10KSB40

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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                  FORM 10-KSB

(MARK ONE)

        
   /X/     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934.



                    FOR THE FISCAL YEAR ENDED APRIL 30, 2000

        
   / /     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934.



      FOR THE TRANSITION PERIOD FROM ________________ TO ________________

                       COMMISSION FILE NUMBER: 001-12531

                              ISONICS CORPORATION

                 (Name of small business issuer in its charter)

                                            
              CALIFORNIA                                    77-0338561
    (State or other jurisdiction of             (IRS Employer Identification No.)
    incorporation or organization)

         5906 MCINTYRE STREET                                 80403
           GOLDEN, COLORADO                                 (Zip Code)
    (Address of principal executive
               offices)



                   Issuer's telephone number: (303) 279-7900

   SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT: None

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                           Common Stock, no par value
               Redeemable Class A Common Stock Purchase Warrants
                     Class B Common Stock Purchase Warrants
               Redeemable Class C Common Stock Purchase Warrants

                                (Title of Class)

    Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve (12) months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes /X/  No / /

    Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. Yes /X/  No / /

    Registrant's revenues for the fiscal year ended April 30, 2000 were
$12,733,000.

    The aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the average bid and asked prices of the Registrant's Common
Stock on, July 14, 2000 was $14,127,360. Excludes approximately 7,985,652 shares
of common stock held by Directors, Officers and holders of 5% or more of the
Registrant's outstanding Common Stock at July 14, 2000. Exclusion of shares held
by any person should not be construed to indicate that such person possesses the
power, direct or indirect, to direct or cause the direction of the management or
policies of the Registrant, or that such person is controlled by or under common
control with the Registrant. There is no non-voting common equity of the
Registrant.

    The number of shares outstanding of the Registrant's Common Stock, no par
value, as of July 14, 2000, was 10,972,160 shares. The following document is
incorporated by reference into Part III of this Form 10-KSB: Proxy Statement for
the annual meeting of shareholders to be held October 11, 2000, which will be
filed no later than August 28, 2000.

    Transitional Small Business Disclosure Format (check
one): Yes / /  No /X/

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                                     PART I

ITEM 1.  BUSINESS

    BECAUSE WE WANT TO PROVIDE YOU WITH MORE MEANINGFUL AND USEFUL INFORMATION,
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS"
(AS SUCH TERM IS DEFINED IN SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED). THESE STATEMENTS REFLECT OUR CURRENT EXPECTATIONS REGARDING OUR
POSSIBLE FUTURE RESULTS OF OPERATIONS, PERFORMANCE, AND ACHIEVEMENTS. THESE
FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

    WHEREVER POSSIBLE, WE HAVE TRIED TO IDENTIFY THESE FORWARD-LOOKING
STATEMENTS BY USING WORDS SUCH AS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT,"
"PLAN," "INTEND," AND SIMILAR EXPRESSIONS. THESE STATEMENTS REFLECT OUR CURRENT
BELIEFS AND ARE BASED ON INFORMATION CURRENTLY AVAILABLE TO US. ACCORDINGLY,
THESE STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES, AND CONTINGENCIES,
WHICH COULD CAUSE OUR ACTUAL RESULTS, PERFORMANCE, OR ACHIEVEMENTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, SUCH STATEMENTS. THESE RISKS,
UNCERTAINTIES AND CONTINGENCIES INCLUDE, WITHOUT LIMITATION, DEMAND FOR, AND
ACCEPTANCE OF, OUR MATERIALS; CHANGES IN DEVELOPMENT AND DISTRIBUTION
RELATIONSHIPS; THE IMPACT OF COMPETITIVE PRODUCTS AND TECHNOLOGIES; AND THE
FACTORS SET FORTH UNDER "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OR PLAN OF OPERATION--FACTORS THAT MAY AFFECT FUTURE
OPERATING RESULTS." WE HAVE NO OBLIGATION TO UPDATE OR REVISE ANY SUCH FORWARD-
LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE
DATE OF THIS FORM 10-KSB.

    We are an advanced materials and technology company, which develops and
commercializes products created from materials whose natural isotopic ratios
have been modified. An isotope is one of two or more species (or nuclides) of
the same chemical element, which differ from one another only in the number of
neutrons in the atom's nucleus. The different number of neutrons can create
significantly different nuclear properties; the most well known of these
properties is radioactivity. Radioactive isotopes (or radioisotopes) can be
found in nature; however, most of our radioisotopes are man-made. Stable
isotopes are not radioactive.

    To take advantage of some of these different nuclear properties--and to
create our products--it is usually necessary to increase ("enrich") or decrease
("deplete") the concentration of a particular isotope or isotopes. There are
over 280 naturally occurring stable isotopes of 83 different elements. The
number of isotopes of any given element varies widely. Stable isotopes of a
given element typically do not differ significantly in their chemical behavior.
Stable isotopes of an element differ in mass and diameter, as well as several
nuclear properties, such as cross-section, spin and magnetic moment. Differences
in these properties can result in substantially different effects, and some of
these different effects have the potential for commercial application. Isotopes
are typically referred to by their atomic mass number, which essentially is the
sum of the number of protons and neutrons in the atom's nucleus. For example,
oxygen-18 has eight protons and ten neutrons in its nucleus, and silicon-28 has
fourteen protons and fourteen neutrons in its nucleus.

    For example, in ultra chemically pure crystals, grown for electronics or
optical applications, isotopic impurities are the greatest contributor to
crystal disorder because of mass and diameter variations. Eliminating this
disorder by using a single enriched isotope (i.e. an isotopically pure
substance) results in increased thermal conductivity and optical transparency,
and thus in improved product performance.

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Similarly, enriching or depleting isotopes based upon their nuclear
cross-sections allows materials to be engineered for applications in the nuclear
power industry, for controlled doping of some semiconductors in the computer
industry, and for use as targets to produce radioisotopes for the life sciences
and other industries.

    Another example is labeling or tagging of materials. By varying the natural
abundance of isotopes present in the material, the material acquires its own
unique mass and/or nuclear magnetic signature. This process "tags" the material,
and most importantly, does not change a given material's chemical properties.
Though chemically equivalent, the "tagged" material is discernible from
unlabeled materials through the use of several types of instruments including
mass spectrometers.

    Enriched stable isotopes may be thought of as extremely pure materials. Not
only are they chemically pure, but also consist primarily of only one isotope
depending on the level of enrichment. This extra degree of purification,
accomplished on the sub-atomic level, provides enhanced performance properties
compared to normal (chemical only) purity materials. Depleted isotopes are
typically processed further, and the elimination (or reduction in level) of an
isotope, or isotopes, prevents the creation of undesirable byproducts in these
subsequent processing steps. In some instances the undesirable byproducts are
produced during the intended use of the non-depleted isotope material.

    Stable isotopes have commercial uses in several areas, including: energy
generation; medical research, diagnostics, and drug development; product tagging
and stewardship; semiconductors; and optical materials. We have successfully
developed and commercialized several isotope products and intend to promote the
emergence and growth of new stable isotope applications. The radioactive
isotopes (or radioisotopes) we produce and sell are typically used in medical
diagnostic, treatment, and therapy applications. In most cases we first produce
an enriched or depleted stable isotope "target," which is then exposed to an
appropriate form of radiation to create a specific radioisotope.

    A key property of a radioisotope is its half-life. The half-life is a
measure of how fast a radioisotope decays into either a stable isotope or
another radioisotope. Since most radioisotopes used in life science applications
have short half-lives, they are rarely found in nature. Therefore these isotopes
have to be made from a target material, usually in a nuclear reactor or a
cyclotron, and usually used immediately. A nuclear reactor or a cyclotron
generates the appropriate form of radiation required to convert the target
material into the desired radioisotope.

    Today our isotope business addresses the material needs of two primary
markets: life sciences and semiconductor materials. While we currently are
focusing on these two markets, we continually evaluate other applications for
both stable and radioisotopes. We also sell isotopes for use in basic scientific
research and certain specific industrial applications. We believe our core
competency is our ability to identify, develop, source, and commercialize
products and services based on isotopically engineered materials.

    We were formed in March 1992, as a partnership, and were subsequently
incorporated in California in March 1993, as A&R Materials, Inc. In September
1996, we changed our name to Isonics Corporation. Our principal executive
offices are located at 5906 McIntyre Street, Golden, Colorado 80403. Our
telephone number is (303) 279-7900, and our facsimile number is (303) 279-7300.
Our web site is isonics.com.

RECENT BUSINESS ACQUISITIONS

    INTERNATIONAL PROCESS RESEARCH CORPORATION

    Effective April 30, 1998, we purchased all of the outstanding capital stock
of International Process Research Corporation ("Interpro") from a previously
unaffiliated corporation (Metallurgy International, Inc.). Interpro, which does
business as Colorado Minerals Research Institute, is a materials processing and
contract research and development company. Interpro performed (through December
1,

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1999) key steps in our depleted zinc manufacturing process. The acquisition was
made to assure future availability of this critical manufacturing technology,
and to provide an infrastructure platform for performing value-added processing
of other isotopes. Interpro has also jointly developed new, lower-cost
technologies to enable its historical customers to better meet the various
metallurgical and mineral processing needs of their customers. In connection
with the acquisition, we issued 353,982 shares of our Common Stock (valued at
$708,000) in exchange for all of the outstanding shares of Interpro. We
accounted for the acquisition as a purchase.

    On May 1, 2000, we substantially reorganized Interpro to focus on one
specific application: the recovery and recycling of zinc metal from various
sources including, galvanized steel scrap, electric arc furnace dust, and brass
scrap. We chose this course of action for two reasons. First, we believe the
market potential for this, and related processes, is significant. Second, the
profound and lengthy slump in the mineral processing and mining industries has
significantly eroded Interpro's historical customer base. However, we will
continue to meet the demands of a few remaining customers through various sub-
contractor relationships. We will also keep the physical infrastructure in place
at our Golden location to allow a reentry into Interpro's historical markets, if
market conditions warrant. Currently, we are using a significant portion of this
infrastructure in our zinc recovery and recycling project.

    CHEMOTRADE GMBH

    Effective June 1, 1998, we acquired all of the outstanding shares of
Chemotrade GmbH, 75 percent of the outstanding shares of Chemotrade Leipzig GmbH
and six (6) percent of the outstanding shares of IUT (collectively
"Chemotrade"). All three companies are located in Germany. Chemotrade GmbH is
located in Dusseldorf, Chemotrade Leipzig GmbH is located in Leipzig, and IUT is
located in Berlin. Two common shareholders owned all three companies' shares
that we purchased. All three companies continue to be engaged in the
distribution, development and manufacture, of stable and radioactive isotopes.
We paid the previously unaffiliated former owners of Chemotrade $855,000 in
cash, 357,730 restricted shares of our common stock valued at $894,000, and two
interest bearing notes, one for $924,000 which was paid in September 1998, and a
second note for $826,000 which was partially paid in June 1999, and the balance
was paid in December 1999.

    The purchase agreement provides for the selling shareholders to receive
additional consideration in the event pretax earnings of $467,000 (DM 1,000,000)
are achieved for the year ending April 30, 2001. The maximum additional
consideration that can be earned is $234,000 (DM 500,000). Any additional
consideration will be recorded as additional goodwill.

BUSINESS THAT WE SOLD

    On December 1, 1999, we sold our depleted zinc business to Eagle-Picher
Technologies, LLC, Cincinnati, Ohio, ("Eagle-Picher") for $8.2 million,
including $1.5 million to be paid over a period of three years. Eagle-Picher's
obligation to pay the final $1.5 million is subject to certain contingencies. We
received cash of approximately $6.7 million from Eagle-Picher at the closing, of
which approximately $1.2 million was used to pay certain accrued liabilities.

    The Agreement executed between us and Eagle-Picher also provides for
Eagle-Picher's sale to us of 200 kilograms of silicon-28 in consideration for a
forty-two (42) month Warrant grant to Eagle-Picher for the purchase of 4,000,000
shares of our common stock at a purchase price of $3.75 per share. The Warrant
is subject to a registration rights agreement. Eagle-Picher exercised the
Warrant in March 2000 under a 'net-exercise' provision entitling it to receive
3,130,435 shares of common stock. These shares are subject to a prorated
reduction to the extent Eagle-Picher does not deliver the required 200 kilograms
of silicon-28 during calendar year 2000.

    Related to, but separate from, the sale of the depleted zinc business, we
contemporaneously signed a ten-year Supply Agreement by which we will have the
exclusive right to purchase quantities of isotopically

                                       5

pure silicon-28, silicon-29, and silicon-30, and a non-exclusive right to
purchase quantities of isotopically pure carbon-12 and carbon-13 produced by
Eagle-Picher from its Oklahoma-based facilities. As partial consideration for
the exclusivity provision, we agreed to pay Eagle-Picher a fee equal to 3.0% of
the net revenues from all sales made by us of products incorporating enriched
silicon isotopes supplied by Eagle-Picher. The ability of Eagle-Picher to
produce isotopes meeting the specifications of the Supply Agreement is
contingent upon Eagle-Picher successfully beginning production of silicon-28. As
of June 30, 2000, Eagle-Picher has not delivered any silicon-28. Unanticipated
problems in bringing their production facility online are the reasons expressed
by Eagle-Picher for this delay. Eagle-Picher's management has assured us that
they will meet their production requirements.

COMPANY STRATEGY

    We believe that our strength is our ability to bring the necessary resources
together to identify, evaluate, develop, engineer, and successfully
commercialize applications for stable and radioactive isotopes, and value-added
products manufactured from these isotopes. This is evidenced by management's
experience (at Isonics and in prior employment) in developing depleted zinc from
what was initially a cost prohibitive concept to a successful commercial
product. The worldwide market for depleted zinc is now one of the largest for a
stable isotope product, exceeding $10 million per year in sales worldwide.

    We believe we have created a product development model that can serve as a
basis for our current and future expansion. To capitalize on the commercial
opportunities that have been identified for stable isotopes, we have adopted a
business strategy designed to maximize the value of our technologies, business
development and management resources, while attempting to minimize capital
costs. This strategy involves:

    - focusing on development of high value-added products, which we expect to
      have a competitive advantage in large or growing markets;

    - leveraging research and development expenditures through collaborations,
      government programs, and corporate and academic partnerships;

    - minimizing early capital needs by obtaining stable and radioactive
      isotopes through alliances and supply agreements with existing stable and
      radioactive isotope sources, followed by investment in Company-owned
      isotope production facilities when markets are more established and the
      optimum production technology has been determined;

    - obtaining value-added processing technology through sub-contract
      manufacturing agreements, joint ventures and acquisitions of strategically
      important technologies and companies; and

    - developing a time-balanced product pipeline to provide a continual supply
      of new business opportunities.

PRODUCTS

    Depleted zinc sales historically were our most significant source of
revenues. However, in fiscal 1999, our revenues were generated from a more broad
range of sources, including depleted zinc sales (approximately 35%),
radioisotopes sales (approximately 34%), and other stable isotopes sales
including our newly introduced silicon-28 isotope (approximately 15%). In fiscal
2000, this trend continued as our revenues were again generated from a broad
range of sources, including depleted zinc sales (approximately 21%),
radioisotopes sales (approximately 46%), and other stable isotopes sales
including oxygen-18 and silicon-28 (approximately 24%). The balance of our
revenues came from the operations of our subsidiary, Interpro (approximately 16%
in FY 1999 and 9% in FY 2000). Interpro performs metallurgical and mineral
processing contract research and process analysis test work.

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    Because we sold our depleted zinc business in December 1999, depleted zinc,
which was a significant source of revenues in both fiscal 2000 and fiscal 1999,
will cease to be a source of revenues in fiscal 2001, and subsequent fiscal
years. Additionally, effective May 1, 2000, we reorganized Interpro. Interpro
will now focus exclusively on developing a new technology to recover and recycle
zinc metal from various sources including galvanized scrap steel. We do not
anticipate any revenues from Interpro in fiscal 2001. However, we believe the
revenue potential in subsequent years is significant.

    ZINC RECOVERY AND RECYCLING BUSINESS OPPORTUNITY

    We believe a business opportunity exists to develop an economic zinc
recovery and recycling technology, which can capture the full value of zinc in
waste products and sell high purity zinc metal in response to the increasing
demand for this metal. The recovery and recycling technology that we are
developing avoids most of the disadvantages of conventional processes; is
applicable to a wide range of zinc-bearing scrap, dust, and sludge; and may
generate additional revenue by enhancing the value of the associated materials
in other zinc-bearing waste streams.

    Zinc metal is the fourth most widely used metal in the world today (after
iron, copper and aluminum). Zinc's primary use is galvanizing, a process where
zinc is used to form a protective coating on steel. Zinc along with copper, are
the two primary components in brass. Zinc is also used in die-casting alloys,
chemicals, and pharmaceuticals, and is used to make coins and batteries. Zinc is
an essential element for most living organisms: in mammals it promotes healthy
growth, and it is an important nutrient for many cultivated plants.

    Because of these diverse applications zinc tends to be dispersed in usage,
and therefore, is probably the least recycled primary metal. However, the demand
for zinc has shown steady growth, and this demand has been principally met by
primary production (mining and refining). The world production of zinc metal is
currently seven million tons per year, which is sold for approximately $1,100
per ton--an annual market of approximately $7.7 billion. Between 15% and 30% of
this amount is produced by recycling, primarily from zinc die-castings. The
United States uses 660,000 tons per year ($726 million) of zinc metal for
galvanizing while the world consumption for galvanizing is estimated at 1.65
million tons ($1.8 billion). Over the past twenty years the increase in
galvanizing consumption world-wide has been approximately 3.4% per year.
Corresponding increases in quantities of zinc associated with scrap are
apparent, particularly in materials being recycled to steel plants.

    During the course of its contract research and development activities,
Interpro was introduced to a patented technology using chlorine gas to recover
and recycle zinc from galvanized steel scrap. At high temperatures (600 to 800
degrees Centigrade), chlorine reacts with the zinc coating (galvanizing) on
steel to form a zinc chloride vapor. The vapor is collected and processed to
produce pure metallic zinc for sale, and chlorine for sale or reuse in our
recovery process.

    We believe that the new technology has a number of benefits compared to
conventional zinc scrap recycling processes:

    - it can be applied to a variety of zinc-bearing waste materials in addition
      to galvanized steel scrap;

    - it enhances the value of the associated materials (zinc-free steel is much
      easier and less costly to recycle);

    - it can use waste plastic (as a source of chlorine and heat) that would
      otherwise be sent to a landfill;

    - it recovers chlorine for sale (to make more plastic, for example) or reuse
      within our process; and

    - the final product is high purity metallic zinc which can be sold to any of
      the current zinc markets identified above.

