-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FYqv5YWXDn8GRdCXjMSm8bZCejJab6PEKZzvNfxjLe9+XY7ekP871z/oentmIJ3K tby/KxQ32pJRwABM2RRA6g== 0001047469-03-034606.txt : 20031028 0001047469-03-034606.hdr.sgml : 20031028 20031028165130 ACCESSION NUMBER: 0001047469-03-034606 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 20031028 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ISONICS CORP CENTRAL INDEX KEY: 0001023966 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 770338561 STATE OF INCORPORATION: CA FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-110032 FILM NUMBER: 03961379 BUSINESS ADDRESS: STREET 1: 5906 MCINTYRE STREET CITY: GOLDEN STATE: CO ZIP: 80403 BUSINESS PHONE: 3032797900 MAIL ADDRESS: STREET 1: 5906 MCINTYRE STREET CITY: GOLDEN STATE: CO ZIP: 80403 SB-2 1 a2121147zsb-2.htm SB-2
QuickLinks -- Click here to rapidly navigate through this document

As filed with the Securities and Exchange Commission on October 28, 2003
Registration No. 333-

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM SB-2

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

California
(State or other jurisdiction
of incorporation or organization)

2819
(Primary Standard Industrial
Code Number)

77-0338561
(I.R.S. Employer
Identification Number)

5906 McIntyre Street
Golden, Colorado 80403
(303) 279-7900
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

James E. Alexander
President, Isonics Corporation
5906 McIntyre Street
Golden, Colorado 80403
(303) 279-7900
(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:
Herrick K. Lidstone, Jr.
Burns, Figa & Will, P.C.
Suite 1030
6400 South Fiddler's Green Circle
Englewood, CO 80111
Tel: 303-796-2626
Fax: 303-796-2777

Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.

If securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. o

If this form is being filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number in the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number in the earlier effective registration statement for the same offering. o

CALCULATION OF REGISTRATION FEE

Title of Each Class of Securities to be Registered	Amount to be Registered(a)	Proposed Maximum Offering Price Per Unit	Proposed Maximum Aggregate Offering Price	Amount of Registration Fee(c)


Common Stock	1,500,000	$1.20	$1,800,000	$146

Class B Common Stock Purchase Warrants	1,350,000	$.45	$607,500	$50

Shares of Common Stock underlying Class B Common Stock Purchase Warrants	1,350,000	$1.50(b)	$2,025,000	$164

Class C Common Stock Purchase Warrants	1,350,000	$.40	$540,000	$44

Shares of Common Stock underlying Class C Common Stock Purchase Warrants	1,350,000	$2.50(b)	$3,375,000	$274

Shares of Common Stock underlying warrants issued in September 2003 financing	900,000	$1.25(b)	$1,125,000	$92

Shares of Common Stock underlying investment banker warrants	1,060,000	$1.25(b)	$1,325,000	$108

Shares of Common Stock underlying investment banker warrants	300,000	$1.00(b)	$300,000	$25

TOTAL			$11,097,500	$903*

*: Paid with this filing.
(a): This registration statement includes 1,350,000 restricted Class B Warrants issued to certain accredited investors in a private placement completed in December 2000 and those that were issued to them as a result of negotiations between Isonics and the selling shareholders completed in July 2001 when we were not able to gain effectiveness of a registration statement originally filed for the selling shareholders in March 2001. This registration statement also includes 1,500,000 shares and 900,000 shares underlying warrants issued to certain accredited investors in a private placement completed in September 2003. The registration statement also includes 1,360,000 shares underlying warrants issued in October 2003 and November 2002 to certain investment bankers. The registration fee for the shares and the restricted Class B Warrants is based on the closing market price for the Registrant's shares and Class B Warrants on October 21, 2003, pursuant to Rule 457(c).
(b): Based on the exercise price of the Class B Warrants, Class C Warrants and the undesignated warrants, pursuant to Rule 457(g)(1) under the Securities Act of 1933, as amended.
(c): Calculated at the rate of $80.90 per $1,000,000 pursuant to fee rate advisory #3 for fiscal year 2004. The registration fee is based on the closing market price for the Registrant's Common Stock on October 21, 2003, pursuant to Rule 457(c).

In accordance with SEC Rule 429, in addition to the shares of our common stock, restricted Class B Warrants, and restricted Class C Warrants included in this Registration Statement, the Prospectus also includes 430,110 Class B Warrants, 632,610 Class C Warrants, 430,110 shares of common stock underlying the Class B Warrants and 632,610 shares of common stock underlying the Class C Warrants from post-effective amendment number 4 on Form SB-2 to our Registration Statement on Form S-4 filed with the Securities and Exchange Commission on March 24, 2003 (SEC File No. 333-37696) (as to which the Registrant paid a filing fee of $5,358), which became effective on April 9, 2003.

Pursuant to Rule 416 of the Securities Act of 1933, there are also being registered hereunder such additional shares as may be issued to the Selling Stockholders because of future dividends, stock distributions, stock splits, or similar capital adjustments.

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

Subject to Completion dated October 28, 2003
PROSPECTUS dated October , 2003
ISONICS CORPORATION

This Prospectus relates to our prospective issuance of up to 3,762,720 shares of common stock underlying issued and issuable warrants to purchase our common stock (our Class B Warrants and Class C Warrants) and an additional 1,780,110 Class C Warrants that are issuable upon the exercise of outstanding Class B Warrants.

This Prospectus also relates to certain Selling Holders' offer to sell 1,350,000 restricted Class B Warrants, as well as 2,400,000 shares of common stock issued or issuable as a result of a placement completed in September 2003 and 1,060,000 and 300,000 shares of common stock underlying warrants issued in October 2003 and November 2002, respectively, to investment bankers we retained.

The Class B Warrants are exercisable at $1.50 per share through December 31, 2005, to purchase one share of common stock and one Class C Warrant. The Class C Warrants are exercisable at $2.50 per share through December 31, 2005, to purchase one share of common stock. We may redeem our outstanding Class B and Class C Warrants for $0.10 each if our common stock trades at or above $3.75 per share for any 20 of 30 consecutive trading days provided a registration statement permitting the exercise of those warrants is then current and in effect. Our common stock is traded in the over-the-counter market and quoted on the Nasdaq SmallCap Stock Market under the symbol "ISON." On October 21, 2003 the reported closing price of our common stock was $1.11 per share. Our Class B Warrants and Class C Warrants are eligible for trading under the symbols ISONL and ISONZ, respectively, but no significant market for these warrants has developed.

An investment in our Class B Warrants, Class C Warrants and our common stock involves a high degree of risk. See "Risk Factors" beginning on Page 7. In deciding whether to exercise the warrants you hold, you should rely only on the information contained in this Prospectus. We have not authorized anyone to provide you with any information that is different from this information.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

Only residents of states in which we have qualified the Class C Warrants and the underlying shares of common stock may exercise their Class B Warrants or Class C Warrants or purchase our common stock or Class B Warrants under this Prospectus. When you exercise the Class B Warrants or Class C Warrants, you will have to provide us information as to your state of residence. We may seek qualification from time-to-time in other states. You may call Isonics Corporation at 303-279-7900, to determine whether your state of residence has been included. (inside front cover)

TABLE OF CONTENTS

		Page
Summary		3
Risk Factors		7
Management's Discussion and Analysis of Financial Condition and Results of Operations		13
Procedure for Exercise of Warrants and Tax Aspects		24
Securities Offered, The Selling Holders and the Plan of Distribution.		25
Use of Proceeds		30
Business		31
Management		46
Security Ownership of Certain Beneficial Holders and Management		49
Executive Compensation		50
Certain Relationships and Related Party Transactions		55
Isonics' Capital Stock		56
Market for Common Equity and Related Stockholder Matters		57
Shares Available for Future Sale		57
Securities and Exchange Commission Position on Indemnification for Securities Act Liabilities		58
Experts		58
Legal Matters		58
How to Obtain Additional Information		58
Financial Statements—April 30, 2003		F-2
Financial Statements—July 31, 2003		F-26

Isonics has not authorized anyone to give any information or make any representation about the offering that differs from, or adds to, the information in this Prospectus or the documents that are publicly filed with the Securities and Exchange Commission. Therefore, if anyone does give you different or additional information, you should not rely on it. The delivery of this Prospectus does not mean that there have not been any changes in Isonics' condition since the date of this Prospectus. If you are in a jurisdiction where it is unlawful to offer to purchase or exercise the securities offered by this Prospectus, or if you are a person to whom it is unlawful to direct such activities, then the offer presented by this Prospectus does not extend to you. This Prospectus speaks only as of its date except where it indicates that another date applies. Documents that are incorporated by reference in this Prospectus speak only as of their date, except where they specify that other dates apply. The information in this Prospectus may not be complete and may be changed. The holders may not exercise these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to purchase or exercise these securities and it is not soliciting an offer to purchase or exercise these securities in any state where the purchase or exercise is not permitted.

SUMMARY

This summary presents selected information from this Prospectus. You should carefully read this entire Prospectus and the documents to which the Prospectus refers in order to understand this offering. See "How to Obtain Additional Information."

Isonics Corporation

We are an advanced materials and technology company. We are selling, developing and we anticipate commercializing additional products created from materials, including materials whose natural isotopic ratios have been modified as well as non-isotopic (natural) materials. An isotope is one of two or more species (or nuclides) of the same chemical element that 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. Most of our radioisotopes, however, are man-made. Stable isotopes, as distinguished from radioisotopes, are not radioactive.

Several manufacturers, located primarily in republics that once were part of the Soviet Union, produce radioactive and stable isotopes. We buy these isotopes from the manufacturers and resell them in the form of common chemical compounds. For example, oxygen-18 is sold as water, and zinc-68 is sold as zinc oxide. Today our business addresses the material needs of two primary markets:

•: life sciences (involving isotopic materials) and
•: semiconductor materials and products (including both isotopic and non-isotopic materials).

While we currently are focusing on these two markets, we continue to evaluate other applications for both stable and radioisotopes and non-isotopic materials. In December 2002, we acquired certain isotope-based trace detection technology that can be used to detect explosives and chemical and biological weapons. We acquired this technology from Institut of Umwelttechnologien GmbH ("IUT"), an entity in which we hold a 6% ownership interest. If and when we begin sales of these products, we expect these products to constitute a third market (the homeland security market) for our products.

We also sell isotopes for use in basic scientific research and industrial applications. We believe our core competency is our ability to identify, develop, source, and commercialize products and services based on isotopically engineered materials as well as non-isotopic semiconductor 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 web site is www.isonics.com. Our common stock is traded on the Nasdaq SmallCap Market under the symbol "ISON." The market for our stock and warrants has historically been characterized by low volume, and broad price and volume volatility. Although our common stock and warrants have been quoted on the Nasdaq SmallCap market, our stock was trading at prices significantly below the $1.00 per share minimum maintenance requirements at times during the last half of the calendar year ended December 31, 2002 and has again, at times, been trading below $1.00 per share since late February 2003. As a result, we are at risk of Nasdaq action to remove our securities from its SmallCap market. We cannot give any assurance that we will be able to meet the Nasdaq requirements to maintain our SmallCap listing, or that if we do, a stable trading market will develop for our stock or our warrants.

The address of our principal executive offices and our telephone and facsimile numbers at that address are:

Isonics Corporation
5906 McIntyre Street
Golden, Colorado 80403
Telephone No.: (303) 279-7900
Facsimile No.: (303) 279-7300

We currently conduct some of our operations through one wholly owned-subsidiary and one partially owned subsidiary. The following chart provides some information about those subsidiaries:

		Name and Headquarters		Place of Formation		Ownership Percentage		Business
		Chemotrade GmbH Dusseldorf, Germany		Germany		100%		Chemotrade GmbH ("Chemotrade") is a value-added re-seller of stable and radioactive isotopes. It supplies radioactive isotopes for pharmaceutical and industrial research as well as for industrial and medical imaging, calibration sources and for brachytherapy applications. Additionally, Chemotrade supplies various stable isotope labeled compounds for pharmaceutical research and drug design, as well as oxygen-18 for use in producing a radioisotope used in positron emission tomography. Chemotrade's market is primarily Europe, but sales are also made to North America and Asia.
		IUT Detection Technologies Inc.,		Colorado, USA		85%		IUT Detection Technologies,Inc. ("IUTDT") owns and we anticipate will commercialize the detection technology that we acquired from IUT. This isotope-based trace detection technology will be used to detect explosives and chemical and biological weapons.

The foregoing does not include Isonics' minority ownership in two companies:

•: Interpro Zinc, LLC, a Colorado entity that engages in the research and development for the recovery and recycling of zinc metal from various sources. Isonics has a 25% interest in this entity.
•: IUT, an entity based in Berlin, Germany, which performs research and development, and manufacturing of radioisotopes. Isonics has a 6% interest in IUT through Chemotrade.

Securities Being Offered

Securities are being offered pursuant to this Prospectus both by Isonics (referred to as "we" or "us") and by certain Selling Holders named below. (See "Selling Securityholders"). We are offering up to:

•: 1,780,110 shares of common stock to the holders of our outstanding Class B Warrants (including 430,110 Class B Warrants that are publicly held and 1,350,000 restricted Class B Warrants);
•: 1,780,110 Class C Warrants to the holders of our outstanding Class B Warrants; and
•: 1,982,610 shares of common stock underlying 202,500 issued and 1,780,110 unissued Class C Warrants.

Pursuant to this Prospectus, the named Selling Shareholders are offering up to:

•: 1,350,000 restricted Class B Warrants that are currently outstanding;
•: 1,500,000 shares of our common stock that are currently outstanding;

•: 900,000 shares of common stock that are issuable upon exercise of common stock warrants issued to accredited investors in connection with our September 2003 financing exercisable through December 31, 2005 at $1.25 per share;
•: 560,000 shares of common stock that are issuable upon exercise of common stock warrants issued to our investment bankers in October 2003, which are exercisable through April 30, 2006 at $1.25 per share;
•: 500,000 shares of common stock that are issuable upon exercise of common stock warrants issued to our investment bankers in October 2003, which are exercisable through October 21, 2006 at $1.25 per share; and
•: 300,000 shares of common stock that are issuable upon exercise of common stock warrants issued to our investment bankers in November 2002, which are exercisable through November 21, 2005 at $1.00 per share.

The Class B Warrants are exercisable at $1.50 per share. The Class C Warrants are exercisable at $2.50 per share. The Class B Warrants and the Class C Warrants expire on December 31, 2005.

The 1,350,000 restricted Class B Warrants were issued in December 2000 and in July 2001 in a private placement made to accredited investors only. There was no underwriter, placement agent, or finder utilized in connection with that placement.

We issued 1,500,000 shares of common stock and 900,000 warrants in September 2003 in a private placement made to accredited investors only. The placement agents for that placement were Park Capital Securities, LLC with an office at 216 East 45^th Street, 9^th Floor, New York, NY 10017 and vFinance Investments, Inc. with an office at 3010 North Military Trail, Suite 300, Boca Raton, FL 33431. The placement agents received reimbursement of certain expenses and a 10% commission pursuant to the placement agent agreement between the parties.

We issued 560,000 warrants (exercisable at $1.25 and expiring on April 30, 2006) in October 2003 to vFinance Investments, Inc. ("vFinance") in connection with an agreement we entered into by which vFinance agreed to provide consulting services related to corporate finance and other financial service matters and make available qualified personnel for this purpose and devote such business time and attention to such matters as it shall determine is required. vFinance agreed that such services shall include, but not be limited to, strategic planning, planning meetings with the investment community, assisting our management in designing our business plan and "growth-by-acquisition" strategy. Additionally, vFinance agreed to prepare or assist in the preparation of a corporate profile, fact sheets, and shareholder letters. This agreement expires on June 30, 2004.

We issued 500,000 warrants (exercisable at $1.25 and expiring on October 21, 2006) in October 2003 to Park Capital Securities, LLC ("Park Capital") in connection with Park Capital's agreement to extend a financial advisory agreement we entered into with it in November 2002. We issued 300,000 warrants (exercisable at $1.00 and expiring on November 21, 2005) in November 2002 under the original financial advisory agreement (of which 240,000 were subsequently assigned to Roadrunner Capital Group, LLC ("Roadrunner")). Pursuant to both agreements, Park Capital agreed to provide services as one of our financial advisors and investment bankers, and to render financial and other general advice to our management with respect to retail marketing of our common stock, business combinations, and similar matters upon the terms and conditions set forth herein. In that regard, Park Capital agreed to assist us in identifying, analyzing, structuring, negotiating and financing suitable business opportunities which we may take advantage of by purchase or sale of stock or assets, assumption of liabilities, merger, consolidation, tender offer, joint venture, financing arrangement or any similar transaction or combination thereof. As extended, this agreement expires December 31, 2004.

Each of the foregoing were issued as "restricted securities" as that term is defined in Rule 144 adopted by the Securities and Exchange Commission under the Securities Act of 1933. The undesignated warrants may only be exercised pursuant to an exemption from registration, if available.

Risk Factors

The purchase of our common stock and warrants involves a high degree of risk. You should purchase our securities or exercise your warrants only if you can afford a complete loss of your investment. See "Risk Factors." We have not authorized anyone to give you information or to make any representation other than those contained in this Prospectus.

Use of Proceeds

We have used and expect to continue to use any proceeds from the exercise of warrants for the expansion of our SOI operations, financing of our operations through IUTDT, research and development and additional working capital. See "Financial Statements."

A Note About Forward-Looking Statements

In our effort to make the information in this Prospectus more meaningful, this Prospectus contains both historical and forward-looking statements. All statements other than statements of historical fact are forward-looking statements within the meanings of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this Prospectus are not based on historical facts, but rather reflect the current expectations of our management concerning future results and events.

The forward-looking statements generally can be identified by the use of terms such as "believe," "expect," "anticipate," "intend," "plan," "foresee," "likely," "will" or other similar words or phrases. Similarly, statements that describe our objectives, plans, or goals are, or may be, forward-looking statements.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Isonics to be different from any future results, performance and achievements expressed or implied by these statements. You should review carefully all information, including the financial statements and the notes to the financial statements included in this Prospectus. In addition to the factors discussed under "Risk Factors," the following important factors could affect future results, causing the results to differ materially from those expressed in the forward-looking statements in this Prospectus:

•: our working capital shortage, which has been aggravated by additional research, development, and marketing expenses necessary to expand our existing and new business lines;
•: demand for, and acceptance of, our materials;
•: changes in development, distribution, and supply relationships;
•: the impact of competitive products and technologies and no assurance as to the validity of our intellectual property rights;
•: the risk of operations in Russia, the Republic of Uzbekistan, and the Republic of Georgia;
•: dependence on future product development;
•: the possibility of future customer concentration;
•: our dependence on key personnel;
•: the volatility of our stock price and the potential adverse impact on our market which may be caused by future sales of restricted securities;
•: the possibility of environmental violations relating to our business activities and products; and
•: the impact of new technologies.

These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in the forward-looking statements in this Prospectus. Other unknown or unpredictable factors also could have material adverse effects on our future results. The forward-looking statements in this Prospectus are made only as of the date of this Prospectus and we do not have any obligation to publicly update any forward-looking statements to reflect subsequent events or circumstances. We cannot assure you that projected results will be achieved.

RISK FACTORS

An investment in and ownership of our common stock is one of high risk. You should carefully consider the risks described below before deciding whether to exercise your Class B Warrants, your Class C Warrants, your undesignated warrants or invest in or continue to hold our common stock. If any of the contingencies discussed in the following paragraphs or other materially adverse events actually occurs, the business, financial condition and results of operations could be materially and adversely affected. In such case, the trading price of our common stock could decline, and you could lose all or part of your investment.

Our working capital shortage and recurring net losses resulted in our auditors issuing an opinion on our financial statements indicating a substantial doubt regarding our ability to continue as a going concern.

The auditors report included with our financial statements includes the following explanatory paragraph:

"The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred a net loss of $1,106,000 during the year ended April 30, 2003 and has an accumulated deficit of $12,322,000 as of April 30, 2003. These factors, among others, as discussed in Note 2 to the consolidated financial statements, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty."

In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in our financial statements is dependent upon our continued operations, which in turn is dependent upon our ability to meet our financing requirements on a continuing basis, to maintain present financing, and to succeed in our future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence.

Although we obtained some working capital funding in September 2003, we continue to pursue funding that will help us meet our future cash needs. We are currently working with several different sources, including both strategic and financial investors, in order to raise sufficient capital to finance both our continuing operations and our isotope-based trace detection technology. Although there is no assurance that additional funding will be available, we believe that our current business plan, if successfully funded, will significantly improve our operating results and cash flow in the future.

Unless we are able to develop and sell new products profitably, we may be unable to remain competitive, furthering the likelihood that our losses and negative cash flow will continue.

We have not operated profitably since our 1996 fiscal year. We recognized net income for the year ended April 30, 2000, only because of the gain recognized on the sale of our depleted zinc assets to Eagle-Picher Technologies, LLC ("Eagle-Picher").

As a consequence of our sale of the depleted zinc operations, our operations and our ability to generate revenues are more heavily dependent upon our ability to develop new products, including those that use stable and radioactive isotopes, and to market and sell those products profitably. We may be unable to develop products that can be profitably marketed and sold, which may prevent us from paying creditors as debts are due, and, in turn, may materially impact our ability to continue our business operations. See "Business."

It is possible that the following circumstances may develop and may adversely impact our available working capital and materially impact our ability to continue our business operations:

•: unanticipated expenses in developing our new products or in producing or marketing our existing products;
•: the necessity of having to protect and enforce our intellectual property rights;
•: technological and market developments; and
•: a corporate decision to expand our production capacity through capital investment or acquisition.

We may not be able to obtain equity or debt financing on reasonable terms when we need such financing. The unavailability of additional financing, when needed, could have a material adverse effect on our business. See "Management's Discussion and Analysis" and "Business."

We have raised capital and issued shares during the years ended April 30, 2002 and 2003, and subsequently which has resulted in dilution to our existing shareholders. This was necessary in order to provide necessary working capital or obtain assets and services, and we will likely issue more shares to raise additional capital or to obtain other services or assets, any of which may result in substantial additional dilution.

During the course of the last two fiscal years and the current fiscal year, we have been required to raise in excess of $4,000,000 of net working capital (after expenses) to finance our business operations and acquisitions. We have raised this capital by issuing shares of common stock and warrants to accredited investors and as compensation to investment bankers making introductions to the accredited investors. During this same period of time, we have issued warrants and shares of common stock to several persons in exchange for their promises to perform investment banking and financial advisory services to us. In many cases, these issuances were below the then-current market prices and can be considered dilutive to our existing shareholders—both as a reduction of their percentage ownership in Isonics and because of issuances at prices below the market.

There are provisions associated with the preferred stock private placement completed on July 29, 1999 that if triggered, would reduce the current conversion price and effectively allow the preferred shares to convert to common stock at a more favorable ratio. As a result of various transactions, the preferred stock is now convertible at 1.67 shares of common stock for each share of Series A Convertible Preferred Stock outstanding. We do not believe that the financing completed in September 2003 caused any further adjustment to the conversion price, but the holders of the Series A Convertible Preferred Stock have expressed their disagreement. As of October 21, 2003 there were 963,666 shares of Series A Convertible Preferred Stock outstanding convertible into 1,609,322 shares of common stock based on our calculation.

If we are successful in raising additional working capital, we will likely have to issue additional shares of our common stock and common stock purchase warrants at prices that may dilute the interests of our existing shareholders. See "Management's Discussion and Analysis," and "Business."

Operations in Russia, the Republic of Uzbekistan, and the Republic of Georgia may be disrupted because of a volatile political and economic climate beyond our control, which could adversely affect our supply of raw materials.

Operations in Russia, the Republic of Uzbekistan, and the Republic of Georgia entail risks. The former republics of the Soviet Union including Uzbekistan and Georgia are experiencing political, social and economic change as they obtain independence from the former central government in Moscow. Some of the republics, including Russia, Uzbekistan and Georgia, are attempting to transition from a central-controlled economy toward a market-based economy. These changes have involved, in some cases, armed conflict and the risk of continued instability has increased since the terrorist attacks on the United States of September 11, 2001. Although Uzbekistan borders Afghanistan, the activities in Afghanistan have not impacted our supply of isotopes. Political or economic instability in these republics may continue or worsen. The price, availability, quality, quantity, ability to export and supply of stable and radioactive isotopes could be directly affected by political, economic and military conditions in Russia, Uzbekistan and Georgia.

We are dependent on suppliers from Russia, Uzbekistan, and Georgia for approximately 95% of both our stable isotopes and our radioisotopes. Accordingly, our operations could be materially adversely affected if hostilities in Russia, Uzbekistan, or Georgia should occur, if trade between Russia, Uzbekistan and/or Georgia and the United States were interrupted or ceased, 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. See "Management's Discussion and Analysis" and "Business."

Because we depend upon few customers for a significant portion of our revenues, our business may be materially and adversely affected if we lose any one of these customers.

Two customers (Eastern Isotopes and Perkin Elmer Life Sciences) accounted for approximately 29% and 17%, respectively of revenues for the year ended April 30, 2003. Two customers (Eastern Isotopes and Perkin Elmer Life Sciences) accounted for approximately 31% and 11%, respectively of revenues for the three months ended July 31, 2003. Four customers (Perkin Elmer Life Sciences, IBT SA, Revis LTD and Idaho Isotopes) accounted for approximately 43%, 15%, 13% and 12%, respectively of the German operation's revenues for the year ended April 30, 2003. Three customers (Perkin Elmer Life Sciences, IBT SA and Idaho Isotopes) accounted for approximately 44%, 24% and 15%, respectively of the German operation's revenues for the three months ended July 31, 2003.

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 by reducing our revenues and our gross margins. Present or future customers could terminate their purchasing patterns with us or significantly change, reduce or delay the amount of isotopes or other products ordered from us. See "Management's Discussion and Analysis" and "Business."

If demand for our product grows suddenly, we may lack the resources to meet demand or we may be required to increase our capital spending significantly.

We have experienced, and may again experience, periods of rapid growth that place a significant strain on our financial and managerial resources. Through our marketing efforts we have increased the number and type of products we offer to our customers in our effort to replace the cash flow reduction that occurred as a result of the sale of our depleted zinc operations, and we are continuing to look for new products to offer. Through our research and development efforts we are also attempting to develop additional products and lines of business. 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, and will require us to develop the management skills of our personnel and to train, motivate and manage our employees. Our failure to effectively manage growth could increase our costs of operations and reduce our margins and liquidity, which could have a material adverse effect on our business, financial condition and results of operations. See "Business."

Because we are dependent upon our key personnel for our future success, if we fail to retain or attract key personnel, our business will be adversely affected.

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; Daniel Grady, Vice President, Life Sciences; Stephen Burden, Vice President, Semiconductor Materials; and Hans Walitzki, Vice President, Advanced Wafer Technology. We have obtained $1,000,000 of key man life insurance on the lives of Mr. Alexander and Mr. Rubizhevsky. Currently neither Mr. Alexander nor Mr. Rubizhevsky is covered by employment agreements and the compensation committee has not yet determined if they will issue new contracts. Dr. Grady and Dr. Burden are covered by employment agreements with an indefinite term that provides at-will employment, terminable at any time by either party. Dr. Walitzki is covered by an employment agreement through November 2006.

We believe that our future success will also depend upon our ability to attract and retain other 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. See "Management."

We may not be able to protect our intellectual property, which would reduce our competitive advantage.

We rely primarily on a combination of patents and patent applications, trade secrets, confidentiality procedures, and contractual provisions to protect our technology. Despite our efforts to protect our technology, 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 to information, materials and intellectual property that we regard as proprietary, and that are protected under the laws of the United States. We may not be able to protect our proprietary interests, or our competitors may independently develop similar technology or intellectual property. If either one of these situations occurs, we may lose existing customers and our business may suffer. See "Business."

The validity of any of the patents licensed to us, or that may in the future be owned by us, may not be upheld if challenged by others in litigation. Further, our products or technologies, even if covered by our patents, may infringe upon patents owned by others. We could incur substantial costs in defending suits brought against us, or any of our licensors, for infringement, in suits by us against others for infringement, or in suits contesting the validity of a patent. Any such proceeding may be protracted. In any suit contesting the validity of a patent, the patent being contested would be entitled to a presumption of validity and the contesting party would be required to demonstrate invalidity of such patent by clear and convincing evidence. If the outcome of any such litigation were adverse to our interests, our liquidity and business operations would be materially adversely affected.

We face technological change and intense competition both domestically and internationally which may adversely affect our ability to sell our products profitably.

Although we do not believe that any entity produces a complete range of stable enriched isotopes for commercial sale, many of our competitors have significantly greater funding than do we and may be able to develop products which are competitive with our products. See "Business."

Further, it is possible that future technological developments may occur. The market for our isotope products is characterized by rapidly evolving technology and continuing process development. Our future success will depend upon our ability to develop and market isotope products that meet changing customer and technological needs on a cost effective and timely basis. If we fail to remain competitive by anticipating the needs of our customers and our customers contract with other suppliers, our revenues and resulting cash flow could be materially and adversely affected.

We could be subject to environmental regulation by federal, state and local agencies, including laws that impose liability without fault, which could produce working capital shortages and lessen shareholders' equity.

We could become subject to a variety of federal, state, and local environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during the isotope product delivery and manufacturing process, although we do not believe that there is any such regulation directly applicable to our current operations. Regulations that become applicable to our operations in the future could restrict our ability to expand our facilities or could require us to acquire costly equipment or to incur other significant expenses to comply with governmental regulations. Historically, our costs of compliance with environmental regulations have not been significant.

We are controlled by only a few officers and directors and, consequently, purchasers of our shares will have very little ability to elect or control our management.

Even if all outstanding warrants and stock options are exercised and convertible securities are exchanged for common stock, our directors and officers will beneficially own 24.3% of the outstanding shares of common stock as of October 21, 2003, and, accordingly, may have the ability to elect a majority of the directors of Isonics and otherwise control the company. As a result, such persons, acting together, will have the ability to substantially influence all matters submitted to stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of substantially all of our assets, and to control our management and affairs. Such concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation or takeover or other business combination involving us or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would be beneficial to other stockholders.

We risk exposing ourselves to an above-policy limit product liability claim, which could adversely affect our working capital, shareholders' equity and profitability.

The use of our radioisotopes in radiopharmaceuticals and in clinical trials may expose us to potential product liability risks that are inherent in the testing, manufacture, marketing, and sale of human diagnostic and therapeutic products. We currently have product liability insurance; however, there is a risk that our insurance would not cover completely or would fail to cover a claim, in which case we may not have the financial resources to satisfy such claims, and the payment of claims would require us to use funds that are otherwise needed to conduct our business and make our products. See "Business."

Our common stock is vulnerable to pricing and purchasing actions that are beyond our control and, therefore, persons acquiring our shares or warrants may be unable to resell their shares or warrants at a profit as a result of this volatility.

The trading price of our securities has been subject to wide fluctuations in response to quarter-to-quarter variations in our operating results, our announcements of technological innovations or new products by us or our competitors, and other events and factors. The securities markets themselves have from time to time and recently experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. Announcements of delays in our testing and development schedules, technological innovations or new products by us or our competitors and developments or disputes concerning patents or proprietary rights could have a significant and adverse impact on such market prices. Regulatory developments in the United States and foreign countries, public concern as to the safety of products containing radioactive compounds, economic and other external factors, all affect the market price of our securities. In addition, the

realization of any of the risks described in these "Risk Factors" could have a significant and adverse impact on such market prices. See "Market for Common Equity and Related Stockholder Matters."

SEC penny stock regulations may limit the ability to trade our securities on the Nasdaq Small Cap Market.

Although our common stock is currently quoted on the Nasdaq SmallCap Stock Market, our common stock has in the past been subject to additional disclosure requirements for penny stocks mandated by the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. The SEC Regulations generally define a penny stock to be an equity security that is not traded on the Nasdaq Stock Market and has a market price of less than $5.00 per share. We have, at times in the past, been included within the SEC Rule 3a-51 definition of a penny stock. When our common stock is considered to be a "penny stock", trading is covered by Rule 15g-9 promulgated under the Securities Exchange Act of 1934, for non-Nasdaq and non-national securities exchange listed securities.

Under this rule, broker-dealers who recommend such securities to persons other than established customers and accredited investors must make a special written disclosure to, and suitability determination for, the purchaser and receive the purchaser's written agreement to a transaction prior to sale. The regulations on penny stocks limit the ability of broker-dealers to sell our common stock and thus the ability of purchasers of our common stock to sell their securities in the secondary market. To the extent we are able to maintain our listing on the Nasdaq SmallCap Stock Market, we will not be subject to these penny stock rules. Reasons for being unable to maintain our listing on the Nasdaq SmallCap Stock Market include:

•: the inability to maintain a bid price for our common stock of $1.00 for the requisite period of time, and
•: the inability to maintain either the minimum stockholders' equity, market capitalization or net income along with the required number of market makers and shareholders necessary for listing.

Our stock was trading at prices significantly below the $1.00 per share minimum maintenance requirements at times during the last half of the calendar year ended December 31, 2002 and has again at times been trading below the Nasdaq minimum trading price requirement of $1.00 per share since late February 2003. The volatility of our stock price, our current price near $1.00 per share, and our financial condition may in the future, result in our failing to meet Nasdaq's requirements. As a result, we could potentially be at risk of Nasdaq action to remove our securities from its SmallCap market. We cannot give any assurance that we will be able to meet the Nasdaq requirements to maintain our SmallCap listing, or that if we do, a stable trading market will develop for our stock or our warrants. See "Market for Common Equity and Related Stockholder Matters."

Future sales of our common stock may cause our stock price to decline.

Our stock price may decline by future sales of our shares or the perception that such sales may occur. As of October 21, 2003, approximately 6,345,367 shares of common stock held by existing stockholders constitute "restricted shares" as defined in Rule 144 under the Securities Act. The restricted 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.

Approximately 65% of the restricted shares of our common stock are either eligible for sale pursuant to Rule 144 or have been registered under the Securities Act for resale by the holders. 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 cause the stock's market price to decline. See "Shares Available for Future Sale."

If we fail to effect and maintain registration of the common stock issued and the common stock underlying issued and outstanding common stock purchase warrants covered by this Registration Statement by a certain date, we must pay the investors of those securities liquidated damages.

We have an obligation to file this Registration Statement to register the securities we issued in our September 2003 financing: 1,500,000 shares of common stock and 900,000 shares underlying the warrants. If we were unable to file the registration statement by October 24, 2003 (and subject to a 10 day grace period), we were required to pay the investors, as liquidated damages, 2% of the purchase price for every 30-day period that the Registration Statement is not filed. If we are unable to cause this Registration Statement to become effective by January 22, 2004, we are required to pay investors, as liquidated damages, 2% of the purchase price for every 30 day period, or portion thereof, that the registration statement is not declared effective.

We cannot offer any assurances that we will be able to obtain effectiveness of the registration statement within the required time period or that, if we do, we will be able to maintain its effectiveness.

We have never paid any cash dividends on our common stock and we do not anticipate paying cash dividends on our common stock in the foreseeable future.

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

Outstanding Series A Convertible Preferred Stock, options and warrants may make it difficult for us to obtain additional capital on reasonable terms.

As of October 21, 2003 we have 963,666 shares of Series A Convertible Preferred Stock outstanding convertible into 1,609,322 shares of our common stock. In addition, we had outstanding options and warrants for the purchase of up to 7,102,840 shares of common stock (at an average exercise price of $1.45 per share), although the exercise price for the options and warrants is in excess of the current market price for our common stock as reported by the public markets. If all of the outstanding options and warrants were to be converted, they would represent approximately 31.7% of our outstanding common shares on a fully diluted basis. Future investors will likely recognize that the holders of the options, warrants and the convertible preferred stock will only exercise their rights to acquire our common stock when it is to their economic advantage to do so. Therefore, even with lower current market prices for our common stock, the market overhang of such a large number of warrants, options, and convertible preferred stock may adversely impact our ability to obtain additional capital because any new investors will perceive that securities offer a risk of substantial potential future dilution. See "Isonics' Capital Stock."

Provisions in our charter documents could prevent or delay a change in control, which could delay or prevent a takeover.

Our Articles of Incorporation authorize the issuance of "blank check" preferred stock with such designations, rights, and preferences, as may be determined by our Board of Directors. Accordingly, the Board of Directors may, without shareholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting, or other rights that could adversely affect the voting power or other rights of the holders of our common stock. Preferred stock could also be issued to discourage, delay, or prevent a change in our control, although we do not currently intend to issue any additional series of our preferred stock. See "Isonics' Capital Stock."

Provisions in our bylaws provide for indemnification of officers and directors to the full extent permitted by California law, which could require us to direct funds away from our business and products.

Our Bylaws provide for indemnification of officers and directors to the full extent permitted by California law, our state of incorporation. We may be required to pay judgments, fines, and expenses incurred by an officer or director, including reasonable attorneys' fees, as a result of actions or proceedings in which such officers and directors are involved by reason of being or having been an officer or director. Funds paid in satisfaction of judgments, fines and expenses may be funds we need for the operation of our business and the development of our products, thereby affecting our ability to attain profitability. This could cause our stock price to drop.

Forward-looking statements may prove to be inaccurate

In our effort to make the information in this report more meaningful, this report contains both historical and forward-looking statements. All statements other than statements of historical fact are forward-looking statements within the meanings of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this report are not based on historical facts, but rather reflect the current expectations of our management concerning future results and events.

The forward-looking statements generally can be identified by the use of terms such as "believe," "expect," "anticipate," "intend," "plan," "foresee," "likely," "will" or other similar words or phrases. Furthermore, statements that describe our objectives, plans, or goals are, or may be, forward-looking statements.

Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Isonics to be different from any future results, performance and achievements expressed or implied by these statements.

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

The statements contained in this report that are not purely historical are forward-looking statements. "Forward looking statements" include statements regarding our expectations, hopes, intentions, or strategies regarding the future. Forward looking statements include: statements regarding future products or product development; statements regarding future selling, general and administrative costs and research and development spending, and our product development strategy; statements regarding future capital expenditures and financing requirements; and similar forward looking statements. It is important to note that our actual results could differ materially from those in such forward-looking statements.

In addition, our working capital shortage and recurring net losses resulted in our auditors issuing an opinion on our financial statements indicating a substantial doubt regarding our ability to continue as a going concern, which is indicative of increased risk. Please see the audit opinion on page F-2 of our financial statements for further information.

General Discussion

As indicated in the risk factors and in the management's discussion and analysis, which follows, we have had significant working capital shortages and a lack of profitable operations. Our revenues in the future will depend on our success in developing and selling products in the semiconductor and stable and radioactive isotope markets. Consistent with our historical experience, our annual results through April 30, 2003 and our quarterly results through July 31, 2003 have been materially affected by the size, timing, and quantity of orders and product shipments during a given quarter. In addition, these annual results have been significantly impacted by one-time events including the July 2002 settlement of the Eagle-Picher dispute and sale of Chemotrade Leipzig ("CTL"). We cannot offer any assurance that these types of events will occur in the future.

During our 2003 fiscal year, we commenced two new operations consisting of our SOI wafer manufacturing operation in Vancouver, Washington, and our acquisition of detection technology from IUT. As a result, we have been required to make a significant cash investment in our SOI wafer manufacturing operations and we may be required to make additional investments of cash, personnel, and materials in either of these operations in the future. These have strained our working capital resources and as a result our auditors issued their opinion to our audited financial statements for the year ended April 30, 2003, which expressed substantial doubt regarding our ability to continue as a going concern. Although an investment in September 2003 by accredited investors has temporarily alleviated our working capital shortage, we need a significant amount of additional financing to achieve our business goals—and we cannot offer any assurance that we will be able to obtain such financing on reasonable terms, if at all.

Management's Discussion and Analysis of Financial Condition or Plan of Operation
for the Quarter ended July 31, 2003

Results of Operations

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

			Three Months Ended July 31,
			2003		2002
Revenues			100.0	%	100.0	%
Cost of revenues			75.7		73.9

	Gross margin		24.3		26.1

Operating expenses:
	Selling, general and Administrative		47.4		51.8
	Research and development		2.8		2.7

		Total operating expenses	50.2		54.5

Operating loss			(25.9	)	(28.4	)

Other income (expense), net			—		61.9

Income (loss) before income taxes			(25.9	)	33.5

Income tax expense			—		—

NET INCOME (LOSS)			(25.9	)%	33.5	%

Revenues

Revenues increased from $2,241,000 for the three months ended July 31, 2002 to $2,285,000 for the three months ended July 31, 2003, an increase of $44,000 or 2.0%. The increase is due to $263,000 of semiconductor materials and products sales for the three months ended July 31, 2003 as compared to $12,000 for the three months ended July 31, 2002, partially offset by a decrease in isotope product sales. Included in semiconductor materials and products revenues for the three months ended July 31, 2003 is a $200,000 sale of silicon-28 as a bulk isotope.

Revenues from domestic isotope product sales for the three months ended July 31, 2003 were $1,468,000, a decrease of 7.3%, or $115,000, from $1,583,000 for the three months ended July 31, 2002. The decrease was primarily the result of a significant decrease in the sale of radioisotopes partially offset by an increase in the sale of stable isotopes.

Revenues from international isotope product sales for the three months ended July 31, 2003 were $554,000, a decrease of 14.2%, or $92,000, from $646,000 for the three months ended July 31, 2002. The decrease was primarily the result of a significant decrease in sales of one specific radioisotope due to a worldwide decrease in demand. It is uncertain if the demand for this radioisotope will return to previous levels.

We do not anticipate significant revenues from sales of silicon-28 based products in fiscal 2004 (although we have completed a $200,000 transaction for the sale of silicon-28 as a bulk isotope in the quarter ended July 31, 2003). 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 products, demand could emerge in the high-performance microprocessor segment 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 for the three months ended July 31, 2003 was $555,000, a decrease of 5.1%, or $30,000, from $585,000 for the three months ended July 31, 2002. On a percentage of revenues basis, gross margin decreased

1.8 percentage points to 24.3%, for the three months ended July 31, 2003, from 26.1%, for the three months ended July 31, 2002. The dollar decrease is directly attributable to a decrease in both domestic and international isotope product sales partially offset by an increase in gross margin generated from the sale of semiconductor materials and products. The percentage of revenues decrease is due to a decrease in higher margin domestic isotope sales and an increase in lower margin semiconductor materials and products sales partially offset by a decrease in lower margin international isotope sales. We anticipate that the gross margin from sales of semiconductor materials and products (both in dollar value and as a percentage of revenues) will increase over time as sales increase and minimize the overall effect of fixed costs, but we can offer no assurances that this will come to fruition.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $77,000, to $1,083,000, for the three months ended July 31, 2003, from $1,160,000, for the three months ended July 31, 2002. On a percentage of revenues basis, selling, general and administrative expenses decreased 4.4 percentage points to 47.4%, for the three months ended July 31, 2003, from 51.8%, for the three months ended July 31, 2002. The dollar decrease is primarily related to a decrease in legal costs associated with the Eagle-Picher dispute and a decrease in other professional services partially offset by an increase in headcount and facility costs related to the semiconductor materials and products business segment. The percentage decrease is also attributable to a decrease in legal costs associated with the Eagle-Picher dispute, a decrease in other professional services and an increase in revenues partially offset by an increase in headcount and facility costs related to the semiconductor materials and products business segment.

If we are able to obtain the necessary funding, we anticipate that we will increase our selling, general and administrative expenses during the year ending April 30, 2004 through anticipated increased marketing efforts for our semiconductor materials and products segment and in an effort to market the isotope-based trace detection technology that we recently acquired from IUT. There can be no assurance that our anticipated increased selling, general and administrative expenses will result in increased revenues from product sales.

Research and Development Expenses

Consistent with our product development strategy, we are seeking to identify and evaluate new stable and radioactive isotope products and potential markets for economic and technical feasibility. We anticipate that we may incur research and development costs associated with the detection technology that we acquired from the IUT only if we are able to obtain adequate additional financing. We will, in addition, continue funding research and development to improve technologies for isotope separation and material processing technologies. Because of the uniqueness of our business, the unique chemicals and processes we deal with and the handling precautions required, these expenses can be significant. We cannot offer any assurance that our current or future lines of business or products resulting from our research and development efforts will be profitable or generate significant revenues.

Research and development expenses increased $4,000, to $65,000, for the three months ended July 31, 2003, from $61,000, for the three months ended July 31, 2002. On a percentage of revenues basis, research and development expenses increased .1 percentage point to 2.8% for the three months ended July 31, 2003, from 2.7%, for the three months ended July 31, 2002.

We believe that the development and introduction of new product applications is critical to our future success. We expect that research and development expenses may increase assuming sufficient cash remains available and we are able to procure necessary materials and outside services, but will likely continue to vary as a percentage of revenues because of the timing and amount of future revenues. Except for work being performed at our facilities in Vancouver, Washington, we operate no other facilities of our own for research and development. All other research and development work is performed by outside entities, none of which we control. None of the companies that currently perform research and development work for us does so on an exclusive basis.

Other Income (Expense), net

dispute partially offset by the expensing of $546,000 of previously unamortized discount related to the Series 2002A Convertible Notes to interest expense and $182,000 of previously capitalized debt offering costs as a result of the conversion of the notes to common stock recognized during the three months ended July 31, 2002.

Income Taxes

We currently operate at a loss and expect to operate at a loss until revenues increase from our current operations or until the products currently under development begin to generate sufficient revenue. The losses we anticipate incurring during the remaining portion of the current year are not expected to generate an income tax benefit because of the uncertainty of the realization of the deferred tax asset. As a result, we have provided a valuation allowance against our net deferred tax assets as realization is uncertain.

Net Income (Loss)

We recognized a net loss of $591,000 for the three months ended July 31, 2003, as compared to net income of $752,000 for the three months ended July 31, 2002. We anticipate that losses will continue until revenues increase from our current operations or until we generate revenues from products introduced as a result of our research and development projects.

Net income in future years will be dependent upon our ability to increase net revenues faster than we increase our selling, general and administrative expenses, research and development expense and other expenses. Assuming we obtain the necessary funding, we anticipate expanding our SOI operations and generating additional revenues during the remainder of the year ending April 30, 2004. However, because of our continuing research and development efforts on new products (possibly including products based on our homeland security technology), we anticipate that our operations during the year ending April 30, 2004 will result in a loss since we are not likely to increase our revenues from our existing products or generate additional sales from the new products we may develop in a sufficient amount (if at all) to offset our operating expenses.

Liquidity and Capital Resources

Our working capital and liquidity have eroded significantly during the three months ended July 31, 2003. Working capital decreased $514,000, to $580,000 at July 31, 2003, from $1,094,000, at April 30, 2003.

Our principal sources of funding for the three months ended July 31, 2003 and 2002 have been from the settlement of the Eagle-Picher dispute, short term loans and proceeds from the sale of shares under our employee stock purchase program. We used cash in operating activities of $298,000 during the three months ended July 31, 2003 and provided cash from operating activities of $1,737,000 during the three months ended July 31, 2002. Cash used in operating activities during the three months ended July 31, 2003 was principally the result of a net loss of $591,000. Cash provided by operating activities for the three months ended July 31, 2002 was principally the result of the settlement of the Eagle-Picher dispute partially offset by operating losses.

Our investing activities used cash of zero and $2,000 for the three months ended July 31, 2003 and 2002, respectively. Cash used in investing activities for the three months ended July 31, 2002 resulted from purchases of property and equipment.

Financing activities provided cash of $162,000 for the three months ended July 31, 2003 and used cash of $24,000 for the three months ended July 31, 2002. Cash provided by financing activities for the three months ended July 31, 2003 resulted principally from short-term working capital loans. Cash used in financing activities for the three months ended July 31, 2002 resulted primarily from payments on borrowings of $25,000.

At July 31, 2003, we had $606,000 of cash and cash equivalents, a decrease of $136,000, as compared to $742,000, at April 30, 2003.

In September 2003 we completed a financing arrangement whereby we issued 1,500,000 shares of restricted common stock and 900,000 common stock warrants to accredited investors for $1,200,000. The common stock warrants are exercisable at $1.25 per share and expire on December 31, 2005. We paid the placement agents a 10% commission related to this arrangement.

On October 22, 2003, we extended our existing financial advisory agreement with Park Capital through December 31, 2004. In connection with this agreement, we issued a common stock warrant to purchase 500,000 shares of our restricted common stock at $1.25 per share. The common stock warrant vested immediately and expires on October 21, 2006.

On October 22, 2003, we entered into a non-exclusive investment banking agreement with vFinance whereby we issued a common stock warrant to purchase 560,000 shares of our restricted common stock at $1.25 per share. The common stock warrant vested immediately, expires on April 30, 2006 and was considered full payment for services to be provided through June 30, 2004.

Our stock was trading at prices significantly below the $1.00 per share Nasdaq minimum bid price requirement at times during the last half of the calendar year ended December 31, 2002 and has again at times been trading below $1.00 per share since late February 2003. The volatility of our stock price, our current price which is near $1.00 per share and our financial condition may result in our failing to meet Nasdaq's requirements. As a result, we could potentially be at risk of Nasdaq action to remove our securities from its SmallCap market. We cannot give any assurance that we will be able to meet the Nasdaq requirements to maintain our SmallCap listing, or that if we do, a stable trading market will develop for our stock.

In general, we expect that our working capital will decrease over time as we continue to use our capital and cash flows from revenues for operations, research and development, and investing activities. We do not expect working capital to increase until we are able to increase our revenues to exceed our cash out-flow (assuming we are able to increase our revenues) or complete a financing arrangement. With our anticipated revenues from operations during the period and projecting our cash flow on the basis of our historical expenditures and the financing completed in September 2003, we have sufficient cash available to fund our short-term working capital requirements through February, 2004.

We are currently working with several different sources, including both strategic and financial investors (including Quivira Venture Capital Partners), in order to raise sufficient capital to finance both our continuing operations and our proposed homeland security business through the use of the isotope-based trace detection technology we acquired from IUT. Although there is no assurance that funding will be available, we believe that our current business plan, if successfully funded, will significantly improve our operating results and cash flow in the future.

Management's Discussion and Analysis of Financial Condition or Plan of Operation
for the Year ended April 30, 2003

Results of Operations

The following table sets forth operations data expressed as a percentage of 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,
			2003		2002
Revenues			100.0	%	100.0	%
Cost of revenues			77.5		75.8

	Gross margin		22.5		24.2
Operating expenses:
	Selling, general and administrative		47.4		54.7
	Research and development		3.3		5.2
	Goodwill impairment		—		12.6

		Total operating expenses	50.7		72.5

Operating loss			(28.2	)	(48.3	)
Other income (expense), net			15.2		(.3	)

Loss before income tax expense			(13.0	)	(48.6	)
Income tax benefit (expense)			.8		—

Net loss			(12.2	)%	(48.6	)%

Revenues

Revenues increased from $8,155,000 for the year ended April 30, 2002 to $9,051,000 for the year ended April 30, 2003, an increase of $896,000 or 11.0%. The increase is due to a significant increase in domestic isotope product sales partially offset by a significant decrease in international isotope product sales. Included in revenues for the year ended April 30, 2003 were $197,000 of semiconductor materials and products sales as compared to $15,000 for the year ended April 30, 2002.

Revenues from domestic isotope product sales for the year ended April 30, 2003 were $5,882,000, an increase of 39.3%, or $1,658,000, from $4,224,000 for the year ended April 30, 2002. The increase was primarily the result of additional product sales to our existing customers and an increase in our customer base for the year ended April 30, 2003.

Revenues from international isotope product sales for the year ended April 30, 2003 were $2,972,000, a decrease of 24.1%, or $944,000, from $3,916,000 for the year ended April 30, 2002. The decrease was primarily the result of the sale of CTL to the 25% shareholder effective May 1, 2002 partially offset by an increase in product sales to our existing customers and an increase in our customer base for the year ended April 30, 2003.

Included in revenues from international isotope product sales for the year ended April 30, 2002 was approximately $1,575,000 of revenues from CTL. Effective May 1, 2002 we sold our 75% interest in CTL to its 25% shareholder for 50,000 Euros (approximately $48,000). CTL, which primarily resells oxygen-18, was notified that its current distribution agreement (which expired on December 31, 2002) would not be renewed. The loss of this agreement was significant as it accounted for approximately 80% of CTL's revenue and as a result, CTL's ability to generate revenues after December 31, 2002 was extremely uncertain. As a result of this disposition, Chemotrade is now free to pursue other opportunities (including selling oxygen-18 throughout the European market) that may have been in conflict with the interests of CTL. We have fully replaced the lost revenue during the year ended April 30, 2003 with additional product sales to new and existing customers both domestically and in Europe. We fully anticipate that we will continue this trend during fiscal year 2004, but we can offer no assurances that this will come to fruition. See "Recent Business Dispositions."

Although we commenced our SOI business on a limited basis during the year ended April 30, 2002, there are still several additional items that need to be resolved, including the refining of our processes and procedures and obtaining certification from our future customers before we will be able to operate our SOI business on a full scale basis. We did commence manufacturing SOI wafers in our own manufacturing facilities during the year ending April 30, 2003 as described elsewhere herein and we expect to be able to continue to do so.

Not withstanding the commencement of manufacturing SOI wafers in our own manufacturing facility in November 2002, we do not anticipate significant revenues from sales of silicon-28 based products in fiscal 2004 (although we have completed a $200,000 transaction for the sale of silane gas in the first quarter of the year ending April 30, 2004). 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 products, demand could emerge in the high-performance microprocessor segment 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 for the year ended April 30, 2003 was $2,037,000, an increase of 3.2%, or $64,000, from $1,973,000 for the year ended April 30, 2002. On a percentage of revenues basis, gross margin decreased 1.7 percentage points to 22.5%, for the year ended April 30, 2003, from 24.2%, for the year ended April 30, 2002. The dollar increase is directly attributable to an increase in higher margin domestic isotope product sales partially offset by a decrease in lower margin international isotope sales primarily due to the disposition of CTL effective May 1, 2002 and a $138,000 negative margin on semiconductor materials and products sales. The percentage of revenues decrease is due to the combination of the negative margin achieved on semiconductor materials and products sales partially offset by an overall increase in higher margin domestic isotope sales and a decrease in lower margin international isotope sales due to the disposition of CTL effective May 1, 2002.

