<PAGE>   1
                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D. C. 20549

                                  FORM 10-K/A2

            (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal period ended December 31, 1998

                                       OR

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

          For the transition period from ___________ to ______________

                             Commission file number
                                     0-22923

                           INTERNATIONAL ISOTOPES INC
             (Exact name of registrant as specified in its charter)

                  Texas                                 74-2763837
         (State of incorporation)           (IRS Employer Identification Number)

          3100 Jim Christal Rd.
              Denton, Texas                               76207
(Address of principal executive offices)                (zip code)

                                  940-484-9492
              (Registrant's telephone number, including area code)

         Securities registered under Section 12(b) of the Exchange Act:
              ----------------------------------------------------
                          COMMON STOCK, $.01 PAR VALUE

         Securities registered under Section 12(g) of the Exchange Act:
              ----------------------------------------------------
                          COMMON STOCK, $.01 PAR VALUE
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES (X) NO ( )

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )


                                      -1-
<PAGE>   2

As of March 30, 1999 the aggregate market value of the common stock of the
registrant held by non-affiliates of the registrant as determined by reference
to the closing price of Common Stock as reported on the Nasdaq Small Cap Market
System, was $36,646,778.

As of March 30, 1999 the number of shares of common stock, $.01 par value,
outstanding was 7,511,625 shares.

INTERNATIONAL ISOTOPES INC

FORM 10-K/A2

TABLE OF CONTENTS

The Registrant is amending its consolidated statements of cash flows for certain
mathematical errors. This amendment does not affect the Company's previously
reported financial position or results of operations, or any footnote
disclosure.

<TABLE>
<CAPTION>
                                                                        Page No.
<S>                                                                     <C>
Part IV.

Item 14.  Exhibits, Financial Statement Schedule
          and Reports on Form 8-K ...................................      3
</TABLE>


                                      -2-
<PAGE>   3

PART IV

Item 14. Exhibits

The following documents are filed or incorporated by reference as exhibits to
this report:

23.1     Consent of KPMG LLP, as independent certified public accountants


                                      -3-
<PAGE>   4

INTERNATIONAL ISOTOPES, INC.

FINANCIAL STATEMENTS

TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                      Page No.
<S>                                                                                   <C>
Independent Auditors' Report........................................................      5

FINANCIAL STATEMENTS

Consolidated Balance Sheets of the Company
    as of December 31, 1998 and 1997................................................      6

Consolidated Statements of Operations for the years ended December 31, 1998 and
   1997, for the period from November 1, 1995 (inception) through December 31,
   1996, and for the period from
   November 1, 1995 (inception) through December 31, 1998...........................      7

Consolidated Statements of Stockholders' Equity for the years ended
   December 31, 1998 and 1997, and for the period from November 1, 1995
   (inception) through December 31, 1996............................................      8

Consolidated Statements of Cash Flows for the years ended December 31, 1998 and
   1997, for the period from November 1, 1995 (inception) through December 31,
   1996, and for the period from
   November 1, 1995 (inception) through December 31, 1998...........................      9

Notes to Consolidated Financial Statements .........................................     11
</TABLE>


                                      -4-
<PAGE>   5

                          Independent Auditors' Report


The Board of Directors
International Isotopes Inc.:

We have audited the accompanying consolidated balance sheets of International
Isotopes Inc. and subsidiaries (a development stage enterprise), (the Company)
as of December 31, 1998 and 1997 and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1998 and 1997, the period from November 1, 1995 (inception) through December 31,
1996, and the period from November 1, 1995 (inception) through December 31,
1998. These consolidated financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 International
Isotopes Inc. and subsidiaries (a development stage enterprise), as of December
31, 1998 and 1997, and the results of their operations and their cash flows for
the years ended December 31, 1998 and 1997, the period from November 1, 1995
(inception) through December 31, 1996, and the period from November 1, 1995
(inception) through December 31, 1998, in conformity with generally accepted
accounting principles.


                                                KPMG LLP

Dallas, Texas
March 19, 1999, except as to Note 1(a)
  which is as of April 15, 1999


                                      -5-
<PAGE>   6

                  INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
                        (a development stage enterprise)
                          Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                                                December 31,
                                  Assets                                    1998            1997
                                                                        ------------    ------------
<S>                                                                     <C>             <C>
Current assets:
     Cash and cash equivalents                                          $  6,371,704    $  8,201,417
     Securities available for sale, at fair value                                 --       5,082,777
     Interest receivable                                                          --         152,358
     Accounts receivable                                                     240,433              --
     Assets held for sale                                                    526,533         564,932
     Inventories                                                           1,744,467              --
     Other                                                                    78,578          97,941
                                                                        ------------    ------------
         Total current assets                                              8,961,715      14,099,425

Property, plant and equipment, net                                        32,350,399       6,280,760

Goodwill, net of accumulated amortization of $195,697                      1,687,846              --
Other assets                                                               2,302,743         741,853
                                                                        ------------    ------------
         Total assets                                                     45,302,703      21,122,038
                                                                        ============    ============

                   Liabilities and Stockholders' Equity

Current liabilities
     Accounts payable                                                   $  1,825,246    $    906,062
     Accrued liabilities                                                     973,752         602,064
     Current portion of lease obligation                                     235,309              --
     Current installments of mortgage and notes payable to banks           3,117,177         634,454
                                                                        ------------    ------------
         Total current liabilities                                         6,151,484       2,142,580

Non-current portion of lease obligation                                      774,758              --
Mortgage and notes payable to banks, excluding current installments       14,483,839       3,053,818
                                                                        ------------    ------------
         Total liabilities                                                21,410,081       5,196,398

Commitments (note 1)

Stockholders' equity
     Preferred stock, $0.01 par value; 5,000,000 shares authorized,
         no shares issued and outstanding                                         --              --
     Common stock, $0.01 par value; 20,000,000 shares authorized,
         issued and outstanding 7,351,625 shares at December 31, 1998
         and 6,370,950 shares at December 31, 1997                            73,515          63,709
     Additional paid-in capital                                           35,183,918      21,787,337
     Deficit accumulated during the developmental stage                  (10,724,811)     (5,205,406)
     Receivable from stockholders                                           (640,000)       (720,000)
                                                                        ------------    ------------
         Total stockholders' equity                                       23,892,622      15,925,640
                                                                        ------------    ------------
         Total liabilities and stockholders' equity                       45,302,703      21,122,038
                                                                        ============    ============
</TABLE>


See accompanying notes to consolidated financial statements.


