8-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): July 23, 2004

ISCO INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Charter)

Delaware	000-22302	36-3688459
(State or Other Jurisdiction of Incorporation or Organization)	(Commission file number)	(I.R.S. Employer Identification Number)

451 Kingston Court, Mt. Prospect, Illinois	60056
(Address of Principal Executive Offices)	(Zip Code)

(847) 391-9400

(Registrant’s telephone number, including area code)

Item 5. Other Events.

Loan Financing

On July 23, 2004, ISCO International, Inc. (the “Company”), Manchester Securities Corporation (“Manchester”), Alexander Finance, L.P. (“Alexander” and together with Manchester, the “Lenders”), Spectral Solutions, Inc. (“Spectral”) and Illinois Superconductor Canada Corporation (“ISCO Canada” and together with Spectral, the “Guarantors”) amended the terms of their October 23, 2002 Loan Agreement, as amended and restated on October 24, 2003 and as further amended on February 24, 2004 (together, the “Original Loan Agreement”) and certain related agreements, (together, the “Second Amendment to Loan Documents”) to reflect (i) that the aggregate loan commitments to the Company be increased from $6,000,000 to $6,500,000; (ii) that, after giving effect to such increase, the Company will simultaneously draw all of the remaining $1,500,000 financing, representing $1,000,000 under the Original Loan Agreement and the $500,000 increase under this Second Amendment to Loan Documents (the “New Loan”); (iii) that the pro rata commitment of each Lender be adjusted, such that Alexander will commit up to $825,000 of the New Loan and Manchester will commit up to $675,000 of the New Loan; (iv) the issuance of secured 14% grid notes in the amounts of $386,900 and $113,100 to Alexander and Manchester, respectively, for the balance of the New Loan not covered by existing notes under the Original Loan Agreement; and (v) that certain conforming changes be made to the related security agreement and the related guaranties.

Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.

Items (a) and (b) are inapplicable.

(c) Exhibits

10.1	Second Amended and Restated Loan Agreement dated July 23, 2004 by and among Manchester Securities Corporation, Alexander Finance, L.P., and ISCO International, Inc.
10.2	Second Amended and Restated Security Agreement dated July 23, 2004 by and among ISCO International, Inc., Spectral Solutions, Inc., Illinois Superconductor Canada Corporation, Manchester Securities Corporation and Alexander Finance, L.P.
10.3	Secured 14% Grid Note dated July 23, 2004 between ISCO International, Inc. and Alexander Finance, L.P. in the principal amount of $386,900.
10.4	Secured 14% Grid Note dated July 23, 2004 between ISCO International, Inc. and Manchester Securities Corporation in the principal amount of $118,100.
10.5	Second Amended and Restated Guaranty of Spectral Solutions, Inc. dated July 23, 2004
10.6	Second Amended and Restated Guaranty of Illinois Superconductor Canada Corporation, Inc. dated July 23, 2004
99.1	Press release dated July 27, 2004 announcing the financing.

SIGNATURES

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

	ISCO International, Inc.
Date: July 28, 2004
	By:	/s/ Frank Cesario
		Frank Cesario
		Chief Financial Officer

Exhibit Index

10.1*	Amendment to Loan Documents dated July 23, 2004 by and among Manchester Securities Corporation, Alexander Finance, L.P., ISCO International, Inc., Spectral Solutions, Inc, and Illinois Superconductor.
10.2*	Second Amended and Restated Security Agreement dated July 23, 2004 by and among ISCO International, Inc., Spectral Solutions, Inc., Illinois Superconductor Canada Corporation, Manchester Securities Corporation and Alexander Finance, L.P.
10.3*	Secured 14% Grid Note dated July 23, 2004 between ISCO International, Inc. and Alexander Finance, L.P. in the principal amount of $386,900.
10.4*	Secured 14% Grid Note dated July 23, 2004 between ISCO International, Inc. and Manchester Securities Corporation in the principal amount of $118,100.
10.5*	Second Amended and Restated Guaranty of Spectral Solutions, Inc. dated July 23, 2004
10.6*	Second Amended and Restated Guaranty of Illinois Superconductor Canada Corporation, Inc. dated July 23, 2004
99.1*	Press release dated July 27, 2004 announcing the financing.

* Filed herewith.

EX-10.1

Exhibit 10.1

SECOND AMENDED AND RESTATED LOAN AGREEMENT

SECOND AMENDED AND RESTATED LOAN AGREEMENT (“Agreement”) dated as of July 23, 2004 (the “Closing Date”) by and among Manchester Securities Corporation, a New York corporation (“Manchester”), Alexander Finance, L.P., an Illinois limited partnership (“Alexander” and together with Manchester, the “Lenders”) and ISCO International, Inc., a corporation organized and existing under the laws of Delaware and formerly known as Illinois Superconductor Corporation (the “Company”).

W I T N E S S E T H:

WHEREAS, the Lenders and the Company have entered into a Loan Agreement, dated as of October 23, 2002 (the “Original Loan Agreement”) pursuant to which, among other things: (i) the Lenders provided aggregate loan commitments to the Company of up to $4,000,000; (ii) warrants to purchase common stock of the Company were to be issued concurrently with advances under the Original Loan Agreement; and (iii) interest on loans thereunder bore interest at the rate of 9½% per annum; and

WHEREAS, the Lenders and the Company amended and restated the terms of the Original Loan Agreement (the “First Amended and Restated Loan Agreement”) to reflect: (i) an increase in the aggregate commitment of the Lenders to $6,000,000; (ii) the elimination of warrant issuances from future loans; (iii) that future loans will bear interest at the rate of 14% per annum; (iv) that future loans mature on October 31, 2004; (v) that such future loans be subject to the discretion of the Lenders and (vi) such other matters as are set forth therein; and

WHEREAS, the Company and the Lenders, pursuant to an Amendment to Loan Documents, dated as of February 24, 2004 (the “Amendment Agreement”) amended the terms of the First Amended and Restated Loan Agreement as follows: (i) extending the maturity dates of the notes issues pursuant to the Original Loan Agreement (the “Original Notes”) and the notes issued pursuant to the First Amended and Restated Loan Agreement (the “New Notes”) to April 1, 2005; and (ii) commencing on March 31, 2004, interest accruing on the Original Notes shall be at the rate of 14% per annum; and

WHEREAS, the Company and the Lenders desire that the aggregate loan commitments of the Lenders to the Company hereunder be increased from $6,000,000 to $6,500,000; and

WHEREAS, the Company and the Lenders desire that the amounts borrowed hereunder (the “Loans”, which as used hereunder shall include all loans advanced under the Original Loan Agreement and the First Amended and Restated Loan Agreement, as amended by the Amendment Agreement) but after the date hereof with respect to the increase in the Commitments set forth in Section 1.1 below, be evidenced by secured grid

notes, having the rights and privileges set forth in the notes in the form and substance of Exhibit A in the aggregate principal amount of $500,000 (the “July 2004 Notes”) hereto and which will be secured by all of the assets of the Company and its subsidiaries pursuant a Second Amended and Restated Security Agreement in the form and substance of Exhibit B hereto (the “Security Agreement”);

WHEREAS, pursuant to Guaranties in favor of the Lenders dated the date hereof and each in the form and substance of Exhibit C hereto (together, the “Guaranties”), the Company’s subsidiaries, Spectral Solutions, Inc., a Colorado corporation and Illinois Superconductor Canada Corporation (the “Guarantors”) will guaranty the Company’s obligations under this Agreement, the Security Agreement and the July 2004 Notes, the Original Notes and the New Notes.

NOW, THEREFORE, in consideration of the foregoing premises and the covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE 1

AMOUNT AND TERMS OF LOANS

Section 1.1 The Advances; Commitment. Each Lender severally and further subject to such Lender’s sole and absolute discretion and not jointly with the other Lender, agrees, on the terms and conditions hereinafter set forth, to make advances (“Advances”) to the Company from time to time on any Business Day (as defined below) during the period commencing on the date hereof and terminating on April 1, 2005 (the “Termination Date”). Any such Advances by a Lender shall be in an aggregate amount outstanding not to exceed at any time such Lender’s Commitment; provided, however, that the aggregate amount available to be borrowed under the “Commitments” shall not exceed $6,500,000. The aggregate Commitments of the Lenders are set forth on Schedule A hereto. Within the limits of each Lender’s Commitment in effect from time to time, and subject to both the Lenders’ discretion (as referred to above) and the terms and conditions set forth above, the Company may borrow under this Section 1.1. The Loans shall be evidenced by the Notes (as defined below), which in turn are guaranteed by the Guaranties and secured pursuant to the Security Agreement.

As used herein, “Business Day” shall mean any day other than a Saturday, Sunday or other day on which commercial banks in New York City are required or authorized to close.

Section 1.2 The July 2004 Loan. Lenders shall, within twenty-four (24) hours following the execution of this Second Amended and Restated Agreement make a Loan to the Company in the aggregate amount of one million five hundred thousand dollars ($1,500,000) (the “July 2004 Loan”), without any prior Borrowing Request (as defined below); provided, however, that the relative Commitments of the Lenders with respect to the July 2004 Loan shall be Alexander, $825,000 and Manchester, $675,000.

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Section 1.3 Making the Advances.

(a) Each set of Advances made by the Lenders (a “Borrowing”), other than the Initial Loan under the Original Loan Agreement, the $1,000,000 Subsequent Loan made under the First Amended and Restated Agreement, and the July 2004 Loan, shall be made on notice (a “Borrowing Request”), given not later than 11:00 A.M. (New York City time) on the first or fifteenth day of the month, by the Company to the Lenders, which date shall be five (5) Business Days prior to the date of the proposed Borrowing. Each Borrowing Request shall be by telecopier and email, in substantially the form of Exhibit G hereto, specifying therein the requested (i) date of such Borrowing and (ii) aggregate amount of such Borrowing. The amount of such Borrowing shall be at least $250,000 (or less only if such amount is the balance of the Advances available under the Notes at such time). In the event that no Default (as defined below) or Event of Default (as defined in the Notes) shall have occurred and be continuing and all conditions to a Borrowing (including those set forth in Article III) shall have been satisfied and each Lender, in its sole and absolute discretion, shall have deemed it advisable to make the requested Advance, then the Company shall be entitled to make Borrowings under the Financing Documents (as defined below).

(b) Notwithstanding the foregoing, no Loan shall be made unless both Lenders shall have agreed to fund their respective Advances. If either Lender does not agree to make its Advance, then the other shall not make its Advance.

(c) The aggregate indebtedness of the Company hereunder to each Lender shall be evidenced by: (i) the existing note, dated as of October 23, 2002, issued to such Lender under the Original Loan Agreement, as amended by the Amendment Agreement (an “Original Note”); (ii) the existing New Note, dated as of October 24, 2003, issued to such Lender under the Amended and Restated Agreement, as amended by the Amendment Agreement (a “New Note”); and (iii) a July 2004 Note (the Original Notes, the New Notes and the July 2004 Notes shall be collectively referred to as “Notes”).

Section 1.4 Repayment. On April 1, 2005, the Termination Date, the Company shall repay to the Lenders the outstanding principal amount of the Advances evidenced by the Notes, together with (a) all accrued interest (such interest accruing whether or not allowable under any applicable bankruptcy laws after a bankruptcy filing by the Company) and (b) all other amounts due under the Loan Documents (as defined below); provided however, that any Event of Default under an Original Note, New Note or July 2004 Note shall be an Event of Default with respect to any of the other Notes. Upon any of the Company’s obligations hereunder or under the other Loan Documents (as defined in Section 4.1 below) becoming due and payable (by acceleration or otherwise), the Lenders shall be entitled to immediate payment of such obligations.

Section 1.5 Termination of the Commitments. On the Termination Date the Commitments of the Lenders shall be terminated in whole and the Notes shall be due and payable in their entirety.

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Section 1.6 Prepayments.

(a) Optional. The Company may, upon 30 days’ prior written notice to the Lenders, which notice shall state the proposed date and aggregate principal amount of any proposed prepayment, prepay outstanding amounts under the Loans, provided that the minimum amount of such prepayment shall be $250,000 (or lesser amount only if such amount is the total principal amount of Notes outstanding at such time) and if such notice is given the Company shall prepay on the proposed repayment date such proposed prepayment amount, together with accrued interest to the date of such prepayment on the principal amount prepaid.

(b) Mandatory. (i) The Company shall, on the date of receipt of cash proceeds (net of reasonable legal expenses and taxes payable as a result of such transaction) from (X) the sale, lease, transfer or other disposition of any assets of the Company, any Guarantor, or any affiliate of the Company or Guarantor other than in the ordinary course of the Company’s or the Guarantor’s business, consistent with past practices, (Y) the incurrence or issuance by the Company, any Guarantor, or any affiliate of the Company or Guarantor of any debt to parties other than the Lenders, (Z) the sale or issuance by the Company, any Guarantor, or any affiliate of the Company or any Guarantor of any capital stock (including, without limitation, preferred stock) or any warrants, rights or options to acquire capital stock, or any other securities other than upon the exercise of outstanding options and warrants or the issuance of options pursuant to the Company’s stock option plan, provided that the number of shares of Common Stock issuable thereunder does not exceed 5% of the outstanding shares of Common Stock, (AA) the receipt by the Company, any Guarantor or any affiliate of the Company or any Guarantor, of any judgment, award or settlement, or (BB) a merger or share exchange pursuant to which 50% of the Company’s voting power is transferred, prepay an aggregate amount of the Loans equal to the lesser of (a) the amount of outstanding Loans and (b) the amount of such net cash proceeds.

(c) Application of Prepayments. Any payments or prepayments by the Company or any Guarantor permitted or required hereunder shall be applied to each Lender, pro rata in relation to the total amount then outstanding under the Loan Documents, in the following order: first, to the payment of any fees, costs, expenses, or charges of the Lenders arising under the Loan Documents, second, to the payment of interest accrued on the outstanding Advances represented by the July 2004 Notes, third, to the payment of the principal amount of the outstanding Advances represented by the July 2004 Notes, fourth, to the payment of interest accrued on the outstanding Advances represented by the New Notes; fifth, to the payment of the principal amount of the outstanding Advances represented by the New Notes, sixth, to the payment of interest accrued on outstanding Advances represented by the Original Notes and seventh, to the payment of the principal amount of the outstanding Advances represented by the Original Notes. Any prepayments, whether optional or mandatory, shall permanently reduce the Lenders’ Commitments, pro rata, to the extent of such prepayments.

Section 1.7 Interest. Interest shall accrue on the Advances as set forth in the Notes, except that with respect to the Original Notes, commencing on March 31, 2004, interest shall accrue at the rate of the lesser of 14% per annum or the highest rate permitted by law and shall otherwise be calculated as set forth in the Original Notes.

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Section 1.8 Payments and Computations.

(a) The Company shall make each payment hereunder and under the Notes not later than 3 P.M. (New York City time) on the day when due, in U.S. dollars, to the Lenders at accounts designated by the Lenders to the Company.

(b) All computations of interest, fees, and charges shall be made by the Lenders on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest, fees, or charges are payable. Each determination by the Lenders of an interest rate, fee, or charge hereunder shall be conclusive and binding for all purposes, absent manifest error.

(c) Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of the payment of interest or fees, as the case may be.

Section 1.9 Financing Documents. Concurrently with the execution and delivery of this Agreement and the July 2004 Notes, the Company is delivering to the Lenders the following additional documents, each dated as of the date hereof, the execution and delivery of which are a condition to the Lenders’ Commitments set forth in Section 1.1(a) above:

(i) the Guaranties;

(ii) the Security Agreement;

(iii) Amendments to UCC financing statements, naming Lenders as the secured parties and the Company as the debtor (the “UCC Financing Statements”) if required by Lenders;

(iv) Amendments to Patent and Trademark financing statements naming the Lenders as secured parties and the Company as the debtor (the “Patent and Trademark Financing Statements”) if required by Lenders;

(v) Legal Opinion of outside counsel to the Company, in the form of Exhibit F hereto delivered not later than five (5) Business after the date hereof.

(vi) Secretary’s Certificate and Incumbency Certificate; and

(vii) UCC Lien Searches

It shall be an Event of Default under the Notes if the legal opinion referred to in clause (v) above is not delivered within five (5) Business Days of the date hereof.

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Section 1.10 This Agreement, the Guaranties, the Security Agreement, the July 2004 Notes, the Amended UCC Financing Statements and the Amended Patent and Trademark Financing Statements are collectively referred to herein as the “Financing Documents.”

ARTICLE 2

REPRESENTATIONS AND WARRANTIES

Section 2.1 Representations, Warranties and Agreements of the Company. The Company hereby makes the following representations and warranties to the Lenders as of the date hereof:

(a) Organization and Qualification. The Company is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of Delaware, with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. The Company has no subsidiaries other than the Guarantors. The Company is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not, individually or in the aggregate, (x) adversely affect the legality, validity or enforceability of any of the Loan Documents in any material respect, (y) have a material adverse effect on the results of operations, assets, or financial condition of the Company or (z) adversely impair in any material respect the Company’s ability to perform fully on a timely basis its obligations under the Loan Documents (a “Material Adverse Effect”).