Included in gross margin for the year ended April 30, 2002 was $326,000 of gross margin from CTL. We have replaced the lost gross margin for the year ended April 30, 2003 with additional product sales, at a higher gross margin percentage, to both new and existing customers, both domestically and in Europe. We fully anticipate that we will continue this trend during fiscal year 2004, but we can offer no assurances that this will come to fruition. See "Recent Business Dispositions."

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $173,000, to $4,290,000 for the year ended April 30, 2003, from $4,463,000 for the year ended April 30, 2002. On a percentage of revenues basis, selling, general and administrative expenses decreased to 47.4%, for the year ended April 30, 2003, from 54.7%, for the year ended April 30, 2002. The dollar decrease is primarily attributable to a decrease in the usage of legal services (pertaining mostly to the Eagle-Pitcher dispute), a decrease in the usage of common stock or common stock warrants issued for other professional services, a decrease in headcount at our corporate offices and Chemotrade partially offset by an increase in headcount and facility costs related to the semiconductor materials and products business segment. The percentage decrease is also attributable to a decrease in the usage of legal services (pertaining mostly to the Eagle-Pitcher dispute), a decrease in the usage of common stock or common stock warrants issued for other professional services, a decrease in headcount at our corporate offices and Chemotrade and an increase in revenues partially offset by an increase in headcount and facility costs related to the semiconductor materials and products business segment.

We anticipate that we will increase our selling, general and administrative expenses during the year ending April 30, 2004 through anticipated increased marketing efforts for our semiconductor materials and products segment and in an effort to market the isotope-based trace detection technology that we recently acquired from IUT. There can be no assurance that our anticipated increased selling, general and administrative expenses will result in increased revenues from product sales.

Goodwill Impairment

The dynamics of Chemotrade's business changed throughout the year ended April 30, 2002, including the realization in the fourth quarter that we would be unable to renew a major sales contract that expired December 31, 2002, the retirement of two key members of management and an evolving change in our current and future product mix. These conditions led to operating results and forecasted future results that were substantially less than had been anticipated at the time of the acquisition of Chemotrade. We revised our projections and determined that the projected results would not fully support the future amortization of the goodwill balance. In accordance with our policy, we assessed the recoverability of goodwill using a discounted cash flow projection over the next six years, at a risk-adjusted rate of 12%. The six-year time horizon represented our best estimate of Chemotrade's future cash flows given current planned operating conditions. Based on this projection, the cumulative cash flow was insufficient to fully recover the goodwill and fixed asset balance. As a result, we determined that assets with a carrying value of $2,881,000 were impaired, resulting in a write-down of goodwill of $1,025,000 to its fair value during the year ended April 30, 2002.

Research and Development Expenses

Consistent with our product development strategy, we are seeking to identify and evaluate new stable and radioactive isotope products and potential markets for economic and technical feasibility. We do not anticipate incurring any research and development costs associated with the technology that we recently acquired from IUT in the first two quarters of the year ending April 30, 2004. We anticipate that we may incur significant research and development costs associated with this technology later in the year ending April 30, 2004 only if we are able to obtain additional financing. We will, in addition, continue funding research and development to improve technologies for isotope separation and material processing technologies. Because of the uniqueness of our business, the unique chemicals and processes we deal with and the handling precautions required, these expenses can be significant. We cannot offer any assurance that our current or future lines of business or products resulting from our research and development efforts will be profitable or generate significant revenues.

Research and development expenses decreased $120,000, to $303,000, for the year ended April 30, 2003, from $423,000, for the year ended April 30, 2002. On a percentage of revenues basis, research and development expenses decreased to 3.3% for the year ended April 30, 2003, from 5.2%, for the year ended April 30, 2002. The dollar decrease is primarily related to an increase in the revenue generated by the sale of silicon 28 epitaxial wafers to different companies for testing purposes. This revenue is recorded as an offset to research and development expenses in the accompanying statement of operations. The percentage decrease is also primarily related to the increase in the revenue generated by the sale of silicon 28 epitaxial wafers to different companies for testing purposes and an increase in revenues.

We believe that the development and introduction of new product applications is critical to our future success. We expect that research and development expenses may increase assuming sufficient cash remains available and we are able to procure necessary materials and outside services, but will likely continue to vary as a percentage of revenues because of the timing and amount of future revenues. We operate no facilities of our own for research and development. All research and development work is performed by outside entities, none of which we control. None of the companies that currently perform research and development work for us does so on an exclusive basis.

Other income (expense), net

Other income (expense), net includes net gains from a legal settlement, amortization of debt offering costs, gains or losses on the sale of lines of businesses or subsidiaries, interest income and expense, and foreign currency gains and losses. Other income (expense), net increased $1,402,000, to $1,380,000, for the year ended April 30, 2003, from ($22,000), for the year ended April 30, 2002. The increase is primarily attributable to the gain (net of the contingency portion of legal fees) of $2,140,000 related to the settlement of the Eagle-Picher dispute and the $30,000 gain resulting from the disposition of CTL, partially offset by the expensing of $546,000 of previously unamortized discount related to the Series 2002A Convertible Notes to interest expense and $182,000 of previously capitalized debt offering costs as a result of the conversion of the notes to common stock.

Income Taxes

We currently operate at a loss and expect to operate at a loss until the products currently under development begin to generate sufficient revenue. The losses incurred in the current year are not expected to generate an income tax benefit because of the uncertainty of the realization of the deferred tax asset. As a result, we have provided a valuation allowance against our net deferred tax asset as realization is uncertain. The income tax benefit in the current year relates to cash received from a carry-back claim resulting from a change in the tax laws. In October 2001, we received approximately $362,000 resulting from a carry-back claim associated with the prior year taxable loss.

Net Loss

We recognized a net loss of $1,106,000 for the year ended April 30, 2003, as compared to a net loss of $3,960,000 for the year ended April 30, 2002. The decrease in the net loss is primarily attributable to the gain (net of the contingency portion of legal fees) of $2,140,000 related to the settlement of the Eagle-Picher dispute. We anticipate that losses will continue until revenues increase from our current operations or until we generate revenues from products introduced as a result of our research and development projects.

Net income in future years will be dependent upon our ability to increase revenues faster than we increase our selling, general and administrative expenses, research and development expense and other expenses. During the year ending April 30, 2004, we anticipate expanding our SOI operations and generating additional revenues. However, because of our continuing research and development efforts on new products (possibly including products based on our newly-acquired homeland security technology), we anticipate that the operations during the year ending April 30, 2004 will result in a loss since we are not likely to increase our revenues from our existing products or generate additional sales from the new products we may develop in a sufficient amount (if at all) to offset our operating expenses.

Liquidity and Capital Resources

Our working capital and liquidity increased during the year ended April 30, 2003 due mainly to the resolution of our dispute with Eagle-Picher via the July 24, 2002 settlement agreement whereby we received $2,500,000 ($2,140,000 net of the contingency portion of our legal fees). Working capital increased $28,000, to $1,094,000, at April 30, 2003, from $1,066,000, at April 30, 2002. Of that, $760,000 of our working capital relates to Chemotrade and is not available to pay our United States based creditors. Our working capital has decreased since we received the funds from the Eagle-Picher settlement as we have used those funds to finance our negative cash flow.

Our principal source of funding for the year ended April 30, 2003 has been from the settlement of the Eagle-Picher dispute. Our principal sources of funding for the year ended April 30, 2002 have been from the issuance of our Series 2002A Convertible Notes (which were subsequently converted into common stock) and the exercise of common stock warrants. We provided cash from operating activities of $606,000 during the year ended April 30, 2003 and used cash in operating activities of $1,858,000 during the year ended April 30, 2002. Cash provided by operating activities during the year ended April 30, 2003 was principally the result of the settlement of the Eagle-Picher dispute partially offset by operating losses. Cash used in operating activities for the year ended April 30, 2002 was principally the result of a net loss of $3,960,000 partially offset by a charge for impairment of goodwill of $1,025,000.

Our investing activities used cash of $550,000 and $17,000 for the years ended April 30, 2003 and 2002, respectively. Cash used in investing activities for the years ended April 30, 2003 and 2002, resulted from purchases of property and equipment.

Financing activities used cash of $39,000 for the year ended April 30, 2003 and provided cash of $1,510,000 for the year ended April 30, 2002. Cash used in financing activities for the year ended April 30, 2003 resulted primarily from payments on borrowings and capital lease obligations of $44,000. Cash provided by financing activities for the year ended April 30, 2002 resulted primarily from the issuance of our Series 2002A Convertible Notes for $1,000,000, the exercise of common stock warrants for $473,000, proceeds of $7,000 from the sale of shares under our employee stock purchase program and $30,000 from the net issuance and repayments of notes payable.

At April 30, 2003, we had $742,000 of cash and cash equivalents, an increase of $17,000, compared to $725,000 at April 30, 2002.

In November 2002, we entered into an agreement with Park Capital whereby we issued a common stock warrant to purchase 300,000 shares of common stock at $1.00 per share (of which 240,000 were subsequently assigned to Roadrunner), for investment banking and consulting services. The common stock warrant vested immediately and expires in November 2005. As originally written, the agreement terminates on December 31, 2003. On October 22, 2003 we extended this financial advisory agreement for an additional twelve months and, as a result, it now expires on December 31, 2004. We issued Park Capital warrants (exercisable at $1.25 and expiring October 21, 2006) to purchase an additional 500,000 shares of our common stock as consideration for extending this agreement. We also entered into an investment banking services agreement with vFinance and issued to vFinance 560,000 warrants to purchase our common stock. The warrants to vFinance are exercisable at $1.25 per share through April 30, 2006.

On March 20, 2002 we completed a financing arrangement whereby we issued $1,000,000 of Series 2002A Convertible Notes. The notes were convertible at a ratio of one common share for each dollar of note outstanding, bore interest at 4% per annum and were due March 1, 2003. During the year ended April 30, 2003, the $1,000,000 of convertible notes were converted to 1,000,000 shares of common stock.

the current exercise price of the related warrants. The 3,085,622 common stock warrants associated with this private placement expired unexercised on July 29, 2002.

In addition to anti-dilution rights, there are provisions associated with the Series A Convertible Preferred Stock that if triggered, would reduce the current conversion price and effectively allow the preferred shares to convert to common stock at a ratio greater than a one for one basis. As a result of a December 2002 settlement with the holders of the Series A Convertible Preferred Stock over the proper calculation of the conversion ratio, the conversion price is currently $.90 per share and, as a result, the Series A Convertible Preferred Stock is now convertible at 1.67 shares of common stock for each share of Series A Convertible Preferred Stock outstanding.

The terms of the private placement completed on December 13, 2000 required that we register the common stock and the common stock underlying the Class B Common Stock Warrants by June 14, 2001. As we were unable to complete the effective registration of such shares by June 14, 2001, on July 26, 2001 we rectified the situation by issuing an additional 112,504 shares of common stock and an additional 675,000 Class B Common Stock Warrants to the investors of the private placement.

On April 30, 2001, we completed the exchange offer described herein whereby the holders of Class A Common Stock Warrants could exchange each Class A Common Stock Warrant for a Class B Common Stock Warrant. In order to participate in the exchange offer, each holder of the Class A Common Stock Warrants was required to submit their election by April 30, 2001. As a result of this exchange offer, 632,610 of the 810,000 Class A Common Stock Warrants were exchanged for Class B Common Stock Warrants. The remaining 177,390 Class A Common Stock Warrants that were not exchanged expired September 21, 2001.

In general (and even though our working capital increased during the year ended April 30, 2003 due, primarily due to the Eagle-Picher settlement), we expect that our working capital will decrease over time as we continue to use our capital and cash flows from revenues for operations, research and development and investing activities (including the expansion of our SOI operations). We do not expect working capital to increase until we are able to increase our revenues to exceed our cash out-flow (assuming we are able to increase our revenues) or complete a financing arrangement. We cannot offer any assurance that we will be able to do so in the near term. Our current working capital shortage resulted in our auditors issuing an opinion on our financial statements indicating substantial doubt regarding our ability to continue as a going concern.

We are currently working with several different sources, including both strategic and financial investors, in order to raise sufficient capital to finance both our continuing operations and our proposed homeland security business through the use of the isotope-based trace detection technology we acquired from IUT. Although there is no assurance that funding will be available, we believe that our current business plan, if successfully funded, will significantly improve our operating results and cash flow in the future.

Critical Accounting Policies

The material accounting policies that we believe are the most critical to an investor's understanding of our financial results and condition and require complex management judgment have been expanded and are discussed below.

Goodwill and Intangible Assets

Effective May 1, 2002 we adopted SFAS No. 142 Goodwill and Other Intangible Assets. SFAS No. 142 addresses the methods used to amortize intangible assets and to assess impairment of those assets, including goodwill resulting from business combinations accounted for under the purchase method. Although we adopted SFAS No. 142 effective May 1, 2002, goodwill and intangible assets other than goodwill acquired after June 30, 2001 have been amortized or not amortized in accordance with SFAS 142. We acquired intangible assets from Silicon Evolution, Inc. ("SEI") and IUT subsequent to June 30, 2001, and have accounted for those assets in accordance with the requirements of SFAS No. 142. Included in our assets at July 31, 2003, is goodwill related to the acquisition of Chemotrade in 1998 with a net carrying value of $1,807,000. Effective with the adoption of SFAS No. 142, we no longer amortize this goodwill, decreasing our amortization expense by approximately $110,000 per year.

In accordance with SFAS No. 142, we have completed our annual impairment test (as of April 30, 2003) on our life sciences reporting unit, which has recorded goodwill. In completing our analysis of the life sciences reporting unit, we used the Discounted Cash Flow Method ("DCF Method") in which the reporting unit was valued by discounting the projected cash flows to its present value based upon a risk-adjusted discount rate. As a

result of the testing, we determined that there is no impairment of goodwill. We are required to assess goodwill for impairment annually, or earlier if indicators of impairment do arise. We are not aware of any indicators of possible impairment as of October 21, 2003.

In performing the calculation under SFAS No. 142, we made several assumptions, including the use of the DCF Method, the number of years used in the projection, the discount rate and growth assumptions. Had we elected to use different variables, the outcome of the calculation could have been different.

We utilized the DCF Method in order to calculate the fair value of our life sciences reporting unit. We had the option to utilize the market capitalization method but given the complexity of our business, we determined that we couldn't reasonably bifurcate the market value of the life sciences reporting unit from our other operations based upon our market value as a whole. In utilizing the DCF Method, we based our calculation over a conservative six-year life with no projected growth over the final four years. The final four years were kept constant in order to ensure that we did not overestimate the potential of the reporting unit. The six-year life was utilized as a result of the fact that the life sciences reporting unit has been selling isotopes for over fifteen years and that demand for isotopes is projected to increase over the next ten years. Given the history of the reporting unit and the projected future of the industry, we determined that it was reasonable to utilize a six-year life. Had we utilized a life of less than six years, the calculation may have suggested that impairment was present. In addition, we discounted the projected cash flows at a rate of 12%. The 12% was deemed reasonable given the current low market interest rate and the extremely low risk of the life sciences business offset by the higher cost of capital for a small company and the related difficulties we have had in raising necessary capital over the years. Had we utilized a discount rate that was substantially larger than 12%, the calculation may have suggested that impairment was present.

Our intangible assets result from the perpetual, exclusive technology license agreement with SEI that we entered into on September 14, 2001 and the isotope-based trace detection technology we acquired from IUT in December 2002. As the intangible assets were acquired after June 30, 2001, we adhere to the guidance provided by SFAS No. 142 Goodwill and Other Intangible Assets. Both the intangible assets acquired from SEI and the isotope-based trace detection technology are being amortized over their estimated useful lives of ten years (which are based upon many factors including the time it will take to develop the technology, the expected life of the finalized product(s) and the estimated lives of similar products). We will continue to evaluate each reporting period whether events and circumstances continue to support our assessment of a ten-year life for these intangible assets. Additionally, if indicators of impairment do arise in the future, the intangible assets will be tested for impairment and may result in an impairment charge in the future. We are not aware of any indicators of possible impairment as of October 21, 2003.

Valuation of Equity Transactions

We value transactions associated with common or preferred stock that is convertible into common stock based on the market value of the underlying common stock on the date of the signing of the agreement. We value transactions associated with common stock warrants at the appropriate measurement date utilizing the Black-Scholes pricing model, with assumptions as to volatility (100%), risk-free interest rate (4.0%) and estimated life of the warrants based on historical information. If the assumptions used, as they relate to volatility, risk-free interest rate and estimated life of the warrants, were materially different, the overall valuation of these transactions could change significantly.

PROCEDURE FOR EXERCISE OF THE WARRANTS AND TAX ASPECTS

Procedure to Exercise Class B Warrants and Class C Warrants. A portion of the Class B Warrants included in this Prospectus have been issued and outstanding since they were issued upon completion of the exchange offer on April 30, 2001. Certain Class C Warrants were issued shortly after the completion of the exchange offer to persons who exercised Class B Warrants. This Prospectus also includes an additional 1,350,000 restricted Class B Warrants that were issued in a private placement in December 2000 and July 2001.

Each registered holder of a Class B Warrant or a Class C Warrant should have possession of a certificate that represents that warrant. Persons who hold their Class B Warrants or their Class C Warrants in a brokerage account or otherwise in a "street name" account may ask their brokers to deliver a certificate for their Class B Warrant or their Class C Warrant to them.

Procedure to Exercise the Undesignated Warrants. 900,000 warrants were issued to three accredited investors in the September 2003 private placement along with 1,360,000 warrants which were issued in October 2003 and November 2002 to certain investment bankers. The warrants are not included in this Registration Statement and there is no obligation of us to register such warrants. These warrants may only be exercised if an exemption from registration is available to our satisfaction. We believe that an exemption will be available to allow holders of these warrants to exercise the warrants since all purchasers were accredited investors. If an exemption is available and these warrants are exercised, the underlying common stock can be offered and sold by the holder of those shares pursuant to this Prospectus.

Registered Holders. If you are a registered holder, and if you have possession of the certificate for your Class B Warrant or Class C Warrant, in order to exercise a warrant, you must:

•: complete the subscription form which is included as a part of the warrant certificate;
•: sign the subscription form and have your signature medallion guaranteed by a broker-dealer member of the STAMP program;
•: deliver the original warrant certificate with the completed, signed, and medallion guaranteed subscription form to Continental Stock Transfer & Trust Co., Inc., 17 Battery Place, 8^th Floor, New York, NY 10004, Attn: Compliance Department; and
•: include your payment for the exercise price ($1.50 times the number of warrants being exercised for the Class B Warrants; and $2.50 times the number of warrants being exercised for the Class C Warrants). You must pay for the exercise by certified or bank cashiers' check payable in United States funds to the order of Isonics Corporation. If you prefer to wire transfer funds, you should contact Continental Stock Transfer & Trust Company by telephone and request wiring instructions. Continental Stock Transfer can be reached by telephone at (212) 509-4000.

We recommend that you do not send your warrant certificate or funds through the regular U.S. Mail. We recommend that you use registered or certified U.S. Mail, or a courier service that will provide you a receipt indicating that Continental Stock Transfer received your warrant certificate and payment. Neither we, nor Continental Stock Transfer, are responsible for your warrant certificate or your payment until Continental Stock Transfer actually receives delivery. Do not send warrant certificates or payment directly to Isonics Corporation.

Warrants held in a Brokerage Account or Otherwise in Street-Name. If you hold your Class B Warrants or Class C Warrants in a brokerage account or otherwise in a "street name" account, you must follow the procedures required by your broker, dealer, or other street-name holder.

Lost Warrant Certificates. If you have lost your warrant certificate, you must contact Continental Stock Transfer & Trust Co., Inc., and follow the procedures established by Continental Stock Transfer for your lost warrant certificate.

Tax Aspects. No gain or loss will be recognized by a holder of any of our Warrants held for investment on the holder's purchase of Common Stock for cash upon exercise of the warrant. The adjusted tax basis of the Common Stock so acquired will be equal to the tax basis of the warrant plus the exercise price. The holding period of the Common Stock acquired upon the exercise of a warrant, will begin on the date the warrant is exercised and the Common Stock is purchased.

No Underwriter, Etc. No underwriter, dealer, or finder, or other person has the right to receive any reimbursement of expenses, any right to appoint a representative to our board of directors, or the right to receive indemnification from us. To our knowledge, no person is engaging in passive market making or stabilizing or other transactions.

SECURITIES OFFERED, THE SELLING HOLDERS AND THE PLAN OF DISTRIBUTION

This Prospectus includes securities that are underlying outstanding Class B Warrants and Class C Warrants and other outstanding warrants. Certain of these securities were included in a prior registration statement declared effective under the Securities Act of 1933 on April 9, 2003, and which are incorporated into this Prospectus pursuant to Rule 429. This Prospectus also includes securities that are underlying Class B Warrants held by the

Selling Holders, in addition to the securities being offered by the Selling Holders. The securities being offered by us and by the Selling Holders are described in the next two sections:

Isonics. This Prospectus includes the following securities that we are offering:

1,780,110 Class C Redeemable Warrants underlying		3,762,720 shares of Common Stock underlying
430,110 outstanding Class B Warrants that are publicly-held, and 1,350,000 outstanding restricted Class B Warrants that are included in this Prospectus for resale		430,110 outstanding Class B Warrants that are publicly held, 202,500 outstanding Class C Warrants that are publicly held, 1,350,000 outstanding restricted Class B Warrants that are included in this Prospectus for resale, and 1,780,110 Class C Warrants issuable upon exercise of outstanding Class B Warrants.

We are not offering any securities except securities that are underlying outstanding Class B Warrants and Class C Warrants that are either outstanding or are issuable upon exercise of Class B Warrants.

The Selling Holders. This Prospectus includes the securities that are being offered by the Selling Holders that were sold: (i) in a December 2000 private placement made to accredited investors only, and that were issued to them in July 2001 as a result of negotiations between Isonics and the Selling Holders completed in July 2001 when we were not able to gain effectiveness of a registration statement originally filed for the Selling Holders in March 2001; (ii) in our September 2003 financing; and (iii) in our October 2003 and November 2002 agreements with investment bankers:

•: 2,400,000 shares of Common Stock, of which 1,500,000 shares are already outstanding and 900,000 shares underlying warrants issued in September 2003; and
•: 1,350,000 restricted Class B Warrants which are already outstanding; and
•: 1,360,000 shares underlying warrants issued in October 2003 and November 2002.

We have set forth in the following table information relative to the Selling Holders as of October 21, 2003. We calculated beneficial ownership based on SEC requirements, and the information we included regarding beneficial ownership is not necessarily indicative of beneficial ownership for any other purpose. Unless otherwise indicated below, each person identified in the table has sole voting and investment power with respect to all shares he, she, or it beneficially owns, subject to applicable community property laws. We have based the percentage calculated for each Selling Holder upon the sum of the "common stock" and "common stock issuable upon exercise of warrants" columns.

None of the Selling Holders had any material relationship with us during the past three years. Furthermore, none of the Selling Holders owns any Series A Convertible Preferred Stock or options or warrants to purchase our common stock except the restricted Class B Warrants purchased in the December 2000 private placement or as issued in July 2001, the warrants issued in the September 2003 financing and the warrants issued to certain investment bankers in October 2003 and November 2002. Greenwood Partners, L.P. has acted as a market maker in our common stock from time to time and, therefore, as described in the table below at October 21, 2003, owns additional Class C Warrants.

We do not know when or in what amounts the Selling Holders may offer the shares described in this Prospectus for sale. The Selling Holders may decide not to sell all or any of the shares that this Prospectus covers. Because the Selling Holders may offer all or some of the shares pursuant to this offering, and because there are currently no agreements, arrangements or understandings with respect to the sale of any of the shares that the Selling Holders will hold after completion of the offering, we cannot estimate the number of the shares that the Selling Holders will hold after completion of the offering. However, for purposes of this table, we have assumed that, after completion of the offering, the Selling Holders will hold none of the securities that this Prospectus covers.

	(a) Common Stock, (b) Shares underlying Warrants Beneficially Owned Prior to This Offering (including Class B Warrants, Class C Warrants, and undesignated warrants as a group
				Securities Being Offered by Selling Holders			(a) Common Stock to be Beneficially Owned After Offering and (b) Percentage, Assuming All Shares Offered are Sold
					(a) Common Stock and (b) Class B Warrants (or shares underlying Class B Warrants)(1)
				Shares underlying undesignated Warrants(1)
Name of Selling Holder(s)	(a)		(b)	Shares underlying undesignated Warrants(1)	(a)	(b)	(a)	(b)
Penelope A. Collins	16,667	*	50,000	0	0	50,000	16,667	<1	%
Generation Capital Associates(5)	0		200,000	0	0	200,000	0	0	%
Greenwood Partners, L.P.(2)	6,877	*	722,800	0	0	540,000	189,677	1.4	%
Edward S. Gutman(3)	8,334	*	100,000	0	0	100,000	8,334	<1	%
Gutman Family Foundation(3)	30,684	*	100,000	0	0	100,000	30,684	<1	%
The HRG Trust, Edward S. Gutman, Trustee(3)	30,684	*	100,000	0	0	100,000	30,684	<1	%
Harvey Silverman	33,334	*	100,000	0	0	100,000	33,334	<1	%
Wolcott Capital Corp.(4)	0		57,500	0	0	100,000	0	0	%
Alan R. Silberman	0		60,000	0	0	60,000	0	0	%
Reback Living Trust Feb 20, 2001(6)	438,400	^	232,500	232,500	387,500	0	50,900	<1	%
Yorkshire Limited(7)	737,500	^	442,500	442,500	737,500	0	0	0	%
Southshore Capital Fund Ltd.(8)	375,000	^	225,000	225,000	375,000	0	0	0	%
Park Capital Securities, LLC(9)	0		560,000	560,000	0	0	0	0	%
vFinance Investments, Inc.(10)	!!		!!	215,600	0	0	!!	!!
Roadrunner Capital Group, LLC(11)	50,000	*	240,000	240,000	0	0	50,000	<1	%
Richard Rosenblum(12)	!!		!!	172,200	0	0	!!	!!
David Stefansky(12)	!!		!!	172,200	0	0	!!	!!

*: The shares denoted by an asterisk were (to our knowledge) either acquired in the open market (and therefore are not restricted securities) or have been held for more than two years (and therefore are eligible for resale under SEC Rule 144(k).) As a result, the shares of common stock denoted by an asterisk are not included in this prospectus.
^: The shares denoted by a carat are included in this prospectus except in the case of The Reback Living Trust Feb 20, 2001 ("Reback") in which case only 387,500 shares are included in the prospectus; we understand that Reback purchased the remaining shares in the open market.
!!: Information to be provided by amendment.
(1): The Selling Holders are offering all of the restricted Class B Warrants (or the shares underlying the restricted Class B Warrants, in the alternative) they acquired in the December 2000 private placement, plus the additional shares and restricted Class B Warrants they received in the July 2001 readjustment, all of the common stock they acquired in the September 2003 private placement and all of the shares underlying the undesignated warrants. The total beneficial ownership does not include Class C Warrants that will be issued upon the exercise of the restricted Class B Warrants. The Class C Warrants are not being offered by the Selling Holders pursuant to this Prospectus.
(2): Greenwood Partners, L.P. is a privately-held company whose controlling person is GMG & Associates, Inc., its general partner, which is controlled by Gregg M. Greenberg. Greenwood Partners, L.P. is a broker-dealer registered under the Securities Exchange Act of 1934, as amended, and from time-to-time makes a market in our common stock in the Nasdaq SmallCap Market. As of October 21, 2003, Greenwood Partners, L.P. had a long position of 6,877 shares of our common stock and long positions of 540,000 Class B Warrants and 182,500 Class C Warrants, and no short position. Greenwood did not own any warrants referred to herein as the "undesignated warrants." The Class C warrants are included in a prior registration statement and are incorporated herein under SEC rule 429.
(3): Mr. Gutman controls both the Gutman Family Foundation and the HRG Trust. Mr. Gutman is a minority limited partner of Greenwood Partners, L.P., but does not in any manner participate in the business of Greenwood Partners, L.P. Mr. Gutman has represented to us that at the time he purchased the shares and the class B warrants from us he had, and at present he continues to have, no agreement or understanding, directly or indirectly, with any person to distribute the securities. Mr. Gutman's ownership of warrants reflects 100,000 Class B Warrants included in this prospectus.
(4): Wolcott Capital Corp. is a privately-held company whose controlling person is Nicholas Ponzio, President. Wolcott's ownership of warrants includes 57,500 Class B Warrants included in this prospectus.
(5): Generation Capital Associates is a limited partnership of which Frank E. Hart is the general partner. Generation Capital ownership of warrants reflects 200,000 Class B Warrants included in this prospectus.

(6): Reback Living Trust Feb 20, 2001 is a living trust whose sole trustee is Abraham Reback. Reback's ownership includes 232,500 undesignated warrants (exercisable at $1.25 through December 31, 2005); the warrants are not included for resale under this prospectus; the shares underlying the warrants are included in the prospectus.
(7): Yorkshire Limited ("Yorkshire") is a privately-held Turks and Caicos Islands corporation. The natural person having voting and dispositive control over such entity is David Sims. Yorkshire's ownership includes 442,500 undesignated warrants (exercisable at $1.25 through December 31, 2005); the warrants are not included for resale under this prospectus; the shares underlying the warrants are included in the prospectus.
(8): Southshore Capital Fund Ltd. ("Southshore") is a privately-held Cayman Islands corporation. The natural person having voting and dispositive power over such entity is C.B. Williams. Southshore's ownership includes 225,000 undesignated warrants (exercisable at $1.25 through December 31, 2005); the warrants are not included for resale under this prospectus; the shares underlying the warrants are included in the prospectus.
(9): Park Capital Securities, LLC, is a privately-held company whose controlling person is Philip Orlando. Park Capital is a broker-dealer registered under the Securities Exchange Act of 1934, as amended. Park Capital does not make a market in our common stock. Park Capital's ownership includes 60,000 undesignated warrants (exercisable at $1.00 through November 21, 2005) and 500,000 undesignated warrants (exercisable at $1.25 through October 21, 2006); the warrants are not included for resale under this prospectus; the shares underlying the warrants are included in the prospectus. Park Capital disclaims any affiliation with Roadrunner or Roadrunner's principals, notwithstanding the employment relationship described in note 11, below.
(10): vFinance Investment, Inc. is a privately-held company whose controlling person is . vFinance is a broker-dealer registered under the Securities Exchange Act of 1934, as amended, and from time-to-time makes a market in our common stock in the Nasdaq SmallCap Market. As of [ ], vFinance had a [short/long] position of shares of our common stock, and long positions of [ ] Class B Warrants and - -0- Class C Warrants. [The short position is not included in the foregoing table.] vFinance disclaims any affiliation with Mr. Stefansky or Mr. Rosenblum, notwithstanding the employment relationship described in note 12, below.
(11): Roadrunner Capital Group, LLC is a privately held company whose controlling person is Nicole Morseli and Chris Messalas, both registered representatives with Park Capital. Roadrunner holds 240,000 undesignated warrants (exercisable at $1.00 per share through November 21, 2005); the warrants are not included for resale under this prospectus; the shares underlying the warrants are included in this prospectus. Roadrunner holds all of its securities for its principals and disclaims any affiliation with Park Capital, the broker-dealer that employs its principals.
(12): Messrs. Stefansky and Rosenblum are each employees of vFinance and are managing directors of vFinance's corporate finance department. They each disclaim any affiliation with the other and further disclaim any affiliation with vFinance, the broker-dealer that employs each of them. Messrs. Stefansky and Rosenblum's ownership includes 172,200 undesignated warrants (exercisable at $1.25 through April 30, 2006); the warrants are not included for resale under this prospectus; the shares underlying the warrants are included in the prospectus.

Plan of Distribution. The Selling Holders have advised us that they may, from time to time, offer and sell the shares of common stock and the Class B Warrants included in this Prospectus. Alternatively, the Selling Holders may exercise the Class B Warrants pursuant to an exemption from registration if one is available at the time, and offer and sell the underlying shares and Class C Warrants under this Prospectus. Holders of common stock warrants may only exercise such warrants pursuant to an exemption from registration if one is available at the time. Once exercised, the shares of common stock underlying the common stock warrants may be sold pursuant to the terms of this Prospectus. The term "Selling Holders" includes pledgees, donees, transferees or other successors in interest selling shares that they acquired after the date of this Prospectus from the Selling Holders as a pledge, gift or other non-sale related transfer. To the extent required, we may amend and supplement this Prospectus from time to time to describe a specific plan of distribution.

Each Selling Holder has advised us that he, she or it will act independently in making decisions with respect to the timing, manner, and size of each sale. Each Selling Holder has advised us that they may make these sales at prices and under terms then prevailing or at prices related to the then current market price. The Selling Holders

have advised us that they may also make sales in negotiated transactions, including pursuant to one or more of the following methods:

•: purchases by a broker-dealer as principal and resale by such broker-dealer for its own account pursuant to this Prospectus;
•: ordinary brokerage transactions and transactions in which the broker solicits purchasers;
•: block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
•: an over-the-counter distribution in accordance with the rules of the Nasdaq SmallCap Market; and
•: in privately negotiated transactions.

In connection with distributions of the shares or otherwise, the Selling Holders have advised us that each may:

•: enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the shares in the course of hedging the positions they assume;
•: sell the shares short and redeliver the shares to close out such short positions;
•: enter into option or other transactions with broker-dealers or other financial institutions which require the delivery to them of shares that this Prospectus offers, which they may in turn resell; and
•: pledge shares to a broker-dealer or other financial institution, which, upon a default, they may in turn resell.

In addition, the Selling Holders may sell any shares that qualify for sale pursuant to Rule 144, rather than pursuant to this Prospectus.

In effecting sales, broker-dealers or agents that the Selling Holders engage may arrange for other broker-dealers to participate. Broker-dealers or agents may receive commissions, discounts or concessions from the Selling Holders, in amounts that the parties may negotiate immediately prior to the sale.

In offering shares that this Prospectus covers, the Selling Holders, and any broker-dealers and any other participating broker-dealers who execute sales for the Selling Holders, may qualify as "underwriters" within the meaning of the Securities Act in connection with these sales. Any profits that the Selling Holders realize, and the compensation that they pay to any broker-dealer, may qualify as underwriting discounts and commissions. Three of the Selling Holders (Greenwood Partners, L.P., vFinance Investments, Inc., and Park Capital Securities, LLC) are broker-dealers that acquired the securities included in this registration statement for investment purposes, and not for the purpose of causing or facilitating a distribution. However, in the view of the staff of the SEC, a broker-dealer offering securities acquired from an issuer should be considered to be an underwriter, and while the SEC staff's view is not dispositive, Greenwood Partners, L.P., Park Capital Securities, LLC, and vFinance Investments, Inc., may each be liable as an underwriter for securities sold by it pursuant to this registration statement.

In order to comply with the securities laws of some states, the Selling Holders must sell the shares in those states only through registered or licensed brokers or dealers. In addition, in some states the Selling Holders must sell the shares only if we have registered or qualified those shares for sale in the applicable state or an exemption from the registration or qualification requirement is available and the Selling Holder complies with the exemption.

We have advised the Selling Holders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the Selling Holders and their affiliates. In addition, we will make copies of this Prospectus available to the Selling Holders for the purpose of satisfying the Prospectus delivery requirements of the Securities Act. The Selling Holders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against liabilities, including liabilities arising under the Securities Act.

At the time a Selling Holder makes a particular offer of shares we will, if required, distribute a Prospectus supplement that will set forth:

•: the number of shares that the Selling Holder is offering;
•: the terms of the offering, including the name of any underwriter, dealer or agent;
•: the purchase price paid by any underwriter;
•: any discount, commission and other underwriter compensation;
•: any discount, commission or concession allowed or reallowed or paid to any dealer; and
•: the proposed selling price to the public.

We have agreed to indemnify the Selling Holders against claims and losses due to material misstatements or omissions made by us (and not by the Selling Holders) in this Prospectus. Each of the Selling Holders has agreed to indemnify us against claims and losses due to material misstatements or omissions made by them.

USE OF PROCEEDS

We will receive no proceeds from the sale by the Selling Holders of the 1,500,000 shares of common stock or the 1,350,000 restricted Class B Warrants included in this Prospectus.

We will receive from $0.00 to a maximum of $2,670,165, from the exercise of the 1,780,110 Class B Warrants that are included in this Prospectus.

If all of the Class B Warrants included in this Prospectus are exercised before December 31, 2005, (of which we can offer no assurance), there will be 1,982,610 Class C Warrants outstanding. We will receive from $0.00 to a maximum of $4,956,525 from the exercise of the Class C Warrants included in this Prospectus.

We will receive from $0.00 to a maximum of $2,750,000 if all the 900,000 warrants issued in September 2003 and the 1,360,000 warrants issued in October 2003 and November 2002 are exercised. We expect to use any proceeds received for various corporate purposes, generally as follows depending, however, on our needs for

capital at the time the warrants are exercised (if exercised). The following summary sets forth our current priorities which may change in the future.

We would use approximately 80%-90% of the first $2,000,000 of proceeds for expansion of our SOI operations (including marketing efforts) and financing of our homeland security operations through our 85% owned subsidiary, IUT Detection Technologies, Inc. (with our use of those proceeds being approximately equally divided between those two uses). We would also anticipate using 10% to 20% of the first $2,000,000 of proceeds for general working capital purposes.

Proceeds in excess of $2,000,000 would be used for research and development efforts (30%), SOI operations (20%), homeland security operations (20%) and working capital (30%).

Clearly the precise use of proceeds would be modified depending on our corporate needs when the proceeds are received.

BUSINESS

Because we want to provide you with more meaningful and useful information, this Prospectus 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. We have described these risks, uncertainties and contingencies under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition or Plan of Operation." In addition, our working capital shortage resulted in our auditors issuing an opinion on our financial statements indicating a substantial doubt regarding our ability to continue as a going concern.

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 report.

General Discussion

Our Isotope Business. In order to develop 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 number is derived from 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. In ultra chemically pure crystals, grown for electronics or optical applications, isotopic impurities can be the greatest contributor to crystal disorder because of mass and diameter differences. Eliminating these variations by using a single enriched isotope (i.e. an isotopically-pure substance) increases thermal conductivity and optical transparency, and thus improves product performance. 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 semiconductors in the computer industry, and for use as targets to produce radioisotopes for the life sciences and other industries.

Stable Isotopes. Stable isotopes may be thought of as extremely pure materials. Not only are these isotopes chemically pure, but they frequently consist 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 as distinguished from normal (i.e., chemical only) purity materials. Depleted isotopes are the result of the elimination (or reduction in level) of an isotope, or isotopes, and can prevent the creation of undesirable byproducts in

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, but not limited to:

•: power generation;
•: medical research, diagnostics, and drug development;
•: product tagging and stewardship;
•: semiconductors; and
•: optical materials.

We have successfully developed and commercialized several isotope products (notably, even-numbered cadmium isotopes for use with helium-cadmium lasers and depleted zinc oxide for nuclear power plants). We intend to promote the emergence and growth of new stable isotope applications.

Radioisotopes. The radioisotopes we acquire and sell are typically used in medical diagnostic and therapy applications. 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, they are manmade and must generally be used shortly after production. They are typically produced by irradiating a target material (often an enriched or depleted stable isotope) in a nuclear reactor, cyclotron or linac. These devices generate the appropriate particles required to transmute or convert the target material into the desired radioisotope.

SOI Wafer Manufacturing. In January 2002, we commenced our SOI wafer operations under an alliance agreement with Silicon Quest International, Inc. ("SQI") whereby SQI agreed to exclusively manufacture and supply SOI wafers for Isonics. As described in more detail below, we commenced manufacturing SOI wafers in our own facility in November 2002 and terminated our agreement with SQI.

Homeland Security. In December 2002, we acquired certain isotope-based trace detection technology to be used to detect explosives and chemical and biological weapons from IUT as described further below.

Company Strategy

We believe our strength lies in our ability to bring the necessary resources together to identify, evaluate, develop, engineer and successfully commercialize applications for stable and radioactive isotopes, non-isotopic materials, and value-added products manufactured from these materials.

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 minimizing capital costs. This strategy involves:

•: focusing on development of high value-added products, which products should give us 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 Isonics-owned isotope production facilities when markets are better 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.

To further our strategy as discussed above, in calendar year 2002 we commenced two new potential businesses—the manufacture and marketing of SOI wafers and the acquisition of detection technology for the commencement of our homeland security operations.

Recent Business Dispositions

Sale of Chemotrade Leipzig GmbH. On July 31, 2002, our wholly-owned subsidiary, Chemotrade, sold its 75% interest in CTL to the 25% shareholder for 50,000 Euros (approximately $48,000). In accordance with the sales agreement, the transaction was effective May 1, 2002 with the new 100% shareholder controlling the operations from that point forward. CTL, which primarily resells oxygen-18, was notified that its then current distribution agreement (which expired on December 31, 2002) would not be renewed. The loss of this agreement was significant as it accounted for approximately 80% of CTL's revenue and as a result, CTL's ability to generate revenues after December 31, 2002 was uncertain. As a result of this disposition, Chemotrade is now free to pursue other opportunities (including selling oxygen-18 throughout the European market) that may have been in conflict with the interests of CTL. We recognized revenue and gross margin related to CTL of approximately $1,575,000 and $326,000, respectively for the year ended April 30, 2002. We fully replaced the lost revenue during fiscal year 2003 with additional product sales to new and existing customers both domestically and in Europe. We fully anticipate that we will continue this trend during the remainder of fiscal year 2004, but we can offer no assurances that this will come to fruition.

Sale of Depleted Zinc Business. On December 1, 1999, we sold our depleted zinc business to Eagle-Picher Technologies, LLC ("Eagle-Picher") for $8.2 million, of which $6.7 million was paid on December 1, 1999. Disputes between Isonics and Eagle-Picher arose which were resolved in a settlement agreement on July 24, 2002. See "Legal Proceedings."

Products

Our revenues have historically derived from sales from a broad range of sources. The mix of our revenues has changed significantly during the past three years.

In fiscal year 2000, our revenues were generated from depleted zinc sales, oxygen-18 and other stable isotopes sales, radioisotopes sales, and from contract research and development activities. We sold our depleted zinc business in December 1999 and did not recognize any revenues from depleted zinc sales after that time.

During fiscal year 2001, our revenues were solely generated from sales of stable and radioactive isotopes because of the prior sale of the depleted zinc operations and the cessation of our contract research and development activities.

During fiscal years 2002 and 2003 and subsequently, our revenues were generated from sales of stable and radioactive isotopes and, commencing January 2002, from sales of SOI wafers. Our sales mix has remained approximately the same through October 21, 2003.

As evidenced by the commencement of our own manufacturing operations for SOI wafers and our recent acquisition of the detection technology from IUT, we are attempting to develop new product lines, which we expect to add to our revenue stream. While we are attempting to ramp up sales of our SOI wafer product line, we do not expect to generate any significant revenues during the remainder of fiscal year 2004 relating to the trace detection technology we acquired from IUT. The following is a more specific discussion of our current products.

We Supply Isotopes for Life Sciences Applications.

For the past several years, we have supplied stable isotopes in elemental and simple compound forms for use in life science applications. In 1998, we expanded our product offerings to include radioisotopes. We will continue selling our current stable and radioactive isotope products/services, develop new ones along similar lines and expand our offerings through vertical integration. From time to time we evaluate building additional isotope separation facilities in the United States or Western Europe. We currently do not have the capital to do so, but it is an important aspect of our strategic plan because we expect that it will reduce our reliance on foreign manufacturers and enhance our bottom line. In addition, we intend to expand our value-added manufacturing capabilities.

Our existing and emerging life sciences products include isotopes used for a large number of purposes and can be categorized as follows:

•: isotopes used in biomedical research, particularly drug development;
•: isotopes used in medical imaging and therapy; and
•: isotopes used in medical diagnostic and analytic equipment.

Although there is currently little FDA oversight affecting our supply of the raw material isotopes to our customers for their use in life science applications, FDA regulation may increase in the next few years. It is not immediately apparent what implications any additional regulation may have for us. The following paragraphs provide a brief summary of our existing and emerging life sciences products:

Biomedical Research. Stable and radioactive isotopes are used by researchers to investigate living systems, determine the chemical structure of important biological compounds, design new drugs and measure extremely low levels of environmental toxins. Known quantities of isotopes including carbon, nitrogen, hydrogen, oxygen, and other elements, are combined into thousands of different chemical compounds. These isotopes are then introduced into biological systems and tracked/measured using a variety of analytic tools. Our products are typically simple labeled-compounds that are used by our customers to synthesize more complex and higher-value compounds. Examples of existing and emerging applications for these products include:

Drug Discovery by Screening. Drugs have historically been designed using a screening process in which prior experience was employed to determine what chemicals might work to treat a condition, and then tests on subjects were performed. Traditionally, numerous aspects of the many phases of drug development have been carried out using radioisotope-labeled versions of promising compounds. The process starts with a very large number of candidate compounds, which are "screened" for their affect on a particular biochemical system. Promising compounds are then subjected to the follow-on phases of drug development and testing. We supply basic or "precursor" compounds labeled with radioisotopes, such as carbon-14 and phosphorous-33, to manufacturers who incorporate them into more complex radioisotope labeled compounds. These compounds are in turn employed in the pharmaceutical development processes mentioned above. The carbon-14 precursors are produced under contract by IUT, a company in which we hold a minority interest.

Rational Drug Design. In contrast with the "hit-or-miss" approach of screening-based drug discovery, today specialized instrumentation is routinely available to determine the chemical structure of large molecules, including the human proteins and enzymes that a drug is intended to affect. This approach is known as rational drug design. We believe that this new instrumentation, combined with sophisticated stable isotope-labeled compounds, 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. We market primarily simple compounds labeled with deuterium, carbon-13 and nitrogen-15 to our customers for this application.

Medical Imaging and Therapy. Radioisotopes have been used for years in the diagnosis and treatment of many medical conditions. The trend in these two areas has been towards increasingly more specific labeled compounds that, after labeling with the radioisotope and introduction into the patient, quickly concentrate at the disease site(s). In theory, the appropriate choices of chemical and radioisotope labels facilitate disease detection and stage determination, which improves therapy selection, administration and monitoring. The medical community is developing and testing several classes of chemical compounds ranging from monoclonal antibodies to peptides for use in the detection, and, eventually, the treatment of many diseases. The FDA has approved some of these for use.

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

The first two applications below represent a significant portion of our revenues this year and we believe they will continue to do so for several years to come. For the first application, we supply a stable isotope, which is converted by the customer to a radioactive isotope and used to detect cancer and other metabolic disorders. For the second, we supply the radioisotopes as radiochemicals for incorporation by the customer into cancer-fighting therapeutic devices. A third application, Diagnostic Breath Testing, is also included. This is an example of a stable isotope that remains stable and is incorporated into compounds, which are then used to detect the presence or absence of disease, dose drugs and monitor therapy.

Positron Emission Tomography ("PET"). Although this powerful nuclear medicine imaging technology has been available for over 25 years, its complexity and cost until recently had relegated PET 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. We believe PET studies are growing at rates of approximately 20 to 50% annually worldwide.

Oxygen-18 is a rare stable isotope of oxygen. Oxygen-18 is used to produce fluorine-18, a radioisotope which is the source of the positrons tracked by the PET imaging equipment. Although we do not produce oxygen-18 ourselves, we purchase and resell oxygen-18 to end users worldwide. In fiscal 1999, we introduced a novel program to recycle "used" oxygen-18; we believe that this program which allows our customers to benefit from the disposal of depleted oxygen-18 provides an economic advantage to our customers and provides a competitive advantage for us over our competitors.

Brachytherapy. Cancer therapy continues to evolve to target specific types of cancer more effectively. 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 radioactive 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 that occurs with external beam radiotherapy. There are three primary criteria that govern the selection of the radioisotope to be implanted in the patient:

•: half-life,
•: type of radiation emitted, and
•: strength of the radiation emitted.

Several companies (Nycomed-Amersham, Theragenics, North American Scientific, and others) already offer, or have plans to offer, brachytherapy products for the treatment of prostate cancer. Studies continue in the applicability of this technique for other tumor types, including some breast and eye 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.

Diagnostic Breath Tests (DBTs). DBTs are a new class of non-invasive, diagnostic procedures gaining worldwide acceptance. DBTs use 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. Demand for DBTs has increased as health care insurance providers have determined to include reimbursement in many health insurance plans. That demand, in turn, is expected to accelerate as regulatory approval is awarded in other countries. Many other tests based on the same principles as DBTs are in various stages of development worldwide. We have supplied small amounts of stable isotope raw material to companies developing DBT chemicals. While these sales are 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.

Calibration Standards. There are many medical devices that measure levels of radiation in patients. These devices need to be calibrated using standards of known radiation strength and type in order to ensure their accuracy. These standards derive 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 manufacturers of the equipment needing calibration.

Medical equipment calibration 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.

We have commenced our Silicon-on-Insulator Wafer Manufacturing and Marketing Operations

SEI License Agreement. On September 14, 2001 we licensed technology owned by SEI which allowed us to enter the business of manufacturing SOI wafers and other silicon wafers. We issued 500,000 shares of our newly-created

Series B Preferred Stock to SEI which automatically converted into 500,000 shares of our Common Stock following our November 13, 2001 shareholders' meeting. The license is exclusive, perpetual, and does not bear any royalty obligation.

The technology we licensed from SEI allows us to manufacture SOI wafers for integrated circuit component (IC's or "Chips") and micro mechanical system (MEMS) manufacturers. We licensed SEI's core intellectual property (IP) technology for precision wafer polishing, cleaning, and bonding silicon wafers to produce thick-film SOI wafers in the 100 mm, 150 mm, 200 mm, and 300mm form factors.

SEI filed for Chapter 7 bankruptcy on November 21, 2001. As part of the Bankruptcy Trustee's duties in the case, the Trustee reviewed our entire financial and business relationship with SEI. Ultimately we entered into a series of agreements with the Trustee in which, among other things, the Trustee:

(i): acknowledged our prior acquisition of virtually all of SEI's intellectual property,
(ii): conveyed all of SEI's residual intellectual property rights to us,
(iii): acknowledged our secured creditor status for all amounts we had loaned SEI before the bankruptcy, including all accrued interest and attorneys' fees we incurred during the bankruptcy case, and
(iv): approved our acquiring selected additional items of SEI's equipment from the bankruptcy estate by crediting the value of the equipment against our secured claim.

The Bankruptcy Court approved all of these agreements and we completed these transactions in April 2003.

SOI Wafer Manufacturing. In an effort to commence our SOI business operations, on December 19, 2001 we entered into an alliance agreement with SQI whereby SQI agreed to exclusively manufacture and supply SOI wafers for us and to provide certain sales and marketing services to us as requested. As a result of the establishment of our own thick-film SOI manufacturing facilities, the alliance agreement with SQI was terminated effective November 22, 2002. Under the terms of the agreement, SQI is prohibited from producing SOI wafers until November 22, 2003.

We shipped our first SOI wafers to one of our customers in late January 2002 and have continued to ship SOI wafers to our customers since that time. Our agreement with SQI permitted us to commence the manufacturing and marketing of SOI wafers using the technology we licensed from SEI, without incurring the significant cash investment we originally contemplated. During the years ended April 30, 2003 and 2002, we recognized revenue of $197,000 and $15,000, respectively, related to the sale of SOI wafers. We anticipate increasing our revenues from the sale of SOI wafers during the remainder of fiscal year 2004, however we can offer no assurance that this will come to fruition.

In September 2002, we entered into several lease agreements related to building space, equipment and services in order to establish our own stand-alone wafer manufacturing facilities ("Fab-1") in Vancouver, Washington. In addition to leasing the building space, we have acquired the equipment necessary to establish our operations through bankruptcy sales (of which the majority of the cost was offset against our receivable from SEI), draws against our equipment financing agreement with Fidelity Capital and cash acquisitions. We are currently producing SOI wafers at Fab-1 and with the proper increase in headcount, we believe that we have the capacity to produce a significant amount of SOI wafers per month.

We are currently increasing our sales activities but the ramp-up in sales is anticipated to be a slow process as we still need to complete the certification process with most new potential customers and many potential customers are proceeding cautiously with SOI wafers until the United States economy recovers. As a result, although we plan to gradually increase our revenues from the sale of SOI wafers, we may not be able to generate significant revenue from the sale of SOI wafers until the last quarter of fiscal year 2004, if at all.

SOI Business Operations. Based on our market research, it appears to us that the use of SOI wafers is growing rapidly in three major markets:

•: integrated circuits,
•: MEMS manufacturing, and
•: micro-optical chips for fiber-optic network devices.

Chip designers are relentlessly driven by the marketplace to seek innovative ways to improve device performance in three key areas:

•: speed,
•: power consumption, and
•: size.

Based on our review, it appears that the SOI technology enables circuit designers to improve device speed approximately 30%; and as the oxide provides a superior source of insulation, leakage current is reduced, providing an energy savings of better than 30%, as well as enabling circuits to be spaced on a finer pitch. SOI technology also provides a degree of radiation hardening to integrated circuits, thus improving circuit reliability and resistance to soft errors induced by background radiation sources. In MEMS and micro-optical device fabrication the use of SOI technology wafers significantly simplifies the manufacturing process.

In fiscal year 2003, we entered into a service agreement with a major semiconductor manufacturer to provide wafer grinding, polishing, and bonding services to support development of advanced silicon wafer technologies. Our proprietary wafer technology is the enabling technology that allows the development program to proceed, and, if any products are developed using these advanced wafers, our technology would be licensed to support such production.

Our research also indicates that the use of isotopically-pure silicon-28 in the SOI wafer may further improve its performance, although our research on this point is continuing.

In May 2002, Isonics announced that it had delivered silicon-28 thin-film SOI wafers to a leading semiconductor manufacturer for evaluation. Isonics has not received the results of that evaluation process which is still underway. Because many of the potential customers for silicon-28 are evaluating thin-film SOI wafers for future products, we expect to continue to evaluate manufacturing technology for these wafers and work with other manufacturers in this field to deliver evaluation wafers incorporating silicon-28.

In May 2003, we announced that we had developed our own thin-film SOI wafer technology and had accepted our first commercial order for thin-film wafers. We expect to expand this activity during the remainder of fiscal year 2004 and become one of the few suppliers that offers both thin and thick film SOI wafers but we can offer no assurance that this will come to fruition.