                                      -6-
<PAGE>   7

                  INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
                        (a development stage enterprise)
                      Consolidated Statements of Operations


<TABLE>
<CAPTION>
                                                                                         Period from           Period from
                                                                                       November 1, 1995      November 1, 1995
                                                          Year Ended December 31,    (inception) through   (inception) through
                                                          1998              1997      December 31, 1996     December 31, 1998
                                                       -----------      -----------  -------------------   -------------------
<S>                                                    <C>              <C>          <C>                   <C>
Revenue:
    Sales of reactor products                          $ 1,422,711               --               --             1,422,711
    Development contract income                            522,000               --               --               522,000
    Sale of accelerator components                          64,454          135,765          775,102               975,321
                                                       -----------      -----------      -----------           -----------
                                                         2,009,165          135,765          775,102             2,920,032

Cost of revenue:
    Cost of reactor products                             1,035,517               --               --             1,035,517
    Cost of development contract                            62,830               --               --                62,830
    Cost of accelerator components                          32,227           79,287          263,440               374,954
                                                       -----------      -----------      -----------           -----------
      Gross Profit                                         878,591           56,478          511,662             1,446,731
                                                       -----------      -----------      -----------           -----------

 Operating costs and expenses:
   Salaries and contract labor                           1,461,480          924,728          109,887             2,496,095
   Employee incentive compensation                              --        2,397,500               --             2,397,500
   Sales and marketing                                     697,530               --              116               697,646
   Product development                                     825,269               --               --               825,269
   General, administrative and consulting                3,553,669        1,193,606          773,634             5,520,909
                                                       -----------      -----------      -----------           -----------
      Total operating expenses                           6,537,948        4,515,834          883,637            11,937,419
                                                       -----------      -----------      -----------           -----------
      Loss from development stage operations            (5,659,357)      (4,459,356)        (371,975)          (10,490,688)

Other income (expense):
   Gain on sale (donation) of assets held for sale         (24,330)          14,974          336,364               327,008
   Interest income                                         288,494          297,835            4,906               591,235
   Interest expense                                           (462)        (224,413)        (303,741)             (528,616)
   Loan financing fees                                          --               --         (750,000)             (750,000)
                                                       -----------      -----------      -----------           -----------
      Loss before extraordinary item                    (5,395,655)      (4,370,960)      (1,084,446)          (10,851,061)

Extraordinary gain (loss) on debt extinguishment          (123,750)              --          250,000               126,250
                                                       -----------      -----------      -----------           -----------

Net loss                                               $(5,519,405)      (4,370,960)        (834,446)          (10,724,811)
                                                       ===========      ===========      ===========           ===========

Loss per common share before extraordinary
   item - basic and diluted                            $     (0.83)     $     (0.92)     $     (0.57)          $     (2.56)
                                                       ===========      ===========      ===========           ===========

Loss per common share - basic and diluted              $     (0.84)     $     (0.92)     $     (0.43)          $     (2.53)
                                                       ===========      ===========      ===========           ===========

Weighted average common shares outstanding -
   basic and diluted                                     6,534,987        4,750,561        1,918,538             4,244,516
                                                       ===========      ===========      ===========           ===========
</TABLE>


See accompanying notes to consolidated financial statements.


                                      -7-
<PAGE>   8

                   INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
                        (a development stage enterprise)
                 Consolidated Statements of Stockholders' Equity
  Years ended December 31, 1998 and 1997, and the period from November 1, 1995
                     (inception) through December 31, 1996


<TABLE>
<CAPTION>
                                                                                                         Deficit
                                                                                                       Accumulated
                                                                          Additional    Receivable     During the         Total
                                                      Common Stock         Paid-in         From        Development    Stockholders'
                                                   Shares     Amount       Capital     Stockholders       Stage          Equity
                                                 ---------  -----------   ----------   ------------    -----------    -------------
<S>                                              <C>        <C>           <C>          <C>             <C>            <C>
Shares purchased by founders at par                624,997  $     2,500           --            --             --          2,500
Shares purchased by founders at prices
  other than par                                   187,923          751          114            --             --            865
Shares issued to chairman as payment
  on notes payable                               1,250,000        5,000           --            --             --          5,000
Shares issued for service fees to
  stockholders who collateralized debt              65,100          260           26            --             --            286
Shares issued for patents                           25,000          100           --            --             --            100
Shares issued to stockholders for
  services rendered                                186,142          745      259,855            --             --        260,600
Shares issued for purchase of subsidiary           827,500        3,310       71,693            --             --         75,003
Shares issued through private placement            600,001        2,400      957,600      (160,000)            --        800,000
Net loss                                                --           --           --            --       (834,446)      (834,446)
Effect of 2.5 for 1 stock split                         --       22,600      (22,600)           --             --             --
                                                 ---------  -----------   ----------    ----------    -----------     ----------
Balance, December 31, 1996                       3,766,663       37,666    1,266,688      (160,000)      (834,446)       309,908
Collection of stock sale receivable                     --           --           --       160,000                       160,000
Shares returned by owners                               --           --      395,994            --                       395,994
Shares issued through private placement             62,500          625       99,375            --                       100,000
Shares issued to employees and                                                                                                --
  directors, including shares                                                                                                 --
  contributed by founders                           86,787          868    1,170,991      (472,000)                      699,859
Shares issued in initial public offering,                                                                                     --
  net                                            2,300,000       23,000   17,685,839            --                    17,708,839
Shares issued to employees                         155,000        1,550    1,168,450      (248,000)                      922,000
Net loss                                                --           --                                (4,370,960)    (4,370,960)
                                                 ---------  -----------   ----------    ----------    -----------     ----------
Balance, December 31, 1997                       6,370,950       63,709   21,787,337      (720,000)    (5,205,406)    15,925,640
Shares issued for purchase of subsidiary           159,416        1,594    3,172,379            --             --      3,173,973
Shares issued for license agreement & patent        37,259          372      724,628            --             --        725,000
Shares issued through private placement            784,000        7,840    9,499,574            --             --      9,507,414
Forgiveness of stock sale receivable                    --           --           --        80,000             --         80,000
Net loss                                                --           --           --            --     (5,519,405)    (5,519,405)
                                                 ---------  -----------   ----------    ----------    -----------     ----------
Balance, December 31, 1998                       7,351,625  $    73,515   35,183,918      (640,000)   (10,724,811)    23,892,622
                                                 =========  ===========   ==========    ==========    ===========     ==========
</TABLE>


          See accompanying notes to consolidated financial statements.


