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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-KSB

(Mark One)

|ý | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | -------------------------------------------------------------------------------

For the fiscal year ended April 30, 2002

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

For the transition period from
 to

Commission file number: 001-12531

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

California

77-0338561(State or other jurisdiction of
incorporation or organization)

(IRS Employer
Identification No.)5906 McIntyre Street
Golden, Colorado

80403(Address of principal executive offices)

(Zip Code)


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

Securities registered pursuant to Section 12(b) of the Exchange Act:None

Securities registered pursuant to Section 12(g) of the Act:Common Stock, no par value
Class B Common Stock Purchase Warrants
Redeemable Class C Common Stock Purchase Warrants(Title of Class)

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

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

Registrant's
revenues for the fiscal year ended April 30, 2002 were $8,155,000.

The
aggregate market value of the voting stock held by non-affiliates of the Registrant based on the average bid and asked prices of the Registrant's Common Stock on,
July 26, 2002 was $6,690,293. Excludes approximately 5,133,740 shares of common stock held by Directors, Officers and holders of 5% or more of the Registrant's outstanding Common Stock on that
date. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or
policies of the Registrant, or that such person is controlled by or under common control with the Registrant. There is no non-voting common equity of the Registrant.

The
number of shares outstanding of the Registrant's Common Stock, no par value, as of July 26, 2002, was 12,102,795 shares. The following document is incorporated by reference
into Part III of this Form 10-KSB: None.

Transitional
Small Business Disclosure Format (check one):    Yes o
No ý

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ITEM 1. BUSINESS

Because we want to provide you with more meaningful and useful information, this annual report on Form 10-KSB contains
certain "forward-looking statements" (as such term is defined in section 21E of the Securities Exchange Act of 1934, as amended). These statements reflect our current expectations regarding our
possible future results of operations, performance, and achievements. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995.

Wherever possible, we have tried to identify these forward-looking statements by using words such as "anticipate," "believe," "estimate," "expect," "plan,"
"intend," and similar expressions. These statements reflect our current beliefs and are based on information currently available to us. Accordingly, these statements are subject to certain risks,
uncertainties, and contingencies, which could cause our actual results, performance, or achievements to differ materially from those expressed in, or implied by, such statements. We have described
these risks, uncertainties and contingencies under "Item 6, Management's Discussion and Analysis of Financial Condition or Plan of Operation." We have no obligation to update or revise any such
forward-looking statements that may be made to reflect events or circumstances after the date of this report.

General Discussion

Isonics Corporation

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

Several
manufacturers, located primarily in republics that once were part of the Soviet Union, produce radioactive and stable isotopes. We buy these isotopes from the manufacturers and
resell them in the form of common chemical compounds. For example, oxygen-18 is sold as water, and carbon-13 is sold as carbon dioxide. Today our business addresses the
material needs of two primary markets:



While
we currently are focusing on these two markets, we continue to evaluate other applications for both stable and radioisotopes and non-isotopic materials. We also sell
isotopes for use in basic scientific research and industrial applications. We believe our core competency is our ability to identify, develop, source, and commercialize products and services based on
isotopically engineered materials as well as non-isotopic semi-conductor materials.

We
were formed in March 1992, as a partnership, and were subsequently incorporated in California in March 1993, as A&R Materials, Inc. In September 1996, we
changed our name to Isonics Corporation. Our web site iswww.isonics.com. The common stock of Isonics is traded on the Nasdaq SmallCap Market under the
symbol "ISON." The market for our stock has historically been characterized by low volume, and broad price and volume volatility. We cannot give any assurance that a stable trading market will develop
for our stock or our warrants.

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



We
currently have two subsidiaries through which we conduct some of our operations. The following chart identifies those subsidiaries and our ownership interest in each as of
April 30, 2002:

|Name and Headquarters               |  | Place of Formation |  | Ownership Percentage     |  | Business                                                                                                                                                                                                                                                                                                                                                                                          
|----------------------------------- |  | ------------------ |  | ------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Chemotrade GmbH
Dusseldorf, Germany |  | Germany            |  | 100%                     |  | Chemotrade and its subsidiary are value-added re-sellers of stable and radioactive isotopes.                                                                                                                                                                                                                                                                                                      
|Chemotrade Leipzig
GmbH             |  | Germany            |  | 75% (through Chemotrade) |  | They supply radioactive isotopes for pharmaceutical and industrial research as well                                                                                                                                                                                                                                                                                                               
|Leipzig, Germany                    |  |                    |  |                          |  | as for industrial and medical imaging, calibration sources and for brachytherapy applications. Additionally, they supply various stable isotope labeled compounds for pharmaceutical research and drug design, as well as
oxygen-18 for use in producing a radioisotope used in positron emission tomography. Their market is primarily Europe, but sales are also made to North America and Asia.

On
July 31, 2002 we sold our 75% interest in Chemotrade Leipzig GmbH ("CTL") for nominal consideration. This transaction was effective as of May 1, 2002. See "Recent Business Dispositions."

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



Trading Symbols

Common Stock

"ISON"Class B Warrants

"ISONL"Class C Warrants

"ISONZ"


Our Isotope Business.In order to develop our products, it is usually necessary to increase ("enrich") or decrease
("deplete") the concentration of a particular isotope or isotopes. There are over 280 naturally occurring stable isotopes of 83 different elements. The number of isotopes of any given element varies
widely. Stable isotopes of a given element typically do not differ significantly in their chemical behavior. Stable isotopes of an element differ in mass and diameter, as well as several nuclear

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properties, such as cross-section, spin, and magnetic moment. Differences in these properties can result in substantially different effects, and some of these different effects have the potential for
commercial application.

Isotopes
are typically referred to by their atomic mass number, which number is derived from the number of protons and neutrons in the atom's nucleus. For example, oxygen-18
has eight protons and ten neutrons in its nucleus, and silicon-28 has fourteen protons and fourteen neutrons in its nucleus. In ultra chemically pure crystals, grown for electronics or
optical applications, isotopic impurities can be the greatest contributor to crystal disorder because of mass and diameter differences. Eliminating these variations by using a single enriched isotope
(i.e. an isotopically-pure substance) increases thermal conductivity and optical transparency, and thus improves product performance. Similarly, enriching or depleting isotopes based upon
their nuclear cross-sections allows materials to be engineered for applications in the nuclear power industry, for controlled doping of semiconductors in the computer industry, and for use as targets
to produce radioisotopes for the life sciences and other industries.

Stable Isotopes.Stable isotopes may be thought of as extremely pure materials. Not only are these isotopes chemically pure,
but they frequently consist of only one isotope depending on the level of enrichment. This extra degree of purification, accomplished on the sub-atomic level, provides enhanced
performance properties as distinguished from normal (i.e., chemical only) purity materials. Depleted isotopes are the result of the elimination (or reduction in level) of an isotope, or isotopes, and
can prevent the creation of undesirable byproducts in subsequent processing steps. In some instances the undesirable byproducts are produced during the intended use of the non-depleted
isotope material. Stable isotopes have commercial uses in several areas, including, but not limited to:



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

Radioisotopes.The radioisotopes we acquire and sell are typically used in medical diagnostic and therapy applications. A key
property of a radioisotope is its half-life. The half-life is a measure of how fast a radioisotope decays into either a stable isotope or another radioisotope. Since most
radioisotopes used in life science applications have short half-lives, they are rarely found in nature. Therefore, they are manmade and must generally be used shortly after production.
They are typically produced by irradtiating a target material (often an enriched or depleted stable isotope) in a nuclear reactor, cyclotron or linac. These devices generate the appropriate particles
required to transmute or convert the target material into the desired radioisotope.

SOI Wafer Manufacturing.In January 2002, we commenced our silicon-on-insulator ("SOI") wafer
operations under an alliance agreement with Silicon Quest International, Inc. ("SQI") whereby SQI agreed to exclusively manufacture and supply SOI wafers for Isonics. While our research has
indicated that the functionality of SOI wafers can be improved using isotopically-pure silicon-28, this research is still in the preliminary stages and currently our SOI wafer
production is being accomplished using natural silicon.

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Company Strategy

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

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



Commencement of Silicon-on-Insulator Wafer Operations

SEI License Agreement.On September 14, 2001 we licensed technology owned by Silicon Evolution, Inc. ("SEI")
which has allowed us to enter the business of manufacturing SOI wafers and other silicon wafers. We issued 500,000 shares of our newly-created Series B Preferred Stock to SEI which
automatically converted into 500,000 shares of our common stock following our November 13, 2001 shareholders' meeting. The license is exclusive, perpetual, and does not bear any royalty
obligation.

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

SEI
filed for bankruptcy on November 21, 2001. Since we licensed assets from SEI and since we are also a $93,000 secured creditor of SEI, we believe that our position in the
bankruptcy, should the trustee in bankruptcy challenge us, is strong in both our capacities. However, the trustee for SEI may attempt to challenge the status of our secured debt. If the trustee were
to succeed in any such challenge, it could potentially affect our recovery of the funds advanced to SEI.

Agreement with Silicon Quest International.In an effort to commence our SOI business operations, on December 19, 2001
we entered into an alliance agreement with SQI whereby SQI agreed to exclusively manufacture and supply SOI wafers for Isonics. In addition, SQI will provide sales and marketing services as requested
by Isonics. The alliance agreement expires on January 24, 2003 and dictates that if the agreement is not amended or extended, then SQI is prohibited from manufacturing SOI wafers without our
written permission until January 24, 2004. In connection with this agreement

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we issued SQI a common stock purchase warrant (valued at $83,000) to purchase 100,000 shares of our restricted common stock at $1.50 per share. The warrant vested immediately and is exercisable in
its entirety beginning December 19, 2002. The warrant expires on December 19, 2004. We shipped our first SOI wafers to one of our customers in late January 2002 and have continued
to ship SOI wafers to our customers since that time. Our agreement with SQI has permitted us to commence the manufacturing and marketing of SOI wafers using the technology we licensed from SEI,
without incurring the significant cash investment we originally contemplated. During the year ended April 30, 2002, we recognized revenue of approximately $15,000 related to the sale of SOI
wafers. We anticipate increasing our revenues from the sale of SOI wafers in fiscal 2003, however we can offer no assurance that this will come to fruition.

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



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



Based
on our review, it appears that the SOI technology enables circuit designers to improve device speed approximately 30%; and as the oxide provides a superior source of insulation,
leakage current is reduced, providing an energy savings of better than 30%, as well as enabling circuits to be spaced on a finer pitch. SOI technology also provides a degree of radiation hardening to
integrated circuits, thus improving circuit reliability and resistance to soft errors induced by background radiation sources. In MEMS and micro-optical device fabrication the use of SOI technology
wafers significantly simplifies the manufacturing process. Our research also indicates that the use of isotopically-pure silicon-28 in the SOI wafer may further improve its
performance, although our research on this point is continuing.

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

Recent Business Dispositions

Sale of Chemotrade Leipzig GmbH.On July 31, 2002, we sold our 75% interest in CTL to the 25% shareholder for 50,000
Euros. The transaction is effective May 1, 2002. As a result of the sale, we will receive 20,000 Euros (on August 10, 2002) and will receive the remaining 30,000 Euros in five equal
monthly installments at the end of each month beginning August 31, 2002. CTL, which primarily resells oxygen-18, was recently notified that its current distribution agreement (which
expires on December 31, 2002) would not be renewed. The loss of this agreement is significant as it accounts for approximately 80% of CTL's revenue and as a result,
CTL's ability to generate revenues after December 31, 2002 is extremely uncertain. In conjunction with this disposition, Chemotrade is now free

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to pursue other opportunities (including selling oxygen-18 throughout the European market) that may have been in conflict with the interests of CTL. We recognized revenue and gross margin
related to CTL of approximately $1,575,000 and $326,000, respectively for the year ended April 30, 2002. While we fully anticipate replacing the lost revenue and gross margin during the year
ended April 30, 2003 with additional product sales to new and existing customers both domestically and in Europe, we can offer no assurances that this will come to fruition.

Sale of Depleted Zinc Business.On December 1, 1999, we sold our depleted zinc business to Eagle-Picher Technologies,
LLC ("Eagle-Picher") for $8.2 million, of which $6.7 million was paid on December 1, 1999. Disputes between Isonics and Eagle-Picher arose which were resolved in a settlement
agreement on July 24, 2002. We received $2,500,000 as consideration for the settlement.See "Legal Proceedings".

Reorganization and Subsequent Sale of International Process Research Corporation.On April 30, 1998, we purchased all
of the outstanding capital stock of International Process Research Corporation ("IPRC") from a previously unaffiliated corporation (Metallurgy International, Inc.). IPRC was a materials
processing and contract research and development company. Through December 1, 1999, IPRC performed key steps in our depleted zinc manufacturing process. We acquired IPRC to assure future
availability of this manufacturing technology (which we subsequently sold to Eagle-Picher), and to provide an infrastructure platform for performing value-added processing of other isotopes. IPRC had
also jointly developed new, lower-cost technologies to enable its customers to better meet the various metallurgical and mineral processing needs. In connection with the acquisition, we
issued 353,982 shares of our common stock (valued at $708,000) in exchange for all of the outstanding shares of IPRC. We accounted for the acquisition as a purchase.

On
May 1, 2000, we substantially reorganized IPRC to focus on the recovery and recycling of zinc metal from various sources, including galvanized steel scrap, electric arc furnace
dust, and brass scrap. We chose this course of action for two reasons. First, we believed the market potential for this, and related processes, was significant. Second, the profound and lengthy slump
in the mineral processing and mining industries significantly eroded IPRC's historical customer base. We continued to meet the demands of a few remaining customers through various
sub-contractor relationships. We also kept the physical infrastructure in place at our Golden, Colorado location in case the market conditions warranted a reentry into IPRC's historical
markets. We used a significant portion of this infrastructure in our zinc recovery and recycling project.

In
January 2001, we acquired the patent rights related to the recovery and recycling of zinc processes from three unaffiliated parties. We issued a total of 75,000 shares of our
common stock valued at $131,000 for these rights. On February 1, 2001, we sold IPRC and transferred the patent rights for the zinc recovery process to Interpro Zinc, LLC, a newly-formed entity
owned by Dr. Robert H. Cuttriss, formerly president of IPRC, James E. Alexander, president, chief executive officer, and chairman of the board of directors of Isonics Corporation, and Boris
Rubizhevsky, senior vice president and director of Isonics Corporation. Each of the three aforementioned individuals owns 25% of Interpro Zinc, LLC. Isonics Corporation owns the remaining 25%. Each
individual contributed $100,000 to Interpro Zinc, LLC to continue the development of the zinc recovery technology. Interpro Zinc, LLC has informed us that they will be actively seeking further
investment to continue their development and commercialization efforts.

As
a part of the February 1, 2001, transaction, Interpro Zinc, LLC assumed approximately $700,000 in liabilities associated with the operations of IPRC and agreed to indemnify us
against any contingent liabilities related to the IPRC site in Golden.

The
disinterested directors of Isonics approved the transaction after receiving advice from management not participating in the transaction, as well as independent consultants, and
believe that the transaction was fair and reasonable to, and in the best interests of, Isonics and our shareholders.

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From
May 1, 2000, through January 31, 2001, IPRC did not engage in any revenue producing activities. We have no intention of returning to the contract research and
development activities that IPRC engaged in prior to May 1, 2000.

Products

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

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

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

During
fiscal 2002, our revenues were generated from sales of stable and radioactive isotopes and, commencing January 2002, from sales of SOI wafers.

We
are attempting to develop new product lines, which we expect to add to our revenue stream, but we do not expect any significant revenues from these new products during fiscal 2003.
The following is a more specific discussion of our current products.

Isotopically-Pure Semiconductor Materials

The majority of semiconductor devices built today use natural silicon as the starting material. Silicon has many desirable characteristics as compared to other
semiconductor materials, and the semiconductor industry has invested billions of dollars to improve and optimize their manufacturing technologies for silicon-based devices. Devices fabricated on
single crystal silicon have performance characteristics that are governed by the electrical and physical characteristics of silicon including:



Carrier
mobilities, for example, govern signal transit times and thus place a limit on device speed. Thermal conductivity governs power dissipation, which, in turn, places an upper limit
on the packing densities achievable for devices on a chip, or on the amount of power that can safely be generated in the circuit without significantly degrading circuit performance.

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

Beginning
with the Pentium®, Sparc®, and Alpha® microprocessors, heat sinks and fans became necessary to control the higher operating temperatures.
According to the Semiconductor Industry

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Association, when the microprocessor's power requirements exceed approximately 110 watts, heat sinks and fans will no longer be adequate and active cooling (refrigeration) will be required. Most of
the major computer companies have already demonstrated cryogenically cooled computers that operate up to one-third faster than their conventionally cooled counterparts. These cryogenic
cooling devices can cost upwards of $400 per microprocessor.

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



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

In
1997, we began a program to introduce 99.9% isotopically-pure silicon-28 as a superior substitute to natural silicon for the manufacture of semiconductor
devices.See "Research and Development."Our first efforts toward developing isotopically-pure semiconductors involved securing the
intellectual property rights to commercialize silicon-28 and similar materials. These efforts culminated in our acquiring exclusive rights to two Yale University patents. See "Patents and Proprietary Rights."

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

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

In
August 2001, we entered into a marketing agreement with a major wafer manufacturer. We have since supplied silicon-28 trichlorosilane (which was produced in the
United States) to this wafer producer for the manufacture of silicon-28 epitaxial wafers. These wafers are being supplied to interested customers worldwide for evaluation in a number of
semiconductor devices. This agreement is critical in assuring that silicon-28 epitaxial wafers will be available to meet the increasingly stringent quality demands of the semiconductor
industry. Any revenues generated under this agreement will be shared 50-50 with the wafer manufacturer.

The
next step in our development program is to make bulk wafers of pure silicon-28. The manufacture of bulk wafers requires substantially more material than we could
economically acquire from our existing suppliers. We sought a domestic, economical supply of silicon-28 in a contract with Eagle-Picher which believed that its silicon isotope separation
technology could supply the necessary

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silicon-28 to us. Eagle-Picher was not able to supply silicon-28, and disputes arose which were resolved in a settlement agreement on July 24, 2002. See "Legal Proceedings".