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 their manufacturing technologies for silicon-based devices. 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 on 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 to a single 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®, Sparc®, and Alpha® microprocessors, heat sinks and fans became necessary to control the higher operating temperatures. According to the Semiconductor Industry Association's National Technology Roadmap for Semiconductors, 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.

A significant body of research, generated over the last twenty years, supports the thesis that isotopically-pure semiconductor materials have superior thermal conductivity properties compared to natural, multi-isotopic materials. We believe this solution (i.e., using isotopically-pure semiconductor materials to manage operating temperatures) is compatible with virtually every other heat management solution currently implemented or envisioned to date. Critically, it does not require changing a single device design or manufacturing process because isotopically-pure semiconductor materials are essentially chemically and physically identical to naturally-occurring semiconductor materials. For example, silicon has three naturally occurring stable isotopes:

•: silicon-28 (92% natural abundance),
•: silicon-29 (5% natural abundance), and
•: silicon-30 (3% natural abundance).

By purifying silicon to 99.9% silicon-28, the thermal conductivity is improved 60% at room temperature and over 600% at -423 degrees Fahrenheit.

In 1997, we began a program to introduce 99.9% isotopically-pure silicon-28 as a superior substitute to natural silicon for the manufacture of semiconductor devices. See "Research and Development." Our first efforts toward developing isotopically-pure semiconductors involved securing the intellectual property rights to commercialize silicon-28 and similar materials. These efforts culminated in our acquiring exclusive rights to two Yale University patents. See "Patents and Proprietary 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 ability of pure silicon-28 to substitute for natural silicon in their manufacturing processes. These tests support our belief that pure silicon-28 is not only a viable substitute material for natural silicon, but that the anticipated thermal conductivity property improvements are significant.

To expand this testing, in July 2002 Isonics qualified Globitech Incorporated to produce silicon-28 epitaxial wafers using silicon-28 trichlorosilane and we implemented a working agreement with them to produce silicon-28 epitaxial wafers for our customers. Globitech is an epitaxial wafer manufacturer located in Sherman, Texas. In addition to producing wafers for Isonics, we have agreed to work with Globitech to supply silicon-28 wafers to Globitech's customers, if demand develops.

In August 2001, we entered into a marketing agreement with a major wafer manufacturer. We have since supplied silicon-28 trichlorosilane (which was produced in the United States) to this wafer producer for the manufacture of silicon-28 epitaxial wafers. These wafers are being supplied to interested customers worldwide for evaluation in a number of semiconductor devices. This agreement is critical in assuring that silicon-28 epitaxial wafers will be available to meet the increasingly stringent quality demands of the semiconductor industry. Any proceeds generated under this agreement will be shared equally with the wafer manufacturer.

The next step in our development program is to make bulk wafers of pure silicon-28. The manufacture of bulk wafers requires substantially more material than we could economically acquire from our existing suppliers. We sought a domestic, economical supply of silicon-28 in a contract with Eagle-Picher, which believed that its silicon isotope separation technology could supply the necessary silicon-28 to us. Eagle-Picher was not able to

supply silicon-28, and disputes arose which were resolved in a settlement agreement on July 24, 2002. See "Legal Proceedings."

We have identified other potential sources for supplying silicon-28, but those sources are not domestic. We have received silicon-28 samples from The Institute of Stable Isotopes ("ISI"), located in Tiblisi, Republic of Georgia. Our analysis indicates that the quality of the silicon-28 appears to meet our requirements, and we are attempting to obtain larger quantities for further testing. We are optimistic about the prospects for using silicon-28 or the related enrichment technology from this supplier to meet our needs.

We received only nominal proceeds ($65,000) from the sale of silicon-28 based products (mainly to universities and research groups) in fiscal 2003 but we did receive an order for $200,000 for the sale of silicon-28 as a bulk isotope in the fourth quarter of fiscal year 2003. The sale of this isotope was completed in May of 2003 and was shipped to a second major wafer manufacturer to support silicon-28 epitaxial wafer production of test wafers. While we cannot forecast future orders of silicon-28 products, we are hopeful that this business will continue to grow as additional potential customers start evaluating silicon-28.

We Are Developing Products to Detect Explosives, Chemical Weapons, Illegal Drugs, and Other Chemical Compounds.

In December 2002, we acquired certain isotope-based trace detection technology to be used to detect explosives and chemical and biological weapons from IUT, an entity in which we hold a 6 percent ownership interest. We issued to IUT 250,000 shares of our restricted common stock as consideration for the technology (which we valued at $273,000). In addition, we granted IUT a 15 percent ownership interest in a newly created subsidiary, IUTDT that will own and commercialize the trace detection technology. Our ownership percentage may be reduced to the extent we raise additional equity capital through this subsidiary or acquire additional technologies. We also paid $50,000 for an option that would have allowed us, upon exercise to acquire an additional 29.1% interest in IUT from an unaffiliated party for a total purchase price of $450,000. The option expired, unexercised, on February 28, 2003.

The technology that we acquired from IUT consists of devices and technologies based on neutron detection and gamma spectroscopy. A number of these technologies and potential products have been under development at IUT for approximately five years, and some are available in prototype form. We are currently working on the development of a product named Neutroscan. To expand its applications, we plan to configure this technology into a form for screening packages or hand carried luggage at airports, office building, and other high security locations. The further development of this product is contingent upon our ability to secure additional financing.

IUTDT will continue to focus on products utilizing nuclear detection technologies and leveraging its experience gained at IUT in establishing relationships with governmental entities, obtaining funding for research and development activities, increasing its portfolio of technology patents and commercializing promising products. IUTDT will work closely with IUT in completing necessary research and development activities along with providing immediate manufacturing needs. If and when IUTDT is able to raise sufficient capital, it may establish sales operations in the United States and will explore all available manufacturing options, as well as potential partnership agreements to meet its possible demand for its products.

Distribution Method

We operate life sciences sales offices in Columbia, Maryland, and Düsseldorf, Germany. We currently market our SOI wafers through our sales office in Vancouver, Washington. We also identify customers through industry sales journals, website identification and trade shows. In addition, many customers come to us by referral from existing customers. There are a limited number of suppliers in the isotope industry and, therefore, most customers are aware of the products and services we offer. Customers directly place the orders and we either ship directly to the customer through our sales offices or the product is shipped directly from the supplier. We use commercial courier services such as Federal Express and DHL to ship all products. Before we terminated our agreement with SQI for the manufacture of SOI wafers, SQI was responsible for packaging and shipping wafers to our customers. We are now packaging and shipping from our own manufacturing facilities using commercial courier services.

Significant Customers

Sciences) accounted for approximately 29% and 17%, respectively, of revenues for the year ended April 30, 2003. Three customers (Perkin Elmer Life Sciences, IBT SA and Idaho Isotopes) accounted for approximately 44%, 24% and 15%, respectively, of the German operation's revenues for the three months ended July 31, 2003. Four customers (Perkin Elmer Life Sciences, IBT SA, Revis LTD and Idaho Isotopes) accounted for approximately 43%, 15%, 13% and 12%, respectively of the German operation's revenues for the year ended April 30, 2003. Two customers accounted for approximately 74% of the German operation's accounts receivable at July 31, 2003. Two customers accounted for approximately 52% of the German segment's accounts receivable at April 30, 2003.

As of April 30, 2002, three customers accounted for approximately 37% of total net accounts receivable. Two customers (Perkin Elmer Life Sciences and Eastern Isotopes) accounted for approximately 22% and 20%, respectively, of revenues for the year ended April 30, 2002. Two customers (Perkin Elmer Life Sciences and Revis LTD) accounted for approximately 36% and 11%, respectively, of the German operation's revenues for the year ended April 30, 2002. Two customers accounted for approximately 37% of the German segment's accounts receivable at April 30, 2002.

Significant reductions in sales to any of our large customers have had, and may in the future have, a material adverse effect on us by reducing our revenues and our gross margins. Present or future customers could terminate their purchasing patterns with us or significantly change, reduce, or delay the amount of isotope or other products ordered from us.

Research and Development

Consistent with our product development strategy, we are seeking to identify and evaluate new stable and radioactive isotope products and potential markets for economic and technical feasibility. We will, in addition, continue funding research and development to improve technologies for isotope separation, materials processing technologies and SOI technologies. During fiscal year 2003 and fiscal year 2002, research and development expenses were $303,000 and $423,000, respectively.

During the remainder of fiscal year 2004, we expect to continue to focus our research and development efforts on the production of high chemical-purity silicon-28 silane gas, silicon-28 trichlorosilane and silicon-28 epitaxial wafers. In addition, we are focused on refining our processes associated with the production of SOI Wafers at our plant in Vancouver, Washington. These research and development efforts continue the research and development we performed in fiscal years 2003 and 2002. In addition, if we are able to raise additional funding, we may commence significant research and development activities at IUTDT for the development of commercially-marketable products using the technology we acquired from IUT in December 2002. It is possible that a significant portion of these R&D activities would be outsourced and completed by IUT. These development activities will not be funded from our current working capital.

Silicon-28.

In fiscal year 2003 we entered into one additional silicon-28 evaluation program with a major semiconductor device manufacturer and supplied silicon-28 epitaxial wafers to them. We have also supplied silicon-28 epitaxial wafers to a number of research organizations.

In fiscal year 2002, we entered into silicon-28 evaluation programs with two additional semiconductor manufacturers, one of which manufactures semiconductor power devices, and supplied silicon-28 epitaxial wafers to these manufacturers.

In May 2001, we entered into a silicon-28 Joint Development program with Advanced Micro Devices ("AMD"), a major microprocessor manufacturer, whereby we supplied AMD with silicon-28 wafers. In fiscal year 2002, we delivered a second lot of silicon-28 epitaxial wafers to AMD and in fiscal year 2003 a third lot was delivered. AMD is using our products to make and rigorously test state-of-the-art microprocessors to accurately quantify the benefits of high thermal conductivity silicon-28 in this application. We expect to use the results of the testing program to find the proper balance between performance and cost. As of October 21, 2003, this testing is still ongoing and the results we have received are generally positive. In addition to AMD, another major microprocessor manufacturer started evaluating silicon-28 epitaxial wafers that were delivered in September 2000. No results have been received from this program and it is believed that the program has been halted due to personnel and cost reductions.

In fiscal year 2001, we delivered a second lot of epitaxial wafers to Cypress Semiconductor ("Cypress"), and we also sold a small quantity of silicon-28 epitaxial wafers to two Japanese semiconductor manufacturers for their

evaluation. Cypress completed one study of static random access memory using 0.25 micron technology (250 nanometers) without finding a significant advantage using silicon-28 and is planning to continue its evaluation process using 90 nanometer technology during the remainder of fiscal year 2004.

In fiscal year 2001, we entered into two research programs at universities;

•: The University of Texas (Austin) evaluated the use of silicon-28 epitaxial wafers as substrates for SiGe:C based transistors, and
•: The University of California (Santa Cruz) used silicon-28 epitaxial wafers to build novel thermoelectric coolers

These research programs are proceeding slowly and we have not received results from them as yet.

In fiscal year 2000, we funded two university research programs and participated in two others.

•: The Southern Methodist University Program measured the thermal conductivity of silicon-28 thin films with various electrical dopants, and modeled the effect of epitaxial layer thickness on the temperature of silicon and gallium arsenide transistors. This program is essentially completed and the results will be published by SMU.
•: The North Carolina State University Program modeled and built power semiconductor devices and determined the effect of silicon-28 epitaxial layers on the device's temperature distribution. This program has been completed, and the unpublished results indicate that significantly smaller leakage currents were found in diodes built on silicon-28 wafers, as compared to natural silicon wafers, indicating that lower temperatures were achieved due to the thin silicon-28 epitaxial layers.
•: Innovations for High Performance Microelectronics (IHP), a German research organization, is evaluating silicon-28 epitaxial wafers in their SiGe:C technology being developed for wireless telecommunications applications. This program is still underway, although the principal scientist has left IHP to take a position at another institution.
•: DIMES, a research organization associated with Delft University in the Netherlands is evaluating silicon-28 SOI wafers to determine if improved cooling can be accomplished. This program is still underway.

Additionally, in fiscal year 2000, we entered into a Cooperative Research & Development Agreement with Lawrence Berkeley Laboratory in Berkeley, California ("LBNL"), to study the properties of various silicon isotopes. This agreement is part of a U.S. Department of Energy program to apply Russian nuclear weapons technology to commercial applications. Delays within the Department of Energy pushed the start of this program to our fiscal year 2002. The first delivery of silicon isotopes occurred in December 2001. The second delivery occurred in April 2003. As a result of this program Isonics has at its disposal approximately 20 kilograms of silicon-28 isotope to further its research programs.

We have provided silicon-28 silane gas to LBNL as part of the Cooperative Research and Development Agreement, and LBNL has manufactured small amounts of silicon-28, silicon-29 and silicon-30 polysilicon which was used to grow small diameter single crystals. These crystals are being used to study the basic physics properties such as thermal conductivity, carrier mobility, and spin coherence lifetimes.

During fiscal year 2000, we also supplied silicon-28 silane gas to ATMI, Inc. in Danbury, Connecticut, and participated in their Office of Naval Research funded program to investigate isotopically-pure silicon carbide. Initial data from this program have shown an improvement in the thermal conductivity of isotopically pure silicon carbide epitaxial layers. This is the first data that we are aware of that has shown improvement in an isotopically modified compound semiconductor. This program has been completed and a final report is being written.

During fiscal year 1999, we signed a joint research and development agreement with Silex Systems, Ltd. The agreement called 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. This agreement reflects our effort to ensure a large supply of silicon isotopes at a reasonable cost to support the large-scale manufacture of isotopically-pure silicon wafers. According to Silex, in 2001 they started a stable isotope separation program that includes silicon.

The adoption of silicon-28 by semiconductor manufacturers will depend on the outcome of the evaluations underway. Even though silicon-28 is a one-for-one substitution for normal silicon, semiconductor companies are

very conservative about changing anything in their manufacturing processes, for fear that their yields will suffer. Typically the testing sequence at these companies is:

1): A detailed analysis of the silicon-28 wafers to make sure that they are equivalent to standard wafers and that their is no risk of contamination to the semiconductor fabrication facility or other wafers in process,
2): Manufacture and testing of test transistors to ensure that the electrical parameters are unchanged,
3): Gate oxide integrity testing as a function of oxide thickness to determine any changes from standard wafers,
4): Manufacture and testing of a device using a well documented (generally older) technology to determine any yield or performance improvements,
5): Manufacture and testing of a device using state-of-the-art technology to determine any yield or performance improvements. Depending on the specific company, this could be technology already in production or technology scheduled for future production,
6): Repeat step 5 with a sufficient quantity of wafers from a qualified wafer supplier to generate a statistically valid conclusion, and finally
7): Production planning for the introduction of a new product based on silicon-28.

The testing sequence is a time consuming process. While several companies are well into the evaluation process, we did not receive significant proceeds in our 2003 fiscal year, and we are not aware of plans for the introduction of products based on silicon-28 wafers. Therefore we do not anticipate significant proceeds from silicon-28 product sales during the remainder of fiscal year 2004, although if any of the evaluation programs underway yield positive results, we could respond to customer demand in a relative short time frame.

Other Semiconductor Isotopes.

In October 2001, we announced an agreement with Cermet, Inc., to research the properties of isotopically-pure zinc oxide. Zinc oxide single crystal wafers are possible substrates for gallium nitride thin film devices and could benefit from higher thermal conductivity. We supplied isotopically-pure zinc oxide which Cermet used to produce single crystal wafers using their proprietary process. The chemical purity of the initial material we provided was not equal to Cermet's standard zinc oxide, and higher purity material will have to be made in order to determine the effectiveness of isotopic enrichment. This research and development program has been put on hold to concentrate on our silicon wafer product line.

We have an oral agreement with Voltaix, Inc. of North Branch, New Jersey to act as a distributor of our products for the ion implantation industry. The first product sold in accordance with the Voltaix agreement is silicon tetrafluoride enriched in the silicon-29 isotope. This isotopically enriched material allows higher beam currents and higher productivity than the natural silicon tetrafluoride currently used in the gallium arsenide industry today. Due to the high price for this product from our current suppliers, there has not been much demand from industry.

In October 2000, we announced a Joint Development Agreement with Epichem Inc., to commercialize isotopically pure gallium for the semiconductor and opto-electronic industries. Research to date has focused on the use of trimethylgallium (TMG) as a feedstock for centrifugal separation of gallium. Trimethylgallium has been found to be extremely corrosive to the normal materials of centrifuge construction, and the project has been expanded to consider exotic materials as well as other chemical forms of gallium that may be more suitable. We are looking for additional funding to pursue this program and intend to submit a proposal under the IPP Program.

Patents and Proprietary Rights

We rely primarily on a combination of patents and patent applications, 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 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. See "Risk Factors."

We currently have no patents in our own name, although we have been notified by the patent office that two patents have been allowed and will be issued shortly. We have filed several other patent applications and 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 (which is currently being performed by outside entities) 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). Each of these patents expire seventeen years after issuance.

Competition

Many of our potential competitors are larger and have significantly greater financial, technical, marketing and other resources than us. Some of our competitors may form partnerships or alliances with large pharmaceutical or electronics companies, with the resulting entity possessing greater market strength than we have. We face competition relative to many of our products, including:

Isotopes for Life Sciences

We do not produce stable or radioactive isotopes for use in the life sciences applications mentioned here. Instead, we distribute products made for us by a variety of producers in Russia, other countries of the former Soviet Union, Europe and North America. In many cases, we have long-term, exclusive supply relationships in place with producers. In others, we have the advantage of relationships that have developed over upwards of 25 years.

Competitors for stable isotopes fall into two categories—other producers and other distributors. Our primary competition from other producers comes from the other manufacturers of oxygen-18—Rotem, Isotec (Sigma Aldrich), CIL and Marshall Industries. To counter this, we have an exclusive five-year supply agreement in place with our producer (which expires July 2006). Our product is very high in quality and arguably the best in the world. We offer a very competitive and effective recycle program. As for competition with other distributors, our primary competition comes from Trace Sciences, a privately-held company in Canada with long-standing supply relationships with several stable isotope producers.

Competitors for radioactive isotopes fall into three categories—bulk radiochemical producers, value-added labeled compound producers and other distributors. Our primary competition for bulk production comes from MDS Nordion in Canada. Most other bulk producers are government-owned or university-operated. They typically sell through distributors like Isonics. We have either an exclusive supply agreement or long-standing supply relationships with many of these organizations. In the segment of value-added producers, we have a narrow product line with an exclusive, three-way supply agreement between Chemotrade, IUT and Perkin Elmer Life Sciences (the largest user of this product line). As for competition with other distributors, the primary competitor, Tenex, is also our supply partner. While Tenex let lapse all of its exclusive supply agreements (agency agreements) with distributors on December 31, 2001, we still have an excellent relationship with Tenex and many of its senior personnel.

Semiconductor Materials.

SOI Wafers. There are several competitors in the thick-film SOI wafer business, many of which are larger than Isonics and have significant financial resources as compared to Isonics. Analog Devices, Okmetic and SEH-Japan are our most significant competitors for thick-film SOI wafers while SOITEC, SEH, Canon, and Ibis are our most significant competitors for thin-film SOI wafers.

Silicon-28. Although we have not yet identified significant competitors, numerous companies in the United States and throughout the world are currently manufacturing semiconductor materials and are working to improve the thermal conductivity and other beneficial characteristics of semiconductor materials. Many of these companies may be larger than Isonics and have significantly greater financial resources at their disposal. Given the size and

importance of these potential markets, we anticipate that substantial competition will emerge as the markets develop.

Homeland Security

A large number of companies are involved in the homeland security industry, an industry that received a significant impetus from the events of September 11, 2001. Many of these companies (such as InVision Technologies, Inc., Ancore Corporation, and L-3 Communications Holdings, Inc.) are significantly larger than Isonics with greater financial resources at their disposal. We believe that the technology that we have acquired from IUT will result in better detection products, which will be attractive to the marketplace. Given the size and importance of the homeland security market, we anticipate that even greater competition will emerge.

Summary of Competition

Many of the areas in which we either compete or intend to compete are rapidly evolving. Competition may develop a patentable product or process that may prevent us from competing in our intended markets. While we expect to compete primarily on the basis of product performance, proprietary position and price, 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

We obtain stable isotopes from a variety of isotope sources, primarily located in Russia or other former Soviet republics. We may invest in our own isotope production facilities in the future upon our determining the optimum production technology for a given isotope or family of isotopes. Other 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.

To date, we have only been able to obtain limited quantities of silicon-28 for use in manufacturing epitaxial wafers. We believe that we will be able to obtain adequate supplies of silicon-28, but we are unable to commit to the suppliers because of our lack of working capital. We do not anticipate that Eagle-Picher will be a source of supply of silicon-28 to us even if they resolve their technical problems and are able to produce the product.

We have historically depended on a limited number of suppliers and processors for most of our manufacturing processes.

Except for the agreements with our supplier of oxygen-18 in Russia, we do not have any written agreements with our suppliers and processors. Although we attempt to reduce our dependence on our suppliers, 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.

Government Regulation

Regulation by government authorities in the United States and other countries is a significant consideration in the research, development, production, distribution and marketing of our products. In order to clinically test, manufacture, distribute, market and sell products, we must follow safety and other standards established by applicable regulatory authorities. We may be 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, and the use, storage and disposal of hazardous or potentially hazardous substances used in connection with our research, development and manufacturing activities. The regulations potentially material to our business are summarized below.

We are not currently subject to any FDA regulation because we do not currently manufacture any Diagnostic Breath Tests, drug products or other medical devices. Our customers may in many cases be subject to FDA regulation. However, if we test, manufacture, market, distribute, export or sell diagnostic products or medical devices in the future, we will also likely be subject to extensive regulation nationally and internationally.

Other Government Regulation

The import, export, handling, transportation, sale, storage and other activities undertaken in connection with our non-medical products are subject to, or potentially subject to, significant federal, state, local and foreign government controls pertaining to hazardous chemicals, 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. We are not currently engaged in any activities that may require us to incur significant expenses related to environmental compliance.

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 and State regulations pertaining to hazardous chemicals and hazardous waste disposal. These shipments are stored in an area of the facility designated for such materials. We believe we are in compliance, in all material respects, with applicable federal and state environmental regulatory requirements.

The shipments from Russian manufacturing sources now enter the U.S. duty free (without tariff). If the shipments become subject to tariff, we may not be able to sell the imported products. Further, the products may cease to be commercially viable because of these increased tariff costs.

The Nuclear Regulatory Commission 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. The Nuclear Regulatory Commission regulates exports of deuterium containing chemicals under general license. We will not be able to ship these chemicals to countries that require a special license for such shipments. None of these countries represents significant current or expected future markets for our products.

Our facilities and employees must also comply with environmental and other regulations concerning our operations. 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 have potential military, nuclear power or nuclear weapons purposes. These controls include export license requirements or other restrictions. We may be unable to obtain or maintain such licenses. Further, the failure to obtain or maintain such licenses, or comply with other restrictions that might be placed on such manufacturing and exports, may have a material adverse effect on us and our operations.

Product Liability and Insurance

Our business exposes us to substantial product, environmental, occupational and other liability risks. These risks are inherent in product research and development, manufacturing, marketing, distribution, and in the use of our products and operations. We have, and will attempt to renew product liability insurance (which currently expires April 30, 2004) in order to protect ourselves from such potential exposures, however there can be no guarantee that upon expiration of our current coverage that adequate insurance coverage will be available, and at an acceptable cost. Furthermore, a product liability or other claim could materially and adversely affect our business or financial condition. The terms of our customer agreements 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 file suit against us based on product liability, breach of warranty or other claims. The foregoing contract clauses might effectively limit our liability in any such actions.

Employees

As of October 21, 2003 we had 12 full-time employees. Five of our employees have Ph.D.s in scientific or engineering disciplines. Approximately one employee is involved in research and product development, two in sourcing, five in our SOI manufacturing operations and four in business development and administration. An employee's responsibilities may also encompass areas other than his or her primary area of responsibility. We consider our relations with our employees to be good. None of our employees is covered by a collective bargaining agreement.

Properties

Effective August 1, 2003, we began leasing our corporate facilities from the Colorado School of Mines Research Institute on a month-to-month basis at a cost of $2,800 per month.

We lease facilities, equipment and services in Vancouver, Washington, for our SOI manufacturing facility under three different leases with an unaffiliated landlord. These leases terminate December 31, 2003 and require minimum monthly payments totaling approximately $14,000 per month.

We lease 1,750 square feet for an administrative sales office in Columbia, Maryland that expires September 30, 2005. Chemotrade leases office space in Düsseldorf, Germany that expires June 15, 2004.

Legal Proceedings

Through July 2002, we were involved in an arbitration matter before the American Arbitration Association in Dallas, Texas (the "AAA") involving our dispute with Eagle-Picher. We filed this arbitration demand on March 26, 2001, and Eagle-Picher filed a competing claim. These competing claims were consolidated into a single proceeding (No. 71Y1980017501) before the AAA. We resolved this dispute on July 24, 2002, before the hearing commenced. Eagle-Picher paid us $2,500,000 as consideration for the settlement ($2,140,000 net of the contingency portion of our legal fees). Neither Isonics nor Eagle-Picher acknowledged fault or liability in connection with the arbitration or with respect to any of the transactions that were the subject of the arbitration.

On July 1, 2002 we agreed to issue 250,000 shares of restricted common stock (valued at $247,500 based upon the fair market value of the stock) to Investor Relations Services, Inc. ("IRSI") so that IRSI would perform consulting services consisting of financial advisory, strategic business planning and investor and public relations services. We terminated the contract in August 2002 due to nonperformance by IRSI and cancelled the shares and returned them to the "authorized, unissued" category. IRSI disputed our termination of the agreement and we resolved this matter in September 2003 by issuing 100,000 shares of restricted common stock.

Changes In And Disagreements With Accountants On Accounting And Financial Disclosure

None.

MANAGEMENT

Identification of Directors and Executive Officers

The following table sets forth the names and ages of all the Directors and Executive Officers of Isonics, and the positions held by each such person as of October 21, 2003. The directors each serve until their successors are duly elected and qualified; officers are appointed by, and serve at the pleasure of, the Board of Directors.

Name	Age	Position
James E. Alexander	54	President, Chief Executive Officer, Treasurer, and Chairman of the Board
Boris Rubizhevsky (2)	52	Senior Vice President, Vice Chairman and Director
Daniel J. Grady	49	Vice President, Life Sciences, Manager of Chemotrade.
Stephen J. Burden	55	Vice President, Semiconductor Materials and Products
John V. Sakys	35	Vice President, Chief Financial Officer and Secretary
Hans Walitzki	47	Vice President, Advanced Wafer Technology
Lindsay A. Gardner (1)(2)	52	Director
Richard Parker (1)(2)	60	Director

(1): Member of the Compensation Committee.
(2): Member of the Audit Committee.

Each of the directors holds office until the next annual meeting of shareholders and until his or her successor is elected and qualified or until his or her earlier death, resignation, or removal. Each officer serves at the discretion of the Board.

James E. Alexander is our co-founder. He has served as our President, Chief Executive Officer and as a director since our inception. Mr. Alexander has worked full-time for Isonics since January 1994. From June 1972 to December 1993, he worked in a variety of technology positions at General Electric Corporation in the aircraft engine and nuclear power divisions, most recently as Manager of Technology Programs. Mr. Alexander received his Bachelors degree in Metallurgical Engineering from the University of Cincinnati and performed graduate work in materials science there. He earned a Masters degree in Business Administration from Santa Clara University.

Boris Rubizhevsky is a co-founder of Isonics and has been Senior Vice President and a director since our inception. Mr. Rubizhevsky became Vice Chairman in March 1997 and has worked exclusively for Isonics during this time. From November 1986 through December 1994, he owned and operated SAR Marketing, a consulting firm providing business advice and services to large multinational corporations. From June 1977 to May 1986, Mr. Rubizhevsky worked at General Electric Corporation as Business Development Manager in various international locations. He received his Bachelors degree in Engineering from Stevens Institute of Technology.

Dr. Daniel J. Grady joined us as Vice President, Life Sciences in 1995 and became manager of our Chemotrade subsidiary in January 2002. From March 1994 through September 1995, Dr. Grady was Vice President of Research and Development at Sopha Medical Systems, a medical diagnostic imaging equipment manufacturer. From April 1991 until March 1994, he served as Marketing Manager, Nuclear Energy for General Electric Corporation. From May 1988 through March 1991, Dr. Grady served as Software Engineer Manager, Nuclear Medicine for General Electric in England. From October 1984 through May 1988, he served as Clinical Applications Manager for General Electric Nuclear Medicine. Between June 1981 and October 1984, he served as Engineering Analysis Section Head for TRW. Dr. Grady received his Bachelors and Masters degrees and Ph.D. in Nuclear Engineering from the University of Michigan.

Dr. Stephen J. Burden joined us in January 1997 as Director of Research & Development. He was promoted to Vice President, Semiconductor Materials effective January 1, 1999. From 1993 to 1997, Dr. Burden was Director of Product Development at SP3, Inc., a manufacturer of diamond-coated tools. From 1984 to 1993, he was Manager of Advanced Materials R&D at GTE Valenite, a subsidiary of GTE Corporation, a manufacturer of cutting tools. From 1974 to 1984, Dr. Burden was employed by General Electric Corporation in various capacities. Dr. Burden received his Ph.D. and Masters of Science degrees in Materials Science and Engineering from Drexel University, and his Bachelors degree in Science Engineering from Northwestern University. Dr. Burden also has an MBA from the University of Michigan.

John V. Sakys joined us in May 2001 as Controller. He was promoted to Vice President, Chief Financial Officer effective September 3, 2001, and he serves as corporate Secretary. From September 2000 to April 2001 Mr. Sakys was controller of AuraServ Communications. From July 1998 to September 2000 Mr. Sakys was Director of Financial Reporting for Media One, Inc. From December 1994 to July 1998 Mr. Sakys was an audit manager at Ernst and Young LLP. Mr. Sakys received his Bachelors degree in Business Economics with an emphasis in accounting from the University of California at Santa Barbara and is a Certified Public Accountant.

Dr. Hans Walitzki joined us in November 2001 as Vice President, Advanced Wafer Technology. He was employed as a vice president, chief technology officer, and Chairman of the Board of Directors of Silicon Evolution, Inc. (of Vancouver, Washington) from its formation in February 1999 until November 2001. Silicon Evolution filed a petition for relief under chapter 7 (liquidation) of the United States Bankruptcy Code in December 2001. Before that (from March 1982 until February 1999), Dr. Walitzki was employed at Wacker Siltronic Corporation in Portland, Oregon and its parent Wacker Siltronic AG in Germany. Dr. Walitzki received his Masters degree in Physics from Bonn University, Germany in 1980 and he received his Ph.D. in Physics from Bonn University in 1982.

Lindsay A. Gardner has served as a director since September 1993. Ms. Gardner is currently Director, Corporate Development and Strategic Planning for Menasha Corporation. From 1991 to 2001, Ms. Gardner was President of LG Associates, a U.S.-based management consulting firm providing strategic planning and materials management expertise to foreign company affiliates of U.S. companies in developing countries. During her tenure at LG Associates, Ms. Gardner resided in Moscow, Russia from September 1991 to January 1994, and Beijing, China from January 1994 to April 2000. She currently resides in Appleton, Wisconsin. From 1977 to 1991, Ms. Gardner worked for General Electric Corporation in a variety of management and functional positions

including international marketing, quality assurance and supply chain management. Ms. Gardner received a Bachelors degree in International Economics from The George Washington University Elliott School of International Affairs and earned a Masters of Business Administration from the University of Louisville.

Richard Parker has served as a director since August 1998. Mr. Parker previously was Vice-President of Distribution Sales for Cypress Semiconductor and he held that position since December 1997 until his retirement which was effective December 31, 2002. Previously, Mr. Parker was Director of Sales for Cypress from April 1984 to December 1997. Prior to joining Cypress, he held various sales and marketing management positions at Fairchild Semiconductor from 1973 to 1984. He received a Bachelors degree in Education from the University of North Dakota.

Significant Employees and Family Relationships.

There are no significant employees who are not also directors or executive officers. There were and are no family relationships among the officers, directors or any person chosen by Isonics to become a director or officer. No arrangement exists between any of the above officers and directors pursuant to which any one of those persons was elected to such office or position. None of our directors is also a director of another company which has a class of securities registered under Section 12 of the Securities Exchange Act of 1934, or which is subject to the reporting requirements of Section 15(d) of that act.

Involvement in Certain Legal Proceedings

Based on information submitted by the directors and executive officers, none of the directors or executive officers is involved in, or has been involved in, legal proceedings during the past five years that are material to an evaluation of the ability or integrity of any director or executive officer.

Promoters and Control Persons.

Not applicable.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
HOLDERS AND MANAGEMENT

The following table sets forth information regarding the ownership of our common stock as of October 21, 2003 by: (i) each director or nominee for director; (ii) each of the executive officers named in the Summary Compensation Table; (iii) all executive officers and directors of the Company as a group; and (iv) all those known by us to be beneficial owners of more than five percent of our common stock.

Beneficial Owner	Beneficial Ownership Number of Shares	Percent of Total
James E. Alexander(1)	2,126,167	15.2	%
Boris Rubizhevsky(2)	1,628,455	11.7	%
Stephen J. Burden(3)	442,260	3.1	%
Daniel J. Grady(4)	382,110	2.7	%
Hans Walitzki(5)	404,000	2.9	%
Lindsay Gardner(6)	292,775	2.1	%
Richard Parker(7)	42,927	0.3	%
John Sakys(8)	133,713	1.0	%
All executive officers and directors as a group (8 persons). The address for all of the above directors and executives officers is: 5906 McIntyre Street, Golden, CO 80403	5,452,407	35.6	%
Richard and Ana Grossman, Orin Hirschman, Adam Smith Capital Management, Adam Smith Investment Partners, LP, Diamond Capital Management Inc., Adam Smith Investments, Ltd., Adam Smith & Company, Inc.,(9)	1,146,736	7.7	%
Yorkshire Limited(10)	1,180,000	8.3	%
Greenwood Partners, L.P. (11)	729,677	5.1	%

(1): Includes: (i) 145,000 shares of common stock underlying stock options of which 85,000 are vested as of October 21, 2003 and which are currently exercisable; (ii) 100,000 shares of common stock underlying 100,000 warrants to purchase common stock of Isonics; (iii) 85,455 shares of common stock held in the name of The James & Carol Alexander Family Foundation; (iv) 500,000 shares held by wife Carol; (v) 29,000 shares held by son Jonathan Alexander.
(2): Includes: (i) 1,271,872 shares of common stock held jointly with wife Nancy Eiden Rubizhevsky; (ii) 141,250 shares of common stock underlying stock options of which 81,250 are vested as of October 21, 2003 and which are currently exercisable; (iii) 100,000 shares of common stock underlying 100,000 warrants to purchase common stock of Isonics; (iv) 33,333 shares of common stock held by wife Nancy Eiden Rubizhevsky; (v) 41,000 shares of common stock held by son Zachary Rubizhevsky; and (vi) 41,000 shares of common stock held by son Ryan Rubizhevsky.
(3): Includes 341,887 shares of common stock underlying stock options of which 281,887 are vested as of October 21, 2003 and which are currently exercisable.
(4): Includes 329,340 shares of common stock underlying stock options of which 269,340 are vested as of October 21, 2003 and which are currently exercisable.
(5): Includes (i) 200,000 shares of common stock of which 20,000 shares are vested as of October 21, 2003, and (ii) 204,000 shares of common stock underlying stock options of which 84,000 are vested as of October 21, 2003 and which are currently exercisable.
(6): Includes 43,014 shares of common stock underlying stock options that are currently exercisable.
(7): Includes 42,927 shares of common stock underlying stock options that are currently exercisable.
(8): Includes 132,812 shares of common stock underlying stock options of which 107,812 are vested as of October 21, 2003 and which are currently exercisable.
(9): Includes beneficial ownership of the following shares as reported by these persons in their Schedule 13D dated December 19, 2002: (i) 33,400 shares of common stock underlying 20,000 shares of Series A Stock owned of record and beneficially by Richard and Ana Grossman; (ii) 33,400 shares of common stock underlying 20,000 shares of Series A Stock owned of record and beneficially by Orin Hirschman (of which

shares Mr. Grossman disclaims beneficial ownership); (iii) 924,068 shares of common stock underlying 553,334 shares of Series A Stock owned of record and beneficially by Adam Smith Investment Partners, L.P.; and (iv) 189,268 shares of common stock underlying 113,334 shares of Series A Stock owned of record and beneficially by Adam Smith Investments, Ltd. The business addresses of Richard Grossman and Orin Hirschman, and the principal executive offices of Adam Smith Investment Partners, L.P. and Adam Smith & Company, Inc., are located at 101 East 52^nd Street, New York, New York 10022. The principal executive offices of Adam Smith Investments, Ltd. are c/o Insinger Fund Administration (BVI) Limited, Tropic Isle Building, P.O. Box 438, Road Town, Tortola, British Virgin Islands.

(10): Includes 442,500 shares of common stock underlying warrants to purchase common stock that are currently exercisable through December 31, 2005. Yorkshire Limited's principal executive offices are located at P.O. Box 65, Griffin House, Bond Street, Grand Turk, Turks and Caicos, British West Indies.
(11): Includes 722,800 shares of common stock underlying warrants to purchase common stock that are currently exercisable through December 31, 2005. Greenwood Partners principal executive offices are located at 261 Old York Road, Suite 424, Jenkintown, PA 19046.

The Series A Convertible Preferred Stock consisted of 1,830,000 shares issued with a liquidation preference of $1.50 per share and a right to convert the shares based on a one for one basis. As of October 21, 2003, 866,334 shares of Series A Convertible Preferred Stock have been converted into common stock. The conversion right of the preferred stock is currently 1.67 shares of common stock for each share of Series A Convertible Preferred Stock (an effective conversion rate of $.90 per share). We do not believe the completion of the September 2003 financing results in any further adjustment to the conversion price, however certain of the holders of the Series A Convertible Preferred Stock have indicated their disagreement with that position. We cannot offer any assurance that there may not be any further adjustment. The Series A Convertible Preferred Stock is entitled to dividends or distributions equal to the amount of the dividend or distribution per share of common stock payable at such time multiplied by the number of shares of common stock then obtainable upon conversion of such Series A Convertible Preferred Stock.

The Redemption Trigger Date for the Series A Convertible Preferred Stock was the business day immediately following the thirtieth consecutive trading day that the average closing price during such trading days (or, if no closing price is reported, the average of the bid and ask prices) of the shares of common stock was above $8.00 per share (which minimum price shall be proportionally adjusted for stock splits, stock dividends, reverse stock splits and any other subdivision or combination of the common stock). As we have met the Redemption Trigger Date, we may redeem all or any part of the Series A Convertible Preferred Stock at our election at any time and from time to time. The Series A Convertible Preferred Stock is convertible into common stock at the option of the holder until and unless we choose to redeem such shares and, until converted, at any meeting of our shareholders, each share of Series A Convertible Preferred Stock is entitled to the number of votes equal to the number of shares of common stock into which the Series A Convertible Preferred Stock is then convertible.

No Change of Control Arrangements.

We know of no plans or arrangement that will result in a change of control at Isonics.

EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth information regarding compensation awarded, paid to, or earned by the chief executive officer and the other principal officers of Isonics for the three years ended April 30, 2001, 2002 and

2003. No other executive officer earned salary and bonus compensation exceeding $100,000 during any of those years. This includes all compensation paid to each by Isonics and any subsidiary.

						Long-term Compensation Awards
						Awards			Payout
	Annual compensation					Awards			Payout
	Annual compensation						Securities Underlying Options & SARs (#)
Name and Principal Position	Fiscal Year	($) Salary	($) Bonus		($) Other(a)	($) Restricted Awards	Securities Underlying Options & SARs (#)		LTIP	All Other Compensation
James E. Alexander President & CEO	2001 2002 2003	240,000 240,000 240,000	0 0 0		0 0 0	0 0 0	0 120,000 0	(d)	0 0 0	0 0 0
Boris Rubizhevsky Senior Vice President	2001 2002 2003	216,000 216,000 216,000	0 0 0		0 0 0	0 0 0	0 118,750 0	(e)	0 0 0	0 0 0
Stephen J. Burden, Vice President	2001 2002 2003	125,000 137,665 144,000	0 0 0		0 0 0	0 0 0	0 109,000 40,000	(f) (g)	0 0 0	0 0 0
Daniel J. Grady Vice President	2001 2002 2003	143,208 144,000 149,500	0 27,750 0	(h)	0 0 0	0 0 0	0 106,375 0	(i)	0 0 0	0 0 0
John V. Sakys, Vice President(b)	2001 2002 2003	0 117,947 125,000	0 0 0		0 0 0	0 0 0	0 107,812 25,000	(j) (k)	0 0 0	0 0 0
Hans Walitzski, Vice President(c)	2001 2002 2003	0 69,745 160,000	0 0 0		0 0 0	0 0 0	0 404,000 0	(l)	0 0 0	0 0 0

(a): Excludes other compensation, the aggregate amount of which does not exceed the lesser of $50,000 or 10% of such named Executive Officers' annual compensation.
(b): Mr. Sakys joined Isonics in May 2001 and became an officer of Isonics effective September 2001.
(c): Dr. Walitzki joined Isonics as an officer in November 2001.
(d): Options to purchase 100,000 shares of common stock were granted in November 2001 with an exercise price of $1.17 (of which 40,000 have vested as of October 21, 2003) and an expiration date of November 12, 2006. Options to purchase 20,000 shares of common stock were granted in March 2002, as consideration for delaying salary in January and March 2002, are currently exercisable at $1.25 per share and expire March 27, 2007. Amount does not include 100,000 common stock warrants granted in March of 2002 which are currently exercisable at $1.25 per share as consideration for pledging common stock as a guarantee relating to the issuance of our Series 2002A Convertible Notes.
(e): Options to purchase 100,000 shares of common stock were granted in November 2001 with an exercise price of $1.17 (of which 40,000 have vested as of October 21, 2003) and an expiration date of November 12, 2006. Options to purchase 18,750 shares of common stock were granted in March 2002, as consideration for delaying salary in January and March 2002, are currently exercisable at $1.25 per share and expire March 27, 2007. Amount does not include 100,000 common stock warrants granted in March of 2002 which are currently exercisable at $1.25 per share as consideration for pledging common stock as a guarantee relating to the issuance of our Series 2002A Convertible Notes.
(f): Options to purchase 100,000 shares of common stock were granted in November 2001 with an exercise price of $1.06 (of which 40,000 have vested as of October 21, 2003) and an expiration date of November 12, 2011. Options to purchase 9,000 shares of common stock were granted in March 2002, as consideration for delaying salary in January and March 2002, are currently exercisable at $1.13 per share and expire March 27, 2007.
(g): Options to purchase 40,000 shares of common stock were granted in April 2003, are currently exercisable at $.90 and expire April 4, 2013.

(h): Dr. Grady's amount reflects the granting of 25,000 restricted common shares with a fair market value of $1.11 per share issued in January 2002.
(i): Options to purchase 100,000 shares of common stock were granted in November 2001 with an exercise price of $1.06 (of which 40,000 have vested as of October 21, 2003) and an expiration date of November 12, 2011. Options to purchase 6,375 shares of common stock were granted in March 2002, as consideration for delaying salary in January and March 2002, are currently exercisable at $1.13 per share and expire March 27, 2007.
(j): Options to purchase 100,000 shares of common stock were granted in May 2001, as consideration for Mr. Sakys joining Isonics, with an exercise price of $1.69 per share (of which 75,000 have vested as of October 21, 2003) and an expiration date of May 22, 2011. Options to purchase 7,812 shares of common stock were granted in March 2002, as consideration for delaying salary in January and March 2002, are currently exercisable at $1.13 per share and expire March 27, 2007.
(k): Options to purchase 25,000 shares of common stock were granted in April 2003, are currently exercisable at $.90 and expire March 4, 2013.
(l): Options to purchase 200,000 shares of common stock were granted in November 2001 with an exercise price of $1.01 (of which 80,000 have vested as of October 21, 2003) and an expiration date of December 1, 2006. Options to purchase 4,000 shares of common stock were granted in March 2002, as consideration for delaying salary in January and March 2002, are currently exercisable at $1.13 per share and expire March 27, 2007. Restricted stock of 200,00 shares with a fair market value of $1.01 per share were granted in November 2001 (of which 20,000 shares have vested as of October 21, 2003).

In October 1996, we adopted an employee benefit plan under Internal Revenue Code Section 401(k). The 401(k) plan is a profit sharing plan under which both employees and Isonics are entitled to contribute a portion of compensation and earnings, respectively, to investment funds to supplement employee retirement benefits. On November 1, 1999, the Isonics Corporation 401(k) plan was merged with the IPRC 401(k) plan and Isonics has continued that plan.

We do not have written plans to pay bonuses or deferred compensation to our employees except those expressly stated in the following sections.

We have adopted medical, dental, and life insurance plans for our employees and their dependents at our cost. In some cases, we also provide discretionary disability and other insurance plans for the benefit of our employees.

Employment Agreements, Termination of Employment and Change In Control Agreements

We do not have employment contracts with either our president (James E. Alexander) or our senior vice president (Boris Rubizhevsky). We do have employment agreements with Dr. Daniel J. Grady, Dr. Stephen J. Burden, Dr. Hans Walitzki, and Mr. John V. Sakys. The agreements have an indefinite term (except for the agreement with Dr. Walitzki which expires November 2006) and provide for at-will employment, terminable at any time by either party. The agreements provide for a rate of annual compensation, which we will review annually. Under each agreement, Dr. Grady, Dr. Burden, Dr. Walitzki, and Mr. Sakys are entitled to participate in our standard plans and policies. The agreements also include confidentiality and invention assignment provisions.

Stock Options and Option Plans

We grant options to executive officers, employees, and consultants under the following plans (collectively the "Plans"):

(a): 1996 Stock Option Plan. Although this plan has been terminated, there are options outstanding. The options granted pursuant to this plan are subject to a registration statement on Form S-8, Commission file no. 333-74339 which has been incorporated into file no. 333-74339 pursuant to Rule 429. As of October 21, 2003, options to purchase 358,769 shares were outstanding under this plan.
(b): 1996 Executives' Equity Incentive Plan. The Executives' Plan authorizes the grant of options to purchase 2,000,000 stock options. The options granted may be either incentive stock options, if they meet the requirements of Section 422 of the Internal Revenue Code, or non-qualified stock options. Of these, 1,000,000 shares are subject to a registration statement on Form S-8, Commission file no. 333-52514, which incorporated the shares included in the previous registration statement on Form S-8, Commission

file no. 333-74339 pursuant to Rule 429. We have issued 91,520 options for shares that are not included within existing registration statements. As of October 21, 2003, options to purchase 994,062 shares were outstanding under this plan.

(c): 1996 Equity Incentive Plan. The Employees' Plan authorizes the grant of options to purchase 1,000,000 stock options. The options granted may be either incentive stock options, if they meet the requirements of Section 422 of the Internal Revenue Code, or non-qualified stock options. Of these, 500,000 shares are subject to a registration statement on Form S-8, Commission file no. 333-52514, which incorporated the shares included in the previous registration statement on Form S-8, Commission file no. 333-74339 pursuant to Rule 429. Isonics has not issued any options for shares not included within the existing registration statements. As of October 21, 2003 options to purchase 267,399 shares were outstanding under this plan.
(d): 1998 Employee Stock Purchase Plan. The Stock Purchase Plan authorizes employees to purchase up to 200,000 shares of Isonics Common Stock. As of October 21, 2003, employees had purchased a total of 44,503 shares of Isonics common stock pursuant to this plan. The shares included in this plan are subject to a registration statement on Form S-8, Commission file no. 333-74339.

Except for the Director's Plan described below, we have not adopted any other stock option or stock appreciation rights plan. See "Compensation of Directors."

Options/SAR Grants in Last Fiscal Year

We granted stock options to the executive officers named in the compensation table (above) during the fiscal year ended April 30, 2003. We did not grant any stock appreciation rights to any person during fiscal year 2003 or subsequently.

		Number of Options		Exercise Price			Term
John V. Sakys		25,000		$	.90		March 4, 2013
Stephen J. Burden		40,000		$	.90		April 4, 2013

We have not granted any stock options to the executive officers named in the compensation table subsequent to April 30, 2003.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values

No officer exercised employee stock options during the fiscal year ended April 30, 2003 or subsequently. The following table sets forth information regarding the year-end value of options being held by the Chief Executive Officer and the other such named officers and persons on April 30, 2003.

Name and Principal Position	Number of securities underlying unexercised options/stock appreciation rights at April 30, 2003 Exercisable/Unexercisable	Value of unexercised in-the-money options/stock appreciation rights at April 30, 2003 Exercisable/Unexercisable
James E. Alexander President & CEO(a)	85,000/60,000	$	0/$0
Boris Rubizhevsky Senior Vice President(b)	81,250/60,000	$	0/$0
Daniel J. Grady Vice President	269,340/60,000	$	52,250/$0
Stephen J. Burden Vice President	281,887/60,000	$	0/$0
John V. Sakys Vice President	82,812/50,000	$	0/$0
Hans Walitzki Vice President	84,000/120,000	$	0/$0

(a): Does not include 100,000 warrants obtained in March 2002 as consideration for pledging common stock as a guarantee relating to the issuance of our Series 2002 A Convertible Notes.
(b): Does not include 100,000 warrants obtained in March 2002 as consideration for pledging common stock as a guarantee relating to the issuance of our Series 2002 A Convertible Notes. Also does not include warrants obtained in connection with a financing transaction that expired July 29, 2002.

Long Term Incentive Compensation Plans, and Defined Benefit and Actuarial Plans

Isonics has no long term incentive compensation plans, defined benefit plans, or actuarial plans.

Compensation of Directors

We reimburse directors for travel and related expenses associated with Board of Directors, meetings. In January 2000, we agreed to compensate non-employee directors $2,000 for attending Board of Directors' meetings in person, and $500 for attending Board of Directors' meetings telephonically beginning January 1, 2000.

The 1998 Directors' Plan (the "Directors' Plan") authorized each person serving as a member of the Board who is not an employee of ours to receive options to purchase 20,000 shares of our Common Stock when such person accepts his 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. The exercise price for the options is the Fair Market Value (as defined in the Executives' Plan) on the date such person becomes a director and the options are exercisable for five years from such date. The options granted under the Directors' Plan vest immediately upon the date of the grant. In the event a Director resigns or is not re-elected to the Board, his or her failure to exercise the options in three months results in the options' termination prior to the expiration of their term. Although the Directors adopted the plan in 1998, the Board formalized the plan by resolution in January 2000.

Under the Directors' Plan the following individuals have been granted options through October 21, 2003:

Name	Shares Under Option	Exercise Price		Expiration
Lindsay Gardner	10,000	$	6.25	April 26, 2005
	10,000	$	2.19	October 10, 2005
	10,000	$	1.06	November 12, 2006
	10,000	$	1.00	November 19, 2007
Richard Parker	10,000	$	6.25	April 26, 2005
	10,000	$	2.19	October 10, 2005
	10,000	$	1.06	November 12, 2006
	10,000	$	1.00	November 19, 2007

We do not have any other arrangements pursuant to which we compensate the Directors for acting in their capacities as such.

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

We provide the following information regarding transactions among officers, directors and significant shareholders of Isonics during the most recent two fiscal years and during the subsequent fiscal year.

Pledging of Shares in Connection with Issuance of Series 2002A 4% Convertible Notes

In connection with the issuance of our Series 2002A 4% Convertible Notes on March 20, 2002, James E. Alexander (president, chief executive officer and a director of Isonics) and Boris Rubizhevsky (senior vice president and a director of Isonics) each pledged 500,000 common shares in order to secure our $1,000,000 obligation while we filed and obtained effectiveness for a Form S-3 registration statement for the benefit of the lenders as selling security holders. In consideration for pledging their shares, we issued both James E. Alexander and Boris Rubizhevsky a warrant to purchase 100,000 shares of common stock. Each warrant vested immediately, is exercisable at $1.25 per share and expires on March 20, 2007. The pledge agreement terminated in June 2002 when we fulfilled our registration obligations.

Agreements With Affiliates of a Former Director

Larry Wells, formerly one of our directors, owns and controls Wells Investment Group, a privately-held corporation that provides financial consulting and other similar services to others. In October 2001 we entered into a consulting agreement with Wells Investment Group pursuant to which:

•: Wells Investment Group agreed to provide consulting services to Isonics, including performing due diligence, in connection with possible third party investment.
•: We paid Wells Investment Group $15,000 and issued to it warrants to purchase 50,000 shares of our Common Stock for $1.50 per share exercisable through October 5, 2005.

Our disinterested directors approved this agreement.

In November 2002, we paid $48,000 to Quivira Venture Partners, a California partnership of which Larry Wells is the managing partner. Quivira has used these funds to pay for expenses to obtain funding from certain non-U.S. investors. If Quivira is able to generate sufficient interest from these investors, we anticipate up to a minimum of $6,000,000 may be available for investment in Isonics on terms that we will then have to negotiate. We have no obligation to accept any investment unless the terms are satisfactory to us.

Corporate Loans to Officers

Isonics as not made any corporate loans to its officers, directors, or shareholders in fiscal years 2003, 2002 or subsequently. The Sarbanes-Oxley Act of 2002 prohibits any loans to corporate officers or directors.

Corporate Loans from Officers and Employees

On September 9, 2003, we borrowed $100,000 from Stephen Burden, our Vice President of Semiconductor Materials and Products. We repaid the loan in full, plus interest at 12% per annum, on September 11, 2003. On August 26, 2003 and July 30, 2003, we borrowed $120,000 and $80,000, respectively from Daniel Grady, our Vice President of Life Sciences. We repaid the loans in full, plus interest at 12% per annum, on September 11, 2003

and August 4, 2003, respectively. On March 4, 2002, we borrowed $75,000 from Stephen Burden, our Vice President of Semiconductor Materials and Products. We repaid the loan in full, plus one month's interest at 12% per annum, on March 31, 2002. We did not borrow any additional funds from our officers or directors during the years ended April 30, 2003 or 2002, or subsequently.

