8-K/A

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

FORM 8-K/A-1

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report: June 11, 2004

ISONICS CORPORATION
(Name of small business issuer as specified in its charter)

California	001-12531	77-0338561
State of Incorporation	Commission File Number	IRS Employer Identification No.

5906 McIntyre Street, Golden, Colorado 80403
Address of principal executive offices

303-279-7900
Telephone number, including
Area code

Not applicable
Former name or former address if changed since last report

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

o

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o

Pre-commencement communications pursuant to Rule 14d-12(b) under the Exchange Act (17 CFR 240.14d-12(b))

o

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.01 (originally filed under Item 2)—Acquisition or Disposition of Assets

        On June 11, 2004, Isonics Corporation ("Isonics" or "we") completed a transaction by which Isonics Vancouver, Inc. (a newly-formed, wholly-owned subsidiary of Isonics) acquired the silicon wafer manufacturing business and related assets from EnCompass Materials Group, Ltd., a privately-held corporation in Vancouver, Washington ("EMG"). To complete the transaction, we paid EMG (who has subsequently changed its name to Silver Silicon Ltd.):

•

a $1,700,000 promissory note (secured by the assets acquired and certain other assets owned by us relating to our SOI business), payable over 33 months with 6% interest;



•

731,930 shares of our restricted common stock (valued at $1,171,088 based upon the fair market value of the stock on June 11, 2004);



•

Payment of approximately $380,000 to satisfy certain of EMG's obligations; and



•

Assumption of other EMG payables in the approximate amount of $300,000 and assumption of certain future obligations (such as EMG's real property leases).

        We completed the transaction pursuant to an asset purchase agreement that we executed on June 7, 2004.

        The assets that we purchased included all of EMG's trade receivables, inventory to support EMG's normal business operations, property, plant and equipment necessary to operate EMG's business operations, EMG's prepayments for the purchase of materials and supplies to be consumed in the ordinary course of business. We also assumed a number of contracts related to the continuing operations of the business previously conducted by EMG, including certain supply contracts, the real estate leases, maintenance agreements, unfilled customer orders, and two sales representative agreements.

        The equipment that we acquired is the equipment necessary to continue EMG's manufacturing and reclamation of silicon wafers business including grinders, polishers, final clean system, packaging unit, and metrology tools. We intend to consolidate our equipment located in our separate Vancouver, Washington facility with the EMG equipment in EMG's leased space and conduct and expand our silicon-on-insulator (SOI) wafer manufacturing business as we attempt to expand the silicon wafer manufacturing and reclamation business we have acquired from EMG.

        Our vice president, Hans Walitzki, who has been in charge of our Vancouver operations will oversee the combined operations, subject to the supervision of our president, James E. Alexander. We have also hired (for a three year term) Robert Swor, previously president of EMG, to assist us in a number of ways as director of operations at our Vancouver, Washington facility.

Item 8.01—Other Events (originally filed under Item 5)

Item 701 Disclosure—Recent Sales of Unregistered Securities

        As described above, on June 11, 2004, we issued 731,930 shares of our restricted common stock to EMG as partial consideration for the completion of the transaction described above. EMG represented that it, and its two equity holders, were accredited investors. The following sets forth the information required by Item 701 in connection with that transaction:

(a)

The transaction was completed effective June 11, 2004.

(b)

There was no placement agent or underwriter for the transaction.

(c)

The shares were not sold for cash. The shares were issued in partial consideration for the purchase by our wholly-owned subsidiary of assets as described above. At the time the number of shares was calculated, the market price of our stock was approximately $1.06 per share.

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(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 accredited investor with disclosure of all aspects of our business, including providing the accredited investor 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 investor obtained all information regarding Isonics it requested, received answers to all questions it posed, and otherwise understood the risks of accepting our securities for investment purposes.

(e)

The common stock issued in this transaction are not convertible or exchangeable. No warrants were issued in this transaction. We did grant the holder certain registration rights, including piggy-back registration rights for the shares issued, and the right to demand registration if the shares have not been registered before December 11, 2004.

(f)

We received no cash proceeds from the issuance of the shares.

Item 9.01—Financial Statements and Exhibits (originally filed under Item 7)

(a)

Financial Statements of Businesses Acquired.

        Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm for EnCompass Materials Group Limited for the period April 15, 2002 (date of inception) to December 31, 2002, the year ended December 31, 2003 and the three months ended March 31, 2004 and 2003 (unaudited) (attached as Exhibit 4 and by this reference incorporated herein).

(b)

Pro forma financial information.

        Pro forma financial information of Isonics Corporation and EnCompass Materials Group Limited (attached as Exhibit 5 and by this reference incorporated herein).

(c)

Exhibits

4.1	*	Asset Purchase Agreement
4.2	*	Registration Rights Agreement
23.1	+	Consent of independent accountants
99.1	*	Press release announcing the completion of the transaction, issued June 10, 2004
99.2	+	Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm for EnCompass Materials Group Limited for the periods stated above
99.3	+	Pro forma financial information of Isonics Corporation and EnCompass Materials Group Limited.

*

Previously filed.

+

Filed herewith.

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 24^th day of August 2004.