We
have identified other potential sources for supplying silicon-28, but those sources are not domestic. We have received silicon-28 samples from The Institute of
Stable Isotopes ("ISI"), located in Tiblisi, Republic of Georgia. Our analysis indicates that the quality of the silicon-28 appears to meet our requirements, and we are attempting to
obtain larger quantities for further testing. We are optimistic about the prospects for using silicon-28 or the related enrichment technology from this supplier to meet our needs. Although
we need 200 kilograms of silicon-28 for our research and development activities, we have not yet placed an order for this quantity of silicon-28 because of a lack of available
financing.
At an expected cost of approximately $25.00 per gram, 200 kilograms would cost approximately $5.0 million.

We
anticipate very little revenue from silicon-28 based products in fiscal 2003, as we are still developing this business. Nonetheless, if we are able to complete our
research and development efforts successfully and market silicon-28 based products, we could begin generating revenues in the second half of fiscal 2003 and in subsequent fiscal years.

We Supply Isotopes for Life Sciences Applications

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

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



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

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



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

We
currently supply stable isotopes of oxygen, thallium, zinc, cadmium, xenon, strontium, and many others that are routinely used in a variety of medical imaging and therapy
applications. These are used in their enriched stable form, such as Xenon-129, or converted to a specific radioactive isotope in a cyclotron or nuclear reactor. We believe that the
increased supply of new isotopes combined with the ongoing development of highly specific biochemical therapies represents a major growth opportunity in this market segment.

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



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Calibration Standards.There are many medical devices that measure levels of radiation in patients. These devices need to be
calibrated using standards of known radiation strength and type in order to ensure their accuracy. These standards derive from radioisotopes such as cobalt-57 and
gadolinium-153. We supply many of the stable isotope target materials, as well as radioisotopes, to many of the manufactures of the equipment needing calibration.

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

Distribution Method

We operate sales offices in Columbia, Maryland and Düsseldorf, Germany. We also identify customers through industry sales journals, website
identification and trade shows. In addition, many customers come to us by referral from existing customers. There are a limited number of suppliers in the isotope industry and, therefore, most
customers are aware of the products and services we offer. Customers directly place the orders and we either ship directly to the customer through our sales offices or the product is shipped directly
from the supplier. We use commercial courier services such as Federal Express and DHL to ship all products. Our manufacturer of SOI wafers, SQI, is responsible for packaging and shipping wafers to our
customers.

Significant Customers

At April 30, 2002, three customers accounted for approximately 37% of total net accounts receivable. Three customers (Perkin Elmer Life Sciences, Eastern
Isotopes, and Reviss Ltd.) accounted for approximately 22%, 20% and 6%, respectively, of revenues for the 2002 fiscal year. Two customers (Perkin Elmer Life Sciences and Reviss Ltd.)
accounted for approximately 36% and 11%, respectively, of the German segment's revenues for the 2002 fiscal year. Two customers accounted for approximately 37% of the German segment's accounts
receivable at April 30, 2002.

At
April 30, 2001, five customers, accounted for approximately 50% of total net accounts receivable. Five customers (Perkin Elmer Life Sciences, Eastern Isotopes,
Reviss Ltd., Commisariat and IPL) accounted for approximately 16%, 9%, 7%, 5% and 4%, respectively of revenues for the year ended April 30, 2001. Two customers (Perkin Elmer Life
Sciences and Reviss Ltd) accounted for approximately 24% and 11%, respectively of the German segment's revenue for the year ended April 30, 2001. One of these customers accounted for
approximately 23% of our German segment's accounts receivable at April 30, 2001.

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

Research and Development

Consistent with our product development strategy, we are seeking to identify and evaluate new stable and radioactive isotope products and potential markets for
economic and technical feasibility. We will, in addition, continue funding research and development to improve technologies for isotope separation and materials processing technologies. During fiscal
2002 and fiscal 2001, research and development expenses were $423,000 and $1,134,000, respectively.

In
fiscal 2003, we expect to continue to focus our research and development efforts on the production of high chemical-purity silicon-28 silane gas, silicon-28
trichlorosilane and silicon-28 epitaxial wafers. In addition, we are focused on refining our processes associated with the production of SOI Wafers. This work is currently being performed
at the SQI facilities. These research and development efforts continue the research and development we performed in fiscal 2002 and 2001.

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Through
IPRC (which we owned 100% through January 31, 2001), we also performed research and development for the recovery and recycling of zinc from various sources such as scrap
metals, including galvanized steel and brass, and electric arc furnace dust.

Silicon-28.

To expand our capacity and to ensure product quality, we had planned to build our own silane gas facility in Golden, Colorado. We have postponed building this
plant due to Eagle-Picher's inability to supply silicon-28. We will continue to use outside sources to perform processing as required for our needs until circumstances and financing
warrant proceeding with this facility.

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

In
May 2001, we entered into a silicon-28 Joint Development program with Advanced Micro Devices ("AMD"), a major microprocessor manufacturer, whereby we supplied AMD
with silicon-28 wafers. In fiscal 2002, we delivered a second lot of silicon-28 epitaxial wafers to AMD. AMD is using our products to make and rigorously test
state-of-the-art microprocessors to accurately quantify the benefits of high thermal conductivity silicon-28 in this application. We expect to use the
results of the testing program to find the proper balance between performance and cost. In addition to AMD, another major microprocessor manufacturer is currently evaluating silicon-28
epitaxial wafers that were delivered in September 2000. As of July 31, 2002 this testing is still ongoing and we have not received any results.

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

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



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



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Additionally,
in fiscal 2000, we entered into a Cooperative Research & Development Agreement with Lawrence Berkeley Laboratory in Berkeley, California, to study the properties of
various silicon isotopes. This agreement is part of a U.S. Department of Energy program to apply Russian nuclear weapons technology to commercial applications. Delays within the Department of Energy
pushed the start of this program to our fiscal year 2002. The first delivery of silicon isotopes occurred in December 2001.

We
also supplied silicon-28 silane gas to ATMI, Inc. in Danbury, Connecticut, and will participate in their Office of Naval Research funded program to investigate
isotopically-pure silicon carbide. Initial data from this program have shown an improvement in the thermal conductivity of isotopically pure silicon carbide epitaxial layers. This is the
first data that we are aware of that has shown improvement in an isotopically modified compound semiconductor. This program is still underway and several interim reports have been written.

During
fiscal 1999, we signed a joint research and development agreement with Silex Systems, Ltd. The agreement calls for Silex to partially fund some of our development
activities and for Silex to assess the feasibility of building a silicon isotope separation plant using Silex's patented laser isotope separation process. This agreement reflects our effort to ensure
a large supply of silicon isotopes at a reasonable cost to support the large-scale manufacture of isotopically-pure silicon wafers. According to Silex, in 2001 they started a stable
isotope separation program that includes silicon.

The
adoption of silicon-28 by semiconductor manufacturers will depend on the outcome of the evaluations underway. Even though silicon-28 is a
one-for-one substitution for normal silicon, semiconductor companies are very conservative about changing anything in their manufacturing processes, for fear that their yields
will suffer. Typically the testing sequence at these companies is:



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This
is a very time consuming process. While several companies are well into the evaluation process, we do not expect the introduction of products based on silicon-28 wafers
in our fiscal year 2003, and therefore do not expect significant revenues from silicon-28 product sales in fiscal 2003.

Other Semiconductor Isotopes.

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

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

In
October 2000, we announced a Joint Development Agreement with Epichem Inc., to commercialize isotopically pure gallium for the semiconductor and
opto-electronic industries. Research to date has focused on the use of trimethylgallium (TMG) as a feedstock for centrifugal separation of gallium. Trimethylgallium has been found to be
extremely corrosive to the normal materials of centrifuge construction, and the project has been expanded to consider exotic materials as well as other chemical forms of gallium that may be more
suitable. This project is ongoing.

Zinc Recovery and Recycling.

Until February 1, 2001, we owned 100% of IPRC. It had been engaged in contract research and development activities. During the course of its contract
research and development activities, IPRC was introduced to a patented technology using chlorine gas to recover and recycle zinc from galvanized steel scrap. Because we sold IPRC effective
February 1, 2001, we do not expect to incur additional research or development expenses relating to zinc recovery and recycling, and we are no longer involved in this or any related activities.
We received a 25% interest in the purchaser and, therefore, still retain an interest should the purchaser's research and development of zinc recovery prove to be successful.

Patents and Proprietary Rights

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

We
currently have no patents in our own name, although we have filed several patent applications. We have rights to several isotopically engineered innovations regarding electronic and
optical materials,

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which we believe may be patentable. Ongoing work in the area of isotope separation by chemical means (which is currently being performed by outside entities) may also lead to patentable inventions.

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

Competition

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

Isotopes for Life Sciences

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

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

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

Semiconductor Materials.

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

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

Summary.

Many of the areas in which we either compete or intend to compete are rapidly evolving. Competition may develop a patentable product or process that may prevent
us from competing in our intended markets. While we expect to compete primarily on the basis of product performance, proprietary position and price, in many cases the first company to introduce a
product to the market will obtain at least a temporary competitive advantage over subsequent market entrants.

Manufacturing and Supply

We obtain stable isotopes from a variety of isotope sources, primarily located in Russia or other former Soviet republics. We may invest in our own isotope
production facilities in the future upon our determining the optimum production technology for a given isotope or family of isotopes. Other
facilities elsewhere in the world, including the Oak Ridge National Laboratory in Oak Ridge, Tennessee, and private and pseudo-governmental facilities in Great Britain, Germany, the Netherlands and
the Republic of South Africa, have the potential to produce stable isotopes.

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

We
have historically depended on a limited number of suppliers and processors for most of our manufacturing processes. Currently, we are depending on SQI for manufacturing our SOI
wafers. SQI is operating pursuant to an alliance agreement whereby they have agreed to manufacture and supply SOI wafers to Isonics on an exclusive basis.

Except
for the agreements with our supplier of oxygen-18 in Russia and SQI, we do not have any written agreements with our suppliers and processors. Although we attempt to
reduce our dependence on our suppliers, disruption or termination of any of the sources could occur, and such disruptions or terminations could have at least a temporary, materially adverse, affect on
our business, financial condition, and results of operations. Moreover, a prolonged inability to obtain alternative sources for processing could have a materially adverse affect on our relations with
our customers.

Government Regulation

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

We
are not currently subject to any FDA regulation because we do not currently manufacture any Diagnostic Breath Tests, drug products or other medical devices. Our customers may in many
cases be subject to FDA regulation. However, if we test, manufacture, market, distribute, export or sell

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diagnostic products or medical devices in the future, we will also likely be subject to extensive regulation nationally and internationally.

Other Government Regulation

The import, export, handling, transportation, sale, storage and other activities undertaken in connection with our non-medical products are subject
to, or potentially subject to, significant federal, state, local and foreign government controls pertaining to hazardous chemicals, import export controls and other matters. These regulations are
complex, pervasive, and constantly evolving. Our ability to effect and maintain compliance with these controls is important to our commercial success. We are not currently engaged in any activities
that may require us to incur significant expenses related to environmental compliance.

We
rely predominantly on Russian and U.S. freight carriers to handle and deliver all our shipments, and utilize domestic overnight courier services for shipments to our customers. These
carriers must comply with Department of Transportation and State regulations pertaining to hazardous chemicals and hazardous waste disposal. These shipments are stored in an area of the facility
designated for such materials. We believe we are in compliance, in all material respects, with applicable federal and state environmental regulatory requirements.

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

The
Nuclear Regulatory Commission has authority to regulate importation and exports of deuterium containing chemicals whose ratio of deuterium atoms to hydrogen atoms exceed 1:5,000. At
present, the deuterium containing compounds that we import do not require any special licenses or importation authorization. The Nuclear Regulatory Commission regulates exports of deuterium containing
chemicals under general license. We will not be able to ship these chemicals to countries that require a special license for such shipments. None of these countries represents significant current or
expected future markets for our products.

Our
facilities and employees must also comply with environmental and other regulations concerning our operations. Failure to ensure compliance with such federal, state, or local laws and
regulations could have a material adverse effect on us.

In
addition, the manufacture, distribution and export of some of our current or potential products and technology may be subject to governmental controls pertaining to materials and
technology that have potential military, nuclear power or nuclear weapons purposes. These controls include export license requirements or other restrictions. We may be unable to obtain or maintain
such licenses. Further, the failure to obtain or maintain such licenses, or comply with other restrictions that might be placed on such manufacturing and exports, may have a material adverse effect on
us and our operations.

Product Liability and Insurance

Our business exposes us to substantial product, environmental, occupational and other liability risks. These risks are inherent in product research and
development, manufacturing, marketing, distribution, and in the use of our products and operations. We have, and will attempt to renew product liability insurance (which currently expires
April 30, 2003) in order to protect ourselves from such potential exposures, however there can be no guarantee that upon expiration of our current coverage that adequate insurance coverage will
be available, and at an acceptable cost. Furthermore, a product liability or other claim could materially and adversely affect our business or financial condition. The terms of our customer agreements
provide that liability is limited to our standard warranty to

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replace non-conforming product, and liability for consequential damages caused by the improper use of our products is limited by contractual terms. Nevertheless, one or more third parties
could file suit against us based on product liability, breach of warranty or other claims. The foregoing contract clauses might effectively limit our liability in any such actions.

Employees

As of July 31, 2002, we had 11 full and part-time employees. Six of our employees have Ph.D.s in scientific or engineering disciplines.
Approximately three employees are involved in research and product development, two in sourcing, and six in business development and administration. An employee's responsibilities may also encompass
areas other than his or her primary area of responsibility. We consider our relations with our employees to be good. None of our employees is covered by a collective bargaining agreement.

ITEM 2. PROPERTIES

We relocated our headquarters to Golden, Colorado in December 1998, into facilities leased by IPRC. IPRC's lease expired in June 2002, however they
are in the process of obtaining a formal extension. Following the sale of IPRC to Interpro Zinc, LLC in February 2001, we entered into a cooperation agreement with Interpro Zinc, LLC that
allows us to continue leasing office, laboratory, and storage space through December 31, 2001 at a rate of $2,500 per month. Effective January 1, 2002, we extended this arrangement on a
month-to-month basis for $4,000 per month.

We
lease 1,750 square feet of office space in Columbia, Maryland that expires December 1, 2003. Chemotrade leases office space in Düsseldorf, Germany that expires
June 15, 2004. IUT leases production and administration facilities in Berlin, Germany.

ITEM 3. LEGAL PROCEEDINGS

During the fiscal year ended April 30, 2002, and subsequently, we were involved in an arbitration matter before the American Arbitration Association in
Dallas, Texas (the "AAA") involving our dispute with Eagle-Picher. We filed this arbitration demand on March 26, 2001, and Eagle-Picher filed a competing claim. These competing claims were
consolidated into a single proceeding (No. 71Y1980017501) before the AAA. We resolved this dispute on July 24, 2002, before the hearing commenced. Eagle-Picher paid Isonics $2,500,000 as
consideration for the settlement ($2,140,000 net of the contingency portion of our legal fees). Neither Isonics nor Eagle-Picher acknowledged fault or liability in connection with the arbitration or
with respect to any of the transactions that were the subject of the arbitration.

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

We did not hold a meeting of our shareholders during the fourth quarter of the fiscal year ended April 30, 2002. We did hold a meeting of our shareholders
on November 13, 2001 which was reported in a current report on Form 8-K of the same date.

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PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a)Market Information.On September 22, 1997, our Units (consisting of one share of common stock and one
Class A warrant) started trading on the Over The Counter (OTC) Bulletin Board under the symbol ISONU. In October 1997, we unbundled the Units and the common stock and Class A
warrants commenced trading on the OTC Bulletin Board. Our Class A warrants expired by their terms on September 21, 2001. Currently the trading symbols for our outstanding securities are
as follows:

Common Stock

"ISON"Class B Warrants

"ISONL"Class C Warrants

"ISONZ"


The
common stock is quoted on the Nasdaq SmallCap Market. As of July 26, 2002, we have outstanding 202,500 Class C warrants, 430,110 registered Class B warrants, as
well as 1,350,000 restricted Class B warrants. The Class B warrants and the Class C warrants are quoted on the Nasdaq SmallCap Market.

The
following table sets forth the high and low bid prices for the common stock (quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions) from May 1, 2000 through April 30, 2002, as reported by OTC Bulletin Board, and beginning July 13, 2000, by the Nasdaq
SmallCap Market.

Quarter Ended
July 31, 2002
(through July 26, 2002)Common Stock (ISON)High

$
1.25Low

$
.96


|                    |      | Quarter Ended
|------------------- | ---- | -------------
|
|Common Stock (ISON) |      |              
|                    | High |              
|                    | Low  |              

|                    |      | Quarter Ended
|------------------- | ---- | -------------
|
|Common Stock (ISON) |      |              
|                    | High |              
|                    | Low  |              

(b)Shareholders and Dividends.As of April 30, 2002, there were approximately 82 holders of record of our common
stock. This does not include an indeterminate number of persons who hold our common stock in brokerage accounts and otherwise in "street name."

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

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(c)Securities Authorized for Issuance Under Equity Compensation Plans.The following is provided with respect to
compensation plans (including individual compensation arrangements) under which equity securities are authorized for issuance as of the fiscal year ending April 30, 2002.

|                                                           |  | Equity Compensation Plan Information(1)
|---------------------------------------------------------- |  | ---------------------------------------
|
|Equity compensation plans approved by security holders     |  | 1,568,473                              
|Equity compensation plans not approved by security holders |  | 0                                      
|Total                                                      |  | 1,568,473                              

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(d)Recent Sales of Unregistered SecuritiesItem 701 Disclosure.The following sets forth information regarding
sales of unregistered securities within the past three years as required by Item 701 of Regulation S-B.

1.Employee Offerings.

(a)Securities Sold.During the past three years, we have issued shares of common stock, and options to purchase shares of
common stock pursuant to our existing employee benefit plans. These employee benefit plans (all of which have been approved by our shareholders) are as follows:



As
of April 30, 2002, options to purchase a total of 929,062 shares, 110,642 shares, and 358,769 shares respectively, were outstanding under the Executives' Plan, Employees' Plan,
and 1996 Stock Option Plan, and options to purchase 773,480, 830,178, and 0 shares, respectively, remained available for grant.

