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

                             ----------------------
                                   FORM 10-KSB

(Mark One)

[X]     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE ACT
        OF 1934.
                    For the fiscal year ended April 30, 1998

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

                For the transition period from _______ to ______

                        Commission file number: 001-12531
                               ISONICS CORPORATION
                 (Name of small business issuer in its charter)

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

    4010 Moorpark Avenue, Suite 119
         San Jose, California                                      95117
 (Address of principal executive offices)                        (Zip Code)
               

                    Issuer's telephone number: (408) 260-0155

    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
                           --------------------------
                                (Title of Class)

         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days. Yes X  No
                                                                      ---   ---
         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. Yes X  No
                                         ---   ---
         Registrant's  revenues  for the fiscal  year ended  April 30, 1998 were
$6,783,000.

         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 27, 1998 was $3,734,381.  Excludes approximately  3,974,013
shares of common stock held by Directors,  Officers and holders of 5% or more of
the Registrant's  outstanding Common Stock at July 27, 1998. 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 each of the Registrant's classes of
common equity, as of the latest  practicable date: class outstanding at July 27,
1998: Common Stock, no par value 6,071,980 shares
      Class A Redeemable Common Stock Purchase Warrants, 810,000.

         Transitional Small Business Disclosure Format (check one): Yes    No X
                                                                       ---   ---
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                                     PART I

ITEM 1.  BUSINESS

         BECAUSE  ISONICS  CORPORATION  ("ISONICS"  OR THE  "COMPANY")  WANTS TO
PROVIDE  INVESTORS  WITH MORE  MEANINGFUL  AND USEFUL  INFORMATION,  THIS ANNUAL
REPORT  ON FORM  10-KSB  (THE  "FORM  10-KSB")  CONTAINS,  AND  INCORPORATES  BY
REFERENCE,  CERTAIN  "FORWARD-LOOKING  STATEMENTS"  (AS SUCH TERM IS  DEFINED IN
SECTION 21E OF THE  SECURITIES  EXCHANGE ACT OF 1934, AS AMENDED),  THAT REFLECT
THE COMPANY'S CURRENT  EXPECTATIONS  REGARDING THE FUTURE RESULTS OF OPERATIONS,
PERFORMANCE AND ACHIEVEMENTS OF THE COMPANY.  THESE  FORWARD-LOOKING  STATEMENTS
ARE MADE  PURSUANT  TO THE SAFE  HARBOR  PROVISIONS  OF THE  PRIVATE  SECURITIES
LITIGATION  REFORM ACT OF 1995.  THE COMPANY HAS TRIED,  WHEREVER  POSSIBLE,  TO
IDENTIFY THESE FORWARD-LOOKING  STATEMENTS BY USING WORDS SUCH AS "ANTICIPATES,"
"BELIEVES,"  "ESTIMATES," "EXPECTS," "PLANS," "INTENDS" AND SIMILAR EXPRESSIONS.
THESE  STATEMENTS  REFLECT  THE  COMPANY'S  CURRENT  BELIEFS  AND ARE  BASED  ON
INFORMATION CURRENTLY AVAILABLE TO IT. ACCORDINGLY, THESE STATEMENTS ARE SUBJECT
TO  CERTAIN  RISKS,  UNCERTAINTIES  AND  CONTINGENCIES,  WHICH  COULD  CAUSE THE
COMPANY'S ACTUAL RESULTS,  PERFORMANCE OR ACHIEVEMENTS TO DIFFER MATERIALLY FROM
THOSE EXPRESSED IN, OR IMPLIED BY, SUCH STATEMENTS.  THESE RISKS,  UNCERTAINTIES
AND CONTINGENCIES  INCLUDE,  WITHOUT LIMITATION,  DEMAND FOR, AND ACCEPTANCE OF,
THE COMPANY'S MATERIALS;  CHANGES IN DEVELOPMENT AND DISTRIBUTION RELATIONSHIPS;
THE IMPACT OF COMPETITIVE  PRODUCTS AND TECHNOLOGIES;  AND THE FACTORS SET FORTH
UNDER "ITEM 6.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OR PLAN OF  OPERATION -
FACTORS THAT MAY AFFECT FUTURE  OPERATING  RESULTS."  THE COMPANY  UNDERTAKES 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 FORM10-KSB OR TO
REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.

         Isonics is an advanced  materials and technology company which develops
and commercializes  products based on enriched stable isotopes.  Stable isotopes
can  be  thought  of  as  ultra-ultra  pure  materials.   This  high  degree  of
purification  accomplished on the sub-atomic level provides enhanced performance
properties compared to normal purity materials.  Stable isotopes have commercial
uses in several areas,  including:  energy, medical,  research,  diagnostics and
drug development; product tagging and stewardship;  semiconductors;  and optical
materials.  Isonics has  successfully  developed and  commercialized  two stable
isotope  products and intends to promote the  emergence and growth of new stable
isotope applications.

         The Company's  principal product to date is isotopically  depleted zinc
("DZ"). DZ, in different chemical forms, is used to prevent corrosion in nuclear
power plants.  Corrosion is a cause of high radiation  fields in such plants and
can result in  radiation  exposure to  workers.  DZ also  reduces  environmental
cracking in certain kinds of nuclear  reactors  which,  if not  controlled,  can
require  extremely  costly  repairs  or can  result in  premature  shutdown  and
de-commissioning  of the  facility.  The Company  believes  that it has provided
substantially all of the DZ used in nuclear power plants worldwide.

         The application of DZ was developed by General Electric Company ("GE"),
where the founders of the Company were previously employed.  Before fiscal 1997,
all sales of DZ by the Company were made to GE pursuant to sales  orders,  which
in turn resold the  product to end users.  In addition to sales to GE, in fiscal
1997 Isonics  commenced direct sales to end users. For the years ended April 30,
1997 and 1998,  approximately  38% and 51% of DZ  revenues  were from sales made
directly to end users, respectively.

         New applications for stable isotopes are continually being developed by
the  Company  and  by  third  parties.   The  Company  believes  that  many  new
applications  have the potential to create new markets.  One  opportunity  is to
supply stable isotope labeled  compounds for the diagnostic  breath test ("DBT")
market.  DBTs provide early diagnosis of conditions that could otherwise lead to
expensive procedures such as endoscopies and biopsies. DBTs under development by
third parties which utilize stable isotopes in their  application  include tests
to  diagnose  peptic  ulcers,  gastric  emptying,  fat  malabsorption  and liver
function. Two DBTs relating to peptic ulcers have been approved by the U.S. Food
and Drug  Administration  (the  "FDA"),  and the  Company  believes  that  other
companies  have applied to the FDA or comparable  agencies in foreign  countries
for  approval  of these and other  tests,  which

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must be obtained  before any  products can be sold.  Certain DBTs are  currently
marketed in the U.S., Europe, and Asia.

         The key  ingredient  for DBTs is the rare  stable  isotope  of  carbon,
carbon-13.  Isonics is the third largest  supplier of carbon-13 in the world and
is the only non-Japanese supplier. To further strengthen this position,  Isonics
announced in February  1998 the  formation of a joint venture with the Institute
of Stable  Isotopes in Tblisi,  Georgia.  The purpose of the joint venture is to
increase  carbon-13  production at the Institute  initially and to transfer that
production  technology to  manufacturing  facilities to be established in Europe
and North America.

         In fiscal 1998, the Company exercised an option to acquire an exclusive
license to two Yale University patents which cover semiconductor devices made of
isotopically  pure silicon,  germanium,  gallium arsenide and most  isotopically
pure compound  semiconductors.  The patents claim that isotopic  purity provides
improved device speed and improved  thermal  conductivity,  two properties which
are  of  great  importance  to  the  semiconductor  industry.  According  to the
Semiconductor  Industry  Association,  sales in 1997 of silicon wafers and other
semiconductor substrates were over $6 billion.

         Improved  thermal  conductivity  of a thin  film of  isotopically  pure
silicon-28 was demonstrated by a researcher at Brown University in 1997. The 60%
room temperature improvement was in line with Isonics' expectations.  Since 1994
Isonics  has been  working to produce  isotopically  pure  silicon-28  epitaxial
wafers suitable for semiconductor device fabrication.  The company believes that
it has achieved this goal.

         The Company is collaborating with academia and industry to evaluate the
benefits  of  isotopically  pure  silicon-28.   The  Company  believes  that  if
evaluations  demonstrate  the  commercial  feasibility  of one or more products,
demand could emerge in certain segments of the semiconductor  market.  There can
be no assurance, however, that these evaluations will demonstrate the commercial
feasibility of any products,  that the Company will be able to commercialize any
such products or that a market will emerge for any such products.

         The Company was formed in March 1992 and  incorporated in California in
March 1993 under the name A&R  Materials,  Inc. In September  1996,  the Company
changed  its name to Isonics  Corporation.  The  Company's  principal  executive
offices are located at 4010 Moorpark  Avenue,  Suite 119, San Jose,  California,
95117. Its telephone number is (408) 260-0155.

Recent Business Acquisitions

         International Process Research Corporation

         Effective  April 30,  1998,  Isonics  purchased  International  Process
Research  Corporation  ("Interpro") by acquiring all of the outstanding  capital
stock of Interpro  from  Metallurgy  International,  Inc.  Interpro,  which does
business as Colorado  Minerals  Research  Institute,  is a contract research and
development and materials processing company which has been performing key steps
in Isonics'  depleted zinc  manufacturing  process and jointly  developing  new,
lower cost technologies to better meet customer needs. The consolidated  balance
sheet of Isonics at April 30,  1998  includes  the  assets  and  liabilities  of
Interpro.  The  consolidated  statement of operations  excludes  Interpro as the
acquisition  occurred on the last day of fiscal  1998.  In  connection  with the
acquisition,  Isonics  issued  shares of its Common Stock in exchange for all of
the outstanding shares of Interpro. The total number of shares of Isonics Common
Stock issued was 353,982,  valued at $708,000. The acquisition was accounted for
as a purchase. No goodwill was recognized upon completing the transaction.

         Chemotrade GmbH

         On July 21, 1998, the Company acquired all of the outstanding shares of
Chemotrade GmbH, 75 percent of the outstanding shares of Chemotrade Liepzig GmbH
and 6 percent of the outstanding shares of IUT (collectively "Chemotrade"),  all
of which were owned by two common  shareholders and engaged in the distribution,
development  and manufacture of stable and  radioactive  isotopes.  The purchase
price  consideration  consists  of $2.576  million to be paid upon  closing  and
contingent consideration of up to $1.1 million to be paid through June 2001. The
consideration paid upon closing consists of cash of $758,000, 357,730 restricted
shares of  common  stock  with a fair  value of  $894,000,  two  notes,  one for
$924,000  bearing  interest at 2% per month due September  15, 1998,  secured by
certain  accounts  receivable  of  Chemotrade,  and a second  note for  $833,000
bearing  interest  at 10%,  due  June  1,  1999.  The  sellers  have  guaranteed
Chemotrade's defined pre tax earnings will be at least

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$550,000  during the sixteen  months ended April 30, 1999 and the twelve  months
ended April 30, 2000 and 2001.  If the pre tax earnings of  Chemotrade  are less
than  $550,000  for the sixteen  month  period  ended April 30,  1999,  the note
payable  of  $833,000  due June 1, 1999,  will be  reduced  $0.75 for each $1.00
shortfall  of  earnings.  If the pre tax  earnings of  Chemotrade  are less than
$550,000 for the year ended April 30, 2000, the owners will repay $0.75 for each
$1.00  shortfall of earnings.  If Chemotrade has pretax earnings of $550,000 for
the year ended April 30, 2001, the sellers will receive additional consideration
of $278,000.  If the pre tax earnings are less than $550,000,  the consideration
will be reduced $0.50 for each $1.00 shortfall in earnings.

Background

         An isotope is one of two or more species of the same  chemical  element
which  differ from one another  only in the number of neutrons in the nucleus of
the atom. The different  number of neutrons can create  significantly  different
nuclear  physics  characteristics.  To take advantage of some of these different
characteristics,  it is usually  necessary  to increase  ("enrich")  or decrease
("deplete")  the  concentration  of a  particular  isotope.  There  are over 280
naturally occurring stable isotopes of 83 elements.  Some elements have only one
naturally occurring stable isotope,  while others have many. Stable isotopes are
not radioactive.

         Stable  isotopes of an element  differ in mass and  diameter as well as
several nuclear  properties,  such as  cross-section,  spin and magnetic moment.
Differences in these properties can result in substantially  different  effects,
and some of these differences have the potential for commercial application. For
example,  in ultra  chemically  pure crystals  grown for  electronics or optical
applications,  isotopic  impurities  are the  greatest  contributor  to  crystal
disorder due to mass and diameter variations. Eliminating this disorder by using
a single enriched isotope (i.e.  isotopically pure) results in increased thermal
conductivity and optical transparency, and thus in improved product performance.
Similarly,  enriching  or  depleting  isotopes  based upon their  cross-sections
allows  materials  to be  engineered  for  applications  in  the  nuclear  power
industry, for controlled doping of some semiconductors and for use as targets to
produce radioisotopes for medicine and industry.

         Stable  isotopes  of an element do not  differ  significantly  in their
chemical behavior.  Tagging of materials can be performed by varying the natural
abundance  of  isotopes  to give a  compound  its own mass or  nuclear  magnetic
signature   without  changing  its  chemical   properties.   Though   chemically
equivalent,  the "tagged" or labeled  compound is discernible from its unlabeled
twin through the use of several types of instruments called spectrometers.

Company Strategy

         The  Company  believes  that its  strength  is the ability to bring the
necessary  elements  together  to  identify,  evaluate,  develop,  engineer  and
successfully  commercialize  applications  for stable  isotopes and  value-added
products  manufactured  from stable isotopes.  This is evidenced by management's
experience (at the Company and in prior employment) in developing DZ from a cost
prohibitive  concept  to a  commercial  product.  DZ is now  one of the  largest
worldwide commercial applications of a stable isotope product.

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

   o     focusing  on  development  of high  value-added  products  which have a
         perceived competitive advantage in large or growing markets;

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

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

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

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

Products

         The Company's revenues are presently dominated by isotopically depleted
zinc (DZ). The remainder of revenues  comes from several stable isotope  labeled
compounds, including carbon-13. No product or licensing revenue has been derived
from isotopically pure silicon-28; however, Isonics believes that the initiation
of such revenue is likely in fiscal 1999.

         Isotopically Depleted Zinc

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

         Testing  sponsored by the Electric Power  Research  Institute has shown
that the  addition  of a soluble  form of zinc to the  nuclear  reactor  coolant
reduces  plant  radiation  fields,  and in some cases,  substantially  mitigates
environmentally  induced  cracking.  Zinc acts as a corrosion  inhibitor for the
stainless steel and other metal  components of the nuclear reactor  systems.  In
boiling water reactors ("BWRs"), zinc prevents the development and concentration
of corrosion  products,  the cause of high radiation  fields which can result in
radiation  exposure to plant workers.  In pressurized  water reactors  ("PWRs"),
zinc not only prevents  radiation  field  build-up,  but has been shown in a PWR
test to substantially reduce environmental cracking.

         Zinc provides the important benefits outlined above, but one isotope of
natural zinc  becomes  radioactive  in the nuclear  reactor,  thus  offsetting a
substantial portion of the desired benefits. By depleting this zinc isotope, the
desired  benefits  are still  obtained  while  the  detrimental  side  effect is
essentially  eliminated.  This product is known as  isotopically  depleted  zinc
("DZ").

         DZ is currently  used by 31 of the  approximately  95 BWRs in the world
including 26 of the 37 U.S. BWRs.  Typical current annual DZ requirements  for a
BWR  utilizing  DZ are  approximately  $250,000  to  $350,000,  based on current
prices.

         Programs to evaluate  the  effectiveness  of  utilizing  DZ at PWRs are
underway in the United States and certain foreign countries. These programs have
demonstrated the technical  effectiveness of DZ for PWRs. Several U.S. PWRs have
indicated  their  intention to use natural zinc,  not DZ, due to an  unfavorable
cost-benefits evaluation.  The Company believes that a market may develop for DZ
use in European PWRs, due in part to the  importance of  environmental  cracking
mitigation and a higher sensitivity to personnel  radiation  reduction and lower
cost pressures than in the U.S.