Isonics Corporation
By:	/s/  JAMES E. ALEXANDER James E. Alexander President and Chief Executive Officer

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Item 2.01 (originally filed under Item 2)—Acquisition or Disposition of Assets
Item 8.01—Other Events (originally filed under Item 5)
Item 9.01—Financial Statements and Exhibits (originally filed under Item 7)

SIGNATURES

EX-23.1

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Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

        We have issued our report dated June 11, 2004, accompanying the consolidated financial statements of EnCompass Materials Group Limited and Subsidiary as of December 31, 2003 and 2002, and for the year ended December 31, 2003 and the period from April 15, 2002 (date of inception) to December 31, 2002, included in the Isonics Corporation Form 8-K/A-1 dated June 11, 2004. We hereby consent to the incorporation by reference of said report in the Registration Statements of Isonics Corporation on Forms S-3, S-4, and S-8 (File Nos. 333-86860, 333-52514, 333-74339, 333-46542, 333-37696, 333-110032, 333-112952, 333-114521, and 333-115194).

/s/ GRANT THORNTON LLP

Portland, Oregon
August 23, 2004

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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

EX-99.2

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Exhibit 99.2

Consolidated Financial Statements and
Report of Independent Registered Public Accountanting Firm
EnCompass Materials Group Limited
For the period April 15, 2002 (date of inception)
to December 31, 2002, the year ended
December 31, 2003 and the three months ended
March 31, 2004 and 2003 (Unaudited)

C O N T E N T S

		Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		3
CONSOLIDATED FINANCIAL STATEMENTS
	CONSOLIDATED BALANCE SHEETS	4
	CONSOLIDATED STATEMENTS OF OPERATIONS	5
	CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY	6
	CONSOLIDATED STATEMENTS OF CASH FLOWS	7
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	8

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Report of Independent Registered Public Accounting Firm

Board of Directors
EnCompass Materials Group Limited

        We have audited the accompanying consolidated balance sheets of EnCompass Materials Group Limited (a Washington Corporation) and Subsidiary as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended December 31, 2003 and for the period from April 15, 2002 (date of inception) to December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

        We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of EnCompass Materials Group Limited and Subsidiary as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the year ended December 31, 2003 and for the period from April 15, 2002 (date of inception) to December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.

        The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note B, the Company incurred a net loss of $1,506,365 and had an accumulated deficit of $3,085,363 as of December 31, 2003. As of December 31, 2003, the Company's current liabilities exceeded its current assets by $256,197 and its total liabilities exceeded its total assets by $1,340,880. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note B. The financial statements do not include adjustments that might result from the outcome of this uncertainty.

Portland, Oregon
June 11, 2004 /s/ Grant Thornton LLP

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EnCompass Materials Group Limited

CONSOLIDATED BALANCE SHEETS

						December 31,
			March 31, 2004 (Unaudited)
						2003			2002
ASSETS
CURRENT ASSETS
	Cash and cash equivalents		$	9,368		$	43,478		$	39,318
	Accounts receivable, principally trade, less allowance for doubtful accounts of $34,694, $36,393 and $215,458 in 2004, 2003 and 2002, respectively			278,498			275,082			878,817
	Inventory, net			346,829			288,315			529,026
	Prepaid expenses and other current assets			73,080			22,070			69,372
		Total current assets		707,775			628,945			1,516,533
	Property, plant and equipment, net			647,980			750,138			1,244,054
	Note receivable—related party			16,286			16,286			—
TOTAL ASSETS			$	1,372,041		$	1,395,369		$	2,760,587
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES
	Line of credit		$	133,327		$	84,946		$	423,606
	Notes payable—current			233,333			233,333			233,333
	Capital lease obligations—current			—			—			77,757
	Accounts payable			338,167			304,214			514,405
	Accrued liabilities			165,501			205,021			269,403
	Accrued liabilities, related party			128,156			57,628			—
		Total current liabilities		998,484			885,142			1,518,504
LONG TERM LIABILITIES
	Notes payable			19,444			77,982			311,315
	Notes payable—shareholder			2,242,221			1,773,125			769,983
TOTAL LIABILITIES				3,260,149			2,736,249			2,599,802
COMMITMENTS (Notes F, G, J and O)				—			—			—
STOCKHOLDERS' (DEFICIT) EQUITY
	Common stock, no par value, 10,000,000 shares authorized and 4,811,502 shares issued and outstanding			1,700,000			1,700,000			1,700,000
	Additional paid-in capital			63,283			63,283			63,283
	Deferred compensation			(18,800	)		(18,800	)		(23,500	)
	Accumulated deficit			(3,632,591	)		(3,085,363	)		(1,578,998	)
		Total stockholders' (deficit) equity		(1,888,108	)		(1,340,880	)		160,785
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY			$	1,372,041		$	1,395,369		$	2,760,587

The accompanying notes are an integral part of these financial statements.

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EnCompass Materials Group Limited

CONSOLIDATED STATEMENTS OF OPERATIONS

For the year ended December 31, 2003, the period from
April 15, 2002 (date of inception) through December 31, 2002
and the three months ended March 31, 2004 and 2003 (Unaudited)