                                      -8-
<PAGE>   9

                  INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
                        (a development stage enterprise)
                     Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                                              Period from          Period from
                                                                         Year               November 1, 1995     November 1, 1995
                                                                   Ended December 31       (inception) through   (inception) through
                                                                 1998            1997       December 31, 1996     December 31, 1998
                                                             ------------     ----------  -------------------   -------------------
<S>                                                          <C>              <C>         <C>                   <C>
Cash flows from operating activities:
   Net loss                                                  $ (5,519,405)    (4,370,960)       (834,446)         (10,724,811)
   Adjustments to reconcile net loss to net cash used in
   operating activities
     Depreciation and amortization                                490,180         17,354           1,660              509,194
     (Gain) loss on sale or donation of assets                     24,330        (14,974)       (336,364)            (327,008)
     Services compensated by stock issuance                            --      1,918,000         260,886            2,178,886
     Forgiveness of receivable from stockholder                    80,000             --              --               80,000
     Extraordinary loss(gain) on extinguishment of debt           123,750             --        (250,000)            (126,250)
     Changes in operating assets and liabilities
       Interest receivable                                        152,358       (152,358)             --                   --
       Accounts receivable                                        446,888             --              --              446,888
       Other assets                                              (435,883)       (87,086)        (10,855)            (533,824)
       Inventory                                                 (485,607)        15,645        (757,498)          (1,227,460)
       Accounts payable                                          (167,031)        91,990         241,341              166,300
       Accrued liabilities                                        348,447        585,589          16,475              950,511
                                                             ------------     ----------      ----------          -----------
         Net cash used in operating activities                 (4,941,973)    (1,996,800)     (1,668,801)          (8,607,574)
                                                             ------------     ----------      ----------          -----------

Cash flows from investing activities:
   Proceeds from sale of certificate of deposit                        --        400,000              --              400,000
   Purchase of certificate of deposit                                  --       (100,000)       (300,000)            (400,000)
   Purchase of assets for sale and operations                 (24,290,167)    (4,694,947)     (1,888,673)         (30,873,787)
   Purchase of securities available for sale                           --     (5,082,777)             --           (5,082,777)
   Proceeds from sale of securities available for sale          5,082,777             --              --            5,082,777
   Proceeds from sale of assets held for sale                      14,069        126,887         691,051              832,007
   Purchase MAC Isotopes, Inc., net of cash received             (495,000)            --              --             (495,000)
   Investment in trademarks and license fee                      (275,000)            --              --             (275,000)
                                                             ------------     ----------      ----------          -----------
         Net cash used in investing activities                (19,963,321)    (9,350,837)     (1,497,622)         (30,811,780)
                                                             ------------     ----------      ----------          -----------

Cash flows from financing activities:
   Collections of stock sale receivable                                --        160,000              --              160,000
   Proceeds from issuance of notes payable to chairman                 --             --         120,000              120,000
   Proceeds from issuance of common stock                       9,507,412     17,808,839         803,366           28,119,617
   Payments on capital leases                                    (220,825)            --              --             (220,825)
   Proceeds from issuance of debt                              17,601,016      7,201,607       4,750,000           29,552,623
   Principal payments on notes payable                         (3,812,022)    (5,932,789)     (2,080,546)         (11,825,357)
   Payments on notes payable to chairman                               --        (20,000)        (95,000)            (115,000)
                                                             ------------     ----------      ----------          -----------
         Net cash provided by financing activities             23,075,581     19,217,657       3,497,820           45,791,058
                                                             ------------     ----------      ----------          -----------

Net increase (decrease) in cash and cash equivalents           (1,829,713)     7,870,020         331,397            6,371,704
Cash and cash equivalents at beginning of period                8,201,417        331,397              --                   --
                                                             ------------     ----------      ----------          -----------
Cash and cash equivalents at end of period                   $  6,371,704      8,201,417         331,397            6,371,704
                                                             ============     ==========      ==========          ===========
</TABLE>


                                  (Continued)


                                      -9-
<PAGE>   10

                  INTERNATIONAL ISOTOPES INC. AND SUBSIDIARIES
                        (a development stage enterprise)
                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                                              Period from          Period from
                                                                         Year               November 1, 1995     November 1, 1995
                                                                   Ended December 31       (inception) through   (inception) through
                                                                 1998            1997       December 31, 1996     December 31, 1998
                                                             ------------     ----------  -------------------   -------------------
<S>                                                          <C>              <C>         <C>                   <C>
Supplemental disclosure of cash flow activities:
   Cash paid for interest (net of capitalized interest)      $     84,455        238,011         295,425              617,891
                                                             ============     ==========      ==========          ===========

   Cash paid for financing fees                              $     86,350         10,261         500,000              596,611
                                                             ============     ==========      ==========          ===========

Supplemental disclosure of noncash transactions:
   Common stock issued for stock receivables                 $         --        720,000         160,000              880,000
                                                             ============     ==========      ==========          ===========

   Common stock issued for account payable to                $         --         62,852              --               62,852
     director
                                                             ============     ==========      ==========          ===========

   Conversion of notes payable to Common Stock               $         --             --           5,000                5,000
                                                             ============     ==========      ==========          ===========

   Acquisition of subsidiary through issuance of
     Common Stock                                            $  3,173,973             --          75,003            3,248,976
                                                             ============     ==========      ==========          ===========

   Capital expenditures included in accounts payable         $    801,254        509,879              --              801,254
                                                             ============     ==========      ==========          ===========

   Acquisition of license fee and patents rights
     through issuance of Common Stock                        $    725,000             --             100              725,100
                                                             ============     ==========      ==========          ===========

   Acquisition of equipment through capital leases           $  1,147,796             --              --            1,147,796
                                                             ============     ==========      ==========          ===========

</TABLE>


          See accompanying notes to consolidated financial statements


                                      -10-
<PAGE>   11

                   INTERNATIONAL ISOTOPES INC AND SUBSIDIARIES
                        (a development stage enterprise)

                   Notes to Consolidated Financial Statements
                        December 31, 1998, 1997 and 1996


(1)  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


(a)  Description of Business and Liquidity

     International Isotopes Inc (the Company) was incorporated in Texas in
     November 1995 as Applied Isotopes Products Corporation. The Company changed
     its name to International Isotopes Inc. in January 1997. The Company is a
     development stage enterprise which has acquired the technology, proprietary
     designs and intellectual property for the design and assembly of a proton
     linear accelerator (LINAC) to produce radioisotopes used in nuclear
     medicine for the detection and treatment of various forms of cancer and
     other diseases. In addition, the Company intends to manufacture and develop
     accelerators, diagnostic scanners, and proton/ neutron therapy equipment.
     Some of these assets were purchased in May 1996 from the State of Texas
     through a competitive bidding process arising from the termination of the
     government funded Superconducting Super Collider (SSC) project. The Company
     also owns 100% of the outstanding common shares of Gazelle Realty, Inc. and
     International Isotopes Idaho, Inc. (I4). Gazelle Realty, Inc. owned 20
     acres of land on which the facility for the LINAC has been constructed and
     1.6 acres of land on which the administration, manufacturing, and research
     and development building was constructed. During 1997 all the property
     owned by Gazelle Realty, Inc. was transferred to the Company. International
     Isotopes Idaho, Inc. has an exclusive five year contract, with an option to
     renew for three additional years, for the utilization of the Department of
     Energy Advanced Test Reactor facility located near Idaho Falls, Idaho.