During
the past three years, we have not issued options and stock bonuses to our employees outside of our existing employee benefit plans.

(b)Names of Principal Underwriters.None

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(c)Consideration Received.The stock options and bonuses issued outside of our employee benefit plans were, for the most
part, issued in consideration of services rendered and did not (therefore) involve the offer or sale of securities. In some cases they were issued to induce the performance of services in the future.

(d)Exemption Claimed.Many of the securities referred to in this section were not offered or sold in a manner that
constituted a "sale" of securities as that term is defined in Section 2(a)(3) of the Securities Act. Where a "sale" occurred, the transactions were exempt from registration under the Securities
Act of 1933, as amended by reason of Sections 4(2) and 4(6) of the Securities Act of 1933 or Rule 701.

(e)Not applicable.

(f)Use of Proceeds.Where proceeds were received, the proceeds were and will be utilized for working capital purposes.

2.Investor Relations Services, Inc.Effective July 1, 2002, we paid 250,000 shares of our restricted common stock as
consideration for consulting services consisting of financial advisory, strategic business planning and investor and public relations to be provided by Investor Relations
Services, Inc.("IRSI"), New Smyrna Beach, Florida. The following sets forth the information required by Item 701 in connection with that transaction:



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



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



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



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



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



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



9.Silicon Quest International, Inc.Effective December 19, 2001, we issued warrants to purchase 100,000 shares
of our restricted common stock as consideration for SQI entering into an alliance with Isonics for the manufacturing, marketing and sales of SOI wafers with SQI. The following sets forth the
information required by Item 701 in connection with that transaction:



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10.Brean Murray & Co.Effective December 11, 2001, we issued warrants to purchase 100,000 shares of our
restricted common stock as consideration for Brean Murray & Co ("Brean Murray"). entering into an agreement with Isonics for investment banking and strategic advisory services. We cancelled
this agreement (including the 100,000 common stock warrants) in late January 2002. The following sets forth the information required by Item 701 in connection with that transaction:



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11.Wells Investment Group.Effective October 15, 2001, we issued warrants to purchase 50,000 shares of our restricted
common stock as consideration for Wells Investment Group ("WIG") entering into a consulting agreement with Isonics to perform certain due diligence and other services in connection with possible third
party investment. WIG is owned and controlled by Larry G. Wells, a director of Isonics. The following sets forth the information required by Item 701 in connection with that transaction:



12.Issuance In Exchange for Patent Rights. During January 2001, we paid 75,000 shares of our restricted common stock
as consideration for patent rights from three non-U.S. persons. The following sets forth the information required by Item 701 in connection with that transaction:



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13.December 2000 Unit Issuance.

(a)Securities Sold. The sale, as described below, occurred on December 13, 2000. The securities sold as units
consisted of one share of Common Stock and two Class B Redeemable Common Stock Warrants. The total number of units sold were 337,500, with the possibility that up to an additional 112,500 units
might be issued based on future market conditions.

(b)Underwriters and other purchasers. No underwriters, agents, or placement agents participated in the private placement.

(c)Purchase Price.The Units were offered and sold to nine accredited investors for cash payments totaling $675,000 ($2.00
per unit). To the extent additional units are issued, the total price per unit will be reduced.

(d)Exemption Claimed. The transactions were exempt from registration under the Securities Act of 1933, as amended by reason
of Sections 4(2) and 4(6) of the Securities Act of 1933 for transactions not involving a public offering and for transactions with accredited investors only.

(e)Terms of Conversion or Exercise.The Class B Warrants are exercisable on the terms set forth herein.

(f)Use of Proceeds.Working capital purposes.

14.December 1999 Warrant Issuance.

(a)Securities Sold. The sale, as described below, occurred on December 1, 1999. The securities sold consists of one
restricted warrant (A Warrant to purchase 4,000,000 shares of restricted Common Stock issued at an exercise price of $3.75 per share.

(b)Underwriters and other purchasers. No underwriters, agents, or placement agents participated in the private placement.

(c)Purchase Price.The warrant was issued to a single accredited investor as consideration for the purchase of 200 kilograms
of silicon-28 pursuant to an Asset Purchase Agreement executed between Isonics and Eagle-Picher, an accredited investor.

(d)Exemption Claimed. The transactions were exempt from registration under the Securities Act of 1933, as amended by reason
of Sections 4(2) and 4(6) of the Securities Act of 1933.

(e)Terms of Conversion or Exercise.Terms of conversion or exercise are as follows:



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We
also entered into a registration rights agreement relating to the shares of Common Stock underlying the Warrant.

(f)Use of Proceeds.We intend to use the 200 kilograms of silicon-28 from the issuance of the Warrant for the
continued development and commercialization of silicon-28 wafers for the semiconductor industry.

15.July 1999 Private Placement.

(a)Securities Sold. The sale of securities, as described below, occurred on July 29, 1999. The securities sold
include:



(b)Underwriters and other purchasers. No underwriters, agents, or placement agents participated in the private placement;
and



(c)Offering Price.The Units were sold for a purchase price of $1.50 per Unit. The Units described in (b) (ii) above
were sold for cash; the Units described in (b) (iii) above were issued in satisfaction of debt obligations.

(d)Exemption Claimed.The transactions were exempt from registration under the Securities Act of 1933, as amended by reason
of Sections 4(2) and 4(6) of the Securities Act of 1933, and Rule 506 of Regulation D thereunder.

(e)Terms of Conversion or Exercise.Terms of conversion or exercise are as follows:



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(f)Use of Proceeds.We intend to use the cash proceeds from the sale of the Units for repayment of debt, working capital,
and to finance the continued growth of operations including the continued development and commercialization of silicon-28 wafers for the semiconductor industry.

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

(a)  Management's Discussion and Analysis of Financial Condition

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

Results of Operations

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

Year Ended April 30,2002

2001Revenues

100.0
%
100.0
%Cost of revenues

75.8

77.3Gross margin

24.2

22.7Operating expenses:Selling, general and administrative

54.7

59.6Research and development

5.2

14.6Goodwill impairment

12.6

Total operating expenses

72.5

74.2Operating loss

(48.3
)
(51.5
)Other income (expense), net

(.3
)
(6.3
)Loss before income tax expense

(48.6
)
(57.8
)Income tax expense



Net loss

(48.6
)%
(57.8
)%


Revenues

Revenues increased from $7,789,000 for the year ended April 30, 2001 to $8,155,000 for the year ended April 30, 2002, an increase of $366,000 or
4.7%. The increase is due to a significant increase in domestic isotope product sales partially offset by a significant decrease in international isotope product sales. Included in revenues for the
year ended April 30, 2002 were approximately $15,000 of semiconductor materials and products sales as compared to zero for the year ended April 30, 2001.

Revenues
from domestic isotope product sales for the year ended April 30, 2002 were $4,224,000, an increase of 62.3%, or $1,622,000, from $2,602,000 for the year ended
April 30, 2001. The increase was primarily the result of additional product sales to our existing customers and an increase in our customer base for the year ended April 30, 2002.

Revenues
from international isotope product sales for the year ended April 30, 2002 were $3,916,000, a decrease of 24.5%, or $1,271,000, from $5,187,000 for the year ended
April 30, 2001. The

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decrease was primarily the result of the acquisition of a major customer by one of our competitors during the second quarter of the year ended April 30, 2001 and several one-time transactions
with governmental agencies during the year ended April 30, 2001.

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

Although
we commenced our SOI business on a limited basis during the year ended April 30, 2002, there are still several additional items that need to be resolved, including the
refining of our processes and procedures and obtaining certification from our future customers before we will be able to operate our SOI business on a full scale basis. Additionally, if we aren't able
to extend our working agreement with SQI, we may be required to raise funds in order to construct our own manufacturing facilities. While we anticipate being able to produce SOI wafers on a full-scale
basis, we can offer no assurance that we will be able to complete the steps necessary in order to do so.

We
do not anticipate significant revenues from sales of silicon-28 based products in fiscal 2003. We are collaborating with academia and industry to evaluate the benefits of
isotopically- pure silicon-28. We believe that if evaluations demonstrate the commercial feasibility of one or more products, demand could emerge in the high-performance micro-processor segment of the
semiconductor market. We can offer no assurance, however, that these evaluations will demonstrate the commercial feasibility of any products, that we will be able to commercialize any such products,
or that a market will emerge for any such products.

Gross Margin

Gross margin for the year ended April 30, 2002 was $1,973,000, an increase of 11.5%, or $203,000, from $1,770,000 for the year ended April 30, 2001.
On a percentage of revenues basis, gross margin increased 1.5 percentage points to 24.2%, for the year ended April 30, 2002, from 22.7%, for the year ended April 30, 2001. The
dollar increase is directly attributable to an increase in higher margin domestic isotope product sales partially offset by a decrease in international lower margin isotope sales. The percentage of
revenues increase is due to the combination of an increase in higher margin domestic isotope sales and a decrease in lower margin international isotope sales.

Included
in gross margin for the year ended April 30, 2002 was approximately $326,000 of gross margin from CTL. While we fully anticipate replacing the lost gross margin from the
sale of CTL during the year ended April 30, 2003 with additional product sales, at a higher gross margin percentage, to both new and existing customers, both domestically and in Europe, we can
offer no assurances that this will come to fruition (see"Recent Business Dispositions").

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $182,000, to $4,463,000 for the year ended April 30, 2002, from $4,645,000 for the year ended
April 30, 2001. On a percentage of revenues basis, selling, general and administrative expenses decreased to 54.7%, for the year ended April 30, 2002, from 59.6%, for the year ended
April 30, 2001. The dollar decrease is primarily attributable to reduced

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corporate usage of professional services including legal, business development and accounting services and reduced salaries, headcount and other related expenses due to the sale of our subsidiary
IPRC, effective February 1, 2001 partially offset by the increased usage of consulting services related to the issuance of common stock to IRSI (See"Recent Sales of
Unregistered SecuritiesItem 701 Disclosure") and the fair market value of common stock warrants issued for services. Included in selling, general and
administrative expenses for the year ended April 30, 2001 was a $270,000 expense to remediate the Golden, Colorado facility that was leased by Isonics. The lease and related remediation
liability were assumed by the buyer of IPRC effective February 1, 2001. The percentage decrease is also attributable to reduced corporate usage of professional services including legal,
business development and accounting services and reduced salaries, headcount and other related expenses due to the sale of our subsidiary IPRC, and an increase in revenues partially offset by the
increased usage of consulting services related to the issuance of common stock to IRSI and the fair market value of common stock warrants issued for services.

Goodwill Impairment

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

Research and Development Expenses

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

Research
and development expenses decreased $711,000, to $423,000, for the year ended April 30, 2002, from $1,134,000, for the year ended April 30, 2001. On a percentage of
revenues basis, research and development expenses decreased to 5.2% for the year ended April 30, 2002, from 14.6%, for the year ended April 30, 2001. The dollar decrease is primarily
related to decreased research and development expenses associated with the zinc recovery and recycling project. These expenses were incurred by IPRC, which was sold effective February 1, 2001.
The percentage decrease is also attributable to the sale of our subsidiary and the increase in revenues.

We
believe that the development and introduction of new product applications is critical to our future success. We expect that research and development expenses may increase assuming
sufficient cash remains available and we are able to procure necessary materials and outside services, but will likely continue to vary as a percentage of revenues because of the timing and amount of
future revenues. We operate no facilities of our own for research and development. All research and

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development work is performed by outside entities, none of which we control. None of the companies that currently perform research and development work for us do so on an exclusive basis.

Other income (expense), net

Other income (expense), net includes interest income and expense, gains or losses on the sale of lines of businesses or subsidiaries, impairment write-downs
related to contract research and development assets held by IPRC and foreign currency gains and losses. Other income (expense), net decreased $467,000, to ($22,000), for the year ended
April 30, 2002, from ($489,000), for the year ended April 30, 2001. The decrease is primarily attributable to charges totaling $208,000 related to the contingent gain previously
recognized on the sale of the depleted zinc business to Eagle-Picher, charges of $354,000 related to the write down of contract research and development assets of IPRC and foreign currency losses of
$66,000 related to the translation of the German financial statements of Chemotrade to US dollars partially offset by recognizing a $59,000 gain on the sale of IPRC during the year ended
April 30, 2001. During the year ended April 30, 2002 we realized a gain of $6,000 related to the translation of the German financial statements of Chemotrade to US dollars.

Income Taxes

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

Net Loss

We recognized a net loss of $3,960,000 for the year ended April 30, 2002, as compared to a net loss of $4,498,000 for the year ended April 30, 2001.
Losses, as incurred during the year ended April 30, 2002, of this magnitude will likely continue until revenues increase from our current operations or until we generate revenues from products
introduced as a result of our research and development projects.

Net
income in future years will be dependent upon our ability to increase net revenues faster than we increase our selling, general and administrative expenses, research and development
expense and other expenses. During the year ended April 30, 2003, we anticipate expanding our SOI operations and generating additional revenues. However, because of our continuing research and
development efforts on new products, we anticipate that the operations during the year ended April 30, 2003 will result in a loss unless we are able to increase our revenues from our existing
products or generate additional sales from the new products we may develop.

Liquidity and Capital Resources

Our working capital and liquidity have eroded significantly during the year ended April 30, 2002. Working capital decreased $543,000, to $1,066,000, at
April 30, 2002, from $1,609,000, at April 30, 2001. Of that, approximately $773,000 of our working capital is in our German Subsidiary and is not available to pay our United States based
creditors.

Subsequent
to year-end, our working capital increased significantly due to the resolution of our dispute with Eagle-Picher via the July 24, 2002 settlement agreement. As a result
of the settlement, we received $2,500,000 ($2,140,000 net of the contingency portion of our legal fees) from Eagle-Picher although neither party acknowledged fault or liability in connection with the
dispute (see"Legal Proceedings"and"Sale of Depleted Zinc BusinessDispute with
Eagle-Picher").

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Our
principal sources of funding have been from the issuance of our Series 2002A Convertible Notes, the exercise of common stock warrants, the exercise of stock options, sales of
common stock and proceeds from the sale of shares under our employee stock purchase program. We used cash in operating activities of $1,858,000 and $3,147,000 for the years ended April 30, 2002
and 2001, respectively. Our investing activities used cash of $17,000 and $43,000 for the years ended April 30, 2002 and 2001, respectively. Cash used in investing activities during the years
ended April 30, 2002 and 2001 resulted primarily from purchases of property and equipment.

Financing
activities generated cash of $1,510,000 and $895,000 for the years ended April 30, 2002 and 2001, respectively. Cash provided by financing activities for the year ended
April 30, 2002 resulted from the issuance of our Series 2002A Convertible Notes for $1,000,000, the exercise of common stock warrants for $473,000, proceeds of $7,000 from the sale of
shares under our employee stock purchase program and $30,000 from the net issuance and repayments of notes payable. Cash provided by financing activities for the year ended April 30, 2001
resulted from the December 13, 2000 issuance of units, comprised of one share of common stock bundled with two Class B warrants for cash of $675,000 with the remaining amount resulting
primarily from the exercise of stock options and proceeds from the sale of shares under our employee stock purchase program.

At
April 30, 2002, we had $725,000 of cash and cash equivalents, a decrease of $365,000, compared to $1,090,000 at April 30, 2001. The decrease is primarily the result of
net losses incurred during the year ended April 30, 2002 as well as other cash expenditures we incurred which, in the aggregate, exceeded cash receipts.

On
March 20, 2002, we completed a financing arrangement whereby we issued $1,000,000 in Series 2002A Convertible Notes along with 200,000 detachable common stock warrants.
The notes are
convertible at a ratio of one common share for each dollar of note outstanding, bear interest at 4% per annum, and are due March 1, 2003. The common stock warrants are exercisable at $1.25 per
warrant and expire on March 20, 2005. The common shares underlying the convertible notes were effectively registered on June 9, 2002. Subsequent to year-end, as of July 26, 2002
the convertible notes have been converted to 1,000,000 shares of common stock.

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

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

Under
the terms of the Series A Convertible Preferred Stock private placement, the related shareholders have anti-dilution rights if we issue or sell common stock after
July 29, 1999 for a per share consideration less than the current exercise price of the related warrants. As a result of various transactions during the year ended April 30, 2002
including the issuance of the Series 2002A 4% Convertible Notes, the issuance of restricted common stock to SEI, IRSI and company employees, the issuance of common stock warrants to SQI, the
exchange offer of Class A common stock warrants and the issuance of common stock options and warrants to employees, we issued an additional 642,654 common stock warrants and reduced the
exercise price to $2.79 on all related common stock warrants in order to satisfy the anti-dilution provisions. As of April 30, 2002, there are 3,085,622 common stock

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warrants outstanding related to the Series A Convertible Preferred Stock private placement. These warrants expired on July 29, 2002.

In
addition to anti-dilution rights, there are provisions associated with the Series A Convertible Preferred Stock that if triggered, would reduce the current conversion price and
effectively allow the preferred shares to convert to common stock at a ratio greater than a one for one basis. As a result of the issuance of the Series 2002A 4% Convertible Notes at $1.00 per
share, the Series A Convertible Preferred Stock is now convertible at 1.50 shares of common stock for each share of Series A Convertible Preferred stock outstanding.

The
purchase agreement relating to the acquisition of Chemotrade required that the former shareholders of Chemotrade receive additional consideration in the event that defined levels of
pretax earnings were achieved for the year ended April 30, 2001. As a result of the performance of
Chemotrade during the year ended April 30, 2001, we paid the former shareholders of Chemotrade contingent consideration of approximately $114,000 during the year ended April 30, 2002.
There were no other events of contingent consideration under the terms of the purchase agreement.

In
general, we expect that our working capital will continue to decrease over time as we continue to use our capital for operations, research and development, and investing activities.
We do not expect working capital to increase until we are able to increase our revenues to exceed our cash out-flow (assuming we are able even to increase our revenues) or complete a financing
arrangement. We cannot offer any assurance that we will be able to do so in the near term. We have sufficient cash available to fund our working capital requirements into the year ended
April 30, 2004.

Critical Accounting Policies

In accordance with recent Securities and Exchange Commission guidance, those material accounting policies that we believe are the most critical to an investor's
understanding of our financial results and condition and require complex management judgment have been expanded and are discussed below.