(b) Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by the Financing Documents, and otherwise to carry out its obligations thereunder. The execution and delivery of each of the Financing Documents by the Company and the consummation by it of the transactions contemplated thereby, have been duly authorized by all requisite corporate action on the part of the Company. Each of the Financing Documents has been duly executed and delivered by the Company and constitutes the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors’ rights and remedies or by other equitable principles of general application.

(c) Capitalization. The authorized, issued and outstanding capital stock of the Company is set forth in Schedule 2.1(c). No shares of Common Stock are entitled to preemptive or similar rights, nor is any holder of the Common Stock entitled to preemptive or similar rights arising out of any agreement or understanding with the Company by virtue of any of the Financing Documents. Except as disclosed in Schedule 2.1(c), there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, securities, rights or obligations

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convertible into or exchangeable for, or giving any person any right to subscribe for or acquire any shares of Common Stock, or contracts, commitments, understandings, or arrangements by which the Company is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock.

(d) [Intentionally Omitted.]

(e) No Conflicts. The execution, delivery and performance of the Financing Documents by the Company and the consummation by the Company of the transactions contemplated thereby, do not and will not (i) conflict with or violate any provision of its Certificate of Incorporation or By-laws or (ii) conflict with, constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company is subject (including Federal and state securities laws and regulations), or by which any material property or asset of the Company is bound or affected, except in the case of each of clauses (ii) and (iii), such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as could not, individually or in the aggregate, have or result in a Material Adverse Effect. The business of the Company is not being conducted in violation of any law, ordinance or regulation of any governmental authority, except for violations which, individually or in the aggregate, do not have a Material Adverse Effect.

(f) Consents and Approvals. The Company is not required to obtain any consent, waiver, authorization or order of, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other person in connection with the execution, delivery and performance by the Company of the Financing Documents other than: (i) the filing of the Amendments to the UCC and Patent and Trademark Financing Statements if any are required by Lenders; and (ii) in all other cases, where the failure to obtain such consent, waiver, authorization or order, or to give or make such notice or filing, would not materially impair or delay the ability of the Company to effect the transactions contemplated by this Agreement free and clear of all liens and encumbrances of any nature whatsoever or would not otherwise have a Material Adverse Effect (the approvals referred to in clause (i) are hereinafter referred to as the “Required Approvals”). The Company has no reason to believe that it will be unable to obtain the Required Approvals.

(g) Private Offering. Assuming (without any independent investigation or verification by or on behalf of the Company) the accuracy of the representations and warranties of Lenders set forth herein, the offer and sale of the July 2004 Notes are exempt from registration under Section 5 of the Securities Act of 1933, as amended (the “Securities Act”). Neither the Company nor any person acting on its behalf has taken or will take any action which might subject the offering, issuance or sale of the July 2004 Notes to the registration requirements of Section 5 of the Securities Act.

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(h) SEC Documents. The Company has filed all reports or other filings required to be filed by it under Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the three years preceding the date hereof (the foregoing materials being collectively referred to herein as the “SEC Documents”), on a timely basis. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Securities Act and the Exchange Act, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder, and none of the SEC Documents, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Documents comply in all material respects with applicable accounting requirements and the published rules and regulations of the Securities and Exchange Commission with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved, except as may be otherwise indicated in such financial statements or the notes thereto, and fairly present in all material respects the financial position of the Company as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal year-end audit adjustments. Since the date of the financial statements included in the Company’s last filed Annual Report on Form 10-K and except as disclosed on Schedule 2.1(h), there has been no event, occurrence or development that has had a Material Adverse Effect which is not specifically disclosed in any of the SEC Documents.

(i) Brokers. The Company has taken no action which would give rise to any claim by any person for brokerage commissions, finder’s fees or similar payments by the Company or the Lenders relating to the Financing Documents or the transactions contemplated thereby.

(j) Compliance with Obligations to the Lenders. The Company is in compliance with all of its obligations to the Lenders, including without limitation, pursuant to prior agreements.

Section 2.2 Representations and Warranties of Lenders. Each Lender severally hereby makes the following representations and warranties to the Company as to itself only as of the date hereof:

(a) Organization; Authority. The Lender is a corporation or partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite legal power and authority to enter into and to consummate the transactions contemplated hereby, by the Security Agreement and by the July 2004 Notes and otherwise to carry out its obligations hereunder and thereunder. The purchase by the Lender of its July 2004 Notes and the Commitments, if any, under this Agreement and the making of Loans from time to time hereunder at such Lender’s discretion, has been duly authorized by all necessary action on the part of the Lender. This Agreement has been duly executed and delivered by the Lender and

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constitutes its valid and legally binding obligation, enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights generally and to general principles of equity.

(b) Investment Intent. Each Lender is acquiring its Notes for its own account and without a present intention to distribute or resell it in violation of applicable securities laws. No Lender will offer, sell, transfer, assign, pledge or hypothecate any portion of the July 2004 Notes in the absence of a registration under, or pursuant to an applicable exemption from, federal and applicable state securities laws.

(c) Experience. The Lender has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in its July 2004 Notes and has so evaluated the merits and risks of such investment.

(d) Ability of Lender to Bear Risk of Investment; Accredited Investor. The Lender is able to bear the economic risk of an investment in its July 2004 Notes at the present time, is able to afford a complete loss of such investment. The Lender is an “accredited investor” as such term is defined in Rule 501 under the Securities Act.

(e) Access to Information. The Lender acknowledges that it has been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of its July 2004 Notes and the merits and risks of investing in its July 2004 Notes; (ii) access to information about the Company and the Company’s financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information which the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment.

ARTICLE 3

CONDITIONS TO ADVANCES

Any making of any Advance by each Lender is subject to the satisfaction at or before the date of such Advance of each of the conditions set forth below. These conditions are for the benefit of each Lender and may be waived by such Lender at any time at its discretion.

(a) Discretion of Lender. The Lender shall have determined, in its sole and absolute discretion that the making of such Advance is desirable;

(b) Absence of Default or Event of Default. There shall be no Event of Default (as defined in the Notes) or any event which, with the passage of time and/or the giving of notice, would constitute an Event of Default (“Default”);

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(c) Accuracy of the Company’s Representations and Warranties. The representations and warranties of the Company under this Agreement shall be true and correct in all material respects as of the date of this Agreement, as of the date on which the Borrowing Request with respect to such Borrowing was delivered by the Company to the Lenders, and as of the date of such Borrowing as though made at that time (except for representations and warranties as of an earlier date, which shall be true and correct in all material respects as of such date); provided, that any representations and warranties which are limited by their terms to materiality shall have been or shall be (as applicable) true and correct in all respects.

(d) Performance by the Company. The Company shall have performed all agreements and satisfied all conditions required to be performed or satisfied by the Company at or prior to the delivery of the Borrowing Request and at or prior to the Borrowing.

(e) Legality and Possibility. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by the Financing Documents.

(f) Security. No changes to the type, validity and sufficiency of the Lender’s collateral security shall have occurred, in the good faith judgment of the Lender, to cause the value of such collateral to be impaired.

(g) Miscellaneous. The Company shall have delivered to the Lenders such other documents relating to the transactions contemplated by this Agreement and the other Financing Documents as the Lenders may reasonably request.

ARTICLE 4

COVENANTS

Section 4.1 Affirmative Covenants. The Company covenants that from the date hereof and for so long as any portion of the Loans or other obligation under the Financing Documents, the Registration Rights Agreement dated October 23, 2002 between the Company and the Lenders (the “Registration Rights Agreement”), the Security Agreement dated as of October 23, 2002, as amended, by and between the Company and the Lenders (the “Original Security Agreement”), the UCC Financing Statements and Patent and Trademark Financing Statements executed in connection with the Original Loan Agreement (the “Original Financing Statements”), the Original Notes, the New Notes, the Guaranties of the Original Notes, the Guaranties of the New Notes, the Amended and Restated Security Agreement dated as of October 24, 2003, as amended by the Amendment Agreement (the “2003 Security Agreement”), the amendments to the Original Financing Statements, and the Warrants issued in connection with the Original Loan Agreement (“Warrants” and collectively with the Registration Rights Agreement, the Original Notes, the New Notes, the Guaranties of the Original

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Notes and the Guaranties of the New Notes, the Original Security Agreement, the 2003 Security Agreement, the Amendment Agreement, the Original Financing Statements, the amendments to the Original Financing Statements and the Financing Documents, the “Loan Documents”) shall remain outstanding, it will observe or perform each of the following unless such observance or performance is expressly waived by the Lenders in writing:

(a) Corporate Existence. It will maintain its corporate existence in good standing and remain qualified to do business as a foreign corporation in each jurisdiction in which the nature of its activities or the character of the properties it owns or leases makes such qualification necessary.

(b) Continuation of Business. Except as set forth on Schedule 4.1(b), it will continue to conduct its business, in all material aspects, as conducted on the day hereof in compliance in all material respects with all applicable rules and regulations of applicable governmental authorities.

Section 4.2 Dividends; Stock Repurchases. So long as any Notes remain outstanding, the Company will not declare any dividends on any shares of any class of its capital stock (other than dividends consisting solely of Common Stock or rights to purchase Common Stock of the Company), or apply any of its property or assets to the purchase, redemption or other retirement of, or set apart any sum for the payment of any dividends on, or for the purchase, redemption or other retirement of, or make any other distribution by reduction of capital or otherwise in respect of, any shares of any class of its capital stock.

Section 4.3 Incurrence of Debt; Liens; Transfer of Assets to Subsidiaries. For so long as any Commitments or portion of the Loans (or any other obligation under the Loan Documents) remain outstanding, neither the Company nor any subsidiary of the Company shall:

(a) Directly or indirectly create, incur, assume, guarantee, or otherwise become or remain directly or indirectly liable with respect to, any indebtedness of any kind, other than (i) indebtedness under the Notes; (ii) other indebtedness to the Lenders which indebtedness is expressly subordinated in writing to the indebtedness under the Loan Documents; or (iii) indebtedness to trade creditors in the ordinary course of business consistent with past practice.

(b) Directly or indirectly create, incur, assume or permit to exist any lien, pledge, charge or encumbrance on or with respect to any of its property or assets (including any document or instrument in respect of goods or accounts receivable) whether now owned or held or hereafter acquired, or any income or profits therefrom, except for Permitted Liens.

(c) Directly or indirectly transfer any of its assets to any subsidiary of the Company.

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As used herein, “Permitted Liens” means (i) liens granted under the Original Security Agreement or under the 2003 Security Agreement; (ii) liens imposed by mandatory provisions of law such as materialmen’s, mechanic’s or warehousemen’s; (iii) liens for taxes, assessments and governmental charges or levies imposed upon the Company or any subsidiaries or their income, profits or property, if the same are not yet due and payable or if the same are contested in good faith and as to which adequate reserves have been provided; (iv) pledges or deposits made to secure payment of worker’s compensation insurance, unemployment insurance, pensions or social security programs or to secure the performance of letters of credits, bids, tenders, public or statutory obligations, surety, performance bonds and other similar obligations; (v) encumbrances consisting of zoning restrictions, easements, or other restrictions on the use of real property, provided that such do not impair the use of such property for the uses intended and none of which is violated by existing or proposed structures or land use and (vi) the liens and encumbrances disclosed on Schedule A of the Security Agreement.

Section 4.5 Warrants issued under Original Loan Agreement. With respect to the Warrants, the provisions of the Registration Rights Agreement and of Section 4.5 of the Original Loan Agreement shall continue to apply.

ARTICLE 5

MISCELLANEOUS

Section 5.1 Fees and Expenses. The Company shall pay, concurrently with the execution and delivery of this Agreement, the reasonable fees and expenses of legal counsel for the Lenders incident to the negotiation, preparation, execution, delivery and performance of the Loan Documents incurred to date and, thereafter, upon request of a Lender, the Company, shall pay any additional fees and expenses incurred by the Lenders and incident to the filing, negotiation, preparation, performance or amendment of the Loan Documents.

Section 5.2 Entire Agreement. This Agreement, together with the Notes, the Security Agreement, the Guaranties and the other Loan Documents, contains the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral or written, with respect to such matters.

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Section 5.3 Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) when sent by facsimile, upon receipt if received on a business day prior to 5:00 p.m. (Central Time), or the first business day following such receipt if received on a business day after 5:00 p.m. (Central Time); or (iii) upon receipt, when deposited with a nationally recognized overnight express courier service, fully prepaid, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

If to the Company:	ISCO International, Inc.
	451 Kingston Court
	Mt. Prospect, Illinois 60056
	Attn: Frank Cesario
	Fax: (847) 391-5015
With copies to:
	Pepper Hamilton LLP
	400 Berwyn Park
	899 Cassatt Road
	Berwyn, Pennsylvania 19312
	Attn: Michael P. Gallagher
	Fax: (610) 640-7835
If to Manchester Securities Corp.:	712 Fifth Avenue, 36th Floor
	New York, New York 10019
	Attn: Dan Gropper
	Fax: (212) 974-2092
With copies to:
	Kleinberg, Kaplan, Wolff & Cohen, P.C.
	551 Fifth Avenue
	New York, NY 10176
	Attn: Lawrence D. Hui
	Fax: (212) 986-8866
If to Alexander:	Alexander Finance, LP
	1560 Sherman Avenue, Suite 900
	Evanston, Illinois 60201
	Attn: Bradford T. Whitmore
	Fax: (847) 733-0339
With copies to:
	Sachnoff & Weaver
	30 S. Wacker Drive
	Chicago, Illinois 60606
	Attn: Evelyn C. Arkebauer, Esq.
	Fax: (312) 207-6400

or such other address or facsimile number as may be designated in writing hereafter, in the same manner, by such person.

Section 5.4 Amendments; Waivers. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by the Company and by Lenders holding at least 75% of the Commitments; or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this

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Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter.

Section 5.5 Headings. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.

Section 5.6 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. Neither the Company nor any Lender may assign this Agreement or any rights or obligations hereunder (other than an assignment from a Lender to an affiliate of such Lender) without the prior written consent of the other; provided that in the event of an assignment by a Lender requiring the Company’s consent, the Company’s consent shall not be unreasonably withheld. Any transfer made in violation of this provision shall be null and void. The assignment by a party of this Agreement or any rights hereunder shall not affect the obligations of such party under this Agreement.

Section 5.7 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

Section 5.8 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without regard to the principles of conflicts of law thereof.

Section 5.9 Survival. The agreements, representations and warranties and covenants contained in this Agreement shall survive the delivery of the Notes pursuant to this Agreement and any Advances made thereunder.

Section 5.10 Counterpart and Facsimile Signatures. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the executing party with the same force and effect as if such facsimile signature page were an original thereof.

Section 5.11 Publicity. The Company and the Lenders shall consult with each other in issuing any press releases or otherwise making public statements with respect to the transactions contemplated hereby and neither the Company nor any Lender shall issue any such press release or otherwise make any such public statement without the prior consent of the other, which consent shall not be unreasonably withheld or delayed, except that no prior consent shall be required if such disclosure is required by law, in which such case the disclosing party shall provide the other party with prior notice of such public statement.

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Section 5.12 Severability. In case any one or more of the provisions of this Agreement shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision which shall be a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement.

Section 5.13 Payment of Expenses. The Company agrees to pay all costs and expenses, including reasonable attorneys’ fees and expenses, which may be incurred by any Lender in successfully enforcing any Financing Document, including without limitation in enforcing Section 5.14 below.

Section 5.14 Indemnification. The Company hereby agrees to indemnify, defend and hold harmless each Lender and its respective partners, shareholders, officers, affiliates, employees or agents (“Indemnified Parties”), from and against any and all losses, claims, damages, liabilities and costs, including reasonable legal fees (collectively “Losses”) (i) incurred as a result of the breach by the Company or any subsidiary of any representation, covenant or other provision in any Loan Document; (ii) incurred as a result of entering into this Agreement; (iii) incurred in enforcing this Section 5.14 or (iv) incurred involving a third-party claim and arising out of the acquisition, holding and/or enforcement by such Lender of any of the Loan Documents.

Section 5.15 Like Treatment of Lenders. Neither the Company nor any of its affiliates shall, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee, payment for the redemptions or exchange of the Notes, or any Advance thereunder or otherwise, to any holder of Notes, for or as an inducement to, or in connection with the solicitation of, any consent, waiver or amendment of any terms or provisions of the Loan Documents, unless such consideration is required to be paid to all holders of Notes bound by such consent, waiver or amendment whether or not such holders so consent, waive or agree to amend and whether or not such holders tender their Notes for redemption or exchange. The Company shall not, directly or indirectly, redeem to prepay any Advances unless such offer of redemption is made pro rata to all holders on identical terms.

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized persons as of the date first indicated above.