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    In addition, our preliminary economic evaluations indicate that zinc can be
recovered and recycled by this technology at a lower unit cost than current
primary production (mining and refining of zinc-bearing ores).

    Current zinc recycling processes generally cannot produce high purity zinc
metal. One reason is that chlorine, which is detrimental to the commonly used
zinc refining process, is often present in zinc-bearing dusts and residues.
These materials require an alternative recovery and recycling process. In
addition, zinc has a low boiling temperature compared to other metals.
Therefore, in high temperature processing, zinc frequently concentrates as a
fume or dust along with other volatile impurities. Hence, recycled (secondary)
zinc is often used only to produce zinc chemicals, plant nutrients, and impure
zinc oxides. Impure zinc oxides are also sold to primary zinc refiners, but at a
considerable discount.

    The original concepts for this new technology were devised and patented by
Professor Derek Fray of the Department of Materials Science and Metallurgy at
the University of Cambridge, Cambridge, England. We are conducting an intensive
program to confirm that the processes described in the patents can be performed
at a larger scale, in both batch and continuous modes, in our laboratories and
pilot plants. We are now negotiating with Professor Fray, and other parties, for
an exclusive license to develop and use this technology in North America and
Europe. As our development program progresses, we plan to file applications for
new patents, where appropriate, to protect our position in regard to this
technology.

    It is our intention to develop this technology, using our current facilities
at the appropriate pilot plant level of operation, and then use the anticipated
results of the pilot plant program (if successful) to attract strategic
investors in this technology. It is our intention to sell, spin-off or otherwise
divest this business to one or more strategic investors. While we believe the
economic potential of this, and related technologies, is significant, this line
of business is not consistent with our core isotope business. We believe this
approach will maximize shareholder value both today and in the long-term.

    LIFE SCIENCES PRODUCTS

    For the past several years, we have supplied stable isotopes in elemental
and simple compound forms for use in life science applications. With the
acquisition of Chemotrade in 1998, we expanded our product offerings to include
radioisotopes. We will continue selling our current stable and radioactive
isotope products, develop new products along similar lines, and expand our
product offerings by vertically integrating. We intend to expand our own isotope
production capabilities. In addition, we intend to expand our value-added
manufacturing capabilities. A brief summary of existing and emerging life
sciences products follows:

    STABLE ISOTOPE LABELED COMPOUNDS.  Stable isotope labeled compounds
("SILCs") are created by incorporating known quantities of certain stable
isotopes of carbon, nitrogen, hydrogen (deuterium), oxygen and other elements,
into thousands of different chemical compounds. SILCs allow researchers to
investigate living systems, determine the chemical structure of important
biological compounds, design new drugs, and measure extremely low levels of
environmental toxins. We believe that greater availability and lower cost of
stable isotopes, and advances in instrumentation to detect stable isotopes will
continue to increase the demand for SILCs.

    Our products are typically simple compound SILCs that are used by our
customers to synthesize more complex and higher-value SILCs. We primarily market
deuterium, carbon-13 and nitrogen-15 for this purpose. In the near term, this
strategy of supplying simple compound SILCs will continue. Examples of existing
and emerging applications for these products include:

    METABOLIC STUDIES. Increasingly, studies of new drugs are performed with
    isotope-labeled drugs to facilitate research on metabolism, distribution,
    mode of action, and elimination. The FDA may eventually require the isotope
    labeling of all new drugs for investigational use during some or all

                                       8

    phases of pre-clinical and clinical evaluations of these drugs. However,
    there can be no assurance that the FDA will make this mandate in the near
    future, if at all.

    RATIONAL DRUG DESIGN. Historically, drugs were designed using a screening
    process in which prior experience was employed to determine what chemicals
    might work to treat a certain condition, and then tests on subjects were
    performed. Today specialized instrumentation is routinely available to
    determine the chemical structure of large molecules, including the human
    proteins and enzymes that a drug will be designed to affect. This approach
    is known as rational drug design. We believe that this new instrumentation,
    combined with sophisticated SILCs, will prove beneficial in determining the
    chemical structure of human proteins and enzymes. We believe rational drug
    design will require an increasing supply of stable isotopes.

    DIAGNOSTIC BREATH TESTS (DBTS).  This new class of non-invasive diagnostic
testing is gaining worldwide acceptance. It uses stable isotope labeled
compounds to detect a wide range of human abnormalities, particularly digestive
disorders such as ulcers. The FDA has approved one test and similar approvals
exist in Europe. Reimbursement by health insurance providers for the test has
led to increased growth in demand that is expected to accelerate as regulatory
approval is awarded in other countries (such as Japan). Many other tests based
on the same principles are in various stages of development. We have supplied
stable isotope raw material to companies developing various DBT chemicals. While
this is not currently a large source of revenues, we continue our sales and
marketing efforts in order to monitor the development and direction of this
potentially very large market.

    The DBT business is subject to extensive government regulation. The products
and instruments in which our products are used, which may be regulated as drugs
and devices, are subject to the scrutiny of FDA review and approval, as well as
ongoing FDA inspection of most aspects of the production, marketing,
distribution and usage. We believe that the production and marketing of DBTs are
also subject to similar regulatory controls in the foreign countries where we
would possibly seek to market products. Consequently, new products cannot be
commercially introduced until after approval (usually several years), and there
can be no assurance that the products will be approved for use.

    BIOMEDICAL RESEARCH.  Traditionally, numerous aspects of the many phases of
drug development have been carried out using radioisotope-labeled versions of
promising compounds. Isonics supplies precursor compounds labeled with
radioisotopes, such as carbon-14 and phosphorous-33, to manufacturers who
incorporate them into more complex radioisotope labeled compounds for use in
basic research and pharmaceutical development. The carbon-14 precursors are
produced under contract by IUT, a company in which we hold a minority interest.
While rational drug design and stable isotope labeled compounds represent
competition for this more traditional approach to research and drug development,
we believe a combination of increasing drug development activity and the large
body of data and experience will ensure a strong market for these products. It
is important to note that we also supply some of the basic stable isotope
products used to make the compounds of these competing technologies.

    MEDICAL IMAGING AND THERAPY.  Radioisotopes have been used for years in the
diagnosis and treatment of many medical conditions in humans. The trend in these
two areas has been towards increasingly more specific chemicals, which, after
labeling with the radioisotope and injection into the patient, quickly
concentrate at the disease site(s). In theory, the appropriate choice of
chemical and radioisotope labels would allow disease detection and stage
determination; followed by therapy selection, administration, and monitoring.
Several classes of chemical compounds ranging from monoclonal antibodies to
peptides, most recently, are being developed, tested and approved for use in the
detection, and eventually, the treatment of many diseases.

    We currently supply stable isotopes of thallium, zinc, cadmium, xenon,
strontium and many others that are routinely used in a variety of medical
imaging and therapy applications. These are used in their enriched stable form,
such as Xenon-129, or converted to a specific radioactive isotope in a cyclotron
or

                                       9

nuclear reactor. We believe that with the increased supply of new isotopes, and
the ongoing development of highly specific biochemical therapies, this market
segment represents a major growth opportunity.

    POSITRON EMISSION TOMOGRAPHY ("PET").  This very powerful nuclear medicine
imaging technology has been available for over 25 years, but because of its
complexity and cost, had been limited primarily to a research role. Technology
and infrastructure improvements have reduced the cost and complexity of
performing PET studies. PET's unique ability to diagnose multiple metabolic
abnormalities, particularly cancer, has resulted in recent approvals by the FDA
and favorable reimbursement levels by Medicare, Medicaid, and third party
insurers. Similar approvals are now common in Europe and parts of Asia though
reimbursement levels vary. PET studies are growing at rates of approximately 20
to 50% annually worldwide.

    Oxygen-18, a rare stable isotope of oxygen, is the enriched stable isotope
used to produce the radioisotope, fluorine-18, which is the source of the
positrons tracked by the PET imaging equipment. Currently demand for oxygen-18
is greater than the supply. To address the demand for oxygen-18, we announced in
May 1999, a multi-year joint cooperation agreement with Global Scientific
Technologies in Russia. We believe we are now the second largest producer of
oxygen-18 in the world. Our oxygen-18 production capacity continues to increase
as a result of production facility additions and a novel program we introduced
in fiscal 1999 that recycles "used" oxygen-18.

    Although there is currently little FDA oversight affecting the raw material
suppliers, it is likely FDA oversight will increase in the next few years. It is
not immediately obvious what the implications may be for our production partner
and us.

    BRACHYTHERAPY.  Cancer therapy continues to evolve to more effectively
target specific types of cancer. Radioisotope labeled compounds promise great
advances in focused treatment, but are still well in the future. Today, external
beam radiotherapy and chemotherapy are the predominant technologies used in
cancer treatment. However, another technology, brachytherapy, is emerging in the
treatment of specific cancers such as prostate cancer.

    In brachytherapy, small sealed sources (seeds) are inserted directly into
the tumor using a variety of minimally invasive surgical methods. The
radioisotope, which is placed inside the seed, is selected and manufactured to
ensure that only the cancerous tissue immediately adjacent to the implanted seed
is irradiated. This minimizes the irradiation of nearby healthy tissue, a common
adverse side effect, which occurs with external beam radiotherapy. Three primary
criteria govern the selection of the radioisotope: half-life, type of radiation
emitted, and strength of the radiation emitted. The half-life and form of
radiation emitted is dictated by the radioisotope selected. Strength of the
radiation is determined during the manufacturing process.

    Several companies (Nycomed-Amersham, Theragenics, North American Scientific,
International Isotopes, Inc., and others) already offer or have announced plans
to offer brachytherapy products for the treatment of certain forms of prostate
cancer. Studies continue in the applicability of this technique for other tumor
types, including some breast cancers. We currently supply several companies with
radioisotopes (or stable isotope targets to be made into radioisotopes) for this
application. We believe this market represents one of the largest growth
opportunities for radioisotopes. It also represents a significant opportunity to
provide value-added products/services in the form of manufactured subcomponents
such as the seeds.

                                       10

    CALIBRATION STANDARDS.  There are many medical devices that measure levels
of radiation in patients. These devices all need to be calibrated using
standards of known radiation strength and type, in order to ensure their
accuracy. These standards are made from radioisotopes such as cobalt-57 and
gadolinium-153. We supply many of the stable isotope target materials, as well
as radioisotopes to many of the manufactures of these standards. We also
distribute the finished products of one of these manufacturers in certain
regions of Europe. Additionally, we distribute the source standards products of
a major manufacturer that recently announced the sale of its industrial source
business. It is not clear what the future implications of this transaction may
be on our revenues.

    Medical equipment calibration standards is one of the largest markets for
radioactive source standards. These medical devices are found in the nuclear
medicine departments at thousands of hospitals around the world. The continued
growth in the numbers and complexity of nuclear medicine imaging equipment,
especially PET, ensure growth in the demand for these radioisotopes.

    PRODUCT TAGGING AND STEWARDSHIP APPLICATIONS

    Thousands of chemicals used everyday in our society are fungible. That is,
these chemicals cannot be differentiated from those produced by another
manufacturer, or even by the same manufacturer on a different day. These
chemicals, and the products made from them, may be identified and distinguished
from each other, by tagging with stable isotopes of carbon, nitrogen, oxygen,
hydrogen, and other elements.

    Alternative tagging methodologies are in use today. These methods typically
involve the addition of extraneous materials such as dyes, exotic chemical
compounds, or radioactive compounds. We believe that adding these extraneous
materials can sometimes detract from the performance of the product, or create
undesirable side effects. Creating the product with chemicals made with specific
ratios of stable isotopes results in a unique, easily identified tag. A tag that
is chemically identical--ensuring comparable performance with no undesirable
side effects.

    To date, we have not had significant demand for our stable isotopes for
these applications. We believe the opportunity exists for demand to develop in
many areas. One example is high-value, low-volume products such as perfumes.
Imitation perfumes, made by other manufacturers, but sold as the original to
unsuspecting consumers, are not uncommon. If the original perfume has been
tagged using stable isotopes, then imitations can be easily identified.

    Another example is where information regarding the manufacture and
distribution of a chemical is important. Ammonium nitrate is a common
fertilizer. However, when combined with fuel oil, it becomes a powerful
explosive. Knowing by whom, when, and where the Ammonium nitrate was made, and
to which distributor it was sold, can be very useful information if authorities
need to investigate the unlawful use of such an explosive. Tagging the Ammonium
nitrate with stable isotopes would provide that information, even after the
explosive was used, as the isotopic ratios are unaffected by an explosive
reaction. These, and other product tagging and stewardship applications may also
develop over time.

    INDUSTRIAL APPLICATIONS AND BASIC RESEARCH.

    CALIBRATION STANDARDS (NON-LIFE SCIENCES).  In addition to the life sciences
calibration standards market, numerous industrial applications also use
radiation, and/or measure radioactivity levels. As with life sciences standards,
we supply many of the stable isotope target materials and radioisotopes used in
these applications. As mentioned above, we also distribute the source standards
products of a major manufacturer that recently announced the sale of its
industrial source business. It is not clear what the future implications of this
transaction may be on our revenues.

    BASIC RESEARCH.  There is still much scientists do not know about
radioactive materials, and how to minimize the dangers associated with these
materials. We provide rare radioisotopes standards to entities that study these
issues. To date this has been a significant source of revenues.

                                       11

    ISOTOPICALLY PURE SEMICONDUCTOR MATERIALS

    The majority of semiconductor devices built today use natural silicon as the
starting material. Silicon has many desirable characteristics as compared to
other semiconductor materials, and the semiconductor industry has invested
billions of dollars to improve and optimize the manufacturing technology for
silicon. Devices fabricated on single crystal silicon have performance
characteristics that are governed by the electrical and physical characteristics
of silicon including: carrier mobilities, effective mass of the carriers, energy
band-gap, electrical conductivity and thermal conductivity. Carrier mobilities,
for example, govern signal transit times and thus place a limit on device speed.
Thermal conductivity governs power dissipation, which, in turn, places an upper
limit on the packing densities achievable for devices on a chip, or the amount
of power that can safely be generated in the circuit without significantly
degrading circuit performance.

    The semiconductor industry trend of adding more transistors on a chip to
increase performance, and shrinking the size of transistors to both increase
performance and decrease costs, has resulted in increased power requirements and
significantly higher operating temperatures. Nowhere is this trend more evident
than in microprocessors. Historically, the 80286, 80386, and 80486 generations
of microprocessors typically did not need external heat sinks to remove heat and
function properly. High operating temperatures and thermal management were not
issues outside of mainframe or workstation computers.

    Beginning with the Pentium-Registered Trademark-, Sparc-Registered
Trademark-, and Alpha-Registered Trademark- microprocessors, heat sinks and fans
became necessary to control the higher operating temperatures. According to the
Semiconductor Industry Association (SIA), when the microprocessor's power
requirements exceed approximately 110 watts, heat sinks and fans will no longer
be adequate and active cooling (refrigeration) will be required. Most of the
major computer companies have already demonstrated cryogenically cooled
computers that operate up to one-third faster than their conventionally cooled
counterparts. These cryogenic cooling devices can cost upwards of $400 per
microprocessor.

    There is a significant body of research, generated over the last twenty
years, supporting the contention that isotopically pure semiconductor materials
have superior thermal conductivity properties when compared to natural,
multi-isotopic materials. Additionally, we believe this solution is compatible
with virtually every other heat management solution currently implemented, or
envisioned, to date, and it does not require changing a single device design or
manufacturing process because pure silicon-28 is essentially
identical--chemically and physically--to natural silicon. SEE "RESEARCH AND
DEVELOPMENT."

    Silicon has three naturally occurring stable isotopes: silicon-28 (92%),
silicon-29 (5%) and silicon-30 (3%). In 1997, we began a program to introduce
99.9% pure silicon-28 as a superior substitute material, to natural silicon, for
the manufacture of semiconductor devices. Our first efforts toward developing
isotopically pure semiconductors involved securing the intellectual property
rights to commercialize silicon-28 and similar materials, which culminated in
our acquiring exclusive rights to two Yale University patents. SEE "PATENTS AND
PROPERTY RIGHTS."

    We then began acquiring sufficient quantities of pure silicon-28 to make
epitaxial wafers. These wafers have been sold or given to numerous manufacturers
and academic institutions to perform additional tests to validate previous
findings, and to confirm the substitutability of pure silicon-28 for natural
silicon in their manufacturing processes. These tests have supported our belief
that pure silicon-28 is not only a viable substitute material, but that the
anticipated thermal conductivity property improvements are significant.

    The next step in our development program is to make bulk wafers of pure
silicon-28. However, the manufacture of bulk wafers requires substantially more
material than we could economically acquire from our existing suppliers. Our
efforts to secure an unlimited, U.S.-based, economical supply of silicon-28
culminated with the December 1999 signing of an agreement with Eagle-Picher to
provide silicon-28 to us

                                       12

on an exclusive basis. The initial 200-kilogram delivery is scheduled for
shipment by December 2000. SEE "BUSINESS THAT WE SOLD" AND "MANUFACTURING AND
SUPPLY."

    Converting silicon-28 from the chemical and physical form we receive from
our suppliers into epitaxial wafers required us to use several contract
manufacturers. We believe that we can perform many of these processes ourselves
at a lower cost and with greater quality assurance. Therefore, we are building a
processing facility in Golden, Colorado to perform many of these processes.
Equipment was ordered and construction was underway as of April 30, 2000, and
this facility is expected to be complete sometime before April 2001. We will
then be able to manufacture sufficient quantities of pure silicon-28 silane gas
to produce bulk wafers, in addition to more epitaxial wafers, to complete our
development efforts.

    Our agreement with Eagle-Picher provides that they will supply to us all
quantities of silicon-28 that they produce from their pilot plant at previously
agreed upon prices. Their isotope separation process is such that it is easily
expanded at their facility in Oklahoma. Additionally, we have worked with Silex
Systems, Ltd., North Ryde, Australia, ("Silex"), who is developing a different
silicon isotope separation process. We believe these companies, and others, will
be able to supply all the silicon-28 that we may require, although none of these
facilities have yet commenced commercial production.

    We also believe that once sufficient orders have been placed for pure
silicon-28 bulk wafers, that one or more wafer manufacturers will convert one or
more of their facilities to produce such wafers. Therefore we intend to focus on
developing and expanding the production processing steps that precede wafer
manufacturing. The expertise that we expect to develop running our
developmental-scale facility should prove sufficient for this purpose.