         Initial  test  results  suggest  that PWRs will  probably use a smaller
amount of DZ per plant as compared to BWRs, but there are approximately 200 PWRs
in the world. At present prices,  the Company estimates the potential market for
sales to  nuclear  power  plants to be  between  approximately  $50-$70  million
annually.  There can be no assurance  that a market will develop for DZ sales to
PWRs, that the Company will be able to sell DZ to all such potential  customers,
or that selling prices of DZ will not decrease.

         Sales of DZ are  presently the  Company's  largest  source of revenues,
representing approximately 79% and 83% of net revenues for fiscal 1997 and 1998,
respectively.  In March 1995,  Isonics  acquired the stable isotope  business of
Isoserve.  The Company believes that it and Isoserve have supplied substantially
all of the DZ used in nuclear  power  plants in the world to date.  Until fiscal
1997,  DZ was sold only to GE, which in turn resold it to the  end-user  nuclear
power  utilities.  The  Company's  sales of DZ to GE have been pursuant to sales
orders placed from time to time by GE, and the Company does not have any written
purchase or sales  agreements with GE relating to sales of DZ or other products.
In addition to sales to GE, the Company  currently  is  marketing DZ directly to
U.S. and foreign utilities and direct  end-users,  and for the years ended April
30,  1997  and  1998  approximately  38%  and

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51% of net revenues from DZ ,  respectively,  were from  end-users.  The Company
believes that direct sales to end users may increase in the future,  while sales
to GE may decrease.  There can be no assurance as to the size of orders, if any,
from  direct end users in the future or as to the number of  customers  that can
purchase DZ from the Company. See "Item 6. Management's  Discussion and Analysis
or Plan of  Operation  - Factors  That May  Affect  Future  Operating  Results -
Customer Concentration."

         The  Company  believes  that  the  decision  to  purchase  DZ is  price
sensitive.  The Company is actively working to further reduce costs by utilizing
in-house production of raw materials,  developing and implementing low-cost zinc
oxide processing technologies, and providing DZ in innovative forms which lowers
the utilities'  overall cost. The acquisition of International  Process Resource
Corporation  (Interpro),  a supplier of such services to Isonics, is expected to
aid in reducing DZ costs and provide  additional revenue and operating income in
fiscal 1999.

         Cadmium

         Sales of cadmium isotopes  represented less than 10% in fiscal 1997 and
less than 1% of net  revenues in fiscal  1998,  respectively.  The Company  sold
enriched  cadmium for use in helium  cadmium  lasers and for the  manufacture of
radioisotopes.  The Company does not anticipate future sales of cadmium isotopes
due to increased  competition and the fact that a new solid state laser, capable
of higher power and  generally  improved  performance,  is already  commercially
available.

          Stable Isotope Labeled Compounds

          Stable   isotope   labeled   compounds   ("SILCs")   are   created  by
incorporating  carbon,  nitrogen,  hydrogen  and oxygen  isotopes  into  several
thousand relevant chemical compounds.  Sales of SILCs represented  approximately
16% and 13% of net revenues in fiscal 1998 and 1997. SILCs allow  researchers to
probe the  metabolism of living  systems,  determine the structures of important
biological  compounds,  design  new drugs and  measure  extremely  low levels of
environmental  toxins. The Company believes that greater  availability of stable
isotopes  and  advances in  instrumentation  (improvements  in  sensitivity  and
reduced cost) will promote increased demand for SILCs.  Examples of existing and
emerging applications include:

         Metabolic  studies.  Increasingly,  drug  studies  are  performed  with
labeled drugs to facilitate research on metabolism, distribution, mode of action
and  elimination.  The FDA may eventually  mandate the labeling of all new drugs
for  investigational  use during some or all phases of pre-clinical and clinical
evaluations of these drugs, but there can be no assurance that the FDA will make
this mandate in the near future, if at all.

         Rational drug design.  Nuclear magnetic resonance ("NMR")  spectroscopy
is being  developed  as a tool to determine  the  structure of larger and larger
molecules in solution,  many of which cannot be analyzed by the more traditional
x-ray  crystallography  techniques.  The  Company  believes  that  this  new NMR
sensitivity  combined with the  sophisticated  isotopically  labeled cell growth
media needed to produce the labeled  human  proteins  will require an increasing
supply of the stable isotopes of carbon, nitrogen and deuterium.

         Product tagging and stewardship  applications.  The source of materials
and explosives may be identified,  without changing their chemistry,  by tagging
with the stable isotopes of carbon, nitrogen, oxygen and hydrogen. Several other
approaches are currently being  implemented,  and other  technologies  have also
been  proposed.  These  other  approaches  involve the  addition  of  extraneous
materials such as dyes, exotic chemical compounds or radioactive compounds.  The
Company  believes that adding such  extraneous  materials can sometimes  detract
from the performance of the product.  Tagging with small amounts of isotopically
engineered  versions of the material itself results in a unique identifier which
behaves chemically in exactly the same way as the host material.

         The Company's efforts to date in the production and sales of SILCs have
focused on structurally  simple "building block" compounds which are used by its
customers  to  synthesize  more  complex  and higher  value  SILCs.  The Company
presently  markets  carbon-13  and  nitrogen-15  building  block  SILCs which it
obtains  through its supply alliance with several stable isotope  producers.  In
the near term,  the Company will continue  this strategy of supplying  "building
block" forms of stable isotopes while at the same time increasing its production
capacity both at its alliance producers and Company facilities.

         In addition to  providing  additional  revenue  potential  and possibly
higher margins,  the Company believes that developing or acquiring  complex SILC
synthesis  capability  would be synergistic  with any Company efforts to

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develop the breath test  diagnostics  product area,  and would also aid in early
identification of future stable isotope business opportunities.

         Diagnostic Breath Tests

         Healthcare  consumes  a large  amount  of  resources  in the  U.S.  and
worldwide.  The Company  believes that  substantial  changes are taking place to
control or reduce the high cost of healthcare.  A significant trend is a general
shift from therapy to cost-effective  prevention.  Early diagnosis of conditions
which otherwise could require expensive  therapies could help diminish the risks
and  expense of such  subsequent  procedures.  The Company has elected to pursue
what it believes is a promising segment of this market:  Diagnostic Breath Tests
("DBTs").

         Breath  tests  are all  based  on the same  principle  and use a common
instrument to measure the result:

         o     a small amount of a carbon-13  SILC  (referred to as a substrate)
               is swallowed by the patient;

         o     breath samples are collected at regular intervals;

         o     and breath samples are analyzed for their carbon-13 content.

         Most DBTs are  intended  to replace  unpleasant,  costly and  sometimes
risky procedures such as endoscopies and biopsies of the digestive  system.  The
Company  believes  that DBTs may become a widely  used and  accepted  diagnostic
tool.  Certain DBTs are  currently  being sold in the U.S. and in Europe.  Their
ease of administration may allow medical internists and general practitioners to
use them,  potentially  resulting in lower cost,  earlier  diagnosis and broader
application.

         The market for DBTs is defined by the  incidence of diseases  addressed
and existing alternative diagnostic procedures. The urea breath test is the most
established  DBT. As they become more widely  available,  carbon-13  urea breath
tests  ("UBTs") may address a potential  population of  approximately  8 million
peptic ulcer  patients in the U.S.,  who presently  utilize drugs and procedures
with an estimated  cost of at least $2 billion each year.  The Company  believes
that the UBT, coupled with antibiotic  treatment,  can reduce the cost of peptic
ulcer  management.  Two  companies in the U.S.  have received FDA approval for a
carbon-13 UBT. The Company believes that several companies in Europe,  including
Sanofi and Inbiomed, are also pursuing regulatory approval.

         The Company  intends  first to enter this  market as a carbon-13  and a
pharmaceutical-grade  substrate supplier. In February 1998, the Company signed a
joint venture agreement with the Institute of Stable Isotopes located in Tblisi,
Georgia.  This  institute was the center of  development of technology for light
isotope  separation in the former Soviet  Union.  The agreement  calls for joint
investment to increase capacity of carbon-13 in Tblisi and providing Isonics the
exclusive  right to purchase the product.  The  agreement  also provides for the
transfer  of  technology  to enable the  construction  of  carbon-13  production
facilities possibly in Europe or the U.S.

         The Company is  investigating  the  feasibility of building such plants
and is considering various strategic options,  such as partnering or acquisition
of  complementary   technologies  or  businesses,   to  leverage  its  carbon-13
production capability.
<TABLE>
         The following  table  identifies  additional  breath tests which are at
various  stages of clinical  research and  pre-clinical  and clinical  trials by
various third parties.
<CAPTION>
          BREATH TEST                                       CONDITION DIAGNOSED
-------------------------------  ---------------------------------------------------------------------
<S>                              <C>
13C-Urea                         Helicobacter pylori
13C-Triolein                     Fat malabsorption
13C-Spirulina                    Gastric emptying
13C-Galactose                    Liver function
13C-Xylose                       Small Bowel Bacterial Overgrowth (the major cause of chronic diarrhea)
13C-Aminopyrine                  Liver function
13C-Caffeine                     Liver function
13C-Erythromycin                 Cyclosporin dosage following transplantation
13C-Valine                       Genotype of MSUD (Maple Syrup Urine Disease)
13C-Sucrose                      Sucrose malabsorption (sucrase-isomaltase complex deficiency)
13C-Starch                       Pancreas amylase function
13C-Cholesteryl Octanoate        Pancreas esterase function
</TABLE>


                                       7
<PAGE>

         The DBT business is subject to  extensive  government  regulation.  The
products and instruments used, which may be regulated as drugs and devices,  are
subject  to the  scrutiny  of FDA  review and  approval  as well as ongoing  FDA
inspection of most aspects of the production, marketing, distribution and use of
these tests.  The Company  believes that the production and marketing of DBTs is
also subject to similar  regulatory  controls in the foreign countries where the
Company would likely seek to market products. Consequently, such products cannot
be commercially introduced for several years, and there can be no assurance that
the products would ever be approved for use.

         Medical Imaging and Therapy Materials

         Stable isotopes of thallium,  zinc, cadmium,  xenon, oxygen,  strontium
and many others are routinely  used in a variety of medical  imaging and therapy
applications.  In their  enriched  form or converted  to a specific  radioactive
isotope in a cyclotron or nuclear  reactor,  these materials are incorporated in
chemical  compounds  which  concentrate in specific parts of the human body upon
injection,  inhalation or ingestion. Measuring the distribution of the materials
in the patient can assist physicians in diagnosing disease states and developing
appropriate treatment therapies, some of which incorporate radioactive materials
produced from stable isotopes.

         Isonics has decided to pursue one particular target isotope, oxygen-18,
used to produce  fluorine-18 which is incorporated  into the pseudo-sugar,  FDG,
and used in Nuclear  Medicine  to  diagnose  multiple  metabolic  abnormalities.
Recent approvals by the FDA, favorable reimbursement levels by Medicare/Medicaid
and third party insurers  combined with similar  dynamics in Europe and Asia are
expected to result in significant  growth in FDG studies which should  translate
into increased oxygen-18 demand.  Buyers of oxygen-18 range from the single site
users who purchase in gram  quantities to the  radiopharmacy  companies who will
buy in kilogram  quantities.  Isonics will initially  focus its sales efforts on
the smaller  buyer until  assured  supplies  permit the Company to  aggressively
pursue long term supply agreements with the large radiopharmacy companies,  like
PetNet,  Syncor,  Nycomed-Amersham,  etc. who will dominate this market  through
their networks of regional  radiopharmacies.  To supply this anticipated demand,
Isonics  is  exploring  a  combination   of  options  which  include   exclusive
distribution rights for existing production, investment in expansion of existing
production facilities and investment in Isonics' own production facilities.

         Most  phases  of  the  development  and  ongoing  production  of  these
materials are  controlled by the FDA and similar  foreign  regulatory  agencies.
This fact,  combined with the complexities of production and  distribution,  has
resulted  in a market  with  only a few  manufacturers.  Tight  quality  control
requirements and the importance to the health care industry of a ready supply of
these drugs leads these  manufacturers  to pay close  attention  to their stable
isotope suppliers.  Quality,  supply  reliability,  ultimate source,  breadth of
offerings,  price and track record are  principal  factors  that a  manufacturer
considers  in  evaluating  a  potential  stable  isotope  supplier.  Much of the
material used to manufacture such products originates in countries of the former
Soviet Union.  While the U.S.  Department of Energy ("DOE") has facilities  that
can manufacture  stable  isotopes,  its costs are usually  substantially  higher
because of the full cost recovery  mandated by  legislation  governing the DOE's
operations.

         The  Company  is  capable  of  supplying  many of the  stable  isotopes
currently sold in this market.  Since the original  impetus for new applications
of stable isotopes in health care frequently comes from the drug  manufacturers,
the Company has recently begun marketing its products, services and capabilities
to the existing and emerging manufacturers.

         Isotopically Pure Semiconductors

         Isotopic  purification of carbon used to manufacture synthetic diamonds
has resulted in  substantially  improved  physical  properties.  Published tests
conducted  by GE and others  have shown  that the  removal of a small  amount of
carbon-13 to produce  isotopically pure carbon-12  synthetic diamonds can result
in a 50% improvement in room temperature thermal conductivity of the diamond. At
cryogenic (i.e., extremely cold) temperatures, the heat conductivity is so great
that it cannot be measured using conventional  techniques.  Additionally the new
diamond  was found to be highly  transparent,  and the  transmission  of certain
frequencies of laser light was increased by  approximately  10 times without the
diamond  sustaining  damage.  GE has stated  that  isotopically  pure  carbon-12
diamonds may enable faster,  more reliable  computers due to their superior heat
removal  capability  and may  result in more  efficient  cutting  tools and more
accurate  laser  measurement  devices,  and that  the new  diamonds  may  enable
designers to use lasers in semiconductor fabrication techniques.


                                       8
<PAGE>

         Studies  conducted at Lawrence  Berkeley  Laboratory and the Max Planck
Institute  on  isotopically  pure  germanium  have  shown  thermal  conductivity
improvements similar to those found in isotopically pure carbon-12 diamonds.

         The Company believes that these and other improved  properties might be
found  in  other  isotopically  pure  materials  and may  result  in  commercial
opportunities,  particularly  in the area of  semiconductors.  According  to the
Semiconductor Industry Association, the 1995 market for silicon wafers and other
semiconductor  substrates was approximately $6 billion. This market is projected
to grow 50% by the year  1999 to over $9  billion.  Improvement  in the  thermal
conductivity  of  these  materials  is  important  since  as  the  feature  size
continuously decreases, the power density increases. As power density increases,
more heat is generated per unit volume,  causing device operating temperature to
rise. The semiconductor  industry is moving toward lower operating  voltages and
is using  mechanical  means to remove bulk heat,  but the Company  believes that
greater heat  dissipation  on the micro scale will become even more important to
the industry in the future.  Better thermal  conductivity  directly affects heat
removal  capability and indirectly  improves device speed. As the industry moves
toward  multi-layer  devices and true 3-D chips, the ability to remove heat will
be a material consideration for the semiconductor industry.

         Natural silicon contains three isotopes,  silicon-28 (92%),  silicon-29
(5%) and silicon-30  (3%). An otherwise  perfect crystal of silicon will contain
imperfections  in the form of isotopes of  different  mass,  with the density of
these  imperfections  amounting to nearly 8%. This far exceeds the doping levels
and density of imperfections  ordinarily found in device-quality  crystals.  The
Company   believes  that  removal  of  the  minor  isotopes   should  result  in
substantially improved thermal conductivity.

         The  Company   believes  that  if  commercial   opportunities   emerge,
isotopically pure silicon-28  deployed as wafers or substrates and as silane for
building  epitaxial  layers  should  find a  niche  in the  manufacture  of high
performance  silicon  semiconductors.  Even at the premium  price  required  for
isotopically  pure  silicon,  the Company  believes  that it can compete in high
performance, less cost driven markets.