ISCO INTERNATIONAL, INC.
By:
Name:	Amr Abdelmonem, Ph.D.
Title:	Chief Executive Officer
MANCHESTER SECURITIES CORPORATION
By:
Name:	Elliot Greenberg
Title:	Vice President
ALEXANDER FINANCE, L.P.
By:
Name:
Title

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SCHEDULES

Schedule A	Schedule of Lenders
Company Schedules
EXHIBITS
Exhibit A	Secured Grid Note
Exhibit B	Second Amended and Restated Security Agreement
Exhibit C	Second Amended and Restated Guaranties
Exhibit D	Amendments to UCC Financing Statements
Exhibit E	Amendments to Patent and Trademark Financing Filings
Exhibit F	Legal opinion of counsel to the Company
Exhibit G	Form of Notice of Borrowing

SCHEDULE A

Lender	Commitment
Manchester Securities Corporation	$	3,484,500
Alexander Finance, L.P.	$	3,015,500
Total	$	6,500,000

EX-10.2

Exhibit 10.2

SECOND AMENDED AND RESTATED SECURITY AGREEMENT

Second Amended and Restated Security Agreement, dated as of July 23, 2004 made by and among ISCO International, Inc., a Delaware Corporation with offices at 451 Kingston Court, Mt. Prospect, Illinois 60056 and formerly known as Illinois Superconductor Corporation (the “Company”), each of the Company’s undersigned subsidiaries (the ”Subsidiaries,” the Company and Subsidiaries are hereafter collectively referred to as the “Debtors” or individually as a “Debtor”), Manchester Securities Corporation, a New York corporation with offices at 712 Fifth Avenue, 36^th Floor, New York, New York 10019 (“Manchester”), Alexander Finance, LP, an Illinois limited partnership with offices at 1560 Sherman Avenue, Evanston, IL 60201 (“Alexander”; Manchester and Alexander are sometimes individually referred to as a “Secured Party” or together referred to as “Secured Parties”), and Manchester Securities Corporation as collateral agent (the “Collateral Agent”).

This Agreement amends and restates the Security Agreement, dated as of October 23, 2002 by and among the Debtors, the Lenders and the Collateral Agent, as previously amended and restated on October 24, 2003, and as further amended on February 24, 2004 (the “Original Security Agreement”).

NOW THEREFORE, in consideration of the foregoing, each Debtor hereby agrees with the Secured Parties and Collateral Agent as follows:

SECTION 1. Grant of Security Interest.

(a) As collateral security for all of the Obligations (as defined in Section 2 hereof), the Debtors hereby jointly and severally pledge and collaterally assign to the Collateral Agent and the Secured Parties, and grant to the Collateral Agent and the Secured Parties a continuing first priority security interest (subject to Permitted Liens (as defined in the Second Amended and Restated Loan Agreement dated as of the date hereof by and among the Company and the Secured Parties (the “Loan Agreement”)) in the following (the “Collateral”):

“Collateral” means all assets of the Debtors (whether currently owned or hereafter acquired by a Debtor), including without limitation all presently existing and hereafter arising (i) accounts, contract rights, and all other forms of obligations owing to the Debtors from any source, including, without limitation, from affiliates and insiders of the Debtors (“Accounts”); (ii) all of the Debtors’ books and records, including ledgers, records indicating, summarizing, or evidencing the Debtors’ assets or liabilities, or the Collateral, all information relating to the Debtors’ business operations or financial condition, all computer programs, disc or tape files, printouts, runs or other computer prepared information, and any equipment containing such information (the Debtors’ “Books”); (iii) all of the Debtors’ present and hereafter acquired equipment, wherever located, and all attachments, accessories, accessions, replacements, substitutions, additions and improvements to any of the foregoing, wherever located (“Equipment”); (iv) all of the Debtors’ present and hereafter acquired general intangibles and other personal property (including, but not limited to, contract rights, rights arising under

common law, statutes or regulations, choses or things in action, goodwill, patents and patentable inventions, whether described and claimed therein or otherwise, and all reissues, divisions, continuations, continuations-in-part, substitutes, renewals, and extensions thereof, and all improvements thereon and all other rights of any kind whatsoever accruing thereunder or pertaining thereto, trade names, trademarks, patent and trademark applications, service marks, copyrights, copyright applications, blueprints, drawings, purchase orders, customer lists, monies due under any royalty or licensing agreements, infringements, claims, computer programs, discs or tapes, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims, as well as all cash collateral that is hypothecated to secure letters of credit or bonding obligations and the right to sue or otherwise recover for any and all past, present and future infringements and misappropriations thereof, and all income, royalties, damages and other payments now and hereafter due and/or payable with respect thereto) (“General Intangibles”); (v) all present and future inventory in which a Debtor has any interest, and all of the Debtors’ present and future raw materials, work in process, finished goods, and packing and shipping material, wherever located, any documents of title representing any of the above (“Inventory”); (vi) all of the Debtors’ negotiable collateral, including all of the Debtors’ present and future letters of credit, notes, drafts, instruments, certificated securities (including but not limited to, the “Pledged Securities” as defined below), documents, personal property leases (where a Debtor is the lessor), chattel paper and the Debtors’ books and records relating to any of the foregoing (“Negotiable Collateral”); and (vii) any money or other assets of the Debtors which hereafter come into the possession, custody or control of the Debtors, and the proceeds and products, whether tangible or intangible, of any of the foregoing including proceeds of insurance covering any or all of the Collateral, and any and all Accounts, Equipment, General Intangibles, Inventory, Negotiable Collateral, money, deposit accounts or other tangible or intangible, real or personal, property resulting from the sale, exchange, collection or other disposition of the Collateral, or any portion thereof or interest therein, and the proceeds and products thereof;

in each case howsoever a Debtor’s interest therein may arise or appear (whether by ownership, security interest, claim or otherwise). For purposes of this Security Agreement, the term “Pledged Securities” means (i) all capital stock and all other securities issued or issuable by all current and future subsidiaries, whether currently issued or issued in the future, including, without limitation, the promissory note issued by Illinois Superconductor Canada Corporation to the Company (“Subsidiary Securities”); (ii) any capital stock or other securities currently owned or received by the Debtors in the future (“Further Securities”); (iii) all other securities which may be issued or issuable in exchange for or in respect of the Further Securities and Subsidiary Securities pursuant to the terms hereof; (iv) all dividends, cash, instruments, securities and other property from time to time received, receivable or otherwise distributed, in respect of, in, for, or upon the exchange or conversion of the securities referred to in clauses (i), (ii) and (iii) above; and (v) all rights and privileges of the Debtors with respect to the Pledged Securities and other properties referred to in clauses (i), (ii), (iii) and (iv).

(b) Any pledge, collateral assignment or grant of a security interest to the Collateral Agent and Secured Parties in the Collateral pursuant to the Original Security Agreement shall continue in full force and effect.

(c) Upon the future receipt of any certificated securities by any Debtor, such Debtor shall immediately deliver the certificates representing such securities, together with stock powers duly executed in blank to the Collateral Agent and corporate resolutions of the type described in Section 1(b) of the Original Security Agreement.

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(d) A reasonably detailed list of the Collateral existing as of the date hereof is set forth on Schedule A attached hereto. For each item of Collateral, Schedule A provides the location, description and ownership and, for items of Collateral which have a certificate of title, the jurisdiction of such certificates, and for those items of Collateral which are mobile goods (goods that are mobile and generally used in more than one jurisdiction such as motor vehicles, trailers and similar items) the present location of such goods. Schedule A also identifies any liens and encumbrances with respect to any items of Collateral and sets forth the jurisdiction of incorporation of each Debtor. Schedule A further lists all patents and trademarks and patent and trademark applications owned by the Debtors.

SECTION 2. Security for Obligations. The security interest created hereby in the Collateral constitutes continuing collateral security for the (a) prompt payment by the Debtors, as and when due and payable, of all amounts from time to time owing by them to the Secured Parties under the Loan Agreement, dated as of October 23, 2002 by and between the Company and the Secured Parties, as amended and restated on October 24, 2003, as amended on February 24, 2004, and as further amended and restated as of the date hereof (the “Loan Agreement”); (ii) the Company’s 9½ secured grid notes, due April 1, 2005, as amended (the “2002 Notes”); (iii) the Company’s 14% secured grid notes due April 1, 2005, as amended (the “2003 Notes”); (iv) the Company’s 14% secured grid notes due April 1, 2005 (the “2004 Notes”); (v) the guaranties dated as of October 23, 2002 issued by each of the Subsidiaries to the Secured Parties, as amended and restated on October 24, 2003, as amended on February 24, 2004, and as further amended and restated as of the date hereof (the “Restated Guaranties”) (the Loan Agreement, the 2002 Notes, the 2003 Notes, the 2004 Notes, the Restated Guaranties and the Security Agreement are hereinafter collectively referred to as the “Transaction Documents”) with the obligations under this clause (a) being referred to as “Indebtedness” and (b) prompt performance by the Debtors of each of their respective covenants and duties under the Transaction Documents (the covenants and obligations referred to in clauses (a) and (b) above hereafter collectively referred to as the “Obligations”). The Debtors further jointly and severally agree that the Collateral Agent and the Secured Parties shall have the rights stated in this Security Agreement with respect to the Collateral in addition to all other rights which the Secured Parties may have by law.

SECTION 3. Representations and Obligations of the Debtors. Each of the Debtors jointly and severally represents, warrants and covenants to the Collateral Agent and the Secured Parties as follows:

(a) Perfection of Security Interest. Each of the Debtors agrees to execute at any time and from time to time such financing statements and to take whatever other actions are requested by the Collateral Agent to perfect and continue the Collateral Agent and the Secured Parties’ security interest in the Collateral including, without limitation, any filings in the United States Patent and Trademark Office or foreign recordal offices. Upon request of the Collateral Agent, each Debtor will deliver to the Collateral Agent any and all documents evidencing or constituting the Collateral, possession of which is required in order for the Collateral Agent and the Secured Parties’ to perfect their security interest therein. Upon request of the Collateral Agent, the

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Debtors will note Collateral Agent’s and Secured Parties’ interest, as the case may be, upon any and all Accounts if not delivered to Collateral Agent for possession by the Collateral Agent. The Collateral Agent may at any time and from time to time, and without further authorization from the Debtors, file a carbon, photographic or other reproduction of any financing statement or of this Security Agreement for use as a financing statement to the extent permitted by applicable law. The Debtors will reimburse the Collateral Agent for all reasonable expenses for the perfection and the continuation of the perfection of Secured Parties’ security interest in the Collateral. Each Debtor will promptly notify the Collateral Agent of any change in its name including any change to the assumed business names of such Debtor. This is a continuing Security Agreement and will continue in effect until all Indebtedness is paid in full and any other Obligations are satisfied and the Secured Parties shall release their interest in the Collateral upon the full and final payment and satisfaction of the Indebtedness and other Obligations. If payment is made by a Debtor, whether voluntarily or otherwise, or by any third party, on the Indebtedness and thereafter a Secured Party is forced to remit the amount of that payment to such Debtor’s trustee in bankruptcy or to any similar person under any federal, state or foreign bankruptcy law or other law for the relief of debtors, the Indebtedness shall be considered unpaid for the purpose of enforcement of this Security Agreement. If permitted or required under applicable law, the Collateral Agent may file any financing statements with respect to the Collateral without the signatures of the Debtors. Any financing statements must state that the Collateral Agent and the Secured Parties have a lien on all of the Debtors’ assets.

(b) Power of Attorney. Each Debtor hereby irrevocably makes, constitutes, and appoints the Collateral Agent (and all of such Collateral Agent’s officers, employees or agents designated by such Collateral Agent) as its true and lawful attorney, with power to: (i) sign such Debtor’s name on any of the documents described hereunder or on any other similar documents to be executed, recorded, or filed in order to perfect or continue perfected the Collateral Agent’s and Secured Parties’ security interest in the Collateral; (ii) at any time that an Event of Default has occurred and is continuing, execute, sign and endorse such Debtor’s name on any invoice or bill of lading relating to any Account, drafts against Account Debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to Account Debtors; (iii) send requests for verification of Accounts; (iv) at any time that an Event of Default has occurred and is continuing, execute, sign and endorse such Debtor’s name on any checks, notices, instruments, acceptances, money orders, drafts, warrants or other item of payment or security that may come into the Collateral Agent’s possession; (v) at any time that an Event of Default has occurred and is continuing, demand, collect, receive, receipt for, sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral; (vi) file any claim or claims or, following an Event of Default, take any action or institute or take part in any proceedings, either in its own name or in the name of such Debtor, or otherwise, which in the discretion of the Collateral Agent may seem to be necessary or advisable; (vii) at any time that an Event of Default has occurred and following acceleration of the Indebtedness, direct the Account Debtors and other persons sending mail to the Debtors to send all mail relating to the Collateral to the Collateral Agent; (viii) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under the Debtors’ policies of insurance and make all determinations and decisions with respect to such policies of insurance; and (ix) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting the Accounts directly with Account Debtors, for amounts and upon terms which the Collateral Agent determines to be reasonable, and the Collateral Agent may cause to be executed

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and delivered any documents and releases which the Collateral Agent determines to be necessary. The appointment of the Collateral Agent as such Debtor’s attorney, and each and every one of the Collateral Agent’s and Secured Parties’ rights and powers, being coupled with an interest, is irrevocable and shall remain in full force and effect until all of the Indebtedness has been fully repaid and the other Obligations satisfied and the Collateral Agent renounces such appointment.

(c) No Violation. The execution and delivery of this Security Agreement does not violate any law or agreement governing any Debtor or to which any Debtor is a party, and the Debtors’ certificates or articles of incorporation and bylaws or other organizational documents do not prohibit any term or condition of this Security Agreement. The execution and delivery hereof is in the interest of each of the Debtors.

(d) Enforceability of Collateral. With respect to the Accounts, and General Intangibles, the Collateral is enforceable in accordance with its terms, is genuine, and complies in all material respects with applicable laws concerning form, content and manner of preparation and execution, and, to the best of the knowledge of the Debtors, all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral, except as such enforcement may be limited by bankruptcy, insolvency, moratorium, fraudulent conveyance or other laws applicable to creditors’ rights generally and by generally applicable equitable principles, whether considered in an action at law or in equity.

(e) Accounts. All Accounts existing as of the date hereof are good and valid Accounts representing an undisputed, bona fide indebtedness incurred by the Account Debtors, and there exists no set-offs or counterclaims against any such Accounts and no agreements under which any deductions or discounts may be claimed with any Account Debtor except as disclosed to the Collateral Agent and the Secured Parties in writing.

(f) Removal of Collateral; Transactions Involving Collateral. To the extent the Collateral consists of Accounts, General Intangibles, Negotiable Collateral or Debtors’ Books the records and other documents pertaining to the Collateral shall be kept at the principal office of the Debtor that owns such collateral, or at such other locations as are reasonably acceptable to the Collateral Agent. Except as provided below, the Debtors shall keep the non-mobile tangible Collateral at the location(s) at which they are kept specified on Schedule A and shall maintain any certificate of title of any tangible Collateral in the same jurisdiction as indicated on Schedule A. Except for transactions in the ordinary course of business in accordance with past practice or for sales or dispositions on arm’s length terms and for fair equivalent value, the Debtors shall not sell, offer to sell, or otherwise transfer, dispose of or encumber any tangible Collateral. Without the prior written consent of the Secured Parties, Debtors shall not sell, offer to sell, or otherwise transfer, dispose of or encumber any intangible Collateral other than pursuant to license agreements made in the ordinary course of Debtor’s business and consistent with past business practice. Without the prior written consent of the Secured Parties, no Collateral that is located in the United States shall be moved outside of the United States.

(g) Title. As of the date hereof, the Debtors hold good and marketable title to all the Collateral, free and clear of all liens and encumbrances except for the lien of this Security

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Agreement and Permitted Liens (as defined in the Loan Agreement). No financing statement or other evidence of a lien or transfer covering any of the Collateral is on file in any public office in any jurisdiction other than those which reflect the security interest created by this Security Agreement or Permitted Liens. The Debtors shall defend the Collateral Agent’s and Secured Parties’ rights in the Collateral against any and all claims and demands.

(h) Prepayments. None of the Collateral has been prepaid by any Account Debtor for any Accounts.

(i) Collateral Schedules and Locations. On a monthly basis, the Debtors shall deliver to the Collateral Agent schedules of the Collateral, including such information as the Collateral Agent may require, including without limitation names and addresses of Account Debtors, the location of mobile goods or changes in any certificates of title and descriptions of any after-acquired general intangibles. The Debtors represent and warrant to the Collateral Agent and the Secured Parties that Schedule A is true, accurate and complete in all material respects and shall be updated monthly by the Debtors to reflect any changes thereto.

(j) Application of Payments Received With Respect to Collateral. Unless an Event of Default (as defined in Section 4 below) has occurred and is continuing, any amounts received by or on behalf of any Debtor with respect to any Account pledged as Collateral hereunder may be used by such Debtor in the ordinary course of its business. Following the occurrence and during the continuance of an Event of Default, any amounts received by or on behalf of any Debtor with respect to any Account shall be applied in the following order: (i) costs and expenses of the Collateral Agent and the Secured Parties reasonably incurred in connection with collecting the Indebtedness and enforcing this Agreement and the Transaction Documents; (ii) accrued and unpaid interest due and owing on the Indebtedness as of such date; (iii) unpaid principal due and owing with respect to the Indebtedness as of such date; and (iv) any excess to the Debtors or other party or parties in accordance with applicable law or court order.

(k) Possession and Collection of Accounts. Following an Event of Default and during the continuance thereof or following acceleration of any Indebtedness, the records and documents evidencing the Accounts pledged as Collateral hereunder shall, upon the Collateral Agent’s request, be delivered to the Collateral Agent or its agent and held in accordance with the terms of this Security Agreement.