    We anticipate very little revenue from silicon-28 based products in fiscal
2001, as we are still developing this business. However, we project significant
revenues in subsequent periods if we are able to successfully complete our
development efforts, and market silicon-28 based products. We have also begun
examining other semiconductor materials including gallium. As with silicon,
gallium has multiple, naturally occurring stable isotopes. Our development
program for gallium, which we began in April 2000, is similar to the one
outlined above for silicon-28. At this time we have begun identifying sources
and procuring small amounts of pure gallium-69 and gallium-71.

    ISOTOPICALLY DEPLETED ZINC

    The U.S. Nuclear Regulatory Commission requires that nuclear power plants
reduce the radiation exposure of the nuclear power plant workers to levels as
low as reasonably achievable. Also of significant concern is the cracking of
nuclear power plant structural materials because of the corrosive nature of the
water used to cool the nuclear reactor core. Nuclear power plants are designed
with substantial safety margins against such cracking, and frequent surveillance
is performed to ensure that these safety margins are not compromised. However,
if not controlled, cracking can require extremely costly repairs or, if not
reparable, could result in the premature shutdown and de-commissioning of a
facility which may have cost hundreds of millions of dollars, or more, to
construct.

    Testing sponsored by the Electric Power Research Institute showed that the
addition of a soluble form of zinc to the nuclear reactor coolant water reduces
plant radiation fields, and in some cases, substantially mitigates
environmentally induced cracking because zinc acts as a corrosion inhibitor for
the stainless steel and other metal components of the nuclear reactor systems.
Natural zinc provides the important benefits outlined above, but one isotope of
natural zinc becomes radioactive in the nuclear reactor, thus offsetting a
substantial portion of the desired benefits. By depleting this zinc isotope, the
desired corrosion-resistance benefits are still obtained while the detrimental
side effect is essentially eliminated. This product is known as isotopically
depleted zinc. In calendar year 1999 isotopically depleted zinc was used by 35
of the approximately 95 Boiling Water Reactors (or "BWRs") in the world
including 29 of the 35 BWRs in the United States.

                                       13

    Effective December 1, 1999, we sold our depleted zinc business to
Eagle-Picher. SEE "BUSINESS THAT WE SOLD."

RESEARCH AND DEVELOPMENT

    Consistent with our product development strategy, we are seeking to identify
and evaluate a variety of new stable and radioactive isotope products and
potential markets for economic and technical feasibility. We will also continue
to fund research and development to improve technologies for isotope separation
and materials processing technologies. During fiscal 2000 and 1999, research and
development expenses were $1,224,000 and $1,155,000, respectively.

    In fiscal 2000, we focused our efforts on two primary projects. The first
project is the production of high chemical-purity silicon-28 silane gas and
silicon-28 epitaxial wafers. The second project is the recovery and recycling of
zinc from various sources such as scrap metals, including galvanized steel and
brass, and electric arc furnace dust.

    In fiscal 1999, we focused our efforts on three primary projects. The first
was procuring silicon-28 and producing silicon-28 epitaxial wafers. The second
was developing new, lower-cost carbon-13 separation methods. The third was
development work to enhance our depleted zinc processing capabilities. The
silicon-28 project was successful. Work in this area continued throughout fiscal
2000, and is continuing through the current (2001) fiscal year. The carbon-13
separation project did not produce the desired results and was ended in
February 1999. The depleted zinc project was completed in November 1998.

    SILICON-28.  To expand our capacity and to ensure product quality, we have
begun building our own silane gas facility in Golden, Colorado. We believe this
facility will be capable of processing isotopically pure silicon-28, to meet our
requirements for the next few years as we continue our planned development
program for silicon-28 semiconductor materials. To date, unaffiliated
contractors have performed this work for us on a sub-contract basis. However, we
have attempted to retain, to the maximum extent possible, ownership of any
intellectual property resulting from such work.

    In fiscal 2000, we funded two new university research programs and
participated in two others. The first funded program is at Southern Methodist
University, Dallas, Texas, which will measure the thermal conductivity of
silicon-28 thin films with various electrical dopants and model the effect of
epitaxial layer thickness on the temperature of silicon and gallium arsenide
transistors. The second funded program is at North Carolina State University,
Raleigh, North Carolina, which will model and build power semiconductor devices
and determine the effect of silicon-28 epitaxial layers on the device's
temperature distribution.

    Additionally, we entered into a Cooperative Research & Development Agreement
("CRADA") with Lawrence Berkeley Laboratory, Berkeley, California, to study the
properties of various silicon isotopes. This CRADA is part of a U.S. Department
of Energy ("DOE") program to re-deploy Russian nuclear weapons technology to
commercial applications. Delays within the DOE have pushed the start of this
program to our fiscal year 2001.

    We also supplied silicon-28 silane gas to ATMI, Inc., Danbury, CT, and will
be participating in their Office of Naval Research ("ONR") funded program to
investigate isotopically pure silicon carbide.

    During fiscal 1999, we signed a joint research and development agreement
with Silex Systems, Ltd. The agreement calls for Silex to partially fund some of
our development activities and for Silex to assess the feasibility of building a
silicon isotope separation plant using Silex's patented laser isotope separation
process. These agreements represent the launch of our efforts to ensure a large
supply of silicon isotopes at a reasonable cost to support the large-scale
manufacture of isotopically pure silicon wafers.

    Additionally, we signed an agreement with Voltaix, Inc., North Branch, New
Jersey, ("Voltaix") to be the distributor of our products for the ion
implantation industry. The first product being sold in accordance with the
Voltaix agreement is silicon tetrafluoride enriched in the silicon-29 isotope.
The isotopically

                                       14

enriched materials allow higher beam currents and higher productivity than the
natural silicon tetrafluoride currently used in the industry today.

    ZINC RECOVERY AND RECYCLING.  During the course of its contract research and
development activities Interpro was introduced to a patented technology using
chlorine gas to recover and recycle zinc from galvanized steel scrap. We have
dedicated the staff and facilities of Interpro to focus primarily on this
project. The original concepts for this new technology were devised and patented
by Professor Derek Fray of the Department of Materials Science and Metallurgy at
the University of Cambridge, Cambridge, England.

    We believe this new technology has numerous benefits compared to
conventional zinc scrap recycling processes including:

    - it can be applied to a variety of waste materials in addition to
      galvanized steel scrap;

    - it enhances the value of the associated materials (zinc-free steel is much
      easier and less costly to recycle);

    - it can use waste plastic (as a source of chlorine and heat) that would
      otherwise be sent to a landfill;

    - it recovers chlorine for sale (to make more plastic, for example) or reuse
      within our process; and

    - the final product is high purity metallic zinc which can be sold to any of
      the current zinc markets identified above.

    It is our intention to develop this technology, using our current facilities
at the appropriate pilot plant level of operation, to attract strategic
investors in this particular technology. It is our intention to sell, spin-off
or otherwise divest this business to one or more strategic investors. While we
believe the economic potential of this, and related technologies, is
significant, this line of business is not consistent with our core isotope
business. We believe this approach will maximize shareholder value both today
and in the long-term.

    As of June 30, 2000, we had completed numerous bench-top tests, and were
readying our facility and equipment to begin a series of pilot plant level,
multi-day test runs.

PATENTS AND PROPRIETARY RIGHTS

    We rely primarily on a combination of trade secrets, confidentiality
procedures and contractual provisions to protect our technology. Despite our
efforts to protect our rights, unauthorized parties may attempt to copy aspects
of our products or to obtain and use information that we regard as proprietary.
Policing unauthorized use of our technology and products is difficult. In
addition, the laws of many countries do not protect our rights in information,
materials and intellectual property that we regard as proprietary to which we
regard as great an extent as do the laws of the United States. There can be no
assurance that our means of protecting our rights in proprietary information,
materials and technology will be adequate or that our competitors will not
independently develop similar information, technology, or intellectual property.

    We currently have no patents in our own name and have not filed any patent
applications. We have rights to several isotopically engineered innovations
regarding electronic and optical materials, which we believe may be patentable.
Ongoing work in the area of isotope separation by chemical means may also lead
to patentable inventions.

    In April 1999, we announced that we had entered into an exclusive licensing
agreement with Yale University that entitles us to exclusive intellectual
property rights to patents covering semiconductor devices derived from
isotopically engineered materials. The license requires payment by us of a
royalty based on a percentage of our, or our sublicensees', net sales of
products derived from technology covered by the Yale patents (#5,144,409, dated
September 1, 1992, and #5,442,191, dated August 15, 1995).

                                       15

COMPETITION

    The markets for our products and proposed products are highly competitive,
and we expect that competition will continue and likely increase as markets grow
and new opportunities are realized. Some of our current competitors, and many of
our potential competitors, are larger and have significantly greater financial,
technical, marketing and other resources than we do. Some of our competitors may
form partnerships or alliances with large pharmaceutical or electronics
companies, with the resulting entity possessing more market strength than we
have. Our competition varies greatly depending on which product or industry is
considered.

    SILCS AND DBT MATERIALS.  We have several larger and numerous smaller
competitors in the markets for our SILC products. We will have additional
competitors if we offer breath test diagnostic products (DBTs), and additional
SILCs in the future. Two of these companies, Cambridge Isotope Laboratories
Inc., and Isotec, Inc., have their own isotope separation facilities, while all
of our competitors produce some combination of SILCs and DBT substrates. We are
aware of at least one company in the United States who has received FDA approval
for a carbon-13 Urea Breath Test ("UBT"), a specific type of DBT. Several
companies in Europe have also received regulatory approval for DBTs. Our
principal current competitors and potential competitors also include: MassTrace,
euriso-top, Aldrich Chemicals, Icon Services, Omicron, C/D/N Isotopes, and
Martek Biosciences. We have in the past, and may in the future, sell products
to, or purchase products from, these companies.

    SEMICONDUCTOR MATERIALS.  Because of the early stage of the semiconductor
materials opportunities, we have not identified significant competitors in these
markets. Numerous companies in the United States and throughout the world are
currently manufacturing semiconductor materials and are known to be conducting
research and development to improve the thermal conductivity and other
beneficial characteristics of semiconductor materials. Many of these companies
are larger than Isonics and have significantly greater financial resources
available. Given the potential size and importance of these new potential
markets, we anticipate that substantial additional competition will emerge if
these markets develop. We believe one of the most important benefits
isotopically pure semiconductor materials are expected to provide is higher
thermal conductivity. This higher thermal conductivity helps alleviate the heat
dissipation problem in high-power density semiconductor devices. Many mechanical
methods have been employed to date including fans, heat sinks and refrigeration
units to dissipate heat. These alternative methods, as well as others which have
come to our attention, we believe without exception, will prove to be
complementary to our materials-based solution, and the benefits will be
additive.

    ZINC RECOVERY AND RECYCLING.  Over the last twenty years, many organizations
have attempted to recover and recycle zinc from galvanized steel and brass
scrap. Many of these organizations are larger than Isonics and have
significantly greater financial resources available. These methods have proven
either cost ineffective, or difficult to implement, because of the complex
metallurgy involved. Additionally, primary zinc from ore deposits around the
world continues to be relatively inexpensive and plentiful. These companies are
also larger than Isonics and also have significantly greater financial resources
available. We believe we will not only have to produce significant cost savings,
versus primary zinc, we will also have to demonstrate significant benefits of
our proposed technology to the steel industry. Our research and development
efforts in this area are in their preliminary stages and we can offer no
assurance that the will be successful.

    DEPLETED ZINC.  During fiscal 2000 (through November 1999), we were among
the leading producers of depleted zinc. We also believed that other entities or
persons were expected to begin producing depleted zinc in substantial quantities
in the near future. Several such possible producers have adequate technical and
financial resources to become viable competitors in the near future. In
particular, Siemens has indicated that it has a relationship with
Ultracentrifuge Netherlands ("UCN") and General Electric Corporation has
indicated that it may establish a second Russian supply source. UCN also
competes with us in the markets for medical target isotopes. This competitive
environment, along with many other factors,

                                       16

contributed to our decision to sell our depleted zinc business to Eagle-Picher
Technologies, LLC, in December 1999.

    SUMMARY.  Many of the areas in which we do, or intend to, compete are
rapidly evolving. There can be no assurance that an existing or potential
competitor has not already developed, or may develop, a patentable product or
process, which will substantially prevent us from competing in our intended
markets.

    We expect to compete primarily on the basis of product performance,
proprietary position and price. Some of our products may also compete based on
product efficacy, safety, patient convenience, and reliability. In many cases
the first company to introduce a product to the market will obtain at least a
temporary competitive advantage over subsequent market entrants.

MANUFACTURING AND SUPPLY

    Consistent with our strategy to effectively utilize capital expenditures and
production facilities, we obtain our isotopes through several multi-year supply
agreements with third parties. To a lesser extent, from time-to-time, we also
obtain stable isotopes from a variety of other isotope sources, primarily
located in Russia, on a spot market basis. We may invest in our own isotope
production facilities in the future upon determining, in our opinion, the
optimum production technology for a given isotope or family of isotopes.

    Currently, we obtain substantially all of our isotopes from Russia, the
Republic of Georgia, Uzbekistan, and other locations within the former Soviet
Union. In December 1999, we entered into a Supply Agreement with Eagle-Picher
Technologies, LLC, for the right to purchase enriched silicon and carbon
isotopes from its facilities in Oklahoma. In addition, Eagle-Picher has an
obligation to provide us 200 kilograms of isotopically pure silicon-28 during
calendar year 2000. According to Eagle-Picher, the first deliveries from the
Eagle-Picher silicon facility are scheduled to begin in the third calendar
quarter of 2000, having been delayed because of typical production start-up
problems.

    We entered into a Supply Agreement, dated July 1996, with Techsnabexport, a
Russian government-based foreign trade organization, and an isotope enrichment
plant located in Siberia, Russia (the "Electro-Chemical Plant" or "ECP"). The
ECP is owned by the Ministry of Atomic Energy of the Russian Federation, which
is a cabinet post in the Russian Federation's government. The Supply Agreement
extends through 2001. Under the Supply Agreement, the ECP will produce depleted
zinc and other stable isotopes for us, will allocate its stable isotope
production capacity to us, and will produce other stable isotopes in response to
marketplace demand for those isotopes. Under the Supply Agreement, the specific
terms for each year's production, including pricing terms, are negotiated
between the parties by November 1st of the preceding year. The agreement
provides, among other provisions:

    - that the ECP will not sell depleted zinc to third parties located in North
      America or to other parties for resale in North America (this, and other
      associated sections of the Supply Agreement have been assigned to
      Eagle-Picher effective December 1, 1999);

    - that as long as the ECP is able to meet all of our requirements for
      depleted zinc at prices competitive with other potential suppliers we will
      not buy depleted zinc from other third parties located in the Russian
      Federation (this, and other associated sections of the Supply Agreement
      have been assigned to Eagle-Picher effective December 1, 1999); and

    - that disputes arising under the Supply Agreement will be resolved by
      arbitration conducted in Sweden under the arbitration rules of the
      Stockholm Chamber of Commerce.

    The enforceability of the Supply Agreement might be subject to a greater
degree of uncertainty than if the Supply Agreement was with a United
States-based company, and the dispute(s), if any, were to be resolved in the
United States. Additionally, the supply of stable isotopes could be adversely
affected by changes in the political, economic, and military conditions in
Russia. Consequently, our operations could be materially and adversely affected
if: trade between Russia and the United States were interrupted or

                                       17

curtailed; or we should fail to obtain and maintain all necessary Russian
Federation governmental approvals, and/or hostilities involving Russia should
occur.

    We have assigned the depleted zinc sections of this Supply Agreement to
Eagle-Picher and we no longer have any rights under those sections. We have
guaranteed performance by Techsnabexport and the ECP to Eagle-Picher. This
guarantee requires Eagle-Picher to pay us $500,000 each year, for three years,
if Techsnabexport and the ECP continue to honor the depleted zinc sections of
this Supply Agreement.

    There can be no assurance that our relationship with the ECP and other
isotope producers in Russia will be successfully maintained. Disruption or
termination of our supply sources could delay shipments by us and could have a
material adverse effect on our business, financial condition and results of
operations. We do not presently maintain political risk insurance but we will
evaluate the desirability and availability of such insurance in the future.
Operations in Russia entail certain other risks, including, among others, supply
disruptions as well as introduction of tariffs and fluctuations in freight
rates. See "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION--FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS--OPERATIONS IN
RUSSIA."

    The ECP is one of four similar plants, which were designed to supply the
former Soviet Union, and certain other countries, with enriched uranium (low
enrichment for commercial nuclear power plant fuel, high enrichment for military
purposes). Following the accident at the nuclear power plant near Chernobyl,
Ukraine, in 1986, certain Russian nuclear power plants have been shut down
reducing the demand for uranium fuel. In the years since the breakup of the
former Soviet Union, beginning in 1989, the demand for uranium for military
purposes has also declined.

    In response to these trends, these processing plants, including the ECP,
have converted, or are considering converting, a portion of their capacity to
processing certain stable isotopes. We believe that additional capacity could be
converted to stable isotope production, if the processing plants decided to do
so. We also believe that these plants have the potential capacity to meet all of
our foreseeable needs for the processing of certain stable isotopes. We believe
that one or more of the other similar enrichment plants may convert part of
their capacity to the production of stable isotopes should market demand
increase substantially. To our knowledge no other organization has a current
contract with these facilities to produce stable isotopes.

    Certain facilities elsewhere in the world, including the Oak Ridge National
Laboratory in Oak Ridge, Tennessee, and private and pseudo-governmental
facilities in Great Britain, Germany, The Netherlands and the Republic of South
Africa, have the potential to produce stable isotopes and, in certain cases,
actually do produce these stable isotopes.

    To increase capacity, and to geographically diversify our production of
certain isotopes, on December 1, 1999, we entered into a Supply Agreement with
Eagle-Picher Technologies, LLC, for it to supply us with enriched stable
isotopes of silicon and carbon. We have already purchased 200 kilograms from
Eagle-Picher to be delivered during 2000. Eagle-Picher expects to produce these
isotopes from its facilities in Oklahoma. There can be no guarantee, however,
that the facility will be able to produce high-purity isotopes on commercially
reasonable terms. We believe that this relationship with Eagle-Picher may
improve our profitability, and will improve the security of our supply if the
facility performs as expected.

    We have historically depended on a limited number of suppliers and
processors for certain manufacturing processes. Although we do have written
agreements with some of our suppliers and processors, we do not have any written
agreements with alternative suppliers and processors. We continue to attempt to
reduce our dependence on our suppliers, but disruption or termination of any of
the sources could occur, and such disruptions or terminations could have at
least a temporary, materially adverse, affect on our business, financial
condition and results of operations. Moreover, a prolonged inability to obtain
alternative sources for processing could have a materially adverse affect on our
relations with our customers. Although our relationship with Eagle-Picher should
provide greater security for our supply of silicon and carbon isotopes if the
facility performs as expected, there can be no assurance that it will in fact do
so.