ISONICS' CAPITAL STOCK

Our authorized capital stock consists of 40,000,000 shares of common stock and 10,000,000 shares of Preferred Stock. As of October 21, 2003, there were outstanding:

•: 13,717,457 shares of common stock;
•: 963,666 shares of Series A Convertible Preferred Stock convertible into common stock at the rate of 1.67 shares of common stock for each share of Series A Convertible Preferred Stock;
•: 1,700,230 shares issuable upon exercise of options issued pursuant to our employee benefit plans; and
•: 5,402,610 shares issuable upon exercise of outstanding warrants.

Common Stock

Subject to preferences that may be applicable to any Preferred Stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available therefore at such times and in such amounts as the Board of Directors may from time to time determine.

Each shareholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of shareholders.

Cumulative voting for the election of directors is specifically authorized by the Bylaws. Under cumulative voting for the election of directors, upon a proper and timely request by a shareholder, each shareholder is entitled to cast a number of votes equal to the number of shares held multiplied by the number of directors to be elected. The votes may be cast for one or more candidates. Thus, under cumulative voting, a majority of the outstanding shares will not necessarily be able to elect all of the directors, and minority shareholders may be entitled to greater voting power with respect to election of directors than if cumulative voting did not apply.

The Bylaws provide that so long as we are a "listed corporation" as defined by applicable California law, there will not be cumulative voting in connection with the election of directors. Under §301.5(d) of the California Corporations Code, a "listed corporation" is defined to include a "corporation with outstanding shares listed on the New York Stock Exchange or the American Stock Exchange" and a "corporation with outstanding securities listed on the National Market System of the Nasdaq Stock Market (or any successor to that entity)." At the present time however, we are not a "listed company" as defined in California law, and as a result cumulative voting will continue to apply in connection with the election of directors.

The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. Upon liquidation, dissolution or winding up of Isonics, the remaining assets legally available for distribution to shareholders, after payment of claims or creditors and payment of liquidation preferences, if any, on outstanding Preferred Stock, are distributable ratably among the holders of the common stock and any participating Preferred Stock outstanding at that time. Each outstanding share of common stock is fully paid and nonassessable.

Preferred Stock

Our outstanding Series A Preferred Stock is described above under "Security Ownership of Certain Beneficial Holders and Management." We do not have any other series of preferred stock outstanding.

Warrants

Our outstanding Class B Warrants and Class C Warrants are described above under "Securities Offered, the Selling Holders and the Plan of Distribution." Although we have other warrants outstanding (including the common stock warrants issued in September and October 2003 and November 2002), they are not included in this Prospectus. These are generally described below in "Shares Available for Future Sale."

Transfer Agent

The transfer agent for our common stock is Continental Stock Transfer & Trust Co., Inc., 17 Battery Place, 8th Floor, New York, NY 10004.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information.

Our common stock is quoted on the Nasdaq SmallCap Market. As of October 21, 2003, we have outstanding 202,500 Class C Warrants, 430,110 registered Class B Warrants, as well as 1,350,000 restricted Class B Warrants. The Class B Warrants and the Class C Warrants are also quoted on the Nasdaq SmallCap Market. Currently the trading symbols for our outstanding securities are as follows:

Common stock		"ISON"
Class B Warrants		"ISONL"
Class C Warrants		"ISONZ"

The following table sets forth the closing 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) for the two most recent fiscal years as reported by the Nasdaq SmallCap Market.

		Quarter Ended Jul 31, 2003		October 31, 2003
				(through October 21, 2003)
Common Stock (ISON)
	High	$	1.15	$	1.29
	Low	$	.71	$	.76

		Quarter Ended
2003 fiscal year		Jul 31, 2002		Oct 31, 2002		Jan 31, 2003		Apr 30, 2003
Common Stock (ISON)
	High	$	1.25	$	1.04	$	1.55	$	1.25
	Low	$	.96	$	.70	$	.68	$	.70

		Quarter Ended
2002 fiscal year		Jul 31, 2001		Oct 31, 2001		Jan 31, 2002		Apr 30, 2002
Common Stock (ISON)
	High	$	1.85	$	1.49	$	1.18	$	1.25
	Low	$	1.14	$	.77	$	0.97	$	1.10

Shareholders and Dividends.

As of October 21, 2003, there were approximately 100 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."

The market price of our common stock could drop if substantial amounts of shares are sold in the public market or if the market perceives that such sales could occur. A drop in the market price could adversely affect holders of the stock and could also harm our ability to raise additional capital by selling equity securities.

SHARES AVAILABLE FOR FUTURE SALE

As of October 21, 2003, we had outstanding options and warrants for the purchase of up to approximately 7,102,840 shares of common stock at an average price of $1.45 per share, representing approximately 31.7% of our outstanding shares of common stock on a fully-diluted basis. Additionally, we have 963,666 shares of Series A Convertible Preferred Stock outstanding convertible to 1,609,322 shares of our common stock. The sum of these securities, 8,712,162 represent 38.8% of our outstanding shares of common stock on a fully-diluted basis.

The perception that these instruments may be exercised for, or converted into, common stock that then could be sold into the public market could adversely affect the market price of our common stock. In addition, we have entered into registration rights agreements with certain of our stockholders entitling them to include their shares of common stock in registration statements for securities filed by Isonics under the Securities Act of 1933, as amended. Awareness of the existence of these registration rights could lead to a perception that sales of the shares subject to the registration rights could occur, which could materially and adversely affect our stock price or could impair our ability to obtain capital through sales of equity securities. In addition, shares we have issued in private transactions over the past two years will become eligible for sale in the public market under SEC Rule 144.

These shares are restricted securities as defined in Rule 144. Under that rule, a stockholder who owns restricted shares that have been outstanding for at least one year is entitled to sell, within any three-month period, a number of restricted shares that does not exceed the greater of: (i) 1% of the then outstanding shares of common stock, or approximately 137,175 shares as of October 21, 2003; and (ii) an amount equal to the average weekly trading volume in the common stock during the four calendar weeks preceding the sale.

SECURITIES AND EXCHANGE COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES

The Articles of Incorporation of Isonics require it to indemnify its officers, directors, employees and agents against certain liabilities incurred by them in those capacities if they acted in good faith and reasonably believed their conduct was in the best interests of Isonics or not opposed to it. Isonics is also required to indemnify a person who is or was a director, officer, employee or agent of Isonics and who was successful, on the merits or otherwise, in defense of any proceeding to which he was a party, against reasonable expenses, which include attorneys' fees, incurred by him or her in connection with the proceeding.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of Isonics under the provisions discussed in the previous paragraph, or otherwise, Isonics has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in that Act and is, therefore, unenforceable.

EXPERTS

The consolidated balance sheets as of April 30, 2003 and 2002, and the consolidated statements of operations, stockholders' equity, and cash flows for the years then ended have been audited by Grant Thornton LLP, independent certified public accountants, as set forth in their report thereon appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of such firm as an expert.

LEGAL MATTERS

Lord, Bissell & Brook, Los Angeles, California, has passed on the validity of the shares of common stock offered hereby under California law, but has not otherwise participated in the preparation of this Prospectus or the registration statement of which this Prospectus is a part.

HOW TO OBTAIN ADDITIONAL INFORMATION

We file annual and quarterly reports, proxy statements, and other information with the Securities and Exchange Commission (the "SEC"). You may read and copy any document we have filed with the SEC in its public reference room at 450 Fifth Street N.W. Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-432-0330. The SEC maintains a World Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding companies, including those that Isonics files electronically with the SEC.

We also furnish Annual Reports to our shareholders that contain audited financial information.

This Prospectus is part of a registration statement we have filed with the SEC relating to an offer of our common stock described in this Prospectus. As permitted by the SEC rules, this Prospectus does not contain all of the information contained in the registration, accompanying exhibits and schedules we file with the SEC. You may refer to the registration, the exhibits and schedules for more information about our Company and our common

stock. The registration statement, exhibits, and schedules are also available at the SEC's public reference rooms or through its EDGAR database on the Internet.

You should rely only on the information contained or incorporated by reference in this Prospectus. Isonics has not authorized anyone to provide you with information that is different from what is contained in this Prospectus. You should not assume that the information contained in this Prospectus is accurate as of any date other than the date set forth on the front cover of this Prospectus.

If you have questions or require additional information concerning the Class B or Class C Warrants or the common stock warrants described herein, please contact the following person at the address and telephone number stated below:

John Sakys
Chief Financial Officer
Isonics Corporation
5906 McIntyre Street
Golden, CO 80403
Telephone No.: (303) 279-7900
Facsimile No.: (303) 279-7300
e-mail: jsakys@isonics.com

ISONICS CORPORATION AND SUBSIDIARIES

Index to Consolidated Financial Statements

		Page
Consolidated Financial Statements for the Years Ended April 30, 2003 and 2002
Report of Independent Certified Public Accountants		F-2
	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
Condensed Consolidated Financial Statements for the Three Months Ended July 31, 2003
	Condensed Consolidated Balance Sheets	F-26
	Condensed Consolidated Statements of Operations	F-27
	Condensed Consolidated Statements of Cash Flows	F-28
	Notes to Condensed Consolidated Financial Statements	F-29

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, 2003 and 2002, 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, 2003 and 2002, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1, the Company adopted Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets on May 1, 2002.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company incurred a net loss of $1,106,000 during the year ended April 30, 2003 and has an accumulated deficit of $12,322,000 as of April 30, 2003. These factors, among others, as discussed in Note 2 to the consolidated financial statements, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Grant Thornton LLP

Denver, Colorado
June 11, 2003

F-2

Isonics Corporation and Subsidiary

CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

			April 30,
			2003			2002
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	742		$	725
	Accounts receivable (net of allowances of $29 and $30, respectively)			711			745
	Inventories			748			460
	Prepaid expenses and other current assets			246			749

		Total current assets		2,447			2,679
LONG-TERM ASSETS:
	Property and equipment, net			615			70
	Goodwill			1,807			1,807
	Intangible assets, net			792			590
	Other assets			86			68

		Total long-term assets		3,300			2,535

TOTAL ASSETS			$	5,747		$	5,214

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
	Current portion of long-term debt		$	—		$	46
	Current portion of obligation under capital leases			48			—
	Convertible notes payable (net of discount of $546 in 2002)			—			454
	Accounts payable			909			824
	Accrued liabilities			396			289

		Total current liabilities		1,353			1,613
OBLIGATION UNDER CAPITAL LEASES, net of current portion				86			—
STOCKHOLDERS' EQUITY:
	Class A Preferred Stock—no par value; 10,000,000 shares authorized; shares issued and outstanding: 2003 and 2002—963,666; liquidation preference: 2003 and 2002—$1,445,499;			745			745
	Common stock—no par value; 40,000,000 shares authorized; shares issued and outstanding: 2003—12,113,533; 2002—10,824,812			11,668			10,354
	Additional paid in capital			4,362			3,912
	Deferred compensation			(145	)		(194	)
	Accumulated deficit			(12,322	)		(11,216	)

		Total stockholders' equity		4,308			3,601

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY			$	5,747		$	5,214

See Notes to Consolidated Financial Statements.

F-3

Isonics Corporation and Subsidiary

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

			Year Ended April 30,
			2003			2002
Revenues			$	9,051		$	8,155
Cost of revenues				7,014			6,182

		Gross margin		2,037			1,973
Operating expenses:
	Selling, general and administrative			4,290			4,463
	Research and development			303			423
	Goodwill impairment			—			1,025

		Total operating expenses		4,593			5,911

Operating loss				(2,556	)		(3,938	)
Other income (expense):
	Gain on legal settlement, net			2,140			—
	Amortization of debt offering costs			(182	)		—
	Interest and other income			95			73
	Interest expense			(590	)		(101	)
	Foreign exchange			(83	)		6

		Total other income (expense), net		1,380			(22	)

Loss before income tax benefit (expense)				(1,176	)		(3,960	)
Income tax benefit (expense)				70			—

NET LOSS			$	(1,106	)	$	(3,960	)

Net loss per share—basic and diluted
	Net loss per share		$	(.09	)	$	(.40	)
	Shares used in computing per share information			11,712			9,876

See Notes to Consolidated Financial Statements.

F-4

Isonics Corporation and Subsidiary

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)

		Preferred Stock			Common Stock
		Preferred Stock			Common Stock			Additional Paid in Capital		Deferred Comp- ensation			(Accu- mulated Deficit)
		Shares	Amount		Shares	Amount		Additional Paid in Capital		Deferred Comp- ensation			(Accu- mulated Deficit)			Total
BALANCES, April 30, 2001		963,666	$	745	8,961,288	$	8,508	$	2,745	$	—		$	(7,256	)	$	4,742
	Exercise of warrants	—		—	494,849		473		—		—			—			473
	Fair value of common stock issued for intangible assets	—		—	500,000		590		—		—			—			590
	Fair value of common stock issued for services and employee compensation	—		—	549,750		574		—		—			—			574
	Fair value of common stock issued for services as deferred compensation	—		—	200,000		202		—		(202	)		—			—
	Amortization of deferred compensation	—		—	—		—		—		8			—			8
	Fair value of warrants issued for services	—		—	—		—		217		—			—			217
	Issuance of common stock to settle registration rights issue	—		—	112,504		—		—		—			—			—
	Common stock issued under Employee Stock Purchase Program	—		—	6,421		7		—		—			—			7
	Warrants issued and beneficial conversion feature related to Series 2002A Convertible Notes	—		—	—		—		950		—			—			950
	Net loss	—		—	—		—		—		—			(3,960	)		(3,960	)

BALANCES, April 30, 2002		963,666		745	10,824,812		10,354		3,912		(194	)		(11,216	)		3,601
	Conversion of Series 2002A
	Convertible Notes into common stock	—		—	1,000,000		1,000		—		—			—			1,000
	Fair value of common stock issued for services	—		—	32,500		36		—		—			—			36
	Fair value of common stock issued for the acquisition of isotope-based trace detection technology	—		—	250,000		273		—		—			—			273
	Common stock issued under Employee Stock Purchase Program	—		—	6,221		5		—		—			—			5
	Fair value of warrants issued for services	—		—	—		—		450		—			—			450
	Amortization of deferred compensation	—		—	—		—		—		49			—			49
	Net loss	—		—	—		—		—		—			(1,106	)		(1,106	)

BALANCES, April 30, 2003		963,666	$	745	12,113,533	$	11,668	$	4,362	$	(145	)	$	(12,322	)	$	4,308

See Notes to Consolidated Financial Statements.

F-5

Isonics Corporation and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

				Year Ended April 30,
				2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss			$	(1,106	)	$	(3,960	)
	Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
		Depreciation and amortization			173			216
		Impairment of goodwill			—			1,025
		Amortization of debt discount and debt offering costs			728			74
		Gain on sale of subsidiary			(30	)		—
		Fair value of common stock and warrants issued for services and amortization of deferred compensation			374			736
	Changes in operating assets and liabilities:
		Accounts receivable			(167	)		33
		Income taxes receivable			—			419
		Inventories			(300	)		32
		Prepaid expenses and other assets			249			(202	)
		Accounts payable			310			70
		Accrued liabilities			375			(301	)

			Net cash provided by (used in) operating activities		606			(1,858	)
CASH FLOWS FROM INVESTING ACTIVITIES:
		Purchases of property and equipment			(521	)		(17	)
		Proceeds from sale of subsidiary net of cash disposed			(29	)		—

			Net cash used in investing activities		(550	)		(17	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Principal payments under capital lease obligations				(20	)		—
	Payments on borrowings				(24	)		(126	)
	Proceeds from borrowings				—			1,156
	Proceeds from issuance of common stock				5			480

			Net cash provided by (used in) financing activities		(39	)		1,510

			NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		17			(365	)
Cash and cash equivalents at beginning of period					725			1,090

Cash and cash equivalents at end of period				$	742		$	725

See Notes to Consolidated Financial Statements.

F-6

Isonics Corporation and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Principles of Consolidation

Isonics Corporation develops and markets products worldwide based on isotopes for applications in the energy, medical research, diagnostic, pharmaceutical and semiconductor industries. The consolidated financial statements (the "financial statements") include our accounts and those of our wholly-owned subsidiary, Chemotrade GmbH ("Chemotrade") and our 85% interest in IUT Detection Technologies, Inc. ("IUTDT"). 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 $543,000 and $388,000 at April 30, 2003 and 2002, respectively.

Accounts Receivable

The majority of our accounts receivable are due from customers of our life sciences segment. Credit is extended based on evaluation of a customers' financial condition and, generally, collateral is not required. Accounts receivable are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. We determine our allowance by considering a number of factors, including length of time trade accounts receivable are past due, our previous loss history, our customer's current ability to pay their obligation to us and the condition of the general economy and the industry as a whole. We write-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Interest accrues beginning on the day after the due date of the receivable. Interest accruals are discontinued on accounts past due 90 days or more, and all interest previously accrued but not collected is reversed against current interest income. Interest income is subsequently recognized on these accounts only to the extent cash is received, or when the future collection of interest and the receivable balance is considered probable by management.

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 recorded on our balance sheet resulted from the acquisition of Chemotrade in 1998. Effective May 1, 2002, we adopted the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142 Goodwill and Other Intangible Assets which requires, among other things that goodwill is no longer amortized but rather tested for impairment.

Prior to the adoption of SFAS No. 142, we evaluated goodwill for impairment by comparing the unamortized balance of goodwill to the undiscounted future cash flows of the related assets. We modified or adjusted goodwill, if impairment was indicated, by comparing the carrying value of the related business assets to their estimated fair value. Estimated fair value was based on estimated discounted future cash flows. Based upon our evaluation during the year ended April 30, 2002, we determined that goodwill had been impaired and as a result, we incurred a charge of $1,025,000 during the year ended April 30, 2002 (see Note 14). Prior to the adoption of SFAS No. 142, the goodwill resulting from the Chemotrade acquisition was being amortized on a straight-line basis over

F-7

twenty years. Subsequent to the adoption of SFAS No. 142, we no longer amortize goodwill, decreasing our amortization expense by approximately $110,000 per year.

SFAS No. 142 addresses the methods used to amortize intangible assets and to assess impairment of those assets, including goodwill resulting from business combinations accounted for under the purchase method. We adopted SFAS No. 142 effective May 1, 2002, except that goodwill and intangible assets other than goodwill acquired after June 30, 2001 have been amortized or not amortized in accordance with SFAS 142. Included in our assets at April 30, 2003, is goodwill related to the acquisition of Chemotrade with a net carrying value of $1,807,000.

Upon adoption, SFAS No. 142 required a transitional impairment test using a fair value approach for acquired goodwill. Goodwill is to be evaluated for impairment using a two-step test. The first step consists of a review for potential impairment, while the second step, if required, calculates the amount of impairment, if any. We completed step one of the transitional impairment test on our life sciences reporting unit, which has recorded goodwill. In completing our analysis of the life sciences reporting unit, we used the Discounted Cash Flow ("DCF") Method in which the reporting unit was valued by discounting the projected cash flows over a six-year period to its present value based upon a risk adjusted discount rate. As a result of the testing, the determined fair value exceeded the carrying value of the reporting unit and therefore, the second step was not performed and no impairment was recorded.

On a prospective basis, we are required to test goodwill and other indefinite-lived intangible assets for impairment on an annual basis based upon a fair value approach. Additionally, goodwill must be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. During the fourth quarter of the year ended April 30, 2003, we completed our annual impairment test for goodwill using methodologies consistent with those applied for our transitional test performed as of May 1, 2002. Such testing resulted in no impairment charge to goodwill, as the determined fair value exceeded the carrying value of the reporting unit.

A reconciliation of previously reported net loss and basic and diluted net loss per share to the amounts adjusted for the exclusion of amortization related to goodwill is as follows (in thousands, except per share data):

	Year Ended April 30,
	2003			2002
Net loss, as reported	$	(1,106	)	$	(3,960	)
Add back: Goodwill amortization		—			175

Adjusted net loss	$	(1,106	)	$	(3,785	)

		Year Ended April 30,
		2003			2002
Basic and diluted net loss per share
	Net loss, as reported	$	(.09	)	$	(.40	)
	Add back: Goodwill amortization		—			.02

	Adjusted net loss	$	(.09	)	$	(.38	)

Long-Lived Assets

Our policy is to record long-lived assets at cost, amortizing these costs over the expected useful lives of the related assets. In accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, these assets are reviewed on a periodic basis for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be realizable. Furthermore, assets held and used in operations are evaluated for continuing value and proper useful lives by comparison to expected undiscounted future cash flows. If impairment has occurred, it is calculated based on the difference between the asset's carrying value and the underlying discounted future cash flows it is expected to generate.

Prior to the adoption of SFAS No. 142, all intangible assets were evaluated for impairment using the methods described in the preceding paragraph. After the adoption of SFAS No.142, amortizable intangible assets continue to use these methods. We determined that no impairment indicators were present during the year ended April 30,

F-8

2003, and accordingly no impairment tests were performed for property and equipment or amortizable intangible assets.

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.

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. These estimates are based upon mangagement's best findings, after considering past and current events and assumptions about future events. Actual results could differ from those estimates.

Fair Values of Financial Instruments

The fair value of cash and cash equivalents, trade receivables, trade payables, capital lease obligations and debt approximates carrying value due to the short maturity of such instruments. The fair value of the convertible notes payable at April 30, 2002 was approximately $870,000, and was estimated based on discounted cash flows using our then current incremental borrowing rate for similar types of borrowing arrangements.

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 Euros. The financial statements of Chemotrade are prepared in Euros 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 compensation 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, as permitted by SFAS No. 123 Accounting for Stock-Based Compensation, as amended. Compensation expense for stock options is measured as the excess, if any, of the quoted market price of our stock at the date of grant over the amount an employee must pay to acquire the stock. No stock-based employee compensation costs relating to options is reflected within our net loss as all options granted had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. We record compensation expense for restricted stock awards based on the quoted market price of our stock at the date of the grant and the vesting period.

F-9

The following table illustrates the effect on net loss and net loss per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation (in thousands, except per share data):

		Year Ended April 30,
		2003			2002
Net loss, as reported		$	(1,106	)	$	(3,960	)
	Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(305	)		(429	)

	Adjusted net loss	$	(1,411	)	$	(4,389	)

		Year Ended April 30,
		2003			2002
Basic and diluted net loss per share
	As reported	$	(.09	)	$	(.40	)
	Adjusted	$	(.12	)	$	(.44	)

Net Income (Loss) Per Share

Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Contingently issuable shares are included in the computation of basic net income (loss) per share when the related conditions are satisfied. Diluted net income (loss) 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 contingently issuable shares, the incremental common shares issuable upon conversion of preferred stock or convertible debt (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 anti-dilutive.

As of April 30, 2003, a total of 5,232,840 outstanding stock options and warrants, and 963,666 outstanding Class A Convertible Preferred Stock shares have been excluded from the diluted computation, as the inclusion would be anti-dilutive. As of April 30, 2002, a total of 7,746,705 outstanding stock options and warrants, and 963,666 outstanding Class A Convertible Preferred Stock shares have been excluded from the diluted computation, as the inclusion would be anti-dilutive.

Reclassifications

Certain reclassifications have been made to the 2002 financial statements in order to conform to the 2003 presentation.

New Accounting Standards

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which is effective for exit or disposal activities initiated after December 31, 2002, with early application encouraged. This statement requires a liability for a cost associated with an exit or disposal activity to be recognized at fair value in the period in which the liability is incurred, except for liabilities for one-time termination benefits requiring future employee service, which are to be recognized ratably over the remaining service period. Adoption of SFAS No. 146 did not have a material impact on our financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. This statement amended SFAS No. 123, Accounting for Stock-Based Compensation to provide alternate methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amended the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. We currently have no intention to change to the fair value method to account for employee stock-based compensation; however the disclosure provisions have been implemented within our financial statements.

F-10

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity which is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for us as of August 1, 2003. SFAS No. 150 changes the classification in the consolidated balance sheets of certain common financial instruments from either equity or mezzanine presentation to liabilities presentation, and requires an issuer of those financial statements to recognize changes in fair value or redemption amounts as applicable in earnings. We do not anticipate the adoption of SFAS No. 150 to have a material impact on our financial statements.

We have reviewed all other recently issued, but not yet effective, accounting pronouncements and do not believe any such pronouncements will have a material impact on our financial statements.

NOTE 2—REALIZATION OF ASSETS

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern. However, we have sustained substantial losses from operations in recent years, and such losses have continued through the unaudited quarter ended July 31, 2003. In addition, historically we have used, rather than provided, cash in our operations, and have been unable to secure adequate financing to meet our future cash needs.

In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon our continued operations, which in turn is dependent upon our ability to meet our financing requirements on a continuing basis, to maintain present financing, and to succeed in our future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence.

F-11

We continue to pursue funding that will help us meet our future cash needs. We are currently working with several different sources, including both strategic and financial investors, in order to raise sufficient capital to finance both our continuing operations and our newly acquired isotope-based trace detection technology (see Note 6). Although there is no assurance that additional funding will be available, we believe that our current business plan, if successfully funded, will significantly improve our operating results and cash flow in the future.

NOTE 3—FINANCIAL STATEMENT COMPONENTS

Inventories consist of the following (in thousands):

	April 30,
	2003		2002
Finished goods	$	312	$	248
Work in process		414		212
Materials and supplies		22		—

	$	748	$	460

Prepaid expenses and other current assets consists of the following (in thousands):

	April 30,
	2003		2002
Prepaid investment banking services (see Note 11)	$	161	$	—
Prepaid consulting services (see Note 9)		—		172
Expenses related to Series 2002A Convertible Notes (see Note 17)		—		182
Note receivable from Silicon Evolution, Inc. (see Note 7)		—		93
Fair value of common stock warrants issued to Silicon Quest International, Inc. for manufacturing services (see Note 8)		—		63
Prepaid insurance		32		62
Other		53		177

	$	246	$	749

Property and equipment consists of the following (in thousands):

	April 30,
	2003			2002
Office furniture and equipment	$	272		$	281
Production equipment		631			27
Leasehold improvements		29			7

		932			315
Accumulated depreciation and amortization		(317	)		(245	)

	$	615		$	70

Depreciation expense for the years ended April 30, 2003 and 2002 was $102,000 and $42,000, respectively.

Intangible assets consists of the following (in thousands):

	April 30,
	2003			2002
Silicon Evolution, Inc. technology license agreement (see Note 7)	$	590		$	590
Isotope-based trace detection technology (see Note 6)		273			—

		863			590
Accumulated amortization		(71	)		—

	$	792		$	590

F-12

Accrued liabilities consist of the following (in thousands):

	April 30,
	2003		2002
Compensation	$	74	$	43
Customer advances and deposits		224		147
Other		98		99

	$	396	$	289

Supplemental disclosure of non-cash investing and financing activities (in thousands):

		Year Ended April 30,
		2003		2002
Common stock issued for intangible assets		$	273	$	590
Capital lease obligations for property and equipment (see Note 12)		$	154	$	—
Associated with Series 2002A Convertible Notes (see Note 17):
	Series 2002A Convertible Notes converted into common stock	$	1,000	$	—
	Common stock warrants issued to employees for pledging shares as collateral	$	—	$	228
	Allocation of proceeds to warrants issued in conjunction with the notes and beneficial conversion feature associated with the convertible notes	$	—	$	620
	Common stock warrants issued to investment banker	$	—	$	102

Supplemental disclosures of cash flow information (in thousands):

		Year Ended April 30,
		2003		2002
Cash paid during the period for:
	Interest	$	24	$	17
	Income taxes	$	—	$	—

NOTE 4—GAIN ON LEGAL SETTLEMENT WITH EAGLE-PICHER TECHNOLOGIES, LLC

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 due in equal installments on November 30, 2000, 2001 and 2002. During the year ended April 30, 2001, we entered into a dispute with Eagle-Picher relating to, among other things, nonpayment of the additional payments related to the alleged nonperformance of our former depleted zinc supplier under the terms of the supply agreement transferred to Eagle-Picher, Eagle Picher's failure to supply us the required amount of silicon-28 to be used in our research and development activities and the validity of Eagle-Picher's exercise of the related common stock warrants into 3,130,435 shares of common stock under the net exercise provision of the warrant agreement.

As we were unable to come to a resolution, we filed for binding arbitration on March 26, 2001 claiming damages against Eagle-Picher of $75,500,000. Eagle-Picher claimed damages of $10,000,000 for alleged misrepresentations regarding the status of the depleted zinc business at the time of sale.

On July 24, 2002, we entered into a settlement agreement whereby Eagle-Picher paid us $2,500,000 as full consideration for settlement of the dispute. Neither Isonics nor Eagle-Picher acknowledged fault or liability in connection with the dispute. In addition, as a result of the settlement, no shares of our common stock were ultimately issued to Eagle-Picher. In connection with the settlement, we recognized legal expense of $360,000 as satisfaction of the contingency portion of our legal fees, resulting in a net gain of $2,140,000.

NOTE 5—SALE OF CHEMOTRADE LEIPZIG GMBH

On July 31, 2002, we sold our 75% interest in Chemotrade Leipzig GmbH ("CTL") to the 25% shareholder for 50,000 Euros (approximately $48,000). In accordance with the sales agreement, the transaction was effective as of May 1, 2002, with the new 100% shareholder controlling the operations from that point forward. We recognized

F-13

a gain of $30,000, which is recorded as interest and other income in the accompanying consolidated statements of operations. The carrying amount of the major classes of assets and liabilities that were disposed in the transaction were: cash and cash equivalents $77,000, accounts receivable $201,00, prepaid expenses and other current assets $215,000, accounts payable $225,000, and accrued liabilities $268,000. CTL was previously included in our life sciences business segment before the disposition.

NOTE 6—ACQUISITION OF ISOTOPE-BASED TRACE DETECTION TECHNOLOGY

In December 2002 we acquired certain isotope-based trace detection technology to be used to detect explosives and chemical and biological weapons from Institut of Umwelttechnologien GmbH ("IUT"), an entity in which we hold a 6% ownership interest. We issued to IUT 250,000 shares of restricted common stock for the isotope-based trace detection technology. In addition, we granted IUT a 15 percent ownership interest in our newly created subsidiary, IUTDT, that will own and commercialize the trace detection technology. Although legally formed, IUTDT has not yet been capitalized and as a result there has been no minority interest recorded in the accompanying consolidated balance sheets. The restricted common stock was valued at $273,000 based upon the closing price of our common stock on December 4, 2002. We have determined that these intangible assets have a finite life and as a result, we are amortizing them over their estimated useful life of ten years. We incurred amortization expense of $12,000 during the year ended April 30, 2003. Amortization expense associated with these intangible assets is anticipated to be approximately $27,000 per year over the remaining useful life.

In December 2002, we acquired an option (at a cost of $50,000), to purchase an additional 29.1% of IUT from an unaffiliated party for an exercise price of $450,000. The option expired unexercised on February 28, 2003.

NOTE 7—ACQUISITION OF INTANGIBLE ASSETS FROM SILICON EVOLUTION, INC.

On September 14, 2001 we entered into a perpetual, exclusive technology license agreement with Silicon Evolution, Inc. ("SEI") whereby we issued 500,000 shares of our Series B Convertible Preferred Stock for the right to indefinitely use intellectual property assets owned or leased by SEI. The 500,000 shares of Series B Convertible Preferred Stock were valued at $590,000 based upon the closing price on September 14, 2001 of our common stock into which the preferred shares were convertible. On November 13, 2001, the Series B Convertible Stock automatically converted to common stock on a share-for-share basis after our shareholders approved an increase in our authorized capitalization (see Note 17).

We initially determined that the acquired intangible assets had an indefinite useful life as they were not bound by any legal time periods or otherwise limited due to competing technologies and other factors, and therefore, in accordance with SFAS No. 142 Goodwill and Other Intangible Assets they were not amortized but rather tested annually for impairment.

During May 2002, upon further evaluation of the uses and applications of the acquired technology and the advancement of the development of our silicon-on-insulator ("SOI") business plan, we determined that the intangible assets no longer had an indefinite life and as a result, the assets are now being amortized over their estimated useful life of ten years. We incurred amortization expense of $59,000 related to these intangible assets during the year ended April 30, 2003. Amortization expense associated with these intangible assets is anticipated to be approximately $59,000 per year over the remaining useful life.

On November 26, 2001 we hired one former SEI employee to function in the role of Vice President, Advanced Wafer Technology for our newly started SOI business. As part of the employment package, we granted the employee 200,000 shares of restricted stock, vesting in different increments over five years and 200,000 stock options of which 40,000 vested on December 1, 2001 and the remaining amounts vest ratably over four years. The restricted stock and the stock options were issued at and are exercisable at $1.01 per share, respectively. The unamortized deferred compensation as of April 30, 2003, relating to the unvested portion of the restricted stock award is $145,000, is recorded as a reduction to stockholders' equity and is being amortized to compensation expense ratably over the vesting period.

In connection with the negotiation of the acquisition of the above described intangible assets, we provided a working capital loan to SEI of $93,000. The loan was secured by substantially all of SEI's assets. In December 2001, SEI filed a petition for relief under Chapter 7 of the United States Bankruptcy Code. In April 2003, we acquired $113,000 of SOI production equipment through the bankruptcy court of which $93,000 of the purchase price was offset against our receivable with the remaining $20,000 paid in cash.

F-14

NOTE 8—ALLIANCE AGREEMENT WITH SILICON QUEST INTERNATIONAL, INC.

On December 19, 2001 we entered into an alliance agreement with Silicon Quest International, Inc. ("SQI") whereby SQI agreed to exclusively manufacture and supply SOI wafers for Isonics. In addition, SQI provided sales and marketing services as requested by Isonics. The alliance agreement was to expire on January 24, 2003 and dictated that if the agreement was not amended or extended, then SQI was prohibited from manufacturing SOI wafers without our written permission until January 24, 2004. In connection with this agreement we issued a common stock warrant (valued at $83,000 using the Black-Scholes pricing model) to purchase 100,000 shares of restricted common stock at $1.50 per share. The common stock warrant vested immediately and is exercisable in its entirety beginning December 19, 2002. The common stock warrant expires on December 19, 2004, and its value was being amortized to cost of revenues over the twelve-month period beginning February 1, 2002. The value of the common stock warrant was amortized to cost of revenues in the amount of $63,000 and $20,000 for the years ended April 30, 2003 and 2002, respectively.

In September 2002, we entered into several lease agreements related to building space, equipment and services in order to establish our own stand-alone wafer manufacturing facilities ("Fab-1") in Vancouver, Washington. The various leases terminate December 31, 2003 and require minimum monthly payments totaling approximately $14,000 per month. In connection with the establishment of Fab-1, we agreed with SQI to terminate our alliance agreement effective November 22, 2002. Under the terms of the agreement, SQI is prohibited from producing SOI wafers until November 22, 2003. We incurred lease expense of $101,000 at Fab-1 during the year ended April 30, 2003.

F-15

NOTE 9—CONSULTING AGREEMENT WITH INVESTOR RELATIONS SERVICES, INC.

On December 18, 2001 we entered into a one-year consulting agreement with Investor Relations Services, Inc. ("IRSI") whereby we issued 500,000 shares of restricted common stock for consulting services consisting of financial advisory, strategic business planning and investor and public relations services. The shares of restricted common stock vested immediately and were considered full payment for services (including IRSI expenses) to be performed during the first six months of calendar 2002. The restricted common stock was valued at $515,000 based upon the closing price of our common stock on December 18, 2001 and was amortized to consulting expense over the six-month period beginning January 1, 2002. As of April 30, 2002 $172,000 had not been amortized and is recorded as prepaid expenses and other current assets in the accompanying consolidated balance sheets. During the last six months of calendar 2002 IRSI was to act as an advisor but to the extent that we requested IRSI to incur any expenses on our behalf, we would have been required to reimburse IRSI for such costs.

On July 1, 2002 we amended the agreement whereby we issued 250,000 shares of restricted common stock (valued at $247,500 based upon the fair market value of the stock) so that IRSI would continue to perform consulting services consisting of financial advisory, strategic business planning and investor and public relations services. The shares of restricted common stock vested immediately and were considered full payment for services (including IRSI expenses) to be performed during the last six months of calendar 2002. In August 2002, the contract was terminated due to nonperformance by IRSI and as a result, effective as of July 1, 2002, the 250,000 shares of restricted common stock were cancelled and returned to the "authorized, unissued" category.

During October 2002 and again in August 2003, IRSI disputed our termination of the agreement based upon nonperformance and has requested to mediate the matter. If a solution is not reached through mediation the next step under the terms of the agreement would be to enter into binding arbitration. We intend to vigorously defend our position and believe that the outcome will not have a material impact on the results of our operations or financial condition.

NOTE 10—INVESTMENT BANKING AGREEMENT WITH VFINANCE, INC.

In January 2002, we entered into an agreement with vFinance, Inc. ("vFinance") whereby we issued a common stock warrant (valued at $44,500 using the Black-Scholes pricing model) to purchase 50,000 shares of common stock at $1.50 per share, for investment banking and consulting services. The common stock warrant vested immediately, expires on March 20, 2005 and was expensed to consulting services upon the signing of the agreement. Under the terms of the agreement, which also requires a monthly fee of $5,000, we retained vFinance on an exclusive basis for 90 days and on a non-exclusive monthly basis thereafter. The agreement was cancelable by either party upon 30 days notification.

On June 10, 2002 we terminated our then current agreement with vFinance, Inc. and entered into a new agreement whereby we issued 25,000 shares of restricted common stock (valued at $26,500 based upon the fair market value of the stock) and 200,000 common stock warrants (valued at $176,000 using the Black-Scholes pricing model) for investment banking, market making and consulting services. The common stock warrants vested immediately, are exercisable at $2.32 per share and expire on June 10, 2006. The agreement is cancelable by either party upon 30 days notification. The value of both the restricted common stock (which vested immediately) and the common stock warrants was being amortized to consulting expense over the twelve-month period (the expected life) of the agreement. During the year ended April 30, 2003 a dispute arose between the two parties whereby vFinance claimed that it is entitled to additional cash payments along with the shares of restricted common stock and common stock warrants in order to perform the required services under the new agreement. We determined that vFinance is not entitled to cash payments and have refused to make such payment. It is doubtful that this dispute will be resolved and thus the value of the future services to be provided over the remaining life of the new agreement is expected to be minimal. As a result of the uncertainty of future benefit under this agreement, we expensed the entire $202,500 of value associated with the restricted common stock and common stock warrants to consulting services during the year ended April 30, 2003. The agreement expired in June 2003 and no additional cash payments were made.

NOTE 11—CONSULTING AGREEMENT WITH PARK CAPITAL SECURITIES, LLC

In November 2002, we entered into an agreement with Park Capital Securities, LLC whereby we issued a common stock warrant (valued at $261,000 using the Black-Scholes pricing model) to purchase 300,000 shares of common stock at $1.00 per share, for investment banking and consulting services. The common stock warrant

F-16

vested immediately, expires in November 2005 and will be expensed to consulting services over the life of the agreement. We recognized consulting services expense of $100,000 related to this agreement during the year ended April 30, 2003. As of April 30, 2003, $161,000 has not been amortized and is recorded as prepaid expenses and other current assets in the accompanying consolidated balance sheets. The agreement terminates on December 31, 2003.

NOTE 12—EQUIPMENT FINANCING AGREEMENT

In October 2002, we entered into an agreement with Fidelity Capital ("Fidelity") whereby Fidelity agreed to provide up to $1,000,000 in equipment financing. Under the terms of the agreement, Fidelity will acquire equipment on our behalf and lease it to us over a term of 36 months at a current blended interest rate of approximately 7.5%. Each draw down on the lease will contain a $1 bargain purchase option, payable at the end of the lease at which time title to the equipment will transfer to us, and as a result they are accounted for as capital leases. Principal amounts outstanding under this facility at April 30, 2003 were $134,000. Included in property and equipment, net as of April 30, 2003 is equipment under capital leases with a cost basis of $154,000.

The following represents the minimum lease payments remaining under capital leases as of April 30, 2003 (in thousands):


Year ending April 30,
	2004	$	61
	2005		61
	2006		33

Total minimum lease payments			155
Less: amount representing interest			21

Present value of minimum lease payments			134
Less: current portion of obligation under capital leases			48

Long term obligation under capital leases		$	86

NOTE 13—ACCOUNTS RECEIVABLE FINANCING AGREEMENT

On January 18, 2002, we entered into an Accounts Receivable Purchase Agreement with Silicon Valley Bank ("SVB") whereby SVB advanced up to 80% of all gross receivables (up to $1,500,000) submitted for financing. Amounts financed were secured individually by the related account receivable and generally by our assets, and incurred monthly finance and administrative charges of up to 2.25% until repaid. The agreement expired January 17, 2003 and there were no amounts outstanding under this agreement as of April 30, 2003 and 2002.

NOTE 14—IMPAIRMENT OF GOODWILL

F-17

NOTE 15—INCOME TAXES

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

		April 30,
		2003			2002
Deferred tax assets
	Accruals and expenses deductible in future periods	$	817		$	730
	Amortization and depreciation		—			125
	Net operating loss and credit carryforwards		2,633			2,206

Total deferred tax assets			3,450			3,061
	Valuation allowance		(3,359	)		(3,061	)

			91			—
Deferred tax liabilities
	Amortization and depreciation		(91	)		—

		$	—		$	—

Income tax expense (benefit) consists of the following (in thousands):

		April 30,
		2003			2002
Current
	Federal	$	(70	)	$	—
	State		—			—
	Foreign		—			—

			(70	)		—
Deferred
	Federal		—			—
	State		—			—
	Foreign		—			—

			—			—

		$	(70	)	$	—

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

	April 30,
	2003			2002
Expected benefit at federal statutory rate	$	(400	)	$	(1,346	)
State taxes net of federal benefit		(36	)		(65	)
Foreign income taxed at different rates		6			82
Other items		62			351
Change in valuation allowance		298			978

	$	(70	)	$	—

The federal net operating loss carryforward of approximately $5,238,000 as of April 30, 2003 expires on various dates through 2023. In addition, Chemotrade has a net operating loss carryforward of approximately $1,550,000 which under current German tax law will not expire until utilized.

We have established a full valuation allowance against the deferred tax assets because it is uncertain whether we will utilize these benefits due to continuing operating losses.

NOTE 16—DEBT AND LETTER OF CREDIT

We had term debt outstanding of $21,000 as of April 30, 2002. The loan bore interest at 5.47%, had a five-year life and was repaid during the year ended April 30, 2003. In addition, we had notes outstanding of $25,000 primarily relating to funding of working capital as of April 30, 2002. The notes bore interest at 12 percent,

F-18

required a monthly payment of approximately $5,000 and were due August 31, 2002. We currently have no lending facilities with any financial institutions, except for a line of credit available to Chemotrade in the amount of 100,000 Euros (approximately $111,000) and a letter of credit guarantee relating to imports and exports for $50,000. The line of credit carries an interest rate of 10.1% on all outstanding amounts and expires February 28, 2004 while the letter of credit also expires February 28, 2004. There were no amounts outstanding under the line of credit as of April 30, 2003 and 2002, respectively.

NOTE 17—STOCKHOLDERS' EQUITY

Increase in Authorized and Reserved Capital

Effective November 13, 2001 our shareholders voted to approve an amendment to our articles of incorporation whereby our authorized common stock was increased from 20,000,000 to 40,000,000 shares.

Common Stock

On December 13, 2000, we completed a private placement to accredited investors whereby we sold 337,500 units for $675,000. Each unit consisted of one share of common stock and two redeemable Class B common stock warrants. Class B common stock warrants are exercisable at $1.50 per share until December 31, 2005. Each Class B common stock warrant entitles the holder to receive one share of common stock and one redeemable Class C common stock warrant. Each Class C common stock warrant entitles the holder to purchase one share of common stock at $2.50 until December 31, 2005. We may redeem the Class B and C common stock warrants at a price of $.10 if the closing price of our common stock trades at or above $3.75 per share for any 20 of 30 consecutive trading days provided a registration statement permitting the exercise of those warrants is then current and effective.

The terms of the private placement completed on December 13, 2000 required that we register the common stock and the common stock underlying the Class B common stock warrants by June 14, 2001. As we were unable to complete the effective registration of such shares by June 14, 2001, on July 26, 2001 we rectified the situation by issuing an additional 112,504 shares of common stock and an additional 675,000 Class B common stock warrants to the investors of the private placement.

Preferred Stock

We currently have 963,666 shares of Series A Convertible Preferred Stock outstanding with a liquidation preference of $1.50 per share. The Series A Convertible Preferred Stock is entitled to dividends or distributions equal to the amount of the dividend or distribution per share of common stock payable at such time multiplied by the number of shares of common stock then obtainable upon conversion of such Series A Convertible Preferred Stock.

The Redemption Trigger Date for the Series A Convertible Preferred Stock is the business day immediately following the thirtieth consecutive trading day that the average closing price during such trading days (or, if no closing price is reported, the average of the bid and ask prices) of the shares of common stock was above $8.00 per share (which minimum price shall be proportionally adjusted for stock splits, stock dividends, reverse stock splits and any other subdivision or combination of the common stock). As we have met the Redemption Trigger Date, we may now redeem all or any part of the Series A Convertible Preferred Stock at our election at any time and from time to time. The Series A Convertible Preferred Stock is convertible into common stock at the option of the holder until and unless we choose to redeem such shares and, until converted, at any meeting of our shareholders, each share of Series A Convertible Preferred Stock is entitled to the number of votes equal to the number of shares of common stock into which the Series A Convertible Preferred Stock is then convertible.

Under the terms of the Series A Convertible Preferred Stock private placement, the related shareholders had anti-dilution rights if we issued or sold common stock after July 29, 1999 for a per share consideration less than the current exercise price of the related warrants. The 3,085,622 common stock warrants associated with this private placement expired unexercised on July 29, 2002.

F-19

Convertible Preferred Stock was convertible at approximately 1.52 shares of common stock for each share of Series A Convertible Preferred Stock outstanding.

The shareholders' of the Series A Convertible Preferred Stock asserted that our calculation of the conversion price was incorrect and that it should be convertible at a lower price due to the issuance of the Series 2002A Convertible Notes in March 2002 while we maintained that our calculation was in accordance with the Series A Convertible Preferred Stock agreement. In December 2002, we entered into a settlement agreement whereby both parties agreed to a conversion price of $.90 per share. As a result of the settlement, the Series A Convertible Preferred Stock is convertible at approximately 1.67 shares of common stock for each share of Series A Convertible Preferred Stock outstanding.

Series 2002A Convertible Notes

On March 20, 2002 we completed a financing arrangement whereby we issued $1,000,000 in Series 2002A Convertible Notes along with 200,000 detachable common stock warrants. The notes were convertible at a ratio of one common share for each dollar of note outstanding, bore interest at 4% per annum and were due March 1, 2003. The common stock warrants vested immediately, are exercisable at $1.25 per share and expire on March 20, 2005. The notes were convertible at the option of the Company at any time provided that we had met the requirement that the common stock underlying the convertible notes had been registered for resale pursuant to an effective registration statement. The notes were convertible at the option of the holder at any time commencing 91 days after the original issuance date.

Under the terms of the financing agreement, we were required to register the common stock underlying the convertible notes for resale pursuant to an effective registration statement. If we failed to meet this requirement, the holders of the notes had the right to exchange their notes for freely trading common shares pledged by two officers of the Company. Each officer had pledged 500,000 shares as collateral. The common shares underlying the convertible notes were effectively registered on June 9, 2002.

As a result of allocating the proceeds between the convertible notes and the detachable warrants on a relative fair value basis, we recorded a discount to the convertible notes of $190,000. In addition, after applying the provisions of EITF 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios and EITF 00-27 Application of EITF Issue 98-5 to Certain Convertible Instruments, we determined that the conversion feature on the $1,000,000 convertible notes had an intrinsic value of $430,000, which was recorded as an additional discount to the convertible notes. The discount to the convertible notes was being amortized to interest expense over the life of the convertible notes. We incurred $74,000 of interest expense related to the amortization of the discount to the convertible notes during the year ended April 30, 2002. As of April 30, 2002 the balance, net of discount, on the Series 2002A Convertible Notes was $454,000 and is presented as convertible notes payable in the accompanying balance sheets. During the year ended April 30, 2003, the $1,000,000 of convertible notes were converted to 1,000,000 shares of common stock. As a result of the conversion of the notes to common stock, we expensed the entire remaining discount amount of $546,000 to interest expense during the year ended April 30, 2003.

In connection with completing the financing arrangement, we paid the investment banker $100,000 and issued them 100,000 common stock warrants (valued at $102,000 using the Black-Scholes pricing model). The common stock warrants are exercisable at $1.25 per share and expire on March 20, 2005. The total debt offering costs had been capitalized and were being amortized to expense over the life of the convertible notes. As a result of the conversion of the notes to common stock, we expensed the entire remaining debt offering costs of $182,000 to other income (expense) during the year ended April 30, 2003.

As a result of two of our officers pledging 500,000 each of their own common shares in connection with this transaction, we issued each of them 100,000 common stock warrants (valued at $228,000 using the Black-Scholes pricing model). The common stock warrants vested immediately, are exercisable at $1.25 per share and expire on March 20, 2007. The fair market value of these common stock warrants was expensed to selling, general and administrative expense during the year ended April 30, 2002.

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

F-20

September 1997, the Board of Directors terminated the 1996 Stock Option Plan. As of April 30, 2003, there remain 358,769 options outstanding and zero shares available for grant under the 1996 Stock Option Plan.

Directors' Stock Option Plan

The 1998 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 common stock when such person accepts his 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 quoted market price 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. As of April 30, 2003, options to purchase a total of 140,000 shares were outstanding under the directors' plan.

Executive and Incentive Stock Option Plans

In November 1996, the Board of Directors adopted the Executives' Incentive and Incentive Stock Option Plans authorizing the granting of up to 570,000 and 150,000 incentive and nonqualified stock options respectively, to our key employees, directors or consultants. Effective October 11, 2000, shareholders approved an increase in the authorized shares for the Executive and Incentive Stock Option Plans to 1,000,000 and 500,000, respectively. Effective November 13, 2001, our shareholders approved an increase in the authorized shares for the Executive and Incentive Stock Option Plans to 2,000,000 and 1,000,000, respectively. 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 four to five years and expire five to ten years after the date of grant. As of April 30, 2003, options to purchase a total of 1,291,461 shares were outstanding and 1,351,901 shares were available for grant 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, 2003, 40,579 shares have been issued under the plan.

SFAS No. 123 Disclosures

We have adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. See Note 1 for the related pro forma disclosures, in accordance with SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. The following assumptions were applied for the SFAS No. 123 disclosure-only provision information included in Note 1.

For purposes of the pro forma disclosures, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the years ended April 30, 2003 and 2002, respectively; no expected dividends, volatility of 100% and 150%; risk-free interest

F-21

rate of 4.0%; and expected lives of four to eight years. A summary of the status of our stock option plans as of April 30, 2003 and 2002, and changes during the years ended on these dates is presented below.

		Number of Shares		Weighted Average Exercise Price
Outstanding, April 30, 2001		1,107,852		$	2.43
	Granted	805,121		$	1.17
	Exercised	—			—
	Canceled	(344,500	)	$	2.84

Outstanding, April 30, 2002		1,568,473		$	1.69
	Granted	275,000		$	.98
	Exercised	—			—
	Canceled	(53,243	)	$	4.60

Outstanding, April 30, 2003		1,790,230		$	1.50

The weighted average fair value of options granted during the years ended April 30, 2003 and 2002 was $.79 and $1.07, respectively.

The following information applies to options outstanding at April 30, 2003:

Range of Exercise Price	Number Outstanding	Weighted Average Exercise Price	Weighted Average Remaining Contractual Life (Years)	Number Exercisable	Weighted Average Exercise Price
$0.58	207,340	$0.58	3	207,340	$0.58
$.90 - $1.44	1,171,461	$1.09	5	668,961	$1.12
$1.66 - $2.38	231,429	$1.79	5	181,429	$1.82
$3.50	80,000	$3.50	4	80,000	$3.50
$5.50 - $6.25	100,000	$5.88	2	72,500	$5.86

	1,790,230	$1.50		1,210,230	$1.57

Warrants

We have issued warrants in connection with debt offerings, private placements of both common and convertible preferred stock, our IPO, services and as consideration for concessions from lenders and vendors. A summary of the activity in our warrants follows:

		Number of Shares		Weighted Average Exercise Price
Outstanding, April 30, 2001		4,635,095		$	3.44
	Warrants issued in settlement of registration statement requirements	675,000			1.50
	Class C warrants issued in connection with exercise of Class B warrants	202,500			2.50
	Warrants issued in connection with issuance of convertible notes	500,000			1.27
	Warrants issued under anti-dilution agreement	642,654			2.79
	Warrants issued for services	250,000			1.43
	Exercised	(494,849	)		0.96
	Expired	(232,168	)		5.48

Outstanding, April 30, 2002		6,178,232			2.35
	Warrants issued for services	520,000			1.51
	Expired	(3,255,622	)		3.04

Outstanding, April 30, 2003		3,442,610		$	1.57

F-22

The outstanding warrants as of April 30, 2003, are summarized as follows:

	Number of Outstanding	Weighted Average Exercise Price		Expiration Date
Class B Warrants	1,780,110	$	1.50	12-31-2005
Class C Warrants	202,500	$	2.50	12-31-2005
Other Warrants	1,460,000	$	1.53	(1	)

	3,442,610	$	1.57

(1): The other warrants expire at various dates ranging from February 28, 2004 through July 31, 2007.

On April 30, 2001, we completed an exchange offer whereby the holders of Class A common stock warrants could exchange each Class A common stock warrant for a Class B common stock warrant. In order to participate in the exchange offer, each holder of the Class A common stock warrants was required to submit their election by April 30, 2001. As a result of this exchange offer, 632,610 of the 810,000 Class A common stock warrants were exchanged for Class B common stock warrants. The remaining 177,390 Class A common stock warrants that were not exchanged expired September 21, 2001.

F-23

NOTE 18—BUSINESS SEGMENTS AND FOREIGN OPERATIONS

We currently have two reportable segments: life sciences and semiconductor materials and products. Our life sciences segment sells stable and radioisotopes in elemental and simple compound forms for use in life sciences applications. Our semiconductor materials and products segment sells SOI wafers and is involved in several research and development projects including silicon-28. Reconciling items consist primarily of corporate expenses that have not been allocated to a specific reportable segment. Amounts for the year ended April 30, 2002 have been reclassified to conform with the current year presentation.