(l) Maintenance and Inspection of Collateral. The Debtors shall maintain or cause to be maintained all tangible Collateral in good condition and repair except for ordinary wear and tear. The Debtors will not commit or permit damage to or destruction of the Collateral or any part of the Collateral. The Collateral Agent and its designated representatives and agents shall have the right at all reasonable times, upon reasonable advance notice, to examine, inspect, and audit the Collateral wherever located and the books, records or any property which is otherwise used in connection with the Collateral. The Debtors shall immediately notify the Collateral Agent of all material cases involving the return, rejection, repossession, loss or damage of or to any Collateral; of any request for credit or adjustment or of any other dispute arising with respect to the Collateral; and generally of all happenings and events materially adversely affecting the Collateral or the value or the amount of the Collateral.

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(m) Taxes, Assessments and Liens. The Debtors will pay when due all taxes, assessments and liens upon the Collateral, its use or operation and upon the Transaction Documents. A Debtor may withhold any such payment or may elect to contest any lien if such Debtor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as the Collateral Agent’s and Secured Parties’ interest in the Collateral is not jeopardized in the Collateral Agent’s sole reasonable opinion. If any of the Collateral is subjected to a lien which is not discharged or bonded, or the enforcement thereof stayed (in either case without granting any security interests in any of the assets of any Debtor) within fifteen (15) days or such longer period as is provided by applicable law, but not to exceed thirty (30) days, the Debtors shall deposit with the Collateral Agent cash, a sufficient corporate surety bond or other security satisfactory to the Collateral Agent (in its discretion) in an amount adequate to provide for the discharge of the lien plus any interest, reasonable costs, attorneys’ fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest the Debtor or Debtors shall defend itself or themselves, the Secured Parties and the Collateral Agent and shall satisfy any final adverse judgment before enforcement against the Collateral. The Debtors shall name the Collateral Agent as an additional obligee under any surety bond furnished in such contest proceedings.

(n) Incorporation by Reference. The Debtors hereby restate and affirm all representations, warranties and agreements contained in the other Transaction Documents (as of each date and time such representations and warranties are made under each of the other Transaction Documents), the terms and conditions of which are hereby incorporated herein by reference.

(o) Compliance With Governmental Requirements. The Debtors shall comply promptly with all laws, ordinances and regulations of all governmental authorities applicable to the production, disposition, or use of the Collateral. The Debtors may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as the Collateral Agent’s interest in the Collateral, in the Collateral Agent’s sole reasonable opinion, is not jeopardized.

(p) Insurance. The Debtors shall maintain insurance with respect to their assets and businesses that is customary for other similarly situated companies.

(q) The Debtors’ Right to Possession and to Collect Accounts. Except as otherwise provided herein, until the occurrence of an Event of Default or acceleration of Indebtedness, the Debtors may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Security Agreement or the other Transaction Documents, provided that the Debtors’ right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by the Collateral Agent is required by law to perfect the Collateral Agent’s and Secured Parties’ security interest in such Collateral. At any time an Event of Default exists or following acceleration of Indebtedness, the Collateral Agent may exercise its right to directly collect the Accounts and to notify Account Debtors to make payments directly to the Collateral Agent for application to the Indebtedness, and the Debtors authorize and direct the Account Debtors, if the Collateral Agent exercises such right, to make payments on the Accounts to the Collateral Agent. If the Collateral Agent at any time has possession of any Collateral, whether before or after an Event of Default, the Collateral

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Agent shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if the Collateral Agent takes such action for that purpose as the Debtors shall reasonably request or as the Collateral Agent, in the Collateral Agent’s sole reasonable discretion, shall deem appropriate under the circumstances, but failure to honor any request by the Debtors shall not of itself be deemed to be a failure to exercise reasonable care. The Collateral Agent shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Collateral. The Collateral Agent shall have the right to direct who shall collect and service the Accounts in accordance with reasonable commercial practices.

(r) Transactions with Others. After the occurrence and during the continuation of any Event of Default, the Collateral Agent may (i) extend the time for payment or other performance, (ii) grant a renewal or change in terms or conditions, or (iii) compromise, compound or release any obligation with an Account Obligor as the Collateral Agent deems advisable, without obtaining the prior written consent of the Debtors, and no such act or failure to act shall affect the Collateral Agent’s or Secured Parties’ rights against the Debtors or the Collateral.

(s) Expenditures by the Collateral Agent. If not discharged or paid when due, and provided that such items have not been contested as permitted herein, the Collateral Agent may (but shall not be obligated to) discharge or pay any amounts required to be discharged or paid by the Debtors under this Security Agreement, including without limitation all taxes, liens, security interests, encumbrances, and other claims, at any time levied or placed on the Collateral. The Collateral Agent also may (but shall not be obligated to) pay all reasonable costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by the Collateral Agent for such purposes will then bear interest at the then rate charged under the Notes from the date incurred or paid by the Collateral Agent to the date of repayment by the Debtors. All such expenses shall become a part of the Indebtedness and, at the Collateral Agent’s option, will (i) be payable on demand or (ii) upon notice to Debtors be added to the balance of the Notes becoming a part of the outstanding principal amount due and payable on the maturity date of the Notes. This Security Agreement also will secure payment of these amounts. Such right under this subsection shall be in addition to all other rights and remedies to which the Collateral Agent and the Secured Parties may be entitled upon the occurrence of an Event of Default.

(t) Sale or Factoring of Accounts; Release of Accounts. Except with respect to Permitted Liens (as defined in the Loan Agreement), or as otherwise expressly permitted herein, the Debtors shall not sell or otherwise transfer or encumber any of the Accounts, or other Collateral without the Collateral Agent’s written consent. It is expressly agreed that the Collateral Agent is under no obligation to grant such a consent and will do so only in its sole and absolute discretion on terms and conditions they deem acceptable in their sole and absolute discretion.

(u) In the event that in the future, any Collateral is held by subsidiaries, affiliates or joint ventures of the Debtors who are not a party to this Agreement, then the Debtors shall cause such entities to grant the Collateral Agent an exclusive first priority lien in such Accounts and Inventory, to cause such entities to enter into security agreements reasonably satisfactory to the Collateral Agent and the Secured Parties, and to take all actions necessary to perfect such security interests.

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(v) Debt. The Company has no Debt other than Debt created under the Transaction Documents or as disclosed on Schedule 3(v) hereto. None of the Subsidiaries have any Debt other than that disclosed on Schedule 3(v) hereto.

(w) Monthly Compliance Certificate. On the last business day of each calendar month, the Company shall deliver to the Collateral Agent a certificate executed by the Chief Financial Officer of the Company stating that each of the representations made by the Debtors in this Security Agreement are true as of the date of such certificate and no default or Event of Default has occurred under this Security Agreement.

(x) Additional Guarantors. The Company shall cause each of its subsidiaries formed or acquired on or subsequent to the date hereof to deliver a guarantee to the Secured Parties substantially in the form of the Subsidiary Guarantees being delivered on the date hereof.

SECTION 4. Events of Default; Remedies.

Events of Default. Each of the following shall constitute an Event of Default under this Security Agreement:

(a) Event of Default under the 2002 Notes, 2003 Notes or 2004 Notes. An Event of Default shall have occurred under the 2002 Notes, 2003 Notes, 2004 Notes or the Loan Agreement.

(b) Other Defaults. Failure of any Debtor to comply with or to perform when due or required (after the expiration of any applicable stated cure periods) any term, obligation, covenant or condition contained in this Security Agreement.

(c) False Statements. Any warranty, representation or statement made or furnished to the Collateral Agent or the Secured Parties by or on behalf of the Debtors under this Security Agreement or any certificate or schedule required thereby is false or misleading in any material respect, either now or at the time made or furnished.

(d) Defective Collateralization. This Security Agreement ceases to be in full force and effect at any time and for any reason (other than by reasons caused solely by actions of the Collateral Agent); or the security interest intended to be created by this Security Agreement is not created and perfected, or such security interest ceases to be valid and perfected at any time and for any reason.

(e) Material Adverse Change. The Secured Parties shall have determined in good faith (which determination shall be conclusive) that a material adverse change has occurred in the condition, value or operation of a material portion of the Collateral.

SECTION 5. Rights and Remedies on Default. If an Event of Default occurs and is continuing under this Security Agreement, at any time thereafter, the Collateral Agent and the Secured Parties shall have all the rights of a secured party under the New York Uniform Commercial Code. In addition and without limitation, the Collateral Agent and the Secured Parties may exercise any one or more of the following rights and remedies:

(a) Accelerate Indebtedness. The Collateral Agent may declare the entire Indebtedness immediately due and payable, without notice.

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(b) Assemble Collateral. The Collateral Agent may require the Debtors to deliver to the Collateral Agent all or any portion of the Collateral and other documents relating to the Collateral. The Collateral Agent may require the Debtors to assemble the Collateral and make it available to the Collateral Agent at a place to be designated by the Collateral Agent. The Collateral Agent also shall have full power to enter upon the property of the Debtors to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Security Agreement at the time of repossession, the Debtors agree that the Collateral Agent may take such other goods, provided that the Collateral Agent makes reasonable efforts to return them to the Debtors after repossession.

(c) Sell the Collateral. The Collateral Agent shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in its own name or that of the Debtors. The Collateral Agent may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, the Collateral Agent will give the Debtors reasonable notice of the time after which any private sale or any other intended disposition of the Collateral is to be made. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Security Agreement and shall be payable on demand, with interest at the lower of twenty percent (20%) per annum or the highest rate permitted by law from date of expenditure until repaid.

(d) Foreclosure. Maintain a judicial suit for foreclosure and sale of the Collateral.

(e) Appoint Receiver. To the extent permitted by applicable law, the Collateral Agent shall have the following rights and remedies regarding the appointment of a receiver: (i) the Collateral Agent may have a receiver appointed as a matter of right, (ii) the receiver may be an employee of the Collateral Agent and may serve without bond, and (iii) all fees of the receiver and the receiver’s attorney shall become part of the Indebtedness secured by this Security Agreement and shall be payable on demand, with interest at the lower of twenty percent (20%) per annum or the highest rate permitted by law from date of expenditure until repaid.

(f) Transfer Title. Effect transfer of title upon sale of all or part of the Collateral. For this purpose, the Debtors irrevocably appoint the Collateral Agent, acting singly, as its attorneys-in-fact to execute endorsements, assignments and instruments in the name of the Debtors as shall be necessary or reasonable. With respect to any such transfer of trademarks, the applicable Debtor hereby transfers all goodwill associated therewith.

(g) Collect Revenues, Apply Accounts. The Collateral Agent, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. The

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Collateral Agent may at any time in its discretion transfer any Collateral into its own names or that of its nominees and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as the Collateral Agent may determine. The Collateral Agent may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as the Collateral Agent may determine, whether or not the Indebtedness is then due. For these purposes, the Collateral Agent may, on behalf of and in the name of the Debtors, open and dispose of mail addressed to any Debtor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment or storage of any Collateral. To facilitate collection, the Collateral Agent may, notify Account Debtors and obligors on any Collateral to make payments directly to the Collateral Agent.

(h) Obtain Deficiency. If the Collateral Agent chooses to sell any or all of the Collateral and/or pursue any other remedy available hereunder, under any other agreement, at law or in equity, the Collateral Agent may obtain a judgment against the Debtors for any deficiency remaining on the Indebtedness due to the Secured Parties after application of all amounts received from the exercise of the rights provided in this Security Agreement. The Debtors shall be liable for a deficiency even if the transaction described in this Subsection is a sale of accounts or chattel paper.

(i) Application of Proceeds. The proceeds of any foreclosure or realization upon the Collateral shall be applied:

(i) First, to the costs and expenses of collection;

(ii) Second, to overdue interest;

(iii) Third, to the outstanding principal amount of the Indebtedness; and

(iv) Fourth, any excess to the Debtors or other party or parties in accordance with applicable law or court order.

(j) Other Rights and Remedies. The Collateral Agent and the Secured Parties shall have all the rights and remedies of a secured creditor under the provisions of the New York Uniform Commercial Code, as may be amended from time to time. In addition, the Collateral Agent and the Secured Parties shall have and may exercise any or all rights and remedies they may have available at law, in equity, or otherwise.

SECTION 6. Cumulative Remedies. All of the Collateral Agent’s and the Secured Parties’ rights and remedies, whether evidenced by this Security Agreement, or the other Transaction Documents or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by the Collateral Agent or the Secured Parties to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of a Debtor under this Security Agreement, after such Debtor’s failure to perform, shall not affect the Collateral Agent’s and Secured Parties’ right to declare a default and to exercise their remedies.

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SECTION 7. Pledged Securities.

(a) So long as no Event of Default shall have occurred and be continuing:

(i) The Debtors shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Securities or any part thereof for any purpose not inconsistent with the terms of this Security Agreement or the Transaction Documents; provided, however, that the Debtors shall not exercise or refrain from exercising any such right if such action would have a material adverse effect on the value of the Pledged Securities or any part thereof; and provided further that the Debtors shall give the Collateral Agent at least five days’ prior written notice of the manner in which it intends to exercise, or the reasons for refraining from exercising, any such right.

(ii) The Debtors shall be entitled to receive and retain any and all dividends and interest paid in respect of the Pledged Securities; provided, however, that any and all

(A) (I) dividends and other distributions paid or payable in cash in respect of any Pledged Securities in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, (II) cash paid, payable or otherwise distributed in respect of principal of, or in redemption of, or in exchange for, any Pledged Securities or (III), cash dividends resulting from transactions outside the ordinary course of business, shall be used to prepay first the 2004 Notes, then the 2003 Notes, then the 2002 Notes (on a pro rata basis based on the Principal Amount (as defined in the 2004 Notes, 2003 Notes and 2002 Notes, as applicable) outstanding on each such Note), or

(B) dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Securities shall be, and shall be forthwith delivered to the Collateral Agent to hold as, Collateral and shall, if received by the Debtors, be received in trust for the benefit of the Secured Parties, be segregated from the other property or funds of the Debtors and be forthwith delivered to the Collateral Agent as Collateral in the same form as so received (with any necessary endorsement).

The Debtors, promptly upon the request of the Collateral Agent, shall execute such documents and do such acts as may be necessary or desirable in the reasonable judgment of the Collateral Agent to give effect to this Section 7(a)(ii).

(iii) The Debtors shall deliver to the Collateral Agent any distribution consisting of Subsidiary Securities or Further Securities immediately upon receipt, together with executed stock powers and corporate resolutions authorizing the transfer of title of such shares after an Event of Default pursuant to the terms of this Security Agreement.

(iv) The Collateral Agent shall execute and deliver (or cause to be executed and delivered) to the Debtors all such proxies and other instruments as Debtors may reasonably request for the purpose of enabling the Debtors to exercise the voting and other rights that it is entitled to exercise pursuant to clause (i) above and to receive the dividends or interest payments that it is authorized to receive and retain pursuant to clause (ii) above.

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(b) Upon the occurrence and during the continuance of an Event of Default:

(i) All rights of Debtors (x) to exercise or refrain from exercising the voting and other consensual rights that it would otherwise be entitled to exercise pursuant to Section 7(a)(i) shall, upon notice to Debtors by the Secured Parties, cease and (y) to receive the dividends and interest payments that it would otherwise be authorized to receive and retain pursuant to Section 7(a)(ii) shall automatically cease, and all such rights shall thereupon become vested in the Collateral Agent, which shall thereupon have the sole right to exercise or refrain from exercising such voting and other consensual rights and to receive and hold as Pledged Securities such dividends, interest payments and other distributions. For the avoidance of doubt, the Collateral Agent is hereby granted an irrevocable proxy coupled with an interest to exercise all voting power with respect to the Subsidiary Securities and/or the Further Securities, effective upon the occurrence of an Event of Default.

(ii) All dividends, interest payments and other distributions that are received by the Debtors contrary to the provisions of clause (i) of this Section 7(b) shall be received in trust for the benefit of the Secured Parties, shall be segregated from other funds of Debtors and shall be forthwith paid over to the Collateral Agent as Collateral in the same form as so received (with any necessary endorsement).

SECTION 8. The Collateral Agent’s Duties.

(a) Other than as specified in this Security Agreement and any amendment hereto, the Collateral Agent shall not be required to take or refrain from taking any actions, to exercise or refrain from exercising any rights, or to make or refrain from making any requests unless it shall first receive proper instructions from Secured Parties holding at least 75% of the outstanding principal amount of the Obligations (or their respective successors or assigns).

(b) The Collateral Agent shall hold all Collateral received by it, and shall make disposition thereof, only in accordance with this Security Agreement or any amendment thereto. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Collateral Agent shall have no duty as to any Collateral, as to ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Pledged Securities, whether or not the Collateral Agent or any of the Secured Parties has or is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against any parties or any other rights pertaining to any Collateral.

(c) The Collateral Agent shall not be under any duty or obligation to inspect, review or examine any document, instrument, certificate, agreement or other papers to determine that they are enforceable or that they are other than what they purport to be on their face. The Collateral Agent shall hold any Collateral delivered to the Collateral Agent as the agent of the and for the benefit of each Secured Party, without preference as to any Secured Party.