                                       18

GOVERNMENT REGULATION

    Regulation by government authorities in the United States and other
countries is a significant consideration in the development, production,
distribution, and marketing of our products; and in our continuing research,
development, and other activities. In order to clinically test, manufacture,
distribute, market, and sell products, especially those intended for therapeutic
or diagnostic use, mandatory procedures, and safety and other standards
established by applicable regulatory authorities must be followed. In some
cases, specific approval to clinically test and commercially distribute such
products must be obtained from numerous governmental authorities. Furthermore,
we are subject to various laws, regulations and requirements relating to such
matters as the import and export of our products, ensuring safe working
conditions, laboratory and manufacturing practices, the use and disposal of
hazardous or potentially hazardous substances used in connection with our
research, development and manufacturing activities. Some of the regulations are
summarized below.

    FDA REGULATION

    We are not currently subject to any FDA regulation because we do not
currently manufacture any DBTs, drug products, or other medical devices. Our
customers may, in many cases, be subject to FDA regulation. If we, in the
future, test, manufacture, market, distribute, export, or sell diagnostic
products (such as any DBTs) or medical devices, we will also likely be subject
to extensive and rigorous regulation by the United States and other countries in
which we may choose to test, manufacture or market our proposed diagnostic
products. As of the date of this Form 10-KSB, we have not determined those
specific countries, other than the United States, where we might seek regulatory
approvals to market any such products it may develop, though we would likely
seek such approval in certain European countries and Japan. The products we
intend to develop are subject to rigorous pre-clinical and clinical testing and
other FDA approval requirements, and similar requirements in most other
countries.

    There can be no assurance that any products developed by us, or other
entities to which we may sell bulk or other materials, will prove to meet all of
the applicable standards to receive marketing approval, or that any such
approvals will be granted on a timely basis, if at all, or that such products if
approved will be commercially successful. Delays and costs in obtaining these
regulatory approvals could adversely affect our ability to commercialize our
products and our ability to generate revenues. Even if regulatory approvals for
a product are obtained, such approvals may involve restrictions and limitations
on the labeling and clinical use of the product. Following market approval, the
product will continue to be subject to compliance with applicable federal and
state laws and regulations.

    DIAGNOSTIC MEDICAL DEVICE PRODUCTS

    Certain of our contemplated diagnostic products may be regulated as medical
devices. Diagnostic products may be subject to one of two marketing approval
procedures. One procedure, known as a "510(k) review," is available when the
manufacturer can demonstrate that the proposed product is "substantially
equivalent" to another product that either was in commercial distribution in the
United States before May 28, 1976, or that has been subsequently classified as a
Class I or Class II medical device. When a 510(k) review is used, a sponsor is
required to submit a Pre-Market Notification to the FDA, at least 90 days before
it plans to initiate commercial distribution of the product.

    Where there is no existing legally marketed product "substantially
equivalent" to a contemplated product, the sponsor is required to seek marketing
approval of the product by a different process. This process, a Pre-Market
Approval ("PMA") application, involves a lengthier and more burdensome
procedure, which would likely require clinical studies. Together with the FDA
review of the PMA, this application process may take three-to-five years before
commercial marketing can occur, if the PMA is approved. There can be no
assurance that any future product we develop which is subject to FDA review will
be found to have an intended use and characteristics that would qualify the
product for commercial

                                       19

distribution for clinical use under 510(k) Pre-Market Notification. Thus, PMAs
may be required for some or all of our future contemplated and proposed
products.

    We have not developed any product that requires any clearance procedure with
the FDA, and no product is currently under active development. We believe that
any DBT instruments that we may develop in the future will be eligible for
marketing under a 510(k) Pre-Market Notification, if cleared by FDA, but that
the substrate would require approval of a New Drug Application ("NDA"). We
believe that clinical studies would be required to obtain FDA approval of the
510(k)/NDA for the DBT instrument/substrate, and would be conducted under an
investigational device exemption ("IDE") approved by the FDA. An IDE normally
restricts the transfer of an investigational device to a limited number of
institutions, and use to a limited number of investigators. There can be no
assurances that FDA will allow us to conduct such clinical studies or that such
studies will provide the data necessary to obtain the approval of the 510(k)/
NDA for any DBT, or other product, that we may develop, or that the FDA will in
fact provide the necessary approval of the 510(k)/NDA in a timely manner, if at
all.

    In addition, use of DBTs and other diagnostic products that we may develop
may be subject to regulation under the Comprehensive Laboratory Improvement Act
of 1986 ("CLIA"). Under CLIA, clinical laboratories must be certified to perform
diagnostic tests. Such certification specifies the highest "complexity level" of
tests that the laboratory can perform. The specific complexity level of a given
diagnostic product is determined by governmental agencies, currently the U.S.
Centers for Disease Control. Our ability to successfully market diagnostic
products within the U.S. may depend on our obtaining a complexity level
determination that allows the broadest use. There can be no assurance that such
complexity level determination can be obtained in a timely manner, if at all,
and that such failure will not have a material adverse effect on us, and our
operations.

    DRUG PRODUCTS

    We have not yet developed any drug products, as defined by the FDA, and our
research and development efforts for such products are only in the very
preliminary stages. The development and marketing of drugs is highly regulated
by the FDA. Certain products that we may develop may be classified, depending on
their characteristics, as drugs regulated under the FDA. Development of a drug
product for use in humans is a multistep process. First, laboratory and animal
testing establish reasonable safety of the experimental product for testing in
humans, and suggest potential efficacy with respect to a given disease. Once the
general investigative plan and protocols for specific human studies are
developed, an investigational new drug application is submitted to the FDA for
approval. Once approved, clinical investigations may commence.

    Following the successful completion of clinical trials, the clinical
evidence that has been accumulated is submitted to the FDA as part of a new drug
application. Approval of the NDA is necessary before a company may market the
product. The approval process can be very lengthy, frequently taking one to two
years, or more, after submission and depends in part upon the speed of FDA's
review of the application and the time required for the company to provide
satisfactory answers or additional clinical or other data when requested. With
any given product, there is no assurance that an NDA will ever be approved in a
timely manner or at all. Failure to obtain such approvals would prevent us from
commercializing our products and would have a material adverse effect on our
business. Furthermore, the process of seeking and obtaining FDA approval for a
new product generally requires substantial funding, and there can be no
assurance such funding will be available.

    CGMPS AND OTHER CONTROLS

    The FDA also has extensive regulations concerning manufacturing of regulated
products in accordance with current good manufacturing practices ("cGMPs"). If
we commence the manufacture of any products subject to FDA regulation (and we
are not currently manufacturing any such products), we will

                                       20

have to comply with cGMPs and we will have to ensure, compliance by our
third-party manufactures. Continued compliance with cGMPs is required to
continue to market both drugs and medial devices once they are approved. Failure
to comply with the cGMP regulations or other applicable legal requirements can
lead to federal seizure of violating products, injunctive relief actions brought
by the federal government and potential criminal investigation and prosecution
of violators and its officers and employees who are responsible for the
activities that lead to the violations.

    EXPORT AND ENVIRONMENTAL CONTROLS

    Certain of our products and technology, particularly those having potential
nuclear energy or military applications, such as depleted zinc and related
technology, are subject to stringent controls over their manufacture, use,
distribution, dissemination and export. In many cases, such activities may
require approvals or licenses from various U.S. and foreign governmental
agencies, and compliance with substantial regulatory controls. Such approvals
can be difficult to obtain and maintain and may not be obtainable from certain
countries. Furthermore, such approvals or licenses may be restricted or
terminated because of changes in laws, regulations, policies governing those
approvals and licenses, or changes in the political or other matters in the
countries granting such approvals or licenses to which our products and
technology would be exported.

    Likewise, certain of our current and potential operations may necessitate
submitting registrations or notifications to federal and state regulatory
authorities responsible for environmental and related matters, including the
U.S. Environmental Protection Agency ("EPA"). Additionally, we are required to
comply with stringent controls pertaining to the handling and distribution of
our products and operations, including under certain conditions obtaining
governmental approvals and licenses, either of which may be subject to
significant restrictions. Violation of any of these regulatory controls may
subject us to significant administrative civil and criminal penalties, including
loss of our approvals and licenses, or the imposition of additional restrictions
on our operations. There can be no assurances that we will be able to obtain and
maintain the approvals or licenses necessary to successfully market our products
and technology, or that it will be able to comply with applicable laws and
regulations. Any such failure to obtain such licenses or approvals, where
required, and comply with such laws and regulations may materially and adversely
affect the our business, financial condition and results of operations.

    REGULATION OF NON-MEDICAL CHEMICAL PRODUCTS

    The import, export, handling, transportation, sale, storage and other
activities undertaken in connection with our non-medical products are subject,
or potentially subject, to substantial federal, state, local and foreign
government controls pertaining to hazardous chemical and chemical wastes, import
export controls and other matters. These regulations are complex, pervasive and
constantly evolving. Our ability to effect and maintain compliance with these
controls is important to our commercial success.

    With respect to transportation of our products, we rely predominantly on
Russian and U.S. freight carriers to handle and deliver all our shipments, and
utilize domestic overnight courier services for shipments to our customers.
These carriers must comply with Department of Transportation ("DOT") regulations
in the shipping and packaging of the stable isotope chemicals. We must also
comply with DOT regulations when packaging material kept in inventory for
domestic shipment. As required under federal and state law, we have prepared
Material Safety Data Sheets ("MSDS"), which are enclosed with each product
shipment. We must periodically update our MSDS sheets based on new literature
reports. We cannot assure that our MSDS sheets will continue to be in compliance
with applicable requirements.

    The shipments received at our Columbia, Maryland facility are subject to
Federal and Maryland regulations pertaining to hazardous chemicals and hazardous
waste disposal. These shipments are stored in an area of the facility designated
for such materials. Currently, we are considered a small quantity generator of
hazardous waste and will rely on certified haulers to dispose of our minimal
amounts of

                                       21

hazardous waste. We believe we are in compliance, in all material respects, with
applicable federal and state environmental regulatory requirements.

    Should the levels of hazardous waste increase as our inventory and handling
operations increase in volume, we would have to comply with Environmental
Protection Agency ("EPA") requirements and obtain an EPA ID number. However,
this is not currently necessary.

    The shipments from Russian manufacturing sources now enter the U.S. duty
free (without tariff); however, there can be no assurance that such duty-free
importation will continue. If the shipments are subject to tariff, we cannot
assure that we will be able to sell the imported products or that the products
will be commercially viable because of these increased tariff costs.

    The Nuclear Regulatory Commission ("NRC") has authority to regulate
importation and exports of deuterium containing chemicals whose ratio of
deuterium atoms to hydrogen atoms exceed 1:5,000. At present, the deuterium
containing compounds that we import do not require any special licenses or
importation authorization. There can be no assurances that the NRC will continue
these policies. The NRC regulates exports of deuterium containing chemicals
under general license. We will not be able to ship these chemicals to certain
countries that require a special license for such shipments; none of these
countries represent significant current or expected future markets for our
anticipated and present products. In addition, certain technology or products
that we have or may in the future develop, may be subject to other government
controls pertaining to armaments, including the need to obtain special licenses
for exports. The imposition of such controls may impair our ability to broadly
market such products.

    Our facilities and employees are also required to comply with environmental
and other regulations concerning the operations of and the materials we use, as
well as handling and distribution of products and waste materials. Failure to
ensure compliance with such federal, state or local laws and regulations could
have a material adverse effect on us.

    In addition, the manufacture, distribution and export of some of our current
or potential products and technology may be subject to governmental controls
pertaining to materials and technology that might have been used for military,
nuclear power, or nuclear weapons purposes. These controls include, in certain
cases, export license requirements or other restrictions. There can be no
assurances that we will be able to obtain or maintain such licenses, or that the
failure to obtain or maintain such licenses, or comply with other restrictions
that might be placed on such manufacturing and exports, will not have a material
adverse effect on us and our operations.

PRODUCT LIABILITY AND INSURANCE

    Our business exposes us to potentially substantial product, environmental,
occupational and other liability risks which are inherent in product research
and development, manufacturing, marketing distribution and use of our products
and operations, including, but not limited to, products used in nuclear power
plants and medical device products. We have product liability insurance in order
to protect ourselves from such potential exposures. There can be no assurance
that adequate insurance coverage will be available at an acceptable cost, if at
all, or, a product liability or other claim would not materially and adversely
affect our business or financial condition. The terms of our agreements with our
customers provide that liability is limited to our standard warranty to replace
non-conforming product, and liability for consequential damages caused by the
improper use of our products is limited by contractual terms. Nevertheless, one
or more third parties could bring action against us based on product liability,
breach of warranty or other claims, and, there can be no assurance that the
foregoing contract clauses would effectively limit our liability in any such
actions.

                                       22

EMPLOYEES

    As of April 30, 2000, we had 27 full and part-time employees, of whom eight
have Ph.D.s in scientific or engineering disciplines. Approximately nine
employees are involved in research and product development, five in
manufacturing and sourcing, and thirteen in business development and
administration, but such employees' responsibilities may also encompass areas
other than their primary area of responsibility. We consider our relations with
our employees to be good. None of our employees are covered by a collective
bargaining agreement.

                                       23

ITEM 2.  PROPERTIES

    We relocated our headquarters to Golden, Colorado in December 1998, and now
share facilities with our wholly-owned subsidiary, Interpro. Interpro leases
approximately 41,000 square feet of office, research and production facilities.
The lease expires in July 2001. The facility is used for our zinc recovery and
recycling research and development project, silicon-28 materials processing, as
well as corporate administration. We also sub-let space and facilities to
contract research, development, and materials processing entities.

    We lease 650 square feet for an administrative sales office in Columbia,
Maryland that expires November 30, 2001. Chemotrade leases office space in
Dusseldorf and Leipzig, Germany. IUT leases production and administration
facilities in Berlin, Germany.

ITEM 3.  LEGAL PROCEEDINGS

    We are not subject to any pending or, to our knowledge, threatened, legal
proceedings.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    During the fourth quarter of the fiscal year ended April 30, 2000, we held
our annual shareholders' meeting in Golden, Colorado, on April 26, 2000. The
only matter submitted to a vote of security holders was the reelection of the
Board of Directors. Each Director was reelected by the following vote:



NAME                                                 SHARES FOR   SHARES WITHHELD
- ----                                                 ----------   ---------------
                                                            

James E. Alexander.................................  6,771,354            0

Boris Rubizhevsky..................................  6,771,354            0

Lindsay A. Gardner.................................  6,771,354            0

Richard Parker.....................................  6,771,354            0

Larry J. Wells.....................................  6,771,354            0


                                       24

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

    On September 22, 1997, our Units (consisting of one share of Common Stock
and one Class A Warrant) started trading on the Over The Counter (OTC) Bulletin
Board under the symbol ISONU. In October 1997, we unbundled the Units; the
Common Stock and Class A Warrants commenced trading on the OTC Bulletin Board
under the symbols ISON and ISONW, respectively.

    The following table sets forth the high and low bid prices for the Common
Stock (quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not represent actual transactions) from May 1, 1998,
through April 30, 2000, as reported by OTC Bulletin Board.



                                                                         QUARTER ENDED
                                               -----------------------------------------------------------------
                                               JULY 31, 1999    OCT. 31, 1999    JAN. 31, 2000    APR. 30, 2000
                                               --------------   --------------   --------------   --------------
                                                                                      
Common Stock (ISON)
      High...................................         3 5/8            2 1/8           10 1/2         17 15/16
      Low....................................         1 7/8            0 7/8                1           5 9/16


                                                                         QUARTER ENDED
                                               -----------------------------------------------------------------
                                               JULY 31, 1998    OCT. 31, 1998    JAN. 31, 1999    APR. 30, 1999
                                               --------------   --------------   --------------   --------------
                                                                                      
Common Stock (ISON)
      High...................................       2 23/32          1 29/32                2           3 9/16
      Low....................................       1 21/32           1 1/32          0 25/32           1 7/16


    As of April 30, 2000, there were approximately 250 holders of record of our
Common Stock. This does not include an indeterminate number of persons who hold
our Common Stock in brokerage accounts and otherwise in 'street name.'

    We have never declared or paid a cash dividend on our Common Stock. We
presently intend to retain our earnings to fund development and growth of our
business and, therefore, do not anticipate paying any cash dividends in the
foreseeable future. Additionally, the certificate of designation for our Series
A Convertible Preferred Stock contains restrictions on our ability to pay
dividends to holders of our Common Stock.

                                       25

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR
PLAN OF OPERATION

OVERVIEW

    Founded in 1992, Isonics Corporation is a specialty chemical and advanced
materials company, which develops and commercializes products based on stable
and radioactive isotopes. Enriched stable isotopes are extremely pure materials
engineered at the molecular level to provide enhanced performance properties in
semiconductors, lasers, high-performance lighting, and energy production. Stable
and radioactive isotopes are also widely used in basic research, pharmaceutical
development and drug design, as well as in medical diagnostics and imaging. By
replacing materials traditionally used in these industries with isotopically
engineered versions of the same materials, product performance, safety, and
economics may be enhanced significantly. Using state-of-the-art technology, we
produce a wide range of enriched stable isotopes, which are then converted into
products including radioactive isotopes, which meet the specialized needs of our
customers.

    In fiscal 1996, we expanded our business scope to include development of
isotopically engineered materials for the medical research, medical diagnostic
and semiconductor industries. In June 1997, we produced the world's first
isotopically pure silicon epitaxial wafer suitable for semiconductor
fabrication. In July 1997, we exercised an option for an exclusive license for
two U.S. patents owned by Yale University concerning isotopically pure silicon
and a wide range of other semiconductor materials. In February 1998, we
announced the availability of isotopically pure silicon-28 epitaxial wafers in
prototype quantities. Until December 1, 1999, our core business was the
production and supply of depleted zinc, a non-radioactive stable isotope, to the
nuclear energy industry. SEE RECENT TRANSACTIONS.

RECENT TRANSACTIONS

    DEPLETED ZINC BUSINESS.  On December 1, 1999, we sold our depleted zinc
business to Eagle-Picher Technologies, LLC ("Eagle-Picher") for $8.2 million,
including $1.5 million to be paid over a period of three years. Eagle-Picher's
obligation to pay the final $1,500,000 is subject to the performance of our
former depleted zinc supplier under the terms of a supply agreement that was
transferred to Eagle-Picher in the sale. We are recognizing the $1,500,000 on a
straight-line basis as our former supplier performs, and, as of April 30, 2000,
we have recognized additional gain of $208,000, which is reported as a note
receivable. We received cash of approximately $6.7 million from Eagle-Picher at
the closing, of which approximately $1.2 million was used to pay certain accrued
liabilities.