Information by segment is set forth below (in thousands):

			2003			2002
Segment revenues:
	Life sciences		$	8,854		$	8,140
	Semiconductor materials and products			197			15

		Total	$	9,051		$	8,155

Segment operating (loss) income
	Life sciences		$	1,099		$	(388	)
	Semiconductor materials and products			(1,009	)		(659	)
	Reconciling amounts			(2,646	)		(2,891	)

		Total	$	(2,556	)	$	(3,938	)

Total assets:
	Life sciences		$	3,807		$	3,543
	Semiconductor materials and products			1,193			598
	Reconciling amounts			747			1,073

		Total	$	5,747		$	5,214

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

			2003			2002
Net revenues
	United States		$	6,079		$	4,239
	Germany			2,972			3,916

		Total	$	9,051		$	8,155

Operating (loss) income
	United States		$	(2,652	)	$	(2,677	)
	Germany			96			(1,261	)

		Total	$	(2,556	)	$	(3,938	)

Total assets
	United States		$	2,956		$	2,402
	Germany			2,791			2,812

		Total	$	5,747		$	5,214

NOTE 19—EMPLOYEE BENEFIT 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 $30,000 and $27,000 for the years ended April 30, 2003 and 2002, respectively.

F-24

NOTE 20—CONCENTRATIONS

As of April 30, 2003, three customers accounted for approximately 46% of total net accounts receivable. Three customers accounted for approximately 37% of total net accounts receivable at April 30, 2002. Two customers (Eastern Isotopes and Perkin Elmer Life Sciences) accounted for approximately 29% and 17%, respectively of revenues for the year ended April 30, 2003. Two customers (Perkin Elmer Life Sciences and Eastern Isotopes) accounted for approximately 22% and 20%, respectively of revenues for the year ended April 30, 2002. Four customers (Perkin Elmer Life Sciences, IBT SA, Revis LTD and Idaho Isotopes) accounted for approximately 43%, 15%, 13% and 12%, respectively of the German operation's revenues for the year ended April 30, 2003. Two customers (Perkin Elmer Life Sciences and Reviss Ltd.) accounted for approximately 36% and 11%, respectively of the German operation's revenues for the year ended April 30, 2002. Two customers accounted for approximately 52% of the German operation's accounts receivable at April 30, 2003. Two customers accounted for approximately 37% of the German segment's accounts receivable at April 30, 2002.

NOTE 21—RELATED PARTY TRANSACTIONS

In October 2001, we entered into a four-year consulting agreement with Wells Investment Group ("WIG") principally for financial advisory services. Under the terms of the agreement, we paid $15,000 and issued a common stock warrant (valued at $45,000 using the Black-Scholes pricing model) to purchase 50,000 shares of restricted common stock at $1.50 per share. The common stock warrant vested immediately, expires on October 15, 2005 and is being amortized to consulting expense over the life of the agreement. WIG, is owned and controlled by a former member of our Board of Directors.

On January 1, 2002, we entered into a one-year consulting agreement with HS-CONSULT GMBH ("HSC") primarily to assist Chemotrade in buying and selling isotope products. HSC primarily consists of our former managing director of Chemotrade and an additional former key employee of Chemotrade. The consulting agreement expired on December 31, 2002 and required a monthly payment of 5,500 Euros for the services to be provided. In connection with the agreement we also issued a common stock warrant (valued at $44,000 using the Black-Scholes pricing model) to purchase 50,000 shares of restricted common stock at $1.20 per share. The common stock warrant vested and is exercisable immediately. The common stock warrant expires on December 31, 2004 and was amortized to consulting expense over the life of the agreement. The consulting agreement was renewed for a term of one year on January 1, 2003 and requires a monthly payment of 5,500 Euros.

On March 4, 2002, we entered into an agreement with our Vice President of Semiconductor Materials and Products whereby he loaned us $75,000. The loan bore interest at a rate of 12% per annum and was repaid in April 2002. There are no amounts outstanding to any employees at April 30, 2003 and 2002.

On January 1, 2002 we extended our cooperation agreement on a month-to-month basis with Interpro Zinc, LLC ("Interpro") to continue leasing office, laboratory and storage space at our current location. We incurred rental expense to Interpro of $57,000 and $33,000 for the years ended April 30, 2003 and 2002, respectively. Our lease with Interpro expires effective July 31, 2003 and as a result we are currently negotiating a new lease (now with the Colorado School of Mines Research Institute) on a month-to-month basis to continue leasing office and storage space at our current location.

NOTE 22—COMMITMENTS

We rent office and production facilities and equipment under operating leases expiring through August 2004. Rent expense for operating leases was $232,000 and $180,000 for the years ended April 30, 2003 and 2002, respectively. Future minimum annual operating lease commitments are as follows (in thousands):

Year ending April 30,
2004	$	232
2005		18

	$	250

F-25

ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

ASSETS

			(Unaudited) July 31, 2003		April 30, 2003
CURRENT ASSETS:
	Cash and cash equivalents		$	606	$	742
	Accounts receivable (net of allowances of $30 and $29, respectively)			646		711
	Inventories			798		748
	Prepaid expenses and other current assets			244		246

		Total current assets		2,294		2,447

LONG-TERM ASSETS
	Property and equipment, net			565		615
	Goodwill			1,807		1,807
	Intangible assets, net			770		792
	Other assets			82		86

		Total long-term assets		3,224		3,300

TOTAL ASSETS			$	5,518	$	5,747

LIABILITIES AND STOCKHOLDERS' EQUITY

			(Unaudited) July 31, 2003			April 30, 2003
CURRENT LIABILITIES:
	Current portion of obligation under capital leases		$	49		$	48
	Accounts payable			967			909
	Accrued liabilities			528			396
	Notes payable			170			—

		Total current liabilities		1,714			1,353

OBLIGATION UNDER CAPITAL LEASES, net of current portion				73			86
STOCKHOLDERS' EQUITY:
	Class A Preferred Stock—no par value; 10,000,000 shares authorized; 963,666 shares issued and outstanding on July 31, 2003 and April 30, 2003; $1,445,499 liquidation preference on July 31, 2003 and April 30, 2003			745			745
	Common stock—no par value; 40,000,000 shares authorized; 12,117,457 shares issued and outstanding on July 31, 2003, and 12,113,533 shares issued and outstanding on April 30, 2003			11,672			11,668
	Additional paid in capital			4,362			4,362
	Deferred compensation			(135	)		(145	)
	Accumulated deficit			(12,913	)		(12,322	)

		Total stockholders' equity		3,731			4,308

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY			$	5,518		$	5,747

See notes to condensed consolidated financial statements.

F-26

ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

			Three Months Ended July 31,
			2003			2002
Revenues			$	2,285		$	2,241
Cost of revenues				1,730			1,656

		Gross margin		555			585
Operating expenses:
	Selling, general and administrative			1,083			1,160
	Research and development			65			61

		Total operating expenses		1,148			1,221

Operating loss				(593	)		(636	)

Other income (expense):
	Gain on legal settlement, net			—			2,140
	Amortization of debt offering costs			—			(182	)
	Foreign exchange			(15	)		(49	)
	Interest and other income			24			35
	Interest expense			(7	)		(556	)

		Total other income (expense), net		2			1,388

Income (loss) before income taxes				(591	)		752
Income tax expense				—			—

NET INCOME (LOSS)			$	(591	)	$	752

Net income (loss) per share—basic
Net income (loss) per share			$	(.05	)	$	.07
Shares used in computing per share information				12,115			10,950
Net income (loss) per share—diluted
Net income (loss) per share			$	(.05	)	$	.06
Shares used in computing per share information				12,115			12,524

See notes to condensed consolidated financial statements.

F-27

ISONICS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

			Three Months Ended July 31,
			2003			2002
Net cash provided by (used in) operating activities			$	(298	)	$	1,737
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchases of property and equipment			—			(2	)

		Cash used in investing activities		—			(2	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Payments on borrowings			—			(25	)
	Proceeds from issuance of notes payable			170			—
	Proceeds from issuance of common stock			4			1
	Principal payments under capital lease obligations			(12	)

		Cash provided by (used in) financing activities		162			(24	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:				(136	)		1,711
	Cash and cash equivalents at beginning of period			742			725

	Cash and cash equivalents at end of period		$	606		$	2,436

Supplemental disclosure of cash flow information:
	Cash paid during the period for:
		Interest	$	4		$	13

		Income taxes	$	—		$	—

Supplemental disclosure of noncash investing and financing activities:
	Series 2002A Convertible Notes converted into common stock		$	—		$	1,000

See notes to condensed consolidated financial statements.

F-28

ISONICS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Isonics Corporation and Subsidiaries as of July 31, 2003, and for the three months ended July 31, 2003 and 2002 have been prepared on the same basis as the annual audited financial statements. In the opinion of management, such unaudited information includes all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of this interim information. Operating results and cash flows for interim periods are not necessarily indicative of results for the entire year. The information included in this report should be read in conjunction with our audited financial statements and notes thereto (which include an opinion from Grant Thornton LLP that expresses substantial doubt regarding our ability to continue as a going concern) included in our Annual Report on Form 10-KSB for the year ended April 30, 2003.

Realization of Assets

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate our continuation as a going concern. However, we have sustained substantial losses from operations in recent years, and such losses have continued through August 31, 2003. In addition, historically we have used, rather than provided, cash in our operations, and have been unable to secure adequate financing to meet our future cash needs.

In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon our continued operations, which in turn is dependent upon our ability to meet our financing requirements on a continuing basis, to maintain present financing, and to succeed in our future operations. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence.

We continue to pursue funding that will help us meet our future cash needs. We are currently working with several different sources, including both strategic and financial investors (including Quivira Venture Partners), in order to raise sufficient capital to finance both our continuing operations and our recently acquired isotope-based trace detection technology. Although there is no assurance that additional funding will be available, we believe that our current business plan, if successfully funded, will significantly improve our operating results and cash flow in the future.

Accounting for Stock-Based Compensation

F-29

		Three Months Ended July 31,
		2003			2002
Net income (loss), as reported		$	(591	)	$	752
	Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(60	)		(51	)

Adjusted net income (loss)		$	(651	)	$	701

		Three Months Ended July 31,
		2003			2002
Net income (loss) per share
	Basic—as reported	$	(.05	)	$	.07
	Basic—adjusted	$	(.05	)	$	.06
	Diluted—as reported	$	(.05	)	$	.06
	Diluted—adjusted	$	(.05	)	$	.06

Net Income (Loss) Per Share

Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Contingently issued shares are included in the computation of basic net income (loss) per share when the related conditions are satisfied. Diluted net income (loss) 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 contingently issued shares, the common shares issuable upon conversion of preferred stock or convertible debt (using the "if converted" method) and shares issuable upon the exercise of stock options and common stock warrants (using the "treasury stock" method). Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive.

The following table reconciles the denominator for the diluted net income (loss) per share computation (in thousands):

		Three Months Ended July 31,
		2003	2002
Denominator for basic net income (loss) per share—weighted average shares		12,115	10,950
Effect of dilutive securities:
	Dilutive effect of conversion of preferred stock	—	1,465
	Dilutive effect of stock options	—	109

	Denominator for diluted net income (loss) per share—adjusted weighted-average shares and assumed conversions	12,115	12,524

As of July 31, 2003, a total of 5,182,840 outstanding stock options and common stock warrants and 963,666 outstanding shares of Class A Convertible Preferred Stock were excluded from the diluted net income (loss) per share calculation, as the inclusion would be anti-dilutive. As of July 31, 2002, a total of 4,213,743 outstanding stock options and common stock warrants and 883,000 common shares related to the $1,000,000 in face value of Series 2002A Convertible Notes converted during the three months ended July 31, 2002, were excluded from the diluted net income (loss) per share calculation, as the inclusion would be anti-dilutive.

F-30

During the three month period ended July 31, 2003, we issued the following shares of common stock:

Description		Number of Common Stock Shares
Balance as of April 30, 2003		12,113,533
Shares issued from employee stock purchase plan		3,924

Balance as of July 31, 2003		12,117,457

The aforementioned equity transactions increased common stock in the accompanying condensed consolidated balance sheets by $4,000 for the three months ended July 31, 2003.

Inventories

Inventories consist of (in thousands):

		July 31, 2003		April 30, 2003
Finished goods		$	371	$	312
Work in process			406		414
Materials and supplies			21		22

	Total inventories	$	798	$	748

Significant customers

As of July 31, 2003, three customers accounted for approximately 48% of total net accounts receivable. Three customers accounted for approximately 46% of total net accounts receivable at April 30, 2003. Two customers (Eastern Isotopes and Perkin Elmer Life Sciences) accounted for approximately 31% and 11%, respectively, of revenues for the three months ended July 31, 2003. Two customers (Perkin Elmer Life Sciences and Eastern Isotopes) accounted for approximately 22% and 20%, respectively, of revenues for the three months ended July 31, 2002. Three customers (Perkin Elmer Life Sciences, IBT SA, and Idaho Isotopes) accounted for approximately 44%, 24%, and 15%, respectively, of the German operation's revenues for the three months ended July 31, 2003. Two customers (Perkin Elmer Life Sciences and Reviss Ltd.) accounted for approximately 45% and 23%, respectively, of the German operation's revenues for the three months ended July 31, 2002. Two customers accounted for approximately 74% of the German operation's accounts receivable at July 31, 2003. Two customers accounted for approximately 52% of the German operation's accounts receivable at April 30, 2003.

Business Segments and Foreign Operations

We currently have two reportable segments: life sciences and semiconductor materials and products. Our life sciences segment sells stable and radioisotopes in elemental and simple compound forms for use in life sciences applications. Our semiconductor materials and products segment sells SOI wafers and is involved in several research and development projects including silicon-28. Reconciling items consist primarily of corporate expenses that have not been allocated to a specific reportable segment. Amounts for the three months ended July 31, 2002 have been reclassified to conform with the current year presentation.

F-31

Information by segment is set forth below (in thousands):

			Three Months Ended July 31,
			2003		2002
Segment revenues:
	Life sciences		$	2,022	$	2,229
	Semiconductor materials and products			263		12

		Total	$	2,285	$	2,241

			Three Months Ended July 31,
			2003			2002
Segment operating (loss) income:
	Life sciences		$	166		$	262
	Semiconductor materials and products			(132	)		(133	)
	Reconciling amounts			(627	)		(765	)

		Total	$	(593	)	$	(636	)

			July 31, 2003		April 30, 2003
Total Assets:
	Life sciences		$	3,600	$	3,807
	Semiconductor materials and products			1,132		1,193
	Reconciling amounts			786		747

		Total	$	5,518	$	5,747

F-32

A summary of operations by geographic area is as follows:

			Three Months Ended July 31,
			2003		2002
Revenues:
	United States		$	1,731	$	1,595
	Germany			554		646

		Total	$	2,285	$	2,241

			Three Months Ended July 31,
			2003			2002
Operating (loss) income:
	United States		$	(579	)	$	(613	)
	Germany			(14	)		(23	)

		Total	$	(593	)	$	(636	)

			July 31, 2003		April 30, 2003
Total Assets:
	United States		$	2,796	$	2,956
	Germany			2,722		2,791

		Total	$	5,518	$	5,747

Consulting Agreement with Investor Relations Services, Inc.

During October 2002 and again in August 2003, IRSI disputed our termination of the agreement based upon nonperformance and requested to mediate the matter. In September 2003, we settled the dispute in its entirety by issuing to IRSI 100,000 shares of our restricted common stock (valued at $94,000 based upon the fair market value of the stock). As a result of the settlement, we have accrued the $94,000, which is included in accrued liabilities in the accompanying condensed consolidated balance sheets.

Related Party Transactions

On July 30, 2003, we entered into an agreement with our Vice President of Life Sciences whereby he loaned us $80,000, which is included in notes payable in the accompanying condensed consolidated balance sheets. The loan bore interest at a rate of 12% per annum and was repaid on August 4, 2003.

F-33

On August 26, 2003, we entered into an agreement with our Vice President of Life Sciences whereby he loaned us $120,000. The loan bore interest at a rate of 12% per annum and was repaid on September 11, 2003.

On September 9, 2003, we entered into an agreement with our Vice President of Semiconductor Materials and Products whereby he loaned us $100,000. The loan bore interest at a rate of 12% per annum and was repaid on September 11, 2003.

Lease Agreement

In August 2003, we entered into a month-to-month lease (at a rate of $2,800 per month) with the Colorado School of Mines Research Institute to continue leasing office and storage space at our current location.

New Accounting Standards

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equitywhich was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective for us as of August 1, 2003. SFAS No. 150 changes the classification in the condensed consolidated balance sheets of certain common financial instruments from either equity or mezzanine presentation to liabilities presentation, and requires an issuer of those financial statements to recognize changes in fair value or redemption amounts as applicable in earnings. The adoption of SFAS No. 150 did not have a material impact on our condensed consolidated financial statements.

We have reviewed all other recently issued, but not yet effective, accounting pronouncements and do not believe any such pronouncements will have a material impact on our condensed consolidated financial statements.

Subsequent Events

On September 25, 2003, we completed a private placement to accredited investors whereby we sold 300,000 units for $1,200,000. Each unit consisted of five shares of common stock and three common stock warrants. Each common stock warrant is exercisable at $1.25 per share until December 31, 2005. We incurred a placement fee of $120,000 in connection with this transaction.

On October 22, 2003, we extended our existing financial advisory agreement with Park Capital Securities, LLC through December 31, 2004. In connection with this agreement, we issued a common stock warrant to purchase 500,000 shares of our restricted common stock at $1.25 per share. The common stock warrant vested immediately and expires on October 21, 2006.

On October 22, 2003, we entered into a non-exclusive investment banking agreement with vFinance Investments, Inc. whereby we issued a common stock warrant to purchase 560,000 shares of our restricted common stock at $1.25 per share. The common stock warrant vested immediately, expires on April 30, 2006 and was considered full payment for services to be provided through June 30, 2004.

F-34

PART II: INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24 INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Articles of Incorporation of Isonics include a provision that eliminates to the fullest extent permitted by California law the personal liability of its directors to Isonics and its shareholders for monetary damages for breach of the directors' fiduciary duties. This limitation has no effect on a director's liability

(i): for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law,
(ii): for acts or omissions that a director believes to be contrary to the best interests of Isonics or its shareholders or that involved the absence of good faith on the part of the director,
(iii): for any transaction from which the director derived an improper personal benefit,
(iv): for acts or omissions that show a reckless disregard for the director's duty to Isonics or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to Isonics or its shareholders,
(v): for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to Isonics or its shareholders,
(vi): under Section 310 of the California Corporations Code (the "California Code") concerning contracts or transactions between Isonics and a director or
(vii): under Section 316 of the California Code concerning directors liability for improper dividends, loans and guarantees.

The provision does not extend to acts or omissions of a director in his capacity as an officer. Further, the provision will not affect the availability of injunctions and other equitable remedies available to Isonics' shareholders for any violation of a director's fiduciary duty to Isonics or its shareholders.

The Articles of Incorporation further authorize Isonics to indemnify its agents (as defined in Section 317(a) of the California Code which includes directors and officers) through Bylaw provisions, agreements with agents, votes of shareholders or disinterested directors or otherwise, to the fullest extent permissible under California law. Pursuant to this provision, the Bylaws of Isonics provide for indemnification of directors and officers. The Bylaws also permit Isonics to enter into indemnity agreements with individual directors, officers, employees, and other agents. Isonics intends to enter into such agreements with its directors and executive officers effective upon the closing of this offering. These agreements, together with the Bylaws and Articles of Incorporation, may require Isonics, among other things, to indemnify directors or officers against certain liabilities that may arise by reason of their status or service as directors (other than liabilities resulting from willful misconduct of a culpable nature), to advance expenses to them as they are incurred, provided that they undertake to repay the amount advanced if it is ultimately determined by a court that they are not entitled to indemnification, and to obtain and maintain directors' and officers' insurance if available on reasonable terms.

In addition to the rights to indemnification provided under California law, in the Articles of Incorporation and in the Bylaws, the 1996 Stock Option Plan (the "Plan") provides indemnification to members of the Board of Directors, officers, or employees of Isonics to whom authority to act for the Board of Directors in connection with that Plan is delegated shall be indemnified against all reasonable expenses, including attorneys' fees, actually and necessarily incurred in defense of any proceeding to which he or she is made a party because of any action allegedly taken or alleged failure to act in connection with the Plan, and against amounts paid in settlement (if approved by independent legal counsel), or in satisfaction of any judgment in such proceeding, unless the director, officer, or employee, as the case may be, is adjudged to have behaved in bad faith, in a grossly negligent manner, or with intentional misconduct as to duties.

Isonics currently has directors' and officers' liability insurance.

At present, there is no pending litigation or proceeding involving a director, officer or employee of Isonics pursuant to which indemnification is sought, nor is Isonics aware of any threatened litigation that may result in claims for indemnification.

Section 317 of the California Code and the Bylaws of Isonics provide for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons, under certain circumstances, for liabilities (including reimbursement of expenses incurred) arising under the Securities Act.

II-1

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, Isonics has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:

Document		Exhibit Number
Registrant's Articles of Incorporation		3.01
Registrant's Bylaws		3.02
Form of Indemnity Agreement		10.09

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expenses to be paid in connection with the sale of the shares of common stock being registered hereby. The Selling Shareholders will pay only those expenses directly related to the transfer of their securities. All amounts are estimates except for the Securities and Exchange Commission registration fee and the NASD filing fee.

Securities and Exchange Commission registration fee	$	1,322
NASD filing fee		—
Accounting fees and expenses		10,000
Legal fees and expenses		15,000
Printing fees and expenses		15,000
Blue-sky fees and expenses		5,000
Transfer agent and registrar fees and expenses		5,000
Miscellaneous		3,678

Fees to be paid by Selling Security Holders		—
Total to be paid by Isonics	$	55,000

ITEM 26 RECENT SALES OF UNREGISTERED SECURITIES.

Employee and Director Offerings

Employee Offerings

(a): During the past years, we have issued shares of common stock, and options to purchase shares of common stock pursuant to our existing employee benefit plans. As noted in the following discussion, portions of some of these plans have been included within registration statements on Form S-8 (file nos. 333-74339 and 333-52514). The following table sets forth information about the options outstanding and available for issuance under each of the plans as of October 21, 2003:

Plan Name	Issued Options/Shares	Available for Grant or Issuance
1996 Stock Option Plan	358,769 options	0 options
1996 Executives Equity Incentive Plan	994,062 options 225,000 shares	708,480 options/shares
1996 Equity Incentive Plan	267,399 options	673,421 options/shares
1998 Employee Stock Purchase Plan	44,503 shares	155,497 shares

Director Offerings

(a) The 1998 Directors' Plan (the "Directors' Plan") authorized each person serving as a member of the Board who is not an employee of Isonics to receive options to purchase 20,000 shares of our common stock when such person accepts his 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. The exercise price for

II-2

the options is the Fair Market Value (as defined in the Executives' Plan) 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 upon the date of the grant. In the event a Director resigns or is not re-elected to the Board, failure to exercise the options in three months results in the options' termination prior to the expiration of their term. Although the Directors adopted the plan in 1998, the Board formalized the plan by resolution in January 2000. The Directors' Plan is not included within any registration statement.

During the last three fiscal years, the following persons have been granted options under the Directors' Plan:

Name	Shares Under Option	Exercise Price		Expiration
Lindsay Gardner	10,000 10,000 10,000	$ $ $	2.19 1.06 1.00	October 10, 2005 November 12, 2006 November 19, 2007
Richard Parker	10,000 10,000 10,000	$ $ $	2.19 1.06 1.00	October 10, 2005 November 12, 2006 November 19, 2007
Larry Wells*	10,000 10,000	$ $	2.19 1.06	January 13, 2003 January 13, 2003

*: Mr. Wells resigned as a director as of October 13, 2002. As a result of his resignation, all of the options granted to Mr. Wells have expired.

Dr. Walitzki

(a): In connection with his employment by Isonics in December 2001, we issued 200,000 shares of common stock to Dr. Walitzki. These shares were subject to certain vesting requirements, and 20,000 have vested as of October 21, 2003. At the same time, we also granted Dr. Walitzki options to purchase 200,000 shares of common stock, of which 80,000 are vested as of October 21, 2003, and are currently exercisable.

Other Non-Plan Issuances to Officers or Directors

None

Applicable to the Offerings to the Employees, Directors, and Dr. Walitzki Offering

(b): No underwriters were involved in the transactions.
(c): The stock options and bonuses issued outside of our employee benefit plans were, for the most part, issued in consideration of services rendered and did not (therefore) involve the offer or sale of securities. In some cases they were issued to induce the performance of services in the future.
(d): Many of the securities referred to in this section were not offered or sold in a manner that constituted a "sale" of securities as that term is defined in Section 2(a)(3) of the Securities Act. Where a "sale" occurred, the transactions were exempt from registration under the Securities Act of 1933, as amended by reason of Sections 4(2) and 4(6) of the Securities Act of 1933 or Rule 701.
(e): There are no conversion rights or exchange rights associated with the common stock. To the extent vested, the options are exercisable to purchase shares of common stock as described above.
(f): Where proceeds were received, the proceeds were utilized for working capital purposes.

2003 Transaction with Park Capital Securities, LLC

On October 22, 2003, we extended our existing financial advisory agreement with Park Capital, a member of the National Association of Securities Dealers, Inc. with offices at 216 East 45^th Street, 9^th Floor, New York, NY 10017. (See "2002 Transaction with Park Capital Securities, LLC," below, for a description of the original agreement.) The agreement to extend the financial advisory agreement provided for the issuance to Park Capital of a warrant to purchase 500,000 shares of common stock in exchange for Park Capital's agreement to continue to

II-3

provide financial advisory and other services to Isonics. The following sets forth the information required by Item 701 in connection with that transaction:

(a) The transaction was effective October 22, 2003. We issued a warrant to acquire 500,000 shares of common stock.

(b) No underwriters were involved in the transaction. The only entity who received securities from us in this transaction was Park Capital.

(c) The securities were not sold for cash. The securities were issued to Park Capital as part of the consideration for Park Capital extending the terms of the financial advisory agreement entered into in November 2002.

(d) The issuance of the shares was accomplished pursuant to the exemptions from registration contained in Sections 4(2) and 4(6) of the Securities Act of 1933. We did not engage in any public advertising or general solicitation in connection with this transaction. We provided Park Capital with disclosure of all aspects of our business, including providing Park Capital and its management with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our investigation, we believe that the management and the board of directors of Park Capital obtained all information regarding Isonics they requested, received answers to all questions they posed, and otherwise understood the risks of accepting our securities in exchange for services to be provided.

(e) There are no conversion rights or exchange rights associated with the shares. The warrants are exercisable to purchase shares of our common stock until October 21, 2003 at $1.25 per share.

(f) We received no proceeds from the issuance of these shares and, therefore, we have no use of proceeds.

2003 Transaction with vFinance Investments, Inc.

On October 22, 2003, we entered into an agreement with vFinance with an office at 3010 North Military Trail, Suite 300, Boca Raton, FL 33431 and at 880 Third Avenue, 4^th Floor, New York, NY 10022, a member of the National Association of Securities Dealers, Inc. The agreement provided for the issuance to vFinance of a warrant to purchase 560,000 shares of common stock in exchange for vFinance's agreement to provide financial advisory and other services to Isonics. The following sets forth the information required by Item 701 in connection with that transaction:

(a) The transaction was effective October 22, 2003. We issued a warrant to acquire 560,000 shares of common stock.

(b) No underwriters were involved in the transaction. The only entity who received securities from us in this transaction was vFinance (who subsequently transferred its right to a portion of those warrants to persons who are directors or executive officers of vFinance).

(c) The securities were not sold for cash. The securities were issued to vFinance as part of the consideration for vFinance entering into the agreement and agreeing to provide consulting services related to corporate finance and other financial service matters and make available qualified personnel for this purpose and devote such business time and attention to such matters as it shall determine is required. Such services shall include, but not be limited to, strategic planning, planning meetings with the investment community, assisting our management in designing our business plan and "growth-by-acquisition" strategy. Additionally, vFinance agreed to prepare or assist in the preparation of a company corporate profile, fact sheets, and shareholder letters.

(d) The issuance of the shares was accomplished pursuant to the exemptions from registration contained in Sections 4(2) and 4(6) of the Securities Act of 1933. We did not engage in any public advertising or general solicitation in connection with this transaction. We provided vFinance with disclosure of all aspects of our business, including providing vFinance and its management with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our investigation, we believe that the management and the board of directors of vFinance obtained all information regarding Isonics they requested, received answers to all questions they posed, and otherwise understood the risks of accepting our securities in exchange for services to be provided.

(e) There are no conversion rights or exchange rights associated with the shares. The warrants are exercisable to purchase shares of our common stock until April 30, 2006 at $1.25 per share.

II-4

(f) We received no proceeds from the issuance of these shares and, therefore, we have no use of proceeds.

2003 Transaction with Investor Relations Services, Inc.

(a) The transaction was completed effective September 18, 2003. We issued 100,000 shares of our restricted common stock to IRSI, an accredited investor as part of a Settlement Agreement and Mutual Release executed September 18, 2003. See "2002 Transaction with Investor Relations Services, Inc.," below, for the genesis of this matter.

(b) The transaction occurred without the use of any underwriters or finders. The only person who received securities from us in this transaction was IRSI.

(c) We issued 100,000 shares of our restricted common stock to IRSI, as part of a Settlement Agreement and Mutual Release, by which IRSI agreed to, among other things, cancel the Renewal Consulting Agreement entered into on July 1, 2002. No cash or other consideration was paid by IRSI for the shares.

(d) We relied on the exemption from registration provided by Sections 4(2) and 4(6) under the Securities Act of 1933 for this transaction. We did not engage in any public advertising or general solicitation in connection with this transaction that was in negotiation for more than two months. We provided IRSI with disclosure of all aspects of our business, including providing IRSI with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our investigation, we believe that IRSI obtained all information regarding Isonics they requested, received answers to all questions they posed, and otherwise understood the risks of accepting our securities as a condition of the Settlement Agreement and Mutual Release.

(e) There are no conversion rights or exchange rights associated with the common stock.

(f) We received no proceeds from the issuance of these shares and, therefore, we have no use of proceeds.

Reback Living Trust Feb 20, 2001; Yorkshire Limited; and Southshore Capital Fund Ltd.

(a) The transaction was completed effective September 25, 2003. We issued 1,500,000 shares of our restricted common stock and 900,000 common stock warrants to three accredited investors, two of which are non-US persons.

(b) The placement agents for the transaction were Park Capital Securities, LLC with an office at 216 East 45^th Street, 9^th Floor, New York, NY 10017 and vFinance, Inc. with an office at 3010 North Military Trail, Suite 300, Boca Raton, FL 33431.

(d) We relied on the exemption from registration provided by Sections 4(2) and 4(6) under the Securities Act of 1933 for this transaction. We did not engage in any public advertising or general solicitation in connection with this transaction that was in negotiation for more than two months. We provided the accredited investors with disclosure of all aspects of our business, including providing the accredited investors with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our investigation, we believe that the accredited investors obtained all information regarding Isonics they requested, received answers to all questions they posed, and otherwise understood the risks of accepting our securities in exchange for the license agreement.

(e) There are no conversion rights or exchange rights associated with the common stock. Each warrant is exercisable to purchase one share of common stock at an exercise price of $1.25 through December 31, 2005. We have an obligation to register the shares included in the units and underlying the warrants, including the obligation to file a registration statement within 30 days of September 25, 2003.

(f) We will use the proceeds for working capital purposes.

IUT

In December 2002 we acquired certain isotope-based trace detection technology to be used to detect explosives and chemical and biological weapons from IUT, an entity in which we hold a 6% ownership interest. We issued to IUT 250,000 shares of restricted common stock for the isotope-based trace detection technology. In addition, we granted IUT a 15% ownership interest in a newly created subsidiary, IUTDT that will own and

II-5

commercialize the trace detection technology. The restricted common stock was valued at $273,000 based upon the closing price of our common stock on December 4, 2002.

(a) The transaction was completed on December 4, 2002. We issued 250,000 shares of our restricted common stock to IUT, a German corporation. All of the shareholders of IUT (other than Isonics, which owns 6% of IUT) are neither citizens nor residents of the United States.

(b) The transaction occurred without the use of any underwriters or finders. The only person who received securities from us in this transaction was IUT.

(c) The restricted common stock was not sold for cash. As described above, we issued the common stock as partial consideration for the exclusive rights with respect to certain technology valued at $273,000.

(d) We relied on the exemption from registration provided by Sections 4(2) under the Securities Act of 1933 for this transaction, as well as Regulation S for offshore transactions. We did not engage in any public advertising or general solicitation in connection with this transaction that was in negotiation for a substantial period of time with IUT. We provided IUT with disclosure of all aspects of our business, including providing them with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our investigation, we believe that IUT obtained all information regarding Isonics they requested, received answers to all questions they posed, and otherwise understood the risks of accepting our securities in exchange for the isotope-based detection technology.

(e) There are no conversion rights or exchange rights associated with the common stock.

(f) We did not receive any proceeds from the issuance of the restricted common stock to IUT and, therefore, we have no use of proceeds.

2002 Transaction with Park Capital Securities, LLC

In November 2002, we entered into a financial advisory agreement with Park Capital whereby we issued a common stock warrant (valued at $261,000 using the Black-Scholes pricing model) to purchase 300,000 shares of common stock at $1.00 per share, for investment banking and consulting services. The common stock warrant vested immediately, expires in November 2005 and will be expensed to consulting services over the life of the agreement. The agreement terminates on December 31, 2003. The following sets forth the information required by Item 701 in connection with that transaction:

(a) The transaction was effective November 22, 2002. We issued a warrant to acquire 300,000 shares of restricted common stock as described above.

(b) No underwriters were involved in the transaction. The only entity who received securities from us in this transaction was Park Capital (although Park Capital subsequently assigned 240,000 warrants to Roadrunner)

(c) The securities were not sold for cash. The securities were issued to Park Capital as part of the consideration for Park Capital entering into the financial advisory agreement and agreeing to provide services thereunder as one of our financial advisor and investment bankers, and to render financial and other general advice to our management with respect to retail marketing of our common stock, business combinations, and similar matters upon the terms and conditions set forth herein. In that regard, Park agreed to assist us in identifying, analyzing, structuring, negotiating and financing suitable business opportunities which we may take advantage of by purchase or sale of stock or assets, assumption of liabilities, merger, consolidation, tender offer, joint venture, financing arrangement or any similar transaction or combination thereof.

(e) The warrants are exercisable to purchase shares of our common stock until November 21, 2005 at $1.00 per share.

II-6

(f) We received no proceeds from the issuance of these shares and, therefore, we have no use of proceeds.

2002 Transaction with Investor Relations Services, Inc.

Effective July 1, 2002, we agreed to pay 250,000 shares of our restricted common stock as consideration for consulting services consisting of financial advisory, strategic business planning and investor and public relations to be provided by IRSI of New Smyrna Beach, Florida. IRSI never rendered any such services and we have terminated the agreement and have advised IRSI that we have no obligation to issue the shares. See "2003 Transaction with Investor Relations Services, Inc.," above, for the resolution of this matter. The following sets forth the information required by Item 701 in connection with that transaction:

(a) The transaction and the rescission were both completed effective July 1, 2002. The contract called for the issuance of 250,000 shares of our restricted common stock to IRSI, but we terminated that obligation, although IRSI advised us that it disputed the termination.

(b) The transaction occurred without the use of any underwriters or finders. The only person who had the contractual right to receive securities from us in this transaction was IRSI.

(c) The restricted common stock was not sold for cash. As described above, we contracted to issue the common stock in consideration for consulting services.

(d) We relied on the exemption from registration provided by Sections 4(2) and 4(6) under the Securities Act of 1933 for this transaction. We did not engage in any public advertising or general solicitation in connection with this transaction that was in negotiation for more than two months. We provided IRSI with disclosure of all aspects of our business, including providing IRSI and its management with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our investigation, we believe that the management and the board of directors of IRSI obtained all information regarding Isonics they requested, received answers to all questions they posed, and otherwise understood the risks of accepting our securities in exchange for services to be provided.

(e) There are no conversion rights or exchange rights associated with the common stock.

(f) We have not received and do not expect to receive any proceeds from the issuance of the restricted common stock to IRSI and, therefore, we have no use of proceeds.

Second 2002 Transaction with vFinance, Inc.

On June 10, 2002, we entered into an agreement with vFinance of Boca Raton, Florida, a member of the National Association of Securities Dealers, Inc. The agreement provided for the issuance to vFinance of 25,000 shares of common stock and a warrant to purchase 200,000 shares of common stock in exchange for vFinance's agreement to provide financial advisory and other services to Isonics. The following sets forth the information required by Item 701 in connection with that transaction:

(a) The transaction was effective June 10, 2002. We issued 25,000 shares of restricted common stock and a warrant to acquire 200,000 shares of common stock.

(b) No underwriters were involved in the transaction. The only entity who received securities from us in this transaction was vFinance, although vFinance transferred its right to a portion of those shares to persons who are directors or executive officers of vFinance.

(c) The securities were not sold for cash. The securities were issued to vFinance as part of the consideration for vFinance entering into the agreement and providing the services thereunder.

(d) The issuance of the shares was accomplished pursuant to the exemptions from registration contained in Sections 4(2) and 4(6) of the Securities Act of 1933. We did not engage in any public advertising or general solicitation in connection with this transaction. We provided vFinance with disclosure of all aspects of our business, including providing vFinance and its management with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our investigation, we believe that the management and the board of directors of vFinance obtained all information regarding Isonics they requested, received answers to all questions they posed, and otherwise understood the risks of accepting our securities in exchange for services to be provided.

II-7

(e) There are no conversion rights or exchange rights associated with the shares. The warrants are exercisable to purchase shares of our common stock until June 10, 2006 at $2.32 per share.

(f) We received no proceeds from the issuance of these shares and, therefore, we have no use of proceeds.

Convertible Loan Transaction with vFinance, Inc.

Effective March 20, 2002, we borrowed $1,000,000 from five persons who are accredited investors. In exchange for the loan, we issued our Series 2002A 4% Convertible Promissory Notes that were due March 1, 2003 to these persons. We had the ability to repay the principal amount of these notes in cash or in shares of our common stock (at $1.00 per share) if the shares were registered. To the extent that we repaid the notes in cash, we were obligated to issue warrants to the holder entitling them to purchase shares of our common stock at $1.00 per share for each $1.00 of cash repayment. Each note was convertible into shares of our common stock at $1.00 per share, and various obligations of the notes were guaranteed by James E. Alexander (our president) and Boris Rubizhevsky (our senior vice president). They each pledged 500,000 shares of our common stock they own to secure these obligations (a total of 1,000,000 shares). We filed and obtained effectiveness for a Form S-3 registration statement for the benefit of the lenders as selling security holders. We also issued each lender a warrant to acquire one share of our restricted common stock for each $5.00 loaned to us and we issued to our president and our senior vice president a warrant to acquire 100,000 shares of common stock each. The following sets forth the information required by Item 701 in connection with that transaction:

(a) The transaction was completed March 20, 2002. We issued $1,000,000 of convertible 4% promissory notes, warrants to purchase 200,000 shares to five accredited investors and warrants to purchase 200,000 shares to our president and senior vice president.

(b) The transaction occurred using vFinance, as an underwriter. We paid them a 10% commission ($100,000) and warrants to purchase 100,000 shares at $1.25 per share, exercisable until March 20, 2005. vFinance assigned a portion of these warrants to certain of its directors and executive officers.

(d) We relied on the exemption from registration provided by Sections 4(2) and 4(6) under the Securities Act of 1933 for this transaction. We did not engage in any public advertising or general solicitation in connection with this transaction. We provided the lenders with disclosure of all aspects of our business, including providing the lenders with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our investigation, we believe that the management and each of the lenders obtained all information regarding Isonics they requested, received answers to all questions they posed, and otherwise understood the risks of accepting our securities.

(e) The notes were convertible at the holders' option into shares of our common stock at $1.00 per share (subject to certain dilution adjustment provisions). The warrants to the accredited investors are exercisable to purchase shares of common stock of Isonics until March 20, 2005 at $1.25 per share. The warrants to our president and senior vice president are exercisable to purchase shares of our common stock until March 20, 2007 at $1.25 per share.

(f) We received a net of approximately $890,000 from the escrow arrangement by which we completed the transaction. We used the proceeds of the loan transaction primarily to finance our silicon-on-insulator operations, to pay our expenses of the transaction (approximately $60,000), to repay past-due expenses (including salaries to officers of approximately $120,000), and for general working capital.

HS-Consult GmbH.

On January 1, 2002, we entered into an agreement with HS-Consult by which HS-Consult agreed to assist Chemotrade in buying and selling isotope products. This agreement included a cash payment and the issuance of warrants to acquire shares of our restricted common stock. HS-Consult is a German company, and the principals of HS-Consult include Herbert Hegener, formerly an executive officer of Chemotrade and a significant employee of Isonics. The following sets forth the information required by Item 701 in connection with that transaction:

(a) The transaction was effective January 1, 2002. We issued a warrant to acquire 50,000 shares of our restricted common stock.

II-8

(b) No underwriters were involved in the transaction. The only entity that received securities from us in this transaction was a German entity, HS-Consult.

(c) The securities were not sold for cash. The warrants were issued to HS-Consult as part of the consideration for HS-Consult providing services to Chemotrade.

(d) The issuance of the warrants was accomplished pursuant to the exemptions from registration contained in Sections 4(2) and 4(6) of the Securities Act of 1933 and Regulation S inasmuch as HS-Consult is not a US Person. We did not engage in any public advertising or general solicitation in connection with this transaction. HS-Consult had disclosure of all aspects of our business at the time it entered into the agreement with us, including our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our investigation, we believe that the management of HS-Consult obtained all information regarding Isonics they requested, received answers to all questions they posed, and otherwise understood the risks of accepting our securities in exchange for services to be provided.

(e) There are no conversion rights or exchange rights associated with the warrants. The warrants are exercisable to purchase shares of our common stock until December 31, 2004, at $1.20 per share.

(f) We received no proceeds from the issuance of these warrants and, therefore, we have no use of proceeds.

First 2002 Transaction with vFinance, Inc.

In January 2002, we entered into a Management and Investment Banking Agreement with vFinance. The investment banking agreement provided for the issuance to vFinance of warrants to purchase 50,000 shares of common stock at $1.50 per share, and a fee of $5,000 per month in exchange for vFinance's agreement to provide financial advisory and other services to us. The following sets forth the information required by Item 701 in connection with that transaction:

(a) The transaction was effective March 22, 2002. We issued a warrant to acquire 50,000 shares of our common stock.

(b) No underwriters were involved in the transaction. The only entity who received securities from us in this transaction was vFinance and certain directors and executive officers of vFinance (who received the warrants by assignment from vFinance).

(c) The securities were not sold for cash. The securities were issued to vFinance as part of the consideration for vFinance entering into the investment banking agreement and providing the services thereunder.

(d) The issuance of the warrants was accomplished pursuant to the exemptions from registration contained in Sections 4(2) and 4(6) of the Securities Act of 1933. We did not engage in any public advertising or general solicitation in connection with this transaction. We provided vFinance with disclosure of all aspects of our business, including providing vFinance and its management with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our investigation, we believe that the management and the board of directors of vFinance obtained all information regarding Isonics they requested, received answers to all questions they posed, and otherwise understood the risks of accepting our securities in exchange for services to be provided.

(e) There are no conversion rights or exchange rights associated with the warrants. The warrants are exercisable to purchase shares of our common stock until March 20, 2005 at $1.50 per share.

(f) We received no proceeds from the issuance of these warrants and, therefore, we have no use of proceeds.

2001 Transaction with Investor Relations Services, Inc.

Effective December 18, 2001, we paid 500,000 shares of our restricted common stock as consideration for consulting services consisting of financial advisory, strategic business planning and investor and public relations to be provided by IRSI, New Smyrna Beach, Florida. The following sets forth the information required by Item 701 in connection with that transaction:

(a) The transaction was completed effective December 18, 2001. We issued 500,000 shares of our restricted common stock to IRSI.

(b) The transaction occurred without the use of any underwriters or finders. The only person who received securities from us in this transaction was IRSI.

II-9

(c) The restricted common stock was not sold for cash. As described above, we issued the common stock in consideration for consulting services being provided by IRSI through December 31, 2002.

(d) We relied on the exemption from registration provided by Sections 4(2) and 4(6) under the Securities Act of 1933 for this transaction. We did not engage in any public advertising or general solicitation in connection with this transaction that was in negotiation for more than two months. We provided IRSI with disclosure of all aspects of our business, including providing IRSI and its management with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our investigation, we believe that the management and the board of directors of IRSI obtained all information regarding Isonics they requested, received answers to all questions they posed, and otherwise understood the risks of accepting our securities in exchange for services to be provided.

(e) There are no conversion rights or exchange rights associated with the common stock.

(f) We have not received any proceeds from the issuance of the restricted common stock to Investor Relations Services and, therefore, we have no use of proceeds.

Silicon Evolution, Inc.

Effective November 13, 2001, we issued 500,000 shares of our restricted common stock to SEI in exchange for 500,000 shares of our Series B Convertible Preferred Stock (the "Series B Stock") previously issued to SEI as reported in our Form 8-K reporting an event of September 14, 2001. The following sets forth the information required by Item 701 in connection with that transaction:

(a) The transaction was completed effective November 13, 2001. We issued 500,000 shares of our restricted common stock to SEI.

(b) The transaction occurred without the use of any underwriters or finders. The only person who received securities from us in this transaction was SEI.

(c) The restricted common stock was not sold for cash. As described above, we issued the common stock in conversion of the Series B Stock.

(d) We relied on the exemption from registration provided by Section 3(a)(9) under the Securities Act of 1933 for this transaction. Furthermore, inasmuch as the conversion occurred automatically, with no discretion on the part of SEI, the transaction did not constitute a "sale" of securities as the term "sale" is defined in Section 2(a)(3) of the 1933 Act. We did not engage in any public advertising or general solicitation in connection with this transaction that was in negotiation for more than two months. We had previously provided SEI with disclosure of all aspects of our business, including providing SEI and its management with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our investigation, we believe that the management and the board of directors of SEI obtained all information regarding Isonics they requested, received answers to all questions they posed, and otherwise understood the risks of accepting our securities in exchange for the license agreement.

(e) There are no conversion rights or exchange rights associated with the common stock.

(f) We have not received any proceeds from the issuance of the restricted common stock to SEI and, therefore, we have no use of proceeds.

Silicon Quest International, Inc.

Effective December 19, 2001, we issued warrants to purchase 100,000 shares of our restricted common stock as consideration for SQI entering into an alliance with Isonics for the manufacturing, marketing and sales of SOI wafers with SQI. The following sets forth the information required by Item 701 in connection with that transaction:

(a) The transaction was effective December 19, 2001. We issued 100,000 common stock warrants.

(b) No underwriters were involved in the transaction. The only person who received securities from us in this transaction was SQI.

(c) The securities were not sold for cash. The securities were issued to SQI as consideration for SQI entering into a letter of intent with Isonics to form an alliance for the manufacturing, marketing and sale of SOI wafers.

II-10

(d) The issuance of the warrants was accomplished pursuant to the exemptions from registration contained in Sections 4(2) and 4(6) of the Securities Act of 1933. We did not engage in any public advertising or general solicitation in connection with this transaction that was in negotiation for more than six weeks. We provided SQI with disclosure of all aspects of our business, including providing SQI and its management with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our investigation, we believe that the management and the board of directors of SQI obtained all information regarding Isonics they requested, received answers to all questions they posed, and otherwise understood the risks of accepting our securities in exchange for the alliance agreement.

(e) There are no conversion rights or exchange rights associated with the warrants. The warrants are exercisable one year after the issuance date to purchase shares of our common stock until December 19, 2004 at $1.50 per share.

(f) We received no proceeds from the issuance of these warrants and, therefore, we have no use of proceeds.

II-11

Brean Murray & Co.

Effective December 11, 2001, we issued warrants to purchase 100,000 shares of our restricted common stock as consideration for Brean Murray & Co ("Brean Murray") entering into an agreement with Isonics for investment banking and strategic advisory services. We cancelled this agreement (including the 100,000 common stock warrants) in late January 2002. The following sets forth the information required by Item 701 in connection with that transaction:

(a) The transaction was effective December 11, 2001. We issued and subsequently cancelled 100,000 common stock warrants.

(b) No underwriters were involved in the transaction. The only person who received securities from us in this transaction was Brean Murray.

(c) The securities were not sold for cash. The securities were issued to Brean Murray as partial consideration for Brean Murray entering into an agreement to provide investment banking and strategic advisory services to Isonics.

(d) The issuance of the warrants was accomplished pursuant to the exemptions from registration contained in Sections 4(2) and 4(6) of the Securities Act of 1933. We did not engage in any public advertising or general solicitation in connection with this transaction that was in negotiation for more than six weeks. We provided Brean Murray with disclosure of all aspects of our business, including providing Brean Murray and its management with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our investigation, we believe that the management and the board of directors of Brean Murray obtained all information regarding Isonics they requested, received answers to all questions they posed, and otherwise understood the risks of accepting our securities in exchange for services to be provided.

(e) There are no conversion rights or exchange rights associated with the warrants except for the "cashless exercise" provision described below. The warrants are exercisable to purchase shares of common stock of Isonics until December 2006 at $1.50 per share. The warrant agreement does provide for a "cashless exercise" of the warrants and, therefore, we may not receive cash proceeds should the holder exercise the warrants pursuant to this cashless exercise provision. The warrants were subsequently cancelled in January 2002.

(f) We received no proceeds from the issuance of these warrants and, therefore, we have no use of proceeds.

Wells Investment Group

Effective October 15, 2001, we issued warrants to purchase 50,000 shares of our restricted common stock as consideration for Wells Investment Group ("WIG") entering into a consulting agreement with us to perform certain due diligence and other services in connection with possible third party investment. WIG is owned and controlled by Larry G. Wells, formerly a director of ours. The following sets forth the information required by Item 701 in connection with that transaction:

(a) The transaction was effective October 15, 2001. We issued 50,000 common stock warrants.

(b) No underwriters were involved in the transaction. The only person who received securities from us in this transaction was WIG.

(c) The securities were not sold for cash. The securities were issued to WIG as partial consideration for Wells Investment Group entering into a consulting agreement with us to perform certain due diligence and other services in connection with possible third party investment.

(d) The issuance of the warrants was accomplished pursuant to the exemptions from registration contained in Sections 4(2) and 4(6) of the Securities Act of 1933. We did not engage in any public advertising or general solicitation in connection with this transaction that was in negotiation for more than six weeks. We provided WIG with disclosure of all aspects of our business, including providing WIG and its management with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our investigation, we believe that the management and the board of directors of WIG obtained all information regarding Isonics they requested, received answers to all questions they posed and otherwise understood the risks of accepting our securities in exchange for services to be provided. In addition, WIG is controlled by Larry G. Wells, a former director of Isonics.

II-12

(e) There are no conversion rights or exchange rights associated with the warrants except for the "cashless exercise" provision described below. The warrants are exercisable to purchase shares of our common stock until October 15, 2005 at $1.50 per share. The warrant agreement does provide for a "cashless exercise" of the warrants and, therefore, we may not receive cash proceeds should the holder exercise the warrants pursuant to this cashless exercise provision.

(f) We received no proceeds from the issuance of these warrants and, therefore, we have no use of proceeds.

Issuance In Exchange for Patent Rights

During January 2001, we paid 75,000 shares of our restricted common stock as consideration for patent rights from three non-U.S. persons. The following sets forth the information required by Item 701 in connection with that transaction:

(a) The transaction was completed during January 2001. We issued 75,000 shares of our restricted common stock to three persons who are not citizens or residents of the United States.

(b) The transaction occurred without the use of any underwriters or finders. The only persons who received securities from us in this transaction were the three non-U.S. persons.

(c) The restricted common stock was not sold for cash. As described above, we issued the common stock in consideration for certain patent rights for processes for the recovery and recycling of zinc. The patent rights were valued at $131,000. On February 1, 2001, we sold IPRC and transferred the patent rights to Interpro Zinc, LLC.

(d) We relied on the exemption from registration provided by Sections 4(2) under the Securities Act of 1933 for this transaction, as well as Regulation S for offshore transactions. We did not engage in any public advertising or general solicitation in connection with this transaction that was in negotiation for more than six months with each of the three non-U.S. persons. We provided each of the vendors of the patent rights with disclosure of all aspects of our business, including providing them with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our investigation, we believe that the vendors of the patent rights obtained all information regarding Isonics they requested, received answers to all questions they posed, and otherwise understood the risks of accepting our securities in exchange for the respective patent rights.

(e) There are no conversion rights or exchange rights associated with the common stock.

(f) We did not receive any proceeds from the issuance of the restricted common stock to the vendors and, therefore, we have no use of proceeds.

December 2000 Unit Issuance

(a) The sale, as described below, occurred on December 13, 2000. The securities sold as units consisted of one share of common stock and two Class B Redeemable Common Stock Warrants. The total number of units sold was 337,500, with the possibility that up to an additional 112,500 units might be issued based on future market conditions. The agreement associated with this private placement required that we register the common stock and the common stock underlying the Class B Common Stock warrants by June 14, 2001 or certain penalty provisions would apply. As we were unable to complete the effective registration of such shares by June 14, 2001, on July 26, 2001, we rectified the situation by issuing an additional 112,504 shares of common stock and an additional 675,000 Class B Warrants to the accredited investors of the private placement. The following information applies to both the original December 2000 issuance and the July 2001 adjustment.

(b) No underwriters, agents, or placement agents participated in the private placement.

(c) The Units were offered and sold to nine accredited investors for cash payments totaling $675,000 ($2.00 per unit). To the extent additional units are issued, the total price per unit will be reduced.

(d) The transactions were exempt from registration under the Securities Act of 1933, as amended by reason of Sections 4(2) and 4(6) of the Securities Act of 1933 for transactions not involving a public offering and for transactions with accredited investors only.

(e) The Class B Warrants are exercisable at a price of $1.50 per share through December 31, 2005 to acquire one share of common stock and one Class C Warrant, exercisable through December 31, 2005, at $2.50 per share to acquire one share of common stock.

II-13

(f) The proceeds were used for working capital purposes.