     The Company has devoted substantially all of its efforts since inception to
     the acquisition and construction of the LINAC project and related assets,
     pharmaceutical production and to raising capital and other organizational
     activities. The operating revenues to date have been limited to the sales
     of accelerator components purchased from the State of Texas, product
     development income and sales of reactor produced products from I4.
     Additionally, the Company has derived operating capital from the sales of
     assets. The Company has financed its operations in part through private
     placements of its equity securities and its initial public offering (the
     "Offering") which occurred on August 19, 1997 (note 7). The Company
     utilized funds obtained from the Offering to increase its capital assets
     primarily through the assembly and upgrade of the LINAC for efficient
     production of radioisotopes and radiopharmaceuticals, as well as
     construction and acquisition of manufacturing facilities, and other
     production equipment. The Company is actively pursuing strategic alliances
     with pharmaceutical companies and universities. The Company has employed
     additional key personnel in the area of LINAC manufacturing, operations,
     radioisotope and radiopharmaceutical production, quality assurance and
     regulatory compliance. The Company will continue to sell the remaining
     assets held for sale and utilize the inventory of accelerator components in
     the manufacturing of products for sale to generate operating capital.

     To date, the Company's product sales have consisted of accelerator
     components acquired from the State of Texas and reactor produced product
     from I4. The Company has not manufactured any accelerator produced
     radioisotope products and there can be no assurance that the Company will
     be able to manufacture or market its products in the future, that future
     revenues will be significant, that any sales will be profitable, or that
     the Company will have sufficient funds available to manufacture or market
     its products. The Company's proposed radioisotope production facility is
     also subject to extensive government regulations. Further, the Company's
     future operations are dependent on the success of the Company's
     commercialization efforts, market acceptance of its products and ability to
     obtain adequate financing until sufficient cash flows can be generated from
     operations.

     The Company has limited history of operations and has experienced operating
     losses and significant costs in the acquisition of key personnel, land and
     facilities. The Company expects operating losses to continue as it
     initiates radioisotope and radiopharmaceutical production, obtains
     validation and customer approval, and increases marketing and product
     development.


                                      -11-
<PAGE>   12

     The Company initiated a private placement of its common stock in late 1998.
     The offering, which consists of units, each consisting of 16,000 shares of
     stock per unit at $12.50 per share and 16,000 three-year warrants with an
     exercise price of $13.75, was partially completed at December 31, 1998.
     Through February 28, 1999, $11,163,750, net of commissions and placement
     costs of $636,250, had been raised ($1,614,750, net of commissions and
     placement costs of $385,250 subsequent to December 31, 1998).

     The Company is continuing efforts to raise additional funding through the
     private placement of its securities. As of April 15, 1999 the Company has
     received commitments of $7,000,000 from certain officers, directors and
     other individuals for equity or bridge financing. The Company is continuing
     to negotiate potential financing options including long term mortgage
     financing for its facilities.

     The Company has incurred losses from operations since inception and has an
     accumulated deficit of $10,724,811 as of December 31, 1998. The Company's
     history of operating losses has resulted in continued dependence upon
     additional external financing. Management's plans regarding its liquidity
     involve the successful execution of its 1999 business plan, including the
     successful commercialization of the Company's products. The Company intends
     to obtain additional capital necessary to fund operations, complete the
     installation of the LINAC, and meet debt service requirements, from public
     and private sales of equity or debt securities. The Company anticipates,
     based on the execution of its business plan and its continued capital
     raising activities, that it will have sufficient funds to finance its
     operating activities for at least the next twelve months. In the event the
     Company is unable to secure sufficient funds, the Company's operations and
     business expansion would be significantly curtailed. There can be no
     assurance that the Company will be able to obtain additional financing or
     obtain financing on terms acceptable to the Company.

(b)  Basis of Presentation

     The consolidated financial statements include the accounts of the Company
     and its wholly owned subsidiaries Gazelle Realty, Inc. and International
     Isotopes Idaho, Inc. All significant intercompany accounts and transactions
     have been eliminated in consolidation. Certain reclassifications were made
     to prior years' presentation to conform to the current year presentation.

     During the period from November 1, 1995 (inception) through December 31,
     1995, the activity of the Company was limited to the Chairman's funding
     expenses totaling $15,240 for the Company. No shares were issued for cash
     until 1996. Accordingly, consolidated financial statements for the two
     months ended December 31, 1995 have not been separately presented. All
     references to the period from November 1, 1995 (inception) through December
     31, 1996 are referred to in the footnotes as the year ended 1996.

(c)  Financial Instruments and Cash Equivalents

     The Company's financial instruments consist of cash equivalents, short-term
     bonds, daily repurchase account, term repurchase account, money market
     accounts, accounts payable and accrued liabilities and notes payable. The
     carrying value of these financial instruments approximates fair value
     because of their short-term nature or because they bear interest at rates
     which approximate market rates.

     Cash equivalents of $6,058,095 and $8,063,151 at December 31, 1998 and
     1997, respectively, consist of money market accounts. For purposes of the
     consolidated statements of cash flows, the Company considers all highly
     liquid financial instruments with original maturities of three months or
     less at date of purchase to be cash equivalents.

(d)  Property, Plant and Equipment

     Property, plant and equipment are stated at cost less accumulated
     depreciation. All plant assets were classified as construction in progress
     for the periods ended December 31, 1997 and November 1, 1995 (inception)
     through December 31, 1996. During 1998, construction on the Company's
     buildings were completed and depreciation began. The Company capitalizes
     interest


                                      -12-
<PAGE>   13

     cost during construction periods, however, amounts were immaterial for the
     years ended December 31, 1997 and 1996. For 1998, interest costs
     capitalized were $607,395

     Plant and equipment are stated at cost less accumulated depreciation. The
     majority of these assets owned by the Company, concurrent with its
     formation, represented assets acquired from the terminated Superconducting
     Super Collider project. A portion of these assets is being retained for the
     construction of the LINAC. The remainder of such assets were acquired with
     the intention of being sold for operating capital and are classified on
     balance sheets as assets held for sale (see note 1(e) below).

     Depreciation on plant assets is computed using the straight-line method.
     Buildings in service are being depreciated over 39 years.

     Depreciation on equipment held for operations is computed using the
     straight-line method. Office furniture and equipment in service are being
     depreciated over 3 to 5 years.

     The Company has construction purchase commitments totaling $2,843,678 at
     December 31, 1998.

(e)  Assets Held for Sale

     Assets held for sale consist primarily of excess accelerator, mechanical
     and test equipment acquired from the terminated Superconducting Super
     Collider project and are carried at the lower of cost or fair value less
     cost to sell. These assets are being disposed of through private sales and
     auctions. For the years ended December 31, 1998,1997 and 1996, the Company
     sold for cash assets held for sale with a book value of $64,454, $111,913
     and $354,687 resulting in a gain/(loss) on sale of ($24,330), $14,974 and
     $336,364, respectively. The remaining assets held for sale are expected to
     be disposed of during 1999. At December 31, 1998, the Company has a
     carrying value of $526,533 in such assets and has assessed the
     recoverability of such assets. However, based on the nature of the assets
     and the potential markets for sale, it is reasonably possible that the
     Company's estimate that it will recover the carrying amount of these assets
     will change in the near term.

     Certain finished goods inventory of accelerator components acquired from
     the terminated Superconducting Super Collider project, amounting to
     $750,760 and $741,853 at December 31, 1998 and 1997, respectively, are
     classified as other assets carried at the lower of cost or fair value less
     costs to sell.