         The Company has produced  isotopically  pure silicon-28  silane and has
produced silicon-28 epitaxial layers on natural silicon substrates.  The Company
believes  that  these  materials  meet  industry   standards  for  semiconductor
fabrication.  Isonics has provided specimens to academic institutions which have
agreed to measure  certain  physical and  electrical  properties  of  silicon-28
compared  to  natural   silicon.   The  Company  is  also   collaborating   with
semiconductor  industry companies to verify that its silicon-28 epitaxial wafers
meet customer specific  requirements and to evaluate the nature and magnitude of
benefits obtainable due to isotopic purity.

         Isonics  has  exercised  its  option to acquire  an  exclusive  license
regarding two U.S.  patents owned by Yale  University,  for the duration of such
patents,  concerning  isotopically  pure  semiconductor  devices.  These patents
expire in 2009 and 2012 and cover silicon, germanium,  gallium arsenide and most
isotopically  pure  compound  semiconductors.   The  Company  believes  that  if
evaluations  demonstrate  the  commercial  feasibility  of one or more products,
demand could emerge in certain segments of the semiconductor  market.  There can
be no assurance, however, that these evaluations will demonstrate the commercial
feasibility of any products,  that the Company will be able to commercialize any
such  products or that a market will emerge for any such  products.  To exercise
the  option,  the Company  delivered  to Yale  specimens  of  isotopically  pure
silicon-28 meeting certain  specifications.  The license requires payment by the
Company of a royalty based on a percentage of the Company's or its sublicensees'
net sales of products derived from technology covered by the Yale patents.

         In  addition  to  silicon,  the  Company  plans to evaluate a number of
compound  semiconductors,  such as  gallium  arsenide,  which  may  particularly
benefit from enhanced heat dissipation capability.

Research and Development

         Consistent with the Company's product development  strategy,  a variety
of new stable  isotope  products and  potential  markets are  continually  being
identified  and evaluated for economic and  technical  feasibility.  The Company
funds research and development to improve  technologies  for isotope  separation
and materials processing technologies. During fiscal 1998 and 1997, research and
development  expenses were $811,000 and $655,000,  none of which were reimbursed
by third parties.


                                       9
<PAGE>

         The Company has focused its efforts on developing  lower cost carbon-13
separation  methods and the production of high chemical purity silicon-28 silane
and epitaxial wafers made from that silane. To date this work has been performed
for the Company on a sub-contract  basis.  To the maximum extent  possible,  the
Company attempts to retain ownership of any intellectual property resulting from
such work.

         The  Company  is  seeking  to  enter  into  formal  joint   development
agreements with a number of semiconductor  industry participants in the areas of
silicon wafer  manufacture and various  potential  applications for isotopically
engineered silicon.

Patents and Proprietary Rights

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

         The  Company  currently  has no  patents  and has not filed any  patent
applications.   The  Company  has  rights  to  several  isotopically  engineered
innovations  regarding electronic and optical materials which it believes may be
patentable. Ongoing work in the area of isotope separation by chemical means may
also lead to patentable inventions.

         To date,  the  Company  has not been  notified  of any  claim  that the
Company's products infringe the proprietary  rights of third parties,  but there
can be no  assurance  that  third  parties  will not claim  infringement  by the
Company with  respect to current or future  products.  Any such claims,  with or
without  merit,  could be  time-consuming,  result in costly  litigation,  cause
product  shipment  delays or  require  the  Company  to enter  into  royalty  or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms  acceptable  to the Company or at all,  which could have a
material  adverse  effect upon the Company's  business,  financial  condition or
results of operations.

Competition

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

         DZ. At present, the Company is the leading producer of DZ, but believes
that other entities or persons may begin producing DZ in substantial quantities.
Several such possible producers have adequate technical and financial  resources
to become viable  competitors of the Company in the near future.  In particular,
Siemens  has  indicated  that  it  has  a  relationship   with   Ultracentrifuge
Netherlands  ("UCN") and GE has indicated that it may establish a second Russian
source to compete with the Company for GE purchases.  UCN also competes with the
Company in the markets for medical target isotopes.

         SILCs and DBT  materials.  The Company has several  larger and numerous
smaller  competitors  in the  markets  for the SILC  products  that the  Company
currently  supplies,  and will have  additional  competitors if it offers breath
test  diagnostic  products  and  additional  SILCs in the  future.  Two of these
companies, Cambridge Isotope Laboratories Inc., and Isotec, Inc., have their own
isotope  separation  capability,  while  all of  the  competitors  produce  some
combination of SILCs and DBT substrates. Two companies in the U.S. have received
FDA approval for a carbon-13 UBT. Several  companies in Europe are also pursuing
regulatory  approval.  The Company's principal current competitors and potential
competitors  also  include  MassTrace,   euriso-top,   Aldrich  Chemicals,  Icon
Services, 


                                       10
<PAGE>

Omicron, C/D/N Isotopes and Martek Biosciences. The Company has in the past, and
may in the future, sell products to or purchase products from these companies.

         Electronics  and  Optical  Materials.  Due to the  early  stage  of the
electronic and optical materials  opportunities,  the Company has not identified
material  competitors  in these markets.  However,  given the potential size and
importance  of  these  new  potential  markets,  the  Company  anticipates  that
substantial competition will emerge if these markets develop.

         Many of the areas in which the  Company is or  intends  to compete  are
rapidly  evolving.  There can be no  assurance  that an  existing  or  potential
competitor  has already  developed,  or may  develop,  a  patentable  product or
process  which will  substantially  prevent the Company  from  competing  in its
intended markets.

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

Manufacturing and Supply

         Consistent   with  the   Company's   strategy   to   minimize   capital
expenditures,  the Company obtains stable isotopes  through a multi-year  supply
agreement  and,  to a lesser  extent,  from time to time from a variety of other
Russian  stable  isotope  sources  and  may  invest  in  Company-owned   isotope
production  facilities  in the future upon  determining  the optimum  production
technology.  Currently,  the Company obtains substantially all its isotopes from
Russia and the Republic of Georgia (which was part of the former Soviet Union).

         The production of DZ is an  international  activity  involving  several
distinct  steps  which  require up to nine  months for the  complete  production
cycle.  First the feed  material,  high purity  diethylzinc,  is procured from a
chemical plant in the United States and shipped by freighter to St.  Petersburg,
Russia.  There it is transported  by truck or train to the gas centrifuge  plant
where it is depleted  of the zinc-64  isotope  and  converted  to depleted  zinc
oxide.  The oxide  form of DZ,  which is  acceptable  for air  freight,  is then
shipped  to  Interpro  in the  United  States,  where  additional  chemical  and
mechanical  operations  are  performed  to prepare the powder for use in nuclear
plants either as pellets or as a very fine grained powder.  If the final product
form is pellets,  further processing is performed in Ireland, but the Company is
pursuing  development  of the  technology  to perform  this  manufacturing  step
in-house in the future.

         The Company has entered into the Supply  Agreement dated July 1996 with
Techsnabexport and an isotope enrichment plant located in Russia, which is owned
by the Ministry of Atomic Energy of the Russian Federation, which is part of the
cabinet of the  government  of the  Russian  Federation.  The term of the Supply
Agreement is through 2001. Under the Supply Agreement, the plant will produce DZ
and other  stable  isotopes for the Company, will  allocate  its stable  isotope
production capacity to the Company and will produce other isotopes to respond to
marketplace  demand on the Company for other stable  isotopes.  Under the Supply
Agreement,  the specific  terms for each year's  production,  including  pricing
terms,  are negotiated  between the parties by November 1 of the preceding year.
The agreement  provides,  among other things, that the plant will not sell DZ to
third  parties  located in North America or to other parties for resale in North
America,  that as  long as the  plant  is  able  to  meet  all of the  Company's
requirements  for DZ at prices  competitive  with other potential  suppliers the
Company  will  not  buy DZ from  other  third  parties  located  in the  Russian
Federation, and that disputes arising thereunder will be resolved by arbitration
conducted  in Sweden under the  arbitration  rules of the  Stockholm  Chamber of
Commerce.  The  enforceability  of the agreement might be subject to the greater
degree of uncertainty than if the agreement was with a U.S. company and disputes
were  resolved  in the U.S.  The  supply of stable  isotopes  could be  directly
affected by political,  economic and military conditions in Russia. Accordingly,
the  operations  of the  Company  could  be  materially  adversely  affected  if
hostilities  involving  Russia  should occur,  if trade  between  Russia and the
United States were  interrupted  or curtailed,  or if the Company should fail to
obtain and maintain all necessary governmental  approvals.  Operations in Russia
entail certain other risks, including,  among others, supply disruptions as well
as  introduction  of tariffs and  fluctuations  in freight  rates.  See "Item 6.
Management's  Discussion  and  Analysis or Plan of  Operation - Factors That May
Affect  Future  Operating  Results  -  Operations  in  Russia."  There can be no
assurance that the Company's  relationship  with its processor in Russia will be
successfully  maintained.  Disruption or  termination  of the  Company's  supply
sources could delay  shipments by the Company and could have a material  adverse
effect on the


                                       11
<PAGE>

Company's business,  financial condition and results of operations.  The Company
does not  presently  maintain  political  risk  insurance  but will evaluate the
desirability and availability of such insurance in the future.

         The plant with which the Company has the agreement  described  above is
one of four  similar  plants  which were  designed  to address  the needs of the
former Soviet Union and certain other  countries' needs for low enriched uranium
for  commercial  nuclear  power plant fuel and for highly  enriched  uranium for
military purposes.  Following the nuclear accident at Chernobyl,  certain of the
Russian  nuclear  power  plants  have been shut down,  reducing  demand on these
enrichment  plants.  In addition,  in recent years the demand on these plants to
produce  products for military  purposes  has  declined.  In part in response to
these  trends,  the plant has  converted a portion of its capacity to processing
stable  isotopes,  and the Company  believes that  additional  capacity could be
converted if the plant decided to do so. The Company believes that the plant has
the  potential  capacity  to meet all of the  Company's  foreseeable  needs  for
processing  of stable  isotopes.  The Company  believes  that one or more of the
other  similar  enrichment  plants  may  convert  part  of its  capacity  to the
production of stable isotopes should market demand grow  substantially.  Certain
other  facilities  elsewhere  in the  world,  including  the Oak Ridge  National
Laboratory in Oak Ridge, Tennessee,  and certain private and pseudo-governmental
organizations in Great Britain,  Germany, The Netherlands and South Africa, have
the potential to produce stable isotopes and, in certain cases, actually produce
isotopes.

         Recognizing  the  need to have  more  control  over the  production  of
Isonics'  isotopes,  the Company  announced  plans for a joint  venture with the
Institute of Stable Isotopes in the Republic of Georgia - the pre-eminent center
for the  separation  of light  isotopes  on the FSU.  This  agreement  calls for
investment by both parties to increase carbon-13 production at the Institute and
provides  for  exclusive  sales of all  carbon-13  production  to  Isonics.  The
agreement further grants rights to Isonics to employ the Institute's  separation
technology at new production  facilities  anywhere in the world. The two parties
have also agreed to cooperate on the  development  projects  which would include
new  isotope  production  technologies  as well as new  applications  of isotope
products.

         To increase  capacity and to  geographically  diversify  the  Company's
production  of certain  isotopes,  the  Company is  considering  constructing  a
facility  outside of Russia.  The Company believes that owning this facility may
improve  its  profitability  and will  improve the  security of its supply.  The
Company intends to conduct a feasibility study to evaluate the nature and timing
of such a facility.  The nature and timing of any such  construction will depend
on several  factors,  including the results of the study.  If such a facility is
constructed,  it is likely that the facility would be located in Europe or North
America.

         The Company depends upon a single processor, located in Russia, for one
process  involved  in the  manufacturing  of its  products,  and  upon a  single
supplier or a limited  number of  suppliers  and  processors  for certain  other
manufacturing processes.  Although the Company does have written agreements with
certain of its suppliers and  processors,  the Company does not have any written
agreements with other suppliers and processors.  The Company seeks to reduce its
dependence on its sole and limited  suppliers,  but disruption or termination of
any of the  sources  could  occur,  and such  disruptions  could have at least a
temporary material adverse affect on the Company's business, financial condition
and results of operations. Moreover, a prolonged inability to obtain alternative
sources for processing could materially adversely affect the Company's relations
with its customers.

Government Regulation

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

         FDA Regulation


                                       12
<PAGE>

         The Company's testing, manufacture, marketing, distribution, export and
sale of diagnostic products,  such as any DBT it might in the future develop and
seek to sell, are subject to extensive and rigorous  regulation by United States
and other  countries  in which the  Company may choose to test,  manufacture  or
market its proposed  diagnostic  products.  As of the date of this  10-KSB,  the
Company has not determined those countries,  other than the United States, where
it might seek  regulatory  approvals to market any such products it may develop.
The products the Company intends to develop are subject to rigorous  preclinical
and  clinical  testing  and  other  FDA  approval   requirements,   and  similar
requirements in most other countries.

         The process for obtaining the required  regulatory  approvals  from the
FDA and other regulatory authorities takes many years and can be expensive.  The
Company has limited  experience in conducting and managing the  preclinical  and
clinical testing necessary to obtain regulatory approvals and expects to rely on
experienced outside experts to assist as well as develop its own resources.  The
various  diagnostic  products of which the Company is contemplating  development
are subject to different regulations and other requirements.  Various components
of the DBT and other products proposed for development are regulated as drugs or
medical  devices under the Federal Food,  Drug,  and Cosmetic Act ("FDCA").  The
applicable FDA requirements for approval may be different for different types or
components of products.

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

         The  Company  or the FDA may  suspend  clinical  trials  or  commercial
distribution at any time if either  determines that the subjects or patients are
being  exposed to an  unacceptable  health  risk  related to the  manufacturing,
testing and use of the Company's investigational or approved products, or if the
FDA determines that the Company has violated applicable laws or regulations.  If
clinical  studies  are  suspended,   the  Company  may  be  unable  to  continue
development of the  investigational  products affected.  Violation of applicable
laws and  regulations,  particularly  those dealing with medical  products,  can
result in the  imposition of substantial  penalties  against the Company and its
employees and officers, such as product seizures,  recalls,  fines,  injunctions
and  withdrawal  or  suspensions  of approvals to test,  manufacture,  export or
market  products.  Delays and costs in obtaining or reinstating  these approvals
and the subsequent  compliance  with  applicable  federal and state statutes and
regulations,  and any penalties  imposed for their  violation,  could  adversely
affect the Company's ability to commercialize products.

         Diagnostic Medical Device Products

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

         The  Company  cannot  proceed  with  sales of such  products  for human
clinical  use until it receives  notification  from the FDA that FDA agrees with
the Company's assertion of substantial equivalence,  a process that can take six
to eighteen  months,  or longer.  In the event that the FDA requests  additional
information for the Pre-Market  Notification,  there could be multiple cycles of
submissions,  each involving an additional  waiting  period,  until clearance is
obtained.  The FDA also has  statutory  authority  to require  clinical or other
study data to support a Pre-Market Notification 510(k).

         Where  there is no existing  legally  marketed  product  "substantially
equivalent"  to the  Company's  product,  the  Company  will be required to seek
marketing  approval  of  its  product  by  the  second  procedure.  This  second
procedure,  a Pre-Market Approval ("PMA") application,  involves a lengthier and
more burdensome procedure,


                                       13
<PAGE>

which would likely require clinical studies. Together with the FDA review of the
PMA, this application process may take 3-5 years before commercial marketing can
occur, if the PMA is approved. There can be no assurance that any future product
the Company develops which is the subject to FDA review will be found to have an
intended use and characteristics  that would qualify the new test for commercial
distribution for clinical use under 510(k) Pre-Market  Notification.  Thus, PMAs
may be required for some or all of the Company's future proposed products.

         The FDA invariably requires clinical data before approving either a PMA
or a 510(k). The FDA is empowered to grant a 510(k) clearance without supporting
clinical  data.  If clinical  studies are necessary for either a PMA approval or
510(k) clearance,  the FDA may require the Company to obtain an  investigational
device  exemption  ("IDE").  An  IDE  normally  restricts  the  transfer  of  an
investigational device to a limited number of institutions, and use to a limited
number of  investigators.  Before the approval and/or clearance is issued,  such
institution or investigators may receive the Company's  investigational  devices
only for the purpose of performing the clinical studies that are to be submitted
to the FDA in support of a 510(k) or a PMA application.