Goodwill and Intangible Assets

Our goodwill results from the acquisition of Chemotrade and is being amortized on a straight-line basis over twenty years. If impairment indicators exist, we
evaluate goodwill for impairment by comparing the unamortized balance of goodwill to the undiscounted future cash flows of the related assets. Estimated undiscounted future cash flows are based on
historical results to-date, modified for the elimination of intercompany management fees and for a conservative estimate for planned business growth. We modify or adjust goodwill if impairment is
indicated based on discounted cash flows. During the year ended April 30, 2002 we incurred an impairment charge of $1,025,000 in order to properly state goodwill at fair market value.

In
June 2001, the Financial Accounting Standards Board adopted SFAS No. 142Goodwill and Other Intangible Assets.SFAS
No. 142 addresses whether intangible assets should be amortized, the methods used to amortize intangible assets and the methods used to assess impairment of those assets, including goodwill
resulting from business combinations accounted for under the purchase method. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, except that goodwill and
intangible assets other than goodwill acquired after June 30, 2001 shall be amortized or not amortized in accordance with SFAS 142. Included in our assets at April 30, 2002, is
goodwill related to the acquisition of Chemotrade in 1998 with a net carrying value of $1,807,000. Upon adoption of SFAS No. 142 on May 1, 2002, we will no longer amortize this goodwill,
decreasing our amortization expense by approximately $110,000 per year. We are required to assess this goodwill for impairment in the year of adoption, effective as of the beginning of the year, and
at least annually thereafter. We will not be able to determine the full effect of these new pronouncements on our financial position or our results

---

of operations, until we are able to complete our analysis of the impairment provisions of the new standards. In the event our analysis under the new guidance indicates this goodwill is further
impaired, we will be required to record a charge to our earnings in the year of adoption.

Our
intangible assets result from the perpetual, exclusive technology license agreement with SEI that we entered into on September 14, 2001. As the intangible assets were acquired
after June 30, 2001, we adhere to the guidance provided by SFAS No. 142Goodwill and Other Intangible Assets.We have determined that
these assets currently have an indefinite useful life as they are not bound by any legal time periods or otherwise limited due to competing technologies and, therefore in accordance with SFAS
No. 142 they will not be amortized but rather tested annually for impairment. If indicators of impairment do arise, the intangible assets will be tested for impairment and may result in an
impairment charge in the future. Additionally, each reporting period we will evaluate whether such events and circumstances continue to support our assessment of an indefinite useful life for these
intangible assets.

Valuation of Equity Transactions

We value transactions associated with common or preferred stock that is convertible into common stock based on the market value of the underlying common stock on
the date of the signing of the agreement. We value transactions associated with common stock warrants at the appropriate measurement date utilizing the Black-Scholes pricing model, with assumptions as
to volatility (150%), risk-free interest rate (4.0%) and estimated life of the warrants based on historical information.

(b)  Risk Factors

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

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

We have not operated profitably since our 1996 fiscal year. We recognized net income for the year ended April 30, 2000, only because of the gain recognized
on the sale of our depleted zinc assets to
Eagle-Picher. Through November 30, 1999, our revenues had historically been derived from our depleted zinc operations.

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

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



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

We have raised capital during the years ended April 30, 2002 and 2001, which has resulted in dilution to our existing shareholders. This was necessary in order to
provide necessary working capital and we may be required to raise additional capital, which may result in substantial additional dilution.

During the 2002 fiscal year, we issued 494,849 shares of common stock for $473,000 as the result of the exercise of common stock warrants. Included in the
exercised common stock warrants were 202,500
Class B warrants. On March 20, 2002, we borrowed $1,000,000 from five accredited investors through the issuance of our Series 2002A 4% Convertible Notes. In addition to the
promissory notes being convertible into common stock at $1.00 per share, we issued these investors 200,000 common stock warrants which have an exercise price of $1.25 per share. As consideration to
the investment banker that arranged this financing, we also paid a $20,000 fee (four months at $5,000 per month as advisory fees under a consulting agreement), $100,000 commission, 50,000 common stock
warrants exercisable at $1.50 (as additional advisory fees under the consulting agreement), an additional 100,000 common stock warrants exercisable at $1.25, and in consideration for an investment
banking agreement entered into after the completion of the initial transaction, an additional 25,000 shares of our restricted common stock and 200,000 common stock warrants exercisable at $2.32 per
share.

On
December 13, 2000, we sold 337,500 units consisting of one share of our common stock and two Class B warrants for $675,000 to a group of accredited investors. As a
result of subsequent adjustments, we issued an additional 112,504 shares of common stock and an additional 675,000 Class B warrants.

The
exercise of the Class B warrants, and/or the Class C warrants may provide us with some additional financing, but it is likely that no warrants will be exercised unless
the market price is in excess of the exercise price ($1.50 per share for the Class B warrants, and $2.50 per share for the Class C warrants). Any such exercise will result in additional
dilution to our shareholders.

Furthermore,
our efforts to raise working capital have resulted in dilution adjustments to our outstanding common stock warrants associated with the preferred stock private placement
completed on July 29, 1999. These dilution adjustments did not result in any additional investment in Isonics, but resulted in the issuance of 642,654 and 146,301 additional common stock
warrants for no additional consideration during the years ended April 30, 2002 and 2001, respectively. As of April 30, 2002, there are 3,085,622 common stock warrants outstanding related
to the preferred stock private placement exercisable at $2.79 per share. These common stock warrants expired on July 29, 2002.

In
addition to anti-dilution rights, there are provisions associated with the preferred stock private placement completed on July 29, 1999 that if triggered, would reduce the
current conversion price and effectively allow the preferred shares to convert to common stock at a ratio greater than a one for one basis. As a result of the issuance of the Series 2002A 4%
Convertible Notes at $1.00 per share, the preferred stock is now convertible at 1.50 shares of common stock for each share of Series A Convertible Preferred Stock outstanding. As of
April 30, 2002 there were 963,666 shares of Series A Convertible Preferred Stock outstanding.

If
we are successful in raising additional working capital, our shareholders may incur additional dilution adjustments.See "Management's Discussion and
Analysis," and "Business."

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

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

We
are dependent on suppliers from Russia, Uzbekistan, and Georgia for approximately 95% of our stable isotopes and 95% of our radioisotopes. Accordingly, our operations could be
materially adversely affected if hostilities in Russia, Uzbekistan, or Georgia should occur, if trade between Russia, Uzbekistan and/or Georgia and the United States were interrupted or ceased, if
political conditions in Russia, Uzbekistan or Georgia disrupt transportation or processing of our goods, if laws or government policies concerning foreign business operations in Russia, Uzbekistan or
Georgia change substantially, or if tariffs are introduced.See "Management's Discussion and Analysis" and "Business."

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

Three customers (Perkin Elmer Life Sciences, Eastern Isotopes, and Reviss Ltd.) accounted for approximately 22%, 20% and 6%, respectively, of revenues
during our 2002 fiscal year. Two customers (Perkin Elmer Life Sciences and Reviss Ltd.) accounted for approximately 36% and 11%, respectively, of the German segment's revenue during our 2002
fiscal year. Five customers (Perkin Elmer Life Sciences, Eastern Isotopes, Reviss Ltd., Commisariat and IPL) accounted for approximately 16%, 9%, 7%, 5% and 4%, respectively of revenues for the
year ended April 30, 2001. Two customers (Perkin Elmer Life Sciences and Reviss Ltd.) accounted for approximately 24% and 11%, respectively of the German segment's revenues for the year
ended April 30, 2001.

While
our goal is to diversify our customer base, we expect to continue to depend upon a relatively small number of customers for a significant percentage of our revenues for the
foreseeable future. Significant reductions in sales to any of our large customers have had, and may in the future have, a material adverse effect on us by reducing our revenues and our gross margins.
Present or future customers could terminate their purchasing patterns with us or significantly change, reduce or delay the amount of isotope or other products ordered from us. See "Management's Discussion and Analysis" and
"Business."

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

We have experienced, and may again experience, periods of rapid growth that place a significant strain on our financial and managerial resources. Through our
marketing efforts we have increased the number and type of products we offer to our customers in our effort to replace the cash flow reduction that occurred as a result of the sale of our depleted
zinc operations, and we are continuing to look for new products to offer. Through our research and development efforts we are also attempting to develop additional products and lines of business. Our
ability to manage growth effectively, particularly

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given our increasing scope of operations, will require us to continue to implement and improve our management, operational and financial information systems, and will require us to develop the
management skills of our personnel and to train, motivate and manage our employees. Our failure to effectively manage growth could increase our costs of operations and reduce our margins and
liquidity, which could have a material adverse effect on our business, financial condition and results of operations.See "Business."

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

Our future success will depend in significant part upon the continued service of our key technical, sales and senior management personnel, including James E.
Alexander, our President and Chief Executive Officer; Boris Rubizhevsky, our Senior Vice President, Isotope Production and Supply; Daniel Grady, Vice President, Life Sciences, Stephen Burden, Vice
President, Semiconductor Materials, and Hans Walitzki, Vice President, Advanced Wafer Technology. We have obtained $1,000,000 of key man life insurance on the lives of Mr. Alexander and
Mr. Rubizhevsky. Currently neither Mr. Alexander nor Mr. Rubizhevsky are covered by employment agreements and the compensation committee has not yet determined if they will issue
new contracts. Mr. Grady and Mr. Burden are covered by employment agreements with an indefinite term that provides at-will employment, terminable at any time by either party.
Mr. Walitzki is covered by an employment agreement through November 2006.

We
believe that our future success will also depend upon our ability to attract and retain other qualified personnel for our operations. The failure to attract or retain such persons
could materially adversely affect our business, financial condition and results of operations.See "Management."

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

We rely primarily on a combination of patents and patent applications, trade secrets, confidentiality procedures, and contractual provisions to protect our
technology. Despite our efforts to protect our technology, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing
unauthorized use of our technology and products is difficult. In addition, the laws of many countries do not protect our rights to information, materials and intellectual property that we regard as
proprietary, and that are protected under the laws of the United States. We may not be able to protect our proprietary interests, or our competitors may independently develop similar technology or
intellectual property. If either one of these situations occurs, we may lose existing customers and our business may suffer.See "Business."

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

---

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

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

Further,
it is possible that future technological developments may occur. The market for our isotope products is characterized by rapidly evolving technology and continuing process
development. Our future success will depend upon our ability to develop and market isotope products that meet changing customer and technological needs on a cost effective and timely basis.
Specifically, the failure by Eagle-Picher to provide us with silicon-28 has hindered, and may continue to hinder, our research and
development activities, which then negatively affects our ability to remain competitive. If we fail to remain competitive by anticipating the needs of our customers and our customers contract with
other suppliers, our revenues and resulting cash flow could be materially and adversely affected.

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

We could become subject to a variety of federal, state, and local environmental regulations relating to the use, storage, discharge and disposal of hazardous
chemicals used during the isotope product delivery and manufacturing process, although we do not believe that there is any such regulation directly applicable to our current operations. Regulations
that become applicable to our operations in the future could restrict our ability to expand our facilities or could require us to acquire costly equipment or to incur other significant expenses to
comply with governmental regulations. Historically, our costs of compliance with environmental regulations have not been significant. In the quarter ended October 31, 2000, we recognized a
$270,000 expense to remediate the Golden, Colorado facility. The lease and this liability were assumed by the buyers of IPRC effective February 1, 2001.See
"Business."

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

Even if all outstanding warrants and stock options are exercised and convertible securities are exchanged for common stock, our directors and officers will
beneficially own 27.4% of the outstanding shares of common stock as of April 30, 2002, and, accordingly, may have the ability to elect a majority of the directors of Isonics and otherwise
control the company. As a result, such persons, acting together, will have the ability to substantially influence all matters submitted to stockholders for approval, including the election and removal
of directors and any merger, consolidation or sale of substantially all of our assets, and to control our management and affairs. Such concentration of ownership may have the effect of delaying,
deferring or preventing a change in control, impeding a merger, consolidation or takeover or other business combination involving us or discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of our business, even if such a transaction would be beneficial to other stockholders.

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

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

---

require us to use funds that are otherwise needed to conduct our business and make our products.See "Business."

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

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

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

Although our common stock is currently quoted on the Nasdaq SmallCap Stock Market, our common stock has in the past been subject to additional disclosure
requirements for penny stocks mandated by the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. The SEC Regulations generally define a penny stock to be an equity security that has a
market price of less than $5.00 per share. We have, at times in the past, been included within the SEC Rule 3a-51 definition of a penny stock. When our common stock is considered to be a "penny
stock", trading is covered by Rule 15g-9 promulgated under the Securities Exchange Act of 1934, for non-Nasdaq and non-national securities exchange listed securities.

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



We
currently satisfy all requirements for continued listing on the Nasdaq SmallCap Market, although the volatility of our stock prices and our financial condition may result in our
failing to meet Nasdaq's requirements at some future date. Subsequent to April 30, 2002, the price of our common stock has, at times, been below $1.00 per share, although Nasdaq has not
notified us that it considers this to be a deficiency. The time required for meeting these thresholds is contingent on any action (or inaction) by Nasdaq with respect to our listing. See "Market for Common Equity and Related
Stockholder Matters."

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

Our stock price may decline by future sales of our shares or the perception that such sales may occur. As of April 30, 2002, approximately 5,593,967 shares
of common stock held by existing stockholders constitute "restricted shares" as defined in Rule 144 under the Securities Act. The restricted shares may only be sold if they are registered under
the Securities Act, or sold under Rule 144, or another exemption from registration under the Securities Act.

Approximately
90% of the restricted shares of our common stock are either eligible for sale pursuant to Rule 144 or have been registered under the Securities Act for resale by the
holders. We are unable to estimate the amount, timing, or nature of future sales of outstanding common stock. Sales of substantial amounts of our common stock in the public market may cause the
stock's market price to decline.See "Shares Available for Future Sale."

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

As of April 30, 2002, we had outstanding preferred stock convertible into, and options and warrants to purchase, an aggregate of 9,192,204 shares of common
stock. As long as these shares of Series A Convertible Preferred Stock remain outstanding and the options and warrants remain unexercised, the terms under which we could obtain additional
capital may be adversely affected because any new investors will perceive that these lower priced securities offer a risk of substantial potential dilution. Depending on the market price for our
common stock as reported by Nasdaq and other sources, new investors frequently prefer to negotiate prices that are at or below the conversion price or exercise price of existing securities. See "Isonics' Capital
Stock."

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

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

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

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

Forward-Looking statements may prove to be inaccurate

In our effort to make the information in this report more meaningful, this report contains both historical and forward-looking statements. All statements other
than statements of historical fact are forward-looking statements within the meanings of Section 27A of the Securities Act of 1933, and

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Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this report are not based on historical facts, but rather reflect the current expectations of our management
concerning future results and events.

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

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

These
factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in the forward-looking statements in this
prospectus. Other unknown or unpredictable factors also could have material adverse effects on the future results of Isonics.

ITEM 7. FINANCIAL STATEMENTS

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

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

None.

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PART III

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

(a) and (b)    Identification of Directors and Executive Officers

The
following table sets forth the names and ages of all the Directors and Executive Officers of Isonics, and the positions held by each such person as of April 30, 2002. The
directors each serve until their successors are duly elected and qualified; officers are appointed by, and serve at the pleasure of, the Board of Directors.

|Name                     |  | Age |  | Position                                                                
|------------------------ |  | --- |  | ------------------------------------------------------------------------
|James E. Alexander       |  | 53  |  | President, Chief Executive Officer, Treasurer, and Chairman of the Board
|Boris Rubizhevsky        |  | 51  |  | Senior Vice President, Vice Chairman and Director                       
|Daniel J. Grady          |  | 47  |  | Vice President, Life Sciences, Manager of Chemotrade.                   
|Stephen J. Burden        |  | 53  |  | Vice President, Semiconductor Materials                                 
|John V. Sakys            |  | 33  |  | Vice President, Chief Financial Officer and Secretary                   
|Hans Walitzki            |  | 46  |  | Vice President, Advanced Wafer Technology                               
|Lindsay A. Gardner(1)(2) |  | 51  |  | Director                                                                
|Richard Parker(1)(2)     |  | 58  |  | Director                                                                
|Larry J. Wells(1)(2)     |  | 59  |  | Director                                                                

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

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

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

Dr. Daniel J. Gradyjoined us as Vice President, Life Sciences in 1995 and became manager of our Chemotrade subsidiary in
January 2002. From March 1994 through September 1995, Dr. Grady was

---

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

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

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

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

Lindsay A. Gardnerwas elected a director in September 1993. Ms. Gardner is currently Director, Corporate Development and
Strategic Planning for Menasha Corporation. From 1991 to 2001, Ms. Gardner was President of LG Associates, a U.S.-based management consulting firm providing strategic planning and materials
management expertise to foreign company affiliates of U.S. companies in developing countries. During her tenure at LG Associates, Ms. Gardner resided in Moscow, Russia from
September 1991 to January 1994, and Beijing, China from January 1994 to April 2000. She currently resides in Appleton, Wisconsin. From 1977 to 1991, Ms. Gardner
worked for General Electric Corporation in a variety of management and functional positions including international marketing, quality assurance and supply chain management. Ms. Gardner
received a Bachelors degree in International Economics from The George Washington University Elliott School of International Affairs and earned a Masters of Business Administration from the University
of Louisville.

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

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Larry J. Wellswas elected a director of Isonics in January 2000. Since 1989, Mr. Wells has been a general partner of SVP
Management Company, the management company for Sundance Venture Partners, L.P., a venture capital fund. From 1983 to 1989, Mr. Wells served as Vice President of Citicorp Venture Capital. He
left Citicorp to become Senior Vice President of Inco Venture Capital. Mr. Wells is also a director of Cellegy Pharmaceuticals, Identix, Inc., as well as several privately held
companies. Mr. Wells received his Bachelors degree in Economics and earned a masters degree in Business Administration
from Stanford University. Mr. Wells was previously a director of Isonics from September 1996 through December 1998.

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

(d)    Involvement in Certain Legal Proceedings

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

(e)    Promoters and Control Persons.

Not
applicable.

(f)    Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) Disclosure

Section 16(a) of the Securities Exchange Act of 1934 (the "1934 Act") requires Isonics' directors, executive officers and persons who own more than ten
percent of a registered class of Isonics' equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of
Isonics. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish Isonics with copies of all Section 16(a) forms they file.