    The Agreement executed between us and Eagle-Picher also provides for
Eagle-Picher's sale to us of 200 kilograms of silicon-28 in consideration for a
forty-two (42) month Warrant grant to Eagle-Picher for the purchase of 4,000,000
shares of our common stock at a purchase price of $3.75 per share. The Warrant
is subject to a registration rights agreement. Eagle-Picher exercised the
Warrant in March 2000 under a 'net-exercise' provision entitling it to receive
3,130,435 shares of common stock. These shares are subject to a prorated
reduction to the extent Eagle-Picher does not deliver the required 200 kilograms
of silicon-28 during calendar year 2000.

    Related to, but separate from, the sale of the depleted zinc business, we
contemporaneously signed a ten-year Supply Agreement by which we will have the
exclusive right to purchase quantities of isotopically pure silicon-28,
silicon-29, and silicon-30, and a non-exclusive right to purchase quantities of
isotopically pure carbon-12 and carbon-13 produced by Eagle-Picher from its
Oklahoma-based facilities. As partial consideration for the exclusivity
provision, we agreed to pay Eagle-Picher a fee equal to 3.0% of the net revenues
from all sales made by us of products incorporating enriched silicon isotopes
supplied by Eagle-Picher. The ability of Eagle-Picher to produce isotopes
meeting the specifications of the Supply Agreement is contingent upon
Eagle-Picher successfully beginning production of silicon-28 as scheduled in
March 2000. As of June 30, 2000, Eagle-Picher had not delivered any silicon-28
to us.

                                       26

    ZINC RECOVERY AND RECYCLING BUSINESS OPPORTUNITY.  On May 1, 2000, we
substantially reorganized Interpro, our Golden, Colorado based wholly-owned
subsidiary, to focus on one specific application--the recovery and recycling of
zinc metal from various sources including: galvanized steel scrap, electric arc
furnace dust, and brass scrap. We chose this course of action for two reasons.
First, we believe the market potential for this and related processes is
significant. Second, the profound and lengthy slump in the mineral processing
and mining industries has significantly eroded Interpro's historical customer
base. We will continue to meet the demands of a few remaining customers through
various sub-contractor relationships. We will also keep the physical
infrastructure in place at our Golden location to allow reentry into Interpro's
historical markets, if market conditions warrant. Currently, we are using a
significant portion of this infrastructure in our zinc recovery and recycling
project.

RESULTS OF OPERATIONS

    The following table sets forth, for the periods indicated, certain statement
of operations data expressed as a percentage of net revenues. The table and the
discussion below should be read in conjunction with the audited financial
statements and the notes thereto appearing elsewhere in this report.



                                                                    YEAR ENDED
                                                                    APRIL 30,
                                                              ----------------------
                                                                2000          1999
                                                              --------      --------
                                                                      
Net revenues................................................   100.0 %       100.0 %
Cost of revenues............................................    79.8          78.7
                                                               -----         -----
    Gross margin............................................    20.2          21.3

Operating expenses:
  Selling, general and administrative.......................    29.1          21.4
  Research and development..................................     9.6           6.8
  Restructuring & office closure............................     0.4           4.1
                                                               -----         -----
    Total operating expenses................................    39.1          32.3
                                                               -----         -----
Operating (loss)............................................   (18.9)        (11.0)
Other income (expense), net.................................    41.0          (2.8)
                                                               -----         -----
Income (loss) before extraordinary item and income taxes....    22.1         (13.8)
Income tax expense..........................................     1.0           1.0
                                                               -----         -----
Net income (loss)...........................................    21.1 %       (14.8)%
                                                               =====         =====


NET REVENUES

    Net revenues decreased from $16,998,000 in fiscal 1999 to $12,733,000 in
fiscal 2000, a decrease of $4,265,000 or 25.1%. The decrease is primarily
because of the sale of our depleted zinc business to Eagle-Picher in
December 1999, and reduced revenue from our contract research and process
development operations. Depleted zinc revenues in fiscal 2000 were $2,645,000,
as compared to fiscal 1999 revenues of $5,959,000, a decrease of $3,314,000, or
55.6%. This decrease is attributable to only having approximately seven months
of sales in fiscal 2000, because of the Eagle-Picher transaction, versus twelve
months of sales in fiscal 1999. Interpro's fiscal 2000 revenues were $1,156,000,
as compared to fiscal 1999 revenues of $2,614,000, a decrease of $1,458,000, or
55.8%. We will have no revenues from depleted zinc or Interpro in fiscal 2001,
because we have sold our depleted zinc business, and have ceased
revenue-generating operations at our Interpro subsidiary to focus Interpro's
resources exclusively on developing a zinc recovery and recycling technology.
Both the depleted zinc sale and the zinc recovery and recycling process project
are described above. SEE "RECENT TRANSACTIONS."

                                       27

    International sales represented approximately 65% of revenues in fiscal
2000, and 60% of revenues in fiscal 1999. This increase is primarily
attributable to significantly lower domestic revenues from Interpro, which were
partially offset by increased domestic sales of stable isotopes (excluding
depleted zinc). Lower depleted zinc sales had a comparable effect on both
international and domestic sales.

    We did not have significant revenues from sales of silicon-28 based products
in the fiscal year ended April 30, 2000, and we do not expect significant
revenues from silicon-28 based products in fiscal 2001, as we are continuing our
research and development efforts in this area. We are collaborating with
academia and industry to evaluate the benefits of isotopically pure silicon-28.
We believe that if evaluations demonstrate the commercial feasibility of one or
more silicon-28 products, demand could emerge in certain segments of the
semiconductor market. We can offer no assurance, however, that these evaluations
will demonstrate the commercial feasibility of any products, that we will be
able to commercialize any such products, or that a market will emerge for any
such products.

GROSS MARGIN

    Gross margin decreased approximately $1,046,000 to approximately $2,577,000
in fiscal 2000, from approximately $3,623,000, in fiscal 1999. On a percentage
of net revenues basis, gross margin decreased 1.1 percentage points to
approximately 20.2% in fiscal 2000, from approximately 21.3% in fiscal 1999. The
dollar and percentage point decreases are primarily because of reduced sales of
depleted zinc, typically a higher margin product, and an increase in stable and
radioisotope revenues generated by both Isonics and Chemotrade. Stable isotopes
typically have lower margins because of more sales competition.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

    Selling, general and administrative expenses increased on a dollar basis by
approximately $55,000 to $3,698,000, in fiscal 2000 from $3,643,000 in fiscal
1999. Selling, general and administrative expenses increased on a percentage of
net revenues basis by 7.7 percentage points to 29.1% of net revenues in fiscal
2000, from 21.4% of net revenue in fiscal 1999. The dollar increase in selling,
general and administrative expenses is primarily attributable to increased
compensation expense and professional service fees at the corporate level. The
percentage of net revenues increase is primarily attributable to lower net
revenues ($12,733,000 in fiscal 2000, and $16,998,000 in fiscal 1999).

RESEARCH AND DEVELOPMENT EXPENSES

    Research and development expenses increased on a dollar basis by
approximately $69,000 to $1,224,000, in fiscal 2000 from $1,155,000 in fiscal
1999. Research and development expenses increased on a percentage of net
revenues basis by 2.8 percentage points to 9.6% of net revenues in fiscal 2000
from 6.8% of net revenue in fiscal 1999.

    In fiscal 2000, we focused our efforts primarily on silicon-28 development
projects including the construction of a silane gas processing facility in
Golden, Colorado, and the zinc recovery and recycling project. We have ceased
our projects related to depleted zinc and carbon-13 recovery.

    As described above, we signed a long-term isotope supply agreement with
Eagle-Picher, and Eagle-Picher is obligated to supply us with 200 kilograms of
silicon-28 in 2000. The silicon-28 will be used to further development of our
semiconductor materials business. Since we purchased the 200 kilograms of
silicon-28 by issuing a warrant to Eagle-Picher to purchase 4,000,000 shares of
stock, as we use the silicon-28 we will recognize an expense of $25 per gram of
silicon-28 received. This is the price we most recently paid for silicon-28 from
another supplier.

    We believe that the development and introduction of new product applications
are critical to our future success and we expect that research and development
expenses will increase (as measured in

                                       28

dollars) in the near term because of the timing of material usage and outside
services, but will likely continue to vary as a percentage of revenues because
of the timing and amount of future revenues.

RESTRUCTURING AND OFFICE CLOSURE

    On October 31, 1998, we announced a restructuring of our operation and
relocation of our headquarters to Golden, Colorado, the location of our
subsidiary, Interpro. We recorded a $691,000 charge in fiscal 1999 in connection
with the restructuring.

    As of April 30, 2000, the only significant restructuring cost remaining are
the lease payments on the former San Jose, California office, which has been
sublet for the remaining term of our lease. The net liability is estimated to be
approximately $47,000 and will be incurred over the next four years. The $56,000
expense in fiscal 2000 was primarily related to moving costs incurred by two
senior executives.

OTHER INCOME (EXPENSE), NET

    Other income (expense), net, includes interest income and expense,
amortization of debt issuance costs and the fair value of warrants issued in
connection with debt, foreign currency exchange gains and losses, and in fiscal
2000, the gain on the sale of the depleted zinc business to Eagle-Picher. The
gain recognized in fiscal 2000 from the sale of the depleted zinc line of
business was approximately $5,296,000. Excluding this amount, Other income
(expense), net, in fiscal 2000 was approximately ($77,000) a decrease in expense
of approximately $407,000 from ($484,000) in fiscal 1999. The decrease in
expense is primarily attributable to lower interest expense (net of interest
income) at the corporate level, as there were no significant borrowings after
November 1999, a period of five months. Also in fiscal 2000, we recognized a
gain of $110,000 resulting from the favorable settlement of a dispute with a
vendor.

INCOME TAXES

    The consolidated entity had income tax expense of $129,000 for fiscal 2000,
and income tax expense of $171,000 for fiscal 1999. The income tax expense in
fiscal 2000 resulted primarily from the gain on the sale of the depleted zinc
business, which was reduced by available net operating loss carryforwards and
the current year domestic operating loss. We also recognized tax expense of
$31,000 related to net income generated by our Chemotrade subsidiary. The income
tax expense in fiscal 1999 resulted from our Chemotrade subsidiary, which had
net income in fiscal 1999, and paid income taxes in Germany. However, both
United States-based entities had net losses in fiscal 1999 and did not have
income tax expense. A valuation allowance has been provided against a portion of
our deferred tax assets for which realization is uncertain. We are exploring
various tax minimization strategies in an effort to conserve future cash flows.

NET INCOME (LOSS)

    We recognized net income of $2,689,000 million for the fiscal year ended
April 30, 2000, as compared to a net loss of $2,521,000 million for the fiscal
year ended April 30, 1999. Net income in fiscal 2000 was primarily because of
the gain of $5,296,000 million on the sale of our depleted zinc business to
Eagle-Picher in December 1999, a transaction that will not recur. Without that
one-time gain, we would likely have recognized a net loss.

    Net income in future years will be dependent on our ability to increase net
revenues while decreasing our selling, general and administrative expenses;
research and development expense; and other expenses as a percentage of net
revenues. Because of our continuing research and development efforts on new
products, we do not expect to generate any significant increase in net revenues
in fiscal 2001, and as a result, anticipate that the current (2001) fiscal
year's operations will result in a significant loss.

                                       29

LIQUIDITY AND CAPITAL RESOURCES

    As a result of the sale of the depleted zinc business to Eagle-Picher on
December 1, 1999, our liquidity has been significantly improved.

    Since inception, our principal sources of funding have been cash from
operations, borrowed funds and sales of Common Stock and Convertible Preferred
Stock. We used cash in operating activities of approximately $4,327,000 during
fiscal 2000. We generated cash in operating activities of approximately $357,000
during fiscal 1999.

    The primary negative influence on fiscal 2000 cash flow from operating
activities was the gain on the sale of the depleted zinc business of
approximately $5,296,000.

    Significant positive influences on fiscal 2000 operating cash flow included:

    - net income of approximately $2,689,000;

    - an increase in taxes payable of $323,000;

    - non-cash charges for depreciation and amortization expense of $567,000;
      and

    - non-cash charges related to debt restructuring and deferred compensation
      of $160,000.

    Significant other negative influences on fiscal 2000 cash flow included:

    - an increase in accounts and notes receivable of $146,000;

    - an increase in inventories prior to the Eagle-Picher transaction of
      $1,066,000;

    - an increase in prepaid expenses and other assets of $139,000;

    - a deferred tax benefit of $640,000;

    - a decrease in accounts payable of $522,000; and

    - a decrease in accrued liabilities of $336,000.

    At April 30, 2000, we had approximately $3,385,000 of cash and cash
equivalents, an increase of $2,933,000, compared to approximately $452,000 at
April 30, 1999. At April 30, 2000, we had positive working capital of
approximately $3,754,000, an increase of $6,071,000, from negative working
capital of approximately $2,317,000, at April 30, 1999. These increases are
primarily the result of the sale of our depleted zinc business to Eagle-Picher.
Factors resulting in our lower fiscal 1999 cash equivalents included our cash
payments for the acquisition of Chemotrade and the losses incurred in fiscal
1999. During fiscal 1999, we paid the sellers of Chemotrade approximately
$1,686,000 in cash, and had one note for approximately $826,000 outstanding due
to the sellers on April 30, 1999. This note was repaid in fiscal 2000.

    Financing activities provided cash of $545,000 in fiscal 2000, and used cash
of $244,000 in fiscal 1999. In fiscal 2000, we had proceeds from the issuance of
preferred stock of approximately $2,250,000. We used approximately $1,931,000 to
pay our line of credit and other borrowings. In fiscal 1999, the primary use of
cash was the excess of repayments of debt, $1,000,000 over proceeds of debt,
$717,000.

    On July 29, 1999, we completed a private placement financing to accredited
investors and certain creditors valued in total at approximately $2,745,000. We
issued 1,830,000 units, each consisting of one share of Series A Convertible
Preferred Stock and one warrant. We received $2,250,000 in cash proceeds and
converted $425,000 of long-term debt in connection with the private placement.
Each share of the Series A Convertible Preferred Stock is convertible into one
share of our Common Stock. The liquidation preference for the Series A
Convertible Preferred Stock is $1.50. Each warrant allows the investor to
purchase one share of Isonics Common Stock for $3.75 through July 29, 2002. We
granted certain

                                       30

registration rights to the holders of the shares of common stock underlying the
Class A Convertible Preferred Stock and the warrants.

    In addition to converting $425,000 of existing debt into equity as part of
the private placement we:

    - Issued 500,000 warrants to purchase shares of our Common Stock to an
      investment banker as a commission on this placement. The warrants are
      exercisable at $3.75 per share through July 29, 2002.

    - Issued 46,667 units in satisfaction of all current and future obligations
      under the Isoserve royalty agreement.

    - Extended the payment due date for the remaining balance on the Chemotrade
      acquisition note to July 2000, which note has been paid in full.

    - Extended the payment due date for certain unsecured promissory notes to
      January 2000, which notes have been paid in full.

    Our investing activities provided cash of approximately $6,715,000 in fiscal
2000. Our investing activities used cash of approximately $705,000 in fiscal
1999. Investing activities in fiscal 2000 were primarily the sale of our
depleted zinc business to Eagle-Picher, which provided cash of approximately
$6,730,000. Uses of cash in fiscal 1999 included approximately $159,000 for
property and equipment, and $546,000 net cash used in the Chemotrade
acquisition.

    On July 24, 1998, we obtained a $3,000,000 asset based credit facility for
our U.S. operations, secured by our U.S. assets, with an unaffiliated lender,
Coast Business Credit ("Coast"). The proceeds of that facility were used to
repay approximately $537,000 of debt outstanding and $742,000 of accounts
payable. At April 30, 1999, and subsequently until December 1, 1999, we were in
default of our borrowing agreements with Coast, and on December 1, 1999, we had
approximately $215,000 of outstanding borrowings. We used some of the proceeds
of the depleted zinc business sale described above to pay off the Coast
borrowings and our relationship with Coast has been terminated.

    Chemotrade has one unsecured revolving line of credit for DM 400,000
(approximately $187,000), at April 30, 2000. We are evaluating alternative
secured credit facilities for Chemotrade.

    On June 13, 2000, we offered to the holders of the outstanding warrants
issued in our public offering (the "Class A Warrants") the opportunity to
exchange their Class A Warrants for Class B Warrants. The exercise price for the
Class B Warrants, $5.80 per share, is the same as that of the Class A Warrant.
If a Class B Warrant is exercised before its expiration date (September 30,
2000), we will issue one share of Common Stock and one Class C Warrant. The
Class C Warrants expire June 15, 2003, are exercisable for one share of Common
Stock at a price of $10.00 per share, and are redeemable if our Common Stock
trades at or above $15.00 per share for any 20 of 30 consecutive trading days.

    We believe that our current cash position, attributable to the proceeds
received from the sale of our depleted zinc business and the reduced levels of
debt associated therewith, will be sufficient to fund operations for more than
the next twelve months. However, our long-term capital requirements will only be
met if we are able to generate profits from operations and positive cash flows,
or develop new sources of financing of which there can be no assurance.

    We anticipate that our working capital will decrease significantly during
fiscal 2001 as we continue our expenditures for selling, general and
administrative expenses; research and development expenses; and other expenses,
without significantly increasing our net revenues. We will be dependent on our
ability to generate a significant amount of revenues from our anticipated new
products to generate positive cash flow from operations in future years although
we can offer no assurance that we will be successful in so doing. We expect our
existing working capital coupled with anticipated revenues from operations will
be sufficient to finance our anticipated operating and capital expenditures
during our current (2001) fiscal

                                       31

year. To the extent we need additional capital before our revenues increase to
the extent necessary to finance our operations we will be dependent on our
ability to raise additional debt or equity financing. If we need to raise
additional financing, we can offer no assurance that such financing will be
available on commercially reasonable terms, if at all.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

    In evaluating our business, readers of this report should carefully consider
the following factors in addition to the other information presented in this
report and in our other reports filed with the SEC that attempt to advise
interested parties of the risks and factors that may affect our business.