         The Company believes that DBT instruments,  if any, that it may develop
in  the  future  will  be  eligible  for  marketing  under  a  510(k)  Premarket
Notification,  if cleared by FDA, but that the substrate would require  approval
of a New Drug  Application  as described in the following  section.  The Company
believes that  clinical  studies would be required to obtain FDA approval of the
510(k)/NDA  the DBT  instrument/substrate,  and  would be  conducted  under  IDE
approved by FDA.  There can be no assurances  that FDA will allow the Company to
conduct  such  clinical  studies  or that such  studies  will  provide  the data
necessary to obtain the approval of the  510(k)/NDA for any DBT or other product
that the Company may  develop,  or that FDA will in fact  provide the  necessary
approval of the 510(k)/NDA in a timely manner, if at all.

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

         Drug Products

         Certain   products  that  may  be  developed  by  the  Company  may  be
classified,  depending on their  characteristics,  as drugs  regulated under the
FDCA.  Development  of a drug product for use in humans is a multistep  process.
First,  laboratory  and  animal  testing  establishes  reasonable  safety of the
experimental  product for testing in humans and suggests potential efficacy with
respect to a given disease.  Once the general  investigative  plan and protocols
for  specific  human  studies  are  developed,   an  investigational   new  drug
application  ("IND") is submitted to the FDA. Under FDA regulations,  the Agency
does  not  approve  an  IND.   Rather,   assuming   compliance  with  applicable
requirements,  the IND becomes effective, thus allowing a clinical investigation
to commence  unless FDA notifies  the sponsor to the contrary  within 30 days of
receipt of the IND. That approval may come within 30 days of IND  submission but
may involve substantial delays if the FDA requests additional information before
approving any clinical testing.

         The  initial  phase of clinical  testing  (Phase 1) is  conducted  on a
relatively   small   number  of  subjects   (e.g.,   20-50)  to   evaluate   the
pharmacological  actions and side effects of the experimental  product in humans
and,  if  possible,  to gain early  evidence of  effectiveness.  Phase 1 studies
evaluate various routes,  dosages and schedules of product  administration.  The
demonstration  of  diagnostic  performance  is not required in order to complete
such studies  successfully.  If acceptable product safety is demonstrated,  then
Phase 2 studies may be  initiated.  The Phase 2 studies are designed to evaluate
the  effectiveness  of the  product in the  diagnosis  of a given  disease  and,
typically,  are  well-controlled,  closely  monitored  studies  on a  relatively
moderate number of patients  (e.g.,  50-200).  The optimal  routes,  dosages and
schedules of administration, and other matters, are determined in these studies.
If Phase 2 trials are successfully completed, Phase 3 trials will be commenced.

         Phase 3  trials  are the  larger  controlled  trials  and  uncontrolled
studies,  often  involving  hundreds  of  patients  (400-500  or more)  that are
intended to gather  additional  information  about safety and  effectiveness  in
order to


                                       14
<PAGE>

demonstrate the overall  risk/benefit  relationship of the experimental  product
and to provide an adequate basis for labeling and marketing approval.  It is not
possible  to  estimate  the  time in  which  Phase  1, 2 and 3  studies  will be
completed with respect to a given product,  although the time period required is
often four to ten years in duration,  depending on the clinical protocol design,
endpoints and FDA requirements.

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

         cGMPs and Other Controls

         The FDA also has  extensive  regulations  concerning  manufacturing  of
regulated  products in  accordance  with  current good  manufacturing  practices
("cGMPs").  The Company's  compliance  with cGMPs,  including  compliance of its
third-party  manufacturers,  and its ability to ensure the  potency,  purity and
quality of the drugs and medical devices manufactured, must be documented in the
NDAs,  510(k)s and PMAs submitted for the products.  Continued  compliance  with
cGMPs is required to continue to market both drugs and medial  devices once they
are approved.  Failure to comply with the cGMP  regulations or other  applicable
legal requirements can lead to federal seizure of violating products, injunctive
relief  actions  brought  by  the  federal  government  and  potential  criminal
investigation  and prosecution of the Company and its officers and employees who
are responsible for the activities that lead to the violations.

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

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

         Export and Environmental Controls

         Certain of the Company's  products and technology,  particularly  those
having potential nuclear energy or military applications, such as DZ and related
technology,  are subject to  stringent  controls  over their  manufacture,  use,
distribution,  dissemination  and export.  In many cases,  such  activities  may
require  approvals  or licenses  from  various  U.S.  and  foreign  governmental
agencies,  and compliance with substantial  regulatory controls.  Such approvals
can be difficult to obtain and maintain and may not be  obtainable  from certain
countries.  Furthermore,  such  approvals  or  licenses  may  be  restricted  or
terminated  because of changes in laws,  regulations,  policies  governing those
approvals  and  licenses,  or changes in the  political or other  matters in the
countries  granting such  approvals or licenses to which the Company's  products
and  technology  would be  exported.  Likewise,  certain  current and  potential
operations  of  the  Company  may  necessitate   submitting   registrations   or
notifications  to  federal  and state  regulatory  authorities  responsible  for
environmental and related matters,  including the U.S. Environmental  Protection
Agency ("EPA") and complying with stringent controls  pertaining to the handling
and  distribution  of the Company's  products and  operations,  including  under
certain  conditions  obtaining  governmental  approvals and licenses,  either of
which may be  subject to  significant  restrictions.  Violation  of any of these
regulatory controls may subject the Company to significant  administrative civil
and criminal  penalties,  including  loss of its approvals and licenses,  or the
imposition of additional restrictions on the Company's operations.  There can be
no assurances that the Company will be able to obtain and maintain the approvals
or licenses  necessary to successfully  market its 


                                       15
<PAGE>

products and technology,  or that it will be able to comply with applicable laws
and  regulations.  Any such failure to obtain such licenses or approvals,  where
required, and comply with such laws and regulations may materially and adversely
affect the  business,  financial  condition  and  results of  operations  of the
Company.

         Regulation of Non-Medical Chemical Products

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

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

         The shipments received at the Company's Columbia, Maryland facility are
subject to federal and Maryland  regulations  pertaining to hazardous  chemicals
and  hazardous  waste  disposal.  These  shipments  are stored in an area of the
facility designated for such materials.  Currently,  the Company is considered a
small quantity  generator of hazardous waste and will rely on certified  haulers
to dispose of its minimal amounts of hazardous waste. The Company believes it is
in  compliance  in all  material  respects  with  applicable  federal  and state
environmental  regulatory  requirements.  Should the levels of  hazardous  waste
increase as its inventory and handling  operations  increase in volume,  then it
would have to comply with Environmental  Protection Agency ("EPA")  requirements
and  obtain  an EPA ID  number,  which  are  costly  and  require  an  increased
investment of personnel and money. The Company has no experience in this area of
compliance  and would have to rely on  outside  consultants  or hire  additional
employees with pertinent experience and training.  Potentially, if substantially
larger  inventories  of hazardous  chemicals  must be maintained at the Maryland
facility,  the Company might have to move to new facilities in order to meet EPA
requirements for the storage of hazardous chemicals.

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

         The Nuclear  Regulatory  Commission  ("NRC") has  authority to regulate
importation  and  exports  of  deuterium  containing  chemicals  whose  ratio of
deuterium  atoms to hydrogen  atoms exceed  1:5000.  At present,  the  deuterium
containing  compounds  which the  Company  imports do not  require  any  special
licenses or importation  authorization.  There can be no assurances that the NRC
will continue these policies.  The NRC regulates exports of deuterium containing
chemicals  under  general  license.  The Company  will not be able to ship these
chemicals  to  certain  countries  which  require  a  special  license  for such
shipments;  none of these countries  represent  significant  current or expected
future markets for the Company. In addition, certain technology or products that
the Company is or may in the future develop,  may be subject to other government
controls pertaining to armaments,  including the need to obtain special licenses
for exports.  The  imposition of such controls may impair the ability to broadly
market such products.

Product Liability and Insurance

         The Company's business exposes it to potentially  substantial  product,
environmental,  occupational  and other  liability  risks which are  inherent in
product research and development,  manufacturing, marketing distribution and use
of its products and operations,  including, but not limited to, products used in
nuclear power plants and medical device products. The Company currently does not
have product liability  insurance,  but may seek such insurance before it begins
commercial  distribution of medical or other products that it may develop. There
can be no  assurance  that  adequate or  necessary  insurance  coverage  will be
available at an acceptable  cost, if at all, or that even


                                       16
<PAGE>

if such insurance were  obtained,  a product  liability or other claim would not
materially  and  adversely  affect the  business or  financial  condition of the
Company.

         The terms of the Company's  agreements with its customers  provide that
liability to nuclear power plant utilities is limited to the Company's  standard
warranty to replace  non-conforming  product,  and liability  for  consequential
damages  caused by the  improper  use of the  Company's  products  is limited by
contractual terms. Nevertheless, one or more third parties could bring an action
against  the  Company  based on product  liability,  breach of warranty or other
claims, and, there can be no assurance that the foregoing contract clauses would
effectively limit the Company's liability in any such actions.

Employees

         As of April 30, 1998, the Company had 38 full-time employees, of whom 9
have Ph.D.s and 7 others have  advanced  degrees in chemistry,  engineering  and
related  fields.  Approximately 7 employees are involved in research and product
development, 23 in manufacturing and sourcing, and 8 in business development and
administration,  but such employees'  responsibilities  may also encompass areas
other than their  primary  area of  responsibility.  The Company  considers  its
relations  with its employees to be good.  None of the  Company's  employees are
covered by a collective bargaining agreement.

                                                    MANAGEMENT

Directors and Executive Officers
<TABLE>
         The  members  of the Board of  Directors  ("Board")  and the  executive
officers of the Company are as follows:
<CAPTION>
                        Name              Age                               Position
         ------------------------------  -----  ------------------------------------------------------------
<S>      <C>                               <C>  <C>
         James E. Alexander                49   President, Chief Executive Officer and Chairman of the Board
         Boris Rubizhevsky                 47   Senior Vice President, Vice Chairman and Director
         Daniel J. Grady                   44   Vice President, Medical, Research & Diagnostics
         Paul J. Catuna                    34   Vice President, Finance, Chief Financial Officer, Secretary
         Lindsay A. Gardner (1)(2)         45   Director
         Larry J. Wells (1)(2)             52   Director
<FN>
         ----------
         (1)   Member of the Compensation Committee.
         (2)   Member of the Audit Committee.
</FN>
</TABLE>

         Each of the  director  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.

         Mr.  Alexander  is a  founder  of the  Company  and has  served  as its
President,  Chief Executive  Officer and a director since its inception.  He has
worked  full-time for the Company since January 1994. From June 1972 to December
1993,  he worked in a variety  of  technology  positions  at GE in the  aircraft
engine and nuclear  power  businesses,  where his last  position  was 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.

         Mr.  Rubizhevsky is a founder of the Company and has been a Senior Vice
President and a director of the Company since inception and became Vice Chairman
in March 1997.  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 GE as Business  Development Manager in various  international  locations.  He
received  his  bachelors  degree  in  Engineering  from  Stevens   Institute  of
Technology.

         Dr. Grady  joined the Company as Vice  President,  Medical,  Research &
Diagnostics in 1995. From March 1994 through  September 1995, Dr. Grady was Vice
President of Research and Development at Sopha Medical Systems.  From April 1991
until March 1994, he served as Marketing  Manager,  Nuclear  Energy for GE. From
May 1998 through  March 1991,  Dr. Grady  served as Software  Engineer  Manager,
Nuclear  Medicine for GE in England.  From  October  1984  through May 1988,  he
served as Clinical  Applications  Manager for GE Nuclear Medicine.  Between June
1981 and October 1984, he served as Engineering  Analysis  Section Head for TRW.
Dr. Grady  received  his  bachelors  and masters  degree,  and Ph.D.  in Nuclear
Engineering from the University of Michigan.

         Mr.  Catuna  joined the Company July 1996 as Chief  Financial  Officer.
From  January  1994 to July 1996,  Mr.  Catuna was employed at Deloitte & Touche
LLP, an  international  accounting and consulting  firm,  where he most recently
served as an audit senior manager. From January 1988 to January 1994, Mr. Catuna
worked for Grant Thornton LLP, an international  accounting and consulting firm,
where he most  recently  served as an audit  manager.  Mr.  Catuna  received his
bachelors  degree in Business  Administration-Accounting  from California  State
University Fresno, and is a certified public accountant.

         Ms.  Gardner was elected a director of Isonics in September  1993.  She
has served from 1991  through  the  present as  President  of LG  Associates,  a
US-based management  consulting firm providing materials management expertise to
foreign company affiliates of US companies in developing  countries.  During her
tenure at LG  Associates,  she resided in Moscow,  Russia from September 1991 to
January 1994 when she moved to Beijing, China, where she currently resides. From
1977  to  1991,  Ms.  Gardner  worked  for GE in a  variety  of  management  and
functional positions including  international  marketing,  quality assurance and
materials.  Ms. Gardner received a bachelors  degree in International  Economics
from The George Washington  University Elliott School of International  Affairs,
and  earned  a  masters  in  Business  Administration  from  the  University  of
Louisville.

         Mr. Wells was elected a director of the Company in September  1996.  He
is the  founder of  Sundance  Venture  Partners,  L.P.  ("Sundance"),  a venture
capital  fund,  and is the  chairman  of the entity  that acts as the manager of
Sundance.  From 1983 to 1987,  Mr.  Wells  served as Vice  President of Citicorp
Venture  Capital and then became Senior Vice President of Inco Venture  capital.
From May 1969 to June 1983,  Mr. Wells was the founder and President of Creative
Strategies  International,  a market research  consulting  firm  specializing in
emerging markets.  Mr. Wells is a director of Identix,  Inc., Atlanta Technology
Group, Cellegy Pharmaceuticals, Gateway Data Sciences and Telegen Corporation as
well as several  privately  held  companies.  Mr. Wells  received his  bachelors
degree in Economics and earned a master's degree in Business Administration from
Stanford University.

ITEM 2.  PROPERTIES

         The   Company's   headquarters   occupies   3,000   square   feet   for
administrative   and   technical   purposes  in  San  Jose,   California   on  a
month-to-month  basis and in August 1998 will move its  headquarters  to a 4,000
square foot site located in San Jose, California.  The new lease expires in July
2003.  The  Company  leases  650  square  feet for an  administrative  office in
Columbia, Maryland that expires in December 1999.

         The Company's subsidiary,  Interpro, leases approximately 41,000 square
feet in Golden,  Colorado  that  expires in July 2000.  The facility is used for
contract   research  and  development  and  materials   processing  as  well  as
administration.

ITEM 3.  LEGAL PROCEEDINGS

         Not Applicable.

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

         During the fourth  quarter of the  fiscal  year ended  April 30,  1998,
there were no matters submitted to a vote of security holders.



                                       17
<PAGE>


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         On September 22, 1997,  the Company's  Units  (consisting  one share of
Common Stock and one Class A Redeemable Warrant) started trading on the Over The
Counter (OTC) Electronic Bulletin Board under the symbol ISONU. In October 1997,
the  Company  unbundled  the Units and the Common  Stock and Class A  Redeemable



                                       18
<PAGE>

Warrants  commenced  trading  on the OTC  Electronic  Bulletin  Board  under the
symbols ISON and ISONW, respectively.
<TABLE>
         The following  table sets forth the high and low bid prices for each of
the  Unit,  the  Common  Stock and the Class A  Redeemable  Warrant  (quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions) from September 22, 1997 through April 30,
1998 as reported by OTC Electronic Bulletin Board.
<CAPTION>
                                                               Quarter Ended
                                             ------------------------------------------------
                                             Oct. 31, 1997     Jan. 31, 1998    Apr. 30, 1998
                                             -------------     -------------    -------------
<S>                                             <C>                <C>          <C>
Units (ISONU)
   High                                         10                   -              -
   Low                                           6 3/8               -              -

Common Stock (ISON)
   High                                          8 3/8             5 5/8        3
   Low                                           5 1/2               1/4        1 13/16

Class A Redeemable Warrants (ISONW)
   High                                          2 3/4             2 1/4          11/16
   Low                                           1 3/8              .01            1/8
</TABLE>
         As of July 27, 1998 there were 148  holders of record of the  Company's
Common Stock.