			March 31,									Period from April 15, 2002 through December 31, 2002
			2004 (Unaudited)			2003 (Unaudited)			Year ended December 31, 2003
SALES
	Gross sales		$	650,665		$	914,995		$	3,763,863		$	4,126,281
	Management service revenue—related party			34,450			—			80,353			—
	Less returns and allowances			(12,066	)		(32,811	)		(95,625	)		(107,411	)
		Net sales		673,049			882,184			3,748,591			4,018,870
COST OF SALES
	Product sales			1,010,188			1,033,029			4,354,215			4,440,939
	Cost of management service revenue			17,140			—			55,033			—
		Cost of sales		1,027,328			1,033,029			4,409,248			4,440,939
	Gross margin			(354,279	)		(150,845	)		(660,657	)		(422,069	)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
	Selling expenses			49,836			94,773			280,393			468,096
	General and administrative expenses			83,312			122,792			473,223			609,061
		Loss from operations		(487,427	)		(368,410	)		(1,414,273	)		(1,499,226	)
OTHER INCOME (EXPENSE)
	Interest expense			(60,005	)		(34,411	)		(184,756	)		(74,899	)
	Interest income			204			—			271			11,925
		Loss from continuing operations		(547,228	)		(402,821	)		(1,598,758	)		(1,562,200	)
DISCONTINUED OPERATIONS
	Loss from discontinued operations			—			30,054			(49,570	)		(16,798	)
	Gain on disposal of assets			—			—			141,963			—
		Gain (loss) from discontinued operations		—			30,054			92,393			(16,798	)
NET LOSS			$	(547,228	)	$	(372,767	)	$	(1,506,365	)	$	(1,578,998	)

The accompanying notes are an integral part of these financial statements.

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EnCompass Materials Group Limited

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY

For the year ended December 31, 2003, the period from
April 15, 2002 (date of inception) through December 31, 2002
and the three months ended March 31, 2004 (Unaudited)

	Series A Preferred Stock
						Common Stock
									Additional Paid-In Capital		Deferred Compensation			Accumulated Deficit
	Shares		Amount			Shares	Amount										Total
BALANCE, April 15, 2002 (date of inception)	735,240		$	1,300,000		—	$	—	$	—	$	—		$	—		$	1,300,000
Issuance of Series A Preferred Stock	227,273			400,000		—		—		—		—			—			400,000
Series A Preferred Stock converted to common stock	(962,513	)		(1,700,000	)	4,811,502		1,700,000		—		—			—			—
Deferred compensation	—			—		—		—		23,500		(23,500	)		—			—
Issuance of warrants	—			—		—		—		39,783		—			—			39,783
Net loss	—			—		—		—		—		—			(1,578,998	)		(1,578,998	)
BALANCE, December 31, 2002	—			—		4,811,502		1,700,000		63,283		(23,500	)		(1,578,998	)		160,785
Amortization of deferred compensation	—			—		—		—		—		4,700			—			4,700
Net loss	—			—		—		—		—		—			(1,506,365	)		(1,506,365	)
BALANCE, December 31, 2003	—			—		4,811,502		1,700,000		63,283		(18,800	)		(3,085,363	)		(1,340,880	)
Net loss (Unaudited)	—			—		—		—		—		—			(547,228	)		(547,228	)
BALANCE, March 31, 2004 (Unaudited)	—		$	—		4,811,502	$	1,700,000	$	63,283	$	(18,800	)	$	(3,632,591	)	$	(1,888,108	)

The accompanying notes are an integral part of these financial statements.

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EnCompass Materials Group Limited

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the year ended December 31, 2003, the period from
April 15, 2002 (date of inception) through December 31, 2002
and the three months ended March 31, 2004 and 2003 (Unaudited)

					March 31,
											December 31,
					2004 (Unaudited)			2003 (Unaudited)
											2003			2002
INCREASE (DECREASE) IN CASH
CASH FLOWS FROM OPERATING ACTIVITIES
	Net loss from continuing operations				$	(547,228	)	$	(402,821	)	$	(1,598,758	)	$	(1,562,200	)
	Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
		Depreciation and amortization				123,825			122,428			490,159			367,323
		Amortization of deferred compensation				—			—			4,700			—
		Issuance of warrants				—			—			—			39,783
	Change in operating assets and liabilities:
		Accounts receivable				(3,416	)		1,275			215,045			(490,127	)
		Inventory				(58,514	)		19,304			13,618			(301,933	)
		Prepaid expenses				(51,010	)		13,125			30,226			(52,296	)
		Note receivable from shareholder				—			—			(16,286	)		—
		Accounts payable				33,953			119,959			228,834			150,975
		Accrued liabilities				(39,520	)		(24,183	)		88,418			116,603
		Accrued interest on notes from shareholders				49,096			23,956			138,142			19,983
		Accrued liabilities, related party				70,528			—			57,628			—
			Net cash used in operating activities			(422,286	)		(126,957	)		(348,274	)		(1,711,889	)
CASH FLOWS FROM INVESTING ACTIVITIES
	Purchases of property, plant and equipment					(21,667	)		(3,900	)		(17,371	)		(1,590,250	)
				Net cash used in investing activities		(21,667	)		(3,900	)		(17,371	)		(1,590,250	)
CASH FLOWS FROM FINANCING ACTIVITIES
	Sale of preferred stock					—			—			—			1,700,000
	Borrowings on notes payable, bank					—			—			—			700,000
	Repayment on notes payable, bank					(58,538	)		(58,334	)		(233,333	)		(155,351	)
	Borrowings on notes payable, shareholder					420,000			200,000			865,000			750,000
	Net (repayments) borrowings on line of credit					48,381			(23,514	)		(177,690	)		262,636
	Borrowings on capital lease obligation					—			—			—			151,317
	Repayments on capital lease obligation					—			(20,246	)		(77,757	)		(73,560	)
				Net cash provided by financing activities		409,843			97,906			376,220			3,335,042
NET INCREASE (DECREASE) IN CASH						(34,110	)		(32,951	)		10,575			32,903
CASH, beginning of period						43,478			32,903			32,903			—
CASH, end of period					$	9,368		$	(48	)	$	43,478		$	32,903
Supplemental disclosure of cash flow information:
	Interest paid				$	10,909		$	10,455		$	66,597		$	54,916
	Series A preferred stock converted to common stock					—			—			—			1,700,000
Non—cash transactions
	Issuance of warrants				$	—		$	—		$	—		$	39,783

The accompanying notes are an integral part of these financial statements.