ITEM 27 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

Exhibit Number		Title
3.01		Registrant's Amended and Restated Articles of Incorporation.(1)
3.02		Registrant's Bylaws.(1)
3.03		Certificate of Determination of Preferences and Rights of the Series A preferred stock (see exhibit 10.18).
3.04		Certificate Of Determination Of Preferences And Rights Of Series B Convertible Preferred Stock(11)
3.05		Certificate of Amendment to Articles of Incorporation(13)
4.01		Specimen Common Stock Certificate.(1)
4.02		Intentionally omitted
4.03		Intentionally omitted
4.04		Intentionally omitted
4.05		Form of warrant Agreement between the Registrant and Continental Stock Transfer & Trust Company.(8)
4.06		Specimen Class B Warrant Certificate (see exhibit 10.27).
4.07		Specimen Class C Warrant Certificate (see exhibit 10.27).
4.08		Amendment No. 1 to warrant Agreement between the Registrant and Continental Stock Transfer & Trust Company.(7)
5.01	*	Opinion as to the Validity of the Securities
10.01		Registrant's 1996 Stock Option Plan.(1)(2)
10.02		Intentionally omitted
10.03		Registrant's 1996 Executives Equity Incentive Plan.(1)(2)
10.04		Registrant's 1996 Equity Incentive Plan.(1)(2)
10.05		Intentionally omitted
10.06		Option Agreement between the Registrant and Yale University.(1)
10.07		Intentionally omitted
10.08		Letter from Yale University to Registrant dated February 10, 1996.(1)
10.09		Form of Indemnity Agreement entered into by Registrant with each of its directors and investors.(2)
10.10	*	Form of Securities Purchase Agreement dated September 23, 2003 by and among Isonics Corporation and various accredited investors.
10.11	*	Form of Warrant Agreement between Isonics Corporation and various accredited investors in connection with Common Stock Purchase Warrants issued in the September 2003 private placement.
10.12	*	Placement Agent Agreement dated September 23, 2003 by and between Park Capital Securities, LLC, vFinance, Inc. and Isonics Corporation.
10.13	*	Investment Banking Agreement with vFinance Investments, Inc.
10.14	*	Financial Advisory Agreement with Park Capital Securities LLC (and extension)

II-14

10.15		Agreement effective December 4, 2002, between Isonics and Institut fur Umwelttechnologien GmbH ("IUT") of Berlin, Germany, by which Isonics has acquired the exclusive, world-wide rights to detection technologies for explosives, chemical weapons, illegal drugs and other chemical compounds(15)
10.16		Intentionally omitted
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		Share Purchase and Assignment Agreement dated December 23, 2002 between Isonics Corporation and Institut fur Umwelttechnologien GmbH.(3)
10.20		Intentionally omitted
10.21		Intentionally omitted
10.22		Form of Registration Rights Agreement.(4)
10.23		Asset Purchase Agreement dated December 1, 1999 between the Registrant and Eagle-Picher Technologies, LLC.(5)
10.24		Registration Rights Agreement dated December 1, 1999 between the Registrant and Eagle-Picher Technologies, LLC.(5)
10.25		Warrant Agreement dated December 1, 1999 between the Registrant and Eagle-Picher Technologies, LLC.(5)
10.26		Supply Agreement between the Registrant and Eagle-Picher Technologies, LLC.(6)
10.27		Amended and Restated warrant Agreement effective as of January 15, 2001, between the Registrant and Continental Stock Transfer and Trust Company, Inc.(8)
10.28		Stock Purchase Agreement dated February 1, 2001, by and between Isonics Corporation and Interpro Zinc, LLC.(9)
10.29		Joint R&D Project Agreement, dated April 21, 1999, by and between Silex Systems Limited and Isonics Corporation.(10)
10.30		Intentionally omitted
10.31		Sponsored Research Agreement, dated December 15, 1999, by and between Isonics Corporation and Southern Methodist University.(10)
10.32		Stevenson-Wydler Cooperative Research and Development Agreement, dated November 9, 1999, by and between Ernest Orlando Lawrence Berkeley National Laboratory and Isonics Corporation (with attached Project Letter Agreement).(10)
10.33		Intentionally omitted
10.34		Agreement between Isonics Corporation and Silicon Evolution, Inc. dated September 14, 2001(12)
10.35		Technology License Agreement dated September 14, 2001, between Silicon Evolution, Inc. and Isonics Corporation(12)
10.36		Form of employment agreement to be entered into pursuant to the agreement between Isonics Corporation and certain persons previously associated with Silicon Evolution, Inc. dated September 14, 2001(12)
10.37		Form of lease agreement to be entered into pursuant to the agreement between Isonics Corporation and Silicon Evolution, Inc. dated September 14, 2001(12)
10.38		Amended and Restated Warrant Agreement dated July 26, 2001.(11)
10.39		Consulting Agreement dated October 15, 2001, with Wells Investment Group(13)
10.40		Form of Registration Rights Agreement between Isonics and various accredited investors in connection with the March 22, 2002, convertible promissory note financing.(14)

II-15

10.41		Form of Series 2002A 4% Convertible Promissory Note due March 1, 2003 between Isonics and various accredited investors in connection with the March 22, 2002, convertible promissory note financing.(14)
10.42		Form of Warrant Agreement expiring March 20, 2005 between Isonics and various accredited investors in connection with the March 22, 2002, convertible promissory note financing.(14)
21.1		List of subsidiaries.
23.10	*	Consent of independent accountants
23.11		Consent of Lord, Bissell & Brook LLP (see exhibit 5.01)

*: Filed herewith. All other documents have been previously filed.
(1): Incorporated herein by reference to exhibit filed with Isonics' Registration Statement on Form SB-2 ("Registration Statement") (Commission file No. 333-13289) in which this exhibit bears the same number except exhibit 3.01, which was numbered 3.03 in that registration statement.
(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 December 23, 2002 and filed February 5, 2003, 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.
(5): Filed with Isonics' Current Report on Form 8-K (File No. 001-12531) dated December 1, 1999, and filed December 10, 1999, and amendment thereto filed February 10, 2000, and incorporated herein by reference.
(6): Confidential treatment obtained.
(7): Filed with Isonics' Current Report on Form 8-K (File No. 001-12531) dated August 17, 2000, and filed August 18, 2000, and incorporated herein by reference.
(8): Filed with Isonics' registration statement on Form S-4 (File No. 333-37696) or the amendments thereto, and incorporated herein by reference.
(9): Filed with Isonics' Current Report on Form 8-K (File No. 001-12531) dated February 1, 2001, and incorporated herein by reference.
(10): Filed with Isonics' annual report on Form 10-KSB (File No. 001-12531) for the year ended April 30, 2001, and incorporated herein by reference.
(11): Filed with Isonics' Form 8-A/12(g) filed on August 1, 2001.
(12): Filed with Amendment no. 2 to registration statement (File No. 333-56562) and incorporated herein by reference.
(13): Filed with Isonics' current report on Form 8-K (File No. 001-12531) dated January 8, 2002 and incorporated herein by reference.
(14): Filed with Isonics' current report on Form 8-K (file no. 001-12531) dated March 22, 2002, and incorporated herein by reference.
(15): Filed with Isonics' quarterly report on Form 10-QSB (file no. 001-12531) for the quarter ended October 31, 2002.

ITEM 28. UNDERTAKINGS.

The Registrant hereby undertakes the following:

(a) (1) To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to:

(i): include any Prospectus required by Section 10(a)(3) of the Securities Act;

II-16

(ii): reflect in the Prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and
(iii): include any additional or changed material information of the plan of distribution.

(2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering.

(3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.

(b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under Item 24 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification relative to alleged securities act violations (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person, the Registrant will submit to a court of appropriate jurisdiction the question of whether such indemnification is against public policy and will be governed by the final adjudication of such issue.

II-17

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Golden, State of Colorado, on October 28, 2003.

		ISONICS CORPORATION
		By:	/s/ JAMES E. ALEXANDER James E. Alexander, President

In accordance with the requirements of the Securities Act of 1933, the following persons in their capacities and on the dates stated signed this registration statement.

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears constitutes and appoints James E. Alexander and Boris I. Rubizhevsky, or either of them, as true and lawful attorneys-in-fact and agents with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities to sign the Registration Statement file herewith and any or all amendments to said Registration Statement (including post-effective amendments and registration statements filed pursuant to Rule 462 and otherwise), and to file the same, with all exhibits thereto, and other documents in connection therewith, the Securities and Exchange Commission granting unto said attorney-in-fact and agents the full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents or any of them, or his substitute, may lawfully do or cause to be done by virtue hereof.

James E. Alexander	President, Principal Executive Officer, Principal Operating Officer, and Director	October 28, 2003
Boris I. Rubizhevsky	Director	October 28, 2003
Lindsay A. Gardner	Director	October 28, 2003
Richard Parker	Director	October 28, 2003
John V. Sakys	Principal Financial Officer and Principal Accounting Officer	October 28, 2003

II-18

QuickLinks

Subject to Completion dated October 28, 2003 PROSPECTUS dated October , 2003 ISONICS CORPORATION
TABLE OF CONTENTS
SUMMARY
RISK FACTORS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION
Management's Discussion and Analysis of Financial Condition or Plan of Operation for the Quarter ended July 31, 2003
Management's Discussion and Analysis of Financial Condition or Plan of Operation for the Year ended April 30, 2003
SECURITIES OFFERED, THE SELLING HOLDERS AND THE PLAN OF DISTRIBUTION
USE OF PROCEEDS
BUSINESS
MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT
EXECUTIVE COMPENSATION
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
ISONICS' CAPITAL STOCK
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
SHARES AVAILABLE FOR FUTURE SALE
SECURITIES AND EXCHANGE COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
EXPERTS
LEGAL MATTERS
HOW TO OBTAIN ADDITIONAL INFORMATION
Report of Independent Certified Public Accountants
CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Isonics Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except share amounts)
Isonics Corporation and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ISONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
ISONICS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited)
ISONICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
ISONICS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24 INDEMNIFICATION OF DIRECTORS AND OFFICERS

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

ITEM 26 RECENT SALES OF UNREGISTERED SECURITIES.

ITEM 27 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

ITEM 28. UNDERTAKINGS.

SIGNATURES
EX-5.01 3 a2121147zex-5_01.htm EX-5.01
QuickLinks -- Click here to rapidly navigate through this document

Exhibit 5.01

LORD BISSELL [LOGO] BROOK LLP
ATTORNEYS AT LAWS

300 S. GRAND AVENUE SUITE 800 LOS ANGELES, CALIFORNIA 90071-3119
213.485.1500 213.485.1200 FAX WWW.LORDBISSELL.COM

October 28, 2003		David R. Decker
		213.687.6778 Fax: 213.341.6778 ddecker@lordbissell.com

Isonics Corporation
5606 McIntyre Street
Golden, Colorado 80403

Re:: Registration Statement on Form SB-2

Gentlemen:

We have acted as special California counsel to Isonics Corporation (the "Company") in connection with the preparation and filing with the Securities and Exchange Commission under the Securities Act of 1933, as amended, of a Registration Statement on Form SB-2 (the "Registration Statement") relating to the public sale by the Company of the following (collectively, the "Securities"):

(a) 1,350,000 Class C Redeemable Warrants underlying outstanding Class B Redeemable Warrants (not including 430,110 Class C Redeemable Warrants underlying outstanding Class B Redeemable Warrants included in a prior opinion), and

(b) 2,700,000 shares of its common stock underlying 1,350,000 outstanding Class B Redeemable Warrants and 1,350,000 Class C Redeemable Warrants underlying outstanding Class B Redeemable Warrants (not including 430,110 shares underlying outstanding Class B Redeemable Warrants and 632,610 shares of its common stock underlying outstanding and issuable Class C Redeemable Warrants included in a prior opinion), and

the resale offering by certain selling shareholders of

(d) 1,350,000 Class B Redeemable Warrants that are currently outstanding, and

(e) 2,260,000 shares of common stock that are underlying outstanding common stock purchase warrants.

In so acting, we have examined and relied upon the original or copies, certified or otherwise identified to our satisfaction, of such corporate records, documents, certificates, and other instruments, and such factual information otherwise supplied to us by the Company as in our judgment are necessary or appropriate to enable us to render the opinion expressed below.

On the basis of and subject to the foregoing, we are of the opinion that the Securities, when sold pursuant to the Registration Statement and Prospectus, will, under the laws of the State of California, upon sale thereof in accordance with the terms set forth in the Registration Statement and the Prospectus, be duly and validly issued, fully paid, and non-assessable.

We consent to the use of this opinion as an exhibit to the Registration Statement and to the use of our name under the heading "Legal Matters" in the Prospectus forming a part of the Registration Statement. Burns, Figa & Will, P.C., of Englewood, Colorado, is authorized to rely on this opinion for purposes of issuing its legal opinions with regard to the Securities.

	Very truly yours,
	/s/ Lord, Bissell & brook LLP
	LORD, BISSELL & BROOK LLP

ATLANTA CHICAGO LONDON LOS ANGELES NEW YORK

QuickLinks

Exhibit 5.01

EX-10.10 4 a2121147zex-10_10.htm EX-10.10
QuickLinks -- Click here to rapidly navigate through this document

Exhibit 10.10

Form of SECURITIES PURCHASE AGREEMENT

This SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of September 23, 2003 is made by and among Isonics Corporation, a California corporation, with headquarters located at 5906 McIntyre Street, Golden, CO 80403 (the "Company"), and the investors named on the signature pages hereto, together with their permitted transferees (each, an "Investor" and collectively, the "Investors").

RECITALS:

A. The Company and the Investors are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Section 4(6) of the Securities Act of 1933, as amended, (the "Securities Act).

B. The Investors desire, upon the terms and conditions stated in this Agreement, to purchase, for an aggregate purchase price of a minimum of $250,000 and a maximum of up to $1,200,000, shares of Common Stock of the Company.

C. The capitalized terms used herein and not otherwise defined have the meanings given them in Article VII hereof.

In consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investors hereby agree as follows:

ARTICLE I
PURCHASE AND SALE OF SECURITIES

1.1 Purchase and Sale of Securities. At the Closing the Company will issue and sell to each Investor, and each Investor will (on a several and not a joint basis) purchase the Securities from the Company. The purchase price per unit (the "Securities") shall be $4.00 and will consist of five (5) shares of Common Stock and a warrant, substantially in the form attached hereto as Exhibit C (the "Warrant") to purchase three (3) shares of Common Stock at an exercise price equal to $1.25. The Warrants if not exercised sooner will expire on December 31, 2005. The Warrants are redeemable by the Company at $0.10 per exercisable share if the underlying Common Stock trades at or above $3.75 for 20 trading days in any 30 consecutive trading day period after the Warrants have been issued.

1.2 Payment. At the Closing, each Investor will pay the aggregate Purchase Price set forth beneath its name on the signature page hereof by wire transfer of immediately available funds to Wachovia Bank, National Association in accordance with the wire instructions set forth on Exhibit A hereto. Wachovia Bank, National Association shall act as escrow agent. The Company will deliver certificates representing the Securities to the Investor no later than ten calendar days after the Company's receipt of the Purchase Price (directly from the Investor or from the Escrow Agent, as the case may be), as described in paragraph 3 of the Placement Agent Agreement (See Exhibit E attached hereto) between the Company Park Capital Securities LLC and vFinance, Inc..

1.3 Closing Date. The Closing will take place on such date or time agreed upon by the parties to this Agreement (the "Closing Date"). The Closing will be held at the offices of the Company or at such other place as the parties agree.

ARTICLE II
INVESTOR'S REPRESENTATIONS AND WARRANTIES

Each Investor represents and warrants to the Company, severally and solely with respect to itself and its purchase hereunder and not with respect to any other Investor, that:

2.1 Investment Purpose. The Investor is purchasing the Securities for its own account and not with a present view toward the public sale or distribution thereof, except pursuant to sales registered or exempted from registration under the Securities Act; provided, however, that by making the representation herein, the Investor does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act.

2.2 Accredited Investor Status. The Investor is an "accredited investor" as defined in Section 2(a)(15) of the Securities Act and Rule 215 promulgated under the Securities Act. The Investor has delivered an Investor Questionnaire in the form of Exhibit B to the Company. The Investor hereby represents that, either by reason of the Investor's business or financial experience or the business or financial experience of the Investor's advisors, if any, the Investor has the capacity to protect the Investor's own interests in connection with the transaction contemplated hereby.

2.3 Reliance on Exemptions. The Investor understands that the Securities are being offered and sold to it in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Investor's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Investor set forth herein in order to determine the availability of such exemptions and the eligibility of the Investor to acquire the Securities.

2.4 Information. The Investor and its advisors, if any, have either had access through the Electronic Data Gathering, Analysis, and Retrieval System ("EDGAR") or have been furnished with all materials relating to the business, finances and operations of the Company, and materials relating to the offer and sale of the Securities, that have been requested by the Investor or its advisors, if any, including, without limitation the Company's Current Reports on Form 8-K dated February 5, 2003, (the "8-Ks"), the Company's Quarterly Reports on Form 10-QSB for the Quarters ended January 31, 2003, October 31, 2002 and July 31, 2002 (the "10-Qs"), and the Company's Annual Report on Form 10-KSB for the year ended April 30, 2002 (the "10-K" and collectively with the 8-Ks and the 10Qs, the "SEC Documents"). The Investor and its advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither such inquiries nor any other due diligence investigation conducted by Investor or any of its advisors or representatives modify, amend or affect the Investor's right to rely on the Company's representations, warranties and covenants contained in Article III below.

2.5 Acknowledgement of Risk. The Investor acknowledges and understands that its investment in the Securities involves a significant degree of risk, including, without limitation, (i) the Company remains a development stage business with limited operating history and requires substantial funds in addition to the proceeds from the sale of Securities; (ii) an investment in the Company is highly speculative, and only investors who can afford the loss of their entire investment should consider investing in the Company and the Securities; (iii) the Investor may not be able to liquidate its investment; (iv) transferability of the Securities is extremely limited; (v) in the event of a disposition of the Securities, the Investor could sustain the loss of its entire investment and (vi) the Company has not paid any dividends on its Common Stock since inception and does not anticipate the payment of dividends in the foreseeable future. Such risks are more fully set forth in the SEC Documents and the risk factors set forth on Exhibit D attached hereto.

2.6 Governmental Review. The Investor understands that no United States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Securities or an investment therein.

2.7 Transfer or Resale. The Investor understands that:

(a) except as otherwise provided in Article V, the Securities have not been and are not being registered under the Securities Act or any applicable state securities laws and, consequently, the Investor may have to bear the risk of owning the Securities for an indefinite period of time because the Securities may not be transferred unless (i) the resale of the Securities is registered pursuant to an effective registration statement under the Securities Act; (ii) the Investor has delivered to the Company an opinion of counsel (in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration; or (iii) the Securities are sold or transferred pursuant to Rule 144;

(b) any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144 and, if Rule 144 is not applicable, any resale of the Securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules and regulations of the SEC thereunder; and

(c) except as set forth in Article V, neither the Company nor any other person is under any obligation to register the Securities under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder.

2.8 Legends. The Investor understands the certificates representing the Securities will bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the certificates for such Securities):

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS, OR UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE LAWS.

2.9 Authorization; Enforcement. This Agreement has been duly and validly authorized, executed and delivered on behalf of the Investor and represents the valid and binding obligations of the Investor enforceable in accordance with its terms, subject to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the rights of creditors generally and the application of general principles of equity.

2.10 Residency. The Investor is a resident of the jurisdiction set forth immediately below such Investor's name on the signature pages hereto.

2.11 Acknowledgements Regarding Placement Agents. The Investor acknowledges that Park Capital Securities, LLC and vFinance, Inc. are acting as placement agents ("Placement Agents") for the Securities being offered hereby and will be compensated by the Company for acting in such capacity. The fee shall consist of a cash payment and Warrants based on the number of units purchased by the investors and as more fully described in Section 3.13 of this Agreement. The Warrants will be based on the same terms as the Warrants issued to the investors. Any securities to be issued to Park Capital Securities, LLC and vFinance, Inc. will be registered in the Registration Statement. The Investor further acknowledges that the information and data provided to the Investor in connection with the transactions contemplated hereby have not been subjected to independent verification by the Placement Agents, and that the Placement Agents make no representation or warranty with respect to the accuracy or completeness of such information, data or other related disclosure material. The Investor further acknowledges that in making its decision to enter into this Agreement and purchase the Securities it has relied on its own examination of the Company and the terms of, and consequences, of holding the Securities. The Investor further acknowledges that the provisions of this Section 2.11 are for the benefit of, and may be enforced by, the Placement Agent.

2.12 The Investor hereby acknowledges receipt and careful review of this Agreement, including all exhibits thereto, and any documents which may have been made available upon request as reflected therein (collectively referred to as the "Offering Materials") and hereby represents that the Investor has been furnished by the Company during the course of the Offering with all information regarding the Company, the terms and conditions of the Offering and any additional information that the Investor has requested or desired to know, and has been afforded the opportunity to ask questions of and receive answers from duly authorized officers or other representatives of the Company concerning the Company and the terms and conditions of the Offering.

2.13 The Investor hereby acknowledges that the Offering has not been reviewed by the United States Securities and Exchange Commission (the "SEC") nor any state regulatory authority since the Offering is intended to be exempt from the registration requirements of Section 5 of the Securities Act pursuant to Section 4(6) of the Securities Act.

2.14 The Investor represents that the Investor has full power and authority (corporate, statutory and otherwise) to execute and deliver this Agreement and to purchase the Securities. This Agreement constitutes the legal, valid and binding obligation of the Investor, enforceable against the Investor in accordance with its terms.

2.15 If the Investor is a corporation, partnership, limited liability company, trust, employee benefit plan, individual retirement account, Keogh Plan, or other tax-exempt entity, it is authorized and qualified to invest in the Company and the person signing this Agreement on behalf of such entity has been duly authorized by such entity to do so.

2.16 The Investor acknowledges that if he or she is a Registered Representative of an NASD member firm, he or she must give such firm the notice required by the NASD's Rules of Fair Practice, receipt of which must be acknowledged by such firm in Section 4 of the Investor Questionnaire which is attached hereto as Exhibit B.

2.17 Anti-Money Laundering.

(a) In General. Investor acknowledges that due to anti-money laundering requirements operating in the United States, as well as Park Capital Securities, LLC's and vFinance, Inc.'s own internal anti-money laundering policies, Park Capital Securities, LLC and vFinance, Inc. may require further identification of the Investor and the source of purchase funds before this Agreement can be processed and purchase monies accepted. Park Capital Securities, LLC and vFinance, Inc. shall be held harmless and indemnified against any loss arising as a result of a failure to process this Agreement if such information has been required by Park Capital Securities, LLC or vFinance, Inc. and has not been satisfactorily provided by the Investor. Investor represents that all purchase payments transferred to the Company pursuant to this Agreement originated directly from a bank or brokerage account in the name of Investor. If Investor is subscribing on behalf of a Beneficial Owner, pursuant to Section 2.17(b) below, then Investor represents that all purchase payments transferred to Investor with respect to such Beneficial Owner originated directly from a bank or brokerage account in the name of such Beneficial Owner. Investor represents and warrants that acceptance by the Company and Park Capital Securities, LLC or vFinance, Inc., as the case may be, of this Agreement, together with acceptance of the appropriate remittance, will not breach any applicable rules and regulations designed to avoid money laundering. Specifically, Investor represents and warrants that all evidence of identity provided to Park Capital Securities, LLC or vFinance, Inc. is genuine and all related information furnished and to be furnished to Park Capital Securities, LLC or vFinance, Inc. is accurate.

(b) Beneficial Ownership. Investor represents and warrants that it is subscribing for the Shares for Investor's own account and own risk, and, unless Investor advises Park Capital Securities, LLC or vFinance to the contrary in writing and identifies with specificity each beneficial owner on whose behalf Investor is acting, Investor represents that it is not acting as a nominee for any other person or entity. Investor also represents that it does not have the intention or obligation to sell, distribute or transfer the Securities, directly or indirectly, to any other person or entity or to any nominee account. If the Investor is (A) acting as trustee, agent, representative or disclosed nominee for another person or entity, or (B) an entity (other than a publicly-traded company listed on an organized exchange (or a subsidiary or a pension fund of such a company) based in a Financial Action Task Force ("FATF") Compliant Jurisdiction) investing on behalf of underlying investors (including a Fund-of-Funds) (the persons, entities and underlying investors referred to in (A) and (B) being referred to collectively as the "Beneficial Owners"), Investor represents and warrants that:

(i): Investor understands and acknowledges the representations, warranties and agreements made herein are made by Investor(A) with respect to Investor and (B) with respect to each of the Beneficial Owners;
(ii): Investor has all requisite power and authority from each of the Beneficial Owners to execute and perform the obligations under this Agreement;
(iii): Investor has adopted and implemented anti-money laundering policies, procedures and controls that comply with, and will continue to comply in all respects with, the requirements of applicable anti-money laundering laws and regulations; and
(iv): Investor has established the identity of all Beneficial Owners, holds evidence of such identities and will make such information available to Park Capital Securities, LLC or vFinance, Inc. as the case may be, upon request, and has procedures in place to ensure that the Beneficial Owners are not Prohibited Investors (as defined in (e) below).

(c) Prohibited Investor. Investor further represents and warrants that neither it or to the best of its knowledge and belief, the Beneficial Owners, nor any person controlling, controlled by, or under common control with it or the Beneficial Owners, nor any person having a beneficial or economic interest in it or the Beneficial Owners, is a Prohibited Investor (defined in (e) below) and Investor is not and will not purchase the Securities on behalf or for the benefit of any Prohibited Investor.

(d) Suspension of Purchase Rights. Investor acknowledges that if, following its purchase of Securities pursuant to this Agreement, Park Capital Securities, LLC or vFinance, Inc., as the case may be, reasonably believes that Investor is a Prohibited Investor or has otherwise breached its representations and warranties herein, Park Capital Securities, LLC or vFinance, Inc., as the case may be, and the Company may be obligated to retroactively terminate this purchase (if possible), by rejecting this Agreement (even after full execution) and not completing this transaction, freezing such Investor's funds forwarded by such Investor pursuant to this Agreement, and stopping the delivery of Securities in accordance with applicable regulations,

or placing a "stop order" with the Transfer Agent or the Company, and it shall have no claim against Park Capital Securities, LLC or vFinance, Inc., as the case may be, or the Company for any form of damages or liabilities as a result of any of the aforementioned actions.

(e) Definitions.

(i): FATF means the Financial Action Task Force on Money Laundering. FATF-Compliant Jurisdiction is a jurisdiction that (A) is a member in good standing of FATF and (B) has undergone two rounds of FATF mutual evaluations. (The following jurisdictions, as determined by the FATF, are currently considered to be compliant: Argentina; Australia; Austria; Belgium; Brazil; Canada; Denmark; European Commission; Finland; France; Germany; Greece; Gulf Cooperation Council; Hong Kong; Iceland; Ireland; Italy; Japan; Luxembourg; Mexico; Kingdom of The Netherlands; New Zealand; Norway; Portugal; Singapore; Spain; Sweden; Switzerland; Turkey; United Kingdom; and the United States of America. The list of FATF compliant jurisdictions is amended periodically. For a current list of FATF compliant jurisdictions, refer to http://www.oecd.org/fatf/.)
(ii): Foreign Bank means an organization that (A) is organized under the laws of a non-U.S. country; (B) engages in the business of banking; (C) is recognized as a bank by the bank supervisory or monetary authority of the country of its organization or principal banking operations; (D) receives deposits to a substantial extent in the regular course of its business; and (E) has the power to accept demand deposits, but does not include the U.S. branches or agencies of a non-U.S. bank.
(iii): Foreign Shell Bank means a Foreign Bank without a Physical Presence in any country, but does not include a Regulated Affiliate.
(iv): Non-Cooperative Jurisdiction means any non-U.S. country that has been designated as non-cooperative with international anti-money laundering principles or procedures by an intergovernmental group or organization, such as the FATF, of which the United States is a member and with which designation the United States representative to the group or organization continues to concur. (The current list of non-cooperative countries and territories, as determined by the FATF, is: Cook Islands; Egypt; Guatemala; Indonesia; Myanmar; Nauru; Nigeria; Philippines; St. Vincent and the Grenadines; and Ukraine. The list of Non-Cooperative Countries and Territories is amended periodically. For a current list of Non-Cooperative Countries and Territories, refer to the Financial Action Task Force website, http://www.oecd.org/fatf/NCCT_en.htm.)
(v): Physical Presence means a place of business that is maintained by a Foreign Bank and is located at a fixed address, other than solely a post office box or an electronic address, in a country in which the Foreign Bank is authorized to conduct banking activities, at which location the Foreign Bank (i) employs one or more individuals on a full-time basis; (ii) maintains operating records related to its banking activities; and (iii) is subject to inspection by the banking authority that licensed the Foreign Bank to conduct banking activities.
(v): Prohibited Investor means (i) a person or entity whose name appears on the List of Specially Designated Nationals and Blocked Persons maintained by the U.S. Office of Foreign Assets Control ("OFAC") (refer to http://www.ustreas.gov/ofac); (ii) a Foreign Shell Bank; or (iii) a person or entity resident in or organized or chartered under the laws of a Non-Cooperative Jurisdiction or whose purchase funds are transferred from or through a Foreign Shell Bank, a bank organized or chartered under the laws of a Non-Cooperative Jurisdiction or a Sanctioned Regime.
(vi): Regulated Affiliate means a Foreign Shell Bank that (i) is an affiliate of a depository institution, credit union, or Foreign Bank that maintains a Physical Presence in the United States or a non-U.S. country, as applicable; and (ii) is subject to supervision by a banking authority in the country regulating such affiliated depository institution, credit union, or Foreign Bank.
(vii): Sanctioned Regimes means targeted foreign countries, terrorism sponsoring organizations and international narcotics traffickers in respect of which OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals. (OFAC has

imposed sanctions upon Balkans, Burma (Myanmar), Cuba, Iran, Iraq, Liberia, Libya, North Korea, Sierra Leone, Sudan, and Zimbabwe.

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants to the Investors that:

3.1 Organization and Qualification. The Company is duly incorporated, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, with full power and authority (corporate and other) to own, lease, use and operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted. The Company is duly qualified to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except where the failure to be so qualified or in good standing would not have a Material Adverse Effect.

3.2 Authorization; Enforcement. (a) The Company has all requisite corporate power and authority to enter into and to perform its obligations under this Agreement, to consummate the transactions contemplated hereby and thereby and to issue the Securities in accordance with the terms hereof; (b) the execution, delivery and performance of this Agreement by the Company and the consummation by it of the transactions contemplated hereby (including without limitation the issuance of the Securities) have been duly authorized by the Company's Board of Directors and no further consent or authorization of the Company, its Board of Directors, or its shareholders is required; (c) this Agreement has been duly executed by the Company; and (d) this Agreement constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, subject to the effect of any applicable bankruptcy, insolvency, reorganization, or moratorium or similar laws affecting the rights of creditors generally and the application of general principles of equity.

3.3 Capitalization. As of June 30, 2003, the authorized capital stock of the Company consists of (a) 40,000,000 shares of Common Stock, no par value per share, of which 12,113,533 shares are issued and outstanding. In addition, the Company has reserved 6,584,741 shares for issuance upon exercise of options and warrants (including options remaining to be issued under certain plans) and 1,609,322 shares issuable upon conversion of the Company's outstanding Series A Convertible Preferred Stock; and (b) 10,000,000 shares of preferred stock, no par value per share, of which 963,666 shares of Series A Convertible Preferred Stock are outstanding. All of such outstanding shares of capital stock are, or upon issuance will be, duly authorized, validly issued, fully paid and nonassessable. No shares of capital stock of the Company, including the Securities issuable pursuant to this Agreement, are subject to preemptive rights or any other similar rights of the stockholders of the Company or any liens or encumbrances imposed through the actions or failure to act of the Company. Except as disclosed above and in the SEC Documents, and except for the transactions contemplated hereby, (i) there are no outstanding options, warrants, scrip, rights to subscribe for, puts, calls, rights of first refusal, agreements, understandings, claims or other commitments or rights of any character whatsoever relating to, or securities or rights convertible into, exercisable for, or exchangeable for any shares of capital stock of the Company, or arrangements by which the Company is or may become bound to issue additional shares of capital stock of the Company; (ii) there are no agreements or arrangements under which the Company is obligated to register the sale of any of its securities under the Securities Act and (iii) there are no anti-dilution or price adjustment provisions contained in any security issued by the Company (or in any agreement providing rights to security holders) that will be triggered by the issuance of the Securities. The Company has made available to the Investors for their review true and correct copies of the Company's Certificate of Incorporation, as amended, as in effect on the date hereof, the Company's Bylaws as in effect on the date hereof and the terms of all securities convertible into or exercisable for Common Stock of the Company and the material rights of the holders thereof in respect thereto.

3.4 Issuance of Securities. The Securities are duly authorized and, upon issuance in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, free from all taxes, liens, claims, encumbrances and charges with respect to the issue thereof, will not be subject to preemptive rights or other similar rights of stockholders of the Company, and will not impose personal liability on the holders thereof.

3.5 No Conflicts; No Violation.

(a) The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance of the Securities) will not (i) conflict with or result in a violation of any provision of its Certificate of Incorporation or Bylaws or (ii) violate or conflict with, or result in a breach of any provision of, or constitute

a default (or an event which with notice or lapse of time or both could become a default) under, or give to others any rights of termination, amendment (including without limitation, the triggering of any anti-dilution provision), acceleration or cancellation of, any agreement, indenture, patent, patent license, or instrument to which the Company is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including U.S. federal and state securities laws and regulations and regulations of any self-regulatory organizations to which the Company or its securities are subject) applicable to the Company or by which any property or asset of the Company is bound or affected (except for such conflicts, breaches, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect).

(b) The Company is not in violation of its Certificate of Incorporation, Bylaws or other organizational documents and the Company is not in default (and no event has occurred which with notice or lapse of time or both could put the Company in default) under any agreement, indenture or instrument to which the Company is a party or by which any property or assets of the Company is bound or affected, except for possible defaults as would not, individually or in the aggregate, have a Material Adverse Effect.

(c) The Company is not conducting its business in violation of any law, ordinance or regulation of any governmental entity, the failure to comply with which would, individually or in the aggregate, have a Material Adverse Effect.

(d) Except as specifically contemplated by this Agreement and as required under the Securities Act and any applicable state securities laws or any listing agreement with any securities exchange or automated quotation system, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency or any regulatory or self regulatory agency in order for it to execute, deliver or perform any of its obligations under this Agreement in accordance with the terms hereof, or to issue and sell the Securities in accordance with the terms hereof. All consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof.

3.6 SEC Documents, Financial Statements. Since January 1, 2002, the Company has timely filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Exchange Act (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents (other than exhibits) incorporated by reference therein, being hereinafter referred to herein as the "SEC Documents"). The Company has delivered to each Investor, or each Investor has had access to, true and complete copies of the SEC Documents, except for such exhibits and incorporated documents. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act or the Securities Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with U.S. generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except as set forth in the financial statements included in the SEC Documents, the Company has no liabilities, contingent or otherwise, other than liabilities incurred in the ordinary course of business subsequent to January 31, 2003, and liabilities of the type not required under generally accepted accounting principles to be reflected in such financial statements. Such liabilities incurred subsequent to January 31, 2003, are not, in the aggregate, material to the financial condition or operating results of the Company.

3.7 Absence of Certain Changes. Except as disclosed in the SEC Documents or on Schedule 3.7, since January 31, 2003, there has been no material adverse change in the assets, liabilities, business, properties, operations, financial condition, prospects or results of operations of the Company.

3.8 Absence of Litigation. Except as disclosed in the SEC Documents, there is no action, suit, claim, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its officers or directors acting as such that could, individually or in the aggregate, have a Material Adverse Effect.

3.9 Intellectual Property Rights. The Company owns or possesses licenses or rights to use all patents, patent applications, patent rights, inventions, know-how, trade secrets, trademarks, trademark applications, service marks, service names, trade names and copyrights necessary to enable it to conduct its business as now operated (the "Intellectual Property"). Except as set forth in the SEC Documents, there are no material outstanding options, licenses or agreements relating to the Intellectual Property, nor is the Company bound by or a party to any material options, licenses or agreements relating to the patents, patent applications, patent rights, inventions, know-how, trade secrets, trademarks, trademark applications, service marks, service names, trade names or copyrights of any other person or entity. Except as disclosed in the SEC Documents, there is no claim or action or proceeding pending or, to the Company's knowledge, threatened that challenges the right of the Company with respect to any Intellectual Property.

3.10 Tax Status. The Company has timely made or filed all federal, state and foreign income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has timely paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith, and has set aside on its books provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. To the knowledge of the Company, there are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. The Company has not executed a waiver with respect to the statute of limitations relating to the assessment or collection of any foreign, federal, state or local tax. None of the Company's tax returns is presently being audited by any taxing authority.

3.11 Environmental Laws. The Company (i) is in compliance with all applicable foreign federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) has received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct its business and (iii) is in compliance with all terms and conditions of any such permit, license or approval where, in each of the three foregoing clauses, the failure to so comply would have, individually or in the aggregate, a Material Adverse Effect

3.12 No Integrated Offering. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales in any security or solicited any offers to buy any security under circumstances that would require registration under the Securities Act of the issuance of the Securities to the Investors. Depending upon the view of the SEC in reviewing the registration statement covering this offering, the issuance of the Securities to the Investors will not be integrated with any other issuance of the Company's securities (past, current or future) for purposes of the Securities Act or any applicable rules of Nasdaq.

3.13 Brokers. Except as set forth below, the Company has taken no action which would give rise to any claim by any person for brokerage commissions, finder's fees or similar payments relating to this Agreement or the transactions contemplated hereby.

(a) Upon the Closing of each investment (as defined below) in the Offering, by an investor first introduced to the Company by Park Capital Securities, LLC (the "Park Capital Investors"), Park Capital Securities, LLC will receive cash commissions equal to 10% of the aggregate value of such investment.

(b) Upon the Closing of each investment (as defined below) in the Offering, by an investor first introduced to the Company by vFinance, Inc. (the "vFinance Investors"), vFinance, Inc. will receive cash commissions equal to 10% of the aggregate value of such investment.

(c) The Company agrees to pay for legal expenses of Park Capital Securities, LLC's counsel in the amount of $7,500 associated with document preparation, review of the Registration Statement to be prepared by the Company's counsel and all amendments thereto. The Company has paid the sum of $2,500 as required by paragraph 5 of the Placement Agent Agreement between the Company and Park Capital Securities LLC, and the Company shall pay an additional $5,000 as described in said paragraph 5.

3.14 Insurance. The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company is engaged.

3.15 Employment Matters. The Company is in compliance with all federal, state, local and foreign laws and regulations respecting employment and employment practices, terms and conditions of employment and wages and hours except where failure to be in compliance would not have a Material Adverse Effect. The Company is not bound by or subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the Company's knowledge, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the Company's knowledge, threatened, that could have a Material Adverse Effect nor is the Company aware of any labor organization activity involving its employees. The Company is not aware that any officer or key employee, or that any group of officers or key employees, intends to terminate their employment with the Company, nor does the Company have a present intention to terminate the employment of any of the foregoing.

3.16 Investment Company Status. The Company is not and upon consummation of the sale of the Securities will not be an "investment company," a company controlled by an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended.

3.17 Subsidiaries. Except as set forth in the SEC Documents, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, association, joint venture, partnership or other business entity and the Company is not a direct or indirect participant in any joint venture or partnership.

3.18 No Conflict of Interest. The Company is not indebted, directly or indirectly, to any of its officers or directors or to their respective spouses or children, in any amount whatsoever other than in connection with expenses or advances of expenses incurred in the ordinary course of business or relocation expenses of employees. None of the Company's officers, directors or employees, or any members of their immediate families, are directly, or indirectly, indebted to the Company (other than in connection with purchases of the Company's stock or as set forth on Schedule 3.18) or, to the best of the Company's knowledge, have any direct or indirect ownership interest in any entity with which the Company is affiliated or with which the Company has a business relationship, or any entity which competes with the Company, except that officers, directors, employees and/or stockholders of the Company may own stock in (but not exceeding five percent (5%) of the outstanding capital stock of) any publicly traded company that may compete with the Company. To the best of the Company's knowledge, none of the Company's officers, directors or employees or any members of their immediate families are, directly or indirectly, interested in any material contract with the Company. The Company is not a guarantor or indemnitor of any indebtedness of any other person or entity.

3.19 Trading in Securities. The Company specifically acknowledges that, except to the extent specifically provided herein or in any of the other offering documents (but limited in each instance to the extent so specified), the Investor retains the right (but is not otherwise obligated) to buy, sell, engage in hedging transactions or otherwise trade in the securities of the Company, including, but not necessarily limited to, the Common Stock, at any time before, contemporaneous with or after the execution of this Agreement or from time to time and in any manner whatsoever permitted by applicable federal and state securities laws.

3.20 Issuance of Shares. A sufficient number of shares of Common Stock issuable pursuant to this Agreement, have been duly authorized and reserved for issuance pursuant to this Agreement. Upon issuance in accordance with this Agreement, the Common Stock will be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof. In the event the Company cannot register a sufficient number of shares of Common Stock, due to the remaining number of authorized shares of Common Stock being insufficient, the Company will use its best efforts to register the maximum number of shares it can based on the remaining balance of authorized shares and will use its best efforts to increase the number of its authorized shares as soon as reasonably practicable.

ARTICLE IV
COVENANTS

4.1 Form D; Blue Sky Laws. The Company will timely file a Notice of Sale of Securities on Form D with respect to the Securities, as required by Form D. Counsel for Park Capital Securities, LLC will, on or before the

Closing Date, take such action as it reasonably determines to be necessary to qualify the Securities for sale to the Investors under this Agreement under applicable securities (or "blue sky") laws of the states of the United States (or to obtain an exemption from such qualification). Counsel for Park Capital Securities, LLC shall be responsible for filing the necessary forms for Blue Sky filings for the Offering with New York and two additional states, but the Company shall be responsible for all filing fees and fees for specific consents for the service of process. The Company will pay counsel for Park Capital Securities, LLC for each state thereafter the amount of $500 plus all filing fees and fees for specific consents for the service of process. The Company's counsel shall prepare and file the Form D. The Company and Park Capital Securities, LLC agree that no sales will be made to any Investor in a state in which the Blue Sky filing requires that the Company generally consent to the service of process as a condition of blue sky qualification, or that may impose an escrow or other requirements on the Company or its affiliates of the sort that are generally referred to as "merit requirements". Counsel for Park Capital Securities, LLC will provide counsel to the Company with copies of all communications to and from any blue sky administrator relating to this Offering prior to submitting to any such blue sky administrator, and promptly after receipt from any blue sky administrator.

4.2 Reporting Status; Eligibility to Use Form S-3. The Company's Common Stock is registered under Section 12 of the Exchange Act. During the Registration Period (as defined below), the Company will timely file all reports, schedules, forms, statements and other documents required to be filed by it with the SEC under the reporting requirements of the Exchange Act, and the Company will not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and regulations thereunder would permit such termination. The Company currently meets, and will take all reasonably necessary action to continue to meet, the "registrant eligibility" requirements set forth in the general instructions to Form S-3 to enable the registration of the Registrable Securities.

4.3 Expenses. The Company and each Investor is liable for, and will pay, its own expenses incurred in connection with the negotiation, preparation, execution and delivery of this Agreement, including, without limitation, attorneys' and consultants' fees and expenses.

4.4 Financial Information. The financial statements of the Company will be prepared in accordance with United States generally accepted accounting principles, consistently applied, and will fairly present in all material respects the consolidated financial position of the Company and results of its operations and cash flows as of, and for the periods covered by, such financial statements (subject, in the case of unaudited statements, to normal year-end audit adjustments).

4.5 Compliance with Law. As long as an Investor owns any of the Securities, the Company will conduct its business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, (including, without limitation, all applicable local, state and federal environmental laws and regulations), the failure to comply with which would have a Material Adverse Effect.

4.6 Sales by Investors. Each Investor will sell any Securities sold by it in compliance with applicable prospectus delivery requirements, if any, or otherwise in compliance with the requirements for an exemption from registration under the Securities Act and the rules and regulations promulgated thereunder. No Investor will make any sale, transfer or other disposition of the Securities in violation of federal or state securities laws.

4.7 Share Issuance At all times, the Company shall keep available Common Stock duly authorized for issuance against the Warrants. If at any time, the Company does not have available an amount of authorized and unissued Common Stock necessary to satisfy the full exercise of the then outstanding Warrants, the Company shall call and hold a special meeting within 30 days of such occurrence, for the purpose of increasing the number of shares authorized. Management of the Company shall recommend to shareholders, officers and directors to vote in favor of increasing the number of common shares authorized.

4.7 Litigation. The Company knows of no pending or threatened legal or governmental proceedings against the Company which could materially adversely affect the business, property, financial condition or operations of the Company or which materially and adversely questions the validity of this Agreement or any agreements related to the transactions contemplated hereby or the right of the Company to enter into any of such agreements, or to consummate the transactions contemplated hereby or thereby. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality which could materially adversely affect the business, property, financial condition or operations of the Company. There is no action, suit, proceeding or investigation by the Company currently pending in any court or before any arbitrator or that the Company intends to initiate.

ARTICLE V
REGISTRATION RIGHTS

5.1 As used in this Agreement, the following terms shall have the following meanings:

(a) "Affiliate" shall mean, with respect to any Person (as defined below), any other Person controlling, controlled by or under direct or indirect common control with such Person (for the purposes of this definition "control," when used with respect to any specified Person, shall mean the power to direct the management and policies of such person, directly or indirectly, whether through ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" shall have meanings correlative to the foregoing).

(b) "Business Day" shall mean a day Monday through Friday on which banks are generally open for business in New York.

(c) "Holders" shall mean the Investors and any person holding Registrable Securities (including, without limitation, the shares of Common Stock issuable upon exercise of the unit purchase options to be granted to the Placement Agents and/or their designees (the "Unit Purchase Options") and the Common Stock underlying the Warrants issuable upon the exercise of the Unit Purchase Options) or any person to whom the rights under Article V have been transferred in accordance with Section 5.9 hereof.

(d) "Person" shall mean any person, individual, corporation, limited liability company, partnership, trust or other nongovernmental entity or any governmental agency, court, authority or other body (whether foreign, federal, state, local or otherwise).

(e) The terms "register," "registered" and "registration" refer to the registration effected by preparing and filing a registration statement in compliance with the Act, and the declaration or ordering of the effectiveness of such registration statement.

(f) "Registrable Securities" shall mean (i) the shares of Common Stock sold in the Offering; (ii) the shares of Common Stock issuable upon exercise of the Warrants (the "Warrant Shares"); (iii) the additional shares ("Additional Shares") of Common Stock issuable upon exercise of the Additional Warrants (as defined in Section 5.11(a)), if any; and (iv) any shares of Common Stock issued as (or issuable upon the conversion of any warrant, right or other security which is issued as) a dividend or other distribution with respect to or in replacement of the Common Stock; provided, however, that securities shall only be treated as Registrable Securities if and only for so long as they (A) have not been disposed of pursuant to a registration statement declared effective by the SEC, (B) have not been sold in a transaction exempt from the registration and prospectus delivery requirements of the Act so that all transfer restrictions and restrictive legends with respect thereto are removed upon the consummation of such sale or (C) are held by a Holder or a permitted transferee pursuant to Section 5.9.

(g) "Registration Expenses" shall mean all expenses incurred by the Company in complying with Section 5.2 hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and expenses of counsel for the Company, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the fees of legal counsel for any Holder).

(h) "Registration Statement" shall have the meaning ascribed to such term in Section 5.2.

(i) "Registration Period" shall have the meaning ascribed to such term in Section 5.4.

(j) "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and all fees and expenses of legal counsel for any Holder.

5.2 No later than thirty days after the final Closing Date of the Offering as described in paragraph 10 of the Placement Agent Agreement (the "Filing Date"), the Company shall file a registration statement on the appropriate form (the "Registration Statement") with the SEC and use its best efforts to effect the registration, qualifications or compliances (including, without limitation, the execution of any required undertaking to file post-effective amendments) no later than ninety calendar days following the Filing Date.

5.3 All Registration Expenses incurred in connection with any registration, qualification, exemption or compliance pursuant to Section 5.2 shall be borne by the Company. All Selling Expenses relating to the sale of securities registered by or on behalf of Holders shall be borne by such Holders pro rata on the basis of the number of securities so registered.

5.4 In the case of the registration, qualification, exemption or compliance effected by the Company pursuant to this Agreement, the Company shall, upon reasonable request, inform each Holder as to the status of such registration, qualification, exemption and compliance. At its expense the Company shall:

(a)

use its best efforts to keep such registration, continuously effective until the Holders have completed the distribution described in the registration statement relating thereto. The period of time during which the Company is required hereunder to keep the Registration Statement effective is referred to herein as "the Registration Period." Notwithstanding the foregoing, at the Company's election, the Company may cease to keep such registration, qualification, exemption or compliance effective with respect to any Registrable Securities, and the registration rights of a Holder shall expire, on the earlier of (i) the date on which no Warrants remain unexercised or (ii) January 1, 2006.

(b)

advise the Holders:

(i): when the Registration Statement or any amendment thereto has been filed with the SEC and when the Registration Statement or any post-effective amendment thereto has become effective;
(ii): of any request by the SEC for amendments or supplements to the Registration Statement or the prospectus included therein or for additional information;
(iii): of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for such purpose;
(iv): of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities included therein for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and
(v): of the happening of any event that requires the making of any changes in the Registration Statement or the prospectus so that, as of such date, the statements therein are not misleading and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the prospectus, in the light of the circumstances under which they were made) not misleading;

(c)

make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of any Registration Statement at the earliest possible time;

(d)

furnish to each Holder, without charge, at least one copy of such Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests in writing, all exhibits (including those incorporated by reference) in the form filed with the SEC;

(e)

during the Registration Period, deliver to each Holder, without charge, as many copies of the prospectus included in such Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents to the use, consistent with the provisions hereof, of the prospectus or any amendment or supplement thereto by each of the selling Holders of Registrable Securities in connection with the offering and sale of the Registrable Securities covered by the prospectus or any amendment or supplement thereto. In addition, upon the reasonable request of the Holder and subject in all cases to confidentiality protections reasonably acceptable to the Company, the Company will meet with a Holder or a representative thereof at the Company's headquarters to discuss all information relevant for disclosure in the Registration Statement covering the Registrable Securities, and will otherwise cooperate with any Holder conducting an investigation for the purpose of reducing or eliminating such Holder's exposure to liability under the Act, including the reasonable production of information at the Company's headquarters;

(f)

during the Registration Period, deliver to each Holder, without charge, (i) as soon as practicable (but in the case of the annual report of the Company to its stockholders, within 120 days after the end of each fiscal year of the Company) one copy of the following documents, other than those documents available via EDGAR: (A) its annual report to its stockholders, if any (which annual report shall contain financial statements audited in accordance with generally accepted accounting principles in the United States of America by a firm of certified public accountants of recognized standing); (B) if not included in substance in its annual report to stockholders, its annual report on Form 10-KSB (or similar form); (C) each of its quarterly reports to its stockholders, and, if not included in substance in its quarterly

reports to stockholders, its quarterly report on Form 10-QSB (or similar form), and (D) a copy of the full Registration Statement (the foregoing, in each case, excluding exhibits); and (ii) upon reasonable request, all exhibits excluded by the parenthetical to the immediately preceding clause (D), and all other information that is generally available to the public;

(g) cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold pursuant to any Registration Statement free of any restrictive legends to the extent not required at such time and in such denominations and registered in such names as Holders may request at least five (5) business days prior to sales of Registrable Securities pursuant to such Registration Statement; and

(h) upon the occurrence of any event contemplated by Section 5.4(b)(v) above, the Company shall promptly prepare a post-effective amendment to the Registration Statement or a supplement to the related prospectus, or file any other required document so that, as thereafter delivered to purchasers of the Registrable Securities included therein, the prospectus will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

5.5 The Holders shall have no right to take any action to restrain, enjoin or otherwise delay any registration pursuant to Section 5.2 hereof as a result of any controversy that may arise with respect to the interpretation or implementation of this Agreement.

5.6 (a) To the extent permitted by law, the Company shall indemnify each Holder, each underwriter of the Registrable Securities and each person controlling such Holder within the meaning of Section 15 of the Act, with respect to which any registration, qualification or compliance has been effected pursuant to this Agreement, against all claims, losses, damages and liabilities (or action in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened (subject to Section 5.6(c) below), arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus or offering circular, or any amendment or supplement thereof, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in light of the circumstances in which they were made, and will reimburse each Holder, each underwriter of the Registrable Securities and each person controlling such Holder, for reasonable legal and other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action as incurred; provided that the Company will not be liable in any such case to the extent that any untrue statement or omission or allegation thereof is made in reliance upon and in conformity with written information furnished to the Company by or on behalf of such Holder and stated to be specifically for use in preparation of such registration statement, prospectus or offering circular; provided that the Company will not be liable in any such case where the claim, loss, damage or liability arises out of or is related to the failure of the Holder to comply with the covenants and agreements contained in this Agreement respecting sales of Registrable Securities, and except that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any such untrue statement or alleged untrue statement or omission or alleged omission made in the preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement becomes effective or in the amended prospectus filed with the SEC pursuant to Rule 424(b) or in the prospectus subject to completion and term sheet under Rule 434 of the Act, which together meet the requirements of Section 10(a) of the Act (the "Final Prospectus"), such indemnity agreement shall not inure to the benefit of any such Holder, any such underwriter or any such controlling person, if a copy of the Final Prospectus furnished by the Company to the Holder for delivery was not furnished to the person or entity asserting the loss, liability, claim or damage at or prior to the time such furnishing is required by the Act and the Final Prospectus would have cured the defect giving rise to such loss, liability, claim or damage.