(f)  Inventories

     Inventories, which relate to the operations of I4, are carried at the lower
     of cost or market. Cost is determined using the first-in first out method.

(g)  Income Taxes

     Income taxes are accounted for under the asset and liability method.
     Deferred tax assets and liabilities are recognized for the future tax
     consequences attributable to differences between the financial statement
     carrying amounts of existing assets and liabilities and their respective
     tax bases and operating loss and tax credit carryforwards. Deferred tax
     assets and liabilities are measured using enacted tax rates expected to
     apply to taxable income in the years in which those temporary differences
     are expected to be recovered or settled. The effect on deferred tax assets
     and liabilities of a change in tax rate is recognized in income in the
     period that includes the enactment date.

(h)  Use of Estimates

     Management of the Company has made a number of estimates and assumptions
     relating to the reporting of assets and liabilities and the disclosure of
     contingent assets and liabilities at the date of the consolidated financial
     statements and reported amounts of revenues and expenses during the
     reporting period to prepare these consolidated financial statements in
     conformity with generally accepted accounting principles. Actual results
     could differ from those estimates.


                                      -13-
<PAGE>   14

(i)  Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of

     Long-lived assets and certain identifiable intangibles are reviewed for
     impairment whenever events or changes in circumstances indicate that the
     carrying amount of an asset may not be recoverable. Recoverability of
     assets to be held and used is measured by comparison of the carrying amount
     of an asset to future net cash flows expected to be generated by the asset.
     If such assets are considered to be impaired, the impairment to be
     recognized is measured by the amount by which the carrying amount of the
     assets exceed the fair value of the assets. Assets to be disposed of are
     reported at the lower of the carrying amount or fair value less costs to
     sell.

(j)  Revenue Recognition

     Revenue is recognized when product development milestones are accomplished,
     reactor products are shipped and accelerator components are shipped. No
     warranty coverage or right of return provisions are given to customers.

(k)  Research, Development and Advertising Costs

     Research, development and advertising costs are expensed when incurred.
     Research and development expenses were $281,706 in 1998, and were
     immaterial during 1997 and 1996.

(l)  Stock Option Plan

     The Financial Accounting Standards Board issued Statement of Financial
     Accounting Standards No. 123, Accounting for Stock-Based Compensation
     ("SFAS No. 123"), which permits entities to recognize as expense over the
     vesting period the fair value of all stock-based awards on the date of
     grant. SFAS No. 123 superseded certain provisions of Accounting Principles
     Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
     related interpretations.

     Alternatively, SFAS No. 123 also allows entities to continue to apply the
     provisions of APB Opinion No. 25 and provide pro forma net income and pro
     forma earning per share disclosures for employee stock option grants made
     in 1995 and future years as if the fair- value based method defined in SFAS
     No. 123 had been applied. The Company has elected to apply the provisions
     of APB Opinion No. 25 and provide the pro forma disclosure provision of
     SFAS No. 123 for its granted employee stock options.

(m)  Goodwill

     Goodwill represents the excess of the aggregate purchase price over the
     fair value of net assets acquired and is amortized on a straight-line basis
     over 77 months. The Company assesses the recoverability of this intangible
     asset by determining whether the amortization of the goodwill balance over
     its remaining life can be recovered through undiscounted future operating
     cash flows of the acquired operation. The amount of goodwill impairment, if
     any, is measured based on projected discounted future operating cash flows
     compared to the carrying value of goodwill.

(n)  Net Loss Per Common Share-Basic and Diluted

     Basic loss per share is computed on the basis of the weighted average
     number of common shares outstanding during the year. Diluted loss per
     share, which is computed on the basis of the weighted average number of
     common shares and all potentially dilutive common shares outstanding during
     the year, is the same as basic loss per share for the years ended December
     31, 1998, 1997 and 1996, and for the period from November 1, 1995
     (inception) through December 31, 1998, as all common stock options and
     warrants were anti-dilutive.

     At December 31, 1998, the Company has 394,500 common stock options and
     1,004,000 common stock warrants outstanding (note 7). Options and warrants
     excluded from the computation of diluted loss per share would have resulted
     in additional weighted average securities, under the treasury stock method,
     totaling 225,406, 94,921, -0-, and 116,987 for the years ended December 31,
     1998, 1997 and 1996, and the period from November 1, 1995 (inception)
     through December 31, 1998, respectively. The potentially dilutive effect of
     these securities has not been considered in the computation of diluted net
     loss per common share since their inclusion would be anti-dilutive.


                                      -14-
<PAGE>   15
(o)  Comprehensive Income

     Effective January 1, 1998, the Company adopted Statement of Financial
     Accounting Standards No. 130, "Reporting Comprehensive Income" which
     establishes standards for reporting and display of comprehensive income in
     a full set of general-purpose financial statements. Comprehensive income
     includes net income and other comprehensive income which is generally
     comprised of changes in the fair value of available-for-sale marketable
     securities, foreign currency translation adjustments and adjustments to
     recognize additional minimum pension liabilities. For each period presented
     in the accompanying consolidated statements of operations, comprehensive
     loss and net loss are the same amount.

(p)  Operating Segments

     SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
     Information" establishes standards for public business enterprises to
     report information about operating segments in financial reports issued to
     shareholders. It also establishes standards for related disclosures about
     products and services, geographic areas and major customers. The Company is
     in development stage and has not begun significant operations. The
     Company's management anticipates operating through various segments in
     future periods as operations for those segments begin.

(2)  SECURITIES

     The Company invests only in high quality, short-term investments which are
     classified as available-for-sale and recorded at fair value. The Company
     records gains and losses on securities using the specific identification
     method. At December 31, 1997, the carrying value at amortized cost
     approximated fair value and these securities were sold or matured during
     1998.

(3)  INVENTORIES

     Inventories consist of the following at December 31, 1998:

<TABLE>
<S>                                         <C>
               Raw materials                $  388,930
               Work in progress              1,355,537
                                            ----------
                                            $1,744,467
                                            ==========
</TABLE>

(4)  ACQUISITIONS

     On April 24, 1998, Company completed the acquisition of MAC Isotopes, Inc.
     from its parent corporation, MACTEC, Inc., of Golden Colorado, and then
     merged MAC Isotopes into International Isotopes Idaho Inc, a newly formed
     subsidiary of the Company. The Company exchanged $500,000 in cash and
     159,416 shares of its Common Stock, valued at $3,173,973 for 100% of the
     stock in MAC Isotopes. MACTEC has the option to sell 50% of the shares back
     to the Company on each of April 23, 1999 and April 24, 2000 for a purchase
     price of $19.91 per share. If the Company does not repurchase the shares,
     Auric Partners, of which William Nicholson, a director of the Company, is a
     partner, is required to purchase the shares. If Auric purchases the shares,
     the Company is obligated to issue to Auric warrants to purchase common
     stock of the Company in sufficient quantity and at an exercise price that
     will compensate it for the difference between $19.91 and the current market
     price of the Company's stock.