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EnCompass Materials Group Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information as of March 31, 2004 and for the
three months ended March 31, 2004 and 2003 is unaudited)

NOTE A—ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        On April 15, 2002 EnCompass Materials Group Limited (EMG or the Company) purchased assets and assumed certain liabilities out of receivership to start operations of the Company. The Company operates primarily in Washington and California, where it provides manufacturing and reclamation of silicon wafers. The Company is a Washington corporation, which is the location of the corporate headquarters.

1.

Principles of consolidation

        The accompanying consolidated financial statements reflect the accounts of the Company and its wholly owned subsidiary, Encompass Distribution Services LLC (EDS). As discussed in footnote M, the Company sold EDS in August 2003. EDS has been included as a discontinued operation in the accompanying financial statements. All material intercompany transactions have been eliminated.

2.

Cash and cash equivalents

        The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. Cash is held in interest bearing or demand deposit bank accounts. These deposits are held by high credit quality financial institutions, which have historically not incurred any credit loss.

3.

Accounts receivable

        The majority of accounts receivable are due from companies in the semiconductor industry. Credit is extended based on evaluation of a customer's financial condition. Accounts receivable are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts. The Company determines their allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and subsequent payments on such accounts are credited to the allowance for doubtful accounts.

4.

Inventory

        Inventory is stated at the lower of average cost or market, determined by estimated net realizable value, and consists of products for resale to customers.

5.

Property, plant and equipment

        Property, plant and equipment is stated at cost. Depreciation and amortization has been provided in the financial statements on the straight-line method based on reasonable estimates of useful lives of the assets, which range from 3 to 7 years.

6.

Fair value of financial instruments

        In accordance with SFAS No. 107, Disclosures about Fair Value of Financial Instruments, the Company discloses the fair value of its financial instruments for which it is practicable to estimate fair value. The carrying amounts of cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued liabilities meeting the definition of a financial instrument, approximate fair value because of the short-term maturity of these instruments. Based on the variable rate structure

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of debt and borrowing rates currently available to the Company for loans with similar terms and maturities, management believes long-term debt approximates fair value.

7.

Income taxes

        The Company originally elected to be taxed as a C Corporation for federal and state income tax purposes. Effective October 1, 2002, the Company changed its election to be taxed as an S Corporation. As such, federal and state income taxes on the Company's income after that date are the responsibility of the stockholders. Accordingly, no provision for income taxes is reflected in the Company's financial statements.

        Prior to the Company's election to become an S Corporation, income taxes were accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires an asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for temporary differences between financial statement and income tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the tax rates and laws that are currently in effect. In addition, the standard requires that the amount of any future tax benefits be reduced by a valuation allowance until it is more likely than not that such benefits will be realized. During the period from April 15, 2002 (date of inception) to September 30, 2002, management believed that sufficient uncertainty existed related to realizability of the deferred tax assets that a valuation allowance was recorded against the deferred tax amount. Upon conversion to an S Corporation, these amounts were written off, with a net effect of $0 in the financial statements.

8.

Revenue and expenses

        Revenue is generated from the sale of wafers and from providing wafer reclaiming services to customers and is recognized when the refurbished product is shipped to the customer. In addition, an allowance is provided for estimated future returns at the time a sale is recorded.

9.

Shipping and handling costs

        The Company charges customers for shipping and handling and these amounts have been included in sales. Shipping and handling costs are included in cost of sales.

10.

Use of estimates

        The preparation of the consolidated financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the amount of assets, liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Estimates are used for, among other things, sales returns, allowance for doubtful accounts, depreciation, and inventory obsolescence. Actual results could differ from those estimates.

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11.

Stock options

        The Company has a stock-based employee compensation plan which is described more fully in Note K. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations.

        The fair value of option grants are estimated using the Black-Scholes option-pricing model, for purposes of measuring the pro forma compensation expense as prescribed by SFAS 123 and as amended by SFAS 148, with the following weighted average assumptions used for grants during the years ended December 31, 2003 and 2002 and the three months ended March 31, 2004 and 2003:

	March 31,
					December 31,
	2004 (Unaudited)		2003 (Unaudited)
					2003		2002
Risk-free interest rate	4.08	%	3.81	%	3.90	%	4.83	%
Expected dividend yield and volatility	0	%	0	%	0	%	0	%
Expected life	10 years		10 years		10 years		10 years

        The following table illustrates the effect on net loss if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation for the years ended December 31, 2003 and 2002 and the three months ended March 31, 2004 and 2003:

	March 31,
							December 31,
	2004 (Unaudited)			2003 (Unaudited)
							2003			2002
Net loss, as reported	$	(547,228	)	$	(372,767	)	$	(1,506,365	)	$	(1,578,998	)
Less: Total stock-based employee compensation expense determined under intrinsic value based method for all awards, net of related tax effects		—			—			4,700			—
Add: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(143	)		—			(9,200	)		—
Pro forma net loss	$	(547,431	)	$	(372,767	)	$	(1,510,865	)	$	(1,578,998	)

        Upon the sale of the Company any unexercised options will expire.