To
our knowledge, based upon a review of the copies of such reports furnished to us and based upon written representations that no other reports were required, all Section 16(a)
filing requirements applicable to Isonics' officers, directors and greater than ten percent beneficial owners were complied
with exception (or in addition) to the following during the fiscal year ended April 30, 2002 and subsequently:



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ITEM 10. EXECUTIVE COMPENSATION

(a) and (b)    Summary Compensation Table

The following table sets forth information regarding compensation awarded, paid to, or earned by the chief executive officer and the other principal officers of
Isonics for the three years ended April 30, 2000, 2001, and 2002. No other executive officer earned salary and bonus compensation exceeding $100,000 during any of those years. This includes all
compensation paid to each by Isonics and any subsidiary.

|                                        |  |                |  |                         |  |                 |     |            |     | Long-term Compensation Awards |  |            
|--------------------------------------- |  | -------------- |  | ----------------------- |  | --------------- | --- | ---------- | --- | ----------------------------- |  | -----------
|
|
|
|
|James E. Alexander
President & CEO      |  | 2000
2001
2002 |  | 212,000
240,000
240,000 |  | 172,549
0
0     | (c) | 39,280
0
0 | (d) | 0
0
0                         |  | 0
0
120,000
|Boris Rubizhevsky
Senior Vice President |  | 2000
2001
2002 |  | 191,000
216,000
216,000 |  | 147,670
0
0     | (f) | 28,185
0
0 | (g) | 0
0
0                         |  | 0
0
118,750
|Stephen J. Burden,
Vice President       |  | 2000
2001
2002 |  | 125,000
125,000
137,665 |  | 0
0
0           |     | 23,452
0
0 |     | 0
0
0                         |  | 0
0
109,000
|Daniel J. Grady
Vice President          |  | 2000
2001
2002 |  | 125,000
143,208
144,000 |  | 10,271
0
27,750 | (k) | 23,833
0
0 | (j) | 0
0
0                         |  | 0
0
106,375
|John V. Sakys,
Vice President(b)        |  | 2000
2001
2002 |  | 0
0
117,947             |  | 0
0
0           |     | 0
0
0      |     | 0
0
0                         |  | 0
0
107,812

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---

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

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

---



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

(c)  Options/SAR Grants in Last Fiscal Year



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



As
of April 30, 2002, options to purchase a total of 929,062 shares, 110,642 shares, and 358,769 shares respectively, were outstanding under the Executives' Plan, Employees' Plan,
and 1996 Stock Option Plan, and options to purchase 773,480, 830,178, and 0 shares, respectively, remained available for grant.

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



There
were no options granted to executive officers named in the compensation table during the fiscal year ended April 30, 2001. We did not grant any stock appreciation rights to
any person during fiscal year 2001 or subsequently. We granted stock options to executives during fiscal 2002 as follows:

|                   |  | Number of Options |  | Exercise Price |      | Term
|------------------ |  | ----------------- |  | -------------- | ---- | ----
|James E. Alexander |  | 100,000           |  | $              | 1.17 |     
|James E. Alexander |  | 20,000            |  | $              | 1.25 |     
|Boris Rubizhevsky  |  | 100,000           |  | $              | 1.17 |     
|Boris Rubizhevsky  |  | 18,750            |  | $              | 1.25 |     
|Daniel J. Grady    |  | 100,000           |  | $              | 1.06 |     
|Daniel J. Grady    |  | 6,375             |  | $              | 1.13 |     
|Stephen J. Burden  |  | 100,000           |  | $              | 1.06 |     
|Stephen J. Burden  |  | 9,000             |  | $              | 1.13 |     
|Hans Walitzki      |  | 200,000           |  | $              | 1.01 |     
|Hans Walitzki      |  | 4,000             |  | $              | 1.13 |     
|John V. Sakys      |  | 100,000           |  | $              | 1.69 |     
|John V. Sakys      |  | 7,812             |  | $              | 1.13 |     

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In
November 2001 we granted Hans Walitzki 200,000 shares of restricted common stock, which vests in different increments over five years.

In
January 2002 we granted Daniel Grady 25,000 shares of restricted common stock, which vested immediately.

(d)    Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values

No
officer exercised employee stock options during the fiscal year ended April 30, 2002, or subsequently.

The
following table sets forth information regarding the year-end value of options being held by the Chief Executive Officer and the other such named officers and persons on
April 30, 2002.

|Name and Principal Position                |  | Shares acquired on exercise (#) |  | Value realized |  | Number of securities underlying unexercised options/stock appreciation rights at April 30, 2002 Exercisable/Unexercisable |  | Value of unexercised in-the-money options/stock appreciation rights at April 30, 2002
Exercisable/Unexercisable
|------------------------------------------ |  | ------------------------------- |  | -------------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------
|James E. Alexander
President & CEO(a)      |  | 0                               |  | 0              |  | 65,000/80,000                                                                                                             |  | $                                                                                                              
|Boris Rubizhevsky
Senior Vice President(b) |  | 0                               |  | 0              |  | 61,250/80,000                                                                                                             |  | $                                                                                                              
|Daniel J. Grady
Vice President             |  | 0                               |  | 0              |  | 249,340/80,000                                                                                                            |  | $                                                                                                              
|Stephen J. Burden
Vice President           |  | 0                               |  | 0              |  | 206,887/95,000                                                                                                            |  | $                                                                                                              
|John V. Sakys
Vice President               |  | 0                               |  | 0              |  | 32,812/75,000                                                                                                             |  | $                                                                                                              
|Hans Walitzki
Vice President               |  | 0                               |  | 0              |  | 44,000/160,000                                                                                                            |  | $                                                                                                              

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(e)    Long Term Incentive Compensation Plans, and Defined Benefit and Actuarial Plans

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

(f)    Compensation of Directors

In January 2000, we agreed to compensate non-employee directors $2,000 for attending Board of Directors' meetings in person, and $500 for
attending Board of Directors' meetings telephonically beginning January 1, 2000. Previously we had not compensated our directors for their service as such.

The
1998 Directors' Plan authorized each person serving as a member of the Board who is not an employee of Isonics to receive options to purchase 20,000 shares of Isonics common stock
when such person accepts his position as a Director and to receive an additional option to purchase 10,000 shares when such person is re-elected as a Director provided such person is not
an Isonics employee. The

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exercise price for the options is the Fair Market Value (as defined in the Executives' Plan) on the date such person becomes a director and the options are exercisable for five years from such date.
The options granted under the Directors' plan vest immediately upon the date of the grant. In the event a Director resigns or is not re-elected to the Board, failure to exercise the
options in three months results in the options' termination prior to the expiration of their term. Although the Directors adopted the plan in 1998, the Board formalized the plan by resolution in
January 2000.

Under
the Directors' Plan the following individuals have been granted options through April 30, 2002:

|Name            |  | Shares Under Option                |  | Exercise Price |                          | Expiration
|--------------- |  | ---------------------------------- |  | -------------- | ------------------------ | ----------
|Lindsay Gardner |  | 20,000
10,000
10,000
10,000
10,000 |  | $$$$$          | 2.38
1.19
6.25
2.19
1.06 |           
|Richard Parker  |  | 20,000
10,000
10,000
10,000
10,000 |  | $$$$$          | 1.66
1.19
6.25
2.19
1.06 |           
|Larry Wells     |  | 20,000
10,000
10,000
10,000        |  | $$$$           | 7.31
6.25
2.19
1.06      |           

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

(g)    Employment Agreements, Termination of Employment and Change In Control Agreements

In September 1997, we entered into employment agreements with James E. Alexander and Boris Rubizhevsky. The agreements had a term of four years and provide
for annual salaries of $200,000 and $180,000, respectively, although either Isonics or the individuals may terminate these agreements prematurely in their discretion. By resolution of the Board of the
Directors made on January 30, 2000, both Mr. Alexander and Mr. Rubizhevsky received salary increases commencing February 1, 2000, equal to 20% of their current salary,
$240,000, and $216,000, respectively. The salary increases were granted in recognition of their performance for Isonics and the fact that neither Mr. Alexander nor Mr. Rubizhevsky had
received salary increases in approximately two and one-half years. Under the agreements, each officer is entitled to receive incentive compensation up to 50% of the officer's annual
salary, as approved by the compensation committee, pursuant to such executive compensation plan. The agreements provide that upon a termination of employment other than for cause (as defined in the
agreements), the officer is entitled to severance compensation of eighteen (18) months of his salary, paid at the same time as salary payments, 25% of the officer's annual prevailing salary,
paid upon termination, and in addition all outstanding stock options held by the officer will be accelerated and will become exercisable in full and our right of repurchase will terminate with respect
to such shares. The agreements provide for similar accelerated vesting of outstanding stock options upon a change in control of Isonics. These contracts expired in September 2001, and the
compensation committee has not yet determined whether to offer new contracts to these officers.

We
have also entered into employment agreements with Dr. Daniel J. Grady, Dr. Stephen J. Burden, Dr. Hans Walitzki, and Mr. John V. Sakys. The agreements have
an indefinite term (except for the agreement with Dr. Walitzki which expires November 2006) and provide for at-will employment,

---

terminable at any time by either party. The agreements provide for a rate of annual compensation, which we will review annually. Under each agreement, Dr. Grady, Dr. Burden,
Dr. Walitzki, and Mr. Sakys are entitled to participate in our standard plans and policies. The agreements also include confidentiality and invention assignment provisions.

At
the end of the fiscal year ended April 30, 2001, Mr. Herbert Hegener was covered by an employment agreement extending through December 2001. This agreement
expired in accordance with its terms, although effective January 1, 2002, we entered into a consulting agreement with HS-Consult, a firm that Mr. Hegener owns. Under this
agreement (which expires December 31, 2002), Mr. Hegener will assist Chemotrade in buying and selling isotope products. We are paying HS-Consult 5,500 Euros per month for
these services, and have issued them a warrant to purchase 50,000 shares of common stock for an exercise price of $1.20 per share, exercisable through December 31, 2004.

(h)    Report on Repricing of Options/SARs

We did not reprice any options or stock appreciation rights during the fiscal year ended April 30, 2002, or subsequently.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

(a) and (b) Ownership of Certain Beneficial Owners and Management.The following table sets forth information regarding the
ownership of the our common stock as of April 30, 2002 by: (i) each director or nominee for director; (ii) each of the executive officers named in the Summary Compensation Table;
(iii) all executive officers and directors of the Company as a group; and (iv) all those known by us to be beneficial owners of more than five percent of our common stock.

|Beneficial Owner                                                                                                                                                                                            |  | Beneficial Ownership
Number of Shares |  | Percent of Total |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- |  | ---------------- | -
|James E. Alexander(1)                                                                                                                                                                                       |  | 2,155,167                             |  | 19.5             | %
|Boris Rubizhevsky(2)                                                                                                                                                                                        |  | 1,753,235                             |  | 15.8             | %
|Stephen J. Burden(3)                                                                                                                                                                                        |  | 399,998                               |  | 3.6              | %
|Daniel J. Grady(4)                                                                                                                                                                                          |  | 377,261                               |  | 3.4              | %
|Hans Walitzki(5)                                                                                                                                                                                            |  | 404,000                               |  | 3.7              | %
|Lindsay Gardner(6)                                                                                                                                                                                          |  | 312,775                               |  | 2.9              | %
|Richard Parker(7)                                                                                                                                                                                           |  | 62,927                                |  | 0.6              | %
|Larry Wells(8)                                                                                                                                                                                              |  | 180,484                               |  | 1.7              | %
|John Sakys(9)                                                                                                                                                                                               |  | 107,812                               |  | 0.9              | %
|All executive officers and directors as a group (9 persons). The address for all of the above directors and executives officers is: 5906 McIntyre Street, Golden, CO 80403                                  |  | 5,753,659                             |  | 46.0             | %
|Richard and Ana Grossman, Orin Hirschman, Adam Smith Capital Management, Adam Smith Investment Partners, LP, Diamond Capital Management Inc., Adam Smith Investments, Ltd., Adam Smith & Company, Inc.,(10) |  | 2,518,901                             |  | 18.9             | %
|Anfel Trading(11)                                                                                                                                                                                           |  | 781,179                               |  | 6.9              | %

---

---



---



The
Series A Convertible Preferred Stock consisted of 1,830,000 shares issued with a liquidation preference of $1.50 per share and a right to convert the shares based on a one for
one basis. As of April 30, 2002, 866,334 shares of Series A Convertible Preferred Stock have elected to convert into common stock. The conversion right of the preferred stock is
currently 1.50 shares of common stock for each share of Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock is entitled to dividends or distributions equal to
the amount of the dividend or distribution per share of common stock payable at such time multiplied by the number of shares of common stock then obtainable upon conversion of such Series A
Convertible Preferred Stock. The Redemption Trigger Date for the Series A Convertible Preferred Stock shall be the business day immediately following the thirtieth consecutive trading day that
the average closing price during such trading days (or, if no closing price is reported, the average of the bid and ask prices) of the shares of common stock was above $8.00 per share (which minimum
price shall be proportionally adjusted for stock splits, stock dividends, reverse stock splits and any other subdivision or combination of the common stock). After the Redemption Date, Isonics may
redeem all or any part of the Series A Convertible Preferred Stock at its election at any time and from time to time. The Series A Convertible Preferred Stock is convertible into common
stock at the option of the holder until and unless Isonics chooses to redeem such shares on the basis of one share of common stock per share of Series A Convertible Preferred Stock and, until
converted, each share of Series A Convertible Preferred Stock is entitled to one vote at any meeting of Isonics' shareholders.

(c)  No Change of Control Arrangements.We know of no plans or arrangement that will result in a change of control at Isonics.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.

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

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

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

---



Consulting Agreement With Wells Investment Group, Inc.

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



The
disinterested directors approved this agreement on behalf of Isonics.

Sale of International Process Research Corporation

Effective February 1, 2001, we sold IPRC to a limited liability company, Interpro Zinc LLC, in a management buy-out. Robert H. Cuttriss, Ph.D.
(formerly an executive officer of Isonics) is the manager of Interpro Zinc LLC and a 25% owner. James E. Alexander (president, chief executive officer and a director of Isonics) and Boris I.
Rubizhevsky (senior vice president and a director of Isonics) are also 25% owners of Interpro Zinc LLC and participated in the purchase of IPRC. Mr. Alexander and Mr. Rubizhevsky advised
our board that they do not intend to participate actively in Interpro Zinc's activities.

Corporate Loans to Officers

In the past, Isonics has from time-to-time made loans to Messrs. Alexander and Rubizhevsky. In each case, the loans have been
interest-bearing and have been repaid. The following table sets forth some information regarding these loans through April 30, 2001.

|                             |  | James E. Alexander
President & CEO |            | Boris Rubizhevsky
Senior Vice President |  
|---------------------------- |  | ---------------------------------- | ---------- | --------------------------------------- | -
|Balance as of April 30, 2000 |  | $                                  | 0.00       |                                         | $
|FY 2001 Borrowings(a)        |  |                                    | 100,000.00 |                                         |  
|FY 2001 Repayments(a)        |  |                                    | 100,000.00 | (b)                                     |  
|Balance as of April 30, 2001 |  | $                                  | 0.00       |                                         | $

There
were no corporate loans to officers in fiscal 2002 or subsequently.

---

Corporate Loans from Officers and Employees

None of our officers or directors extended loans to Isonics during the year ended April 30, 2001. On March 4, 2002, we borrowed $75,000 from Stephen
Burden, our Vice President of Semiconductor Materials and Products. We repaid the loan in full, plus one month's interest at 12% per annum, on March 31, 2002.