RELATIONSHIP WITH CERTAIN SUPPLIERS AND AVAILABILITY OF RAW MATERIALS

    Related to, but separate from, the sale of the depleted zinc business, we
contemporaneously signed a ten-year Supply Agreement by which we will have the
exclusive right to purchase quantities of isotopically pure silicon-28,
silicon-29, and silicon-30, and a non-exclusive right to purchase quantities of
isotopically pure carbon-12 and carbon-13 produced by Eagle-Picher from its
current and planned facilities in Oklahoma. As partial consideration for the
exclusivity provision, we agreed to pay Eagle-Picher a fee equal to 3.0% of the
net revenues from all sales made by us of products incorporating enriched
silicon isotopes supplied by Eagle-Picher. We believe the ability of
Eagle-Picher to produce isotopes meeting the specifications of the Supply
Agreement is contingent upon Eagle-Picher successfully beginning production of
silicon-28. As of June 30, 2000, Eagle-Picher has not delivered any silicon-28.
Unanticipated problems in bringing their production facility online are the
reasons expressed by Eagle-Picher for this delay. Eagle-Picher's management has
assured us that they will meet their production requirements.

OPERATIONS IN RUSSIA, UZBEKISTAN, AND THE REPUBLIC OF GEORGIA

    Operations in Russia, Uzbekistan, and the Republic of Georgia ("Georgia")
entail certain risks. Recently, the former republics of the Soviet Union,
including Uzbekistan and Georgia, have experienced political, social and
economic change as they sought independence from the former central government
in Moscow, and certain of the republics, including Russia, Uzbekistan, and
Georgia, have attempted to transition from a central controlled economy toward a
market-based economy. These changes have involved, in certain cases, armed
conflict. There can be no assurance that political or economic instability in
these republics will not continue or worsen. The supply of stable isotopes could
be directly affected by political, economic and military conditions in Russia,
Uzbekistan, and Georgia. Accordingly, our operations could be materially
adversely affected if hostilities in Russia should occur, if trade between
Russia, Uzbekistan, or Georgia and the United States were interrupted, if
political conditions in Russia, Uzbekistan, or Georgia disrupt transportation or
processing of our goods, if laws or government policies concerning foreign
business operations in Russia, Uzbekistan, or Georgia change substantially, or
if tariffs are introduced.

DEPENDENCE ON FUTURE PRODUCT DEVELOPMENT

    On December 1, 1999, we sold our depleted zinc business, which had provided
35% of our revenues in fiscal 1999, and 21% of our revenues in fiscal 2000. As a
result, our future operations will be more heavily dependent upon our ability to
develop new products using stable and radioisotopes and market and sell those
products profitably. While we have a high degree of confidence that we can be
successful, we can expect to incur significant operating losses until we are
able to do so. Our ability to develop, market and sell these products will
depend on our suppliers' (including Eagle-Picher) ability to meet our demand for
stable and radioisotopes, as well as, other suppliers who modify the chemical
and physical forms of these isotopes. There can be no assurance that we will be
able to develop products that can be profitably marketed and sold.

                                       32

CUSTOMER CONCENTRATION

    Prior to fiscal 1999, substantially all of our net revenues in any
particular period were attributable to a limited number of customers, primarily
General Electric Corporation. Consistent with our historical experience, our
quarterly results during fiscal year 2000 were affected materially by the level
of orders received from a limited number of significant depleted zinc users
during such quarters and product shipments by us to our depleted zinc customers
during such period. Despite the sale of the depleted zinc business, we continue
to be subject to a certain degree of variability based on the timing of sales of
our stable and radioisotopes orders. We cannot be assured that our principal
customers will continue to purchase our products. A decrease in or loss of
orders from one or more major customers would have a material and adverse effect
on our financial condition and results of operations. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS" AND "BUSINESS."

    While our goal is to diversify our customer base, we expect to continue to
depend upon a relatively small number of customers for a significant percentage
of our revenues for the foreseeable future. Significant reductions in sales to
any of our large customers have had and may in the future have a material
adverse effect on us. We cannot guarantee that present or future customers will
not terminate their arrangements with us or significantly change, reduce or
delay the amount of manufacturing services ordered from us. A termination of a
manufacturing relationship or change, reduction or delay in orders could harm
us.

FACTORS AFFECTING OPERATING RESULTS; VARIABILITY OF ORDERS

    We operate with little backlog. A significant portion of our net revenues
have been, and we believe will continue to be, derived from a limited number of
orders that are processed and shipped in the same quarter in which the orders
are received. The timing of such orders and their fulfillment has caused, and is
likely to continue to cause, material fluctuations in our operating results. Our
expense levels are relatively fixed, and as has been the case in prior quarters,
these factors will affect our operating results for future periods.

MANAGEMENT OF GROWTH

    We have experienced periods of rapid growth that have placed a significant
strain on our financial and managerial resources. Our ability to manage growth
effectively, particularly given our increasing scope of operations, will require
us to continue to implement and improve our management, operational, and
financial information systems, as well as to develop the management skills of
our personnel and to train, motivate and manage our employees. Our failure to
effectively manage growth could have a material adverse effect on our business,
financial condition and results of operations.

DEPENDENCE ON KEY PERSONNEL

    Our future success will depend in significant part upon the continued
service of our key technical, sales and senior management personnel, including
James E. Alexander, our President and Chief Executive Officer; Boris
Rubizhevsky, our Senior Vice President, Isotope Production and Supply; Robert
Cuttriss, President of Interpro; and Herbert Hegener, Managing Director of
Chemotrade. We maintain $1 million of key man life insurance on the lives of
Messrs. Alexander, Rubizhevsky and Cuttriss and each is covered by an employment
agreement extending through September 2001, 2001, and 2003, respectively.
Mr. Hegener is covered by an employment agreement extending through the year
2001. We believe that our future success will depend in large part upon our
ability to attract and retain qualified personnel for our operations. The
failure to attract or retain such persons could materially adversely affect our
business, financial condition and results of operations.

                                       33

VOLATILITY OF STOCK PRICE

    The trading price of our securities has been subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, our
announcements of technological innovations or new products or actions of our
competitors, and other events or factors. In addition, the stock market has
experienced wide price and volume fluctuations, which have at times been
unrelated to the operating performance of the companies whose securities are
traded. These broad market fluctuations may adversely affect the market price of
our common stock and common stock warrants.

SHARES ELIGIBLE FOR FUTURE SALE

    Our officers and directors, and all other stockholders have agreed, pursuant
to lock-up agreements expiring September 2000, that without the prior written
consent of Monroe Parker Securities, Inc. (the "Representative") and the
Company, that they will not sell or otherwise dispose of common stock
beneficially owned by them. We were advised by officials of the Representative,
that on December 22, 1997, the Representative ceased market-making activities;
therefore, we may, in the future at our sole discretion and without the
Representative's consent, release a portion of securities subject to these
lock-up agreements.

    Our stock price may be hurt by future sales of our shares or the perception
that such sales may occur. As of July 14, 2000, approximately 8,973,886 shares
of Common Stock held by existing stockholders constitute "restricted shares" as
defined in Rule 144 under the Securities Act. These shares may only be sold if
they are registered under the Securities Act or sold under Rule 144 or another
exemption from registration under the Securities Act. Sales under Rule 144 are
subject to the satisfaction of certain holding periods, volume limitations,
manner of sale requirements, and the availability of current public information
about us.

    Of our restricted shares, 5,843,451 shares of Common Stock are either
eligible for sale pursuant to Rule 144, or have been registered under the
Securities Act for resale by the holders, leaving only the 3,130,435 shares held
by Eagle-Picher that are not available for resale. We are unable to estimate the
amount, timing or nature of future sales of outstanding Common Stock. Sales of
substantial amounts of our Common Stock in the public market may hurt the
stock's market price.

ITEM 7.  FINANCIAL STATEMENTS

    The information required by this item begins on page F-1 of Part III of this
Report on Form 10-KSB and is incorporated into this part by reference.

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSURE

    Not applicable.

                                       34

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

    The information required by this item is incorporated by reference from the
information under the captions "Election of Directors," "Executive Officers" and
"Section 16(a) Beneficial Ownership Compliance" contained in the Company's
Definitive Proxy Statement for Annual Meeting of Stockholders to be filed with
the Securities and Exchange Commission no later than August 28, 2000, (the
"Proxy Statement").

ITEM 10.  EXECUTIVE COMPENSATION

    The information required by this item is incorporated by reference from the
information under the caption "Executive Compensation" contained in the Proxy
Statement.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The information required by this item is incorporated by reference from the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" contained in the Proxy Statement.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required by this item is incorporated by reference from the
information under the caption "Certain Transactions" contained in the Proxy
Statement.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

    (a) Exhibits Pursuant to Item 601 of Regulation S-B:



     EXHIBIT NO.                                   TITLE
     -----------        ------------------------------------------------------------
                     
     3.01               [Reserved]
     3.02               Registrant's Bylaws. (1)
     3.03               Registrant's Amended and Restated Articles of
                         Incorporation. (1)
     4.01               Specimen Common Stock Certificate. (1)
     4.02               Form of Representatives' Warrant Agreement. (1)
     4.03               Form of Warrant Agreement between the Registrant and
                         Continental Stock Transfer & Trust Company, Monroe Parker
                         Securities. (1)
     4.04               Specimen Warrant Certificate. (1)
    10.01               Registrant's 1996 Stock Option Plan. (1)(2)
    10.02               Form of Employment Agreement between the Registrant and
                         certain officers of the Registrant. (1)(2)
    10.03               Registrant's 1996 Executives Equity Incentive Plan. (1)(2)
    10.04               Registrant's 1996 Equity Incentive Plan. (1)(2)
    10.05               Memorandum of Agreement between Electrochemical Plant, AO
                         Techsnabexport, Co., Ltd. and Registrant. (1)
    10.06               Option Agreement between the Registrant and Yale
                         University. (1)
    10.07               Office Lease Agreement between Paulsen Properties and the
                         Registrant dated as of January 1, 1996, as amended. (1)
    10.08               Letter from Yale University to Registrant dated
                         February 10, 1996. (1)
    10.09               Form of Indemnity Agreement to be entered into by Registrant
                         with each of its directors and investors. (1)(2)


                                       35




     EXHIBIT NO.                                   TITLE
     -----------        ------------------------------------------------------------
                     
    10.10               Stock Purchase Agreement, dated as of April 30, 1998, among
                         Isonics Corporation, a California corporation, Metallurgy
                         International, Pty Ltd., a Nevada corporation, and
                         International Process Research Corporation, a Colorado
                         corporation. (3)
   10.10.1              Escrow Agreement, dated as of May 15, 1998, among Isonics
                         Corporation, a California corporation, Metallurgy
                         International, Pty Ltd., a Nevada corporation, Robert H.
                         Cuttriss (as Agent), and Colorado Business Bank, as Escrow
                         Agent. (3)
    10.11               Registration Rights Agreement dated as of September 27, 1996
                         by and among Registrant and certain investors. (1)
    10.12               Employment Agreement between the Registrant and James E.
                         Alexander. (1)(2)
    10.13               Employment Agreement between the Registrant and Boris
                         Rubizhevsky. (1)(2)
    10.14               Security Agreement dated March 31, 1995 between the Company
                         and Isoserve, Inc. (1)
    10.15               Consulting Agreement between the Registrant and Larry Wells
                         Co., Inc. (1)(2)
    10.16               February 1997 Agreement between the Registrant,
                         Electrochemical Plant and AO Techsnabexport,
                         Co., Ltd. (1)
    10.17               Letter from Yale University to Registrant dated January 28,
                         1997. (1)
    10.18               Certificate of Determination of Preferences and Rights of
                         the Series A Preferred Stock. (4)
    10.19               Form of Subscription Agreement. (4)
    10.20               Form of Warrant. (4)
    10.21               Investment Banking Agreement. (4)
    10.22               Form of Registration Rights Agreement. (4)
    23.10               Consent of independent accountants
    27.01               Financial Statement Schedule.


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

(1) Incorporated herein by reference to exhibit filed with the Company's
    Registration Statement on Form SB-2 ("Registration Statement"). File
    No. 333-13289 in which this exhibit bears the same number.

(2) Items that are management contracts or compensatory plans or arrangements
    required to be filed as exhibits pursuant to Item 13(a) of Form 10-KSB.

(3) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531), dated
    May 15 and filed May 27, 1998, and incorporated herein by reference.

(4) Filed with Isonics' Current Report on Form 8-K (File No. 001-12531), dated
    July 29 and filed August 12, 1999, and incorporated herein by reference.

    (b) Reports on Form 8-K.

        No Reports on Form 8-K were filed by the Company in the quarter ended
    April 30, 2000, or
       subsequently.

                                       36

                                   SIGNATURES

    In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

    July 28, 2000

                                                      
                                                       ISONICS CORPORATION,
                                                       a California Corporation

                                                       By:            /s/ JAMES E. ALEXANDER
                                                            -----------------------------------------
                                                                        James E. Alexander
                                                              PRESIDENT, CHIEF EXECUTIVE OFFICER AND
                                                                      CHAIRMAN OF THE BOARD



    Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:



                      SIGNATURE                                 NAME AND TITLE               DATE
                      ---------                                 --------------               ----
                                                                                   
               /s/ JAMES E. ALEXANDER                  Principal Executive Officer
     -------------------------------------------         Chairman of the Board           July 28, 2000
                 James E. Alexander                      Director

                /s/ BORIS RUBIZHEVSKY
     -------------------------------------------       Vice Chairman                     July 28, 2000
                  Boris Rubizhevsky                      Director

               /s/ LINDSAY A. GARDNER
     -------------------------------------------       Director                          July 28, 2000
                 Lindsay A. Gardner

                 /s/ RICHARD PARKER
     -------------------------------------------       Director                          July 28, 2000
                   Richard Parker

                 /s/ LARRY J. WELLS
     -------------------------------------------       Director                          July 28, 2000
                   Larry J. Wells

              /s/ BRANTLEY J. HALSTEAD                 Principal Financial Officer
     -------------------------------------------         Principal Accounting Officer    July 28, 2000
                Brantley J. Halstead                     Chief Financial Officer


                                       37

                                   SIGNATURES

    In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                                      
                                                       ISONICS CORPORATION,
                                                       a California Corporation

                                                       By:            /s/ JAMES E. ALEXANDER
                                                            -----------------------------------------
                                                                        James E. Alexander
                                                              PRESIDENT, CHIEF EXECUTIVE OFFICER AND
                                                                      CHAIRMAN OF THE BOARD



    Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:



                        NAME                                        TITLE                    DATE
                        ----                                        -----                    ----
                                                                                   
               /s/ JAMES E. ALEXANDER
     -------------------------------------------       Principal Executive Officer       July 28, 2000
                 James E. Alexander                      Chairman of the Board Director

                /s/ BORIS RUBIZHEVSKY
     -------------------------------------------       Vice Chairman                     July 28, 2000
                  Boris Rubizhevsky                      Director

               /s/ LINDSAY A. GARDNER
     -------------------------------------------       Director                          July 28, 2000
                 Lindsay A. Gardner

                 /s/ RICHARD PARKER
     -------------------------------------------       Director                          July 28, 2000
                   Richard Parker

                 /s/ LARRY J. WELLS
     -------------------------------------------       Director                          July 28, 2000
                   Larry J. Wells

              /s/ BRANTLEY J. HALSTEAD                 Principal Financial Officer
     -------------------------------------------         Principal Accounting Officer    July 28, 2000
                Brantley J. Halstead                     Chief Financial Officer


                                       38

                      ISONICS CORPORATION AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                PAGE
                                                              --------
                                                           
Report of Independent Certified Public Accountants..........    F-2

Consolidated Financial Statements...........................

  Consolidated Balance Sheets...............................    F-3

  Consolidated Statements of Operations.....................    F-4

  Consolidated Statement of Stockholders' Equity............    F-5

  Consolidated Statements of Cash Flows.....................    F-6

  Notes to Consolidated Financial Statements................    F-7


                                      F-1

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors

Isonics Corporation and Subsidiaries

We have audited the accompanying consolidated balance sheets of Isonics
Corporation and Subsidiaries as of April 30, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Isonics
Corporation and Subsidiaries as of April 30, 2000 and 1999, and the consolidated
results of their operations and their consolidated cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.

GRANT THORNTON LLP

San Jose, California
June 26, 2000

                                      F-2

                      ISONICS CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)



                                                                   APRIL 30,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
                           ASSETS
CURRENT ASSETS:
  Cash and cash equivalents.................................  $ 3,385    $   452
  Accounts receivable (net of allowances of $119 and $82,
    respectively)...........................................    1,055        932
  Note receivable...........................................      208         --
  Inventories...............................................      266        651
  Prepaid expenses..........................................      209        160
  Deferred income taxes, current............................      148         --
                                                              -------    -------
    Total current assets....................................    5,271      2,195
PROPERTY AND EQUIPMENT, net.................................      660      1,018
GOODWILL, net...............................................    3,062      3,388
NOTES RECEIVABLE FROM SHAREHOLDERS..........................       17        130
DEFERRED INCOME TAXES.......................................      492         --
OTHER ASSETS................................................       31         75
                                                              -------    -------
                                                              $ 9,533    $ 6,806
                                                              =======    =======
            LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Current portion of long-term debt and line of credit......  $    20    $ 1,136
  Notes payable to related parties..........................       --        922
  Accounts payable..........................................      533      1,368
  Accrued liabilities.......................................      591      1,036
  Income taxes payable......................................      373         50
                                                              -------    -------
    Total current liabilities...............................    1,517      4,512
STOCKHOLDERS' EQUITY
  Class A Preferred Stock--no par value; 10,000,000 shares
    authorized; shares issued and outstanding:
    2000--1,830,000.........................................    2,745         --
  Common stock--no par value; 20,000,000 shares authorized;
    shares issued and outstanding: 2000--10,492,931;
    1999--6,607,760.........................................    6,764      6,795
  Notes receivable from shareholders........................       --       (469)
  Deferred compensation.....................................     (150)        --
  Accumulated deficit.......................................   (1,343)    (4,032)
                                                              -------    -------
    Total stockholders' equity..............................    8,016      2,294
                                                              -------    -------
                                                              $ 9,533    $ 6,806
                                                              =======    =======


                See Notes to Consolidated Financial Statements.