12.

Concentrations of credit risk

        The Company has two customers accounting for approximately $1,446,000 (39%) and $1,338,000 (30%) of revenues for the year ended December 31, 2003 and the period from April 15, 2002 (date of inception) to December 31 2002, respectively, two customers accounting for approximately $326,000 (50%) for the three months ended March 31, 2004 (unaudited) and three customers accounting for approximately $568,000 (64%) for the three months ended March 31, 2003 (unaudited).

10

        A majority of the Company's accounts receivables are from four customers. These four customers accounted for $248,000 (79%), $744,000 (67%) and $271,000 (88%) of trade receivables at December 31, 2003 and 2002 and March 31, 2004 (unaudited), respectively.

13.

Interim Financial Data

        The consolidated financial statements as of March 31, 2004 and for the three months ended March 31, 2004 and 2003 are unaudited; however these financial statements have been prepared on a basis consistent with the audited financial statements and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and of cash flows in accordance with generally accepted accounting principles. Results of the interim periods are not necessarily indicative of results for the entire year.

NOTE B—GOING CONCERN

        The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and contemplate continuation of the Company as a going concern. For the year ended December 31, 2003, the Company incurred a net loss from continuing operations of $1,598,758 before the gain from disposal of discontinued operations of $92,393. The Company has incurred cumulative losses for the period from April 15, 2002 (date of inception) to December 31, 2003 of $3,085,363. The Company had negative cash flow from operating activities of $348,274 for the year ended December 31, 2003 and $1,711,889 for the period ended December 31, 2002. As of December 31, 2003 the Company had negative working capital of $256,197. Without substantial increases in revenue, the Company's continued existence is dependent on external financing from the Company's majority shareholder. These matters raise substantial doubt about the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

        On June 11, 2004, as more fully described in Note O, the Company sold substantially all of its assets pursuant to an asset purchase agreement.

11

NOTE C—INVENTORY

        Inventory consists of the following at:

			December 31,
	March 31, 2004 (Unaudited)
			2003		2002
Raw materials	$	67,918	$	61,271	$	176,972
Production supplies		68,017		54,440		64,402
Work in process		45,296		14,395		10,308
Finished goods		200,598		184,673		307,344
		381,829		314,779		559,026
Less inventory reserve		35,000		26,464		30,000
	$	346,829	$	288,315	$	529,026

NOTE D—PROPERTY, PLANT AND EQUIPMENT

        Property, plant and equipment consisted of the following at:

			December 31,
	March 31, 2004 (Unaudited)
			2003		2002
Machinery & equipment	$	1,409,598	$	1,387,931	$	1,392,103
Software		8,000		8,000		8,000
Leasehold improvements		211,689		211,689		211,689
		1,629,287		1,607,620		1,611,792
Less accumulated depreciation and amortization		981,307		857,482		367,738
	$	647,980	$	750,138	$	1,244,054

        Depreciation and amortization expense for the year ended December 31, 2003, the period from April 15, 2002 (date of inception) to December 31, 2002 and the three months ended March 31, 2004 and 2003 (unaudited) was $490,159, $367,738, $123,825 and $124,348, respectively.

NOTE E—LINE OF CREDIT

        In August 2002, the Company entered into an annual line of credit agreement with a lender for an amount of up to $1,000,000 which is collateralized by the assets of the Company and restricted by a defined borrowing base limit. Amounts borrowed under the line of credit agreement bear interest at the prime rate plus 3%. The line of credit agreement requires annual renewal. When the line of credit was renewed in August 2003, in conjunction with the sale of EDS (see Note M) the maximum amount available under the line of credit was reduced to $500,000. The interest rate at December 31, 2003 and 2002 and March 31, 2004 (unaudited) was 7.0%, 7.25% and 8.0%, respectively. There were no significant covenants on the line of credit.

12

NOTE F—CAPITAL LEASE

        The Company leases certain equipment under a capital lease. The amount owed on the capital lease obligation was $0, $77,757 and $0 at December 31, 2003 and 2002 and March 31, 2004 (unaudited), respectively.

NOTE G—NOTES PAYABLE

Notes Payable—Financial Institution

        Notes payable consists of the following at:

			December 31,
	March 31, 2004 (Unaudited)
			2003		2002
Notes payable to Comerica Bank—California, due in monthly installments of $19,444 plus interest at 6.75%, final payment due in April 2005, guaranteed by a shareholder of the Company	$	252,777	$	311,315	$	544,648
Less current portion		233,333		233,333		233,333
Total long term debt	$	19,444	$	77,982	$	311,315

        Future maturities of notes payable are as follows:

Year ending December 31,
	2004	$	233,333
	2005		77,982
		$	311,315

Notes Payable—Shareholder

        Notes payable to a shareholder consist of the following at:

			December 31,
	March 31, 2004 (Unaudited)
			2003		2002
Notes payable to shareholder, accruing interest at 11%, accrued interest due through December 31, 2004 due on July 1, 2008. Monthly principal payments of $33,646 plus interest due beginning January 1, 2005, final payment due December 1, 2008.	$	2,035,000	$	1,615,000	$	750,000
Plus accrued interest		207,221		158,125		19,983
Total notes payable—shareholder	$	2,242,221	$	1,773,125	$	769,983

13

Notes Payable—Shareholder

        Future maturities of notes payable to shareholders are as follows:

Year ending December 31,
	2004	$	—
	2005		403,750
	2006		403,750
	2007		403,750
	2008		561,875
		$	1,773,125

        Subsequent to December 31, 2003 the Company received additional amounts from a shareholder totaling $1,075,000 as needed to fund operations. These additional loans have the same terms as the loans disclosed above.