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(d) The duties and obligations of the Collateral Agent shall be determined solely by the express provisions of this Security Agreement or any amendment hereto or any instructions permitted hereby. The Collateral Agent shall have no obligation with respect to any other matters covered in any other document other than as expressly provided herein, or any amendment hereto. The Collateral Agent shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Security Agreement or as set forth in a written amendment to this Security Agreement executed by the parties hereto or their successors or assigns. No representations, warranties, covenants or obligations of the Collateral Agent or any Secured Party shall be implied with respect to this Agreement or the Collateral Agent’s services hereunder. Without limiting the generality of the foregoing, the Collateral Agent:

(i) shall use the same degree of care and skill as a reasonably prudent person would use in similar circumstances (without limiting the generality of the foregoing, the Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its possession if such Collateral is accorded treatment substantially equal to that which the Collateral Agent accords its own property of like tenor);

(ii) shall not be obligated to take any legal action hereunder that might in its reasonable judgment involve any expense or liability unless it has been furnished with reasonable indemnity from the Secured Parties;

(iii) may rely on and shall be protected in acting in good faith upon any certificate, instrument, opinion, notice, letter, telegram or other document, or any security, delivered to it and in good faith believed by it to be genuine and to have been signed by the proper party or parties;

(iv) may rely on and shall be protected in acting in good faith upon the written instructions of Secured Parties holding at least 75% of the outstanding principal amount of the Obligations;

(v) may consult its own independent counsel satisfactory to it and the opinion of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered, or omitted by it hereunder in good faith and in furtherance of its duties hereunder, in accordance with the opinion of such counsel;

(vi) may execute any of the powers hereunder or perform any duties hereunder either directly or through agents or attorneys; and

(vii) will be regarded as making no representation and having no responsibilities (except as expressly set forth herein) as to the validity, sufficiency, value, genuineness, ownership or transferability of any portion of the Collateral, and will not be required to and will not make any representations as to the validity, value or genuineness of any portion of the Collateral.

(e) Neither the Collateral Agent nor any of its partners, agents or employees, shall be liable for any error in judgment, for any mistake of fact or for any action taken or omitted to be taken by it or them hereunder or in connection herewith in good faith and believed by it or them to be within the purview of this Security Agreement, except for its or their own gross negligence,

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lack of good faith or willful misconduct. In no event shall the Collateral Agent or its partners, officers, agents and employees be held liable for any special, indirect or consequential damages resulting from any action taken or omitted to be taken by it or them hereunder in connection herewith even if advised of the possibility of such damages.

(f) Whenever, in the administration of this Security Agreement, the Collateral Agent reasonably shall deem it necessary that a matter be proved or established prior to taking, suffering or omitting any action under this Security Agreement, such matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate of the Secured Parties, and such certificate shall be full warranty to the Collateral Agent for any action taken, suffered or omitted under the provisions of this Agreement, upon the faith thereof.

SECTION 9. Miscellaneous Provisions.

(a) Entire Agreement; Amendments. This Security Agreement, together with the other Transaction Documents, constitute the entire understanding and agreement of the parties as to the matters set forth in this Security Agreement. No alteration of or amendment to this Security Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

(b) CHOICE OF LAW AND VENUE; MUTUAL JURY TRIAL WAIVER. THE VALIDITY OF THIS SECURITY AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. THE PARTIES MUTUALLY IRREVOCABLY AND UNCONDITIONALLY AGREE (I) THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE STATE OF NEW YORK, NEW YORK COUNTY AND THAT THE PARTIES SHALL BE SUBJECT TO THE JURISDICTION OF SUCH COURTS, AND (II) THAT SERVICE OF PROCESS BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, SHALL CONSTITUTE PERSONAL SERVICE. EACH DEBTOR, THE COLLATERAL AGENT AND THE SECURED PARTIES WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 9(b). EACH DEBTOR, THE COLLATERAL AGENT AND THE SECURED PARTIES HEREBY WAIVES THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS SECURITY AGREEMENT OR ANY OF THE ACTIONS CONTEMPLATED HEREIN, INCLUDING WITHOUT LIMITATION CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH DEBTOR, THE COLLATERAL AGENT AND THE SECURED PARTIES REPRESENTS THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

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(c) Attorneys’ Fees; Expenses. The Debtors agrees to pay, jointly and severally upon demand, all of the Collateral Agent’s and Secured Parties’ costs and expenses, including without limitation reasonable attorneys’ fees and legal expenses, incurred in connection with the enforcement of this Security Agreement. The Collateral Agent or any Secured Party may pay someone else to help enforce this Security Agreement, and the Debtors shall pay the costs and expenses of such enforcement. Costs and expenses include without limitation the Collateral Agent’s and Secured Parties’ reasonable attorneys’ fees and legal expenses whether or not there is a lawsuit, reasonable attorneys’ fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. The Debtors also shall pay all court costs and such additional fees as may be directed by the court.

(d) Caption Headings. Caption headings in this Security Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Security Agreement.

(e) Notices. All notices required to be given under this Security Agreement shall be given in writing and shall be effective when actually delivered or two (2) days after being deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given or, if via facsimile, when sent via facsimile transmission to the party to whom the notice is to be given and confirmation of such transmission has been received, at the address and/or facsimile number shown below:

If to Elliott or the Collateral Agent:

Manchester Securities Corporation

712 Fifth Avenue, 36^th Floor

New York, New York 10019

Telephone: (212) 974-6000

Facsimile: (212) 974-2092

Attention: Dan Gropper

With a copy to:

Kleinberg, Kaplan, Wolff & Cohen, P.C.

551 Fifth Avenue, 18th Floor

New York, New York 10176

Telephone: (212) 986-6000

Facsimile: (212) 986-8866

Attention: Lawrence D. Hui, Esq.

If to Alexander:

Alexander Finance, LP

1560 Sherman Avenue

Evanston, Illinois

Telephone: (847) 733-0232

Facsimile: (847) 733-0339

Attention: Bradford T. Whitmore

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With a copy to:

Sachnoff & Weaver

30 S. Wacker Drive

Chicago, Illinois 60606

Telephone: (312) 207-3879

Facsimile: (312) 207-6400

Attention: Evelyn C. Arkebauer, Esq.

If to the Company or a Subsidiary:

ISCO International, Inc.

451 Kingston Court

Mount Prospect, Illinois 60056

Telephone: (847) 391-9400

Facsimile: (847) 391-5015

Attention: Frank Cesario

With a copy to:

Pepper Hamilton LLP

400 Berwyn Park

899 Cassatt Road

1235 Westlakes Drive

Berwyn, Pennsylvania 19312

Telephone: (610) 640-7800

Facsimile: (610) 640-7835

Attention: Michael P. Gallagher, Esq.

Any party may change its address for notices under this Security Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. For notice purposes, the Debtors agrees to keep the Collateral Agent informed at all times of the Debtors’ current addresses.

(f) Severability. The parties acknowledge and agree that the Collateral Agent and the Secured Parties are not agents or partners of each other, that all representations, warranties, covenants and agreements of the Collateral Agent and the Secured Parties hereunder are several and not joint, that the Collateral Agent and the Secured Parties shall not have any responsibility or liability for the representations, warranties, agreements, acts or omissions of the other and that any rights granted to the Collateral Agent and the Secured Parties hereunder shall be enforceable by each of the Collateral Agent and the Secured Parties hereunder. If a court of competent jurisdiction finds any provision of this Security Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken, and all other provisions of this Security Agreement in all other respects shall remain valid and enforceable and such offending provision shall not be affected in any other jurisdiction.

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(g) Successor Interests. Subject to the limitations set forth above on transfer of the Collateral, this Security Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns to the extent permitted by Section 5.6 of the Loan Agreement. The Debtors shall not, however, have the right to assign this Security Agreement without the prior written consent of the Secured Parties which may be withheld for any reason in the Secured Parties’ sole discretion.

(h) Waiver. The Collateral Agent and the Secured Parties shall not be deemed to have waived any rights under this Security Agreement unless such waiver is given in writing and signed by the Collateral Agent and the Secured Parties. No delay or omission on the part of the Collateral Agent or Secured Parties in exercising any right shall operate as a waiver of such right or any other right. A waiver by the Collateral Agent or Secured Parties of a provision of this Security Agreement shall not prejudice or constitute a waiver of the Collateral Agent’s or the Secured Parties’ right otherwise to demand strict compliance with that provision or any other provision of this Security Agreement. No prior waiver by the Collateral Agent or Secured Parties, nor any course of dealing between the Secured Parties and the Debtors, shall constitute a waiver of any of the Collateral Agent’s or the Secured Parties’ rights or of any of the Debtors’ obligations as to any future transactions. Whenever the consent of the Collateral Agent and/or the Secured Parties is required under this Security Agreement, the granting of such consent in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of the Collateral Agent and/or the Secured Parties.

(i) Indemnity. The Debtors agree, jointly and severally, to indemnify, pay and hold the Collateral Agent, each Secured Party and the officers, partners, directors, employees, agents and affiliates thereof (collectively, the “indemnitees”) harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel) that may be imposed on, incurred by, or asserted against any indemnitee, in any manner relating to or arising out of this Security Agreement and any action undertaken or contemplated hereby. This indemnification shall survive the satisfaction and payment of the Indebtedness and termination of this Security Agreement.

(j) Subsidiary Liability. Notwithstanding anything in this Security Agreement to the contrary, each Subsidiary’s obligations hereunder shall not exceed the maximum amount that would not be subject to avoidance under fraudulent conveyance, fraudulent transfer, and other similar laws.

(k) No Subrogation. Notwithstanding any payment made by any Debtor hereunder or any set-off or application of funds of any Debtor by the Secured Parties, no Debtor shall be entitled to be subrogated to any of the rights of the Secured Parties against a Debtor or any collateral security or guarantee or right of offset held by the Secured Parties for the payment of the Indebtedness, nor shall any Debtor seek or be entitled to seek any contribution or reimbursement from another Debtor in respect of payments made by such Debtor hereunder,

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until all amounts owing to the Secured Parties by the Debtors under any Transaction Documents are paid in full. If any amount shall be paid to any Debtor on account of such subrogation rights at any time when any such amounts shall not have been paid in full, such amount shall be held by such Debtor in trust for the Secured Parties, segregated from other funds of such Debtor, and shall, forthwith upon receipt by such Debtor, be turned over to the Secured Parties in the exact form received by such Debtor (duly indorsed by such Debtor to Secured Parties, if required), to be applied against the Indebtedness of the Debtors under the Transaction Documents, whether matured or unmatured, in such order as the Secured Parties may determine.

(l) The actions of the holders of 75% of the outstanding principal amount of the Obligations shall be deemed the actions of Secured Parties for purposes of giving any notice or enforcing any rights or remedies.

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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their respective officers thereunto duly authorized, as of the date first above written.

ISCO INTERNATIONAL, INC.
By:
Name:	Amr Abdelmonem, Ph.D.
Title:	Chief Executive Officer
SPECTRAL SOLUTIONS, INC.
By:
Name:
Title:
ILLINOIS SUPERCONDUCTOR CANADA CORPORATION
By:
Name:
Title:
MANCHESTER SECURITIES CORPORATION
By:
Name:	Elliot Greenberg
Title:	Vice President
ALEXANDER FINANCE, L.P.
By:
Name:
Title:
COLLATERAL AGENT:
MANCHESTER SECURITIES CORPORATION
By:
Name:	Elliot Greenberg
Title:	Vice President

20

SCHEDULE A

Identification, Ownership and Location of Collateral and Liens

21

EX-10.3

EXHIBIT 10.3

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE MAY NOT BE SOLD, ASSIGNED OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW OR AN EXEMPTION THEREFROM.

14% SECURED GRID NOTE

U.S.$386,900	Dated: July 23, 2004
Note No.: C-2	Mt. Prospect, Illinois

FOR VALUE RECEIVED, the undersigned, ISCO INTERNATIONAL, INC., a Delaware corporation formerly known as ILLINOIS SUPERCONDUCTOR CORPORATION with offices at 451 Kingston Court, Mt. Prospect, Illinois 60056 (“Borrower”), promises to pay to the order of ALEXANDER FINANCE, L.P., an Illinois limited partnership at 1560 Sherman Avenue, Suite 900, Evanston, Illinois 60210, or its registered assigns (“Lender”), in lawful money of the United States, the principal sum of Three Hundred Eighty-Six Thousand and Nine Hundred Dollars (U.S.$386,900), or, if less, the outstanding principal amount of Advances (as defined in Loan Agreement) made to Borrower pursuant to the Second Amended and Restated Loan Agreement dated as of the date hereof to which Borrower, Lender and Manchester Securities Corporation (“Manchester”) are parties (the “Loan Agreement”), as shown on the Grid Schedule attached as Schedule 1 hereto, due April 1, 2005, (the “Maturity Date”), and to pay interest on the principal sum outstanding under this Note at the rate of the lesser of 14% per annum or the highest rate permitted by law, compounded annually, which interest shall also be due and payable on the Maturity Date, or such earlier date upon acceleration in accordance with the terms hereof. Accrual of interest shall commence on the first day to occur after the date hereof and shall continue until payment in full of the principal sum and all other amounts due hereunder have been made. The principal of, and interest on, this Note are payable in such currency of the United States of America as of the time of payment is legal tender for payment of public and private debts. This Note is one of the Notes (the “2004 Notes”) issued pursuant to the Loan Agreement. Capitalized terms used herein and not otherwise defined shall have the meaning ascribed thereto in the Loan Agreement.

This Note is subject to the following additional provisions:

1. Interest and Payment Application. Interest shall be calculated on a 360 day year simple interest basis and paid for the actual number of days elapsed. All interest due hereunder shall be payable at the Maturity Date. Notwithstanding anything contained herein, the outstanding principal balance and interest due hereunder shall bear interest, from and after the occurrence and during the continuance of an Event of Default (as defined below) hereunder, at the rate equal to the lower of twenty percent (20%) per annum, compounded annually, or the highest rate permitted by law, and from and after such time interest shall be payable from time to time on demand. Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs, then to accrued and unpaid interest and fees and any remaining amount to principal.

2. Prepayment. Borrower may pre-pay all or any part of this Note at any time upon thirty (30) days prior written notice to Lender, without cost or penalty in accordance with the provisions of Section 1.6(a) of the Loan Agreement, and must pre-pay this Note in the circumstances described in Section 1.6(b) of the Loan Agreement.

3. No Impairment. Borrower shall not intentionally take any action which would impair the rights of Lender hereunder.

4. Obligations Absolute. No provision of this Note shall alter or impair the obligation of Borrower, which is absolute and unconditional, to pay the principal of, and interest on, this Note at the time, place and rate, and in the manner, herein prescribed.

5. Advances Under the Loan Agreement. Upon the closing of each Advance made by Lender under the Loan Agreement, Lender shall adjust the grid schedule attached to this Note as Schedule 1 to reflect the principal amount and the terms of such Advance. Notwithstanding anything to the contrary contained herein or in the Loan Agreement, Lender’s failure to so adjust the grid schedule shall not in any manner affect Borrower’s obligation to repay the amount of any Advances made by Lender under the Loan Agreement in accordance with the terms of the Loan Agreement and this Note.

6. Defaults and Remedies.

(a) Events of Default. An “Event of Default” is: (i) default in payment of the principal amount or accrued but unpaid interest thereon of any of the 2004 Notes or any of the Notes issued by the Company on October 24, 2003 to the Lender and Manchester, as amended on February 24, 2004 (the “2003 Notes”) or any of the Notes issued by the Company on October 23, 2002 to the Lender and Manchester, as amended on February 24, 2004 (the “2002 Notes” and together with the 2004 Notes and 2003 Notes, the “Loan Notes”) on or after the date such payment is due, (ii) failure by Borrower for ten (10) days after notice to it, to comply with any other material provision of any of the Loan Notes or the Loan Agreement; (iii) an Event of Default under the Security Agreement (as defined below); (iv) a breach by Borrower of its representations or warranties in the Loan Agreement; (v) any default under or acceleration prior to maturity of any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by Borrower or a subsidiary of Borrower or for money borrowed the repayment of which is guaranteed by Borrower or a subsidiary of Borrower, whether such indebtedness or guarantee now exists or shall be created hereafter, provided that the obligations with respect to any such borrowed or accelerated amount exceeds, in the aggregate, $500,000; (vi) any money judgment, writ or warrant of attachment, or similar process in excess of $500,000 in the aggregate shall be entered or filed against Borrower or a subsidiary of Borrower or any of their respective properties or other assets and shall remain unpaid, unvacated, unbonded and unstayed for a period of 45 days; (vii) if Borrower or any subsidiary of Borrower pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case; (B) has an involuntary case commenced against it, and such case is not dismissed within 30 days of such commencement or consents to

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the entry of an order for relief against it in an involuntary case; (C) consents to the appointment of a Custodian of it for all or substantially all of its property; (D) makes a general assignment for the benefit of its creditors; or (E) admits in writing that it is generally unable to pay its debts as the same become due; or (viii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (1) is for relief against Borrower in an involuntary case; (2) appoints a Custodian of Borrower or for all or substantially all of its property; or (3) orders the liquidation of the Company or any subsidiary, and the order or decree remains unstayed and in effect for ninety (90) days. The terms “Bankruptcy Law” means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors. The term “Custodian” means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law.

