.    Legal Proceedings

        The Company continues its activities related to its SWIFT column products and to the filed lawsuits by and against Cornell Research Foundation, Inc. ("Cornell") All legal actions are in their preliminary stages. The Company intends to pursue these matters very vigorously and believes that it will prevail whether through court action or through any court-ordered or party-agreed-to arbitration. Details on these lawsuits can be found in Isco's annual report on Form 10-K for fiscal year 2002 under Part I, Item 3, Legal Proceedings.

        The Company began selling the new SWIFT columns late in the in the fourth quarter of fiscal 2002. At this time, the revenues from SWIFT columns are not material to the overall revenues of the Company. The Company continues to invest in infrastructure to build and expand this column business. Details on the Company's investments in this area can be found in Isco's annual report on Form 10-K for fiscal year 2002 under the section entitled "Factors Affecting Future Results" in Part I, Item 2, Management's Discussion and Analysis of Results of Operations and Financial Condition.

Item 6.    Exhibits and Reports on Form 8-K

(a)

Exhibits:

(b)

Reports on Form 8-K: No reports on Form 8-K have been filed during the quarter ended October 25, 2002, or during the period from October 26, 2002 to the date of this quarterly report on Form 10-Q.

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SIGNATURES

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

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CERTIFICATIONS

        Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Public Law Number107-204), the Chief Executive Officer of the Company certifies that:

1)

I have reviewed the report;

2)

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

3)

Based upon my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations, and cash flows of the Company as of, and for, the period presented in this report;

4)

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

a)

designed such disclosure controls and procedures to ensure that material information relating to the Company and its consolidated subsidiaries is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

evaluated the effectiveness of the Company's disclosure controls and procedures within 90 days prior to the filing date of this report (the "Evaluation Date");

c)

presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5)

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

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize, and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and

6)

The Company's other certifying officers have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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        Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Public Law Number107-204), the Chief Financial Officer of the Company certifies that:

1)

I have reviewed the report;

2)

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

3)

Based upon my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations, and cash flows of the Company as of, and for, the period presented in this report;

4)

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

a)

designed such disclosure controls and procedures to ensure that material information relating to the Company and its consolidated subsidiaries is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

evaluated the effectiveness of the Company's disclosure controls and procedures within 90 days prior to the filing date of this report (the "Evaluation Date");

c)

presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5)

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

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the Company's ability to record, process, summarize, and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and

6)

The Company's other certifying officers have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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QuickLinks

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 4. CONTROLS AND PROCEDURES

Item 3. Legal Proceedings