NOTE H—RELATED-PARTY TRANSACTIONS

        The Company has entered into transactions with certain related companies, which are controlled by the shareholders of EMG, as well as with the shareholders themselves. Balances with these related parties are as follows:

			December 31,
	March 31, 2004 (Unaudited)
			2003		2002
Notes payable to a shareholder, due in monthly installments of $33,646 plus interest at 11% beginning January 1, 2005, final payment due in July 1, 2008	$	2,035,000	$	1,615,000	$	750,000
Interest accrued to a shareholder		207,221		158,125		19,983
Note receivable from a shareholder for sale of EDS		16,286		16,286		—
Accrued interest receivable from a shareholder		271		271		—
Accounts payable to related company		128,156		57,628		—
Management service revenue from related company		34,450		80,353		—
Sales to related company		121,503		509,702		—
Purchases from related company		93,119		4,170		—

NOTE I—EMPLOYEE RETIREMENT PLANS

        The Company has adopted a 401(k) savings plan for all eligible employees. All employees are eligible to participate in the plan following the attainment of age 21 and completion of 3 months of service. Participants may contribute any dollar amount up to 15% of their total compensation to the plan, but not to exceed a federally indexed limit each year. The Company has the option of contributing a discretionary amount to the plan. During the year ended December 31, 2003, the period from April 15, 2002 (date of inception) to December 31, 2002 and the three months ended March 31,

14

2004 and 2003 (unaudited), the Company contributed approximately $2,600, $12,400, $0 and $0 respectively, to the plan.

NOTE J—COMMITMENTS

        The Company leases manufacturing, warehouse and office space and equipment under operating leases that expire in three to five years. Future minimum payments are as follows:

Year ending December 31,
	2004	$	254,408
	2005		258,162
	2006		165,189
	2007		9,528
	2008		9,528

        The Company leases additional warehouse and office space under an operating lease, which does not contain a renewal option and is cancelable at the Company's option. The Company subleases warehouse and office space not required for current operations. Such subleases provided rental income of $15,554 and $1,154 for the year ended December 31, 2003 and the three months ended March 31, 2003 (unaudited), respectively. The Company recognized rent expense of $218,541, $166,176, $50,250 and $57,216 for the year ended December 31, 2003, the period from April 15, 2002 (date of inception) to December 31, 2002 and the three months ended March 31, 2004 and 2003 (unaudited), respectively.

NOTE K—STOCK OPTION PLAN

        The Company has a stock option plan which permits the Board of Directors to grant up to 500,000 options of Common Stock to employees, directors, officers, agents, consultants and independent contractors of the Company. The Plan provides for the granting of incentive stock options, nonqualified stock options, restricted stock awards, and/or unrestricted stock awards.

        Options may be granted under this plan at not less than 100 percent of the fair market value of the Common Stock at the grant date in the case of incentive stock options and must be exercised within a 10-year period from the date of issuance. However, in the case of employees then owning more than 10 percent of the voting power of all classes of the Company's stock, incentive stock options may not be granted for less than 110 percent of the fair market value of the Common Stock at the date of grant, and the term of such options shall not exceed ten years. Vesting of options under the plan is determined by the Board of Directors and is generally 20 percent per year over a five-year period on the anniversary date of the award. Options expire no later than 10 years after the date of grant.

        During 2002, the Company granted options to employees at below the fair value, resulting in a deferred charge of $23,500. Total deferred stock-based employee compensation expense of $23,500 was recorded on the consolidated balance sheet during 2002 as deferred compensation expense, and the related amortization of $4,700 for the year ended December 31, 2003 is included in general and administrative expense on the consolidated statements of income.

15

        The following table summarizes the plan activity:

	2003				2002
Stock options	Shares		Weighted average exercise price		Shares		Weighted average exercise price
Outstanding at beginning of year	263,000		$	.25	—		$	—
Granted	17,000			.25	267,000			.25
Forfeited	(25,000	)		.25	(4,000	)		.25
Outstanding at end of year	255,000		$	.25	263,000		$	.25
Options exercisable at end of year	47,000		$	.25	—		$	—
Weighted-average fair value of options granted during the year			$	.20			$	.20

        At December 31, 2003 and 2002 there were 47,000 and 0 options exercisable, respectively, and 245,000 and 237,000 options available for future grant under the Plan, respectively.

NOTE L—SHAREHOLDER'S EQUITY

Preferred Stock

        The Company had previously authorized 2,000,000 shares of Series A preferred stock with no par value. Preferred shareholders were to receive an 8% dividend when and if declared by the Board. The right of the holders of preferred stock to receive dividends was not cumulative. There have been no dividends declared as of December 31, 2003.

        On September 27, 2002, all shares of outstanding preferred stock were converted to common stock on a 1:5 basis and the articles of incorporation were amended to eliminate this class of stock. No Series A preferred shares are issued and outstanding at December 31, 2003 and 2002.

Common Stock

        The Company authorized 4,000,000 shares of common stock with no par value. On September 27, 2002, the Company amended its Articles of Incorporation to increase the authorized shares of common stock to 10,000,000 shares. Each shareholder may vote in corporate matters in proportion to the number of shares held.