(b) Remedies. If an Event of Default occurs and is continuing with respect to any of the Loan Notes, Lender may declare all of the then outstanding principal amount of this Note, including any accrued and unpaid interest due thereon, to be due and payable immediately, except that in the case of an Event of Default arising from events described in clauses (vii) and (viii) of Section 6(a) above, this Note shall become due and payable without further action or notice.

7. Waivers of Demand, Etc. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, hereby expressly waives demand and presentment for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, all other notices whatsoever and bringing of suit and diligence in taking any action to collect amounts called for hereunder, and will be directly and primarily liable for the payment of all sums owing and to be owing hereon, regardless of and without any notice, diligence, act or omission as or with respect to the collection of any amount called for hereunder.

8. Replacement Note. In the event that Lender notifies Borrower that this Note has been lost, stolen or destroyed, a replacement Note identical in all respects to the original Note (except for the outstanding principal amount, if different than that shown on the original Note), shall be delivered to Lender, provided that Lender executes and delivers to Borrower an agreement reasonably satisfactory to Borrower to indemnify Borrower from any loss incurred by it in connection with this Note.

9. Loan Agreement; Security Agreement; Guaranties. This Note is being issued to Lender in connection with the Loan Agreement and is entitled to the benefits thereof. In addition Borrower’s obligations under this Note are guaranteed by the Second Amended and Restated Guaranties (the “Guaranties”) of Spectral Solutions, Inc. and Illinois Superconductor Canada Corporation, subsidiaries of Borrower (the together, the “Guarantors”) and this Note is entitled to the benefits thereof. Borrower’s obligations under this Note are also secured, pursuant to the terms of the Second Amended and Restated Security Agreement, dated as of July         , 2004, by and among Borrower, Guarantors, Lender and Manchester (the “Security Agreement”), by all the assets of Borrower and Guarantors.

10. Payment of Expenses. Borrower agrees to pay all debts and expenses, including reasonable attorneys’ fees and expenses, which may be incurred by Lender in preparing, administering or enforcing this Note and/or collecting any amount due under this Note, the Loan Agreement, the Security Agreement or the Guaranties.

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11. Savings Clause. In case any provision of this Note is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Note will not in any way be affected or impaired thereby. In no event shall the amount of interest paid hereunder exceed the maximum rate of interest on the unpaid principal balance hereof allowable by applicable law. If any sum is collected in excess of the applicable maximum rate, the excess collected shall be applied to reduce the principal debt. If the interest actually collected hereunder is still in excess of the applicable maximum rate, the interest rate shall be reduced so as not to exceed the maximum amount allowable under law.

12. Amendment. Neither this Note nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by both Borrower and Lender; except that Sections 4 and 6 hereof may not be amended, nor the interest rate or principal amount hereunder increased or the maturity date hereunder shortened, without the consent of the holders of 75% of the aggregate principal maximum amount of the outstanding Loan Notes.

13. Assignment Etc. Lender may not transfer or assign any of its rights or interests in or to this Note or any part hereof (other than to any affiliate of such Lender) without the prior written consent of the Borrower, such consent not to be unreasonably withheld; provided, however, that Lender may mortgage, encumber or transfer this Note or any of its rights or interest in and to this Note or any part hereof in accordance with applicable securities laws, rules and regulations. Each assignee, transferee and mortgagee shall have the right to transfer or assign its interest in accordance with the prior sentence. Each such assignee, transferee and mortgagee shall have all of the rights of Lender under this Note, the Loan Agreement, the Security Agreement and the Guaranties. This Note shall be binding upon Borrower and its successors and shall inure to the benefit of Lender and its successors and assigns. Any transfer made in violation of this provision shall be null and void.

14. No Waiver. No failure on the part of Lender to exercise, and no delay in exercising any right, remedy or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by Lender of any right, remedy or power hereunder preclude any other or future exercise of any other right, remedy or power. Each and every right, remedy or power hereby granted to Lender or allowed it by law or other agreement shall be cumulative and not exclusive of any other, and may be exercised by Lender from time to time.

15. Miscellaneous. Unless otherwise provided herein, any notice or other communication to Borrower hereunder shall be sufficiently given if in writing and personally delivered or mailed to Borrower by certified mail, return receipt requested, at its address set forth above or such other address as it may designate for itself in such notice to Lender, and communications shall be deemed to have been received when delivered personally or, if sent by mail or facsimile, then when actually received by the party to whom it is addressed. Whenever the sense of this Note requires, words in the singular shall be deemed to include the plural and

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words in the plural shall be deemed to include the singular. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may (1) renew, extend (repeatedly and for any length of time) or modify this Note (in accordance with Section 12 above), or release any party or any guarantor or collateral, (2) impair, fail to realize upon or perfect any security interest Lender may have from time to time in collateral, or (3) take any other action deemed necessary by Lender, in each case without the consent of or notice to anyone and without releasing Borrower or any guarantor from any liability.

16. Choice of Law and Venue; Waiver of Jury Trial. THIS NOTE SHALL BE CONSTRUED UNDER THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW OR CHOICE OF LAW. Borrower hereby agrees that all actions or proceedings arising directly or indirectly from or in connection with this Note shall, at Lender’s sole option, be litigated only in the Supreme Court of the State of New York or the United States District Court for the Southern District of New York, in each case, located in New York County, New York. Borrower consents to the exclusive jurisdiction and venue of the foregoing courts and consents that any process or notice of motion or other application to either of said courts or a judge thereof may be served inside or outside the State of New York or the Southern District of New York by certified or registered mail, return receipt requested, directed to Borrower at its address set forth in this Note (and service so made shall be deemed “personal service” and be deemed complete five (5) days after the same has been posted as aforesaid) or by personal service or in such other manner as may be permissible under the rules of said courts. BORROWER HEREBY WAIVES ANY RIGHT TO A JURY TRIAL IN CONNECTION WITH ANY LITIGATION PURSUANT TO THIS NOTE.

IN WITNESS WHEREOF, Borrower has caused this instrument to be duly executed by an officer thereunto duly authorized.

ISCO INTERNATIONAL, INC.
By:
Name:	Amr Abdelmonem, Ph.D.
Title:	Chief Executive Officer

ATTEST:

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SCHEDULE 1

(Grid Schedule of Advances Made Under the Loan Agreement)

Date Principal Amount of Advance Interest Rate Maturity Date

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EX-10.4

Exhibit 10.4

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS NOTE MAY NOT BE SOLD, ASSIGNED OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW OR AN EXEMPTION THEREFROM.

14% SECURED GRID NOTE

U.S.$113,100	Dated: July 23, 2004
Note No.: C-1	Mt. Prospect, Illinois

FOR VALUE RECEIVED, the undersigned, ISCO INTERNATIONAL, INC., a Delaware corporation formerly known as ILLINOIS SUPERCONDUCTOR CORPORATION with offices at 451 Kingston Court, Mt. Prospect, Illinois 60056 (“Borrower”), promises to pay to the order of MANCHESTER SECURITIES CORPORATION, a New York corporation at 712 Fifth Avenue, New York, New York 10019, or its registered assigns (“Lender”), in lawful money of the United States, the principal sum of One Hundred Thirteen Thousand and One Hundred Dollars (U.S.$113,100), or, if less, the outstanding principal amount of Advances (as defined in Loan Agreement) made to Borrower pursuant to the Second Amended and Restated Loan Agreement dated as of the date hereof to which Borrower, Lender and Alexander Finance, L.P. (“Alexander”) are parties (the “Loan Agreement”), as shown on the Grid Schedule attached as Schedule 1 hereto, due April 1, 2005, (the “Maturity Date”), and to pay interest on the principal sum outstanding under this Note at the rate of the lesser of 14% per annum or the highest rate permitted by law, compounded annually, which interest shall also be due and payable on the Maturity Date, or such earlier date upon acceleration in accordance with the terms hereof. Accrual of interest shall commence on the first day to occur after the date hereof and shall continue until payment in full of the principal sum and all other amounts due hereunder have been made. The principal of, and interest on, this Note are payable in such currency of the United States of America as of the time of payment is legal tender for payment of public and private debts. This Note is one of the Notes (the “2004 Notes”) issued pursuant to the Loan Agreement. Capitalized terms used herein and not otherwise defined shall have the meaning ascribed thereto in the Loan Agreement.

This Note is subject to the following additional provisions:

1. Interest and Payment Application. Interest shall be calculated on a 360 day year simple interest basis and paid for the actual number of days elapsed. All interest due hereunder shall be payable at the Maturity Date. Notwithstanding anything contained herein, the outstanding principal balance and interest due hereunder shall bear interest, from and after the occurrence and during the continuance of an Event of Default (as defined below) hereunder, at the rate equal to the lower of twenty percent (20%) per annum, compounded annually, or the highest rate permitted by law, and from and after such time interest shall be payable from time to time on demand. Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs, then to accrued and unpaid interest and fees and any remaining amount to principal.

2. Prepayment. Borrower may pre-pay all or any part of this Note at any time upon thirty (30) days prior written notice to Lender, without cost or penalty in accordance with the provisions of Section 1.6(a) of the Loan Agreement, and must pre-pay this Note in the circumstances described in Section 1.6(b) of the Loan Agreement.

3. No Impairment. Borrower shall not intentionally take any action which would impair the rights of Lender hereunder.

4. Obligations Absolute. No provision of this Note shall alter or impair the obligation of Borrower, which is absolute and unconditional, to pay the principal of, and interest on, this Note at the time, place and rate, and in the manner, herein prescribed.

5. Advances Under the Loan Agreement. Upon the closing of each Advance made by Lender under the Loan Agreement, Lender shall adjust the grid schedule attached to this Note as Schedule 1 to reflect the principal amount and the terms of such Advance. Notwithstanding anything to the contrary contained herein or in the Loan Agreement, Lender’s failure to so adjust the grid schedule shall not in any manner affect Borrower’s obligation to repay the amount of any Advances made by Lender under the Loan Agreement in accordance with the terms of the Loan Agreement and this Note.

6. Defaults and Remedies.

(a) Events of Default. An “Event of Default” is: (i) default in payment of the principal amount or accrued but unpaid interest thereon of any of the 2004 Notes or any of the Notes issued by the Company on October 24, 2003 to the Lender and Alexander, as amended on February 24, 2004 (the “2003 Notes”) or any of the Notes issued by the Company on October 23, 2002 to the Lender and Alexander, as amended on February 24, 2004 (the “2002 Notes” and together with the 2004 Notes and 2003 Notes, the “Loan Notes”) on or after the date such payment is due, (ii) failure by Borrower for ten (10) days after notice to it, to comply with any other material provision of any of the Loan Notes or the Loan Agreement; (iii) an Event of Default under the Security Agreement (as defined below); (iv) a breach by Borrower of its representations or warranties in the Loan Agreement; (v) any default under or acceleration prior to maturity of any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any indebtedness for money borrowed by Borrower or a subsidiary of Borrower or for money borrowed the repayment of which is guaranteed by Borrower or a subsidiary of Borrower, whether such indebtedness or guarantee now exists or shall be created hereafter, provided that the obligations with respect to any such borrowed or accelerated amount exceeds, in the aggregate, $500,000; (vi) any money judgment, writ or warrant of attachment, or similar process in excess of $500,000 in the aggregate shall be entered or filed against Borrower or a subsidiary of Borrower or any of their respective properties or other assets and shall remain unpaid, unvacated, unbonded and unstayed for a period of 45 days; (vii) if Borrower or any subsidiary of Borrower pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case; (B) has an involuntary case commenced against it, and such case is not dismissed within 30 days of such commencement or consents to

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the entry of an order for relief against it in an involuntary case; (C) consents to the appointment of a Custodian of it for all or substantially all of its property; (D) makes a general assignment for the benefit of its creditors; or (E) admits in writing that it is generally unable to pay its debts as the same become due; or (viii) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (1) is for relief against Borrower in an involuntary case; (2) appoints a Custodian of Borrower or for all or substantially all of its property; or (3) orders the liquidation of the Company or any subsidiary, and the order or decree remains unstayed and in effect for ninety (90) days. The terms “Bankruptcy Law” means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors. The term “Custodian” means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law.

(b) Remedies. If an Event of Default occurs and is continuing with respect to any of the Loan Notes, Lender may declare all of the then outstanding principal amount of this Note, including any accrued and unpaid interest due thereon, to be due and payable immediately, except that in the case of an Event of Default arising from events described in clauses (vii) and (viii) of Section 6(a) above, this Note shall become due and payable without further action or notice.

7. Waivers of Demand, Etc. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, hereby expressly waives demand and presentment for payment, notice of nonpayment, protest, notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, all other notices whatsoever and bringing of suit and diligence in taking any action to collect amounts called for hereunder, and will be directly and primarily liable for the payment of all sums owing and to be owing hereon, regardless of and without any notice, diligence, act or omission as or with respect to the collection of any amount called for hereunder.

8. Replacement Note. In the event that Lender notifies Borrower that this Note has been lost, stolen or destroyed, a replacement Note identical in all respects to the original Note (except for the outstanding principal amount, if different than that shown on the original Note), shall be delivered to Lender, provided that Lender executes and delivers to Borrower an agreement reasonably satisfactory to Borrower to indemnify Borrower from any loss incurred by it in connection with this Note.

9. Loan Agreement; Security Agreement; Guaranties. This Note is being issued to Lender in connection with the Loan Agreement and is entitled to the benefits thereof. In addition Borrower’s obligations under this Note are guaranteed by the Amended and Second Restated Guaranties (the “Guaranties”) of Spectral Solutions, Inc. and Illinois Superconductor Canada Corporation, subsidiaries of Borrower (the together, the “Guarantors”) and this Note is entitled to the benefits thereof. Borrower’s obligations under this Note are also secured, pursuant to the terms of the Second Amended and Restated Security Agreement, dated as of July     , 2004, by and among Borrower, Guarantors, Lender and Alexander (the “Security Agreement”), by all the assets of Borrower and Guarantors.

10. Payment of Expenses. Borrower agrees to pay all debts and expenses, including reasonable attorneys’ fees and expenses, which may be incurred by Lender in preparing, administering or enforcing this Note and/or collecting any amount due under this Note, the Loan Agreement, the Security Agreement or the Guaranties.

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11. Savings Clause. In case any provision of this Note is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Note will not in any way be affected or impaired thereby. In no event shall the amount of interest paid hereunder exceed the maximum rate of interest on the unpaid principal balance hereof allowable by applicable law. If any sum is collected in excess of the applicable maximum rate, the excess collected shall be applied to reduce the principal debt. If the interest actually collected hereunder is still in excess of the applicable maximum rate, the interest rate shall be reduced so as not to exceed the maximum amount allowable under law.

12. Amendment. Neither this Note nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by both Borrower and Lender; except that Sections 4 and 6 hereof may not be amended, nor the interest rate or principal amount hereunder increased or the maturity date hereunder shortened, without the consent of the holders of 75% of the aggregate principal maximum amount of the outstanding Loan Notes.

13. Assignment Etc. Lender may not transfer or assign any of its rights or interests in or to this Note or any part hereof (other than to any affiliate of such Lender) without the prior written consent of the Borrower, such consent not to be unreasonably withheld; provided, however, that Lender may mortgage, encumber or transfer this Note or any of its rights or interest in and to this Note or any part hereof in accordance with applicable securities laws, rules and regulations. Each assignee, transferee and mortgagee shall have the right to transfer or assign its interest in accordance with the prior sentence. Each such assignee, transferee and mortgagee shall have all of the rights of Lender under this Note, the Loan Agreement, the Security Agreement and the Guaranties. This Note shall be binding upon Borrower and its successors and shall inure to the benefit of Lender and its successors and assigns. Any transfer made in violation of this provision shall be null and void.

14. No Waiver. No failure on the part of Lender to exercise, and no delay in exercising any right, remedy or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise by Lender of any right, remedy or power hereunder preclude any other or future exercise of any other right, remedy or power. Each and every right, remedy or power hereby granted to Lender or allowed it by law or other agreement shall be cumulative and not exclusive of any other, and may be exercised by Lender from time to time.

15. Miscellaneous. Unless otherwise provided herein, any notice or other communication to Borrower hereunder shall be sufficiently given if in writing and personally delivered or mailed to Borrower by certified mail, return receipt requested, at its address set forth above or such other address as it may designate for itself in such notice to Lender, and communications shall be deemed to have been received when delivered personally or, if sent by mail or facsimile, then when actually received by the party to whom it is addressed. Whenever the sense of this Note requires, words in the singular shall be deemed to include the plural and

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words in the plural shall be deemed to include the singular. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may (1) renew, extend (repeatedly and for any length of time) or modify this Note (in accordance with Section 12 above), or release any party or any guarantor or collateral, (2) impair, fail to realize upon or perfect any security interest Lender may have from time to time in collateral, or (3) take any other action deemed necessary by Lender, in each case without the consent of or notice to anyone and without releasing Borrower or any guarantor from any liability.