         The  Company has never  declared or paid a cash  dividend on its common
stock. The Company  presently intends to retain its earnings to fund development
and growth of its business and,  therefore,  does not anticipate paying any cash
dividends in the foreseeable future. Additionally, a financing agreement between
the Company  and a lender  contains a covenant  prohibiting  the payment of cash
dividends without prior lender approval.

         In July 1997 the Company  issued  warrants to purchase an  aggregate of
450,000 shares of its Common Stock to investors in connection with the amendment
to loans by such  investors.  Such  issuance of warrants was made in reliance on
Section 4(2) of the Securities Act. The purchasers were sophisticated  investors
who  represented  to the  Registrant  that the warrants were being  acquired for
investment.

         Between  April 30, 1997 and  September  22, 1997,  the Company  granted
options under the Company's  stock option plans and warrants to purchase a total
of 141,000 shares of Common Stock at an exercise price of $3.50 per share,  to a
limited number of employees and advisory board members. In addition, the Company
granted stock options  outside of the Company's stock option plans to purchase a
total of  120,000  shares of Common  Stock,  at an  exercise  price of $6.38 per
share, to an employee. No consideration was paid to the Company by any recipient
of any of the foregoing  options or warrants for the grant of any such option or
warrant.  During such period,  no shares of Common Stock were issued pursuant to
the  exercise  of options or  warrants.  Such  grants  were made in  reliance on
Section 4(2) of and Rule 701 under the Securities Act.

         Between  September  23, 1997 and April 30,  1998,  the Company  granted
options  under the  Company's  stock  option  plans to purchase a total  177,500
shares of Common Stock at exercise prices ranging from $2.00 to $2.88 per share,
to employees.  No consideration  was paid to the Company by any recipient of any
of the foregoing  options for the grant of any such option.  During such period,
no shares of Common Stock were issued pursuant to the exercise of options.  Such
grants  were made in reliance on Section  4(2) of the  Securities  Act and/or an
exemption was not necessary in that the options were granted in transactions not
involving  a "sale" of  securities  as such term is used in Section  2(3) of the
Securities Act.

         On May 15, 1998,  the Company issued 353,982 shares of its Common Stock
to Metallurgy International,  Inc., a Nevada corporation, in exchange for all of
the outstanding capital stock of International Process Research  Corporation,  a
Colorado  corporation.  For accounting  purposes the transaction was recorded on
April 30, 1998, the effective date of the  acquisition.  One-half of such shares
are being held in the name of an escrow agent pursuant to the terms of the stock
purchase agreement.  The shares were issued in reliance upon Section 4(2) of the
Securities Act.


                                       19
<PAGE>

Use of Proceeds

         On September  22, 1997,  the Company's  Registration  Statement on Form
SB-2 (File no. 333-13289) was declared  effective by the Securities and Exchange
Commission.  The  managing  underwriter  for  the  offering  was  Monroe  Parker
Securities,  Inc. The Registration Statement, as amended,  covered 800,000 Units
plus an additional 120,000 Units that the underwriter had the option to purchase
solely to cover  over-allotments,  if any.  Each Unit  consisted of one share of
Common Stock,  no par value per share,  and one Redeemable  Class A Common Stock
Purchase Warrant.  The offering  commenced on September 23, 1997 and the sale to
the public of 800,000  Units at $5.90 per Unit was  completed on  September  25,
1997 for an  aggregate  price of $4.72  million.  On  September  25,  1997,  the
underwriter partially exercised their over-allotment option and purchased 10,000
additional  Units.  As a  result,  a total of  810,000  Units  were  sold in the
offering at an aggregate price of approximately $4.779 million. All of the Units
sold in the offering were sold by the Company.  The offering  terminated without
any further Units being sold.

         Expenses  incurred by the Company in  connection  with the issuance and
distribution of the Units in the offering  included (i) underwriting  discounts,
commissions and allowances and (ii) other expenses,  of  approximately  $632,000
and $695,000,  respectively.  Total offering  expenses of  approximately  $1.327
million resulted in net offering proceeds to the Company of approximately $3.452
million. No expenses were paid directly or indirectly to directors,  officers or
affiliates of the Company or 10% owners of any class of equity securities of the
Company.  Of the net offering  proceeds to the Company of  approximately  $3.452
million,  through April 30, 1998,  approximately $1.482 million had been used to
repay debt,  approximately  $74,000 had been used to fund capital  expenditures,
approximately  $121,000 had been used to further develop  technology  associated
with the  diagnostic  breath test market,  $133,000 had been used to develop and
test  isotopically  pure  silicon,  $42,000  had been  used for  enhancement  of
internal research and development  capabilities and  approximately  $561,000 had
been used for general  corporate  purposes.  No payments  were made  directly or
indirectly to directors,  officers or affiliates of the Company or 10% owners of
any class of equity securities of the Company.  Approximately  $1.039 million of
the net offering proceeds remain as working capital.

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

Overview

         Founded in 1992,  Isonics  Corporation  is an  advanced  materials  and
technology company which develops and commercializes  products based on enriched
stable  isotopes.  Stable  isotopes are ultra-ultra  pure  materials.  This high
degree of purification  accomplished on the sub-atomic  level provides  enhanced
performance properties compared to normal purity materials. Stable isotopes have
commercial  uses  in  several  areas,  including  energy;   medical,   research,
diagnostics   and   drug   development;   product   tagging   and   stewardship;
semiconductors;  and optical materials.  Isonics has successfully  developed and
commercialized  two stable isotope products and intends to promote the emergence
and growth of new stable isotope applications.

         Isonics core business is production and supply of depleted zinc (DZ), a
non-radioactive  stable isotope, to the energy industry. In fiscal 1996, Isonics
expanded its business scope to include  development of  isotopically  engineered
materials  for the  medical  research,  medical  diagnostic,  and  semiconductor
industries.  In June 1997 Isonics produced the world's first  isotopically  pure
silicon  epitaxial wafer suitable for  semiconductor  fabrication.  In July 1997
Isonics  exercised an option for an exclusive license for two U.S. patents owned
by Yale  University  concerning  isotopically  pure  silicon and a wide range of
other semiconductor  materials.  The Company is currently  evaluating  potential
applications  for  isotopically  pure  silicon  in  collaboration  with  certain
industrial   and   university   partners  and  is  developing   strategies   for
commercialization.   Isonics  is  supplying  stable  isotope  labeled  compounds
("SILCs"),  mainly  enriched  carbon for  pharmaceutical  research  and  medical
diagnostic test  development.  The Company is developing  advanced,  lower cost,
production  technology for enriched carbon which the Company believes will allow
it to become the cost leader in the  potentially  large  enriched  carbon market
supporting a new class of minimally  invasive  diagnostic  tests which are being
developed by others.  The Company  believes  that a  substantial  portion of its
revenues  in the future will  depend on its  success in  developing  and selling
products in the semiconductor and SILC markets.

         In September 1997,  Isonics completed its initial public offering.  The
proceeds of this  offering  will allow the  Company to continue  its silicon and
carbon  development  efforts,  to selective add key  technical  personnel and to


                                       20
<PAGE>

perform   engineering   studies  prior  to  adopting  a  plan  to  increase  and
geographically  diversify  manufacturing  capacity  necessary to support planned
sales growth.

         Effective April 30, 1998, the Company  acquired  International  Process
Research  Corporation  ("Interpro") located in Golden,  Colorado.  Interpro is a
contract  research and  development and materials  processing  company which has
been  performing  key steps in  Isonics'  DZ  manufacturing  process and jointly
developing new, lower-cost technologies to better meet customer needs.

         Historically,  substantially  all of the  Company's net revenues in any
particular  period have been  attributable  to a limited number of customers and
sales of DZ.  Before the  acquisition  of Interpro,  the Company  operated  with
little backlog and a significant portion of the Company's total revenues to date
have been derived from a limited number of DZ orders in any particular  quarter.
Consistent with the Company's  historical  experience,  the Company's  quarterly
results  are  expected  to be  materially  affected  by the size and  timing and
quantity of DZ orders, and products shipments received from significant DZ users
during such quarter;  however with the acquisition of Interpro such fluctuations
should be reduced.  However;  a lost or delayed DZ sale could have a significant
impact on the  Company's  operating  results for a particular  period,  and such
fluctuations  could  materially  and adversely  affect the  Company's  business,
financial condition and results of operations. The Company expects that with the
acquisition of Interpro and the continued increase of depleted zinc sales to end
users and  commercialization  of electronic material products,  concentration of
net revenues from a limited number of customers will be reduced.

Results of Operations

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

                                                               Year Ended
                                                                April 30,
                                                            -----------------
                                                             1997       1998
                                                            ------     ------

Net revenues                                                 100.0%     100.0%
Cost of revenues                                              79.7       68.7
                                                            ------     ------
       Gross margin                                           20.3       31.3
Operating expenses:
    Selling, general and administrative                       26.1       19.8
    Research and development                                  14.4       12.0
                                                            ------     ------
Total operating expenses                                      40.5       31.8
                                                            ------     ------
Operating income (loss)                                      (20.2)      (0.5)
Other expense, net                                            (8.7)      (2.1)
                                                            ------     ------
Income (loss) before extraordinary item and income taxes     (28.9)      (2.6)
Income tax (expense) benefit                                  (1.1)       4.6
                                                            ------     ------
Income (loss) before extraordinary item                      (30.0)       2.0
Extraordinary item - loss on extinguishment of debt            -         (3.7)
                                                            ------     ------
Net income (loss)                                            (30.0)%     (1.7)%
                                                            ======     ======

Net Revenues

         Net Revenues.  Net revenues increased from $4.54 million in fiscal 1997
to $6.78  million in fiscal  1998,  an increase of $2.24  million or 49.4%.  The
increase is due primarily due to increased demand for DZ and SILC products.  Net
revenues from DZ increased by approximately $2.0 million on increased unit sales
of  approximately  37%.  Average  unit  sales  prices for DZ also  increased  in
comparison to the previous  year. The increase in net revenues and averages unit
sales  prices is due to an  increased  demand for  depleted  zinc in the nuclear
industry  as well as the  Company's  continued  sales  growth to end users.  Net
revenues for SILCs were  approximately $1.1 million an increase of approximately
$500,000 or 81% during fiscal 1997. The revenue  growth  reflects the increasing
demand for SILCs, specifically enriched carbon products;  however, the Company's
revenue  from  SILCs is  limited  by the  available  supply of  enriched  carbon
products.  The Company has and intends to continue to develop relationships with
potential  producers  of SILCs,  such as the  Institute  of Stable  Isotopes  in
Tblisi, Georgia, to meet the growing demand for its SILC products.

         International  sales  represented less than 10% of net revenues for the
years ended April 30, 1997 and 1998.


                                       21
<PAGE>

Gross Margin

         Gross  margin is affected by the volume of product  sales,  product mix
and average selling price.  The Company's gross margin  percentage  increased to
31.3% of net revenues in fiscal 1998 from 20.3% in fiscal 1997. The  improvement
is due to increased average unit sales price of DZ, increased  proportion of net
revenues  generated  from DZ and to lesser extent  increased  gross margins from
SILCs.

Selling, General and Administrative Expenses

         Selling,  general and  administrative  expenses  increased  on a dollar
basis to  approximately  $1.34  million for fiscal  1998 from $1.18  million for
fiscal 1997,  while declining on a percentage basis to 19.8% of net revenues for
fiscal  1998 from 26.1%  during  fiscal  1997.  The dollar  increase in selling,
general and administrative expenses is primarily attributable to media relations
and  insurance  costs  associated  with  being a public  company  and  increased
administrative  personnel.  The decrease as a percentage of net revenues was due
to growth in DZ and SILC product  revenues  without the need to add  significant
additional  personnel.   The  Company  anticipates  that  selling,  general  and
administrative expenses will generally continue to increase in absolute dollars,
but may vary as a percentage of net revenues.

Research and Development Expenses

         Research  and  development  expenses  increased  on a  dollar  basis to
approximately  $811,000  for fiscal  1998 from  $655,000 in fiscal  1997,  while
declining  on a  percentage  basis to 12.0% of net  revenues in fiscal 1998 from
14.4% during fiscal 1997.  The dollar  increase  during fiscal 1998 is primarily
due to increased  staffing and consulting  costs associated with the development
of  isotopically  pure silicon  wafers;  costs to develop  advanced,  lower cost
production  technology for enriched  carbon;  and  commencement of a feasibility
study to increase isotope  production.  The decrease in research and development
expenses  as a  percentage  of net  revenues  for fiscal  1998  compared  to the
previous  fiscal year was due to revenue growth.  The Company  believes that the
development  and  introduction  of new product  applications  is critical to its
future success and expects that research and development  expenses will increase
on a dollar basis, but may vary as a percentage of net revenues.

Interest income (expense), net

         Interest expense reflects  interest and, prior to the Company's initial
public  offering,  amortization  of issuance  costs and discounts on outstanding
debt. Interest expense, net, decreased by $250,000 from $395,000 for fiscal 1997
to $145,000 for fiscal 1998.  The decrease is due to the Company's  repayment of
approximately  $1.85  million  of  outstanding  debt  during  fiscal  1998 which
resulted in reduced interest expense.

Income Taxes

         The  provision  for income  taxes was  $53,000  for fiscal 1997 and the
effective  rate of 4% was the result of  providing  a  valuation  allowance  for
deferred tax assets.  The benefit of $314,000 for fiscal 1998 and the  effective
rate of 177% relates to the  realization of deferred tax assets  associated with
the purchase of Interpro and the reduction of the related valuation allowance.

         Extraordinary Item. In accordance with the terms of certain outstanding
notes the  Company  was  required  to repay debt  totaling  $1,397,000  upon the
closing of the  Company's  initial  public  offering  in  September  1997.  Upon
repayment of the notes,  unamortized debt issuance costs and discounts  totaling
$252,000 were charged to earnings as an extraordinary item.

Liquidity and Capital Resources

         Since inception,  the Company's  principal  sources of funding has been
its cash from operations,  borrowed funds and sales of common stock. The Company
used cash in operating  activities  of  approximately  $539,000  and  $1,577,000
during  fiscal 1998 and 1997,  respectively.  Cash used by operating  activities
during fiscal 1998 was principally the result of a net loss of $115,000,  net of
adjustments for non-cash items, primarily depreciation,  amortization,  deferred
income taxes, and extraordinary loss on extinguishment of debt, and increases of
accounts  receivable,  offset in part by  decreases in  inventory.  Cash used by
operating  activities  during fiscal 1997, was


                                       22
<PAGE>

principally the result of a net loss of $1,363,000, adjusted for non-cash items,
primarily  depreciation  and  amortization,  and  increases in  inventories  and
decreases  in  accounts  payable,   offset  in  part  by  increases  in  accrued
liabilities.

         The  Company's  investing  activities  used cash of $72,000 and $10,000
during  fiscal  1998  and  1997,  respectively.  Investing  activities  were for
purchases of property and equipment.

         Financing  activities provided cash of $1,621,000 and $1,499,000 during
fiscal 1998 and 1997, respectively. Cash provided by financing activities during
fiscal 1998 resulted  primarily  from the  completion  of the Company's  initial
public stock  offering which were offset in part by the repayment of outstanding
debt. Financing activities during fiscal 1997 consisted of the issuance of notes
and common  stock which were  offset in part by debt  issuance  costs,  deferred
offering costs, and principal payments on debt.

         At April 30, 1998,  the Company had  $1,044,000 of cash  equivalents an
increase of $1,016,000 compared to $28,000 at April 30, 1997. At April 30, 1998,
the Company had $1,811,000 of working capital an increase of $2,252,000 compared
to negative  working  capital of $441,000 at April 30, 1997.  The increases were
primarily the result of the Company's initial public stock offering in September
1997.

         On July 24, 1998 the Company  obtained a $3.0 million  credit  facility
with an asset based  lender.  The proceeds of the new  facility  will be used to
repay  approximately  $346,000 debt  outstanding  at April 30, 1998. The Company
believes  that  cash  equivalents  on hand at  April  30,  1998  and  borrowings
available  under its line of credit  facility  will be  sufficient  to allow the
Company to continue its expected level of operations for the next twelve months.
There can be no assurance;  however,  that events in the future will not require
the Company to seek additional  capital sooner or, if so required,  that it will
be available on terms  acceptable  to the Company.  To the extent that cash from
the line of credit is not  sufficient  to meet the  Company's  projected  future
working capital needs, the Company's business,  financial condition,  cash flows
and results of operations may be materially and adversely affected.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

         Some  of  the  factors  that  could  cause  actual  results  to  differ
materially are set forth below.