                                      F-3

                      ISONICS CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)



                                                                  YEAR ENDED
                                                                   APRIL 30,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
Net revenues................................................  $12,733    $16,998
Cost of revenues............................................   10,156     13,375
                                                              -------    -------
  Gross margin..............................................    2,577      3,623
Operating expenses:
  Selling, general and administrative.......................    3,698      3,643
  Research and development..................................    1,224      1,155
  Restructuring and office closure..........................       56        691
                                                              -------    -------
    Total operating expenses................................    4,978      5,489
                                                              -------    -------
Operating loss..............................................   (2,401)    (1,866)
Other income (expense)
  Interest income...........................................      105         36
  Interest expense..........................................     (321)      (575)
  Gain on sale of product line..............................    5,296         --
  Foreign currency gain.....................................       29         55
  Other.....................................................      110         --
                                                              -------    -------
    Total other income (expense), net.......................    5,219       (484)
                                                              -------    -------
Income (loss) before taxes..................................    2,818     (2,350)
Income tax expense..........................................      129        171
                                                              -------    -------
NET INCOME (LOSS)...........................................  $ 2,689    $(2,521)
                                                              =======    =======
NET INCOME (LOSS) PER SHARE--BASIC
  Net income (loss) per share...............................  $  0.40    $ (0.41)
  Shares used in computing per share information............    6,781      6,210
NET INCOME (LOSS) PER SHARE--DILUTED
  Net income (loss) per share...............................  $  0.26    $ (0.41)
  Shares used in computing per share information............   10,409      6,210


                See Notes to Consolidated Financial Statements.

                                      F-4

                      ISONICS CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)



                               PREFERRED STOCK          COMMON STOCK        SHAREHOLDER
                             --------------------   ---------------------      NOTES        DEFERRED      (ACCUMULATED
                              SHARES      AMOUNT      SHARES      AMOUNT    RECEIVABLE    COMPENSATION      DEFICIT)      TOTAL
                             ---------   --------   ----------   --------   -----------   -------------   ------------   --------
                                                                                                 
BALANCES, May 1, 1998......         --    $   --     5,714,250    $5,289       $(337)         $  --         $(1,511)     $ 3,441

  Issuance of common stock
    for Chemotrade
    acquisition............         --        --       357,730       894          --             --              --          894

  Issuance of common stock
    in lieu of salaries....         --        --       118,182       130          --             --              --          130

  Conversion of debt into
    common stock...........         --        --       127,209       191          --             --              --          191

  Exercise of stock options
    and warrants...........         --        --       290,389       147        (130)            --              --           17

  Fair value of warrants
    issued with debt.......         --        --            --       144          --             --              --          144

  Interest on notes
    receivable from
    stockholders, net of
    repayments.............         --        --            --        --          (2)            --              --           (2)

  Net loss.................         --        --            --        --          --             --          (2,521)      (2,521)
                             ---------    ------    ----------    ------       -----          -----         -------      -------

BALANCES, April 30, 1999...         --        --     6,607,760     6,795        (469)            --          (4,032)       2,294

  Issuance of preferred
    stock..................  1,830,000     2,745            --        --          --             --              --        2,745

  Exercise of stock options
    and warrants...........         --        --     3,918,986        81          --             --              --           81

  Fair value of warrants
    issued for debt
    restructuring..........         --        --            --       157          --             --              --          157

  Fair value of stock
    issued for services as
    deferred
    compensation...........         --        --        25,000       153          --           (153)             --           --

  Amortization of deferred
    compensation...........         --        --            --        --          --              3              --            3

  Shares issued under
    Employee Stock Purchase
    Program................         --        --        13,723        13          --             --              --           13

  Repayment of notes
    receivable from
    stockholders, net of
    interest...............         --        --            --        --          34             --              --           34

  Repayment of notes
    receivable and accrued
    interest with common
    stock..................         --        --       (72,538)     (435)        435             --              --           --

  Net income...............         --        --            --        --          --             --           2,689        2,689
                             ---------    ------    ----------    ------       -----          -----         -------      -------

BALANCES, April 30, 2000...  1,830,000    $2,745    10,492,931    $6,764       $  --          $(150)        $(1,343)     $ 8,016
                             =========    ======    ==========    ======       =====          =====         =======      =======


                See Notes to Consolidated Financial Statements.

                                      F-5

                      ISONICS CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)



                                                                  YEAR ENDED
                                                                   APRIL 30,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss).........................................  $ 2,689    $(2,521)
  Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
    Gain on sale of depleted zinc business..................   (5,296)        --
    Depreciation and amortization...........................      567        520
    Interest on notes receivable from shareholders..........      (23)       (24)
    Fair value of warrants and stock issued and amortization
      of deferred compensation..............................      160        274
    Interest recognized upon conversion of debt to equity...       --         64
    Deferred income taxes...................................     (640)        --
    Loss on disposal of property and equipment..............       75        504
    Forgiveness of notes receivable due from stockholders...       27         --
    Changes in operating assets and liabilities:
      Accounts and notes receivable.........................     (146)     1,748
      Inventories...........................................   (1,066)       (89)
      Prepaid expenses and other assets.....................     (139)        68
      Accounts payable......................................     (522)      (112)
      Accrued liabilities and other.........................     (336)       (30)
      Income taxes payable..................................      323        (45)
                                                              -------    -------
          Net cash provided by (used in) operating
            activities......................................   (4,327)       357

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment.......................      (15)      (159)
  Proceeds from sale of depleted zinc business..............    6,730         --
  Purchase of Chemotrade, net of cash acquired..............       --       (546)
                                                              -------    -------
          Net cash provided by (used in) investing
            activities......................................    6,715       (705)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments on line of credit and other borrowings...........   (1,931)    (1,000)
  Proceeds from borrowings..................................       75        717
  Repayment of notes receivable from shareholders...........       57         22
  Proceeds from issuance of preferred stock.................    2,250         --
  Proceeds from issuance of common stock....................       94         17
                                                              -------    -------
          Net cash provided by (used in) financing
            activities......................................      545       (244)
                                                              -------    -------

          NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS...    2,933       (592)

Cash and cash equivalents at beginning of period............      452      1,044
                                                              -------    -------

Cash and cash equivalents at end of period..................  $ 3,385    $   452
                                                              =======    =======


                See Notes to Consolidated Financial Statements.

                                      F-6

                      ISONICS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

    Isonics Corporation ("We" or the "Company") develop and market products
worldwide based on isotopes for applications in the energy, medical research,
diagnostic, pharmaceutical and semiconductor industries. Through one of our
subsidiaries, we also provide contract research and development services.

PRINCIPALS OF CONSOLIDATION

    The consolidated financial statements include our accounts and those of our
wholly-owned subsidiaries, International Process Research Corporation
("Interpro") and Chemotrade GmbH ("Chemotrade"). All significant intercompany
accounts have been eliminated in consolidation.

CASH EQUIVALENTS

    Cash equivalents include investments purchased with a maturity of less than
ninety days. Cash balances held in foreign bank accounts were $151,000 at April
30, 2000.

CONCENTRATION OF CREDIT RISK

    Financial instruments that potentially subject us to concentrations of
credit risk consist primarily of cash equivalents and trade accounts receivable.
Cash equivalents are maintained with high quality institutions and are regularly
monitored by management. We extend credit to our customers, most of whom are
large, established companies. Credit risk is mitigated by performing ongoing
credit evaluations of our customers' financial condition and we generally do not
require collateral.

INVENTORIES

    Inventories are stated at the lower of cost (first-in, first-out) or market.
We perform periodic assessments to determine the existence of obsolete, slow
moving and non-salable inventories, and record provisions to reduce such
inventories to net realizable value when necessary.

PROPERTY AND EQUIPMENT

    Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over three to seven years. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the lease term.

GOODWILL

    Goodwill resulted from the acquisitions of Isoserve, Inc. and Chemotrade. We
evaluate goodwill for impairment by comparing the unamortized balance of
goodwill to the undiscounted future cash flows of the related assets. We modify
or adjust goodwill if impairment is indicated. Based upon our most recent
evaluation, we believe that no impairment of goodwill exists as of April 30,
2000; however, with the sale of the depleted zinc business to Eagle-Picher on
December 1, 1999, unamortized goodwill of $112,000 related to the
Isoserve, Inc. acquisition was charged against the gain on the sale of the
product line. The goodwill resulting from the Chemotrade acquisition is being
amortized on a straight-line basis over twenty years.

                                      F-7

                      ISONICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES

    We account for income taxes using an asset and liability approach for
financial accounting and reporting purposes. A valuation allowance is provided
when deferred tax assets are not expected to be realized.

REVENUE RECOGNITION

    Revenue from product sales is recognized upon shipment. Product returns and
warranty costs have not been material in any period. Revenue from contract
research and development services is recognized ratably as services are
performed and costs are incurred.

USE OF ESTIMATES IN THE FINANCIAL STATEMENTS

    In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, we are required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as revenues and expenses during the
reporting period. Actual results could differ from those estimates.

FAIR VALUES OF FINANCIAL INSTRUMENTS

    The fair value of cash and equivalents, trade receivables, trade payables
and debt approximates carrying value due to the short maturity of such
instruments.

TRANSLATION OF FOREIGN CURRENCIES

    We conduct substantially all of our transactions in U.S. dollars, except for
certain transactions of Chemotrade that are conducted in Duetsche Marks. The
financial statements of Chemotrade are prepared in Duetsche Marks and remeasured
into U.S. dollars for purposes of consolidation, with the U.S. dollar as the
functional currency. Gains and losses from remeasurement and transaction gains
and losses are included in the statement of operations.

ACCOUNTING FOR STOCK-BASED COMPENSATION

    We account for stock-based awards to employees and directors using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees and related interpretations. We
provide additional pro forma disclosures as required under Statement of
Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation.

NET INCOME (LOSS) PER SHARE

    Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common shares and potentially
dilutive securities outstanding during the period. Potentially dilutive
securities consist of the incremental common shares issuable upon conversion of
preferred stock (using the "if converted" method) and shares issuable upon the
exercise of stock options and warrants (using the "treasury stock" method).
Potentially dilutive securities are excluded from the computation if their
effect is

                                      F-8

                      ISONICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
anti-dilutive. Contingently issued shares are included in earnings per share
when the related conditions are satisfied.

    The following table reconciles the denominator used in the per share
computation (in thousands):



                                                                  YEAR ENDED
                                                                   APRIL 30,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
Weighted average shares of common stock outstanding.........    7,174     6,210
Less: weighted average shares contingently issued...........     (393)       --
                                                               ------     -----
  Shares used for net income (loss) per share - basic.......    6,781     6,210
Dilutive effect of stock options and warrants...............    1,850        --
Dilutive effect of convertible preferred stock..............    1,385        --
Add back: weighted average shares contingently issued.......      393        --
                                                               ------     -----
  Shares used for net income (loss) per share - diluted.....   10,409     6,210
                                                               ======     =====


    A total of 3,464,047 shares issuable from the exercise of outstanding
options and warrants were excluded from the calculation of loss per share in
1999, as their inclusion would have been anti-dilutive.

RECLASSIFICATIONS

    Certain reclassifications have been made to the 1999 financial statements in
order to conform to the 2000 presentation.

NOTE 2--FINANCIAL STATEMENT COMPONENTS

    Inventories consist of the following (in thousands):



                                                                   APRIL 30,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
Finished goods..............................................    $139       $420
Work in process.............................................      27         --
Raw materials...............................................      --        231
                                                                ----       ----
                                                                $266       $651
                                                                ====       ====


                                      F-9

                      ISONICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--FINANCIAL STATEMENT COMPONENTS (CONTINUED)
    Property and equipment consists of the following (in thousands):



                                                                   APRIL 30,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
Office furniture and equipment..............................   $  174     $  159
Production equipment........................................      898      1,094
Leasehold improvements......................................       19         19
                                                               ------     ------
                                                                1,091      1,272
Accumulated depreciation and amortization...................     (431)      (254)
                                                               ------     ------
                                                               $  660     $1,018
                                                               ======     ======


    Goodwill related to acquisitions consists of the following (in thousands):



                                                                   APRIL 30,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
Isoserve, net of accumulated amortization of $472 and
  $315......................................................   $   --     $  157
Chemotrade, net of accumulated amortization of $323 and
  $154......................................................    3,062      3,231
                                                               ------     ------
                                                               $3,062     $3,388
                                                               ======     ======


    Accrued liabilities consist of the following (in thousands):



                                                                   APRIL 30,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
Compensation................................................    $ 68      $  391
Interest....................................................      --          68
Customer advances and deposits..............................     194          97
Restructuring costs.........................................      47          61
Other.......................................................     282         419
                                                                ----      ------
                                                                $591      $1,036
                                                                ====      ======


                                      F-10

                      ISONICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--FINANCIAL STATEMENT COMPONENTS (CONTINUED)
    Supplemental disclosure of non-cash investing and financing activities (in
thousands):



                                                                   APRIL 30,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
Stock issued for note receivable............................    $ --     $   130
                                                                ====     =======
Conversion of trade payables into debt......................    $243     $    95
                                                                ====     =======
Conversion of liabilities and debt into preferred stock.....    $495     $    --
                                                                ====     =======
Retirement of common stock to pay shareholder notes
  receivable................................................    $435     $    --
                                                                ====     =======
Purchase of Chemotrade
  Cash paid.................................................    $ --     $   546
  Cash acquired.............................................      --         309
  Stock issued to seller....................................      --         894
  Debt issued to seller.....................................      --       1,750
  Liabilities assumed.......................................      --       1,598
  Goodwill..................................................      --      (3,385)
                                                                ----     -------
  Assets acquired...........................................    $ --     $ 1,712
                                                                ====     =======


    Supplemental disclosures of cash flow information (in thousands):



                                                                   APRIL 30,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
Cash paid during the period for:
  Interest..................................................    $388       $475
  Income taxes..............................................     433        227


                                      F-11

                      ISONICS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3--ACQUISITIONS

    On July 21, 1998, we acquired all of the outstanding shares of Chemotrade
and a subsidiary, which was owned by two shareholders. Chemotrade is engaged in
the distribution, development and manufacturing of stable and radioisotopes. The
purchase was effective June 1, 1998, the date control was transferred, and our
financial statements include the results of Chemotrade's operations from
June 1, 1998. Pro forma results of operations for 1999 have not been presented
as the pro forma amounts would not have been materially different than those
reported.

    The consideration paid upon closing consisted of $546,000 cash, 357,730
restricted shares of common stock with a fair market value of $894,000, and two
notes. The first note of $924,000 (DM 1,663,000) bore interest at 2% per month
and was paid in August 1998, and the second note of $812,000 (DM 1,500,000) bore
interest at 10% per year and was paid by December 1999. Transaction costs were
$125,000. Imputed interest from the effective date of the acquisition totaled
$28,000.

    The purchase agreement provides for the selling shareholders to receive
additional consideration in the event pretax earnings of $467,000 (DM 1,000,000)
are achieved for the year ending April 30, 2001. The maximum additional
consideration that can be earned is $234,000 (DM 500,000). Any additional
consideration will be recorded as additional goodwill.

NOTE 4--SALE OF DEPLETED ZINC BUSINESS

    On December 1, 1999, we sold our depleted zinc business to Eagle-Picher
Technologies, LLC ("Eagle-Picher") for $8,230,000, including $1,500,000 to be
paid over a period of three years. We received cash of approximately $6,730,000
from Eagle-Picher at the closing, of which approximately $1,150,000 was used to
pay certain accrued liabilities and debt. Upon completion of the sale, we
recognized a net gain on the sale amounting to $5,088,000. Eagle-Picher's
obligation to pay the final $1,500,000 is subject to the performance of our
former depleted zinc supplier under the terms of a supply agreement that was
transferred to Eagle-Picher in the sale. We are recognizing the $1,500,000 on a
straight-line basis as our former supplier performs. As a result, we have
recognized additional gain of $208,000 through April 30, 2000, which is reported
as a note receivable at April 30, 2000.

NOTE 5--INCOME TAXES

    Deferred tax assets (liabilities) are comprised of the following (in
thousands):



                                                                  APRIL 30,
                                                             -------------------
                                                               2000       1999
                                                             --------   --------
                                                                  
Deferred tax assets
  Accruals and expenses deductible in future periods.......   $1,609    $ 1,269
  Net operating loss carryforwards.........................       --        435
                                                              ------    -------
    Total deferred tax assets..............................    1,609      1,704
  Valuation allowance......................................     (376)    (1,178)
                                                              ------    -------
                                                               1,233        526

Deferred tax liabilities
  Amortization and depreciation............................     (593)      (526)
                                                              ------    -------

                                                              $  640    $    --
                                                              ======    =======


                                      F-12

                      ISONICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--INCOME TAXES (CONTINUED)
    Income tax expense (benefit) consists of the following (in thousands):



                                                                   APRIL 30,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
Current
  Federal...................................................   $ 640       $ --
  State.....................................................      98         --
  Foreign...................................................      31        171
                                                               -----       ----
                                                                 769        171

Deferred
  Federal...................................................    (640)        --
  State.....................................................      --         --
                                                               -----       ----
                                                                (640)        --
                                                               -----       ----
                                                               $ 129       $171
                                                               =====       ====


    A reconciliation of our effective tax rate to the federal statutory tax rate
of 34% follows (in thousands):



                                                                   APRIL 30,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
                                                                   
Expected tax (benefit) at federal statutory rate............   $ 958      $(799)
State taxes net of federal benefit..........................      98       (104)
Foreign income taxed at different rates.....................     (77)        26
Non-deductible expenses.....................................      67         84
Utilization of previously unrecognized net operating loss
  and tax credit carryforwards..............................    (115)        --
Change in valuation allowance...............................    (802)     1,097
Other.......................................................      --       (133)
                                                               -----      -----
                                                               $ 129      $ 171
                                                               =====      =====


NOTE 6--DEBT AND LINE OF CREDIT

    At April 30, 1999, we had amounts owing to our primary lender, along with
other secured and unsecured debt, amounting to $1,136,000. We also had
borrowings amounting to $922,000 payable to related parties. We repaid all of
these borrowings, except for certain term debt with an outstanding balance of
$20,000 at April 30, 2000, with the proceeds from the sale of our depleted zinc
business. We currently have no lending facilities with any financial
institutions, except for an unsecured line of credit available to Chemotrade in
the amount of DM 400,000 ($187,000). At April 30, 2000, there are no borrowings
outstanding under this line of credit.

                                      F-13

                      ISONICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--STOCKHOLDERS' EQUITY

COMMON STOCK

    On September 22, 1997, we completed an initial public offering of 810,000
units, each unit consisting of one share of common stock and one redeemable
common stock purchase warrant. Each warrant entitles the holder to purchase one
share of common stock at $5.80 per share, exercisable until September 21, 2001.
We may redeem the warrants at a price of $0.10 per warrant if the closing price
of our common stock is at least $14.50 per share for 20 consecutive trading
days.

    In connection with the offering, we granted the underwriter warrants to
purchase up to 160,000 shares of common stock at a weighted average exercise
price of $7.77. The warrants are exercisable at anytime until September 21,
2001.