---

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.



|Exhibit
Number |  | Title                                                                                                                                                                                                                                      
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.01           |  | Form of Underwriting Agreement.(1)                                                                                                                                                                                                         
|3.01           |  | Registrant's Amended and Restated Articles of Incorporation.(1)                                                                                                                                                                            
|3.02           |  | Registrant's Bylaws.(1)                                                                                                                                                                                                                    
|3.03           |  | Certificate of Determination of Preferences and Rights of the Series A preferred stock (see exhibit 10.18).                                                                                                                                
|3.04           |  | Certificate Of Determination Of Preferences And Rights Of Series B Convertible Preferred Stock(11)                                                                                                                                         
|3.05           |  | Certificate of Amendment to Articles of Incorporation(13)                                                                                                                                                                                  
|4.01           |  | Specimen Common Stock Certificate.(1)                                                                                                                                                                                                      
|4.02           |  | Form of Representatives' warrant Agreement.(1)                                                                                                                                                                                             
|4.03           |  | Form of warrant Agreement between the Registrant and Continental Stock Transfer & Trust Company, Monroe Parker Securities.(1)                                                                                                              
|4.04           |  | Specimen Class A warrant Certificate.(1)                                                                                                                                                                                                   
|4.05           |  | Form of warrant Agreement between the Registrant and Continental Stock Transfer & Trust Company. (8)                                                                                                                                       
|4.06           |  | Specimen Class B warrant Certificate (see exhibit 10.27).                                                                                                                                                                                  
|4.07           |  | Specimen Class C warrant Certificate (see exhibit 10.27).                                                                                                                                                                                  
|4.08           |  | Amendment No. 1 to warrant Agreement between the Registrant and Continental Stock Transfer & Trust Company.(7)                                                                                                                             
|5.01           |  | not applicable                                                                                                                                                                                                                             
|10.01          |  | Registrant's 1996 Stock Option Plan.(1)(2)                                                                                                                                                                                                 
|10.02          |  | Form of Employment Agreement between the Registrant and certain officers of the Registrant.(1)(2)                                                                                                                                          
|10.03          |  | Registrant's 1996 Executives Equity Incentive Plan.(1)(2)                                                                                                                                                                                  
|10.04          |  | Registrant's 1996 Equity Incentive Plan.(1)(2)                                                                                                                                                                                             
|10.05          |  | Memorandum of Agreement between Electrochemical Plant, AO Techsnabexport, Co., Ltd. and Registrant.(1)                                                                                                                                     
|10.06          |  | Option Agreement between the Registrant and Yale University.(1)                                                                                                                                                                            
|10.07          |  | Office Lease Agreement between Paulsen Properties and the Registrant dated as of January 1, 1996, as amended.(1)                                                                                                                           
|10.08          |  | Letter from Yale University to Registrant dated February 10, 1996.(1)                                                                                                                                                                      
|10.09          |  | Form of Indemnity Agreement entered into by Registrant with each of its directors and investors.(2)                                                                                                                                        
|10.10          |  | Stock Purchase Agreement, dated as of April 30, 1998, among Isonics Corporation, a California corporation, Metallurgy International, Inc., a Nevada corporation, and International Process Research Corporation, a Colorado
corporation.(3)
|10.10.1        |  | Escrow Agreement, dated as of May 15, 1998, among Isonics Corporation, a California corporation, Metallurgy International, Inc., a Nevada corporation, Robert H. Cuttriss (as Agent), and Colorado Business Bank, as Escrow
Agent.(3)      
|10.11          |  | Registration Rights Agreement dated as of September 27, 1996 by and between Registrant and certain investors.(1)                                                                                                                           
|10.12          |  | Employment Agreement between the Registrant and James E. Alexander.(1)(2)                                                                                                                                                                  
|10.13          |  | Employment Agreement between the Registrant and Boris Rubizhevsky.(1)(2)                                                                                                                                                                   
|10.14          |  | Security Agreement dated March 31, 1995 between Isonics and Isoserve, Inc.(1)                                                                                                                                                              
|10.15          |  |                                                                                                                                                                                                                                            

---

|10.16  |  | February 1997 Agreement between the Registrant, Electrochemical Plant and AO Techsnabexport, Co., Ltd.(1)                                                                                                                         
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.17  |  | Letter from Yale University to Registrant dated January 28, 1997.(1)                                                                                                                                                              
|10.18  |  | Certificate of Determination of Preferences and Rights of the Series A preferred stock.(4)                                                                                                                                        
|10.19  |  | Form of Subscription Agreement.(4)                                                                                                                                                                                                
|10.20  |  | Form of warrant.(4)                                                                                                                                                                                                               
|10.21  |  | Investment Banking Agreement.(4)                                                                                                                                                                                                  
|10.22  |  | Form of Registration Rights Agreement.(4)                                                                                                                                                                                         
|10.23  |  | Asset Purchase Agreement dated December 1, 1999 between the Registrant and Eagle-Picher Technologies, LLC.(5)                                                                                                                     
|10.24  |  | Registration Rights Agreement dated December 1, 1999 between the Registrant and Eagle-Picher Technologies, LLC.(5)                                                                                                                
|10.25  |  | Warrant Agreement dated December 1, 1999 between the Registrant and Eagle-Picher Technologies, LLC.(5)                                                                                                                            
|10.26  |  | Supply Agreement between the Registrant and Eagle-Picher Technologies, LLC.(6)                                                                                                                                                    
|10.27  |  | Amended and Restated warrant Agreement effective as of January 15, 2001, between the Registrant and Continental Stock Transfer and Trust Company, Inc.(8)                                                                         
|10.28  |  | Stock Purchase Agreement dated February 1, 2001, by and between Isonics Corporation and Interpro Zinc, LLC.(9)                                                                                                                    
|10.29  |  | Joint R&D Project Agreement, dated April 21, 1999, by and between Silex Systems Limited and Isonics Corporation.(10)                                                                                                              
|10.30  |  | Contribution to "Corporate ResearchECE/Baliga" fund dated December 30, 1999, from Isonics Corporation to North Carolina State University.(10)                                                                                    
|10.31  |  | Sponsored Research Agreement, dated December 15, 1999, by and between Isonics Corporation and Southern Methodist University.(10)                                                                                                  
|10.32  |  | Stevenson-Wydler Cooperative Research and Development Agreement, dated November 9, 1999, by and between Ernest Orlando Lawrence Berkeley National Laboratory and Isonics Corporation (with attached Project Letter
Agreement).(10)
|10.33  |  | Memorandum of Agreement, dated July 1996, by and among Electrochemical Plant, AO Techsnabexport Co., Ltd. and A & R Materials, Inc.(10)                                                                                           
|10.34  |  | Agreement between Isonics Corporation and Silicon Evolution, Inc. dated September 14, 2001(12)                                                                                                                                    
|10.35  |  | Technology License Agreement dated September 14, 2001, between Silicon Evolution, Inc. and Isonics Corporation(12)                                                                                                                
|10.36  |  | Form of employment agreement to be entered into pursuant to the agreement between Isonics Corporation and Silicon Evolution, Inc. dated September 14, 2001(12)                                                                    
|10.37  |  | Form of lease agreement to be entered into pursuant to the agreement between Isonics Corporation and Silicon Evolution, Inc. dated September 14, 2001(12)                                                                         
|10.38  |  | Amended and Restated Warrant Agreement dated July 26, 2001.(11)                                                                                                                                                                   
|10.39  |  | Consulting Agreement dated October 15, 2001, with Wells Investment Group(13)                                                                                                                                                      
|10.40  |  | Form of Registration Rights Agreement between Isonics and various accredited investors in connection with the March 22, 2002, convertible promissory note financing.(14)                                                          
|10.41  |  | Form of Series 2002A 4% Convertible Promissory Note due March 1, 2003 between Isonics and various accredited investors in connection with the March 22, 2002, convertible promissory note financing.(14)                          
|10.42  |  | Form of Warrant Agreement expiring March 20, 2005 between Isonics and various accredited investors in connection with the March 22, 2002, convertible promissory note financing.(14)                                              
|21.1   |  | List of subsidiaries.                                                                                                                                                                                                             
|23.10* |  | Consent of independent accountants                                                                                                                                                                                                

---

|23.11* |  | Certification pursuant to 18 U.S.C. 1350
|------ |  | ----------------------------------------

---

During
the fourth quarter of the fiscal year ended April 30, 2002, and subsequently, Isonics Corporation has filed current reports on Form 8-K, as follows:

|Date of Report |  | Items |  | Brief Description                                                                                
|-------------- |  | ----- |  | -------------------------------------------------------------------------------------------------
|3/22/2002      |  | 5, 7  |  | Disclosure of financing transaction and Item 701 disclosure, and exhibits                        
|2/28/2002      |  | 5     |  | Amending items of the April 30, 2001 Form 10-KSB                                                 
|1/8/2002       |  | 5, 7  |  | Amendment of Articlces of incorporation, alliance with SQI, and Item 701 disclosure, and exhibits

---



SIGNATURES

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

August 5,
2002

| |  | ISONICS CORPORATION,a California Corporation
| |  | --------------------------------------------
| |  | By:                                         

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

|Date           |  | Name and Title                                                                                                 |  | Signature            
|-------------- |  | -------------------------------------------------------------------------------------------------------------- |  | ---------------------
|               |  |                                                                                                                |  |                      
|August 5, 2002 |  | James E. Alexander
Principal Executive Officer Chairman of the Board Director, and Principal Financial Officer |  | /s/JAMES E. ALEXANDER
|August 5, 2002 |  | Boris Rubizhevsky
Vice Chairman
Director                                                                       |  | /s/BORIS RUBIZHEVSKY 
|August 5, 2002 |  | Lindsay A. Gardner
Director                                                                                    |  | /s/LINDSAY A. GARDNER
|August 5, 2002 |  | Richard Parker
Director                                                                                        |  | /s/RICHARD PARKER    
|August 5, 2002 |  | Larry J. Wells
Director                                                                                        |  | /s/LARRY J. WELLS    
|August 5, 2002 |  | John Sakys, Principal
Accounting Officer                                                                       |  | /s/JOHN SAKYS        

---



ISONICS CORPORATION AND SUBSIDIARY        Index to Financial Statements

|                                                   |                                                 | Page
|-------------------------------------------------- | ----------------------------------------------- | ----
|Report of Independent Certified Public Accountants |                                                 | F-2 
|Consolidated Financial Statements                  |                                                 |     
|                                                   | Consolidated Balance Sheets                     |     
|                                                   | Consolidated Statements of Operations           |     
|                                                   | Consolidated Statements of Stockholders' Equity |     
|                                                   | Consolidated Statements of Cash Flows           |     
|                                                   | Notes to Consolidated Financial Statements      |     

---

Report of Independent Certified Public Accountants

Board of Directors

Isonics
Corporation and Subsidiary

We
have audited the accompanying consolidated balance sheets of Isonics Corporation and Subsidiary as of April 30, 2002 and 2001, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Isonics Corporation and Subsidiary as of
April 30, 2002 and 2001, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the
United States of America.

/s/
Grant Thornton LLP

Denver,
Colorado
July 31, 2002

---



Isonics Corporation and Subsidiary        CONSOLIDATED BALANCE SHEETS        (In thousands, except share amounts)

|                                           |                                                                                                                               | April 30,                  |      
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------- | -------------------------- | -----
|
|ASSETS                                     |                                                                                                                              
|CURRENT ASSETS:                            |                                                                                                                               |                            |      
|                                           | Cash and cash equivalents                                                                                                     |                            | $    
|                                           | Accounts receivable (net of allowances of $30 and $39, respectively)                                                          |                            |      
|                                           | Income taxes receivable                                                                                                       |                            |      
|                                           | Inventories                                                                                                                   |                            |      
|                                           | Prepaid expenses and other current assets                                                                                     |                            |      
|                                           |                                                                                                                               |                            |      
|                                           |                                                                                                                               | Total current assets       |      
|LONG-TERM ASSETS:                          |                                                                                                                               |                            |      
|                                           | Property and equipment, net                                                                                                   |                            |      
|                                           | Goodwill (net of accumulated amortization of $668 and $493, respectively)                                                     |                            |      
|                                           | Intangible assets not subject to amortization                                                                                 |                            |      
|                                           | Other assets                                                                                                                  |                            |      
|                                           |                                                                                                                               |                            |      
|                                           |                                                                                                                               | Total long-term assets     |      
|                                           |                                                                                                                               |                            |      
|TOTAL ASSETS                               |                                                                                                                               | $                          | 5,214
|                                           |                                                                                                                               |                            |      
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                                                                                                              
|CURRENT LIABILITIES:                       |                                                                                                                               |                            |      
|                                           | Current portion of long-term debt                                                                                             |                            | $    
|                                           | Convertible notes payable (net of discount of $546)                                                                           |                            |      
|                                           | Accounts payable                                                                                                              |                            |      
|                                           | Accrued liabilities                                                                                                           |                            |      
|                                           |                                                                                                                               |                            |      
|                                           |                                                                                                                               | Total current liabilities  |      
|STOCKHOLDERS' EQUITY:                      |                                                                                                                               |                            |      
|                                           | Class A Preferred Stockno par value; 10,000,000 shares authorized; shares issued and outstanding: 2002963,666; 2001963,666 |                            |      
|                                           | Common stockno par value; 40,000,000 shares authorized; shares issued and outstanding: 200210,824,812; 20018,961,288       |                            |      
|                                           | Additional paid in capital                                                                                                    |                            |      
|                                           | Deferred compensation                                                                                                         |                            |      
|                                           | Accumulated deficit                                                                                                           |                            |      
|                                           |                                                                                                                               |                            |      
|                                           |                                                                                                                               | Total stockholders' equity |      
|                                           |                                                                                                                               |                            |      
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                               | $                          | 5,214
|                                           |                                                                                                                               |                            |      

See
Notes to Consolidated Financial Statements.

---



Isonics Corporation and Subsidiary        CONSOLIDATED STATEMENTS OF OPERATIONS        (In thousands, except per share amounts)

|                                             |                                                            | Year Ended April 30,              |       
|-------------------------------------------- | ---------------------------------------------------------- | --------------------------------- | ------
|
|Revenues                                     |                                                            | $                                 | 8,155 
|Cost of revenues                             |                                                            |                                   | 6,182 
|                                             |                                                            |                                   |       
|                                             |                                                            | Gross margin                      |       
|Operating expenses:                          |                                                            |                                   |       
|                                             | Selling, general and administrative                        |                                   |       
|                                             | Research and development                                   |                                   |       
|                                             | Goodwill impairment                                        |                                   |       
|                                             |                                                            |                                   |       
|                                             |                                                            | Total operating expenses          |       
|                                             |                                                            |                                   |       
|Operating loss                               |                                                            |                                   | (3,938
|Other income (expense)                       |                                                            |                                   |       
|                                             | Interest and other income, net                             |                                   |       
|                                             | Loss on disposal of property and equipment                 |                                   |       
|                                             | Loss on sale of depleted zinc business                     |                                   |       
|                                             | Gain on sale of International Process Research Corporation |                                   |       
|                                             | Interest expense                                           |                                   |       
|                                             | Foreign exchange                                           |                                   |       
|                                             |                                                            |                                   |       
|                                             |                                                            | Total other income (expense), net |       
|                                             |                                                            |                                   |       
|Loss before income tax expense               |                                                            |                                   | (3,960
|Income tax expense                           |                                                            |                                   |      
|                                             |                                                            |                                   |       
|NET LOSS                                     |                                                            | $                                 | (3,960
|                                             |                                                            |                                   |       
|DEEMED DIVIDEND ON PREFERRED STOCK           |                                                            | $                                 |      
|                                             |                                                            |                                   |       
|NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS |                                                            | $                                 | (3,960
|                                             |                                                            |                                   |       
|Net loss per sharebasic and diluted         |                                                            |                                   |       
|                                             | Net loss per share attributable to common shareholders     |                                   | $     
|                                             | Shares used in computing per share information             |                                   |       

See
Notes to Consolidated Financial Statements.

---



Isonics Corporation and Subsidiary        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (In thousands, except share amounts)

|                         |                                                                                                  | Preferred Stock |          | Common Stock |       |      |            |            |   |        |     |   |      
|------------------------ | ------------------------------------------------------------------------------------------------ | --------------- | -------- | ------------ | ----- | ---- | ---------- | ---------- | - | ------ | --- | - | -----
|
|
|BALANCES, April 30, 2000 |                                                                                                  | 1,830,000       |          | $            | 1,415 |      | 10,492,931 |            | $ | 6,764  |     | $ | 2,016
|                         | Conversion of preferred stock to common stock                                                    |                 | (866,334 | )            |       | (670 | )          | 866,334    |   |        | 670 |   |      
|                         | Deemed dividend on preferred stock                                                               |                 |         |              |       |     |            |           |   |        |    |   |      
|                         | Exercise of stock options and warrants                                                           |                 |         |              |       |     |            | 301,244    |   |        | 208 |   |      
|                         | Fair value of common stock and warrants issued for services                                      |                 |         |              |       |     |            | 4,500      |   |        | 44  |   |      
|                         | Amortization of deferred compensation                                                            |                 |         |              |       |     |            |           |   |        |    |   |      
|                         | Issuance of common stock                                                                         |                 |         |              |       |     |            | 337,500    |   |        | 675 |   |      
|                         | Common stock issued under Employee Stock Purchase Program                                        |                 |         |              |       |     |            | 14,214     |   |        | 16  |   |      
|                         | Fair value of common stock issued for patent rights                                              |                 |         |              |       |     |            | 75,000     |   |        | 131 |   |      
|                         | Cancellation of common stock issued to Eagle-Picher related to exercise of common stock warrants |                 |         |              |       |     |            | (3,130,435 | ) |        |    |   |      
|                         | Net loss                                                                                         |                 |         |              |       |     |            |           |   |        |    |   |      
|                         |                                                                                                  |                 |          |              |       |      |            |            |   |        |     |   |      
|BALANCES, April 30, 2001 |                                                                                                  | 963,666         |          |              | 745   |      | 8,961,288  |            |   | 8,508  |     |   | 2,745
|                         | Exercise of warrants                                                                             |                 |         |              |       |     |            | 494,849    |   |        | 473 |   |      
|                         | Fair value of common stock issued for intangible assets                                          |                 |         |              |       |     |            | 500,000    |   |        | 590 |   |      
|                         | Fair value of common stock issued for services and employee compensation                         |                 |         |              |       |     |            | 549,750    |   |        | 574 |   |      
|                         | Fair value of common stock issued for services as deferred compensation                          |                 |         |              |       |     |            | 200,000    |   |        | 202 |   |      
|                         | Amortization of deferred compensation                                                            |                 |         |              |       |     |            |           |   |        |    |   |      
|                         | Fair value of warrants issued for services                                                       |                 |         |              |       |     |            |           |   |        |    |   |      
|                         | Issuance of common stock to settle registration rights issue                                     |                 |         |              |       |     |            | 112,504    |   |        |    |   |      
|                         | Common stock issued under Employee Stock Purchase Program                                        |                 |         |              |       |     |            | 6,421      |   |        | 7   |   |      
|                         | Warrants issued and beneficial conversion feature related to Series 2002A Convertible Notes      |                 |         |              |       |     |            |           |   |        |    |   |      
|                         | Net loss                                                                                         |                 |         |              |       |     |            |           |   |        |    |   |      
|                         |                                                                                                  |                 |          |              |       |      |            |            |   |        |     |   |      
|BALANCES, April 30, 2002 |                                                                                                  | 963,666         |          | $            | 745   |      | 10,824,812 |            | $ | 10,354 |     | $ | 3,912
|                         |                                                                                                  |                 |          |              |       |      |            |            |   |        |     |   |      

See Notes to Consolidated Financial Statements.