Relationship With Certain Suppliers and Availability of Raw Materials

         The  Company  depends  upon an  isotope  enrichment  plant,  located in
Russia,  which  is  owned  by the  Ministry  of  Atomic  Energy  of the  Russian
Federation,  which  is part of the  cabinet  of the  government  of the  Russian
Federation, for one process involved in the manufacturing of depleted zinc (DZ).
The  Company  also  relies  upon a single or  limited  number of  suppliers  and
processors  for certain other  manufacturing  processes.  The Company  signed an
agreement  with the  commercial  department of the Ministry to purchase  certain
isotope separation services through 2001.  Disruption or termination of services
provided  by the  Ministry  or the  Company's  single or limited  suppliers  and
processors could have a material and adverse affect upon the Company's financial
condition and results of operations.

Operations in Russia

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


                                       23
<PAGE>

Customer Concentration

         Historically,  substantially  all of the  Company's net revenues in any
particular  period  have been  attributable  to a limited  number of  customers.
Consistent with the Company's  historical  experience,  the Company's  quarterly
results  during fiscal 1999 are expected to be affected  materially by the level
of orders  received from  significant  DZ and SILC users during such quarter and
product  shipments by the Company to DZ and SILC  customers  during such period.
The Company  expects that with the  acquisition  of Interpro  and the  continued
increase  of  depleted  zinc sales to end users as well as the  increase of SILC
revenues will reduce the  concentration of net revenues from a limited number of
customers.  Although  there can be no  assurance  that the  Company's  principal
customers  will continue to purchase  products,  a decrease in or loss of orders
from one or more major customers could have a material and adverse effect on the
Company's financial condition and results of operations.

Factors Affecting Operating Results; Variability of Orders

         Before the  acquisition of Interpro,  the Company  operated with little
backlog and a significant  portion of the Company's net revenues have been,  and
the Company  believes  will  continue to be,  derived  from a limited  number of
orders that are  processed  and shipped in the same  quarter in which the orders
are received. The timing of such orders and their fulfillment has caused, and is
likely to continue to cause,  material  fluctuations in the Company's  operating
results.  The Company's  expense levels are relatively  fixed and are based,  in
part,  on  expectations  of future net  revenues.  As has been the case in prior
quarters,  these factors will affect the Company's  operating results for future
periods.

Management of Growth

         The Company has in the past  experienced  periods of rapid  growth that
have placed a  significant  strain on the  Company's  financial  resources.  The
Company's  ability  to  manage  growth   effectively,   particularly  given  the
increasing  scope of  operations,  will require it to continue to implement  and
improve its management,  operational, and financial information systems, as well
as to develop the management  skills of its managers and to train,  motivate and
manage its employees.  The company's failure to effectively  manage growth could
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.

Dependence on Key Personnel

         The Company's  future success will depend in significant  part upon the
continued service of its key technical,  sales and senior management  personnel,
including James E. Alexander,  Isonics'  President and Chief Executive  Officer,
Boris  Rubizhevsky,  Isonics'  Senior Vice  President,  Isotope  Production  and
Supply,  and Robert Cuttriss,  President of Interpro.  The Company  maintains $1
million  of  key  man  life  insurance  on  the  lives  of  Messrs.   Alexander,
Rubizhevsky,  and Cuttriss and all are covered by employment agreements with the
Company  extending  through  2001,  2001,  and 2003,  respectively.  The Company
believes  that its future  success will depend in large part upon its ability to
attract  and retain  qualified  personnel  for its  operations.  The  failure to
attract or retain such persons could  materially  adversely affect the Company's
business, financial condition and results of operations.

Dates following December 31, 1999 and beyond (the "Year 2000 Problem")

         Many existing computer systems and applications, and other devices, use
only two digits to identify a year in the date field,  without  considering  the
impact of the  upcoming  change in the century.  Such  systems and  applications
could fail or create erroneous results unless  corrected.  The Company relies on
its internal financial systems and external systems of business enterprises such
as  customers,   suppliers,   creditors,   and  financial   organizations   both
domestically  and globally,  directly and  indirectly  for accurate  exchange of
data. The Company has evaluated such systems and believes the cost of addressing
the Year 2000 Problem,  will not have a material adverse affect on the result of
operations  of  financial  position  of the  Company.  However,  even though the
internal  systems of the  Company are not  materially  affected by the Year 2000
issue the Company could be affected  through  disruption in the operation of the
enterprises with which the Company interacts.


                                       24
<PAGE>

Volatility of Stock Price

         The trading price of the Company's  securities has been subject to wide
fluctuations in response to quarter to quarter  variations in operating results,
announcements of technological innovations or new products by the Company or its
competitors,  and other  events or factors.  In  addition,  the stock market has
experienced  wide  price  and  volume  fluctuations,  which  have at times  been
unrelated to the operating  performance  of the companies  whose  securities are
traded. These broad market fluctuations may adversely effect the market price of
the Common Stock and Warrants.

Shares Eligible for Future Sale

         The  officers and  directors of the Company and all other  stockholders
have agreed,  pursuant to lock-up  agreements,  that  without the prior  written
consent of Monroe Parker Securities,  Inc. (the Representative) and the Company,
that they will not sell or otherwise dispose of common stock  beneficially owned
by them. The Company has been advised by officials of the  Representative in the
initial public offering,  that on December 31, 1997, the  Representative  ceased
market-making activities;  therefore, the Company may, in the future at its sole
discretion, release a portion of securities subject to these lock-up agreements.

ITEM 7.  FINANCIAL STATEMENTS

         The information  required by this item is included on pages F-1 to F-18
of Part III of this Report on Form 10-KSB and is incorporated  into this part by
reference.

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

Not applicable.

                                    PART III

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

         The information required by this item is incorporated by reference from
the information under the captions "Election of Directors," "Executive Officers"
and "Section 16(a) Beneficial Ownership  Compliance"  contained in the Company's
Definitive  Proxy  Statement for Annual Meeting of Stockholders to be filed with
the Securities and Exchange Commission no later than August 28, 1998 (the "Proxy
Statement"), and in "Item 1--Business--Management" of this Form 10-KSB.

ITEM 10.  EXECUTIVE COMPENSATION

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

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

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

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

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

                                       25
<PAGE>

<TABLE>
ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

         (a)      Exhibits Pursuant to Item 601 of Regulation S-B:
<CAPTION>
 Exhibit No.                                                   Title
--------------- ---------------------------------------------------------------------------------------------------

<S>             <C>
     3.01       [Reserved]
     3.02       Registrant's Bylaws. (1)
     3.03       Registrant's Amended and Restated Articles of Incorporation. (1)
     4.01       Specimen Common Stock Certificate. (1)
     4.02       Form of Representatives' Warrant Agreement. (1)
     4.03       Form of Warrant Agreement between the Registrant and Continental Stock Transfer & Trust Company,
                Monroe Parker Securities. (1)
     4.04       Specimen Warrant Certificate. (1)
    10.01       Registrant's 1996 Stock Option Plan. (1)(2)
    10.02       Form of Employment Agreement between the Registrant and certain officers of the Registrant. (1)(2)
    10.03       Registrant's 1996 Executives Equity Incentive Plan. (1)(2)
    10.04       Registrant's 1996 Equity Incentive Plan. (1)(2)
    10.05       Memorandum of Agreement between Electrochemical Plant, AO Techsnabexport, Co., Ltd. and
                Registrant. (1)
    10.06       Option Agreement between the Registrant and Yale University. (1)
    10.07       Office Lease Agreement between Paulsen Properties and the Registrant dated as of January 1, 1996,
                as amended. (1)
    10.08       Letter from Yale University to Registrant dated February 10, 1996. (1)
    10.09       Form of Indemnity Agreement to be entered into by Registrant with each of its directors and
                investors. (1)(2)
    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 among Registrant and certain
                investors. (1)
    10.12       Employment Agreement between the Registrant and James E. Alexander. (1)(2)
    10.13       Employment Agreement between the Registrant and Boris Rubizhevsky. (1)(2)
    10.14       Security Agreement dated March 31, 1995 between the Company and Isoserve, Inc. (1)
    10.15       Consulting Agreement between the Registrant and Larry Wells Co., Inc. (1)(2)
    10.16       February 1997 Agreement between the Registrant, Electrochemical Plant and AO Techsnabexport, 
                Co., Ltd. (1)
    10.17       Letter from Yale University to Registrant dated January 28, 1997. (1)
    24.01       Power of Attorney (see page 27).
    27.01       Financial Statement Schedule.

         (b)    Reports  on Form  8-K.  No Report on Form 8-K was filed by the Company in the
                quarter ended April 30, 1998.

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

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

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

                                       26
<PAGE>


                       ISONICS CORPORATION AND SUBSIDIARY
                          Index to Financial Statements


                                                                            Page
                                                                            ----

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

Consolidated Financial Statements

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

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

     Consolidated Statement of Stockholders' Equity (Deficit)................F-5

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

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

                                      F-1

<PAGE>


               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,  1998 and 1997,  and the  related
consolidated statements of operations,  stockholders' equity (deficit), 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  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material   respects,   the  consolidated   financial  position  of  Isonics
Corporation  and Subsidiary as of April 30, 1998 and 1997, and the  consolidated
results  of its  operations  and its cash  flows for the years  then  ended,  in
conformity with generally accepted accounting principles.



San Jose, California
July 1, 1998


                                      F-2
<PAGE>

<TABLE>

                       Isonics Corporation and Subsidiary

                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share amounts)

<CAPTION>

                                                                                       April 30,
                                                                                ---------------------
                                                                                  1997          1998
                                                                                -------       -------
<S>                                                                             <C>           <C>    
                                            ASSETS

  CURRENT ASSETS:
     Cash and cash equivalents                                                  $    28       $ 1,044
     Accounts receivable (net of allowances of $0 and $130, respectively)             4         1,629
     Inventories                                                                  1,539           456
     Prepaid expenses                                                                14            45
     Deferred income taxes                                                         --             112
                                                                                -------       -------
             Total current assets                                                 1,585         3,286

  PROPERTY AND EQUIPMENT, net                                                        70         1,626
  GOODWILL (net of accumulated amortization of $157 and $236)                       315           236
  NOTES RECEIVABLE FROM SHAREHOLDERS                                                 41           170
  OTHER ASSETS                                                                       11            22
  DEFERRED OFFERING COSTS                                                           556          --
  DEBT ISSUANCE COSTS (net of accumulated amortization of $61)                      106          --
  DEFERRED INCOME TAXES                                                            --             315
                                                                                -------       -------

  TOTAL                                                                         $ 2,684       $ 5,655
                                                                                =======       =======

                          LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

  CURRENT LIABILITIES:
     Current portion of long-term debt                                          $   403       $    80
     Accounts payable                                                             1,105           657
     Accrued liabilities                                                            518           738
                                                                                -------       -------
             Total current liabilities                                            2,026         1,475

  LONG-TERM DEBT                                                                  1,268           312
  DEFERRED INCOME TAXES                                                            --             427
  COMMITMENTS                                                                      --            --

  STOCKHOLDERS' EQUITY (DEFICIT)
     Class A Preferred Stock - no par value; 10,000,000 shares authorized;
       issued and outstanding:  none                                               --            --
     Common stock -no par value; 20,000,000 shares authorized; issued and
       outstanding: 1997, 4,550,268, 1998, 5,714,250                              1,129         5,289
     Notes receivable from shareholders                                            (343)         (337)
     Accumulated deficit                                                         (1,396)       (1,511)
                                                                                -------       -------
             Total stockholders' equity (deficit)                                  (610)        3,441
                                                                                -------       -------

  TOTAL                                                                         $ 2,684       $ 5,655
                                                                                =======       =======

<FN>
                       See Notes to Financial Statements.
</FN>
</TABLE>

                                       F-3
<PAGE>

<TABLE>
                       Isonics Corporation and Subsidiary

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

<CAPTION>
                                                                            Year Ended
                                                                             April 30,
                                                                      ------------------------
                                                                        1997            1998
                                                                      -------          -------
<S>                                                                   <C>              <C>
  Net revenues                                                        $ 4,539          $ 6,783
  Cost of revenues                                                      3,616            4,662
                                                                      -------          -------

           Gross margin                                                   923            2,121

  Operating expenses:
     Selling, general and administrative                                1,183            1,342
     Research and development                                             655              811
                                                                      -------          -------

           Total operating expenses                                     1,838            2,153
                                                                      -------          -------

  Operating loss                                                         (915)             (32)

  Other income (expense)
     Interest income                                                       14               74
     Interest expense                                                    (409)            (219)
                                                                      -------          -------

           Total other expense, net                                      (395)            (145)
                                                                      -------          -------

  Loss before extraordinary item and taxes                             (1,310)            (177)

  Income tax expense (benefit)                                             53             (314)
                                                                      -------          -------

  Income (loss) before extraordinary item                              (1,363)             137

  Extraordinary item - loss on extinguishment of debt                    --               (252)
                                                                      -------          -------

  NET LOSS                                                            $(1,363)         $  (115)
                                                                      =======          =======

  Net income (loss) per share - basic
     Net income (loss) per share before extraordinary item            $ (0.35)         $  0.03
     Extraordinary item                                               $  --            $ (0.05)
     Net loss per share                                               $ (0.35)         $ (0.02)
     Shares used in computing per share information                     3,880            5,039

  Net income (loss) per share - diluted
     Net income (loss) per share before extraordinary item            $ (0.35)         $  0.02
     Extraordinary item                                               $  --            $ (0.04)
     Net loss per share                                               $ (0.35)         $ (0.02)
     Shares used in computing per share information                     3,880            6,469

  Pro forma net income (loss) per share
     Net income (loss) per share                                      $ (0.23)         $  0.01
     Shares used in computing pro forma per share information           4,486            6,614

<FN>
                      See Notes to Financial Statements.
</FN>
</TABLE>

                                      F-4
<PAGE>

<TABLE>
                       Isonics Corporation and Subsidiary

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


<CAPTION>
                                                                                                Notes
                                          Preferred Stock      Common Stock       Additional  Receivable              
                                        ------------------    -----------------    Paid-in      from     (Accumulated
                                        Shares      Amount    Shares     Amount    Capital   Shareholders   Deficit)     Total
                                        ------      ------    ------     ------    -------   ------------   --------     -----
<S>                                    <C>      <C>         <C>        <C>        <C>        <C>          <C>         <C>
 BALANCES, May 1, 1996                  6,250   $     125   3,570,046  $       1  $      77   $    --     $     (33)  $     170

    Exercise of stock options            --          --       750,898          1        531        (330)       --           202

    Interest on notes receivable
      from stockholders                  --          --          --         --         --           (13)       --           (13)

    Conversion of preferred stock      (6,250)       (125)    229,324       --          125        --          --          --

    Issuance of warrants with
      promissory notes                   --          --          --         --          394        --          --           394

    Recapitalization                     --          --          --        1,127     (1,127)       --          --          --

    Net loss                             --          --          --         --         --          --        (1,363)     (1,363)
                                    ---------   ---------   ---------  ---------  ---------   ---------   ---------   ---------

 BALANCES, April 30, 1997                --          --     4,550,268      1,129       --          (343)     (1,396)       (610)

    Issuance of common stock (net
      of issuance costs of $1,327)       --          --       810,000      3,452       --          --          --         3,452

    Interest on notes receivable
      from stockholders                  --          --          --         --         --           (22)       --           (22)

    Repayment of interest from
      stockholders                       --          --          --         --         --            28        --            28

    Issuance of common stock in
      connection with Interpro
      acquisition                        --          --       353,982        708       --          --          --           708

    Net loss                             --          --          --         --         --          --          (115)       (115)
                                    ---------   ---------   ---------  ---------  ---------   ---------   ---------   ---------

 BALANCES, April 30, 1998                --     $    --     5,714,250  $   5,289  $    --     $     337   $  (1,511)  $   3,441
                                    =========   =========   =========  =========  =========   =========   =========   =========