                                      -15-
<PAGE>   16

     A summary of the assets acquired and liabilities assumed in connection with
     the MAC Isotopes acquisition follows:

<TABLE>
<S>                                                            <C>
               Current assets, net of cash acquired            $ 2,051,822
               Property, plant and equipment                        41,810
               Intangible assets                                 1,883,542
               Current liabilities                                (308,201)
                                                               -----------
                        Total                                    3,668,973
               Issuance of 159,416 shares of common stock,
                   at $19.91 per share                           3,173,973
                                                               -----------
                        Cash paid, net of cash acquired        $   495,000
                                                               ===========
</TABLE>

     The results of operations of MAC Isotopes, for the period prior to the
     acquisition in 1998 and 1997 were insignificant, therefore pro forma
     results of operations for those periods have not been provided.

     On December 13, 1996, the Company acquired all of the outstanding stock of
     Gazelle in exchange for 827,500 shares of the Company's common stock.
     Gazelle's sole asset is land and Gazelle had no additional tangible or
     intangible assets or liabilities and no operating activity.

     Accounting standards under rules and regulations issued by the Securities
     and Exchange Commission (SEC) require that transfers of nonmonetary assets
     to a company by its promoters or shareholders in exchange for stock prior
     to or at the time of the company's initial public offering be recorded at
     the transferor's historical cost basis determined under generally accepted
     accounting principles. Accordingly, the acquisition of Gazelle by the
     Company has been accounted for based upon the historical cost of the land
     purchased by the transferors. The resulting carrying value totaling $87,894
     is inclusive of the $12,891 costs incurred by the Company for the
     acquisition.

     The Company also acquired a three-year option to purchase approximately 60
     additional acres of land adjacent to the property held by Gazelle for
     approximately $3.7 million. No consideration was charged for this option,
     and the grant of the option was not contingent upon the Company's
     acquisition of Gazelle.

(5)  PROPERTY, PLANT AND EQUIPMENT

     In November 1997, the Company purchased an office/manufacturing facility
     and a warehouse facility located on 12 acres at 3100 Jim Christal Road,
     Denton, Texas at a cost of $2,100,000. The Company has incurred $375,000
     since acquisition in costs related to improvements for offices,
     furnishings, HVAC and general refurbishing. The office/manufacturing
     facility houses the Company's administrative offices but is devoted
     primarily to finished radiopharmaceutical and brachytherapy production
     through the addition of $6,853,000 in a suite of production clean rooms and
     equipment. The warehouse facility houses the 42 MeV Cyclotron, donated by
     MD Anderson Cancer Center to the University of North Texas which has been
     remodeled and rebuilt at a cost of $1,731,000 and will be operated by the
     Company under a ten year lease with the University of North Texas to
     produce short-lived and research radioisotopes.

     In early 1998, the Company completed construction of a facility for
     administration, manufacturing and services located on 1.6 acres in Denton,
     Texas at a cost of $1,260,000. The Company is using the building for
     instrumentation manufacturing and other services.

     The Company owns 20 acres of land in an Industrial Research Park in Denton,
     Texas. The Company completed construction of the building housing its
     Radioisotope Production Facility devoted to the LINAC on this land in
     September 1998 at an approximate cost of $7,524,000. The City of Denton has
     agreed to grant a temporary certificate of occupancy subject to completion
     of the primary road for the Research Park, which is anticipated to be
     completed in the summer of 1999.

     In March 1998, the Company purchased 115 acres of land in Waxahachie, Texas
     from the State of Texas at a cost of $424,000. This site includes a
     building that can be used as a secondary accelerator production and testing
     site.


                                      -16-
<PAGE>   17

     Property, plant and equipment is summarized as follows at December 31, 1998
     and 1997:

<TABLE>
<CAPTION>
                                                           1998                1997
                                                        -----------         ---------
<S>                                                     <C>                 <C>
     Land                                               $   663,674           563,674
     Furniture and fixtures                                 958,663           466,214
     Plant & improvements                                14,211,707         2,871,266
     Production equipment                                16,829,565         2,398,333
                                                        -----------         ---------
                                                         32,663,609         6,299,487
     Less accumulated depreciation and amortization        (313,210)          (18,727)
                                                        -----------         ---------
     Property, plant & equipment, net                   $32,350,399         6,280,760
                                                        ===========         =========
</TABLE>

     At December 31, 1998, gross property, plant and equipment of $15,914,268,
     consisting primarily of the LINAC, Cyclotron and Pharmacy equipment, were
     not yet operational and not subject to depreciation.

(6)  MORTGAGE AND NOTES PAYABLE TO BANKS

     Mortgage and notes payable to banks as of December 31, 1998 and 1997,
     consist of the following:

<TABLE>
<CAPTION>
                                                                                  1998             1997
                                                                              ------------     -----------
<S>                                                                           <C>              <C>
Variable rate (10.00% at December 31, 1998) line of credit payable to
financial institution secured by stock owned by the Chairman of the Board     $  2,450,060              --

Variable rate (9.25% at December 31, 1998) note payable to bank secured by
substantially all of the Company's assets. Face amount of the note is
$15,000,000. Principal and current interest are payable in monthly
installments of approximately $154,379 with a final balloon payment of
$12,057,765 due November 1, 2003                                                14,918,638              --

Variable rate (9.25% at December 31, 1998) revolving line of credit secured
by accounts receivable. Maximum amount of the line of credit is $5,000,000
with interest payments due monthly and the principal balance due on October 1,
1999                                                                               232,318              --

Variable rate established by Chase Manhattan Bank (8.5% at December 31,
1997) mortgage and note payable, repaid in full in 1998                                 --       2,337,778

Variable rate established by Chase Manhattan Bank (8.5% at December 31,
1997) line of credit payable to bank secured by 20 acres of land. Maximum
amount of the line of credit was $500,000 with interest payments due
monthly and the principal balance paid in 1998                                          --         500,000

Variable rate established by Chase Manhattan Bank (8.5% at December 31,
1997) note payable to bank (interim construction loan) secured by building
repaid in full in 1998                                                                  --         769,298

Variable rate established by Chase Manhattan Bank (8.5% at December 31,
1997) line of credit payable to bank secured by 20 acres of land. Maximum
amount of the line of credit was $250,000 with interest payments due
monthly and the principal balance paid in full in 1998                                  --          81,196
                                                                              ------------     -----------
Total mortgage and notes payable to banks                                       17,601,016       3,688,272
Less current installments                                                       (3,117,177)       (634,454)
                                                                              ------------     -----------
Mortgage and notes payable to banks, excluding current installments           $ 14,483,839       3,053,818
                                                                              ============     ===========

The aggregate maturities of mortgage and notes payable to banks are as follows:

Years Ending December 31:

1999                                                                                           $ 3,117,177
2000                                                                                               540,730
2001                                                                                               592,924
2002                                                                                               650,155
2003                                                                                            12,700,030
                                                                                               -----------
                                                                                               $17,601,016
                                                                                               ===========
</TABLE>


                                      -17-
<PAGE>   18

     On October 9, 1998 the Company executed two promissory notes with a
     commercial lender for the purpose of refinancing existing short-term debt
     and to provide a line of credit based on eligible accounts receivable. The
     financing included a $15,000,000 note to be repaid in monthly installments
     of principal and interest in the amount of $154,379 through November 2003
     at which time the remaining principal balance will be due and a revolving
     line of credit with a maximum availability of $5,000,000 and a maturity
     date of October 1, 1999. At December 31, 1998, the Company had no unused
     availability on the revolving line of credit. The interest rates for both
     notes, currently 9.25%, is one percent over the prime rate as listed by the
     Wall Street Journal and resets every six months. The loan is secured by
     substantially all of the Company's assets and contains a $4,000,000
     guarantee by I.L. Morgan, Chairman of the Board. Funds of $15,000,000
     received from execution of the note financing were used in part to repay
     two interim construction loans ($5,874,064 outstanding at time of
     repayment) and $9,125,936 of other indebtedness. Terms of this loan
     contains various restrictive covenants, including prohibition of additional
     liens existing on security interest, limitation on additional indebtedness,
     limitations on dividends and similar payments and prohibition of any
     mergers or acquisitions. In connection with the repayment of indebtedness,
     the Company paid a prepayment penalty of $123,750 which has been presented
     as an extraordinary loss in the accompanying statement of operations for
     the year ended December 31, 1998.

     In May 1996, the Company obtained $2,900,000 from a lending institution to
     fund the acquisition of assets of the terminated Superconducting Super
     Collider project from the State of Texas and related acquisition costs. The
     loan was secured by all of the assets of the Company as well as certain
     collateral personally owned by certain stockholders. An additional minimum
     profit sharing fee of $750,000 was to be paid from proceeds obtained from
     asset sales by November 3, 1996.

     On December 16, 1996, the Company obtained alternate financing from a note
     payable to a bank to pay off the remaining outstanding principal balance of
     $1,471,213 under the original $2,900,000 note payable to the lending
     institution plus interest, minimum additional profit sharing and legal
     fees. A compromise, settlement, and release agreement was obtained from the
     lending institution effective December 31, 1996. In negotiating the
     settlement, the initial minimum profit sharing fee of $750,000 was reduced
     by $250,000 to $500,000. This reduction has been recorded as an
     extraordinary item.

(7)  STOCKHOLDERS' EQUITY

     Common stock - During December 1998, the Company issued in a private
     placement, 49 units consisting each of 16,000 shares of common stock and
     16,000 warrants. The warrants are exercisable at any time during a three
     year period ending November 2001 at a sales price equaling 110% of the
     private placement offering price of the shares ($13.75 per share). The
     private placement resulted in net proceeds to the Company of $9,507,414
     after deducting placement fees and issuance costs of $292,586.

     On July 1, 1998 the Company issued 29,017 shares of common stock for patent
     rights. The shares were issued at a price of $17.23 per share or $500,000
     in the aggregate.

     On May 14, 1998 the Company issued 8,242 shares of common stock for a
     license agreement. The shares were issued at a price of $27.30 per share or
     $225,000 in the aggregate.

     On April 24, 1998 the Company issued 159,416 shares of common stock for the
     purchase of subsidiary. The shares were issued at a price of $19.91 per
     share or $3,173,973 in the aggregate.

     On August 19, 1997 and September 30, 1997, the Company completed the
     Offering of 2,300,000 shares of its Common Stock at $9.00 per share. The
     Company received proceeds of $17,708,839 after deducting underwriters'
     discounts and commissions and issuance cost of $4,872,294 of which
     $1,980,000 related to the issuance of common stock warrants.

     Between March and July 1997, in order to establish a pool of shares for
     issuances to new employees, seven of the Company's founding stockholders
     contributed 247,496 shares of common stock, valued at $1.60 per share, to
     the Company. These shares, plus an additional 47,504 shares (total of
     295,000 shares) were sold to certain key employees and directors at a
     purchase price of $1.60 per share, for notes aggregating $472,000. On
     December 31, 1997, the Company issued


                                      -18-
<PAGE>   19

     155,000 additional shares of common stock at a purchase price of $1.60 per
     share to four employees in exchange for stock notes receivable of $248,000.
     These transactions resulted in the issuance of 450,000 total shares of
     common stock, of which 125,000 shares were issued as compensation for loan
     guarantees in January 1997, at a purchase price of the then estimated fair
     value of $1.60 per share. The remaining 325,000 shares were issued at
     quoted market values ranging from $7.00 to $9.00 per share, resulting in
     charges to operations for employee incentive compensation totaling
     $1,918,000 plus related employee taxes of $479,500 (total charges of
     $2,397,500). All stock notes receivable are recourse notes and are due
     December 31, 2000 and bear interest at 6.14% compounded semi-annually.

     In January 1997, the Company issued 39,283 shares of common stock to settle
     an outstanding account payable to a director of $62,852 included in
     accounts payable at December 31, 1996.

     In January 1997, the Company issued 62,500 shares of common stock through
     private placement for proceeds of $100,000. This transaction completed the
     private placement which aggregated issuance of 662,501 shares of common
     stock and proceeds of $1,060,000.

     Stock Option Plan - In January 1997, the Company adopted a Stock Incentive
     Plan (the Plan) pursuant to which the Company's Board of Directors may
     grant stock options to officers, key employees, and consultants. The Plan
     authorizes grants of options to purchase up to 600,000 shares of authorized
     but unissued common stock. Stock options are granted with an exercise price
     equal to 85% of the quoted market value of the common stock at the date of
     grant. The Company's options generally have a three-year vesting period and
     a maximum term of three years.

     The Company granted 82,400 stock options during 1998 at an average exercise
     price of $15.65 per share. During 1998 there were forfeitures of 34,800
     stock options that were granted during 1997. The Company granted 346,900
     stock option shares during 1997, primarily at an exercise price of $7.65
     per share, resulting in a weighted-average exercise price of $7.66.