---



Isonics Corporation and Subsidiary        CONSOLIDATED STATEMENTS OF CASH FLOWS        (In thousands)

|                                                 |                                                                             | Year Ended April 30,                                                                                  |                                  
|------------------------------------------------ | --------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ---------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:            |                                                                             |                                                                                                       |                                  
|                                                 | Net loss                                                                    |                                                                                                       | $                                
|                                                 | Adjustments to reconcile net loss to net cash used in operating activities: |                                                                                                       |                                  
|                                                 |                                                                             | Loss on sale of depleted zinc business                                                                |                                  
|                                                 |                                                                             | Gain on sale of International Process Research Corporation                                            |                                  
|                                                 |                                                                             | Depreciation and amortization                                                                         |                                  
|                                                 |                                                                             | Impairment of goodwill                                                                                |                                  
|                                                 |                                                                             | Fair value of common stock and warrants issued for services and amortization of deferred compensation |                                  
|                                                 |                                                                             | Deferred income taxes                                                                                 |                                  
|                                                 |                                                                             | Loss on disposal of property and equipment                                                            |                                  
|                                                 |                                                                             | Changes in operating assets and liabilities:                                                          |                                  
|                                                 |                                                                             |                                                                                                       | Accounts receivable              
|                                                 |                                                                             |                                                                                                       | Income taxes receivable          
|                                                 |                                                                             |                                                                                                       | Inventories                      
|                                                 |                                                                             |                                                                                                       | Prepaid expenses and other assets
|                                                 |                                                                             |                                                                                                       | Accounts payable                 
|                                                 |                                                                             |                                                                                                       | Accrued liabilities              
|                                                 |                                                                             |                                                                                                       | Income taxes payable             
|                                                 |                                                                             |                                                                                                       |                                  
|                                                 |                                                                             |                                                                                                       |                                  
|CASH FLOWS FROM INVESTING ACTIVITIES:            |                                                                             |                                                                                                       |                                  
|                                                 | Purchases of property and equipment                                         |                                                                                                       |                                  
|                                                 |                                                                             |                                                                                                       |                                  
|                                                 |                                                                             |                                                                                                       |                                  
|CASH FLOWS FROM FINANCING ACTIVITIES:            |                                                                             |                                                                                                       |                                  
|                                                 | Payments on borrowings                                                      |                                                                                                       |                                  
|                                                 | Proceeds from borrowings                                                    |                                                                                                       |                                  
|                                                 | Proceeds from issuance of common stock                                      |                                                                                                       |                                  
|                                                 |                                                                             |                                                                                                       |                                  
|                                                 |                                                                             |                                                                                                       |                                  
|                                                 |                                                                             |                                                                                                       |                                  
|                                                 |                                                                             |                                                                                                       |                                  
|Cash and cash equivalents at beginning of period |                                                                             |                                                                                                       | 1,090                            
|                                                 |                                                                             |                                                                                                       |                                  
|Cash and cash equivalents at end of period       |                                                                             | $                                                                                                     | 725                              
|                                                 |                                                                             |                                                                                                       |                                  

See
Notes to Consolidated Financial Statements.

---



Isonics Corporation and Subsidiary        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Principles of Consolidation

Isonics Corporation develops and markets products worldwide based on isotopes for applications in the energy, medical research, diagnostic, pharmaceutical and
semiconductor industries. The consolidated financial statements include our accounts and those of our wholly-owned subsidiary, Chemotrade GmbH ("Chemotrade"). The consolidated financial statements
also include the accounts of International Process Research Corporation ("IPRC") through January 31, 2001. On February 1, 2001, we sold IPRC to a management group (see Note 10).
All significant intercompany accounts have been eliminated in consolidation.

Cash Equivalents

Cash equivalents include investments purchased with a maturity of less than ninety days. Cash balances held in foreign bank accounts were $388,000 and $616,000 at
April 30, 2002 and 2001, respectively.

Concentration of Credit Risk

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

Inventories

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

Property and Equipment

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

Goodwill

Goodwill resulted from the acquisition of Chemotrade. We evaluate goodwill for impairment by comparing the unamortized balance of goodwill to the undiscounted
future cash flows of the related assets. We modify or adjust goodwill, if impairment is indicated, by comparing the carrying value of the related business assets to their estimated fair value.
Estimated fair value is based on estimated discounted future cash flows. Based upon our most recent evaluation, we have determined that goodwill has been impaired and as a result, we have taken a
charge of $1,025,000 during the year ended April 30, 2002 (see Note 9). The goodwill resulting from the Chemotrade acquisition is being amortized on a straight-line basis
over twenty years. In 2001, we increased the amount of recorded goodwill by $114,000 resulting from contingent consideration payable to the sellers based on the 2001 earnings of Chemotrade.

---

Income Taxes

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

Revenue Recognition

Revenue from product sales is recognized upon shipment. Product returns and warranty costs have not been material in any period. Prior to the sale of IPRC,
revenue from contract research and development services was recognized ratably as services were performed and costs were incurred. Following the sale of IPRC, we no longer conduct contract research
and development activities.

Use of Estimates in the Financial Statements

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, we are required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and
expenses during the reporting period. These estimates are based upon mangagement's best findings, after considering past and current events and assumptions about future events. Actual results could
differ from those estimates.

Fair Values of Financial Instruments

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

Translation of Foreign Currencies

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

Accounting for Stock-Based Compensation

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

Net Loss Per Share

Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Contingently issuable shares are included
in the computation of basic earnings per share when the related conditions are satisfied. Diluted earnings per share is computed using the weighted average number of common shares and potentially
dilutive securities outstanding

---

during the period. Potentially dilutive securities consist of contingently issuable shares, the incremental common shares issuable upon conversion of preferred stock (using the "if converted" method)
and shares issuable upon the exercise of stock options and warrants (using the "treasury stock" method). Potentially dilutive securities are excluded from the computation if their effect is
anti-dilutive.

In
2002, a total of 7,746,705 outstanding stock options and warrants, and 963,666 outstanding Class A Convertible Preferred Stock shares have been excluded from the diluted
computation, as the inclusion would be anti-dilutive. In 2001, a total of 5,742,947 outstanding stock options and warrants, and 963,666 outstanding Class A Convertible Preferred
Stock shares have been excluded from the diluted computation, as the inclusion would be anti-dilutive. During 2001, 3,130,435 shares of common stock were excluded from the basic
computation, as the issuance of this common stock was contingent upon the delivery of silicon-28 per the terms of the Eagle-Picher Technologies, LLC ("Eagle-Picher") transaction (see
Note 3).

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

Year Ended April 30,2002

2001Weighted average shares of common stock outstanding

9,876

10,807Less: Weighted average shares contingently issued



(2,478
)Shares used for net loss per sharebasic and diluted

9,876

8,329


New Accounting Standards

In June 2001, the Financial Accounting Standards Board (the "FASB") adopted SFAS No. 141Business
Combinationsand SFAS No. 142Goodwill and Other Intangible Assets.SFAS No. 141 addresses the methods used to
account for business combinations and requires the use of the purchase method of accounting for all combinations after June 30, 2001. SFAS No. 142 addresses the methods used to amortize
intangible assets and to assess impairment of those assets, including goodwill resulting from business combinations accounted for under the purchase method. SFAS No. 142 is effective for fiscal
years beginning after December 15, 2001, except that goodwill and intangible assets other than goodwill acquired after June 30, 2001 shall be amortized or not amortized in accordance
with SFAS 142. We acquired intangible assets from Silicon Evolution, Inc. ("SEI") subsequent to June 30, 2001, and have followed the requirements of SFAS No. 142 (see
Note 4).

Included
in our assets at April 30, 2002, is goodwill related to the acquisition of Chemotrade in 1998 with a net carrying value of $1,807,000. Upon adoption of SFAS
No. 142 on May 1, 2002, we will no longer amortize this goodwill, decreasing our amortization expense by approximately $110,000 per year. We are required to assess this goodwill for
impairment in the year of adoption, effective as of the beginning of the year, and at least annually thereafter. We will not be able to determine the full effect of these new pronouncements on our
financial position or our results of operations until we are able to complete our analysis of the impairment provisions of the new standards. In the event our analysis under the new guidance indicates
this goodwill is further impaired, we will be required to record a charge to our earnings in the year of adoption.

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

---

NOTE 2FINANCIAL STATEMENT COMPONENTS

Inventories consist of the following (in thousands):

April 30,2002

2001Finished goods

$
248

$
186Work in process


212


306$
460

$
492


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

April 30,2002

2001Prepaid consulting services (see Note 6)

$
172

$
Expenses related to Series 2002A Convertible Notes (see Note 13)


182


Note receivable from SEI (see Note 4)


93


Fair value of common stock warrants issued to Silicon Quest International for manufacturing services (see Note 5)


63


Prepaid Insurance


62


Other


177


190$
749

$
190


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

April 30,2002

2001Office furniture and equipment

$
281

$
272Production equipment


27


34Leasehold improvements


7


7315


313Accumulated depreciation and amortization


(245
)

(218
)$
70

$
95


Accrued
liabilities consist of the following (in thousands):

Year ended
April 30,2002

2001Compensation

$
43

$
52Customer advances and deposits


147


152Contingent consideration payable on Chemotrade acquisition





114Other


99


272$
289

$
590


---

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

Year ended
April 30,2002

2001Class A Preferred Stock converted into common stock

$


$
670Common stock issued for patent rights

$


$
131Contingent consideration accrued on Chemotrade acquisition

$


$
114Common stock issued for intangible assets

$
590

$
Associated with Series 2002A Convertible Notes (Note 13):Common stock warrants issued to employees for pledging shares as collateral

$
228

$
Allocation of proceeds to warrants issued in conjunction with the notes and beneficial conversion feature associated with the convertible notes

$
620

$
Common stock warrants issued to investment banker

$
102

$



Supplemental
disclosures of cash flow information (in thousands):

Year ended
April 30,2002

2001Cash paid during the period for:Interest

$
17

$
3Income taxes

$


$
195


NOTE 3SALE OF DEPLETED ZINC BUSINESS

On December 1, 1999, we sold our depleted zinc business to Eagle-Picher for $8,230,000, including $1,500,000 due in equal installments on
November 30, 2000, 2001 and 2002. We received cash of approximately $6,730,000 from Eagle-Picher at the closing, of which approximately $1,150,000 was used to pay certain accrued liabilities
and debt. Upon completion of the sale, we recognized a net gain on the sale amounting to $5,088,000. Eagle-Picher's obligation to pay the final $1,500,000 was subject to the performance of our former
depleted zinc supplier under the terms of a supply agreement that was transferred to Eagle-Picher in the sale.

For
the year ended April 30, 2000, we were recognizing the $1,500,000 on a straight-line basis as our former supplier performed. As of April 30, 2000, we had
recognized additional gain of $208,000. Eagle-Picher failed to make the first additional payment due November 30, 2000. We believe that the unaffiliated supplier performed as required, and that
Eagle-Picher had no cause for its non-payment. We demanded payment from Eagle-Picher, but Eagle-Picher made an unacceptable counteroffer. A total of $458,000 of the contingent gain had
been recognized at the time of Eagle-Picher's default, of which $250,000 had been recognized in the year ended April 30, 2001. We ceased recognizing any additional contingent gain as a result
of Eagle Picher's failure to make the first payment when due. We established a reserve for the notes receivable and gain recognized to date resulting in a net loss of $208,000 in 2001.

Additionally,
Eagle-Picher was to supply us with 200 kilograms of silicon-28 by December 31, 2000, to be used in research and development activities. We gave
Eagle-Picher a common stock warrant to

---

obtain 4,000,000 shares of our common stock, however, these common stock warrants and the underlying shares, were contingent upon the delivery of silicon-28 by Eagle-Picher by
December 31, 2000. Eagle-Picher exercised its common stock warrant, under a net exercise provision in the warrant agreement, and received 3,130,435 shares of our common stock, in
March 2000. Because Eagle-Picher exercised its warrant pursuant to the terms of the net exercise provision, Eagle-Picher did not pay cash to exercise the warrant. Eagle-Picher disputed our
calculation and believed we should have issued to it an additional 155,279 shares of common stock.

In
addition to its refusal to pay the aforementioned installments of $500,000 due November 30, 2000 and 2001, Eagle-Picher did not deliver 200 kilograms of silicon-28,
meeting the specifications as set forth in our agreement, by December 31, 2000. We know that Eagle-Picher's silicon-28 production facility in Oklahoma has encountered certain
technical difficulties, which Eagle-Picher refers to as aforce majeure. We believe that Eagle-Picher's technical difficulties did not meet the
definition offorce majeureper our agreements, which would have entitled Eagle-Picher to a delay in the delivery requirement.

As
Eagle-Picher was claimingforce majeure, it believed it was entitled to retain its ownership to the 3,130,435 shares obtained through
the net exercise of the common stock warrant and believed it also should have received the disputed 155,279 shares of our common stock. We disputed Eagle-Picher's claims and on January 26,
2001, our Board of Directors authorized us to cancel Eagle-Picher's common stock shares and return those shares to the "authorized, unissued" category. We cancelled the shares on February 20,
2001.

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

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

NOTE 4ACQUISITION OF INTANGIBLE ASSETS FROM SILICON EVOLUTION, INC.

On September 14, 2001 we entered into a perpetual, exclusive technology license agreement with SEI whereby we issued 500,000 shares of our Series B
Convertible Preferred Stock for the right to indefinitely use intellectual property assets owned or leased by SEI. The 500,000 shares of Series B Convertible Preferred Stock were valued at
$590,000 based upon the closing price on September 14, 2001 of our common stock into which the preferred shares were convertible. On November 13, 2001, the Series B Convertible
Stock automatically converted to common stock on a share-for-share basis after our shareholders approved an increase in our authorized capitalization (see Note 13).
Under the terms of the agreement, SEI may convert the license into a non-exclusive license if we fail to invest at least $2,000,000 in facilities for the production of
Silicon-On-Insulator ("SOI") wafers on or before October 1, 2002.

We
have determined that the acquired intangible assets currently have an indefinite useful life as they are not bound by any legal time periods or otherwise limited due to competing
technologies, and

---

therefore, in accordance with SFAS No. 142Goodwill and other Intangible Assetsthey will not be amortized but rather tested annually for
impairment. If indicators of impairment do arise, the intangible assets will be tested for impairment and may result in an impairment charge in the future. Additionally, each reporting period we will
evaluate whether events and circumstances continue to support our assessment of an indefinite useful life for these intangible assets.

On
November 26, 2001 we hired one former SEI employee to function in the role of Vice President, Advanced Wafer Technology for our newly started SOI business. As part of the
employment package, we granted the employee 200,000 shares of restricted stock, vesting in different increments over five years and 200,000 stock options of which 20,000 vested on December 1,
2001 and the remaining amounts vest ratably over five years. The restricted stock and the stock options were issued at and are exercisable at $1.01 per share, respectively. The unamortized deferred
compensation as of April 30, 2002, relating to the unvested portion of the restricted stock award is $194,000, is recorded as a reduction to stockholders' equity and is being amortized to
compensation expense ratably over the vesting period.

In
connection with the negotiation of the acquisition of the above described intangible assets, we provided a working capital loan to SEI of approximately $93,000. The loan is secured by
substantially all of SEI's assets. In December 2001, SEI filed a petition for relief under Chapter 7 of the United
States Bankruptcy Code. We are confident that our security position will allow for full recoverability of the receivable and we anticipate repayment of this loan to occur during the year ending
April 30, 2003.

NOTE 5ALLIANCE AGREEMENT WITH SILICON QUEST INTERNATIONAL, INC.

On December 19, 2001 we entered into an alliance agreement with Silicon Quest International, Inc. ("SQI") whereby SQI agreed to exclusively
manufacture and supply SOI wafers for Isonics. In addition, SQI will provide sales and marketing services as requested by Isonics. The alliance agreement expires on January 24, 2003 and
dictates that if the agreement is not amended or extended, then SQI is prohibited from manufacturing SOI wafers without our written permission until January 24, 2004. In connection with this
agreement we issued a common stock warrant (valued at $83,000 using the Black-Scholes pricing model) to purchase 100,000 shares of restricted common stock at $1.50 per share. The common stock warrant
vested immediately and is exercisable in its entirety beginning December 19, 2002. The common stock warrant expires on December 19, 2004, and its value is being amortized to cost of
revenues over the twelve month period beginning February 1, 2002. As of April 30, 2002, approximately $63,000 has not been amortized and is recorded as prepaid expenses and other current
assets in the accompanying consolidated balance sheet. We shipped our first SOI wafers in January 2002 and recognized revenue of approximately $15,000 for the year ended April 30, 2002.

NOTE 6CONSULTING AGREEMENT WITH INVESTOR RELATIONS SERVICES, INC.

On December 18, 2001 we entered into a one-year consulting agreement with Investor Relations Services, Inc. ("IRSI") whereby we issued
500,000 shares of restricted common stock for consulting services consisting of financial advisory, strategic business planning and investor and public relations services. The shares of restricted
common stock vested immediately and were considered full payment for services (including IRSI expenses) to be performed during the first six months of calendar 2002. The restricted common stock was
valued at $515,000 based upon the closing price of our common stock on December 18, 2001 and is being amortized to consulting expense over the six-month period

---

beginning January 1, 2002. As of April 30, 2002 approximately $172,000 has not been amortized and is recorded as prepaid expenses and other current assets in the accompanying
consolidated balance sheets. During the last six months of calendar 2002 IRSI will act as an advisor but to the extent that we request IRSI to incur any expenses on our behalf, we will be required to
reimburse IRSI for such costs.

Subsequent
to year end, on July 1, 2002 we amended the agreement whereby we issued 250,000 shares of restricted common stock so that IRSI will continue to perform consulting
services consisting of financial advisory, strategic business planning and investor and public relations services. The shares of restricted common stock vested immediately and were considered full
payment for services (including IRSI expenses) to be performed during the last six months of calendar 2002. The restricted common stock was valued at $247,500 based upon the closing price of our
common stock on July 1, 2002.

NOTE 7INVESTMENT BANKING AGREEMENT WITH VFINANCE, INC.

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

Subsequent
to year-end, on June 10, 2002, we entered into a new agreement with vFinance whereby we issued 25,000 shares of restricted common stock (valued at $26,500
based upon the fair market value of the stock) and 200,000 common stock warrants (valued at $176,000 using the Black-Scholes pricing model) for investment banking, market making and consulting
services. The common stock warrants are exercisable at $2.32 per share and expire on June 10, 2006. The agreement is cancelable by either party upon 30 days notification.

NOTE 8ACCOUNTS RECEIVABLE FINANCING AGREEMENT

On January 18, 2002 we entered into an Accounts Receivable Purchase Agreement with Silicon Valley Bank ("SVB") whereby SVB will advance up to 80% of all
gross receivables (up to $1,500,000) submitted for financing. Amounts financed are secured individually by the related account receivable and generally by our assets and incur monthly finance and
administrative charges of up to 2.25% until repaid. The agreement expires January 17, 2003 and there were no amounts outstanding under this agreement as of April 30, 2002 or subsequent
to year-end through July 31, 2002.

---

NOTE 9IMPAIRMENT OF GOODWILL

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

NOTE 10REORGANIZATION AND SUBSEQUENT SALE OF IPRC

On May 1, 2000, we substantially reorganized IPRC to focus on the recovery and recycling of zinc metal from various sources, including galvanized steel
scrap, electric arc furnace dust and brass scrap. From May 1, 2000, through January 31, 2001 IPRC did not engage in any revenue producing activities.