(b) Each Holder will severally, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers, each underwriter of the Registrable Securities and each person who controls the Company within the meaning of Section 15 of the Act, against all claims, losses, damages and liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened (subject to Section 5.6(c) below), arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus or offering circular, or any amendment or supplement thereof, incident to any such registration, qualification or compliance, or based on any

omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in light of the circumstances in which they were made, and will reimburse the Company, such directors and officers, each underwriter of the Registrable Securities and each person controlling the Company for reasonable legal and any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action as incurred, in each case to the extent, but only to the extent, that such untrue statement or omission or allegation thereof is made in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Holder and stated to be specifically for use in preparation of such registration statement, prospectus or offering circular; provided that the indemnity shall not apply to the extent that such claim, loss, damage or liability results from the fact that a current copy of the prospectus was not made available to the Holder and such current copy of the prospectus would have cured the defect giving rise to such loss, claim, damage or liability. Notwithstanding the foregoing, in no event shall a Holder be liable for any such claims, losses, damages or liabilities in excess of the proceeds received by such Holder in the offering, except in the event of fraud by such Holder.

(c) Each party entitled to indemnification under this Section 5.6 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such Indemnified Party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement, unless such failure is materially prejudicial to the Indemnifying Party in defending such claim or litigation. An Indemnifying Party shall not be liable for any settlement of an action or claim effected without its written consent (which consent will not be unreasonably withheld).

(d) If the indemnification provided for in this Section 5.6 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party thereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

5.7 (a) Each Holder agrees that, upon receipt of any notice from the Company of the happening of any event requiring the preparation of a supplement or amendment to a prospectus relating to Registrable Securities so that, as thereafter delivered to the Holders, such prospectus shall not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, each Holder will forthwith discontinue disposition of Registrable Securities pursuant to the registration statement contemplated by Section 5.2 until its receipt of copies of the supplemented or amended prospectus from the Company and, if so directed by the Company, each Holder shall deliver to the Company all copies, other than permanent file copies then in such Holder's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice.

(b) Each Holder shall suspend, upon request of the Company, any disposition of Registrable Securities pursuant to the Registration Statement and prospectus contemplated by Section 5.2 during (i) any period not to exceed two 30-day periods within any one 12-month period the Company requires in connection with a primary underwritten offering of equity securities and (ii) any period, not to exceed one 30-day period per circumstance or development, when the Company determines in good faith that offers and sales pursuant thereto should not be made by reason of the presence of material undisclosed circumstances or developments with respect to which the disclosure that would be required in such a prospectus is premature, would have an adverse effect on the Company or is otherwise inadvisable.

(c) As a condition to the inclusion of its Registrable Securities, each Holder shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the

Company may request in writing or as shall be required in connection with any registration, qualification or compliance referred to in this Article V.

(d) At the end of the Registration Period the Holders shall discontinue sales of shares pursuant to such Registration Statement upon receipt of notice from the Company of its intention to remove from registration the shares covered by such Registration Statement which remain unsold, and such Holders shall notify the Company of the number of shares registered which remain unsold immediately upon receipt of such notice from the Company.

5.8 With a view to making available to the Holders the benefits of certain rules and regulations of the SEC which at any time permit the sale of the Registrable Securities to the public without registration, the Company shall use its reasonable best efforts to:

(a) make and keep public information available, as those terms are understood and defined in Rule 144 under the Act, at all times;

(b) file with the SEC in a timely manner all reports and other documents required of the Company under the Exchange Act; and

(c) so long as a Holder owns any unregistered Registrable Securities, furnish to such Holder, upon any reasonable request, a written statement by the Company as to its compliance with Rule 144 under the Act, and of the Exchange Act, a copy of the most recent annual or quarterly report of the Company, all necessary opinion letters that may be requested by the Transfer Agent and such other reports and documents of the Company as such Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing a Holder to sell any such securities without registration.

(d) at the request of any Investor, give its Transfer Agent instructions (supported by an opinion of Company counsel, if required or requested by the Transfer Agent) to the effect that, upon the Transfer Agent's receipt from such Investor of:

(i): a certificate (a "Rule 144 Certificate") certifying (A) that such Investor has held the shares of Registrable Securities which the Investor proposes to sell (the "Securities Being Sold") for a period of not less than (1) year and (B) as to such other matters as may be appropriate in accordance with Rule 144 under the Securities Act, and (B) an opinion of Investor's counsel, acceptable to the Company, that, based on the Rule 144 Certificate, the Securities Being Sold may be sold pursuant to the provisions of Rule 144, even in the absence of an effective Registration Statement, the Transfer Agent is to effect the transfer of the Securities Being Sold and issue to the buyer(s) or transferee(s) thereof one or more stock certificates representing the transferred Securities Being Sold without any restrictive legend and without recording any restrictions on the transferability of such shares on the Transfer Agent's books and records (except to the extent any such legend or restriction results from facts other than the identity of the Investor, as the seller or transferor thereof, or the status, including any relevant legends or restrictions, of the shares of the Securities Being Sold while held by the Investor). If the Transfer Agent requires any additional documentation at the time of the transfer, the Company shall deliver or cause to be delivered all such reasonable additional documentation as may be necessary to effectuate the issuance of an unlegended certificate.

5.9 The rights to cause the Company to register Registrable Securities granted to the Holders by the Company under Section 5.2 may be assigned in full by a Holder in connection with a transfer by such Holder of its Registrable Securities, provided, however, that (i) such transfer may otherwise be effected in accordance with applicable securities laws; (ii) such Holder gives prior written notice to the Company; and (iii) such transferee agrees to comply with the terms and provisions of this Agreement, and such transfer is otherwise in compliance with this Agreement. Except as specifically permitted by this Section 5.9, the rights of a Holder with respect to Registrable Securities as set out herein shall not be transferable to any other Person.

5.10 With the written consent of the Company and the Holders holding at least a majority of the Registrable Securities that are then outstanding, any provision of this Article V may be waived (either generally or in a particular instance, either retroactively or prospectively and either for a specified period of time or indefinitely) or amended. Upon the effectuation of each such waiver or amendment, the Company shall promptly give written notice thereof to the Holders, if any, who have not previously received notice thereof or consented thereto in writing.

5.11 Delay in Filing or Effectiveness of Registration Statement.

(a) The Company shall use its best efforts to ensure that a registration statement (the "Registration Statement") is filed on or before Filing Date as defined in Section 5.2, above (which date is referred to herein as the "Registration Filing Deadline"). The Registration Statement will include for resale by the Holders in accordance with the plan of distribution set forth therein the Common Stock included within the units and the Common Stock underlying the Warrants (the "Registrable Securities"), but not the Warrants themselves. In the event the Registration Statement covering this offering is not filed on or before the Registration Filing Deadline, the Company shall pay the Investor, as liquidated damages, 2% of the purchase price of the units for every 30 calendar day period that the Registration Statement is not filed. No payment shall be required if the delay is ten days or less; the liquidated damages will be 1% if the delay is more than ten days but not more than twenty days.

(b) The Company shall use its best efforts to cause such Registration Statement to become effective on or before ninety calendar days following the Filing Date. In the event the Registration Statement is not declared effective within ninety (90) calendar days following the Registration Filing Deadline (unless the delay was caused by the failure of any person named in the Registration Statement as a selling securityholder to provide the Company with information regarding the selling securityholder necessary to be included therein or to agree to a customary cross indemnification agreement), the Company shall pay the Investor, as liquidated damages, 2% of the purchase price of the units for every 30 calendar day period, or portion thereof, that the registration statement is not declared effective. No payment shall be required if the delay is ten days or less; the liquidated damages will be 1% if the delay is more than ten days but not more than twenty days. Any liquidated damages shall be paid in cash or freely trading common stock at the Company's option, and such damages shall continue until the obligation is fulfilled, subject to a maximum of 12 months from the Closing Date.

The Company shall respond to all SEC comments promptly, and will keep Park Capital Securities, LLC, vFinance, Inc. or their counsel advised with respect to the SEC's review of the Registration Statement. The Company shall cause the Registration Statement relating to the Registrable Securities to become effective no later than three (3) business days after notice from the SEC that the Registration Statement may be declared effective.

(c) The Company shall bear registration expenses of the Registration Statement and its counsel shall prepare and file the Registration Statement. Park Capital Securities, LLC, vFinance, Inc. and any other person for whom Registrable Securities are included in the Registration Statement will bear their own expenses. Each such person will also provide the Company with information regarding "Selling Securityholders" and "Plan of Distribution" and other information required to be included about them, their stock and Warrant ownership, and otherwise that is necessary to be included in the Registration Statement. Park Capital Securities, LLC and vFinance, Inc. understand that they and persons associated with them will likely be considered to be underwriters by the SEC and the SEC will likely require this disclosure in the Registration Statement.

ARTICLE VI
INDEMNIFICATION

In consideration of each Investor's execution and delivery of this Agreement and its acquisition of the Securities hereunder, and in addition to all of the Company's other obligations under this Agreement, the Company will indemnify and hold harmless each Investor and each other holder of the Securities and all of their stockholders, officers, directors, employees and direct or indirect investors and any of the foregoing person's agents or other representatives (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Indemnitees") from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (regardless of whether any such Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "Indemnified Liabilities"), incurred by an Indemnitee as a result of, or arising out of, or relating to (a) any breach of any representation or warranty made by the Company herein or in any other certificate, instrument or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained herein or in any other certificate, instrument or document contemplated hereby or thereby or (c) any cause of action, suit or claim brought or made against such Indemnitee and arising out of or resulting from the execution, delivery, performance, breach or enforcement of this Agreement by the Company. To the extent that the foregoing

undertaking by the Company is unenforceable for any reason, the Company will make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities that is permissible under applicable law.

ARTICLE VII
DEFINITIONS

7.1 "Closing" means the closing of the purchase and sale of the Securities under this Agreement.

7.2 "Closing Date" has the meaning set forth in Section 1.3.

7.3 "Common Stock" means the common stock, no par value per share, of the Company.

7.4 "Company" means Isonics Corporation.

7.5 "Exchange Act" means the Securities Exchange Act of 1934, as amended.

7.6 "Indemnified Liabilities" has the meaning set forth in Article VI.

7.7 "Indemnitees" has the meaning set forth in Article VI.

7.8 "Investors" means the investors whose names are set forth on the signature pages of this Agreement, and their permitted transferees.

7.9 "Material Adverse Effect" means a material adverse effect on (a) the business, operations, assets or financial condition of the Company or (b) the ability of the Company to perform its obligations pursuant to the transactions contemplated by this Agreement or under any instruments to be entered into or filed in connection herewith.

7.10 "Nasdaq" means the Nasdaq National Market System.

7.11 "Rule 144" means Rule 144 promulgated under the Securities Act, or any successor rule.

7.12 "SEC" means the United States Securities and Exchange Commission.

7.13 "SEC Documents" has the meaning set forth in Section 3.6.

7.14 "Securities" means the Common Stock and Warrants sold pursuant to this Agreement.

7.15 "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute.

ARTICLE VIII
GOVERNING LAW; MISCELLANEOUS

8.1 Governing Law; Jurisdiction. This Agreement will be governed by and interpreted in accordance with the laws of the State of New York without regard to the principles of conflict of laws. The parties hereto hereby submit to the exclusive jurisdiction of the United States federal and state courts located in the State of New York with respect to any dispute arising under this Agreement or the transactions contemplated hereby or thereby. The Investor and the Company hereby knowingly, voluntarily and intentionally waive any rights they may have to a trial by jury in respect of any litigation based hereon, or arising out of, under, or in connection with, this Agreement, or any course of conduct, course of dealing, statements (whether oral or written) or actions of the Investor or the Company. The Company acknowledges and agrees that it has received full and sufficient consideration for this provision and that this provision is a material inducement for the Investor entering into this Agreement.

8.2 Counterparts; Signatures by Facsimile. This Agreement may be executed in two or more counterparts, all of which are considered one and the same agreement and will become effective when counterparts have been signed by each party and delivered to the other parties. This Agreement, once executed by a party, may be delivered to the other parties hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.

8.3 Headings. The headings of this Agreement are for convenience of reference only, are not part of this Agreement and do not affect its interpretation.

8.4 Severability. If any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision will be deemed modified in order to conform with such statute or rule of law.

Any provision hereof that may prove invalid or unenforceable under any law will not affect the validity or enforceability of any other provision hereof.

8.5 Entire Agreement; Amendments. This Agreement (including all schedules and exhibits hereto) constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement.

8.6 Notices. Any notices required or permitted to be given under the terms of this Agreement must be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) and will be effective five days after being placed in the mail, if mailed by regular U.S. mail, or upon receipt, if delivered personally, or by courier (including a recognized overnight delivery service), in each case addressed to a party. The addresses for such communications are:

If to the Company:		James E. Alexander, President Isonics Corporation 5906 McIntyre Street Golden, CO 80403 (P) 303 279-7900 (F) 303-279-7300
With a copy to:		Herrick K. Lidstone, Jr., Esq. Burns, Figa & Will, P.C. 6400 South Fiddler's Green Circle Suite 1030 Englewood, CO 80111 (P) 303-796-2626 (F) 720-493-9951

If to an Investor: To the address set forth immediately below such Investor's name on the signature pages hereto.

Each party will provide written notice to the other parties of any change in its address.

8.7 Successors and Assigns. This Agreement is binding upon and inures to the benefit of the parties and their successors and assigns. The Company will not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Investors, and no Investor may assign this Agreement or any rights or obligations hereunder without the prior written consent of the Company. Notwithstanding the foregoing, an Investor may assign all or part of its rights and obligations hereunder to any of its "affiliates," as that term is defined under the Securities Act, without the consent of the Company so long as the affiliate is an accredited investor as defined in Section 2(a)(15) and Rule 215 of the Securities Act) and agrees in writing to be bound by this Agreement. This provision does not limit the Investor's right to transfer the Securities pursuant to the terms of this Agreement or to assign the Investor's rights hereunder to any such transferee pursuant to the terms of this Agreement.

8.8 Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

8.9 Further Assurances. Each party will do and perform, or cause to be done and performed, all such further acts and things, and will execute and deliver all other agreements, certificates, instruments and documents, as another party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

8.10 No Strict Construction. The language used in this Agreement is deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

8.11 Equitable Relief. The Company recognizes that, if it fails to perform or discharge any of its obligations under this Agreement, any remedy at law may prove to be inadequate relief to the Investors. The Company

therefore agrees that the Investors are entitled to seek temporary and permanent injunctive relief in any such case.

[BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK.]

IN WITNESS WHEREOF, the undersigned Investors and the Company have caused this Agreement to be duly executed as of the date first above written.

		COMPANY:
		ISONICS CORPORATION
		By:

OMNIBUS SIGNATURE PAGE TO
ISONICS CORPORATION
SECURITIES PURCHASE AGREEMENT

The undersigned hereby executes and delivers the Securities Purchase Agreement to which this signature page is attached, which, together with all counterparts of the Agreement and signature pages of the other parties named in said Agreement, shall constitute one and the same document in accordance with the terms of the Agreement.


		Sign Name:
		Print Name (and title if applicable):
		Date:
		Address:


		Telephone:
		Facsimile:
		Dollar Amount:
		Number of Units Purchased at $4.00 each:

Exhibit A

Wire Transfer Instructions

Intentionally Omitted

Exhibit B

Investor Questionnaire

Intentionally Omitted

Exhibit C

Form of Warrant Agreement

Intentionally Omitted (see exhibit 10.11)

Exhibit D

Risk Factors

Intentionally Omitted

Schedule of Exceptions

Schedule 3.3		None
Schedule 3.7		None
Schedule 3.8		None

QuickLinks

Exhibit 10.10

Form of SECURITIES PURCHASE AGREEMENT
RECITALS
ARTICLE I PURCHASE AND SALE OF SECURITIES
ARTICLE II INVESTOR'S REPRESENTATIONS AND WARRANTIES
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY
ARTICLE IV COVENANTS
ARTICLE V REGISTRATION RIGHTS
ARTICLE VI INDEMNIFICATION
ARTICLE VII DEFINITIONS
ARTICLE VIII GOVERNING LAW; MISCELLANEOUS
OMNIBUS SIGNATURE PAGE TO ISONICS CORPORATION SECURITIES PURCHASE AGREEMENT
EX-10.11 5 a2121147zex-10_11.htm EX-10.11
QuickLinks -- Click here to rapidly navigate through this document

Form of WARRANT AGREEMENT

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE EXERCISED, SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES OR AN OPINION OF COUNSEL OR OTHER EVIDENCE ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

ISONICS CORPORATION

COMMON STOCK PURCHASE WARRANT

1. Issuance; Certain Definitions. In consideration of good and valuable consideration, the receipt of which is hereby acknowledged by ISONICS CORPORATION, a California corporation (the "Company"), or registered assigns (the "Holder") is hereby granted the right to purchase at any time until 5:00 P.M., New York City time, on December 31, 2005 (the "Expiration Date"), ( ) fully paid and nonassessable shares of the Company's Common Stock, no par value per share (the "Common Stock"), at an initial exercise price per share (the "Exercise Price") of $1.25 per share, subject to further adjustment as set forth herein.

2. Exercise of Warrants. This Warrant is exercisable in whole or in part at any time and from time to time, prior to the earlier of the Expiration Date and the date fixed for redemption under Section 8(a), below. Such exercise shall be effectuated by submitting to the Company (either by delivery to the Company or by facsimile transmission as provided in Section 8 hereof) a completed and duly executed Notice of Exercise (substantially in the form attached to this Warrant) as provided in this paragraph. The date such Notice of Exercise is faxed or delivered to the Company shall be the "Exercise Date," provided that the Holder of this Warrant tenders this Warrant to the Company within five business days thereafter.

(a) The Notice of Exercise shall be executed by the Holder of this Warrant and shall indicate the number of shares then being purchased pursuant to such exercise. Upon surrender of this Warrant, together with appropriate payment of the Exercise Price for the shares of Common Stock purchased, the Holder shall be entitled to receive a certificate or certificates for the shares of Common Stock so purchased.

(b) The Holder must pay the Exercise Price per share of Common Stock for the shares then being exercised in cash or by certified or official bank check.

3. Reservation of Shares. The Company hereby agrees that at all times during the term of this Warrant there shall be reserved for issuance upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance upon exercise of this Warrant (the "Warrant Shares").

4. Mutilation or Loss of Warrant. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) receipt of reasonably satisfactory indemnification, and (in the case of mutilation) upon surrender and cancellation of this Warrant, the Company will execute and deliver a new Warrant of like tenor and date and any such lost, stolen, destroyed or mutilated Warrant shall thereupon become void.

5. Rights of the Holder. The Holder shall not, by virtue hereof, be entitled to any rights of a stockholder in the Company, either at law or equity. The rights of the Holder are limited to those expressed in this Warrant and are not enforceable against the Company except to the extent set forth herein.

6. Protection Against Dilution and Other Adjustments.

6.1 Adjustment Mechanism. If an adjustment of the Exercise Price is required pursuant to Section 6.2, the Holder shall be entitled to purchase such number of additional shares of Common Stock as will cause (i) the total number of shares of Common Stock that the Holder is entitled to purchase pursuant to this Warrant, multiplied by (ii) the adjusted Exercise Price per share, to equal (iii) the dollar amount of the total number of shares of Common Stock that the Holder is entitled to purchase before adjustment multiplied by the total Exercise Price before adjustment.

6.2 Capital Adjustments. In case of any stock split or reverse stock split, stock dividend, reclassification of the Common Stock, recapitalization, merger or consolidation, or like capital adjustment affecting the Common Stock of the Company, the provisions of this Section 6 shall be applied as if such capital adjustment event had occurred immediately prior to the date of this Warrant and the original Exercise Price had been fairly allocated to the stock resulting from such capital adjustment. Where the terms of the preceding sentence are not directly applicable, the board of directors of the Company will apply this Section in a fair, equitable and reasonable manner so as to give effect, as nearly as may be, to the purposes hereof. A rights

offering to stockholders shall be deemed a stock dividend to the extent of the bargain purchase element of the rights.

6.3 Adjustment for Spin Off. If, for any reason, prior to the exercise of this Warrant in full, the Company spins off or otherwise divests itself of a part of its business or operations or disposes all or of a part of its assets in a transaction (the "Spin Off") in which the Company does not receive compensation for such business, operations or assets, but causes securities of another entity (the "Spin Off Securities") to be issued to security holders of the Company, then

(a) the Company shall cause (i) to be reserved Spin Off Securities equal to the number thereof which would have been issued to the Holder had all of the Holder's unexercised Warrants outstanding on the record date (the "Record Date") for determining the amount and number of Spin Off Securities to be issued to security holders of the Company (the "Outstanding Warrants") been exercised as of the close of business on the trading day immediately before the Record Date (the "Reserved Spin Off Shares"), and (ii) to be issued to the Holder on the exercise of all or any of the Outstanding Warrants, such amount of the Reserved Spin Off Shares equal to (x) the Reserved Spin Off Shares multiplied by (y) a fraction, of which (I) the numerator is the amount of the Outstanding Warrants then being exercised, and (II) the denominator is the amount of the Outstanding Warrants; and

(b) the Exercise Price on the Outstanding Warrants shall be adjusted immediately after consummation of the Spin Off by multiplying the Exercise Price by a fraction (if, but only if, such fraction is less than 1.0), the numerator of which is the numerator of which is the Average Market Price of the Common Stock for the five (5) trading days immediately following the fifth trading day after the Record Date, and the denominator of which is the Average Market Price of the Common Stock on the five (5) trading days immediately following the fifth trading day after the Record Date, and the denominator of which is the Average Market Price of the Common Stock on the five (5) trading days immediately preceding the Record Date; and such adjusted Exercise Price shall be deemed to be the Exercise Price with respect to the Outstanding Warrants after the Record Date.

7. Exercise and Transfer to Comply with the Securities Act; Registration Rights.

7.1 Exercise and Transfer. This Warrant has not been registered under the Securities Act of 1933, as amended, (the "Act") and has been issued to the Holder for investment and not with a view to the distribution of either the Warrant or the Warrant Shares. This Warrant may not be exercised, and neither this Warrant nor any of the Warrant Shares or any other security issued or issuable upon exercise of this Warrant may be sold, transferred, pledged or hypothecated in the absence of an effective registration statement under the Act relating to such security or an opinion of counsel satisfactory to the Company that registration is not required under the Act. Each certificate for the Warrant, the Warrant Shares and any other security issued or issuable upon exercise of this Warrant shall contain a legend on the face thereof, in form and substance satisfactory to counsel for the Company, setting forth the restrictions on transfer contained in this Section 7.

7.2 Registration Rights. Reference is made to Article V of the Securities Purchase Agreement between the Holder and the Company pursuant to which this Warrant was issued. The Company's obligations under said Article V and the other terms and conditions thereof are incorporated herein by reference.

8. Redemption. (a) The Company may redeem this Warrant at its option at a redemption price of $0.10 per Warrant, at any time during the term of this Warrant, provided that the Redemption Threshold shall have equaled or exceeded $3.75 per share for at least twenty of the thirty consecutive trading days ending not later than the third day prior to the date on which the Notice of Redemption, as defined below, is given (subject to adjustment in the event of any stock splits or other similar events). Notice of redemption (the "Notice of Redemption") shall be given not later than the 30^th day before the date fixed for redemption. On and after the date fixed for redemption, the Holder shall have no rights with respect to the Warrants except to receive the $0.10 per Warrant upon surrender of this Warrant agreement. After Notice of Redemption is received by the Holder, but prior to the date fixed for redemption, the Holder may still exercise this Warrant.

(b) For the purposes of Section 8(a), the term "Redemption Threshold" shall mean: (i) the last reported closing sale price for the Common Stock as officially reported by the Nasdaq SmallCap Market, if the Common Stock is then traded on the Nasdaq SmallCap Market; or (ii) the last reported closing sale price on the Nasdaq National Market or a national securities exchange, if the Common Stock is then traded on the Nasdaq National Market or a national securities exchange, in each case as officially reported by the Nasdaq National Market or such national securities exchange; or (iii) if the Common Stock is not then traded on the

Nasdaq SmallCap Market, the Nasdaq National Market or a national securities exchange, but is then traded in the over-the-counter market, then the average of the last reported bid and asked prices of the Common Stock reported by the National Quotation Bureau, Inc. or similar bureau if the National Quotation Bureau, Inc. is no longer reporting such information.

9. Notices. Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission or sent by certified, registered or express mail, postage pre-paid. Any such notice shall be deemed given when so delivered personally, telegraphed, telexed or sent by facsimile transmission, or, if mailed, two days after the date of deposit in the United States mails, as follows:

(i): if to the Company, to:

Isonics Corporation
5906 McIntyre Street
Golden,Colorado 80403
Attn: James E. Alexander, President
Telephone No.: (303) 279-7900
Telecopier No.: (303) 279-7300

(ii): if to the Holder, to the address set below the Holder's acceptance on page 4, below.

Any party may be notice given in accordance with this Section 8 if any of the parties designates another address or person for receipt of notices hereunder.

10. Supplements and Amendments; Whole Agreement. This Warrant may be amended or supplemented only by an instrument in writing signed by the parties hereto. This Warrant contains the full understanding of the parties hereto with respect to the subject matter hereof and thereof and there are no representations, warranties, agreements or understandings other than expressly contained herein and therein.

11. Governing Law. This Warrant shall be deemed to be a contract made under the laws of the State of New York for contracts to be wholly performed in such state and without giving effect to the principles thereof regarding the conflict of laws. Each of the parties consents to the jurisdiction of the federal courts whose districts encompass any part of the City of New York, New York, or the state courts of the State of New York sitting in the City of New York, in connection with any dispute arising under this Warrant. Each of the parties hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions.

12. Jury Trial Waiver. The Company and the Holder hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other in respect of any matter arising out or in connection with this Warrant.

13. Counterparts. This Warrant may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.

14. Descriptive Headings. Descriptive headings of the several Sections of this Warrant are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof.

IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of the day of , 2003.

		ISONICS CORPORATION
		By:

Acceptance by Holder

The undersigned hereby accepts the Warrants described in the foregoing Warrant agreement in accordance with the terms of the foregoing Warrant agreement and in accordance with the terms of the Securities Purchase Agreement between the undersigned and Isonics Corporation.

		September , 2003
Name:
Address:



Telephone:
Facsimile:
Social Security or FEIN number:

(if joint ownership, both parties must sign and provide the relevant information)

NOTICE OF EXERCISE OF WARRANT

The undersigned hereby irrevocably elects to exercise the right, represented by the Warrant dated as of , , to purchase shares of the Common Stock, no par value, of ISONICS CORPORATION and tenders herewith payment in accordance with Section 1 of said Common Stock Purchase Warrant.

— CASH: $ = (Exercise Price × Exercise Shares)

Payment is being made by:

—: enclosed check
—: wire transfer
—: other

I understand that I may only exercise this Warrant if there is a registration statement relating to the exercise of this Warrant that is effective under federal and applicable state law, or alternatively if there is an exemption from registration available under federal and applicable state (which exemption must be established to the satisfaction of Isonics). In each case, I understand that Isonics may require that I provide it information regarding my financial status, state of residence, and other information necessary to determine whether the exercise is subject to an effective registration statement or to determine whether an applicable exemption is available.

Please deliver the stock certificate to:

Dated:

[Name of Holder]

By:

QuickLinks

Form of WARRANT AGREEMENT
NOTICE OF EXERCISE OF WARRANT
EX-10.12 6 a2121147zex-10_12.htm EX-10.12
QuickLinks -- Click here to rapidly navigate through this document

Exhibit 10.12

PLACEMENT AGENT AGREEMENT

THIS PLACEMENT AGENT AGREEMENT is made and entered into as of this 23 day of September, 2003, by and between Park Capital Securities, LLC with an office at 216 East 45^th Street, 9^TH Floor, New York, NY 10017 ("Park Capital"), vFinance, Inc. with an office at 3010 North Military Trail, Suite 300, Boca Raton, FL 33431 ("vFinance") and Isonics Corporation with an office at 5906 McIntyre Street, Golden, CO 80403 (the "Company"). Park Capital and vFinance are collectively referred to as "Placement Agents".

WHEREAS, the proposed private placement offering (the "Offering") of the Company's securities is being made under Section 4(6) of the Securities Act of 1933, as amended (the "Act") pursuant to the terms more fully set forth on Exhibit A. This Placement Agent Agreement (the "Agreement") sets forth the mutual agreements and understandings between the Company and the Placement Agents relating to the Offering.

NOW THEREFORE, in consideration of the mutual promises made herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

1. The Placement Agents, NASD member broker-dealers, will introduce the Company to "accredited investors" as defined in Section 2(a)(15) of the Act and Rule 215 promulgated under the Act for the purchase of units for a minimum of $250,000 (the "Minimum Offering Amount") and a maximum of $1,200,000 (the "Maximum Offering Amount"). The units consisting of five (5) shares of Common Stock and three (3) Warrants will be offered at $4.00 per unit and will be offered and sold pursuant to the terms more fully set forth on Exhibit A, attached hereto and made a part hereof.

2. The sale of Securities (the "Offering") will be made in a private placement through the Placement Agents on a "best efforts" basis pursuant to a Securities Purchase Agreement and all supplements, amendments and exhibits thereto, all of which constitute an integral part thereof, in accordance with Section 4(6) of the Act and the regulations promulgated thereunder. The Placement Agents further acknowledge that in connection with the Offering, they are not authorized to, and agree not to, provide any information or make any representation to any potential purchaser of securities other than as set forth in the Securities Purchase Agreement and the related Offering documents.

3. At any time after receipt of subscriptions for at least the Minimum Offering Amount the Company may accept such subscriptions from each of the investors and may conduct a closing (a "Closing") (the date of any such Closing a "Closing Date"). Following receipt of the Minimum Offering Amount the Company may conduct additional Closings until such time as the Company has received up to the Maximum Offering Amount. Certificates representing shares of the Common Stock and Warrants shall be delivered to the investors no later than ten (10) calendar days after the Closing Date.

4. The Company agrees that following execution of the Securities Purchase Agreements, the Park Capital Investors or vFinance Investors, as the case may be, (as defined below in Section 6 hereof) shall be entitled to the registration rights described in the Securities Purchase Agreement.

5. The Company has paid $2,500 and has (upon breaking escrow of $250,000 in gross subscription proceeds) agreed to pay an additional $5,000 to Park Capital's counsel for all legal fees and costs of Park Capital directly and necessarily incurred in connection with the proposed Offering, including but not limited to, the costs of preparing and printing the Securities Purchase Agreement, review of any Registration Statement and amendments, post-effective amendments and supplements thereto, if any; preparing, printing and delivering all selling documents, including but not limited to this Agreement, stock and warrant certificates; blue sky fees (for New York and two additional states), filing fees and legal fees and disbursements of Park Capital's counsel. Park Capital will bear any and all other expenses it may incur in connection with this Offering ("Park's Expenses"). The Company will bear its own expenses incurred in connection with this offering, including those expenses associated with any Registration Statement and amendments, post-effective amendments and supplements thereto, if any; preparing, printing and delivering exhibits thereto and copies of the preliminary, final and supplemental prospectus (collectively, the "Company Expenses").

6. (a) Upon the Closing of each investment (as defined below) in the Offering, by an investor first introduced to the Company by Park Capital (the "Park Capital Investors"), Park Capital will receive cash commissions equal to 10% of the aggregate value of such investment.

(b) Upon the Closing of each investment (as defined below) in the Offering, by an investor first introduced to the Company by vFinance (the "vFinance Investors"), vFinance will receive cash commissions equal to 10% of the aggregate value of such investment.

7. Unless required by law, any services and advice rendered by the Placement Agents pursuant to this Agreement (and the existence of this Agreement) shall not be disclosed publicly in any manner without their prior written approval and shall be treated by the Company as confidential information except as otherwise provided in paragraph 14, below. The Company shall not use the name of Park Capital or vFinance, or any officer, director, employee or shareholder thereof in any press release regarding the Offering without the express written permission of Park Capital or vFinance, as the case may be. All material non-public information given to the Placement Agents by the Company shall be treated by the Placement Agents as confidential information and shall not be used by the Placement Agents except in rendering its services pursuant to this Agreement. The Company will use its best efforts to clearly delineate to the Placement Agents any such information.

8. The Placement Agents reserve the right to conduct legal, business and financial due diligence of the Company to the extent that the Placement Agents, in their sole discretion, deem it necessary and appropriate.

9. (a) The Company agrees to indemnify each of the Placement Agents, the directors, officers, employees, shareholders, its attorneys, controlling persons under the Act, affiliates and agents thereof (each a "Placement Agent Indemnitee," together, the "Placement Agent Indemnitees"), pay on demand and protect, defend, save and hold each Placement Agent Indemnitee harmless from and against any and all liabilities, damages, losses, settlements, claims, actions, suits, penalties, fines, costs or expenses (and all actions in respect thereof) (including, without limitation, reasonable attorneys' fees and related expenses)

(A) incurred by or asserted against any Placement Agent Indemnitee of whatever kind or nature, arising from, in connection with or occurring as a result of, this Agreement or the matters contemplated by this Agreement, including without limitation, (i) the engagement of the Placement Agents pursuant to this Agreement or any other related agreement, including any modifications or future additions to such engagement and related activities prior to the date hereof, (ii) any act by the Placement Agents or any Placement Agent Indemnitee taken in good faith in connection with this Agreement or the transactions contemplated therein (including, without limitation, the purchase of securities of the Company) except to the extent any such act results from the negligence or willful misconduct of the Placement Agents, (iii) a breach of any representation, warranty, covenant, or agreement of the Company contained in this Agreement, the Securities Purchase Agreement or any of the other documents utilized in connection with the Offering, (iv) the employment by the Company or by any person affiliated, associated, or otherwise related to, retained by, or working under the direction of the Company (not including any person who may be an indemnitor under paragraph 9(b), below) of any device, scheme or artifice to defraud, or the engaging by the Company or by any person affiliated, associated, or otherwise related to, retained by, or working under the direction of the Company in any act, practice or course of business which operates or would operate as a fraud or deceit, or any conspiracy with respect thereto, in connection with the Offering, or (v) any untrue statement or alleged untrue statement of a material fact contained in any of the documents used in connection with or otherwise related to the Offering or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading unless as a result of the negligence or willful misconduct of the Placement Agents.

(B) The Company further agrees that it will not, without the prior written consent of the Placement Agents, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not the Placement Agents or any Placement Agent Indemnitee is an actual or potential party to such claim, action, suit or proceeding) unless such settlement, compromise or consent (i) includes an unconditional release of the Placement Agents and each other Placement Agent Indemnitee hereunder from all liability arising out of such claim, action, suit or proceeding, (ii) does not include any finding, concession, evidence or admission of any liability, wrongdoing of any nature, violation of any law, rule, regulation or the rights of any person or entity, which could be used in any way as, or deemed to be evidence of, an admission or concession that any person has or has not suffered any damage, and (iii) does not include any other term or condition that could be detrimental to, injure or adversely affect the business or reputation of a Placement Agent Indemnitee.

(b) Park Capital and vFinance, as may be applicable, severally and not jointly, agree to indemnify each of the Company, the directors, officers, employees, shareholders, its attorneys, controlling persons under the Act, affiliates and agents thereof (each a "Company Indemnitee," together, the "Company Indemnitees"), pay on demand and protect, defend, save and hold each Company Indemnitee harmless from and against any and all

liabilities, damages, losses, settlements, claims, actions, suits, penalties, fines, costs or expenses (and all actions in respect thereof) (including, without limitation, reasonable attorneys' fees and related expenses)

(A) incurred by or asserted against any Company Indemnitee of whatever kind or nature, arising from, in connection with or occurring as a result of, this Agreement or the matters contemplated by this Agreement, including without limitation, (i) any act by Park Capital or vFinance or any person affiliated, associated, or otherwise related to, retained by, or working under the direction of Park Capital or vFinance, taken in good faith in connection with this Agreement or the transactions contemplated therein (including, without limitation, the purchase of securities of the Company) which liability results from the negligence or willful misconduct of Park Capital or vFinance or of any person affiliated, associated, or otherwise related to, retained by, or working under the direction of Park Capital or vFinance, (ii) a breach of any representation, warranty, covenant, or agreement of Park Capital or vFinance contained in this Agreement, the Securities Purchase Agreement or any of the other documents utilized in connection with the Offering, (iii) the employment by Park Capital or vFinance or by any person affiliated, associated, or otherwise related to, retained by, or working under the direction of Park Capital or vFinance of any device, scheme or artifice to defraud, or the engaging by Park Capital or vFinance or by any person affiliated, associated, or otherwise related to, retained by, or working under the direction of Park Capital or vFinance in any act, practice or course of business which operates or would operate as a fraud or deceit, or any conspiracy with respect thereto, in connection with the Offering, or (v) any untrue statement or alleged untrue statement of a material fact contained in any of the documents used in connection with or otherwise related to the Offering or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading to the extent such information was provided to the Company by Park Capital or vFinance for use in the Securities Purchase Agreement.

(B) Park Capital and vFinance each further agree that they will not, without the prior written consent of the Company, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not the Company or any Company Indemnitee is an actual or potential party to such claim, action, suit or proceeding) unless such settlement, compromise or consent (i) includes an unconditional release of the Company and each other Company Indemnitee hereunder from all liability arising out of such claim, action, suit or proceeding, (ii) does not include any finding, concession, evidence or admission of any liability, wrongdoing of any nature, violation of any law, rule, regulation or the rights of any person or entity, which could be used in any way as, or deemed to be evidence of, an admission or concession that any person has or has not suffered any damage, and (iii) does not include any other term or condition that could be detrimental to, injure or adversely affect the business or reputation of a Company Indemnitee.

(c) Promptly upon receipt by any Indemnitee (which term includes a Placement Agent Indemnitee or a Company Indemnitee, as the context may require) of notice of any complaint or the assertion or institution of any claim with respect to which indemnification is being sought hereunder, such Indemnitee shall notify the Company and the Placement Agents in writing of such complaint or of such assertion or institution, but failure to so notify the Company or the Placement Agents shall not relieve the appropriate party from any obligation such party may have hereunder, unless, and only to the extent that, such failure results in the forfeiture by such party of substantial rights and defenses, and such failure to so notify the Company or the Placement Agents will not in any event relieve the Company or the Placement Agents (as appropriate) from any other obligation or liability the Company or the Placement Agents may have to any Indemnitee otherwise than under this Agreement. If the Company or the Placement Agents (as appropriate) so elect or are requested by such Indemnitee, the Company or the Placement Agents (as appropriate) will assume the defense of such claim, including the employment of counsel reasonably satisfactory to such Indemnitee and the payment of the fees and expenses of such counsel. In the event, however, that such Indemnitee reasonably determines in its sole judgment that having common counsel would present such counsel with a conflict of interest or such Indemnitee concludes that there may be legal defenses available to it or other Indemnitees that are different from or in addition to those available to the Company or the Placement Agents (as appropriate), then such Indemnitee may employ its own separate counsel to represent or defend it in any such claim and the Company or the Placement Agents (as appropriate) shall pay the reasonable fees and expenses of such counsel. Notwithstanding anything herein to the contrary, if the Company or the Placement Agents (as appropriate) fail timely or diligently to defend, contest, or otherwise protect against any claim, the relevant Indemnitee shall have the right, but not the obligation, to defend, contest, compromise, settle, assert crossclaims or counterclaims, or otherwise protect against the same, and shall be fully indemnified by the Company or the Placement Agents (as appropriate) therefor, including, but not limited to, for

the fees and expenses of its counsel and all amounts paid as a result of such claim or the compromise or settlement thereof. In any claim in which the Company or the Placement Agents (as appropriate) assume the defense, the Indemnitee shall have the right to participate in such defense and to retain its own counsel therefor at its own expense.

(d) To the extent any indemnification pursuant to the preceding paragraphs (or any of them) is prohibited or limited by law, the Company and the Placement Agents (as appropriate) agree to make the maximum contribution with respect to any amounts for which it would otherwise be liable under this Section 9 to the fullest extent permitted by law.

(e) (A) If (i) Park Capital or vFinance, other than by reason of their negligence or willful misconduct, becomes involved in any capacity in any action, proceeding or investigation brought by any shareholder of the Company, in connection with or as a result of the consummation of the transactions contemplated by this Agreement, or if Park Capital or vFinance are impleaded in any such action, proceeding or investigation by any person, or (ii) Park Capital or vFinance, other than by reason of their negligence or willful misconduct, becomes involved in any capacity in any action, proceeding or investigation brought by the Securities and Exchange Commission ("SEC") against or involving the Company or in connection with or as a result of the consummation of the transactions contemplated by this Agreement, or if Park Capital is impleaded in any such action, proceeding or investigation by any person, then in any such case, the Company will reimburse Park Capital and/or vFinance, as the case may be, for their reasonable legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith, as such expenses are incurred. The reimbursement obligations of the Company under this section shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any affiliates of Park Capital and/or vFinance, as the case may be, that are actually named in such action, proceeding or investigation, and partners, directors, agents, employees, attorneys, accountants, auditors and controlling persons (if any), of Park Capital and/or vFinance, as the case may be, and any such affiliate, and shall be binding upon and inure to the benefit of any successors of the Company, Park Capital and/or vFinance and any such affiliate and any such person.

(B) If (i) the Company, other than by reason of its negligence or willful misconduct, becomes involved in any capacity in any action, proceeding or investigation brought by any shareholder or affiliate of Park Capital and/orvFinance, in connection with or as a result of the consummation of the transactions contemplated by this Agreement, or if the Company is impleaded in any such action, proceeding or investigation by any person, or (ii) the Company, other than by reason of its negligence or willful misconduct, becomes involved in any capacity in any action, proceeding or investigation brought by the Securities and Exchange Commission ("SEC") against or involving Park Capital or in connection with or as a result of the consummation of the transactions contemplated by this Agreement, or if the Company is impleaded in any such action, proceeding or investigation by any person, then in any such case, Park Capital and/or vFinance, as the case may be, will reimburse the Company for its reasonable legal and other expenses (including the cost of any investigation and preparation) incurred in connection therewith, as such expenses are incurred. The reimbursement obligations of Park Capital and/or vFinance, as the case may be, under this section shall be in addition to any liability which Park Capital and/or vFinance, as the case may be, may otherwise have, shall extend upon the same terms and conditions to any affiliates of the Company that are actually named in such action, proceeding or investigation, and partners, directors, agents, employees, attorneys, accountants, auditors and controlling persons (if any), as the case may be, of the Company and any such affiliate, and shall be binding upon and inure to the benefit of any successors of the Company, Park Capital or vFinance and any such affiliate and any such person.

(f) (A) Should Park Capital, vFinance or any of their directors, officers, partners, shareholders, agents or employees, other than by reason of its or their negligence or willful misconduct, be required or be requested by us to provide documentary evidence or testimony in connection with any proceeding arising from or relating to the engagement of the Placement Agents under this Agreement, the Company agrees to pay all reasonable expenses (including, but not limited to, fees and expenses of counsel) in complying therewith, payable in advance.

(B) Should the Company, or any of its directors, officers, partners, shareholders, agents or employees, other than by reason of its or their negligence or willful misconduct, be required or be requested by us to provide documentary evidence or testimony in connection with any proceeding arising from or relating to the engagement of the Placement Agents under this Agreement, the Placement Agents agree severally and not jointly to pay all reasonable expenses (including, but not limited to, fees and expenses of counsel) in complying therewith, payable in advance.

(g) The Company and Park Capital and vFinance each hereby consent to personal jurisdiction and service and venue in any court in which any claim which is subject to this Agreement is brought against any Indemnitee.

(h) All the terms set forth in this Section 9 shall apply severally and not jointly to Park Capital and vFinance, as may be applicable.

10. The parties anticipate September 30, 2003 to be the final Closing Date of the Offering, however the parties may extend the Offering date upon mutual agreement without notice to the investors. The provisions of Section 9 of this Agreement shall survive the term of this Agreement.

11. Closing; Placement and Fees.

(a) Conditions to the Placement Agent's Obligations. The obligations of the Placement Agents hereunder are subject to the accuracy of the representations and warranties of the Company contained in this Agreement and the Securities Purchase Agreement, and, as of the Closing Date, to the performance by the Company of its obligations hereunder and to the following additional conditions:

(i) No Material Misstatements. The Company's public filings ("SEC Documents") do not contain an untrue statement of a fact, which in the opinion of the Placement Agents, is material, or omit to state a fact, which, in the opinion of the Placement Agents, is material and is required to be stated therein, or is, in the opinion of the Placement Agents, necessary to make the statements therein, in light of the circumstances under which they were made, not misleading;

(ii) Compliance with Agreements. The Company shall have complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder and under the Securities Purchase Agreement at or prior to each Closing;

(iii) Corporate Action. The Company shall have taken all corporate action necessary in order to permit the valid execution, delivery and performance of the SEC Documents by the Company, including, without limitation, obtaining the approval of the Company's board of directors, for the execution and delivery of the SEC Documents, the performance by the Company of its obligations hereunder and the Offering contemplated hereby;

(iv) Opinion of Counsel to the Company. The Placement Agents shall have received an opinion of counsel to the Company with respect to the fact that the securities sold in the offering are (or will be) legally and validly authorized, fully-paid, and non-assessable, stating that each of the Investors may rely thereon as though addressed directly to such Investor, dated as of each Closing Date; and

(v) Officer's Certificate. The Placement Agents shall receive an Officer's Certificate, signed by the appropriate parties and dated as of the Closing Date. These certificates shall state, among other things, that the representations and warranties contained herein hereof are true and accurate in all material respects at such Closing Date with the same effect as though expressly made at such Closing Date.

12. Press Releases, Etc. Except as otherwise required by applicable law or the rules of a regulatory body, the Company shall not, during the period commencing on the date hereof and ending thirty (30) days after the Closing Date, issue any press release or other communication, make any written or oral statement to any media organization or publication or hold any press conference, presentation or seminar, or engage in any other publicity with respect to the Company, their financial condition, results of operations, business, properties, assets, or liabilities, or the Offering, without the prior written consent of the Placement Agents except in the ordinary course of business and not for the purpose of soliciting any interest in the Offering.

13. Liability of Placement Agents: (a) The Company acknowledges that all opinions and advice (written or oral) given by the Placement Agents to the Company in connection with the engagement of the Placement Agents are intended solely for the benefit and use of the Company in considering the transaction to which they relate, and the Company agrees that no person or entity other than the Company shall be entitled to make use of or rely upon the advice of the Placement Agents to be given hereunder, and no such opinion or advice shall be used for any other purpose or reproduced, disseminated, quoted or referred to at any time, in any manner or for any purpose, nor may the Company make any public references to the Placement Agents, or use the name of Park Capital of vFinance in any annual reports or any other reports or releases of the Company without the prior written consent of Park Capital of vFinance, as the case may be.

(b) The Placement Agents represent to the Company that they are broker-dealers registered as such under the Securities Exchange Act of 1934 and applicable state laws, and they are members in good standing of the

National Association of Securities Dealers, Inc. Each of the Placement Agents further represents and warrants to the Company that they will cause the Offering to be conducted in a manner in compliance with all applicable laws governing offerings to accredited investors only. In that connection, the Company and the Placement Agents understand that the Company has recently filed a registration statement with the Securities and Exchange Commission for the registration of shares being offered by the Company and certain selling securityholders.

14. The Company agrees not to use the name of either of the Placement Agents in any written document used externally without their prior consent, which shall not be unreasonably withheld, except as otherwise required by law. The Placement Agents recognize that the Company is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and consequently will be required to make all disclosures required by or that the Company deems is appropriate under the Securities Exchange Act of 1934 and the rules and regulations thereunder.

15. (A) The Company hereby represents and warrants to the Placement Agents that all representation and warrantees made in the Securities Purchase Agreement shall be true and correct as of each closing date.

(B) To the extent the Securities Purchase Agreement contains any representations and warranties by the Placement Agents (including, without limitation, with respect to the plan of distribution, the manner of the Offering, and other similar sections), they each hereby represent and warrant to the Company that all representation and warrantees made by them in the Securities Purchase Agreement shall be true and correct as of each closing date.

16. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of law. The parties hereby irrevocably submit to the exclusive jurisdiction of the Courts of the State of New York. The Company and the Placement Agents hereby waive a trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other in respect of any matter arising out or in connection with this Warrant.

17. This Agreement shall be binding upon and inure to the benefit of Park Capital, vFinance and the Company and each of their successors and assigns. This Agreement may not be assigned by either party without the prior written consent of the other.

18. Park Capital, vFinance or the Company may terminate this Agreement at any time after September 30, 2003, if the minimum amount of $250,000 is not raised and anytime after October 10, 2003, if the maximum of $1,200,000 is not raised, but the Company must close on the funds received in escrow if the gross amount is more than $250,000 on or before September 30, 2003.

19. Nothing herein shall restrict or otherwise limit Park Capital or vFinance from performing similar or dissimilar services for any other private or publicly listed companies or for its own account. The provisions of this paragraph 19 shall be enforceable to the fullest extent permitted by law.

20. Once the minimum of $250,000 is raised and the initial closing takes place, each of the Placement Agents severally shall provide non-exclusive consulting services to the Company up to and including March 30, 2004 under a separate agreement to be negotiated by the parties. Although each of the Placement Agents shall be obligated to render the advice contemplated by this Agreement upon reasonable request of the Company, each of the Placement Agents shall not be obligated to spend any specific amount of time in so doing. Each of the Placement Agents' duties may include but will not necessarily be limited to, providing recommendations concerning

(a): changes in the capitalization of the Company;
(b): changes in the Company's corporate structure;
(c): offerings of securities in public and private transactions;
(d): alternative uses of corporate assets;
(e): structure and use of debt;
(f): sales of stock by insiders pursuant to Rule 144 or otherwise;
(g): strategic relationships; and
(h): mergers and acquisitions.

In consideration of these services the Company has agreed that the Placement Agent shall receive the fees set forth in Section 6 of this Agreement. Except as contemplated by the terms hereof or as required by applicable law, the Placement Agents shall keep confidential all material non-public information provided to it by the Company, and shall not disclose such information to any third party, other than such of its employees and advisors as the Placement Agents determine to have a need to know.

21. This Agreement, including Exhibit A attached hereto and made a part hereof, embodies the entire agreement and understanding between the parties hereto and supersedes any prior agreements or understandings, oral or written, relating to the subject matter hereof. If any provision of this Agreement is determined to be invalid or unenforceable in any respect, such determination will not affect such provision in any other respect or any other provision of this Agreement, which will remain in full force and effect. This Agreement may not be amended or otherwise modified or waived except by an instrument in writing signed by the Company, Park Capital and vFinance. This Agreement may be executed in any number of counterparts, each of which together shall constitute one and the same original document and a facsimile copy of a signed counterpart shall be deemed an original.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written.

PARK CAPITAL SECURITIES, LLC
By:	/s/ Philip Orlando
	Name:	Philip Orlando
	Title:	President and CEO
vFINANCE, INC.
By:	/s/ Richard Rosenblum
	Name:	Richard Rosenblum
	Title:	Senior Vice President
ISONICS CORPORATION
By:	/s/ Boris Rubizhevsky
	Name:	Boris Rubizhevsky
	Title:	Senior Vice President

EXHIBIT A

IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. NO FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY HAS RECOMMENDED THESE SECURITIES. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS TRANSACTION. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. PURCHASERS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.

ISONICS CORPORATION

SALE OF COMMON STOCK AND WARRANTS

SUMMARY OF TERMS

Issuer:		Isonics Corporation (the "Company").

Placement Agents:		Park Capital Securities, LLC ("Park Capital") and vFinance, Inc. ("vFinance")
Amount of Financing:		A minimum of $250,000 and a maximum of $1,200,000 (the "Offering").
Type of Securities:		A unit consisting of five (5) shares of Common Stock and three (3) Warrants.
		Each Warrant will have an exercise price of $1.25 and will entitle the Warrant holder to receive one (1) share of Common Stock. The Warrants if not exercised sooner will expire on December 31, 2005. The Warrants are redeemable by the Company at $.10 per share if the underlying Common Stock trades at or above $3.75 for any 20 trading days in a 30 consecutive trading day period.
Offering Price:		The Offering Price per unit will be $4.00
Anticipated Closing Date:		September 30, 2003, for closing on the $250,000 minimum and October 10, 2003, for closing on balance of up to $1,200,000 gross proceeds in the Offering.
Distribution of Stock Certificates and Warrants:		Subsequent to the final Closing and receipt of original signatures on all required documents from investors, the Company will distribute all stock certificates and warrants to the investors.
Use of Proceeds:		General working capital.
Accredited Investors:		Neither Park Capital nor vFinance will solicit any person in connection with the Offering who is not known to Park Capital or vFinance to be an accredited investor.
Purchase Agreement:		The investment will be made pursuant to a securities purchase agreement reasonably acceptable to the Company and the investors, which securities purchase agreement will contain, among other things, appropriate representations and warranties of the Company, covenants of the Company reflecting the provisions set forth herein and appropriate conditions of Closing. Additionally, the investors will make such representations and warranties as are customary in transactions of this kind, including, without limitation, representations regarding due organization, authorization, purchase for investment and not for resale or distribution, and investment experience. Park Capital and vFinance will offer, and the Company will sell the securities to accredited investors only pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended.
Placement Fees:		In connection with the Offering, the Company will pay to Park Capital a placement fee on investments made by investors who are Park Capital clients in this Offering. The fee shall consist of a cash payment equal to ten percent (10%) of the amount of such investment.
		In connection with the Offering, the Company will pay to vFinance a placement fee on investments made by investors who are vFinance clients in this Offering. The fee shall consist of a cash payment equal to ten percent (10%) of the amount of such investment.
Registration:		The Company shall use its best efforts to ensure that a registration statement (the "Registration Statement") is filed on or before thirty (30) calendar days after the final Closing Date of the Offering as described in paragraph 10 of the Placement Agent Agreement (which date is referred to herein as the "Registration Filing Deadline"). The Registration Statement will include for resale by the holders in accordance with the plan of distribution set forth therein the Common Stock included within the Units and the Common Stock underlying the Warrants (the "Registrable Securities"), but not the Warrants themselves. In the event the Registration Statement covering this Offering is not filed on or before the Registration Filing Deadline, the Company shall pay the Investor, as liquidated damages, 2% of the purchase price of the units for every 30 calendar day period that the Registration Statement is not filed. No payment shall be required if the delay is ten days or less; the liquidated damages will be 1% if the delay is more than ten days but not more than twenty days.