PREFERRED STOCK

    On July 29, 1999, we completed a private placement financing to accredited
investors and certain creditors valued in total at approximately $2,745,000. We
issued 1,830,000 units, each consisting of one share of Series A Convertible
Preferred Stock and one warrant. We received $2,250,000 in cash proceeds and
converted $425,000 of long-term debt in connection with the private placement.
Each share of the Series A Convertible Preferred Stock is convertible into one
share of our Common Stock. The liquidation preference for the Series A
Convertible Preferred Stock is $1.50 per share, amounting to a total liquidation
preference of $2,745,000 at April 30, 2000. Each warrant allows the investor to
purchase one share of Isonics Common Stock for $3.75 through July 29, 2002. We
granted certain registration rights to the holders of the shares of common stock
underlying the Class A Convertible Preferred Stock and the warrants.

    In addition to converting $425,000 of existing debt into equity as part of
the private placement we:

    - Issued 500,000 warrants to purchase shares of our Common Stock to an
      investment banker as a commission on this placement. The warrants are
      exercisable at $3.75 per share through July 29, 2002.

    - Issued 46,667 units in satisfaction of all current and future obligations
      under the Isoserve royalty agreement.

    - Extended the payment due date for the remaining balance on the Chemotrade
      acquisition note to July 2000, which note has been paid in full.

    - Extended the payment due date for certain unsecured promissory notes to
      January 2000, which notes have been paid in full.

STOCK OPTION AND PURCHASE PLANS

1996 STOCK OPTION PLAN

    Our 1996 Stock Option Plan authorized the grant of incentive and
nonqualified stock options to our key employees, directors or consultants. The
options generally expire ten years from the date of grant. In September 1997,
the Board of Directors terminated the 1996 Stock Option Plan. As of April 30,
2000, there remain 488,356 options outstanding under the 1996 Stock Option Plan.

                                      F-14

                      ISONICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)
DIRECTORS' STOCK OPTION PLAN

    The 1998 Directors' Plan (the "Directors' Plan") provides that each person
serving as a member of the Board, who is not an employee of Isonics, receive
options to purchase 20,000 shares of Isonics Common Stock when such person
accepts the position as a Director and to receive an additional option to
purchase 10,000 shares when such person is re-elected as a Director provided
such person is not an employee of Isonics at the time of election. The exercise
price for the options is the fair market value on the date of grant and the
options are exercisable for five years from such date. The options granted under
the Directors' plan vest immediately. In the event a Director resigns or is not
re-elected to the Board, failure to exercise the options within three months
results in the options' termination. Although the Directors adopted the plan in
1998, the Board formalized the plan by resolution in January 2000.

    As of April 30, 2000, options to purchase a total of 110,000 shares were
outstanding under the Directors' Plan. We do not have any other arrangements
under which we compensate the Directors for acting in their capacities as
Directors.

EXECUTIVE AND INCENTIVE STOCK OPTION PLANS

    In November 1996, the Board of Directors adopted the Executive and Incentive
Stock Option Plans authorizing the granting of up to 570,000 and 150,000
incentive and nonqualified stock options to our key employees, directors or
consultants. Incentive stock options are granted at a price not less than fair
market value, and nonqualified stock options are granted at a price not less
than 85% of the fair market value. Options are exercisable when vested,
typically over five years, and expire ten years after the date of grant. As of
April 30, 2000, options to purchase a total of 488,408 shares were outstanding
under the Executive and Incentive Stock Option Plans.

EMPLOYEE STOCK PURCHASE PLAN

    The employee stock purchase plan has reserved 200,000 shares of our common
stock for sale to all permanent employees who have met minimum employment
criteria. Employees who do not own 5% or more of the outstanding shares are
eligible to participate through payroll deductions. At the end of each offering
period, shares are purchased by the participants at 85% of the lower of the fair
market value of our Common Stock at the beginning or the end of the offering
period. As of April 30, 2000, 13,723 shares have been issued under the plan.

PRO FORMA DISCLOSURE OF COMPENSATION EXPENSE UNDER SFAS NO. 123

    The exercise price of options granted generally approximates the fair market
value per share of our stock on the date of grant. Accordingly, no compensation
cost has been recognized for grants from the plans made to employees or
directors. Had compensation cost for grants to employees and directors been
determined based on the fair value of the options at the grant dates consistent
with SFAS No. 123,

                                      F-15

                      ISONICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION, our results of operations and per share
amounts for the years ended April 30, 2000 and 1999 would have been changed to
the pro forma amounts indicated below.



                                                         2000         1999
                                                      ----------   -----------
                                                             
Net income (loss)
  As reported.......................................  $2,689,000   $(2,521,000)
  Pro forma.........................................   1,248,000    (3,174,000)

Income (loss) per share--diluted
  As reported.......................................  $     0.26   $     (0.41)
  Pro forma.........................................        0.12         (0.51)


                                      F-16

                      ISONICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)

    The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted average
assumptions; no expected dividends, volatility of 150%; risk-free interest rate
of 6.0%; and expected lives of five (5) years. A summary of the status of our
stock option plans as of April 30, 2000 and 1999, and changes during the years
ending on these dates is presented below.



                                                                          WEIGHTED
                                                                          AVERAGE
                                                              NUMBER OF   EXERCISE
                                                               SHARES      PRICE
                                                              ---------   --------
                                                                    
Outstanding, May 1, 1998....................................  1,054,809    $1.84
  Granted...................................................    480,721    $1.71
  Exercised.................................................   (195,830)   $0.66
  Canceled..................................................   (343,123)   $3.35
                                                              ---------

Outstanding, April 30, 1999.................................    996,577    $1.49
  Granted...................................................    169,500    $6.35
  Exercised.................................................    (21,813)   $1.16
  Canceled..................................................    (57,500)   $1.69
                                                              ---------
Outstanding, April 30, 2000.................................  1,086,764    $2.25
                                                              =========


    The weighted average fair value of options granted during the years ended
April 30, 2000 and 1999 was $5.78 and $1.56, respectively.

    The following information applies to options outstanding at April 30, 2000:



                                                  WEIGHTED                               WEIGHTED
             RANGE OF                             AVERAGE                                AVERAGE
             EXERCISE                 NUMBER      EXERCISE     NUMBER        NUMBER      EXERCISE
              PRICE                 OUTSTANDING    PRICE     OUTSTANDING   EXERCISABLE    PRICE
- ----------------------------------  -----------   --------   -----------   -----------   --------
                                                                          
      $0.58.......................     336,927     $0.58           6         336,927      $0.58
$1.00 -- $1.44....................     204,783     $1.27           9         149,783      $1.34
$1.62 -- $2.38....................     208,054     $1.90           8          91,050      $1.88
$2.56 -- $3.50....................     180,000     $2.98           8         125,000      $3.16
$5.56 -- $7.31....................     157,000     $6.72           5         157,000      $6.72
                                     ---------                               -------
                                     1,086,764     $2.25                     859,760      $2.35
                                     =========                               =======


NOTES RECEIVABLE FROM SHAREHOLDERS

    In fiscal 1997, two of our executive officers exercised stock options to
each acquire 259,175 shares of common stock at an exercise price of $0.64 per
share. In fiscal 1999, two other executive officers exercised stock options to
acquire 57,603 and 138,227 shares of common stock at exercise prices of $0.87
and $0.58, respectively. In each case, we loaned the executive officer the
aggregate amount representing the exercise price of the option, and the officer
executed a promissory note reflecting the loan. Each executive officer pledged
the purchased shares as collateral for the loan pursuant to a pledge agreement.
Each loan bears interest at an annual rate equal to the minimum applicable
federal rate, and interest is payable annually; principal and accrued but unpaid
interest is due five years from the date of the note. Until each note has

                                      F-17

                      ISONICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)
been paid in full and upon any sale of such option shares by the respective
executive, a portion of the sales proceeds will be used to pay amounts owed
under the note. In addition, during fiscal 1998, we loaned to each of the two
executive officers related to the fiscal 1997 option exercises, pursuant to a
five-year note with interest at the minimum applicable federal rate, the amount
equal to the federal and state tax liability incurred by him as a result of
exercising such option, and agreed to pay compensation to such officers equal to
the amount of interest payable under these loans and the amount of taxes payable
as a result of such compensation. At April 30, 1999, principal and interest due
on the loans to acquire the common stock totaled $460,000 and $9,000,
respectively, and, principal and interest on the loans to pay the federal and
state tax liabilities totaled $126,000 and $4,000, respectively.

    In January 2000, the Board of Directors agreed to forgive the current
interest and principal due related to the tax notes and to accept Isonics Common
Stock, owned by the officers, in payment of the balances owed for the share
purchase loans. The amount owed by Mr. James Alexander, our President and CEO,
that was forgiven was $74,000. The amount owed by Mr. Boris Rubizhevsky, our
Senior Vice President, that was forgiven was $61,000. In both cases the amount
forgiven was treated as bonus compensation to Mr. Alexander and
Mr. Rubizhevsky. Each officer surrendered 30,437 shares of Isonics Common Stock
to pay off $175,000 of principal and accrued interest. The other two loans,
executed in fiscal 1999, were paid in full: the first, in cash, in March 2000;
and the second, by the surrender of 11,664 shares of our Common Stock in
January 2000. As of April 30, 2000 we had no notes receivable outstanding for
the acquisition of stock.

WARRANTS

    In addition to the warrants issued as part of our initial public offering,
we have issued warrants in connection with debt offerings and a private
placement of convertible preferred stock, and as consideration for concessions
from lenders and vendors. A summary of the activity in our warrants follows:



                                                                           WEIGHTED
                                                                           AVERAGE
                                                              NUMBER OF    EXERCISE
                                                                SHARES      PRICE
                                                              ----------   --------
                                                                     
Outstanding, May 1, 1998....................................   2,462,029    $3.81
  Warrants issued with debt.................................      75,000     2.51
  Exercised.................................................     (94,559)    0.18
  Expired...................................................          --     0.00
                                                              ----------
Outstanding, April 30, 1999.................................   2,442,470    $3.90
  Warrants issued in debt restructuring.....................      95,000     2.61
  Warrants issued in private placement of convertible
    preferred stock.........................................   2,330,000     3.75
  Warrants issued for isotope supply agreement..............   4,000,000     3.75
  Exercised.................................................  (3,897,173)    3.55
  Forfeited, via net exercise...............................  (1,043,650)    3.92
  Expired...................................................          --     0.00
                                                              ----------
Outstanding, April 30, 2000.................................   3,926,647    $4.01
                                                              ==========


    In fiscal 1999 we issued two unsecured promissory notes bearing interest at
prime plus 4% for $200,000 each to a vendor and an unaffiliated party. The two
$200,000 notes were due in April 1999. The

                                      F-18

                      ISONICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)
Company issued 50,000 warrants each to the vendor and the unaffiliated party.
The fair value of these warrants, $144,000, was recorded as additional interest
expense. The unaffiliated party converted its $200,000 unsecured promissory note
into 133,000 shares of convertible preferred stock and 133,000 warrants as
described above under "PREFERRED STOCK."

    In July 1999, we made a principal payment of $550,000 towards the amounts
owing to the former Chemotrade shareholders from the acquisition of Chemotrade.
At that time, we extended the due date of the balance to July 31, 2000. In
consideration for the extension, we issued 70,000 warrants to the former
Chemotrade shareholders, exercisable at $3.00 per warrant until June 30, 2004.
We recognized a charge amounting to $157,000 representing the fair value of the
warrants issued determined using the Black-Scholes option pricing model.

    In conjunction with the sale of our depleted zinc business to Eagle-Picher,
we agreed that Eagle-Picher will sell to us 200 kilograms of silicon-28 in
consideration for warrants to purchase 4,000,000 shares of our common stock at a
purchase price of $3.75 per share, exercisable for forty-two months.
Eagle-Picher exercised the warrants in March 2000 under a 'net-exercise'
provision entitling Eagle-Picher to receive 3,130,435 shares of common stock.
These shares are subject to a prorated reduction to the extent Eagle-Picher does
not deliver the required 200 kilograms of silicon-28 in calendar 2000.
Accordingly, these contingent shares are excluded from the number of shares used
for calculating basic net income per share. The shares issued are subject to a
registration rights agreement. Eagle-Picher claims that we should issue to them
an additional 155,279 shares pursuant to the net exercise provision, but we
believe their calculation is in error, and we are continuing discussions with
representatives of Eagle-Picher to resolve this dispute.

    On June 13, 2000, we offered to the holders of the outstanding warrants
issued in our public offering (the "Class A Warrants") the opportunity to
exchange their Class A Warrants for Class B Warrants. The exercise price for the
Class B Warrants, $5.80 per share, is the same as that of the Class A Warrant.
If a Class B Warrant is exercised before its expiration date (September 30,
2000), we will issue one share of Common Stock and one Class C Warrant. The
Class C Warrants expire June 15, 2003, are exercisable for one share of Common
Stock at a price of $10.00 per share, and are redeemable if our Common Stock
trades at or above $15.00 per share for any 20 of 30 consecutive trading days.

    We have reserved shares of common stock for issuance as follows:



                                                              APRIL 30,
                                                                2000
                                                              ---------
                                                           
Exercise of stock options...................................  1,296,543
Exercise of warrants........................................  3,926,647
Employee stock purchase plan................................    186,277
Convertible preferred stock.................................  1,830,000
                                                              ---------
                                                              7,239,467
                                                              =========


NOTE 8--BUSINESS SEGMENTS AND FOREIGN OPERATIONS

    We have two operating segments: Isotope Production and Contract Research and
Development. Our reportable segments are strategic business units that offer
different products and services. They are managed based on the fundamental
differences in their operations.

                                      F-19

                      ISONICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--BUSINESS SEGMENTS AND FOREIGN OPERATIONS (CONTINUED)
    Information by segment is set forth below (in thousands):



                                                                2000       1999
                                                              --------   --------
                                                                   
Net revenues
  Isotope Production........................................  $11,577    $14,384
  Contract Research and Development.........................    1,156      2,614

Operating income (loss)
  Isotope Production........................................  $(2,070)   $(1,035)
  Contract Research and Development.........................     (331)      (831)

Identifiable assets
  Isotope Production........................................  $ 8,711    $ 5,713
  Contract Research and Development.........................      822      1,093


    A summary of our operations by geographic area is presented below (in
thousands):



                                                                2000       1999
                                                              --------   --------
                                                                   
Net revenues
  United States.............................................  $ 4,501    $ 6,817
  Germany...................................................    8,232     10,181

Operating income (loss)
  United States.............................................  $(2,486)   $(2,322)
  Germany...................................................       85        456

Identifiable assets
  United States.............................................  $ 8,117    $ 5,507
  Germany...................................................    1,416      1,299


NOTE 9--PROFIT SHARING PLAN

    We have a profit sharing plan qualified under section 401(k) of the Internal
Revenue Code. The plan is a defined contribution plan, covering substantially
all of our employees. Company contributions to the plan aggregated approximately
$40,000 and $30,000 for 2000 and 1999, respectively.

NOTE 10--CONCENTRATIONS

    Two customers accounted for approximately 15% and 10% of net revenues for
the year ended April 30, 2000. One of these customers accounted for 18% of
accounts receivable at April 30, 2000. Two separate customers accounted for 23%
and 13% of net revenues for the year ended April 30, 1999. Accounts receivable
at April 30, 1999, did not include any amounts due from either of these two
customers.

NOTE 11--RESTRUCTURING

    In the year ended April 30, 1999, we recorded a charge to operations
amounting to $691,000 relating to a planned restructuring of our operations.
This charge consisted primarily of lease termination costs of $132,000,
severance pay for terminated employees of $91,000, and the write down of fixed
assets of $468,000. As of April 30, 2000, we had completed the restructuring.
The only costs remaining to be paid,

                                      F-20

                      ISONICS CORPORATION AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--RESTRUCTURING (CONTINUED)
which have been accrued, relate to the lease payments of approximately $47,000
on our former facilities in excess of the sublease income.

NOTE 12--COMMITMENTS

    We rent office, production facilities and equipment under operating leases
expiring through March 2004. Rent expense for operating leases was approximately
$224,000 and $202,000 for the years ended April 30, 2000 and 1999, respectively.
Future minimum annual operating lease commitments are as follows (in thousands):



YEAR ENDING APRIL 30,
- ---------------------
                                                           
      2001..................................................    $163
      2002..................................................      40
      2003..................................................      16
      2004..................................................       8
                                                                ----
                                                                $227
                                                                ====


    On December 1, 1999, we signed a ten-year supply agreement with Eagle-Picher
by which we will have the exclusive right to purchase quantities of isotopically
pure silicon-28, silicon-29, and silicon-30, and a non-exclusive right to
purchase quantities of isotopically pure carbon-12 and carbon-13 produced by
Eagle-Picher from its Oklahoma-based facilities. We agreed to pay Eagle-Picher a
fee equal to 3% of the net revenues from all sales made by us of products
incorporating the enriched silicon isotopes supplied by Eagle-Picher. As of
April 30, 2000, no royalties have accrued under this agreement.

                                      F-21

EX-23.10

              CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

    We have issued our report dated June 26, 2000, accompanying the consolidated
financial statements of Isonics Corporation and Subsidiaries (the "Company")
included in the Company's Annual Report on Form 10-KSB for the year ended April
30, 2000. We hereby consent to the incorporation by reference of said report in
the Company's Registration Statements on Form S-8 (File No. 333-74339) and
Form S-4 (File No. 333-37696).

GRANT THORNTON LLP

San Jose, California
June 26, 2000

EX-27

 


<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-KSB
FOR THE PERIOD ENDED APRIL, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.

<MULTIPLIER> 1,000

                             
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          APR-30-2000
<PERIOD-START>                             MAY-01-1999
<PERIOD-END>                               APR-30-2000
<CASH>                                           3,385
<SECURITIES>                                         0
<RECEIVABLES>                                    1,263
<ALLOWANCES>                                         0
<INVENTORY>                                        266
<CURRENT-ASSETS>                                 5,271
<PP&E>                                             660
<DEPRECIATION>                                       0
<TOTAL-ASSETS>                                   9,533
<CURRENT-LIABILITIES>                            1,517
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                      2,745
<COMMON>                                         6,764
<OTHER-SE>                                       (150)
<TOTAL-LIABILITY-AND-EQUITY>                     8,016
<SALES>                                         12,733
<TOTAL-REVENUES>                                12,733
<CGS>                                           10,156
<TOTAL-COSTS>                                   15,134
<OTHER-EXPENSES>                                 (134)
<LOSS-PROVISION>                               (5,406)
<INTEREST-EXPENSE>                                 321
<INCOME-PRETAX>                                  2,818
<INCOME-TAX>                                       129
<INCOME-CONTINUING>                              2,689
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                     2,689
<EPS-BASIC>                                       0.40
<EPS-DILUTED>                                     0.26