In
January 2001, we acquired the patent rights related to the recovery and recycling of zinc processes from three unaffiliated parties. A total of 75,000 shares of our common
stock valued at $131,000 were issued for these rights. On February 1, 2001 we sold IPRC and the acquired patent rights to Interpro Zinc, LLC ("Interpro"), a limited liability company formed by
a management group. As part of the transaction, Interpro assumed approximately $700,000 in liabilities associated with the operations of IPRC and agreed to indemnify us against any contingent
liabilities related to the IPRC site in Golden, Colorado. The management group consists of Dr. Robert H. Cuttris, formerly president of IPRC, James E. Alexander, president, chief executive
officer and chairman of the board of directors of Isonics Corporation, and Boris Rubizhevsky, senior vice president and director of Isonics Corporation. Each of the three aforementioned individuals
owns 25% of Interpro. Each of the three aforementioned individuals contributed $100,000 to Interpro to continue the development of the zinc recovery technology. Isonics received a 25% interest in
Interpro as consideration for the sale. We realized a gain from the sale of IPRC of $59,000, representing the net liabilities at the date of disposition. In addition, Interpro has assumed
Dr. Cuttriss' employment agreement that extended through September 2003. We
signed a cooperation agreement (which expired on December 31, 2001) with Interpro to continue leasing office, laboratory and storage space at our current location.

On
January 1, 2002 we extended our cooperation agreement on a month-to-month basis with Interpro to continue leasing office, laboratory and storage space
at our current location. We incurred rental expense to Interpro of approximately $33,000 for the year ended April 30, 2002.

---

NOTE 11INCOME TAXES

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

April 30,2002

2001Deferred tax assetsAccruals and expenses deductible in future periods

$
730

$
1,464Amortization and depreciation


125


Net operating loss and credit carryforwards


2,206


683Total deferred tax assets


3,061


2,147Valuation allowance


(3,061
)

(2,083
)


64Deferred tax liabilitiesAmortization and depreciation





(64
)$


$



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

April 30,2002

2001CurrentFederal

$
(888
)
$
(419
)State


(81
)

Foreign


(37
)

(1,006
)

(419
)DeferredFederal


888


419State


81


Foreign


37


1,006


419$


$



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

April 30,2002

2001Expected benefit at federal statutory rate

$
(1,346
)
$
(1,529
)State taxes net of federal benefit


(65
)

(178
)Foreign income taxed at different rates


82


Other items


351


Change in valuation allowance


978


1,707$


$



---

The
federal net operating loss carryforward of approximately $4,955,000 as of April 30, 2002 expires on various dates through 2022. In addition, Chemotrade has a net operating
loss carryforward of approximately $428,000 which under current German tax law will not expire until utilized.

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

NOTE 12DEBT AND LETTER OF CREDIT

We have term debt outstanding of $21,000 and $16,000 as of April 30, 2002 and 2001, respectively. The loan bears interest at 5.47%, has a
five-year life and is anticipated to be repaid in the year ended April 30, 2003. As a result, the loan has been classified as short term in the accompanying balance sheets. In
addition, we have notes outstanding of $25,000 primarily relating to funding of working capital. The notes bear interest at 12 percent, require a monthly payment of approximately $5,000 and are
due August 31, 2002. We currently have no lending facilities with any financial institutions, except for an unsecured line of credit available to Chemotrade in the amount of approximately
$190,000 and a letter of credit guarantee relating to imports and exports for $50,000. There were no amounts outstanding under the line of credit as of April 30, 2002 and 2001, respectively.

NOTE 13STOCKHOLDERS' EQUITY

Increase in Authorized and Reserved Capital

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

Common Stock

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

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

Preferred Stock

On July 29, 1999, we completed a private placement financing to accredited investors and creditors valued in total at approximately $2,745,000. We issued
1,830,000 units, each consisting of one share of

---

Series A Convertible Preferred Stock and one common stock purchase warrant. We received $2,250,000 in cash proceeds and converted $425,000 of long-term debt in connection with the
private placement.
Each share of the Series A Convertible Preferred Stock is convertible into one share of our common stock.

During
1998, the Emerging Issues Task Force issued EITF 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios," which was applicable for equity instruments issued after May 20, 1999. EITF 98-5 requires issuers of convertible preferred stock containing a nondetachable conversion
feature that is in-the-money at the commitment date to allocate part of the proceeds of the issuance to the conversion feature based on its intrinsic value. The conversion
feature on the 1,830,000 shares of preferred stock had an intrinsic value of $686,000 at the commitment date and was reported as a deemed dividend for the year ended April 30, 2000.

On
November 16, 2000, the Emerging Issues Task Force issued EITF 00-27, "Application of EITF Issue 98-5 to Certain Convertible Instruments." EITF
00-27 requires the use of an effective conversion price in determining the value of a conversion feature contained in a convertible equity instrument. The consensus opinion for this issue
is retroactive for instruments issued after May 20, 1999 and is to be applied in the quarter that includes November 16, 2000. In applying the requirements of EITF 00-27, we
determined the value of the conversion feature contained in our preferred stock to be $1,415,000. Of this amount, $686,000 was reported as a deemed dividend in 2000 as discussed above. The remaining
$729,000 has been reported as a deemed dividend in 2001.

Dilution Adjustments to Preferred Shareholders

Under the terms of the Series A Convertible Preferred Stock private placement, the related shareholders have anti-dilution rights if we issue
or sell common stock after July 29, 1999 for a per share consideration less than the current exercise price of the related warrants. As a result of various transactions during the year ended
April 30, 2002 including the issuance of the Series 2002A 4% Convertible Notes, the issuance of restricted common stock to SEI, IRSI and company employees, the issuance of common stock
warrants to SQI, the exchange offer of Class A common stock warrants and the issuance of common stock options and warrants to employees, we issued an additional 642,654 common stock warrants
and reduced the exercise price to $2.79 on all related common stock warrants in order to satisfy the anti-dilution provisions. As of April 30, 2002, there are 3,085,622 common stock
warrants outstanding related to the Series A Convertible Preferred Stock private placement. These common stock warrants expired unexercised on July 29, 2002.

In
addition to anti-dilution rights, there are provisions associated with the Series A Convertible Preferred Stock that if triggered, would reduce the current
conversion price and effectively allow the preferred shares to convert to common stock at a ratio greater than a one for one basis. As a result of the issuance of the Series 2002A 4%
Convertible Notes at $1.00 per share, the Series A Convertible Preferred Stock is now convertible at 1.50 shares of common stock for each share of Series A Convertible Preferred stock
outstanding.

Series 2002A Convertible Notes

On March 20, 2002 we completed a financing arrangement whereby we issued $1,000,000 in Series 2002A Convertible Notes along with 200,000 detachable
common stock warrants. The notes are

---

convertible at a ratio of one common share for each dollar of note outstanding, bear interest at 4% per annum and are due March 1, 2003. The common stock warrants vested immediately, are
exercisable at $1.25 per share and expire on March 20, 2005. The notes are convertible at the option of the Company at any time provided that we have met the requirement that the common stock
underlying the convertible notes has been registered for resale pursuant to an effective registration statement. The notes are convertible at the option of the holder at any time commencing
91 days after the original issuance date.

Under
the terms of the financing agreement, we were required to register the common stock underlying the convertible notes for resale pursuant to an effective registration statement. If
we failed to meet this requirement, the holders of the notes had the right to exchange their notes for freely trading common shares pledged by two officers of the Company. Each officer had pledged
500,000 shares as collateral. The common shares underlying the convertible notes were effectively registered on June 9, 2002. None of the notes have been converted to common stock as of
April 30, 2002. Subsequent to year-end, as of July 25, 2002, the $1,000,000 of convertible notes have been converted to 1,000,000 shares of common stock.

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

In
connection with completing the financing arrangement, we paid the investment banker $100,000 and issued them 100,000 common stock warrants (valued at $102,000 using the Black-Scholes
pricing model). The common stock warrants are exercisable at $1.25 per share and expire on March 20, 2005. The total debt offering costs have been capitalized and are being amortized to expense
over the life of the convertible notes.

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

---

Stock Option and Purchase Plans

1996 Stock Option Plan

Our 1996 Stock Option Plan authorized the grant of incentive and nonqualified stock options to our key employees, directors or consultants. The options generally
expire ten years from the date of grant. In September 1997, the Board of Directors terminated the 1996 Stock Option Plan. As of April 30, 2002, there remain 358,769 options outstanding
and zero shares available for grant under the 1996 Stock Option Plan.

Directors' Stock Option Plan

The 1998 Directors' Plan provides that each person serving as a member of the Board, who is not an employee of Isonics, receive options to purchase 20,000 shares
of common stock when such person accepts his position as a director and to receive an additional option to purchase 10,000 shares when such person is re-elected as a director provided such
person is not an employee of Isonics at the time of election. The exercise price for the options is the quoted market price on the date of grant and the options are exercisable for five years from
such date. The options granted under the directors' plan vest immediately. In the event a director resigns or is not re-elected to the Board, failure to exercise the options within three
months results in the options' termination. As of April 30, 2002, options to purchase a total of 170,000 shares were outstanding under the directors' plan.

Executive and Incentive Stock Option Plans

In November 1996, the Board of Directors adopted the Executives' Incentive and Incentive Stock Option Plans authorizing the granting of up to 570,000 and
150,000 incentive and nonqualified stock options respectively, to our key employees, directors or consultants. Effective October 11, 2000,
shareholders approved an increase in the authorized shares for the Executive and Incentive Stock Option Plans to 1,000,000 and 500,000, respectively. Effective November 13, 2001, our
shareholders approved an increase in the authorized shares for the Executive and Incentive Stock Option Plans to 2,000,000 and 1,000,000, respectively. Incentive stock options are granted at a price
not less than fair market value, and nonqualified stock options are granted at a price not less than 85% of the fair market value. Options are exercisable when vested, typically over four to five
years and expire five to ten years after the date of grant. As of April 30, 2002, options to purchase a total of 1,039,704 shares were outstanding and 1,603,658 shares were available for grant
under the Executive and Incentive Stock Option Plans.

Employee Stock Purchase Plan

The employee stock purchase plan has reserved 200,000 shares of our common stock for sale to all permanent employees who have met minimum employment criteria.
Employees who do not own 5% or more of the outstanding shares are eligible to participate through payroll deductions. At the end of each offering period, shares are purchased by the participants at
85% of the lower of the fair market value of our common stock at the beginning or the end of the offering period. As of April 30, 2002, 34,358 shares have been issued under the plan.

---

Pro Forma Disclosure of Compensation Expense under SFAS No. 123

The exercise price of options granted is the quoted market price of our stock on the date of grant. Accordingly, no compensation expense has been recognized for
grants from the plans made to employees or directors. Had compensation cost for grants to employees and directors been determined based on the fair value of the options at the grant dates consistent
with SFAS No. 123, Accounting for Stock-Based Compensation, our results of operations and per share amounts for the years ended April 30,
2002 and 2001 would have been changed to the pro forma amounts indicated below.

2002

2001Net loss attributable to common shareholdersAs reported

$
(3,960,000
)
$
(5,227,000
)Pro forma

$
(4,389,000
)
$
(5,819,000
)Income loss per share attributable to common shareholdersbasicAs reported

$
(.40
)
$
(.63
)Pro forma

$
(.44
)
$
(.70
)Income loss per share attributable to common shareholdersdilutedAs reported

$
(.40
)
$
(.63
)Pro forma

$
(.44
)
$
(.70
)


For
purposes of the pro forma disclosures, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted
average assumptions; no expected dividends, volatility of 150%; risk-free interest rate of 4.0%; and expected lives of four to eight years. A summary of the status of our stock option
plans as of April 30, 2002 and 2001, and changes during the years ended on these dates is presented below.

Number of
Shares

Weighted
Average
Exercise
PriceOutstanding, April 30, 2000

1,086,764

$
2.25Granted

235,000

$
2.68Exercised

(201,912
)
$
1.03Canceled

(12,000
)
$
2.00Outstanding, April 30, 2001

1,107,852

$
2.43Granted

805,121

$
1.17Exercised




Canceled

(344,500
)
$
2.84Outstanding, April 30, 2002

1,568,473

$
1.69


The
weighted average fair value of options granted during the years ended April 30, 2002 and 2001 was $1.07 and $2.46, respectively.

---

The
following information applies to options outstanding at April 30, 2002:

Range of
Exercise Price

Number
Outstanding

Weighted Average
Exercise Price

Weighted
Average Remaining
Contractual
Life (Years)

Number
Exercisable

Weighted Average
Exercise price$0.58

207,340

$
0.58

4

207,340

$
0.58$1.00 - $1.44

909,704

$
1.12

5

414,704

$
1.17$1.66 - $2.38

241,429

$
1.81

6

166,429

$
1.73$3.50

80,000

$
3.50

5

80,000

$
3.50$5.50 - $7.31

130,000

$
6.13

4

72,500

$
7.151,568,473

$
1.69



940,973

$
1.80


Warrants

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

|                            |                                                                         | Number of
Shares |          | Weighted
Average
Exercise
Price
|--------------------------- | ----------------------------------------------------------------------- | ---------------- | -------- | -------------------------------
|Outstanding, April 30, 2000 |                                                                         | 3,926,647        |          | $                              
|                            | Warrants issued in private placement of common stock                    |                  | 675,000  |                                
|                            | Warrants issued under anti-dilution agreement                           |                  | 146,301  |                                
|                            | Warrants issued for services                                            |                  | 10,000   |                                
|                            | Exercised                                                               |                  | (99,332  | )                              
|                            | Forfeited, via net exercise                                             |                  | (23,521  | )                              
|                            |                                                                         |                  |          |                                
|Outstanding, April 30, 2001 |                                                                         | 4,635,095        |          |                                
|                            | Warrants issued in settlement of registration statement requirements    |                  | 675,000  |                                
|                            | Class C warrants issued in connection with exercise of Class B warrants |                  | 202,500  |                                
|                            | Warrants issued in connection with issuance of convertible notes        |                  | 500,000  |                                
|                            | Warrants issued under anti-dilution agreement                           |                  | 642,654  |                                
|                            | Warrants issued for services                                            |                  | 250,000  |                                
|                            | Exercised                                                               |                  | (494,849 | )                              
|                            | Expired                                                                 |                  | (232,168 | )                              
|                            |                                                                         |                  |          |                                
|Outstanding, April 30, 2002 |                                                                         | 6,178,232        |          | $                              
|                            |                                                                         |                  |          |                                

---

The
outstanding warrants as of April 30, 2002, are summarized as follows:

Number
Outstanding

Weighted
Average
Exercise
Price

Expiration
DateClass B Warrants

1,780,110

$
1.50

12-31-2005Class C Warrants

202,500

$
2.50

12-31-2005Other Warrants

4,195,622

$
2.70

(1
)6,178,232

$
2.35


---

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

NOTE 14BUSINESS SEGMENTS AND FOREIGN OPERATIONS

We currently have three reportable segments: life sciences, semiconductor materials and products and corporate. Our life sciences segment sells stable and
radioisotopes in elemental and simple compound forms for use in life sciences applications. Our semiconductor materials and products segment sells SOI wafers and is involved in several research and
development projects including silicon-28. Our corporate segment has no revenues of its own.

---

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

2002

2001Segment revenues:Life sciences

$
8,140

$
7,789Semiconductor materials and products


15


Total

$
8,155

$
7,789Segment operating (loss) incomeLife sciences

$
(388
)
$
512Semiconductor materials and products


(659
)

(594
)Corporate


(2,891
)

(3,927
)Total

$
(3,938
)
$
(4,009
)Total assets:Life sciences

$
3,543

$
5,069Semiconductor materials and products


598


Corporate


1,073


1,033Total

$
5,214

$
6,102


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

2002

2001Net revenuesUnited States

$
4,239

$
2,602Germany


3,916


5,187Total

$
8,155

$
7,789Operating lossUnited States

$
(2,677
)
$
(3,978
)Germany


(1,261
)

(31
)Total

$
(3,938
)
$
(4,009
)Total assetsUnited States

$
2,402

$
1,814Germany


2,812


4,288Total

$
5,214

$
6,102


NOTE 15EMPLOYEE BENEFIT PLAN

We have a profit sharing plan qualified under section 401(k) of the Internal Revenue Code. The plan is a defined contribution plan, covering substantially
all of our employees. Company contributions to the plan aggregated approximately $27,000 and $39,000 for 2002 and 2001, respectively.

---

NOTE 16CONCENTRATIONS

As of April 30, 2002, three customers accounted for approximately 37% of total net accounts receivable. Five customers accounted for approximately 50% of
total net accounts receivable at April 30, 2001. Three customers accounted for approximately 48.0% of revenues during the year ended April 30, 2002. Five customers accounted for
approximately 41% of revenues during the year ended April 30, 2001.    Two customers accounted for approximately 47% and 35% of the German segment's revenue for the year ended
April 30, 2002 and 2001, respectively. Two customers accounted for approximately 37% of the German segment's accounts receivable at April 30, 2002. One customer accounted for
approximately 23% of the German segment's accounts receivable at April 30, 2001.

NOTE 17RELATED PARTY TRANSACTIONS

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

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

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

NOTE 18COMMITMENTS

We rent office and production facilities and equipment under operating leases expiring through March 2004. Rent expense for operating leases was
approximately $180,000 and $224,000 for the years ended April 30, 2002 and 2001, respectively. Future minimum annual operating lease commitments are as follows (in thousands):

Year ending April 30,2003

$
1722004


46$
218


---

NOTE 19SUBSEQUENT EVENTS

Subsequent to year-end, on July 31, 2002, we sold our 75% interest in Chemotrade Leipzig GmbH ("CTL") to the 25% shareholder for
50,000 Euros. The transaction is effective as of May 1, 2002. Under the terms of the agreement, we will receive 20,000 Euros on August 10, 2002 and the remaining 30,000 Euros will be
paid in five equal monthly installments at the end of each month beginning August 31, 2002. We recognized revenue and gross margin related to CTL of approximately $1,575,000 and $326,000,
respectively for the year ended April 30, 2002.

---

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