16. Choice of Law and Venue; Waiver of Jury Trial. THIS NOTE SHALL BE CONSTRUED UNDER THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW OR CHOICE OF LAW. Borrower hereby agrees that all actions or proceedings arising directly or indirectly from or in connection with this Note shall, at Lender’s sole option, be litigated only in the Supreme Court of the State of New York or the United States District Court for the Southern District of New York, in each case, located in New York County, New York. Borrower consents to the exclusive jurisdiction and venue of the foregoing courts and consents that any process or notice of motion or other application to either of said courts or a judge thereof may be served inside or outside the State of New York or the Southern District of New York by certified or registered mail, return receipt requested, directed to Borrower at its address set forth in this Note (and service so made shall be deemed “personal service” and be deemed complete five (5) days after the same has been posted as aforesaid) or by personal service or in such other manner as may be permissible under the rules of said courts. BORROWER HEREBY WAIVES ANY RIGHT TO A JURY TRIAL IN CONNECTION WITH ANY LITIGATION PURSUANT TO THIS NOTE.

IN WITNESS WHEREOF, Borrower has caused this instrument to be duly executed by an officer thereunto duly authorized.

ISCO INTERNATIONAL, INC.
By:
Name:	Amr Abdelmonem, Ph.D.
Title:	Chief Executive Officer

ATTEST:

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SCHEDULE 1

(Grid Schedule of Advances Made Under the Loan Agreement)

Date Principal Amount of Advance Interest Rate Maturity Date

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EX-10.5

EXHIBIT 10.5

SECOND AMENDED AND RESTATED GUARANTY

OF

SPECTRAL SOLUTIONS, INC.

ISCO INTERNATIONAL, INC., a corporation organized and existing under the laws of Delaware and formerly known as Illinois Superconductor Corporation (“ISCO”) and the corporate parent of SPECTRAL SOLUTIONS, INC., a corporation organized and existing under the laws of the State of Colorado (“Guarantor”), has issued to MANCHESTER SECURITIES CORPORATION, a corporation organized under the laws of the State of New York, and ALEXANDER FINANCE LP, an Illinois limited partnership (collectively, “Payees”): (i) 9½% secured grid notes due April 1, 2005, as amended, in the aggregate principal amount of up to $4,000,000 (the “2002 Notes”), (ii) 14% secured grid notes due April 1, 2005, as amended, in the aggregate principal amount of $2,000,000 (the “2003 Notes”), and (iii) 14% secured grid notes due April 1, 2005, in the aggregate principal amount of $500,000 (the “2004 Notes” and together with the 2002 Notes and the 2003 Notes, the “Notes”), in each case pursuant to the Loan Agreement dated October 23, 2002 as previously amended and as amended and restated as of the date hereof (the “Loan Agreement”).

Section 1. Guaranty.

(a) In consideration of Payees purchasing the Notes and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Guarantor hereby absolutely, irrevocably and unconditionally guarantees to Payees the full payment and performance when due of any and all obligations and undertakings of ISCO under the Notes, the Loan Agreement and the Security Agreement, as previously amended and as amended and restated as of the date hereof (the “Security Agreement”) entered into pursuant to the Loan Agreement (such obligations and undertakings shall hereinafter be referred to as the “Obligations”), together with all reasonable attorneys’ fees, disbursements and all other costs and expenses of collections reasonably incurred by Payees in enforcing any of such Obligations and/or this Guaranty.

(b) Notwithstanding the provisions of Section 1(a), Guarantor’s obligations hereunder shall not exceed the maximum amount that would not be subject to avoidance under fraudulent conveyance, fraudulent transfer, and other similar laws.

Section 2. Certain Guarantor Waivers.

(a) Waivers of Notice, Etc. Guarantor waives notice of acceptance of this Guaranty and notice of the creation or performance of any of the Obligations, and waives presentment, demand of payment, protest or notice of protest, notice of dishonor or nonperformance of any of the Obligations, suit or taking other action or non-action by Payees, ISCO or any other guarantor against, and any other notice to, any party liable thereon (including, without limitation, Guarantor). Guarantor also hereby waives any notice of default by ISCO and any other notice to which Guarantor might otherwise be entitled, the right to interpose any counterclaim or

consolidate any other action with an action on this Guaranty, and the benefit of any statute of limitations affecting its liabilities hereunder or the enforcement hereof. No act or omission of any kind in connection with any of the foregoing shall in any way impair or otherwise affect the legality, validity, binding effect or enforceability of any term or provision of this Guaranty or any of the obligations of Guarantor hereunder.

(b) Guaranty Not Affected. Guarantor hereby covenants, agrees and consents that Payees may, at any time and from time to time (whether or not after revocation or termination of this Guaranty), without incurring responsibility to Guarantor, and without impairing or releasing any of the obligations of Guarantor hereunder and, upon or without any terms or conditions, and in whole or in part: (i) agree with ISCO to change the manner, place or terms of performance, including (without limitation) any change or extend the time of performance of, renew or alter, any of the Obligations, any security therefor, or any other liability incurred directly or indirectly in respect thereof, or to make any other change in the Obligations, and the guaranty herein made shall apply to the Obligations as so changed, extended, renewed or altered; (ii) take additional security, for or sell, exchange, release, surrender, substitute, realize upon or otherwise deal with in any manner and in any order any property by whomsoever at any time pledged or mortgaged to secure, or howsoever securing, any of the Obligations or any other liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset thereagainst; (iii) exercise or refrain from exercising any rights against ISCO or others (including, without limitation, Guarantor) or otherwise act or refrain from acting; (iv) settle or compromise any Obligation, any security therefor, or any liability (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or subordinate the performance of all or any part thereof to the performance of any of the Obligations (whether due or not) to creditors of ISCO other than Payees and Guarantor; (v) apply any sums by whomsoever paid or howsoever realized to any Obligation regardless of what Obligations remain unperformed; (vi) cancel, compromise, modify, or waive the provisions of any document relating to any of the Obligations; (vii) release any other guarantor or surety of the Obligations; and (viii) grant ISCO any indulgence as Payees may, in its sole discretion, determine.

(c) Failure to Perfect Lien, Etc. No failure by Payees to file, record or otherwise perfect any lien or security interest, nor any improper filing or recording, nor any failure by Payees to insure or protect any security nor any other dealing (or failure to deal) with any security by Payees with respect to any of the Obligations, shall impair or release any of the obligations of Guarantor hereunder. No invalidity, irregularity or unenforceability of all or any part of the Obligations or of any security therefor shall affect, impair or be a defense to this Guaranty, and this Guaranty is a primary obligation of Guarantor.

(d) Waiver of Subrogation. No payment by Guarantor except the indefeasible performance in full of the Obligations shall entitle Guarantor to be subrogated to any of the rights of Payees. Guarantor shall have no right of reimbursement or indemnity whatsoever and no right of recourse to or with respect to any assets or property of ISCO or to any security for the Obligations, unless and until all of the Obligations have been indefeasibly performed in full, other than as such reimbursement or indemnity rights are waived in the next paragraph below.

(e) Payment Guaranty; Waiver of Defenses, Counterclaims, Etc. Guarantor hereby agrees that this Guaranty constitutes guaranty of payment, performance and compliance (and not

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a guaranty of collection only), and waives any right to require that any resort be had by Payees to ISCO or any other guarantor or to any security pledged with respect to the performance of any of the Obligations. Further, this guaranty of payment is absolute and unconditional, and shall remain valid, binding and fully enforceable irrespective of any circumstance of any nature that might otherwise constitute a defense, offset, claim, abatement or counterclaim that Guarantor or ISCO may assert against Payees with respect to any of the Obligations or otherwise, including, but not limited to, failure of consideration, fraudulent inducement, breach of warranty, payment, statute of frauds, statute of limitations, accord and satisfaction, and usury, and irrespective of the validity, legality, binding effect or enforceability of the terms of any agreement or instrument relating to any of the Obligations. Guarantor hereby absolutely, unconditionally and irrevocably waives any and all rights to assert any such defenses, offsets, claims, abatements and counterclaims. In the event Payees are not permitted or otherwise unable (because of the pendency of any bankruptcy, insolvency, receivership or other similar proceeding) to accelerate the Obligations but would otherwise be permitted to do so at such time pursuant to the Loan Agreement, Payees may demand performance in full under this Guaranty as if all of the Obligations had been duly accelerated, and Guarantor will not raise, and hereby expressly waives, any claim or defense with respect to such acceleration.

Section 3. Remedies. In the case of any proceedings to collect any obligations of Guarantor, Guarantor shall pay all costs and expenses of every kind for collection and enforcement of this Guaranty, including attorneys’ fees and disbursements. Upon the occurrence and during the continuance of any failure of any of the Obligations to be performed when due, Payees may elect to nonjudicially or judicially foreclose against any real or personal property security it holds for the Obligations, or accept an assignment of any such security in lieu of foreclosure or compromise or adjust any part of the Obligations, or make any other accommodation with ISCO or any other guarantor, pledgor or surety, or exercise any other remedy against ISCO or any other guarantor, pledgor or surety, or any security, in accordance with and subject to the provisions of the documents creating such security interests. No such action by Payees will release, limit or otherwise affect the obligations of Guarantor to Payees, even if the effect of that action is to deprive Guarantor of the right to collect any reimbursement from ISCO or any other person for any sums paid to Payees.

Section 4. Reinstatement, Indemnification, Etc. If claim is ever made upon Payees for repayment, return, restoration or other recovery of any amount or amounts received by Payees in payment or on account of any of the Obligations, and Payees repay all or part of such amount: (a) because such payment or application of proceeds is or may be avoided, invalidated, declared fraudulent, set aside or determined to be void or voidable as a preferential transfer, fraudulent conveyance, impermissible set off or a diversion of trust funds; or (b) for any other reason, including (without limitation) by reason of (i) any judgment, decree or order of any court or administrative body having jurisdiction over Payees or any of their property, or (ii) any settlement or compromise of any such claim effected by Payees with any such claimant (including ISCO); then, and in such event, Guarantor agrees that any such judgment, decree, order, settlement or compromise shall be binding upon Guarantor, notwithstanding any revocation hereof or the cancellation of any Notes or other instrument or document evidencing any of the Obligations and the obligations of Guarantor hereunder shall continue to apply, or shall automatically (and without further action) be reinstated if not then in effect, as case may be, and Guarantor shall be and remain liable to Payees hereunder for the amount so repaid or

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recovered to the same extent as if such amount had never originally been received by Payees. Guarantor hereby indemnifies Payees, and agrees to reimburse and hold Payees harmless on demand, from and against all actions, claims, losses, judgments, damages, amounts paid in settlement and expenses (including reasonable attorneys’ fees and court costs) brought against or incurred by Payees and arising out of, relating to or in connection with any of the Obligations.

Section 5. Waiver of Rights, Etc. No delay on the part of Payees in exercising any of their options, powers or rights, or partial or single exercise thereof, shall constitute a waiver thereof. No waiver of any of their rights hereunder, and no modification or amendment of this Guaranty, shall be deemed to be made by Payees unless the same shall be in writing, duly signed by an officer of each Payee on behalf of such Payee, and each such waiver, if any, shall apply only with respect to the specific instance involved, and shall in no way impair the rights of Payees or the obligations of Guarantor to Payees in any other respect at any other time.

Section 6. Enforcement, Etc. Payees, in their sole discretion, may proceed to exercise or enforce any right, power, privilege, remedy or interest that Payees may have under this Guaranty, the Obligations or any applicable law: at law, in equity, in rem or in any other forum available under applicable law; without notice except as otherwise expressly required by law provided herein; without pursuing, exhausting or otherwise exercising or enforcing any other right, power, privilege, remedy or interest that Payees may have against or in respect of Guarantor, the Obligations, ISCO, any other guarantor, surety, pledgor, collateral or any other person or thing; and without regard to any act or omission of Payees or any other person. Each Payee may enforce this Guaranty individually as to its portion of the Obligations.

Section 7. Reliance. Guarantor expressly acknowledges that Guarantor has not received or relied upon any oral or written agreements, understandings, representations or warranties from Payees or any other party with respect to this Guaranty (or any of Guarantor’s obligations hereunder), and that this Guaranty contains the entire understanding of the parties with respect to the subject matter hereof and supersedes and replaces any and all prior oral or written agreements and understandings with respect thereto.

Section 8. Representations, Warranties and Agreements of Guarantor. Guarantor hereby makes the following representations and warranties to Payees as of the date hereof:

(a) Organization and Qualification. Guarantor is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of Colorado, with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. Guarantor has no subsidiaries. Guarantor is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not, individually or in the aggregate, (x) adversely affect the legality, validity or enforceability of any of this Guaranty in any material respect, (y) have a material adverse effect on the results of operations, assets, prospects, or financial condition of Guarantor or (z) adversely impair in any material respect Guarantor’s ability to perform fully on a timely basis its obligations under this Guaranty (a “Material Adverse Effect”).

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(b) Authorization; Enforcement. Guarantor has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Guaranty, and otherwise to carry out its obligations hereunder. The execution and delivery of this Guaranty by Guarantor and the consummation by it of the transactions contemplated hereby have been duly authorized by all requisite corporate action on the part of the Guarantor. This Guaranty has been duly executed and delivered by Guarantor and constitutes the valid and binding obligation of Guarantor enforceable against Guarantor in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors’ rights and remedies or by other equitable principles of general application.

(c) No Conflicts. The execution, delivery and performance of this Guaranty by Guarantor and the consummation by Guarantor of the transactions contemplated thereby do not and will not (i) conflict with or violate any provision of its Certificate of Incorporation or By-laws or (ii) conflict with, constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which Guarantor is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or govern-mental authority to which Guarantor is subject (including Federal and state securities laws and regulations), or by which any material property or asset of Guarantor is bound or affected, except in the case of each of clauses (ii) and (iii), such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as could not, individually or in the aggregate, have or result in a Material Adverse Effect. The business of Guarantor is not being conducted in violation of any law, ordinance or regulation of any governmental authority, except for violations which, individually or in the aggregate, do not have a Material Adverse Effect.

(d) Consents and Approvals. Guarantor is not required to obtain any consent, waiver, authorization or order of, or make any filing or registration with, any court or other federal, state, local or other govern-mental authority or other person in connection with the execution, delivery and performance by Guarantor of this Guaranty.

Section 9. Successors and Assigns. This Guaranty is binding upon Guarantor and its successors or assigns, and shall inure to the benefit of Payees and their respective successors and assigns.

Section 10. Modification, Etc. This Guaranty cannot be terminated or changed orally and no provision hereof may be modified or waived except in writing by the holders of 75% of the outstanding principal amount of the Notes.

Section 11. Section and Other Headings. The Sections and other headings contained in this Guaranty are for reference purposes only and shall not affect the meaning or interpretation of this Guaranty.

Section 12. Governing Law. THIS GUARANTY AND THE RIGHTS OF PAYEES AND THE OBLIGATIONS OF GUARANTOR HEREUNDER SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW OR CHOICE 0F LAW.

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Section 13. Severability. In the event that any term or provision of this Guaranty shall be finally determined to be superseded, invalid, illegal or otherwise unenforceable pursuant to applicable law by a governmental authority having jurisdiction and venue, that determination shall not impair or otherwise affect the validity, legality or enforceability (a) by or before that authority of the remaining terms and provisions of this Guaranty, which shall be enforced as if the unenforceable term or provision were deleted, or (b) by or before any other authority of any of the terms and provisions of the Guaranty.

Section 14. Consent to Jurisdiction. Guarantor hereby irrevocably submits to the exclusive jurisdiction and venue of any New York state and federal court located in New York County, New York, over any action or proceeding arising out of any dispute between Guarantor and Payees, and Guarantor further irrevocably consents to the service of any process in any such action or proceeding by the mailing of a copy of such process to Guarantor at the address set forth below.

Section 15. Waiver of Jury Trial, Inconvenient Forum. GUARANTOR AND, BY ACCEPTING THIS GUARANTY, PAYEES, HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT EACH MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS GUARANTY, OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND ANY RIGHT TO OBJECT TO INCONVENIENT FORUM OR IMPROPER VENUE IN NEW YORK COUNTY, NEW YORK. GUARANTOR HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF PAYEES NOR PAYEES’ COUNSEL HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT PAYEES WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL. GUARANTOR ALSO ACKNOWLEDGES THAT PAYEES HAVE BEEN INDUCED TO ACCEPT THIS GUARANTY BY, AMONG OTHER THINGS, THE FOREGOING WAIVER OF TRIAL BY JURY.

Dated the 23rd day of July, 2004

SPECTRAL SOLUTIONS, INC.

By:

Address:

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EX-10.6

EXHIBIT 10.6

SECOND AMENDED AND RESTATED GUARANTY

OF

ILLINOIS SUPERCONDUCTOR CANADA CORPORATION

ISCO INTERNATIONAL, INC., a corporation organized and existing under the laws of Delaware and formerly known as Illinois Superconductor Corporation (“ISCO”) and the corporate parent of ILLINOIS SUPERCONDUCTOR CANADA CORPORATION, a corporation organized and existing under the laws of the Province of Ontario, Canada (“Guarantor”), has issued to MANCHESTER SECURITIES CORPORATION, a corporation organized under the laws of the State of New York, and ALEXANDER FINANCE L.P., an Illinois limited partnership (collectively, “Payees”): (i) 9½% secured grid notes due April 1, 2005, as amended, in the aggregate principal amount of up to $4,000,000 (the “2002 Notes”), (ii) 14% secured grid notes due April 1, 2005, as amended, in the aggregate principal amount of $2,000,000 (the “2003 Notes”), and (iii) 14% secured grid notes due April 1, 2005, in the aggregate principal amount of $500,000 (the “2004 Notes” and together with the 2002 Notes and the 2003 Notes, the “Notes”) each case pursuant to the Loan Agreement dated October 23, 2002 as previously amended and as amended and restated as of the date hereof (the “Loan Agreement”).