Warrants

        On April 23, 2002 the Company issued warrants to one stockholder for the purchase of 198,121 shares of common stock. The shares are exercisable at $0.25 per share and expire on April 22, 2012. The warrants are exercisable upon issuance. The related expense associated with these warrants of $39,783 is recorded in general and administrative expense in the statement of operations for the period from April 15, 2002 to December 31, 2002.

16

NOTE M—DISCONTINUED OPERATIONS

        In August 2003, the Company sold its Encompass Distribution Services LLC (EDS) business to two EMG shareholders and received cash of $1,810, a promissory note for $16,286, and forgiveness of $58,904 owed to one of the buyers for a total sales price of $77,000. The Company recognized a gain on the sale of EDS of $141,963.

        Summarized financial information for EDS (discontinued operations) is set forth below:

	March 31,
					December 31,
	2004 (Unaudited)		2003 (Unaudited)
					2003			2002
Revenue	$	—	$	539,478	$	1,174,000		$	551,000
Operating income (loss)		—		45,470		(7,100	)		(9,600	)
Net income (loss)		—		30,054		(49,570	)		(16,798	)

NOTE N—GUARANTEES

        The Company has a cross guaranty agreement with EDS, a related party, to guaranty the lines of credit for each company as a result of the sale of this subsidiary in August 2003. The Company is a guarantor on EDS' $500,000 line of credit at December 31, 2003 and March 31, 2004, which is renewable annually. The maximum amount of future obligation under the guarantee is limited to the amount drawn on the line. On June 11, 2004, as part of the sale of the Company, the cross guaranty agreement with EDS was terminated.

NOTE O—SUBSEQUENT EVENT

        On June 11, 2004, the Company entered into an agreement to sell all of its assets to Isonics Corporation of Denver, Colorado. The Company will receive 731,930 shares of Isonics Corporation common stock and a $1,700,000 note receivable from Isonics Corporation. Isonics Corporation acquired substantially all the operating assets of the Company and assumed certain liabilities related to the acquired business operations.

17

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Consolidated Financial Statements and Report of Independent Registered Public Accountanting Firm EnCompass Materials Group Limited For the period April 15, 2002 (date of inception) to December 31, 2002, the year ended December 31, 2003 and the three months ended March 31, 2004 and 2003 (Unaudited)
EnCompass Materials Group Limited CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended December 31, 2003, the period from April 15, 2002 (date of inception) through December 31, 2002 and the three months ended March 31, 2004 and 2003 (Unaudited)

EX-99.3

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Exhibit 99.3

PRO FORMA FINANCIAL INFORMATION OF ISONICS CORPORATION AND
ENCOMPASS MATERIALS GROUP LIMITED

Unaudited Pro Forma Combined Balance Sheet as of April 30, 2004

Notes to Unaudited Pro Forma Combined Balance Sheet as of April 30, 2004

Unaudited Pro Forma Combined Statement of Operations for the year ended April 30, 2004

Notes to Unaudited Pro Forma Combined Statement of Operations for the year ended April 30, 2004

UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(Dollars in thousands)

        The following unaudited pro forma financial information of Isonics Corporation gives effect to the acquisition of the business and assets of Encompass Materials Group Limited ("EMG") as if such transaction was consummated April 30, 2004, in the case of the Unaudited Pro Forma Combined Balance Sheet and as if such transaction was consummated on May 1, 2003, in the case of the Unaudited Pro Forma Combined Statement of Operations for the year ended April 30, 2004. The Unaudited Pro Forma Combined Balance Sheet as of April 30, 2004 includes EMG historical information as of March 31, 2004. The Unaudited Pro Forma Combined Statement of Operations for the year ended April 30, 2004 includes EMG historical information for the year ended March 31, 2004. The acquisition of the business and assets of EMG was completed on June 11, 2004. All related adjustments are described in the accompanying notes. In the opinion of management, all adjustments have been made that are necessary to present fairly the pro forma data.

        The following unaudited pro forma combined financial information is presented for illustrative purposes only, does not purport to be indicative of our financial position or results of operations as of the date hereof, or as of or for any other future date, and is not necessarily indicative of what our actual financial position or results of operations would have been had the foregoing transaction been consummated on such dates, nor does it give effect to (i) any transactions other than the foregoing transaction and those described in the accompanying Notes to Unaudited Pro Forma Combined Financial Information or (ii) Isonics Corporation or EMG's results of operations since April 30, 2004. The following unaudited pro forma combined financial information does not give effect to any anticipated annual savings or the additional revenues expected to be achieved following the consummation of the transaction. Actual amounts could differ from those presented.

        The following unaudited pro forma combined financial information is based upon the historical financial statements of Isonics Corporation and EMG, and should be read in conjunction with such historical financial statements, the related notes and the Notes to Unaudited Pro Forma Combined Financial Information.

        In the preparation of the unaudited pro forma combined financial information, management has estimated that the historical book value of the EMG assets and liabilities acquired approximates the fair value thereof, except for property and equipment which has been estimated based upon preliminary appraisal results as described in the Notes to Unaudited Pro Forma Combined Financial Information. Although the final appraisal and purchase accounting allocation is not anticipated to result in values that are materially greater or less than the values assumed in the preparation of the following unaudited pro forma combined financial information, there can be no assurance with respect thereof.