     The following table summarized information about fixed stock options
     outstanding at December 31, 1998:

<TABLE>
<CAPTION>
                                               Options Outstanding              Options Exerciseable

                          Options            Weighted-        Weighted         Number         Weighted-
                      Outstanding at          Average          Average     Exercisable at      Average
Range of Exercise      December 31,          Remaining        Exercise      December 31,      Exercise
    Prices                 1998          Contractual Life      Price           1998            Price

<S>                   <C>                <C>                  <C>          <C>                <C>
$7.65  to $16.45         369,400            1.63 years         $  8.66        90,697           $7.67

$16.46 to $26.00          25,100            2.29 years         $ 19.29             0               0
</TABLE>

     The fair value of each option grant is estimated on the date of grant using
     the Black-Scholes option pricing model with the following assumptions for
     1998 and 1997:

<TABLE>
<CAPTION>
                                       1998          1997
                                     --------      --------
<S>                                  <C>           <C>
     Expected dividend yield               --            --
     Risk-free interest rate              5.6%          5.6%
     Expected volatility             45% - 96%           24%
     Expected life                    3 years       3 years
     Weighted average fair value        $9.12         $2.26
</TABLE>

     The Company applies APB Opinion No. 25 and related Interpretations in
     accounting for the Plan and, accordingly, except for stock options issued
     at less than quoted market value at date of issue, no compensation cost has
     been recognized for its stock options in the accompanying consolidated
     financial statements. Had the Company determined compensation cost based on
     the fair value at


                                      -19-
<PAGE>   20

     the grant date for its stock options under SFAS No. 123, the Company's net
     loss would have been increased to the pro forma amounts indicated below for
     the years ended December 31, 1998 and 1997 and the period from November 1,
     1995 (inception) through December 31, 1998:

<TABLE>
<CAPTION>
                                                                      Period from
                                                                    November 1, 1995
                                                                   (inception) through
                                             1998          1997     December 31, 1998
                                         ----------    ----------  -------------------
<S>                                      <C>           <C>         <C>
     Net loss:             As reported   (5,519,405)   (4,370,960)   (10,724,811)

                           Pro forma     (5,806,478)   (4,610,828)   (11,251,752)

     Net loss per basic    As reported        (0.84)        (0.92)         (2.53)
     and diluted share:
                           Pro forma          (0.89)        (0.97)         (2.65)
</TABLE>

     Preferred Stock - Under the terms of the original Articles of Incorporation
     and By-Laws in effect at December 31, 1996, the Company was authorized to
     issue 5,000,000 shares of Preferred Stock, par value $1.00 per share. No
     shares of $1.00 par Preferred Stock were issued. Restated Articles of
     Incorporation and By-Laws adopted by the Company effective March 20, 1997,
     changed the par value of Preferred Stock to $.01 and revised certain voting
     rights. Under the Restated Articles of Incorporation and By-Laws, Preferred
     Stock may be issued in series from time to time at the discretion of the
     Board of Directors. The Board of Directors is authorized to set the
     distinguishing characteristics of each series prior to issuance, including
     the granting of limited or full voting rights, rights to payment of
     dividends and amounts payable in event of liquidation, dissolution or
     winding up of the Company. No shares of serial preferred stock have been
     issued.

     Warrants - In connection with the aforementioned Offering, on August 19,
     1997 the Company issued, to Keane Securities Co., Inc., warrants to
     purchase 220,000 shares of the Company's common stock. The warrants are
     exercisable at any time during a four-year period beginning August 19, 1998
     with an exercise price equal to 120% of the initial public offering price
     of the shares ($10.80 per share). As of December 31, 1998 none of the
     warrants have been exercised.

(8)  INCOME TAXES

     Income tax expense (benefit) differed from the amounts computed by applying
     the U.S. federal income tax rate of 34% to pretax losses as a result of the
     following:

<TABLE>
<CAPTION>
                                                   1998           1997            1996
                                               -----------     ----------       --------
<S>                                            <C>             <C>              <C>
Computed "expected" tax benefit                $(1,876,598)    (1,486,126)      (283,712)
Losses for which no tax benefit was realized     1,860,525      1,495,939        283,712
Other                                               16,073         (9,813)            --
                                               -----------     ----------       --------
                                               $        --             --             --
                                               ===========     ==========       ========
</TABLE>

     The tax effects of temporary differences that give rise to significant
     portions of the Company's deferred tax assets as of December 31, 1998 and
     1997 are presented below:

<TABLE>
<CAPTION>
                                                       1998             1997
                                                   -----------      -----------
<S>                                                <C>              <C>
Deferred tax assets:
Costs expensed for financial reporting
  purposes not yet deducted for tax                $ 3,634,051      $ 1,654,575
Property and Equipment                                  19,206          141,495
Other                                                  (13,081)         (16,419)
                                                   -----------      -----------
Net deferred tax asset                               3,640,176        1,779,651
Less valuation allowance                            (3,640,176)      (1,779,651)
                                                   -----------      -----------
Net deferred taxes                                 $        --      $        --
                                                   ===========      ===========
</TABLE>


                                      -20-
<PAGE>   21

     The valuation allowances for 1998 and 1997 have been applied to offset the
     deferred tax assets in recognition of the uncertainty that such tax
     benefits will be realized. The net change in valuation allowance for the
     years ended December 31, 1998, 1997, and 1996 was an increase of
     $1,860,525, $1,495,939 and $283,712, respectively.

(9)  LEASE COMMITMENTS

     The Company is obligated under various capital leases for certain equipment
     that expire at various dates during the next five years. At December 31,
     1998, the gross amount of equipment and related accumulated amortization
     recorded under capital leases were as follows:

<TABLE>
<CAPTION>
                                                         1998
                                                     -----------
<S>                                                  <C>
               Production equipment                  $ 1,045,958
               Furniture & fixtures                      338,500
               Less accumulated amortization            (154,995)
                                                     -----------
                                                     $ 1,229,463
                                                     ===========
</TABLE>

     Amortization of assets held under capital leases is included with
     depreciation expense.

     The Company leases office space and certain office equipment under
     operating leases expiring at various dates through 2003. Rental expense
     under such leases for the years ended December 31, 1998, 1997 and 1996 was
     $352,703, $189,000 and $53,800, respectively.

     Future minimum lease payments under noncancelable operating leases (with
     initial or remaining lease terms in excess of one year) and future minimum
     capital lease payments as of December 31, 1998 are:

<TABLE>
<CAPTION>
                                                             Capital        Operating
Years ending December 31                                     Leases          Leases
                                                           ----------      ----------
<S>                                                        <C>             <C>
    1999                                                   $  356,665      $  573,781
    2000                                                      427,251         526,420
    2001                                                      248,151         374,660
    2002                                                      166,611         311,243
    2003                                                       48,051         178,328
                                                           ----------      ----------
Total minimum lease payments                                1,246,729      $1,964,432
                                                                           ==========

Less amount representing interest (at rates ranging
      from 8.5% to 25%)                                       236,662
                                                           ----------
          Present value of net minimum capital
               lease payments                               1,010,067
Less current portion of obligations under
     capital leases                                           235,309
                                                           ----------
          Obligations under capital leases,
               excluding current portions                     774,758
                                                           ==========
</TABLE>

(10) RELATED PARTY TRANSACTIONS

     During 1996, the Company issued 186,143 shares of common stock valued at
     $260,600 to various stockholders and affiliates for consulting purposes. In
     addition, during 1996 the Company issued 21,700 shares to two board members
     and a stockholder as compensation for providing collateral on notes
     payable.


                                      -21-
<PAGE>   22
                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
EXHIBIT
NUMBER   DESCRIPTION
-------  -----------
<S>      <C>
23.1     Consent of KPMG LLP, as independent certified public accountants
</TABLE>