Section 1. Guaranty.

(a) In consideration of Payees purchasing the Notes and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Guarantor hereby absolutely, irrevocably and unconditionally guarantees to Payees the full payment and performance when due of any and all obligations and undertakings of ISCO under the Notes, the Loan Agreement and the Security Agreement, as previously amended and as amended and restated as of the date hereof (the “Security Agreement”) entered into pursuant to the Loan Agreement (such obligations and undertakings shall hereinafter be referred to as the “Obligations”), together with all reasonable attorneys’ fees, disbursements and all other costs and expenses of collections reasonably incurred by Payees in enforcing any of such Obligations and/or this Guaranty.

(b) Notwithstanding the provisions of Section 1(a), Guarantor’s obligations hereunder shall not exceed the maximum amount that would not be subject to avoidance under fraudulent conveyance, fraudulent transfer, and other similar laws.

Section 2. Certain Guarantor Waivers.

(a) Waivers of Notice, Etc. Guarantor waives notice of acceptance of this Guaranty and notice of the creation or performance of any of the Obligations, and waives presentment, demand of payment, protest or notice of protest, notice of dishonor or nonperformance of any of the Obligations, suit or taking other action or non-action by Payees, ISCO or any other guarantor against, and any other notice to, any party liable thereon (including, without limitation, Guarantor). Guarantor also hereby waives any notice of default by ISCO and any other notice to

which Guarantor might otherwise be entitled, the right to interpose any counterclaim or consolidate any other action with an action on this Guaranty, and the benefit of any statute of limitations affecting its liabilities hereunder or the enforcement hereof. No act or omission of any kind in connection with any of the foregoing shall in any way impair or otherwise affect the legality, validity, binding effect or enforceability of any term or provision of this Guaranty or any of the obligations of Guarantor hereunder.

(b) Guaranty Not Affected. Guarantor hereby covenants, agrees and consents that Payees may, at any time and from time to time (whether or not after revocation or termination of this Guaranty), without incurring responsibility to Guarantor, and without impairing or releasing any of the obligations of Guarantor hereunder and, upon or without any terms or conditions, and in whole or in part: (i) agree with ISCO to change the manner, place or terms of performance, including (without limitation) any change or extend the time of performance of, renew or alter, any of the Obligations, any security therefor, or any other liability incurred directly or indirectly in respect thereof, or to make any other change in the Obligations, and the guaranty herein made shall apply to the Obligations as so changed, extended, renewed or altered; (ii) take additional security, for or sell, exchange, release, surrender, substitute, realize upon or otherwise deal with in any manner and in any order any property by whomsoever at any time pledged or mortgaged to secure, or howsoever securing, any of the Obligations or any other liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset thereagainst; (iii) exercise or refrain from exercising any rights against ISCO or others (including, without limitation, Guarantor) or otherwise act or refrain from acting; (iv) settle or compromise any Obligation, any security therefor, or any liability (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or subordinate the performance of all or any part thereof to the performance of any of the Obligations (whether due or not) to creditors of ISCO other than Payees and Guarantor; (v) apply any sums by whomsoever paid or howsoever realized to any Obligation regardless of what Obligations remain unperformed; (vi) cancel, compromise, modify, or waive the provisions of any document relating to any of the Obligations; (vii) release any other guarantor or surety of the Obligations; and (viii) grant ISCO any indulgence as Payees may, in its sole discretion, determine.

(c) Failure to Perfect Lien, Etc. No failure by Payees to file, record or otherwise perfect any lien or security interest, nor any improper filing or recording, nor any failure by Payees to insure or protect any security nor any other dealing (or failure to deal) with any security by Payees with respect to any of the Obligations, shall impair or release any of the obligations of Guarantor hereunder. No invalidity, irregularity or unenforceability of all or any part of the Obligations or of any security therefor shall affect, impair or be a defense to this Guaranty, and this Guaranty is a primary obligation of Guarantor.

(d) Waiver of Subrogation. No payment by Guarantor except the indefeasible performance in full of the Obligations shall entitle Guarantor to be subrogated to any of the rights of Payees. Guarantor shall have no right of reimbursement or indemnity whatsoever and no right of recourse to or with respect to any assets or property of ISCO or to any security for the Obligations, unless and until all of the Obligations have been indefeasibly performed in full, other than as such reimbursement or indemnity rights are waived in the next paragraph below.

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(e) Payment Guaranty; Waiver of Defenses, Counterclaims, Etc. Guarantor hereby agrees that this Guaranty constitutes guaranty of payment, performance and compliance (and not a guaranty of collection only), and waives any right to require that any resort be had by Payees to ISCO or any other guarantor or to any security pledged with respect to the performance of any of the Obligations. Further, this guaranty of payment is absolute and unconditional, and shall remain valid, binding and fully enforceable irrespective of any circumstance of any nature that might otherwise constitute a defense, offset, claim, abatement or counterclaim that Guarantor or ISCO may assert against Payees with respect to any of the Obligations or otherwise, including, but not limited to, failure of consideration, fraudulent inducement, breach of warranty, payment, statute of frauds, statute of limitations, accord and satisfaction, and usury, and irrespective of the validity, legality, binding effect or enforceability of the terms of any agreement or instrument relating to any of the Obligations. Guarantor hereby absolutely, unconditionally and irrevocably waives any and all rights to assert any such defenses, offsets, claims, abatements and counterclaims. In the event Payees are not permitted or otherwise unable (because of the pendency of any bankruptcy, insolvency, receivership or other similar proceeding) to accelerate the Obligations but would otherwise be permitted to do so at such time pursuant to the Loan Agreement, Payees may demand performance in full under this Guaranty as if all of the Obligations had been duly accelerated, and Guarantor will not raise, and hereby expressly waives, any claim or defense with respect to such acceleration.

Section 3. Remedies. In the case of any proceedings to collect any obligations of Guarantor, Guarantor shall pay all costs and expenses of every kind for collection and enforcement of this Guaranty, including attorneys’ fees and disbursements. Upon the occurrence and during the continuance of any failure of any of the Obligations to be performed when due, Payees may elect to nonjudicially or judicially foreclose against any real or personal property security it holds for the Obligations, or accept an assignment of any such security in lieu of foreclosure or compromise or adjust any part of the Obligations, or make any other accommodation with ISCO or any other guarantor, pledgor or surety, or exercise any other remedy against ISCO or any other guarantor, pledgor or surety, or any security, in accordance with and subject to the provisions of the documents creating such security interests. No such action by Payees will release, limit or otherwise affect the obligations of Guarantor to Payees, even if the effect of that action is to deprive Guarantor of the right to collect any reimbursement from ISCO or any other person for any sums paid to Payees.

Section 4. Reinstatement, Indemnification, Etc. If claim is ever made upon Payees for repayment, return, restoration or other recovery of any amount or amounts received by Payees in payment or on account of any of the Obligations, and Payees repay all or part of such amount: (a) because such payment or application of proceeds is or may be avoided, invalidated, declared fraudulent, set aside or determined to be void or voidable as a preferential transfer, fraudulent conveyance, impermissible set off or a diversion of trust funds; or (b) for any other reason, including (without limitation) by reason of (i) any judgment, decree or order of any court or administrative body having jurisdiction over Payees or any of their property, or (ii) any settlement or compromise of any such claim effected by Payees with any such claimant (including ISCO); then, and in such event, Guarantor agrees that any such judgment, decree, order, settlement or compromise shall be binding upon Guarantor, notwithstanding any revocation hereof or the cancellation of any Notes or other instrument or document evidencing any of the Obligations and the obligations of Guarantor hereunder shall continue to apply, or

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shall automatically (and without further action) be reinstated if not then in effect, as case may be, and Guarantor shall be and remain liable to Payees hereunder for the amount so repaid or recovered to the same extent as if such amount had never originally been received by Payees. Guarantor hereby indemnifies Payees, and agrees to reimburse and hold Payees harmless on demand, from and against all actions, claims, losses, judgments, damages, amounts paid in settlement and expenses (including reasonable attorneys’ fees and court costs) brought against or incurred by Payees and arising out of, relating to or in connection with any of the Obligations.

Section 5. Waiver of Rights, Etc. No delay on the part of Payees in exercising any of their options, powers or rights, or partial or single exercise thereof, shall constitute a waiver thereof. No waiver of any of their rights hereunder, and no modification or amendment of this Guaranty, shall be deemed to be made by Payees unless the same shall be in writing, duly signed by an officer of each Payee on behalf of such Payee, and each such waiver, if any, shall apply only with respect to the specific instance involved, and shall in no way impair the rights of Payees or the obligations of Guarantor to Payees in any other respect at any other time.

Section 6. Enforcement, Etc. Payees, in their sole discretion, may proceed to exercise or enforce any right, power, privilege, remedy or interest that Payees may have under this Guaranty, the Obligations or any applicable law: at law, in equity, in rem or in any other forum available under applicable law; without notice except as otherwise expressly required by law provided herein; without pursuing, exhausting or otherwise exercising or enforcing any other right, power, privilege, remedy or interest that Payees may have against or in respect of Guarantor, the Obligations, ISCO, any other guarantor, surety, pledgor, collateral or any other person or thing; and without regard to any act or omission of Payees or any other person. Each Payee may enforce this Guaranty individually as to its portion of the Obligations.

Section 7. Reliance. Guarantor expressly acknowledges that Guarantor has not received or relied upon any oral or written agreements, understandings, representations or warranties from Payees or any other party with respect to this Guaranty (or any of Guarantor’s obligations hereunder), and that this Guaranty contains the entire understanding of the parties with respect to the subject matter hereof and supersedes and replaces any and all prior oral or written agreements and understandings with respect thereto.

Section 8. Representations, Warranties and Agreements of Guarantor. Guarantor hereby makes the following representations and warranties to Payees as of the date hereof:

(a) Organization and Qualification. Guarantor is a corporation, duly incorporated, validly existing and in good standing under the laws of the Province of Ontario, Canada, with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. Guarantor has no subsidiaries. Guarantor is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not, individually or in the aggregate, (x) adversely affect the legality, validity or enforceability of any of this Guaranty in any material respect, (y) have a material adverse effect on the results of operations, assets, prospects, or financial condition of Guarantor or (z) adversely impair in any material respect Guarantor’s ability to perform fully on a timely basis its obligations under this Guaranty (a “Material Adverse Effect”).

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(b) Authorization; Enforcement. Guarantor has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Guaranty, and otherwise to carry out its obligations hereunder. The execution and delivery of this Guaranty by Guarantor and the consummation by it of the transactions contemplated hereby have been duly authorized by all requisite corporate action on the part of Guarantor. This Guaranty has been duly executed and delivered by Guarantor and constitutes the valid and binding obligation of Guarantor enforceable against the Guarantor in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors’ rights and remedies or by other equitable principles of general application.

(c) No Conflicts. The execution, delivery and performance of this Guaranty by Guarantor and the consummation by Guarantor of the transactions contemplated thereby do not and will not (i) conflict with or violate any provision of its Certificate of Incorporation or By-laws or (ii) conflict with, constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which Guarantor is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or govern-mental authority to which Guarantor is subject (including Federal and state securities laws and regulations), or by which any material property or asset of Guarantor is bound or affected, except in the case of each of clauses (ii) and (iii), such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as could not, individually or in the aggregate, have or result in a Material Adverse Effect. The business of Guarantor is not being conducted in violation of any law, ordinance or regulation of any governmental authority, except for violations which, individually or in the aggregate, do not have a Material Adverse Effect.

(d) Consents and Approvals. Guarantor is not required to obtain any consent, waiver, authorization or order of, or make any filing or registration with, any court or other federal, state, local or other govern-mental authority or other person in connection with the execution, delivery and performance by Guarantor of this Guaranty.

Section 9. Successors and Assigns. This Guaranty is binding upon Guarantor and its successors or assigns, and shall inure to the benefit of Payees and their respective successors and assigns.

Section 10. Modification, Etc. This Guaranty cannot be terminated or changed orally and no provision hereof may be modified or waived except in writing by the holders of 75% of the outstanding principal amount of the Notes.

Section 11. Section and Other Headings. The Sections and other headings contained in this Guaranty are for reference purposes only and shall not affect the meaning or interpretation of this Guaranty.

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Section 12. Governing Law. THIS GUARANTY AND THE RIGHTS OF PAYEES AND THE OBLIGATIONS OF GUARANTOR HEREUNDER SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW OR CHOICE OF LAW.

Section 13. Severability. In the event that any term or provision of this Guaranty shall be finally determined to be superseded, invalid, illegal or otherwise unenforceable pursuant to applicable law by a governmental authority having jurisdiction and venue, that determination shall not impair or otherwise affect the validity, legality or enforceability (a) by or before that authority of the remaining terms and provisions of this Guaranty, which shall be enforced as if the unenforceable term or provision were deleted, or (b) by or before any other authority of any of the terms and provisions of the Guaranty.

Section 14. Consent to Jurisdiction. Guarantor hereby irrevocably submits to the exclusive jurisdiction and venue of any New York state and federal court located in New York County, New York, over any action or proceeding arising out of any dispute between Guarantor and Payees, and Guarantor further irrevocably consents to the service of any process in any such action or proceeding by the mailing of a copy of such process to Guarantor at the address set forth below.

Section 15. Waiver of Jury Trial, Inconvenient Forum. GUARANTOR AND, BY ACCEPTING THIS GUARANTY, PAYEES, HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT EACH MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS GUARANTY, OR THE TRANSACTIONS CONTEMPLATED HEREBY, AND ANY RIGHT TO OBJECT TO INCONVENIENT FORUM OR IMPROPER VENUE IN NEW YORK COUNTY, NEW YORK. GUARANTOR HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF PAYEES NOR PAYEES’ COUNSEL HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT PAYEES WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL. GUARANTOR ALSO ACKNOWLEDGES THAT PAYEES HAVE BEEN INDUCED TO ACCEPT THIS GUARANTY BY, AMONG OTHER THINGS, THE FOREGOING WAIVER OF TRIAL BY JURY.

Dated the 23rd day of July, 2004

ILLINOIS SUPERCONDUCTOR CANADA CORPORATION

By:

Address:

6

EX-99.1

Exhibit 99.1

News Release CONTACT: Frank Cesario PHONE: 847-391-9492 INTERNET: iscoir@iscointl.com

ISCO International Announces Extension of RF² Solution Platform and Financing

Mt. Prospect, IL (July 27, 2004) – ISCO International, Inc. (AMEX: ISO), a leading supplier of interference-control solutions for the wireless telecommunications industry, reported the launch of a new product extension under its RF²(^™) platform. Additionally, the Company reported that it has secured additional financing under its credit line arrangement.

According to Dr. Amr Abdelmonem, Chief Executive Officer of ISCO, “We are very excited about the expansion of our RF² family of solutions into product life cycle extension. RF² was designed to help wireless operators fill in coverage holes, extend the range of their sites and improve network performance in critical areas including dropped calls and access failures. We have extended this platform to more directly assist operators in getting the most mileage out of their existing infrastructure, allowing them to migrate to newer technology at their own pace. As ISCO provides solutions that match up well with next generation technology requirements, this expansion into dedicated life cycle extension broadens our market coverage. We expect purchase orders to begin to flow for this expanded RF² solution during the current quarter (the third quarter of 2004).

“We are also pleased to announce that we have reached agreement with our lenders to both draw the remaining $1 million on the existing credit line and to increase the size of that credit line by $500,000, drawing that amount simultaneously. All other terms are the same as the existing credit line. We believe that, as a result of this transaction, we will be able to better execute our business plan by applying resources toward the expanding marketplace for our solutions.”

Safe Harbor Statement

Because the Company wants to provide investors with meaningful and useful information, this news release contains, and incorporates by reference, certain “forward-looking statements” that reflect the Company’s current expectations regarding the future results of operations, performance and achievements of the Company. The Company has tried, wherever possible, to identify these forward-looking statements by using words such as “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends” and similar expressions.

These statements reflect the Company’s current beliefs and are based on information currently available to it. Accordingly, these statements are subject to certain risks, uncertainties and contingencies, which could cause the Company’s actual results, performance or achievements to differ materially from those expressed in, or implied by, such statements. These factors include, among others, the following: the Company’s ability to obtain current financing to sustain operations, market acceptance of the Company’s technology; the spending patterns of wireless network operators in connection with the build out of 2.5G and 3G wireless systems; the Company’s ability to obtain additional financing in the future; the Company’s history of net losses and the lack of assurance that the Company’s earnings will be sufficient to cover fixed charges in the future; uncertainty about the Company’s ability to compete effectively against better capitalized competitors and to withstand downturns in its business or the economy generally; continued downward pressure on the prices charged for the Company’s products due to the competition of rival manufacturers of front-end systems for the wireless telecommunications market; the timing and receipt of customer orders; the Company’s ability to attract and retain key personnel; and the effects of legal proceedings. A more complete description of these risks, uncertainties and assumptions is included in the Company’s filings with the Securities and Exchange Commission, including those described under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K. You should not place undue reliance on any forward-looking statements. The Company undertakes no obligation to release publicly the results of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events.

Web site: http://www.iscointl.com