2

ISONICS CORPORATION

UNAUDITED PRO FORMA COMBINED BALANCE SHEET

APRIL 30, 2004

(Dollars in thousands)

ASSETS

			Isonics Historical		EMG Historical		Pro Forma Adjustments			Pro Forma Combined
CURRENT ASSETS
	Cash and cash equivalents		$	3,691	$	9	$	(415	)(1)(4)	$	3,285
	Accounts receivable			851		279		—			1,130
	Inventories			985		347		—			1,332
	Prepaid expenses and other current assets			143		73		—			216
		Total current assets		5,670		708		(415	)		5,963
LONG-TERM ASSETS
	Property and equipment, net			471		648		1,948	(1)		3,067
	Goodwill			1,807		—		470	(1)		2,277
	Intangible assets, net			706		—		—			706
	Other assets			27		16		—			43
		Total long-term assets		3,011		664		2,418			6,093
TOTAL ASSETS			$	8,681	$	1,372	$	2,003		$	12,056

LIABILTIES AND STOCKHOLDERS' EQUITY

			Isonics Historical		EMG Historical			Pro Forma Adjustments			Pro Forma Combined
CURRENT LIABILITIES
	Line of credit		$	—	$	133		$	(133	)(4)	$	—
	Notes payable			—		233			(233	)(4)		—
	Notes payable—Silver Silicon Ltd.			—		—			1,700	(1)		1,700
	Current portion of obligation under capital leases			54		—			—			54
	Accounts payable			628		338			—			966
	Accrued liabilities			256		166			—			422
	Due to related party			—		128			(128	)(2)		—
		Total current liabilities		938		998			1,206			3,142
	Obligation under capital leases, net of current portion			32		—			—			32
	Notes payable—shareholders			—		2,262			(2,262	)(2)		—
TOTAL LIABILITIES				970		3,260			(1,056	)		3,174
STOCKHOLDERS' EQUITY (DEFICIT)				7,711		(1,888	)		3,059	(1)(3)		8,882
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY			$	8,681	$	1,372		$	2,003		$	12,056

3

ISONICS CORPORATION

NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET

APRIL 30, 2004

(Dollars in Thousands)

(1)

The aggregate purchase price paid by Isonics Corporation and the related purchase accounting (which is based upon preliminary appraisal results) for the acquisition, assuming it was consummated at April 30, 2004 is as follows:

Calculation of purchase price

Note payable to Silver Silicon Ltd. (formerly EMG)	$	1,700
731,930 shares of common stock (valued at the closing price of our common stock on June 11, 2004) issued to Silver Silicon Ltd.		1,171
Estimated legal, accounting and other advisory fees		49
		2,920

Fair value of net assets acquired

Working capital	$	(162	)
Other long-term assets		16
Property and equipment (based upon preliminary appraisal results)		2,596
Goodwill		470
	$	2,920

(2)

Represents excluded liabilities that remain with the Silver Silicon Ltd.

(3)

Elimination of EMG equity of ($1,888).

(4)

Line of credit and notes payable totaling $366 paid off by Isonics at closing per the terms of the agreement.

4

ISONICS CORPORATION

UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

YEAR ENDED APRIL 30, 2004

(Dollars in thousands, except per share amounts)

			Isonics Historical			EMG Historical			Pro Forma Adjustments			Pro Forma Combined
Revenues			$	8,721		$	3,539		$	—		$	12,260
Cost of revenues				7,138			4,403			389	(4)		11,930
		Gross margin		1,583			(864	)		(389	)		330
Operating expenses:
	Selling, general and administrative			5,186			668			—			5,854
	Research and development			569			—			—			569
		Total operating expenses		5,755			668			—			6,423
Operating loss				(4,172	)		(1,532	)		(389	)		(6,093	)
Other income (expense), net				9			(211	)		116	(2)(3)		(86	)
Loss from continuing operations before income taxes				(4,163	)		(1,743	)		(273	)		(6,179	)
Income taxes				—			—			—			—
Loss from continuing operations				(4,163	)		(1,743	)		(273	)		(6,179	)
Loss from discontinued operations				—			(79	)		79	(1)		—
Gain on disposal of discontinued operations				—			142			(142	)(1)		—
NET LOSS			$	(4,163	)	$	(1,680	)	$	(336	)	$	(6,179	)
DEEMED DIVIDENDS ON PREFERRED STOCK			$	(2,862	)		—			—		$	(2,862	)
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS			$	(7,025	)	$	(1,680	)	$	(336	)	$	(9,041	)
Net loss per share—basic and diluted
	Net loss per share attributable to common stockholders		$	(.53	)		—			—		$	(.65	)
	Shares used in computing per share information			13,252			—			732			13,984

5

ISONICS CORPORATION

NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

April 30, 2004

(Dollars in Thousands)

(1)

Eliminates discontinued operations associated with Encompass Distribution Services, LLC.

(2)

Eliminates interest expense of $211 associated with EMG debt and payables to related parties.

(3)

Adds interest expense ($95) associated with $1,700 payable to Silver Silicon Ltd. at 6% (payable ratably over 33 months beginning October 2004).

(4)

Additional depreciation expense associated with allocation of excess purchase price to property and equipment over the recorded book value. Allocation was assumed to have a five-year life for depreciation purposes.

6

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PRO FORMA FINANCIAL INFORMATION OF ISONICS CORPORATION AND ENCOMPASS MATERIALS GROUP LIMITED