<FN>
                                              See Notes to Financial Statements.
</FN>
</TABLE>

                                                                F-5
<PAGE>
<TABLE>

                       Isonics Corporation and Subsidiary

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<CAPTION>
                                                                                            Year Ended
                                                                                             April 30  
                                                                                       ---------------------
                                                                                        1997          1998
                                                                                       -------       -------
<S>                                                                                    <C>           <C>
 CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss                                                                           $(1,363)      $  (115)
    Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization                                                        310           200
      Interest on notes receivable from shareholders                                       (13)          (22)
      Deferred income taxes                                                                143          (315)
      Extraordinary item - loss on extinguishment of debt                                 --             252
      Changes in assets and liabilities:
        Accounts and notes receivable                                                      (10)       (1,232)
        Inventories                                                                       (533)        1,083
        Prepaid expenses                                                                    (4)            5
        Other assets                                                                        (8)            5
        Accounts payable                                                                  (243)         (283)
        Accrued liabilities and other                                                      233          (117)
        Income taxes payable                                                               (89)         --
                                                                                       -------       -------
            Net cash used in operating activities                                       (1,577)         (539)

 CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of property and equipment                                                    (10)          (72)
    Cash acquired in purchase of Interpro                                                 --               6
                                                                                       -------       -------
            Net cash used in investing activities                                          (10)          (66)
 CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from issuance of debt and warrants                                          1,751          --
    Repayment of notes receivable from shareholders                                       --              28
    Payments of debt                                                                      (339)       (1,852)
    Proceeds from issuance of common stock                                                 202         3,452
    Payment of debt issuance costs                                                        (115)           (7)
                                                                                       -------       -------
            Net cash provided by financing activities                                    1,499         1,621
                                                                                       -------       -------

            NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS                                (88)        1,016

 Cash and cash equivalents at beginning of period                                          116            28
                                                                                       -------       -------

 Cash and cash equivalents at end of period                                            $    28       $ 1,044
                                                                                       =======       =======

 Supplemental disclosure of noncash financing activities:
    Stock issued for note receivable                                                   $   330       $  --
                                                                                       =======       =======
    Forgiveness of note receivable from shareholder                                    $  --         $    33
                                                                                       =======       =======
    Purchase of Interpro
      Cash acquired                                                                                  $     6
      Stock issued to seller                                                                             708
      Liabilities assumed                                                                              1,464
                                                                                                     -------
      Assets acquired                                                                                $ 2,178
                                                                                                     =======

 Supplemental  disclosures of cash flow information:
    Cash paid during the period for:
      Interest                                                                         $   135       $   177
      Income taxes                                                                           9             1

<FN>
                                            See Notes to Financial Statements.
</FN>
</TABLE>

                                                         F-6
<PAGE>


                       Isonics Corporation and Subsidiary

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization

     Isonics   Corporation,   (the  "Company")  develops  and  markets  products
worldwide  based on enriched  stable  isotopes for  applications  in the energy,
medical  research,  diagnostic,  pharmaceutical  and  semiconductor  industries.
Through its wholly owned subsidiary,  International Process Research Corporation
("Interpro")  dba Colorado  Minerals  Research  Institute,  the Company provides
contract research and development services.  Isonics acquired Interpro effective
April 30, 1998.  The  consolidated  balance sheet at April 30, 1998 includes the
assets and  liabilities of Isonics  Corporation and Interpro.  The  consolidated
statement of operations includes the results of Isonics Corporation and does not
include the operations of Interpro as the  acquisition  occurred on the last day
of fiscal 1998.

Principals of Consolidation

     The consolidated  financial  statements include the accounts of the Company
and its wholly owned subsidiary, Interpro. All significant intercompany accounts
have been eliminated.

Cash Equivalents

     Cash equivalents include money market investments with an original maturity
of less than ninety days.

Concentration of Credit Risk

     Financial   instruments   that   potentially   subject   the   Company   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.  The Company  extends
credit to its customers,  most of whom are large, established companies.  Credit
risk is mitigated by performing  ongoing  credit  evaluations  of its customers'
financial condition and generally does not require collateral.

Inventories

     Inventories  are  stated  at the  lower of cost  (first-in,  first-out)  or
market.

Property and Equipment

     Property and equipment are stated at cost.  Depreciation  is computed using
the straight-line  method over five 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 Isoserve,  Inc.,  and is being
amortized on a  straight-line  basis over six years.  The Company  evaluates the
realizability  of  goodwill  annually  to  determine  potential   impairment  by
comparing the undiscounted  future cash flows of the related assets. The Company
modifies or adjusts goodwill if an impairment is indicated.  Based upon its most
recent evaluation,  the Company believes that no material impairment of goodwill
exists as of April 30, 1998.


                                      F-7
<PAGE>


                       Isonics Corporation and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

Income Taxes

     The Company accounts for income taxes using an asset and liability approach
for financial accounting and reporting purposes.

Revenue Recognition

     Revenue from product sales is recognized  upon shipment.  Product  warranty
costs have not been material in any period.

Use of Estimates in the Financial Statements

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

Fair Values of Financial Instruments

     The fair value of cash and equivalents  approximates  carrying value due to
the  short  maturity  of such  instruments.  The fair  value of  long-term  debt
approximates carrying value based on terms available for similar instruments.

Accounting for Stock-Based Compensation

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

Net Income (Loss) Per Share

     In February 1997, the Financial  Accounting Standards Board issued SFAS No.
128, Earnings Per Share. The Company adopted SFAS No. 128 during fiscal 1998 and
restated  earnings  per share data for all periods to conform with SFAS No. 128.
SFAS No. 128  requires a dual  presentation  of basic and diluted  earnings  per
share  ("EPS").  Basic EPS  excludes  dilution  and is computed by dividing  net
income (loss)  attributable to common  stockholders  by the weighted  average of
common  shares  outstanding  for the period.  Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted  into common stock.  Pro forma net income (loss) per
share has been  presented  to depict what the net income  (loss) per share would
have been had the common shares  issuable for debt  repayment  been  outstanding
during that period.


                                      F-8
<PAGE>


                       Isonics Corporation and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued)

     The following table  illustrates the  reconciliation  of the numerators and
denominators of the basic and diluted earnings (loss) per share computation:

                                                          Year Ended April 30,
                                                         ----------------------
                                                            1997         1998
                                                         ---------    ---------
   Pro forma net income (loss)
     Net loss                                            $  (1,363)   $    (115)
     Interest on nonconvertible promissory notes               315          193
                                                         ---------    ---------

        Pro forma net income (loss)                      $  (1,048)   $      78
                                                         =========    =========

   Pro forma shares
     Basic shares                                            3,880        5,039
     Stock options and warrants                                -          1,430
     Pro forma shares issued for repayment of debt             606          145
                                                         ---------    ---------

        Pro forma shares                                     4,486        6,614
                                                         =========    =========

   Diluted shares
     Basic shares                                            3,880        5,039
     Stock options and warrants                                -          1,430
                                                         ---------    ---------

        Diluted shares                                       3,880        6,469
                                                         =========    =========

Recent Issued Accounting Standards

     In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting  Comprehensive  Income, which requires that an entity report, by major
components and as a single total, the change in net assets from  non-shareholder
sources during the period;  and SFAS No. 131,  Disclosures  about Segments of an
Enterprise  and  Related  Information,  which  establishes  annual  and  interim
reporting  standards for an entity's business  segments and related  disclosures
about its products, services,  geographic areas and major customers. Adoption of
these statements will not impact the Company's  financial  position,  results of
operations  or cash  flows.  Both  statements  are  effective  for  fiscal years
beginning after December 15, 1997, with earlier application permitted.


NOTE 2 - INVENTORIES

     Inventories consist of the following (in thousands):

                                                       April 30,
                                                ----------------------
                                                   1997         1998
                                                ---------    ---------
         Finished goods                         $   1,387    $     250
         Work in process                              -            -
         Raw Materials                                152          206
                                                ---------    ---------

                                                $   1,539    $     456
                                                =========    =========


                                      F-9
<PAGE>


                       Isonics Corporation and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



NOTE 3 - PROPERTY AND EQUIPMENT

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

                                                             April 30,
                                                      ----------------------
                                                         1997        1998
                                                      ---------    ---------

     Office furniture and equipment                   $      93    $     118
     Production equipment                                   -          1,549
     Leasehold Improvements                                   4            4
                                                      ---------    ---------
                                                             97        1,671
     Accumulated depreciation and amortization              (27)         (45)
                                                      ---------    ---------

                                                      $      70    $   1,626
                                                      =========    =========


NOTE 4 - ACCRUED LIABILITIES

     Accrued liabilities consist of the following (in thousands):

                                                               April 30,
                                                      ----------------------
                                                        1997         1998
                                                      ---------    ---------
     Compensation                                     $     328    $     419
     Customer advances                                      -             76
     Other                                                  190          243
                                                      ---------    ---------

                                                      $     518    $     738
                                                      =========    =========


NOTE 5 - INCOME TAXES
<TABLE>
     Deferred tax assets (liabilities) are comprised of the following (in thousands):
<CAPTION>
                                                                      April 30,
                                                               ----------------------
                                                                 1997         1998
                                                               ---------    ---------
<S>                                                            <C>          <C>
    Deferred tax assets
      Accruals and reserves deductible in future periods       $     226    $     297
      Net operating loss carryforwards                               508          211
                                                               ---------    ---------
           Total deferred tax assets                                 734          508
      Valuation allowance                                           (734)         (81)
                                                               ---------    ---------
                                                                     -            427
    Deferred tax liabilities
      Amortization and depreciation                                  -           (427)
                                                               ---------    ---------

                                                               $     -      $     -
                                                               =========    =========
</TABLE>


                                      F-10
<PAGE>


                       Isonics Corporation and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



NOTE 5 - INCOME TAXES (continued)

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

                                          April 30,
                                    ----------------------
                                      1997         1998
                                    ---------    ---------
       Current
         Federal                    $     (78)   $     -
         State                            (12)           1
                                    ---------    ---------
                                          (90)           1
       Deferred
         Federal                          110         (230)
         State                             33          (85)
                                    ---------    ---------
                                          143         (315)
                                    ---------    ---------
                                    $      53    $    (314)
                                    =========    =========
<TABLE>
     A reconciliation  of the statutory federal income tax rate to the effective
tax rate is as follows:
<CAPTION>
                                                                              April 30,
                                                                       --------------------
                                                                         1997         1998
                                                                       ------       -------
<S>                                                                     <C>          <C>
       Statutory federal income tax rate                                (35.0)%       (35.0)%
       State income taxes (net of federal income tax benefit)            (5.5)         (4.1)
       Amortization of warrants issued with promissory notes              3.9          47.1
       Other                                                               .5           (.3)
       Change in valuation allowance                                     40.1        (185.1)
                                                                       ------       -------

       Effective tax rate                                                4.0%        (177.4)%
                                                                       ======       =======
</TABLE>

     The  valuation  allowance  for deferred tax assets as of April 30, 1997 and
1998 was $734,000 and $81,000,  respectively.  The Company  provided a valuation
allowance  for its deferred tax asset to the extent it believes  realization  of
such asset is uncertain.

     The Company has $570,000 and $319,000 of net operating  loss  carryforwards
for state and federal purposes  available  through 2003 and 2113,  respectively.
Current  federal and state tax law  includes  certain  provisions  limiting  the
annual use of net operating loss  carryforwards  in the event of certain defined
changes in stock  ownership.  The annual use of the Company's net operating loss
carryforwards could be limited according to these provisions.


                                      F-11
<PAGE>


                       Isonics Corporation and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



<TABLE>
NOTE 6 - LONG TERM DEBT

     Long term debt consists of the following (in thousands):
<CAPTION>
                                                                                   April 30,
                                                                            ----------------------
                                                                               1997         1998
                                                                            ---------    ---------
<S>                                                                         <C>          <C>
       Bank term loan -  guaranteed by the SBA                              $      43    $      40
       Notes payable - unsecured                                                  291          -
       Nonconvertible promissory notes, net of unamortized
         discount of $245                                                       1,153          -
       Royalty payable to Isoserve, Inc.                                          135          -
       Bank term loan                                                             -            147
       Revolving line of credit                                                   -            159
       Capital leases                                                              49           46
                                                                            ---------    ---------
                                                                                1,671          392
       Less current maturities                                                    403           80
                                                                            ---------    ---------

                                                                            $   1,268    $     312
                                                                            =========    =========
</TABLE>

     The bank  term  loan,  guaranteed  by the SBA, is collateralized  by all of
Isonics'  assets and bears  interest at  prime (8.5% at April 30, 1997 and 1998)
plus 2.75%.  Principal and interest  payments are due in 120 monthly payments of
$700 ending January 2005.

     Notes  payable,  unsecured;  were repaid during fiscal 1998. The notes were
due on demand and interest ranged from 8.0% to 24.0%.

     Nonconvertible  promissory  notes were repaid during fiscal 1998. The notes
were  collateralized  by the  Company's  assets and  interest was due monthly at
12.0% through May 1, 1997 and 15% thereafter. In connection with the issuance of
the promissory notes, the Company issued warrants to the noteholders to purchase
a total of 1,131,936 shares of common stock at a weighted average exercise price
of $2.78,  exercisable  for a period of five years  commencing  August 1996.  In
conjunction with the financing,  the Company issued warrants to purchase 304,098
shares of common stock  exercisable for a period of five years commencing August
1996,  at  $0.5788  per share to an  advisor.  The  aggregate  fair value of the
warrants  issued in connection with the financing was $394,000 of which $149,000
and $74,000 was amortized to operations as additional  interest  expense  during
fiscal  1997 and  1998,  respectively.  Debt  issuance  costs of  $167,000  were
incurred in conjunction with notes of which $61,000 and $32,000 was amortized to
operations  as  additional   interest  expense  during  fiscal  1997  and  1998,
respectively.  Of the total  original  promissory  notes and  original  warrants
issued,  $620,000 and 303,696 warrants were purchased by related  parties.  Upon
the closing of the Company's  initial  public  offering in September  1997,  the
notes were repaid. See Note 9.

     The bank  term  loan is  collateralized  by  certain  equipment  and  bears
interest at prime (8.5% at April 30,  1998) plus 1.0%.  Principal  and  interest
payments of $3,800 are due in forty eight monthly payments ending February 2002.


                                      F-12
<PAGE>


                       Isonics Corporation and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



NOTE 6 - LONG TERM DEBT (continued)

     The revolving line of credit is  collateralized by all of Interpro's assets
and is guaranteed by Isonics.  Borrowings under the line of credit bear interest
at prime (8.5% at April 30,  1998) plus 1.0%.  Borrowings  are limited to 75% of
Interpro's eligible trade accounts receivable as contractually defined. Interest
payments are due monthly.  The credit  arrangement  prohibits the payment of any
cash dividends without prior bank approval and requires Interpro to meet certain
financial  covenants,  including minimum tangible net worth and maximum leverage
ratio.  Subsequent  to year end,  the line of credit was amended to increase the
defined  borrowing  base from  $160,000 to $350,000 and the maturity date of the
line of credit  was  extended  to July 1999.  The entire  balance of the line of
credit is included as long-term debt on the balance sheet.

     Maturities  of  long-term  debt as of April  30,  1998 are as  follows  (in
thousands):

              1999                                   $      80
              2000                                         204
              2001                                          45
              2002                                          42
              2003                                           6
              Thereafter                                    15
                                                     ---------

                                                     $     392
                                                     =========

NOTE 7 - COMMITMENTS

     At April 30, 1998,  furniture  and  equipment  with a cost and  accumulated
amortization of $100,000 and $26,000 has been acquired under capital leases. The
Company also rents office,  production  facilities and equipment under operating
leases expiring through July 2003.

     Future  minimum  annual  operating  and capital  lease  commitments  are as
follows (in thousands):

                                                           April 30, 1998
                                                       ---------------------
                                                       Operating     Capital
                                                       ---------    --------
         1999                                          $    163     $    45
         2000                                               178           3
         2001                                                91           -
         2002                                                77           -
         2003                                                20           -
         Thereafter                                          -            -
                                                       ---------    --------

           Total minimum lease payments                $    529          48
                                                       =========

         Amount representing interest                                    (2)
                                                                    --------
         Present value of minimum lease payments                         46
         Current portion                                                (43)
                                                                    --------

         Long-term portion                                          $     3
                                                                    ========


                                      F-13
<PAGE>


                       Isonics Corporation and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



NOTE 7 - COMMITMENTS (continued)

     Rent expense for operating leases was approximately $47,000 and $39,000 for
the years ended April 30, 1997 and 1998, respectively.