		The Company shall use its best efforts to cause such Registration Statement to become effective no later than ninety (90) calendar days following the Registration Filing Deadline. In the event the Registration Statement is not declared effective within ninety (90) calendar days following the Registration Filing Deadline (unless the delay was caused by the failure of any person named in the Registration Statement as a selling securityholder to provide the Company with information regarding the selling securityholder necessary to be included therein or to agree to a customary cross indemnification agreement), the Company shall pay the Investor, as liquidated damages, 2% of the purchase price of the units for every 30 calendar day period, or portion thereof, that the registration statement is not declared effective. No payment shall be required if the delay is ten days or less; the liquidated damages will be 1% if the delay is more than ten days but not more than twenty days. Any liquidated damages shall be paid in cash or freely trading common stock at the Company's option, and such damages shall continue until the obligation is fulfilled, subject to a maximum of 12 months from the Closing Date.
		The Company shall respond to all SEC comments promptly, and will keep Park Capital and vFinance advised with respect to the SEC's review of the Registration Statement.
		The Company agrees to make such filings as are necessary to keep the Registration Statement effective until the earlier of (i) the second anniversary of the first date on which no Warrants remain unexercised or unexpired or (ii) the date all shares of Common Stock and shares of Common Stock underlying the Warrants, purchased by the investors in this Offering, may be sold under Rule 144 without volume limitations.
		The Company shall bear registration expenses of the Registration Statement and its counsel shall prepare and file the Registration Statement. Park Capital, vFinance and any other person for whom Registrable Securities are included in the Registration Statement will bear their own expenses. Each such person will also provide the Company with information regarding "Selling Securityholders" and "Plan of Distribution" and other information required to be included about them, their stock and warrant ownership, and otherwise that is necessary to be included in the Registration Statement. Park Capital and vFinance understand that they and persons associated with them will likely be considered to be underwriters by the SEC and the SEC will likely require this disclosure in the Registration Statement. The Company and each person for whom Registrable Securities are included in the Registration Statement will enter into mutual indemnification agreements.
Share Issuance:		At all times, the Company shall keep available Common Stock duly authorized for issuance against the Warrants. If at any time, the Company does not have available an amount of authorized and unissued Common Stock necessary to satisfy the full exercise of the then outstanding Warrants, the Company shall call and hold a special meeting within 30 days of such occurrence, for the purpose of increasing the number of shares authorized. Management of the Company shall recommend to shareholders, officers and directors to vote in favor of increasing the number of common shares authorized.
Legal Fees:		The Company agrees to pay for legal expenses in the amount of $7,500 associated with document preparation, review of the Registration Statement to be prepared by the Company's counsel and all amendments thereto. $2,500 shall be payable immediately prior to document preparation and the balance of $5,000 shall be payable upon funding of the first funds to be released from escrow and shall not be payable unless at least $250,000 is released from escrow.
Escrow:		Wachovia Bank shall act as Escrow Agent and the Company shall be responsible for escrow fees which will be assessed in accordance with a schedule to be provided by Wachovia Bank before the Company has any binding obligation of any nature to Park Capital or to Wachovia Bank.

Blue Sky Laws:		Counsel for Park Capital shall be responsible for filing the necessary forms for Blue Sky filings for the Offering with New York and two additional states, but the Company shall be responsible for all filing fees and fees for specific consents for the service of process. The Company will pay Park Capital's counsel for each state thereafter the amount of $500 plus all filing fees and fees for specific consents for the service of process. The Company's counsel shall prepare and file the Form D. The Company, Park Capital and vFinance agree that no sales will be made to any Investor in a state in which the Blue Sky filing requires that the Company generally consent to the service of process as a condition of Blue Sky qualification, or that may impose an escrow or other requirements on the Company or its affiliates of the sort that are generally referred to as "merit requirements". Counsel for Park Capital and vFinance will provide counsel to the Company with copies of all communications to and from any blue sky administrator relating to this Offering prior to submitting to any such blue sky administrator, and promptly after receipt from any blue sky administrator.
Notice and Convertibles:		The Company agrees to give Park Capital and vFinance written notice of any financing that it closes until the earlier of (a) ninety (90) calendar days following the date the Registration Statement is declared effective or (b) eighteen (18) calendar months following the date closing of the Offering, the earlier of (a) and (b) being referred to as the "Notice Period". Such written notice shall include the amount of the financing, the date the closing of the financing occurred, the names of the investors and the general terms of the financing.
		The Company agrees that during the Notice Period it (i) shall not enter into any other financing transactions with other investors prior to December 31, 2003, (except with respect to financing that is currently being negotiated through Quivira Venture Partners and its affiliates); (ii) shall not enter into any convertible financing, equity line financing, common stock with a reset financing or warrant with a reset financing and (iii) shall not sell any common stock, warrants, units or preferred stock for less than $.80.
Regulation D Offering:		The Securities offered hereby have not been registered under the Securities Act of 1933 as amended, or any State Securities Laws and are being offered and sold in reliance on exemptions from the Registration requirements of such laws for sales of securities to accredited investors only. The Securities are subject to the restrictions of transferability and resale and may not be transferred or resold except as permitted under such laws pursuant to registration or an exemption therefrom. The Securities have not been approved or disapproved by the Securities and Exchange Commission or any other regulatory authority, nor have any of the foregoing authorities passed upon or endorsed the merits of this offering or the accuracy or adequacy of the offering materials. Any representation to the contrary is unlawful.
Legal Compliance:		The Company, Park Capital and vFinance understand that the Company has recently filed a registration statement with the Securities and Exchange Commission for the registration of shares being offered by the Company and certain selling securityholders. Counsel for the Company, Park Capital and vFinance will review these issues before commencing on any aspect of the Offering to determine whether the Offering can be completed in the light of the guidance given by the Securities and Exchange Commission in Current Issues and Rulemaking Projects (Div. Corp. Fin. At §VIII.A.9 (pg 55), "Integration of Registered and Unregistered Offerings", Rel. 33-7606A; and Black Box, Inc., (SEC No Act. Pub. Avail. 6/26/1990) and their progeny.
		To the extent that Park Capital and vFinance undertake the Offering, they will do so in compliance with all laws, rules, and regulations applicable to the conduct and completion of an offering to a limited number of accredited investors only.

Mutual Indemnification:		The Company, Park Capital and vFinance will enter into a mutual indemnification agreement that is appropriate to these circumstances. Such indemnification agreement may be included in the Purchase Agreement discussed above or in a separate agreement.
Non-binding Term Sheet:		This term sheet is not binding on the parties. The Securities Purchase Agreement between the Company and the accredited investors, and a Placement Agent Agreement between the Company, Park Capital and vFinance, when prepared and executed, will be binding upon the parties.

QuickLinks

Exhibit 10.12

EX-10.13 7 a2121147zex-10_13.htm EX-10.13
QuickLinks -- Click here to rapidly navigate through this document

Exhibit 10.13

CONSULTING AGREEMENT

THIS AGREEMENT is made as of October 22, 2003, by and between Isonics Corp., Inc. a California corporation having its principal address at 5906 McIntyre Street, Golden, CO, 80403-7445 (the "Company") and vFinance Investments, Inc. a Florida Corporation (the "Consultant").

RECITALS:

A. The Company requires financial consulting services to build the value of the Company for the benefit of its shareholders; and vFinance Investments, Inc. agrees to perform consulting services related to corporate finance and other financial service matters, upon the request of the President of the Company, and will make available qualified personnel for this purpose and devote such business time and attention to such matters as it shall determine is required; and

B. The Consultant is an broker/dealer who has provided investment and merchant banking services for a number of companies; and

C. The Consultant is a market maker in electronic pink sheets, bulletin board and NASDAQ small capitalization companies; and

D. The Company recognizes the substantial experience and knowledge of the Consultant in matters relating to investment banking; and

E. The Company further recognizes that it is in the best interests of the Company to engage the consulting services of the Consultant; and

F. The Company desires to retain the valuable services and counsel of the Consultant, and the Consultant desires to render such services to the Company upon the terms set forth in this Agreement.

NOW, THEREFORE, in consideration of the mutual promises and covenants set forth below, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby agree as follows:

1.

Recitals. The Recitals to this Agreement are hereby incorporated into this Agreement as though full restated herein.

2.

Engagement. The Company hereby engages the Consultant, and the Consultant accepts engagement by the Company, upon the terms and conditions set forth in this Agreement. Such engagement is non-exclusive in that the Company may engage other consultants as the Company determines to be appropriate, even though such other consultants may be in competition with the Consultant and the Consultant may provide similar services to other entities.

3.

Term. The term of this Agreement shall begin on the date hereof and shall continue until June 30, 2004.

4.

Consulting Services Compensation.

(A): The Company shall pay to Consultant or its designees as compensation for its services under this Agreement Five Hundred Sixty Thousand (560,000) warrants to purchase shares of the company's common stock at a price equal to $1.25. The warrants will expire (unless exercised) on April 30, 2006.
(B): The Company may in the future provide the Consultant with such additional compensation as the Company and the Consultant shall mutually agree for any additional services by the Consultant not provided for in this Agreement.

5.

Duties. From time to time as reasonably requested by the Company, the Consultant agrees to perform consulting services related to corporate finance and other financial service matters, upon the request of the President of the Company, and will make available qualified personnel for this purpose and devote such business time and attention to such matters as it shall determine is required. Such services shall include, but not be limited to, strategic planning, planning meetings with the investment community, assisting the Company's management in designing the Company's Business Plan and "Growth-by-Acquisition" strategy. Additionally, Consultant shall prepare or assist in the preparation of a Company Corporate Profile, Fact Sheets, and Shareholder Letters,

6.

Nature of Engagement. The Company is engaging the Consultant as an independent contractor. Nothing in this Agreement shall be construed to create an employer-employee relationship between the parties. The

services to be provided will not be in connection with the offer or sale of securities in a capital-raising transaction.

7.: Expenses. Upon receipt of requests from the Consultant for reimbursement, the Company shall reimburse the Consultant for all reasonable and necessary expenses the Consultant incurs after the date of this Agreement in performing its duties in connection with this Agreement. The Consultant shall be required to receive authorization from the Company prior to incurring any expenses
8.: Notices. Any notice, report or demand required, permitted or desired under this Agreement shall be sufficient if in writing and delivered by certified mail, return receipt requested, Federal Express (or similar courier), telegram or receipted hand delivery at the following addresses (or such other addresses designated by proper notice):


		To the Company:		5906 McIntyre Street, Golden, CO, 80403-7445
		To the Consultant:		David Stefansky vFinance Investments, Inc. 880 Third Avenue 4^{th Floor} New York, NY 10022

: Any notice otherwise delivered shall be deemed given when actually received by recipient.
9.: Miscellaneous.
: (A) Governing Law. This Agreement shall be governed by, interpreted and enforced in accordance with the laws of the State of New York.
: (B) Entire Agreement. This instrument contains the entire agreement of the parties concerning engagement and may not be changed or modified except by written agreement duly executed by the parties hereto.
: (C) Confidentiality. Except as may otherwise be required by law, the specific provisions of this Agreement shall remain strictly confidential, although the Consultant understands that the Company is obligated to disclose the terms of this Agreement in its reports filed under the Securities Exchange Act of 1934, as amended and must file a copy of this Agreement as an exhibit to its reports under the Securities Exchange Act of 1934 and any registration statement under the Securities Act of 1933. Notwithstanding the foregoing, the parties agree that Consultant shall disclose that it is being compensated by the Company in all of its promotional releases to the public, in accordance with the Act. Furthermore, the Consultant acknowledges that, from time-to-time in the performance of its services hereunder, the Consultant may come into possession of material non-public information regarding the Company. The Consultant agrees to maintain the confidentiality of such material non-public information (whether or not identified as such by the Company) and will take no action in violation of the federal or state securities laws (including, without limitation, Regulation FD) with respect to such material non-public information. If the Consultant has any question whether information in its possession about the Company is material non-public information, it will treat such information as material non-public information until the Company concurs with the assessment that such information is not material or non-public, or until the Company thereafter publicly announces such information. Neither the Company nor the Consultant shall, either directly or indirectly through their respective officers, directors, employees, shareholders, partners, joint ventures, agents, consultants, contractor, affiliates or any other person, disclose, communicate, disseminate or otherwise breach the confidentiality of all or any provision of this Agreement without the express written consent of both parties to this Agreement or utilize or disclose material non-public information without the express written consent of the Company.
: (D) Assignment. The obligations of the parties under this Agreement shall not be assigned without the written consent of the parties. Notwithstanding any provision of this Agreement to the contrary, however, the Consultant shall be entitled to provide that any funds payable or stock issuable to it pursuant to this Agreement shall instead be paid or issued to one or more designees provided an exemption from registration is available for such assignment or designation (which exemption must be established to the reasonable satisfaction of the Company).
: (E) Termination. The Company or the Consultant may terminate this Agreement upon 30 days' notice to the other party. If the Company terminates this Agreement, the Consultant will be entitled to retain all of the compensation it has received hereunder. If the Consultant terminates this Agreement (other than for cause),

the Consultant will be obligated to return to the Company all of the warrants paid as provided in paragraph 4.A (if the termination occurs before February 28, 2004) or (if the termination occurs after February 28, 2004) one-half of the warrants paid as provided in paragraph 4.A.

: (F) Counterparts and Facsimile. This Agreement may be executed in counterparts, and all counterparts will be considered as part of one agreement binding on all parties to this Agreement. This Agreement may be executed via facsimile, which signatures shall be deemed legal and binding as an original signature hereto.
: (G) Severability. If any term, condition or provision of this Agreement or the application thereof to any party or circumstances shall, at any time or to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term, condition or provision to parties or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term, condition and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

/s/ James E. Alexander
By:		James Alexander
		President
		Isonics Corporation
/s/ David Stefansky
By:		David Stefansky
		MANAGING DIRECTOR
		vFinance, Investments, Inc.

QuickLinks

Exhibit 10.13

EX-10.14 8 a2121147zex-10_14.htm EX-10.14
QuickLinks -- Click here to rapidly navigate through this document

Exhibit 10.14

PARK CAPITAL SECURITIES, LLC,
216 East 45^th Street, 7^th Floor
New York, New York 10017
212-244-1555

November 22, 2002

Boris Rubizhevsky
Vice Chairman & Senior Vice President
Isonics Corporation
5906 McIntyre Street
Golden, Colorado 80403

FINANCIAL ADVISORY AGREEMENT

Dear Mr. Rubizhevsky,

This Agreement is made and entered into as of November 22, 2002 between Park Capital Securities ("Park") and Isonics Corporation, (together with all subsidiaries, affiliates, successors and other controlled units, either existing or formed subsequent to the execution of this engagement, the "Company").

In consideration of the mutual promises made herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.: The Company hereby engages Park on a non-exclusive basis and upon the other terms and conditions as set forth herein as one of the Company's financial advisor to render financial and other general advice to the Company and as its exclusive investment banker with respect to retail marketing of the Company's common stock, Transactions (as defined below), and similar matters upon the terms and conditions set forth herein. In that regard, Park will assist the Company in identifying, analyzing, structuring, negotiating and financing suitable business opportunities which the Company may take advantage of by purchase or sale of stock or assets, assumption of liabilities, merger, consolidation, tender offer, joint venture, financing arrangement or any similar transaction or combination thereof. Park understands that the company wishes to raise equity capital from the private or public markets as deemed appropriate at the time of the transaction.
2.: Except as otherwise specified in Paragraph 6 hereof, this Agreement shall be effective until and including December 31, 2003, commencing upon the execution hereof.
3.: During the term of this Agreement, Park shall provide the Company with such regular and customary consulting advice regarding the matters described in paragraph 1 above and paragraph 4 below as the Company may reasonably request, provided that Park shall not be required to undertake duties not reasonably within the scope of the financial advisory or investment banking services contemplated by paragraphs 1 and 4 of this Agreement. It is understood and acknowledged by the parties that the value of Park's advice is not readily quantifiable, and that Park shall be obligated to render advice upon the request of the Company, in good faith, but shall not be obligated to spend any specific amount of time in so doing. Park may, with the prior written approval of the Company, engage the services of any other NASD member investment banking firm to assist in the arrangement of a Transaction for the Company, to be based on full disclosure by Park and the other investment banking firm(s) of any agreements between them related to this Agreement.
4.: Park shall render such other financial advisory and investment and/or investment banking services as may from time to time be agreed upon in writing by Park and the Company.
5.: A. In consideration for the services rendered by Park to the Company pursuant to this Agreement (and in addition to the expenses provided for in Paragraph 7 hereof), the Company shall compensate Park by issuing to Park a warrant to purchase three hundred thousand (300,000) shares of the Company's restricted common stock (the "Warrant"). The Warrants shall be purchased for a cashless nominal sum and shall be exercisable for a period of two (2) years from the date of Closing with an exercise price per share equal to $1.00.
: For the purposes of this Agreement, consideration paid or to be paid other than in cash shall be valued at the fair market value, except that liabilities assumed and notes issued will be valued at the face amount thereof. The fair market value of consideration paid in securities for which there is a recognized trading market shall be based on the closing "offer" price of the securities on the day immediately preceding the closing of the Transaction and shall be computed as if the securities were freely tradable. For the purpose of

this Agreement "Transaction" shall mean merger, business combination or reorganization, purchase or sale of some or all of the stock or assets of the Company or of another company by the Company not in the ordinary course of business, joint venture, licensing agreement, royalty agreement, distribution agreement or any similar transaction or combination thereof. Transaction Fees shall be paid by the Company to Park at the first closing of any Transaction, provided that the fee due to Park as a result of Consideration which is contingent upon the occurrence of some future event (e.g. earnout or the realization of earnings projections) shall be paid by the Company to Park at the earlier of: (i) the receipt of such Consideration, or (ii) the time that the amount of such Consideration can be determined.

: B. In the event that the Company completes a Transaction for which Park has provided material advice or assistance as a part of its engagement hereunder, or if Park otherwise renders material services to the Company during the course of this engagement not described in paragraphs 1 or 4 hereof (e.g. Fairness Opinion) Park shall receive a customary investment banking fee to be mutually agreed upon between Park and the Company based on the nature and type of services rendered. For the purposes of this provision, the term "Transaction" shall mean a merger, business combination or reorganization, purchase or sale of some or all of the stock or assets of the Company or of another company by the Company not in the ordinary course of business, joint venture, licensing agreement, royalty agreement, distribution agreement or any similar transaction or combination thereof with a total valuation to the Company exceeding $2,500,000.
6.: In the event that this Agreement shall not be renewed or if terminated for any reason, notwithstanding any such renewal or termination, Park shall be entitled to a full fee as provided under Paragraph 5 hereof, for any Transaction for which the discussions involving Park to any material extent were conducted during the term of this Agreement by the Company or by Park on behalf of the Company which is consummated within a period of twelve (12) months after non-renewal or termination of this Agreement. Upon termination of this Agreement, Park shall provide the Company with a written list of parties with whom it had material discussions in connection with any Transaction, which list (upon acceptance by Isonics, which acceptance shall not be unreasonably withheld) shall govern the operation of this Paragraph.
7.: In addition to the fees payable hereunder, and regardless whether any Transaction set forth in Paragraph 5 hereof is proposed or consummated, the Company shall reimburse Park for all reasonable fees and disbursements of Park's outside counsel and Park's reasonable travel and out-of-pocket expenses incurred in connection with the services performed by Park pursuant to this Agreement, including without limitation, hotel, food and associated expenses; provided that to the extent such reimbursements referenced in this Paragraph 7 exceed $1,000 in the aggregate, they shall be subject to the Company's prior written approval.
8.: The Company acknowledges that all opinions and advice (written or oral) given by Park to the Company in connection with Park's engagement are intended solely for the benefit and use of the Company and its Board in considering the Transaction or other matter to which they relate, and the Company agrees that no person or entity other than the Company and its Board shall be entitled to make use of or rely upon the advice of Park to be given hereunder, and no such opinion or advice shall be used for any other purpose or reproduced, disseminated, quoted or referred to at any time, in any manner or for any purpose, nor may the Company make any public references to Park, or use Park's name in any annual reports or any other reports or releases of the Company without Park's prior written consent, which shall not be unreasonably withheld.
: Park and the Company agree and acknowledge that the decision to consummate a Transaction or other matter shall be in the Company's sole and absolute discretion.
9.: The Company acknowledges that Park and its affiliates are in the business of providing financial services and consulting advice to others. Nothing herein contained shall be construed to limit or restrict Park in conducting such business with respect to others, or in rendering such advice to others, except as such advice may relate to matters relating to the Company's business and properties. Notwithstanding the foregoing, during the term of this Agreement and for three years after the termination of this Agreement for any reason, Park shall maintain the confidentiality of all information that Park may obtain about the Company which the Company has not made publicly available. This includes (but is not limited to) the Company's trade secrets, customer information, financial information, business plans, projections, and any information that Park develops regarding the Company or possible Transactions under this Agreement.
10.: The Company recognizes, acknowledges and agrees that in performing its services under this engagement, Park will use and rely upon the data, material and other information supplied by the Company without independently verifying its accuracy, completeness or veracity, except to the extent Park has actual knowledge

to the contrary. The Company represents and warrants to Park that all such information concerning the Company provided by the Company in response to requests made by Park or otherwise, will be true and accurate in all material respects and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in light of the circumstances under which such statements are made. (The foregoing warranty only applies to information that the Company supplies to Park regarding the Company; the foregoing warranty does not apply to information that Park may obtain from other publicly available sources except for filings that the Company has made with the Securities and Exchange Commission.) Park shall be under no obligations to make an independent appraisal of assets or an investigation or inquiry as to any information regarding, or any representations of, any other participant in a Transaction, and shall have no liability with regard thereto. The Company acknowledges and agrees that Park will be using and relying upon such information supplied by the Company and its officers, agents and others and any other publicly available information concerning the Company without any independent investigation or verification thereof or independent appraisal by Park of the Company or its business or assets. Park does not provide legal, tax or accounting services and does not render such advice. If, in Park's opinion after completion of its due diligence process, the condition of the Company, financial or otherwise, and its prospects are not substantially as represented in the documents the Company has filed with the Securities and Exchange Commission, Park shall have the sole discretion to review and determine its continued interest in proposed Transactions. Park must make this decision, if at all, not later than December 15, 2002 and, if Park makes this decision Park must return the Warrant to the Company for cancellation.

11.: Since Park will be acting on behalf of the Company in connection with its engagement hereunder, the Company and Park have entered into a separate indemnification agreement substantially in the form attached hereto as Annex A and dated the date hereof, providing for the indemnification of Park by the Company. Park has entered into this Agreement in reliance on the indemnities set forth in such indemnification agreement.
12.: Park shall perform its services hereunder as an independent contractor and not as an employee of the Company or an affiliate thereof. It is expressly understood and agreed to by the parties hereto that Park shall have no authority to act for, represent or bind the Company or any affiliate thereof in any manner, except as may be agreed to expressly by the Company in writing from time to time.
13.: A. This Agreement and the Annex A attached hereto constitute the entire agreement and understanding of the parties hereto, and supersede any and all previous agreements and understandings, whether oral or written, between the parties with respect to the matters set forth herein.
: B. Any notice or communication permitted or required hereunder shall be in writing and shall be deemed sufficiently given if hand-delivered or sent (i) postage prepaid by registered mail, return receipt requested, or (ii) by facsimile to the respective parties as set forth below, or to such other address as either party may notify the other of in writing:


if to the Company, to:	Isonics Corporation 5906 McIntyre Street Golden, CO 80403
	Attn:	Boris Rubizhevsky Vice Chairman & Senior Vice President
if to Park, to:	Park Capital Securities, LLC 216 East 45^th Street, 7^th Floor New York, NY 10017
	Attn:	Philip Orlando President

: C. This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors, legal representatives and assigns, and is subject to the approval of the Company's board of directors.
: D. This Agreement may be executed in any number of counterparts, each of which together shall constitute one and the same original document. This Agreement may be executed and delivered by exchange of

facsimile copies showing the parties' signatures, and those signatures need not be affixed to the same copy. The facsimile copies showing the signatures of the parties will constitute originally signed copies of the same Agreement requiring no further execution.

: E. No provision of this Agreement may be amended, modified or waived, except in a writing signed by all of the parties hereto.
: F. This Agreement shall be construed in accordance with and governed by the laws of the State of New York, without giving effect to its conflict of law principles. The parties agree that if the senior officers of the parties are unable to resolve any disagreement or dispute arising hereunder, either party may submit the Dispute to JAMS, Inc. (www.jamsadr.com and 949-224-1810, "JAMS"), or its successor, for mediation, and if the matter is not resolved through mediation, then it shall be submitted to JAMS, or its successor, for final and binding arbitration. Either party may commence mediation by providing to JAMS and the other party a written request for mediation, setting forth the subject of the dispute and the relief requested. The parties will cooperate with JAMS and with one another in selecting a mediator from JAMS' panel of neutrals, and in scheduling the mediation proceedings promptly, not later than 20 days after such request for mediation. The parties covenant that they will participate in the mediation in good faith, and that they will share equally in its costs. All offers, promises, conduct and statements, whether oral or written, made in the course of the mediation by any of the parties, their agents, employees, experts and attorneys, and by the mediator or any JAMS employees, are confidential, privileged and inadmissible for any purpose, including impeachment, in any arbitration or other proceeding involving the parties, provided that evidence that is otherwise admissible or discoverable shall not be rendered inadmissible or non-discoverable as a result of its use in the mediation. Either party may initiate arbitration with respect to the matters submitted to mediation by filing a written demand for arbitration at any time following the initial mediation session or 45 days after the date of filing the written request for mediation, whichever occurs first. The mediation may continue after the commencement of arbitration if the parties so desire. Unless otherwise agreed by the parties, the mediator shall be disqualified from serving as arbitrator in the case. The provisions of this Clause may be enforced by any Court of competent jurisdiction, and the party seeking enforcement shall be entitled to an award of all costs, fees and expenses, including attorneys fees, to be paid by the party against whom enforcement is ordered.
: G. For a period of one year following the termination or expiration of this Agreement, if Park earned any fees under Paragraph 5B and if the Company or its subsidiaries: disposes of any assets or businesses that were acquired in the Transaction, Park will have the right to offer to act as the Company's agent for all such dispositions pursuant to a separate engagement letter that Park will offer to the Company within ten days of notification by the Company that it intends to dispose of such assets. Any decision by Park to act as financial advisor in connection with dispositions, or in any other capacity for the Company would be contained in separate agreements, which agreements would contain, among other matters, provisions for customary fees for transactions of similar size, nature and indemnification of Park. The agreements with respect to financing or refinancing would also include such conditions precedent as due diligence, current conditions and approval by the requisite committees, as well as customary representations and warranties.
: H. Park represents and warrants to the Company that it has skill in performing the duties contemplated in paragraphs 1 and 4, above, and understands that the Company is relying on Park's skill and competence in doing so. Without limiting any other representation and warranty contained herein, Park represents and warrants to the Company that it will perform its duties under this Agreement in compliance with all applicable laws and regulations, including (without limitation) federal and applicable state securities laws and regulations.

If the foregoing correctly sets forth the understanding between Park and the Company with respect to the foregoing, please so indicate your agreement by signing in the place provided below, at which time this letter shall become a binding contract.

		PARK CAPITAL SECURITIES, LLC
		By:	/s/ Philip Orlando Philip Orlando President Investment Banking

Accepted and Agreed:
ISONICS CORPORATION
By:	/s/ Boris Rubizhevsky
	Name:	Boris Rubizhevsky
	Title:	Vice Chairman & Senior Vice President

ANNEX A
Mutual Indemnification Provisions

In connection with the engagement of Park Capital Securities ("Park") by Isonics Corp. (the "Company") pursuant to a letter agreement dated November 22, 2002 between the Company and Park as it may be amended from time to time (the "Letter Agreement"), the Company, hereby agrees as follows:

1.: In connection with or arising out of or relating to the engagement of Park under the Letter Agreement, or any actions taken or omitted, services performed or matters contemplated by or in connection with the Letter Agreement, the Company agrees to reimburse Park, its affiliates and their respective directors, officers, employees, agents and controlling persons (each a "Park Indemnified Party") promptly upon demand for actual, out-of-pocket expenses (including reasonable fees and expenses for legal counsel) as they are incurred in connection with the investigation of, preparation for or defense of any pending or threatened claim, or any litigation, proceeding or other action in respect thereof (collectively, a "Claim") arising out of the actions of, or failure to act by, the Company or its executive officers hereunder. The Company also agrees (in connection with the foregoing) to indemnify and hold harmless each Park Indemnified Party from and against any and all out-of-pocket losses, claims, damages and liabilities, joint or several, to which any Park Indemnified Party may become subject, including any amount paid in settlement of any litigation or other action (commenced or threatened) to which the Company shall have consented in writing (such consent not to be reasonably withheld), whether or not any Park Indemnified Party is a party and whether or not liability resulted; provided, however, that the Company shall not be liable pursuant to this sentence in respect of any loss, claim, damage or liability to the extent that a court or other agency having competent jurisdiction shall have determined by final judgment (not subject to further appeal) that such loss, claim, damage or liability was incurred solely as a direct result of the willful misconduct or gross negligence of such Park Indemnified Party.
2.: In connection with or arising out of or relating to the engagement of Park under the Letter Agreement, or any actions taken or omitted, services performed or matters contemplated by or in connection with the Letter Agreement, Park agrees to reimburse the Company, its affiliates and their respective directors, officers, employees, agents and controlling persons (each a "Company Indemnified Party") promptly upon demand for actual, out-of-pocket expenses (including reasonable fees and expenses for legal counsel) as they are incurred in connection with the investigation of, preparation for or defense of any pending or threatened claim, or any litigation, proceeding or other action in respect thereof (collectively, a "Claim") arising out of the actions of, or failure to act by, Park or its agents hereunder. Park also agrees (in connection with the foregoing) to indemnify and hold harmless each Company Indemnified Party from and against any and all out-of-pocket losses, claims, damages and liabilities, joint or several, to which any Company Indemnified Party may become subject, including any amount paid in settlement of any litigation or other action (commenced or threatened) to which Park shall have consented in writing (such consent not to be reasonably withheld), whether or not any Company Indemnified Party is a party and whether or not liability resulted; provided, however, that Park shall not be liable pursuant to this sentence in respect of any loss, claim, damage or liability to the extent that a court or other agency having competent jurisdiction shall have determined by final judgment (not subject to further appeal) that such loss, claim, damage or liability was incurred solely as a direct result of the willful misconduct or gross negligence of such Company Indemnified Party.
3.: An Indemnified Party (which includes, as appropriate, a Park Indemnified Party or a Company Indemnified Party) shall have the right to retain separate legal counsel of its own choice to conduct the defense and all related matters in connection with any Claim. The Company or Park (as appropriate under Paragraph 1 or 2, above) shall pay the reasonable fees and expenses of such legal counsel, and such counsel shall to the fullest extent, consistent with its professional responsibilities, cooperate with the other party and any legal counsel designated by the other party.
4.: Neither the Company nor Park (as appropriate under Paragraph 1 or 2, above) will, without the prior written consent of each Indemnified Party settle, compromise or consent to the entry of any judgment in any pending or threatened Claim in respect of which indemnification may be reasonably sought hereunder (whether or not any such Indemnified Person is an actual or potential party to such Claim), unless such settlement, compromise or consent includes an unconditional, irrevocable release of each Indemnified Person against whom such Claim may be brought hereunder from any and all liability arising out of such Claim.
5.: In the event the indemnity provided for in paragraphs 1 and 2 hereof is unavailable or insufficient to hold any Indemnified Party harmless, then the Company (under Paragraph 1) or Park (under Paragraph 2) shall

contribute to amounts paid or payable by an Indemnified Party in respect of such Indemnified Party's losses, claims, damages and liabilities as to which the indemnity provided for in paragraphs 1 and 2 hereof is unavailable or insufficient (i) in such portion as appropriately reflects the relative benefits received by the Company or Park (as applicable), on the one hand, and the Indemnified Party, on the other hand, in connection with the matters as to which losses, claims, damages or liabilities relate, or (ii) if the allocation provided by (i) above is not permitted by applicable law, in such proportion as appropriately reflects not only the relative benefits referred to in clause (i) but also the relative fault of the Company or Park (as applicable), on the one hand, and the Indemnified Parties, on the other hand, as well as any other equitable considerations. The amounts paid or payable by a party in respect of losses, claims, damages and liabilities referred to above shall be deemed to include any reasonable legal or other out-of-pocket fees and expenses incurred in defending any litigation, proceeding or other action or claim.

6.: It is understood and agreed that, in connection with Park's engagement by the Company under the Letter Agreement, Park may also be engaged to act for the Company in one or more additional capacities, and that the terms of any such additional engagement may be embodied in one or more separate written agreements. These Indemnification Provisions shall apply to the engagement under the Letter Agreement and to any such additional engagement and any modification of such additional engagement; provided, however, that in the event that the Company engages Park to act as a dealer manager in an exchange or tender offer or as an underwriter in connection with the issuance of securities by the Company or to furnish an opinion letter, such further engagement may be subject to separate indemnification and contribution provisions as may be mutually agreed upon.
7.: These Indemnification Provisions shall remain in full force and effect in connection with the transaction contemplated by the Letter Agreement whether or not consummated, and shall survive the expiration of the period of the Letter Agreement, and shall be in addition to any liability that the Company might otherwise have to any Indemnified Party under the Letter Agreement or otherwise.
8.: Each party hereto consents to personal jurisdiction and service of process and venue in any court in the State of New York in which any claim for indemnity is brought by any Indemnified Person but will be subject to the mandatory mediation and arbitration provisions set forth in the Letter Agreement to which this Exhibit A is attached.

PARK CAPITAL SECURITIES, LLC
BY:		/s/ Philip Orlando
NAME:		Philip Orlando
TITLE:		President
ISONICS CORPORATION
BY:		/s/ Boris Rubizhevsky
NAME:		Boris Rubizhevsky
TITLE:		Vice Chairman & Senior Vice President

PARK CAPITAL SECURITIES, LLC,
216 East 45^th Street, 7^th Floor
New York, New York 10017
212-244-1555

October 22, 2003

James E. Alexander
Chairman and Chief Executive Officer
Isonics Corporation
5906 McIntyre Street
Golden, Colorado 80403

FINANCIAL ADVISORY AGREEMENT

Dear Mr. Alexander,

This Agreement is made and entered into as of October 22, 2003 between Park Capital Securities, LLC ("Park") and Isonics Corporation, (together with all subsidiaries, affiliates, successors and other controlled units, either existing or formed subsequent to the execution of this engagement, the "Company").

In consideration of the mutual promises made herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.: The Company hereby engages Park on a non-exclusive basis and upon the other terms and conditions as set forth herein as one of the Company's financial advisors and investment bankers to render financial and other general advice to the Company with respect to retail marketing of the Company's common stock, Transactions (as defined below in Paragraph 5B), and similar matters upon the terms and conditions set forth herein. In that regard, Park will assist the Company in identifying, analyzing, structuring, negotiating and financing suitable business opportunities which the Company may take advantage of by purchase or sale of stock or assets, assumption of liabilities, merger, consolidation, tender offer, joint venture, financing arrangement or any similar transaction or combination thereof. Park understands that the Company wishes to raise equity capital from the private or public markets as deemed appropriate at the time of the transaction.
2.: Except as otherwise specified in Paragraph 6 hereof, this Agreement shall be effective until and including December 31, 2004, commencing upon the execution hereof. The prior Financial Advisory Agreement dated November 22, 2002, is hereby extended in a manner consistent with the terms of this Agreement and is hereby amended to the extent inconsistent with the terms of this Agreement, upon the mutual agreement of Park and the Company. Any other agreements between the Company and Park Capital or any person affiliated with, employed by, or retained by Park Capital by which such person provides services to the Company be and hereby are terminated, and Park Capital will indemnify and hold the company harmless from any liability thereunder (not including the Agreement between the Company and Park Capital dated November 22, 2003 which is being extended hereby).
3.: During the term of this Agreement, Park shall provide the Company with such regular and customary consulting advice regarding the matters described in paragraph 1 above and Paragraph 4 below as the Company may reasonably request, provided that Park shall not be required to undertake duties not reasonably within the scope of the financial advisory or investment banking services contemplated by paragraphs 1 and 4 of this Agreement. It is understood and acknowledged by the parties that the value of Park's advice is not readily quantifiable, and that Park shall be obligated to render advice upon the request of the Company, in good faith, but shall not be obligated to spend any specific amount of time in so doing. Park may, with the prior written approval of the Company, engage the services of any other NASD member investment banking firm to assist in the arrangement of a Transaction for the Company, to be based on full disclosure by Park and the other investment banking firm(s) of any agreements between them related to this Agreement.
4.: Park shall render such other financial advisory and investment and/or investment banking services as may from time to time be agreed upon in advance in writing by Park and the Company.
5.: A. In consideration for the services rendered by Park to the Company pursuant to this Agreement (and in addition to the expenses provided for in Paragraph 7 hereof), the Company shall compensate Park by issuing to Park a warrant to purchase five hundred thousand (500,000) shares of the Company's restricted common stock (the "Warrant"). The Warrants shall be purchased for a cashless nominal sum and shall be exercisable for a period of three (3) years with a cash-only exercise price per share equal to $1.25.

: B. In the event that the Company completes a Transaction for which Park has provided material advice or assistance as a part of its engagement hereunder, or if Park otherwise renders material services to the Company during the course of this engagement not described in Paragraphs 1 or 4 hereof (e.g. Fairness Opinion) Park shall receive a customary investment banking fee to be mutually agreed upon between Park and the Company based on the nature and type of services rendered. For the purposes of this provision, the term "Transaction" shall mean a merger, business combination or reorganization, purchase or sale of some or all of the stock of the Company or of another company by the Company not in the ordinary course of business, joint venture, licensing agreement, royalty agreement, distribution agreement or any similar transaction or combination thereof with a total valuation to the Company exceeding $1,500,000.
: C. In the event the Company completes a Transaction within 180 days of the date of this Agreement in which another entity introduced to the Company in writing by Park prior to the date of this Agreement invests funds in the Company, its IUT Detection Technologies subsidiary, or in any other subsidiary or business of the Company, in an amount and on terms acceptable to the Company in the Company's sole discretion, then in such event Park shall receive 6% of the investment amount in cash and 10% warrant coverage for purchase of common stock of the Company. The number of warrants for shares of common stock owed to Park shall be exercisable based on the 5 day average closing bid price of the Company's common stock during the 5 trading days immediately preceding, but not including, the date that the Company receives each investment. However, in no case shall the exercise price be less than $1.25 per share and shall be exercisable for three years after the issuance of the warrant.
6.: In the event that this Agreement shall not be renewed or if terminated for any reason, notwithstanding any such renewal or termination, Park shall be entitled to a full fee as provided under Paragraph 5 hereof, for any Transaction for which the discussions involving Park to any material extent were conducted during the term of this Agreement by the Company or by Park on behalf of the Company which is consummated within a period of twelve (12) months after non-renewal or termination of this Agreement. Upon termination of this Agreement, Park shall provide the Company with a written list of parties with whom it had material discussions in connection with any Transaction, which list (upon acceptance by Isonics, which acceptance shall not be unreasonably withheld) shall govern the operation of this Paragraph.
7.: In addition to the fees payable hereunder, and regardless whether any Transaction set forth in Paragraph 5 hereof is proposed or consummated, the Company shall reimburse Park for all reasonable fees and disbursements of Park's outside counsel and Park's reasonable travel and out-of-pocket expenses incurred in connection with the services performed by Park pursuant to this Agreement, including without limitation, hotel, food and associated expenses; provided that to the extent such reimbursements referenced in this Paragraph 7 exceed $1,000 in the aggregate, they shall be subject to the Company's prior written approval.
8.: The Company acknowledges that all opinions and advice (written or oral) given by Park to the Company in connection with Park's engagement are intended solely for the benefit and use of the Company and its Board in considering the Transaction or other matter to which they relate, and the Company agrees that no person or entity other than the Company and its Board shall be entitled to make use of or rely upon the advice of Park to be given hereunder, and no such opinion or advice shall be used for any other purpose or reproduced, disseminated, quoted or referred to at any time, in any manner or for any purpose, nor may the Company make any public references to Park, or use Park's name in any annual reports or any other reports or releases of the Company without Park's prior written consent, which shall not be unreasonably withheld.
: Park and the Company agree and acknowledge that the decision to consummate a Transaction or other matter shall be in the Company's sole and absolute discretion.
9.: The Company acknowledges that Park and its affiliates are in the business of providing financial services and consulting advice to others. Nothing herein contained shall be construed to limit or restrict Park in conducting such business with respect to others, or in rendering such advice to others, except as such advice may relate to matters relating to the Company's business and properties. Notwithstanding the foregoing, during the term of this Agreement and for three years after the termination of this Agreement for any reason, Park shall maintain the confidentiality of all information that Park may obtain about the Company which the Company has not made publicly available. This includes (but is not limited to) the Company's trade secrets, customer information, financial information, business plans, projections, and any information that Park develops regarding the Company or possible Transactions under this Agreement.

10.: The Company recognizes, acknowledges and agrees that in performing its services under this engagement, Park will use and rely upon the data, material and other information supplied by the Company without independently verifying its accuracy, completeness or veracity, except to the extent Park has actual knowledge to the contrary. The Company represents and warrants to Park that all such information concerning the Company provided by the Company in response to requests made by Park or otherwise, will be true and accurate in all material respects and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in light of the circumstances under which such statements are made. (The foregoing warranty only applies to information that the Company supplies to Park regarding the Company; the foregoing warranty does not apply to information that Park may obtain from other publicly available sources except for filings that the Company has made with the Securities and Exchange Commission.) Park shall be under no obligations to make an independent appraisal of assets or an investigation or inquiry as to any information regarding, or any representations of, any other participant in a Transaction, and shall have no liability with regard thereto. The Company acknowledges and agrees that Park will be using and relying upon such information supplied by the Company and its officers, agents and others and any other publicly available information concerning the Company without any independent investigation or verification thereof or independent appraisal by Park of the Company or its business or assets. Park does not provide legal, tax or accounting services and does not render such advice. If, in Park's opinion after completion of its due diligence process, the condition of the Company, financial or otherwise, and its prospects are not substantially as represented in the documents the Company has filed with the Securities and Exchange Commission, Park shall have the sole discretion to review and determine its continued interest in proposed Transactions. Park must make this decision, if at all, not later than November 1, 2003 and, if Park makes this decision Park must return the Warrant to the Company for cancellation.
11.: Since Park will be acting on behalf of the Company in connection with its engagement hereunder, the Company and Park have entered into a separate indemnification agreement substantially in the form attached hereto as Annex A and dated the date hereof, providing for the indemnification of Park by the Company. Park has entered into this Agreement in reliance on the indemnities set forth in such indemnification agreement.
12.: Park shall perform its services hereunder as an independent contractor and not as an employee of the Company or an affiliate thereof. It is expressly understood and agreed to by the parties hereto that Park shall have no authority to act for, represent or bind the Company or any affiliate thereof in any manner, except as may be agreed to expressly by the Company in writing from time to time.
13.: A. This Agreement and the Annex A attached hereto constitute the entire agreement and understanding of the parties hereto, and supersede any and all previous agreements and understandings, whether oral or written, between the parties with respect to the matters set forth herein.
: B. Any notice or communication permitted or required hereunder shall be in writing and shall be deemed sufficiently given if hand-delivered or sent (i) postage prepaid by registered mail, return receipt requested, or (ii) by facsimile to the respective parties as set forth below, or to such other address as either party may notify the other of in writing:


if to the Company, to:	Isonics Corporation 5906 McIntyre Street Golden, CO 80403
	Attn:	James E. Alexander, President
if to Park, to:	Park Capital Securities, LLC 216 East 45^th Street, 9^th Floor New York, NY 10017
	Attn:	Philip Orlando President

: C. This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors, legal representatives and assigns, and is subject to the approval of the Company's board of directors.

: D. This Agreement may be executed in any number of counterparts, each of which together shall constitute one and the same original document. This Agreement may be executed and delivered by exchange of facsimile copies showing the parties' signatures, and those signatures need not be affixed to the same copy. The facsimile copies showing the signatures of the parties will constitute originally signed copies of the same Agreement requiring no further execution.
: E. No provision of this Agreement may be amended, modified or waived, except in a writing signed by all of the parties hereto.
: F. This Agreement shall be construed in accordance with and governed by the laws of the State of New York, without giving effect to its conflict of law principles. The parties agree that if the senior officers of the parties are unable to resolve any disagreement or dispute arising hereunder, either party may submit the Dispute to JAMS, Inc. (www.jamsadr.com and 949-224-1810, "JAMS"), or its successor, for mediation, and if the matter is not resolved through mediation, then it shall be submitted to JAMS, or its successor, for final and binding arbitration. Either party may commence mediation by providing to JAMS and the other party a written request for mediation, setting forth the subject of the dispute and the relief requested. The parties will cooperate with JAMS and with one another in selecting a mediator from JAMS' panel of neutrals, and in scheduling the mediation proceedings promptly, not later than 20 days after such request for mediation. The parties covenant that they will participate in the mediation in good faith, and that they will share equally in its costs. All offers, promises, conduct and statements, whether oral or written, made in the course of the mediation by any of the parties, their agents, employees, experts and attorneys, and by the mediator or any JAMS employees, are confidential, privileged and inadmissible for any purpose, including impeachment, in any arbitration or other proceeding involving the parties, provided that evidence that is otherwise admissible or discoverable shall not be rendered inadmissible or non-discoverable as a result of its use in the mediation. Either party may initiate arbitration with respect to the matters submitted to mediation by filing a written demand for arbitration at any time following the initial mediation session or 45 days after the date of filing the written request for mediation, whichever occurs first. The mediation may continue after the commencement of arbitration if the parties so desire. Unless otherwise agreed by the parties, the mediator shall be disqualified from serving as arbitrator in the case. The provisions of this Clause may be enforced by any Court of competent jurisdiction, and the party seeking enforcement shall be entitled to an award of all costs, fees and expenses, including attorneys' fees, to be paid by the party against whom enforcement is ordered.
: G. Any decision by Park to act as financial advisor in connection with dispositions, or in any other capacity for the Company would be contained in separate agreements, which agreements would contain, among other matters, provisions for customary fees for transactions of similar size, nature and indemnification of Park. The agreements with respect to financing or refinancing would also include such conditions precedent as due diligence, current conditions and approval by the requisite committees, as well as customary representations and warranties.
: H. Park represents and warrants to the Company that it has skill in performing the duties contemplated in Paragraphs 1 and 4, above, and understands that the Company is relying on Park's skill and competence in doing so. Without limiting any other representation and warranty contained herein, Park represents and warrants to the Company that it will perform its duties under this Agreement in compliance with all applicable laws and regulations, including (without limitation) federal and applicable state securities laws and regulations.

		PARK CAPITAL SECURITIES, LLC
		By:	/s/ Philip Orlando Philip Orlando President Investment Banking

Accepted and Agreed:
ISONICS CORPORATION
By:	/s/ James E. Alexander
	Name:	James E. Alexander
	Title:	Chairman and Chief Executive Officer

ANNEX A
Mutual Indemnification Provisions

In connection with the engagement of Park Capital Securities ("Park") by Isonics Corp. (the "Company") pursuant to a letter agreement dated October 15, 2003 between the Company and Park as it may be amended from time to time (the "Letter Agreement"), the Company, hereby agrees as follows:

1.: In connection with or arising out of or relating to the engagement of Park under the Letter Agreement, or any actions taken or omitted, services performed or matters contemplated by or in connection with the Letter Agreement, the Company agrees to reimburse Park, its affiliates and their respective directors, officers, employees, agents, attorneys and controlling persons (each a "Park Indemnified Party") promptly upon demand for actual, out-of-pocket expenses (including reasonable fees and expenses for legal counsel) as they are incurred in connection with the investigation of, preparation for or defense of any pending or threatened claim, or any litigation, proceeding or other action in respect thereof (collectively, a "Claim") arising out of the actions of, or failure to act by, the Company or its executive officers hereunder. The Company also agrees (in connection with the foregoing) to indemnify and hold harmless each Park Indemnified Party from and against any and all out-of-pocket losses, claims, damages and liabilities, joint or several, to which any Park Indemnified Party may become subject, including any amount paid in settlement of any litigation or other action (commenced or threatened) to which the Company shall have consented in writing (such consent not to be reasonably withheld), whether or not any Park Indemnified Party is a party and whether or not liability resulted; provided, however, that the Company shall not be liable pursuant to this sentence in respect of any loss, claim, damage or liability to the extent that a court or other agency having competent jurisdiction shall have determined by final judgment (not subject to further appeal) that such loss, claim, damage or liability was incurred solely as a direct result of the willful misconduct or gross negligence of such Park Indemnified Party.
2.: In connection with or arising out of or relating to the engagement of Park under the Letter Agreement, or any actions taken or omitted, services performed or matters contemplated by or in connection with the Letter Agreement, Park agrees to reimburse the Company, its affiliates and their respective directors, officers, employees, agents, attorneys and controlling persons (each a "Company Indemnified Party") promptly upon demand for actual, out-of-pocket expenses (including reasonable fees and expenses for legal counsel) as they are incurred in connection with the investigation of, preparation for or defense of any pending or threatened claim, or any litigation, proceeding or other action in respect thereof (collectively, a "Claim") arising out of the actions of, or failure to act by, Park or its agents hereunder. Park also agrees (in connection with the foregoing) to indemnify and hold harmless each Company Indemnified Party from and against any and all out-of-pocket losses, claims, damages and liabilities, joint or several, to which any Company Indemnified Party may become subject, including any amount paid in settlement of any litigation or other action (commenced or threatened) to which Park shall have consented in writing (such consent not to be reasonably withheld), whether or not any Company Indemnified Party is a party and whether or not liability resulted; provided, however, that Park shall not be liable pursuant to this sentence in respect of any loss, claim, damage or liability to the extent that a court or other agency having competent jurisdiction shall have determined by final judgment (not subject to further appeal) that such loss, claim, damage or liability was incurred solely as a direct result of the willful misconduct or gross negligence of such Company Indemnified Party.
3.: An Indemnified Party (which includes, as appropriate, a Park Indemnified Party or a Company Indemnified Party) shall have the right to retain separate legal counsel of its own choice to conduct the defense and all related matters in connection with any Claim. The Company or Park (as appropriate under Paragraph 1 or 2, above) shall pay the reasonable fees and expenses of such legal counsel, and such counsel shall to the fullest extent, consistent with its professional responsibilities, cooperate with the other party and any legal counsel designated by the other party.
4.: Neither the Company nor Park (as appropriate under Paragraph 1 or 2, above) will, without the prior written consent of each Indemnified Party settle, compromise or consent to the entry of any judgment in any pending or threatened Claim in respect of which indemnification may be reasonably sought hereunder (whether or not any such Indemnified Person is an actual or potential party to such Claim), unless such settlement, compromise or consent includes an unconditional, irrevocable release of each Indemnified Person against whom such Claim may be brought hereunder from any and all liability arising out of such Claim.

5.: In the event the indemnity provided for in Paragraphs 1 and 2 hereof is unavailable or insufficient to hold any Indemnified Party harmless, then the Company (under Paragraph 1) or Park (under Paragraph 2) shall contribute to amounts paid or payable by an Indemnified Party in respect of such Indemnified Party's losses, claims, damages and liabilities as to which the indemnity provided for in Paragraphs 1 and 2 hereof is unavailable or insufficient (i) in such portion as appropriately reflects the relative benefits received by the Company or Park (as applicable), on the one hand, and the Indemnified Party, on the other hand, in connection with the matters as to which losses, claims, damages or liabilities relate, or (ii) if the allocation provided by (i) above is not permitted by applicable law, in such proportion as appropriately reflects not only the relative benefits referred to in clause (i) but also the relative fault of the Company or Park (as applicable), on the one hand, and the Indemnified Parties, on the other hand, as well as any other equitable considerations. The amounts paid or payable by a party in respect of losses, claims, damages and liabilities referred to above shall be deemed to include any reasonable legal or other out-of-pocket fees and expenses incurred in defending any litigation, proceeding or other action or claim.
6.: It is understood and agreed that, in connection with Park's engagement by the Company under the Letter Agreement, Park may also be engaged to act for the Company in one or more additional capacities, and that the terms of any such additional engagement may be embodied in one or more separate written agreements. These Indemnification Provisions shall apply to the engagement under the Letter Agreement and to any such additional engagement and any modification of such additional engagement; provided, however, that in the event that the Company engages Park to act as a dealer manager in an exchange or tender offer or as an underwriter in connection with the issuance of securities by the Company or to furnish an opinion letter, such further engagement may be subject to separate indemnification and contribution provisions as may be mutually agreed upon.
7.: These Indemnification Provisions shall remain in full force and effect in connection with the transaction contemplated by the Letter Agreement whether or not consummated, and shall survive the expiration of the period of the Letter Agreement, and shall be in addition to any liability that the Company might otherwise have to any Indemnified Party under the Letter Agreement or otherwise.
8.: Each party hereto consents to personal jurisdiction and service of process and venue in any court in the State of New York in which any claim for indemnity is brought by any Indemnified Person but will be subject to the mandatory mediation and arbitration provisions set forth in the Letter Agreement to which this Exhibit A is attached.

PARK CAPITAL SECURITIES, LLC
BY:		/s/ Philip Orlando
NAME:		Philip Orlando
TITLE:		President
ISONICS CORPORATION
BY:		/s/ James E. Alexander
NAME:		James E. Alexander
TITLE:		Chairman and Chief Executive Officer

QuickLinks

Exhibit 10.14

ANNEX A Mutual Indemnification Provisions
ANNEX A Mutual Indemnification Provisions
EX-23.10 9 a2121147zex-23_10.htm EX-23.10
QuickLinks -- Click here to rapidly navigate through this document

Exhibit 23.10

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We have issued our report dated June 11, 2003, accompanying the consolidated financial statements of Isonics Corporation and Subsidiaries contained in the Registration Statement and Prospectus. We consent to the use of the aforementioned report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption "Experts".

/s/ Grant Thornton LLP

GRANT THORNTON LLP

Denver, Colorado
October 28, 2003

QuickLinks

Exhibit 23.10

-----END PRIVACY-ENHANCED MESSAGE-----

ISONICS CORPORATION

PARK CAPITAL SECURITIES, LLC

/s/ Boris Rubizhevsky

/s/ Philip Orlando

Name: Boris Rubizhevsky
Title: Senior Vice President

Name: Philip Orlando
Title: President and CEO

vFINANCE, INC.

/s/ Richard Rosenblum

Name: Richard Rosenblum
Title: Senior Vice President