     The Company is required to make  royalty  payments to  Isoserve,  Inc.  for
depleted zinc metal sold through fiscal 2000. The maximum royalty payments under
the agreement are $1,000,000.  At April 30 1997, the Company had a liability for
the present value of the expected  minimum royalty payments which was met during
fiscal 1998.  The Company paid  royalties of $140,000 and $192,000 for the years
ended April 30, 1997 and 1998, respectively,  and has paid $523,000 of royalties
since inception.


NOTE 8 - STOCKHOLDERS' EQUITY

     On September 30, 1996 and March 26, 1997, the Board of Directors approved a
1 for  6.89  and a 1  for  1.26  reverse  stock  split  of  its  common  shares,
respectively.  On August 11,  1997,  the Board of  Directors  approved a 3 for 1
stock split of its common shares. All per share amounts, number of shares, stock
options and warrant data have been  restated to reflect the reverse stock splits
and stock split. In December 1996, the shareholders  approved an increase in the
authorized  shares of Preferred and Common Stock to 10,000,000  and  20,000,000,
respectively.

Convertible Preferred Stock

     The Articles of Incorporation  authorized the issuance of 100,000 shares of
nonvoting  Class A and B convertible  preferred  stock.  In December  1996,  all
shares of these  outstanding  convertible  preferred  stock  were  converted  to
229,324  shares  of  common  stock  in a  cashless  conversion  and the  Company
eliminated the designation of rights,  preferences and restriction for preferred
stock.

Common Stock

     On September 22, 1997, the Company  completed an initial public offering of
810,000  units,  each  unit  consisting  of one  share of  common  stock and one
redeemable  common stock purchase  warrant.  Each warrant entitles the holder to
purchase one share of common stock at $5.80 per share,  commencing September 22,
1998. The Company may redeem the warrants  commencing  March 21, 1999 at a price
of $.10 per warrant if the closing  price of the common stock is at lease $14.50
per share for at lease 20 consecutive trading days.

     In  connection  with the  offering,  the Company  granted  the  underwriter
warrants to purchase up to 160,000 shares of common stock at a weighted  average
exercise  price of $7.77.  The warrants are  exercisable  for a four year period
commencing  September  22, 1998. In addition,  the Company  granted an executive
stock  options to purchase up to 120,000  shares of common  stock at $6.38.  The
options are exercisable  through September 2002 upon obtaining certain financial
goals.


                                      F-14
<PAGE>


                       Isonics Corporation and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



NOTE 8 - STOCKHOLDERS' EQUITY (continued)

     The Company has reserved shares of common stock for issuance as follows:

                                                     April 30,
                                                       1998
                                                     ----------
         Exercise of stock options                    1,587,309
         Exercise of warrants                         2,462,034
                                                     ----------
                                                      4,049,343
                                                     ==========
Stock Option Plan

1996 Stock Option Plan

     The  Company's  1996 Stock  Option Plan  authorized  the grant of 1,727,832
incentive  and  nonqualified  stock  options  to  key  employees,  directors  or
consultants of the Company.  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,  as determined by the Board of
Directors.  Options  generally  become  exercisable upon issuance under the 1996
Stock  Option Plan and are subject to  redemption  rights  typically  over three
years and generally expire ten years after the date of grant. In September 1997,
the Board of Directors terminated the Company's 1996 Stock Option Plan.

Executive and Incentive Stock Option Plans

     In  November  1996,  the  Board of  Directors  adopted  the  Executive  and
Incentive  Stock  Options  Plans  authorizing  the granting of up to 570,000 and
150,000 incentive and nonqualified stock options to key employees,  directors or
consultants of the Company, 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 five years and expire ten years after
the date of grant.

     The exercise price of the options  generally  approximates  the fair market
value per share of the  Company's  stock on the date of grant.  Accordingly,  no
compensation  cost has been recognized for the plan. Had  compensation  cost for
the plan been  determined  based on the fair  value of the  options at the grant
dates consistent with SFAS No. 123, Accounting for Stock-Based Compensation, the
Company's net loss and net loss per share for the years ended April 30, 1997 and
1998 would have been changed to the pro forma amounts indicated below.

                                              1997                      1998
                                          ------------               -----------

Net loss
  As reported                             $(1,363,000)               $(115,000)
  Pro forma                                (1,465,000)                (379,000)

Loss per share (diluted)
  As reported                                  $(0.35)                  $(0.02)
  Pro forma                                     (0.25)                   (0.06)



     The fair value of each option grant is estimated on the date of grant using
the  Black-Scholes  options-pricing  model with the following  weighted  average
assumptions  used  for  grants  in 1997  and  1998,  respectively;  no  expected
dividends,  volatility  of 150%;  risk-free  interest  rate of 6.0% and expected
lives of 5 years. A summary of the status of the Company's stock option plans as
of April 30, 1997 and 1998,  and changes  during the years ending on these dates
is presented below.


                                      F-15
<PAGE>


                       Isonics Corporation and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



NOTE 8 - STOCKHOLDERS' EQUITY (continued)

                                                                  Weighted
                                                                  Average
                                                    Number of     Exercise
                                                     Shares        Price
                                                    ---------    ----------

         Outstanding, May 1, 1996                     993,503      $0.61
           Granted                                    476,761      $0.94
           Exercised                                 (750,898)     $0.71
           Canceled                                   (34,557)     $0.87
                                                    ---------

         Outstanding, April 30, 1997                  684,809      $0.72
           Granted                                    382,500      $3.82
           Exercised                                      -           -
           Canceled                                   (12,500)     $2.60
                                                    ---------

         Outstanding, April 30, 1998                1,054,809      $1.84
                                                    =========

     The weighted  average fair value of options  granted during the years ended
April 30, 1997 and 1998 was $0.44 and $3.25, respectively.
<TABLE>
     The following information applies to options outstanding at April 30, 1998:
<CAPTION>

<S>                                              <C>           <C>           <C>              <C>  
         Range of exercise prices                $0.58-$0.87   $1.70-$2.50   $2.88-$3.50      $6.38

         Options outstanding                         613,380       216,429       105,000    120,000
         Weighted average exercise price               $0.64         $1.99         $3.35      $6.38
         Weighted average remaining contractual
           life (years)                                    8            10            10         10


         Options exercisable                         613,380        14,286        80,000         --
         Weighted average exercise price               $0.64         $1.70         $3.50         --
</TABLE>

     Options  to  purchase  399,285  and  934,669  shares of  common  stock at a
weighted average exercise price of $0.61 and $0.66 per share were not subject to
rights of repurchase at April 30, 1997 and 1998, respectively.

     In fiscal  1997,  two  executive  officers of the Company  exercised  stock
options to each acquire  259,175  shares of common stock at an exercise price of
$0.64 per  share.  In each  case,  the  Company  loaned  the  executive  officer
$165,000,  representing  the  exercise  price  of the  option,  and the  officer
executed a promissory note  reflecting the loan. Each executive  officer pledged
the purchased shares as collateral for the loan pursuant to a pledge  agreement.
Each loan  bears  interest  at an annual  rate equal to the  minimum  applicable
federal rate, and interest is payable annually; principal and accrued but unpaid
interest  is due five years from the date of the note.  Until each note has been
paid  in  full  and  upon  any  sale of such  option  shares  by the  respective
executive,  a portion of the sales  proceeds  will be used to pay  amounts  owed
under the note. In addition,  during fiscal 1998,  the Company loaned to each of
the  executive  officers,  pursuant  to a  five-year  note with  interest at the
minimum  applicable  federal rate, the amount equal to the federal and state tax
liability  incurred by him as a result of  exercising  such  option,  and to pay
compensation to such officer equal to the amount of interest payable under these
loans and the amount of taxes payable as a result of such compensation. At April
30,  1997,  principal  and interest due on the loans to acquire the common stock
totaled  $330,000 and $13,000,  respectively.  At April 30, 1998,  principal and
interest  due on the loans to acquire  the common  stock  totaled  $330,000  and
$7,000, respectively.  At April 30, 1998, principal and interest on the loans to
pay the federal and state tax liability  incurred as a result of exercising such
option  totaled  $123,000 and $3,000,  respectively.  During  fiscal  1998,  the
executives  received  compensation  of $38,000 to repay interest  payable to the
Company on the common stock and tax notes.

     During  fiscal 1998, a note  receivable  and interest due from an executive
officer totaling $25,000 and $8,000, respectively,  was forgiven by the Board of
Directors.


                                      F-16
<PAGE>


                       Isonics Corporation and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



NOTE 9 - EXTRAORDINARY ITEM

     The terms of the Company's non-convertible  promissory notes stated that in
the event of an initial public  offering of the Company's  stock,  all principal
and interest would be due within five days of the closing of such initial public
offering. Accordingly, the Company repaid the notes and interest in fiscal 1998.
At the time of repayment, unamortized debt issuance costs and discounts totaling
$252,000 were charged to earnings as an extraordinary item.


NOTE 10 - SIGNIFICANT CUSTOMERS AND SUPPLIERS

     One customer  accounted  for 49% and 47% of net revenues in fiscal 1997 and
1998, respectively.  A second customer accounted for 20% and 18% of net revenues
in  fiscal  1997 and 1998.  A third  customer  accounted  for 13% and 11% of net
revenues in fiscal 1997 and 1998.  A fourth  customer  accounted  for 10% of net
revenues in fiscal 1997. A fifth  customer  accounted for 12% of net revenues in
fiscal  1998.  Export sales were less than 10% of net revenues in 1997 and 1998.
Export sales are principally to Asia.

     The Company  currently uses a single source processor in its  manufacturing
process;  a disruption of this relationship  could have an adverse impact on the
operating results of the Company.  The Company has not experienced a disruption;
however,  the Company recognizes the risks and is actively pursuing  alternative
sources.


NOTE 11 - ACQUISITION OF INTERPRO

     On April 30, 1998, the Company acquired all of the outstanding common stock
of Interpro.  The  purchase  price was paid in 353,982  shares of the  Company's
common  stock  with a fair  market  value of  $708,000.  Transaction  costs were
$70,000 and no goodwill was  recognized  upon  completing the  transaction.  The
assets and  liabilities  of Interpro  are included in the April 30, 1998 balance
sheet of the  Company,  while the results of  operations  of the Company for the
year ended April 30, 1998 excludes  Interpro as the acquisition  occurred on the
last day of the  fiscal  year end.  Pro forma  results of  operations  as if the
acquisition had occurred at the beginning of fiscal 1998 are as follows:

                                                                    Year Ended
                                                                  April 30, 1998
                                                                  --------------
                                                                    (Unaudited)

    Net revenues                                                     $   9,310
    Gross margin                                                         2,795
    Net loss                                                              (151)
    Net loss per share                                               $    (.03)
    Number of shares used in computing per share information             5,393


                                      F-17
<PAGE>


                       Isonics Corporation and Subsidiary

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 12 - EMPLOYEE BENEFIT PLAN

     The Company has  established a profit  sharing plan under section 401(k) of
the Internal  Revenue Code. The plan is a defined  contribution  plan,  covering
substantially  all employees of the Company.  Company  contributions to the plan
aggregated $3,000 for both 1997 and 1998.

NOTE 13 - SUBSEQUENT EVENTS (unaudited)

Acquisition of Chemotrade GmbH

     On July 21, 1998,  the Company  acquired all of the  outstanding  shares of
Chemotrade GmbH, 75 percent of the outstanding shares of Chemotrade Liepzig GmbH
and 6 percent of the outstanding shares of IUT (collectively "Chemotrade"),  all
of which were owned by two common  shareholders and engaged in the distribution,
development  and manufacture of stable and  radioactive  isotopes.  The purchase
price  consideration  consists  of $2.576  million to be paid upon  closing  and
contingent consideration of up to $1.1 million to be paid through June 2001. The
consideration paid upon closing consists of cash of $758,000, 357,730 restricted
shares of  common  stock  with a fair  value of  $894,000,  two  notes,  one for
$924,000  bearing  interest at 2% per month due September  15, 1998,  secured by
certain  accounts  receivable  of  Chemotrade,  and a second  note for  $833,000
bearing  interest  at  10%,  due June  1,  1999.  The  sellers  have  guaranteed
Chemotrade's  defined  pre tax  earnings  will be at least  $550,000  during the
sixteen  months ended April 30, 1999 and the twelve  months ended April 30, 2000
and 2001. If the pre tax earnings of  Chemotrade  are less than $550,000 for the
sixteen month period ended April 30, 1999, the note payable of $833,000 due June
1, 1999, will be reduced $0.75 for each $1.00 shortfall of earnings.  If the pre
tax earnings of  Chemotrade  are less than $550,000 for the year ended April 30,
2000,  the owners  will repay $0.75 for each $1.00  shortfall  of  earnings.  If
Chemotrade  has pretax  earnings of $550,000  for the year ended April 30, 2001,
the sellers will receive  additional  consideration of $278,000.  If the pre tax
earnings are less than  $550,000,  the  consideration  will be reduced $0.50 for
each $1.00 shortfall in earnings.

Line of Credit

     On July 24,  1998,  the Company  entered into a $3.0 million line of credit
agreement.  The credit  facility  bears  interest at the bank's  prime rate plus
2.25%. Interest payments are due monthly and all outstanding  borrowings are due
July 31, 2000. The credit facility consists of the following:

     *  $500,000  equipment  term loan,  payable over forty eight equal  monthly
        installments of principal and interest;
     *  $250,000  term  loan,  with  interest  only  payments  due  monthly  and
        principal due October 31, 1998;
     *  $500,000  revolving  line of credit,  borrowings  are  limited to 35% of
        eligible inventory;
     *  $1,250,000  revolving  line of credit,  borrowings are limited to 80% of
        eligible accounts receivable; and
     *  $500,000 equipment  acquisition term loan, borrowings are limited to 80%
        of  invoice  cost  of   equipment,   payable  over  thirty  six  monthly
        installments of principal and interest.  The availability of the loan is
        conditioned  upon the Company  achieving  and  maintaining  minimum debt
        service coverage ratios.

       In connection  with the funding of the loan,  debt  totaling  $346,000 at
       April 30, 1998 will be repaid.


                                      F-18
<PAGE>


                                   SIGNATURES

         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized, on the 11th day of August 1998.

                                       Isonics Corporation


                                       By:      /s/ James E. Alexander
                                           -------------------------------------
                                           James E. Alexander
                                           President and Chief Executive Officer
                                           and Director


                                POWER OF ATTORNEY

         KNOW  ALL MEN BY THESE  PRESENTS,  that  each  person  whose  signature
appears below constitutes and appoints James E. Alexander and Paul J. Catuna, or
any of them, his attorney-in-fact,  each with the power of substitution, for him
in any and all  capacities,  to sign any amendments to this Report,  and to file
the same, with exhibits  thereto and other  documents in connections  wherewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorney-in-fact,  or his substitute or substitutes, may do or
cause to be done by virtue hereof.
<TABLE>
         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated.
<CAPTION>
              Signatures                                        Title                             Date
---------------------------------------  ----------------------------------------------   --------------------
<S>                                      <C>                                                   <C>
Principal Executive Officer:

        /s/ James E. Alexander           President, Chief Executive Officer and Director       August 11, 1998
---------------------------------------
            James E. Alexander

Principal Financial Officer
and Principal Accounting Officer:

          /s/ Paul J. Catuna             Vice President, Finance, Chief Financial Officer      August 11, 1998
---------------------------------------
              Paul J. Catuna

Additional Directors:

         /s/ Boris Rubizhevsky           Senior Vice President and Director                    August 11, 1998
---------------------------------------
             Boris Rubizhevsky


        /s/ Lindsay A. Gardner           Director                                              August 11, 1998
---------------------------------------
          Lindsay A. Gardner


          /s/ Larry J. Wells             Director                                              August 11, 1998
---------------------------------------
            Larry J. Wells
</TABLE>
                                       27