<PAGE>

================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             ----------------------
                                 AMENDMENT NO. 2
                                       ON
                                   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, 1999

/ /  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.)

          5906 MCINTYRE STREET
            GOLDEN, COLORADO                               80403
(Address of principal executive offices)                 (Zip Code)


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

    SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                           COMMON STOCK, NO PAR VALUE
                REDEEMABLE CLASS A COMMON STOCK PURCHASE WARRANTS
                                (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, 1999 were
$16,998,000.

     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 February 10, 2000 was $12,372,477. Excludes approximately
4,927,790 shares of common stock held by Directors, Officers and holders of 5%
or more of the Registrant's outstanding Common Stock at February 10, 2000.
Exclusion of shares held by any person should not be construed to indicate that
such person possesses the power, direct or indirect, to direct or cause the
direction of the management or policies of the Registrant, or that such person
is controlled by or under common control with the Registrant. There is no
non-voting common equity of the Registrant.

     The number of shares outstanding of the Registrant's Common Stock, no par
value, as of February 10, 2000: was 6,605,414 shares.

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

================================================================================

<PAGE>

                                     PART I

ITEM 1.  BUSINESS

     BECAUSE WE WANT TO PROVIDE YOU WITH MORE MEANINGFUL AND USEFUL INFORMATION,
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS"
(AS SUCH TERM IS DEFINED IN SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED). THESE STATEMENTS REFLECT OUR CURRENT EXPECTATIONS REGARDING OUR
POSSIBLE FUTURE RESULTS OF OPERATIONS, PERFORMANCE, AND ACHIEVEMENTS. THESE
FORWARD-LOOKING STATEMENTS ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

     WHEREVER POSSIBLE, WE HAVE TRIED TO IDENTIFY THESE FORWARD-LOOKING
STATEMENTS BY USING WORDS SUCH AS "ANTICIPATES," "BELIEVES," "ESTIMATES,"
"EXPECTS," "PLANS," "INTENDS," AND SIMILAR EXPRESSIONS. THESE STATEMENTS REFLECT
OUR CURRENT BELIEFS AND ARE BASED ON INFORMATION CURRENTLY AVAILABLE TO US.
ACCORDINGLY, THESE STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES, AND
CONTINGENCIES, WHICH COULD CAUSE OUR ACTUAL RESULTS, PERFORMANCE, OR
ACHIEVEMENTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, SUCH
STATEMENTS. THESE RISKS, UNCERTAINTIES AND CONTINGENCIES INCLUDE, WITHOUT
LIMITATION, DEMAND FOR, AND ACCEPTANCE OF, OUR 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 OF FINANCIAL CONDITION OR PLAN OF OPERATION - FACTORS THAT MAY
AFFECT FUTURE OPERATING RESULTS." WE HAVE NO OBLIGATION TO UPDATE OR REVISE ANY
SUCH FORWARD-LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF THIS FORM 10-KSB. IF THERE ARE ANY
"UNANTICIPATED EVENTS" PRIOR TO THE FILING OF THIS FORM 10-KSB, THEY MUST BE
DISCLOSED AND THIS CAVEAT WOULD NOT PROTECT YOU.

     Isonics Corporation is an advanced materials and technology company which
develops and commercializes products based on enriched stable isotopes. Stable
isotopes can be thought of as extremely 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 several isotope
products and intends to promote the emergence and growth of new stable isotope
applications.

     Our principal product through November 1999 was isotopically depleted zinc.
Depleted zinc 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. Depleted zinc also reduces environmental cracking in
certain kinds of nuclear reactors, which if not controlled, can require
extremely costly repairs, or possibly result in premature shutdown and
de-commissioning of the facility. We believe that we have historically provided
substantially all of the depleted zinc used in nuclear power plants worldwide.
However, in December 1999, we sold our depleted zinc business to Eagle-Picher
Technologies, LLC.

     New applications for stable isotopes are continually being developed by us
and by third parties. We believe that new applications have the potential to
create new markets. One of these new applications for stable isotope labeled
compounds is 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 that
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"). We believe that other companies have applied to the
FDA or comparable agencies in foreign countries for approval of these and other
tests. FDA approval must be obtained before DBTs can be sold in the United
States.


                                       2
<PAGE>

     The rare, stable isotope of carbon, carbon-13, is the key ingredient for
most DBTs. Isonics is the third largest supplier of carbon-13 in the world and
is the only non-Japanese owned supplier. To further strengthen this position, in
February 1998, we formed a joint venture with the Institute of Stable Isotopes
in Tblisi, Georgia. The purpose of the joint venture was to increase carbon-13
production at the Institute initially, and then to transfer that production
technology to manufacturing facilities to be established in Europe and North
America. Our carbon-13 production capacity does not presently meet our
anticipated requirements. Consequently, in December 1999, we entered into an
agreement with Eagle-Picher Technologies, LLC, to purchase carbon-13 from the
their-Oklahoma-based facility. To date this facility has not produced any
carbon-13, or other carbon isotopes of sufficient enrichment to be of commercial
interest to us. We believe production of enriched carbon isotopes from this
facility will commence in 2000.

     We are collaborating with academia and industry to evaluate the benefits of
isotopically pure silicon-28. One of the properties of isotopically pure
silicon-28 is its high thermal conductivity, which we are currently researching
for use in semiconductor applications. We believe that if evaluations
demonstrate the commercial feasibility of one or more products, demand could
emerge in certain segments of the semiconductor market. We can offer no
assurance, however, that these evaluations will demonstrate the commercial
feasibility of any products, that we will be able to commercialize any such
products, or that a market will emerge for any such products. According to the
Semiconductor Industry Association, sales in 1998 of silicon wafers and other
semiconductor substrates were over $7 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 based on our
preliminary research. Since 1994, Isonics has been working to produce
isotopically pure silicon-28 epitaxial wafers suitable for the manufacture of
semiconductor devices. Epitaxial wafers are made by taking an existing silicon
wafer and then growing a thin surface layer of silicon using chemical vapor
deposition.

     In fiscal 1999, we acquired an exclusive license relating 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 that are of great
importance to the semiconductor industry. We believe we have achieved this goal
as evidenced by our shipments of epitaxial wafers in fiscal 1999.

     We were formed in March 1992, as a partnership, and were subsequently
incorporated in California in March 1993, as A&R Materials, Inc. In September
1996, we changed our name to Isonics Corporation. Our principal executive
offices are located at 5906 McIntyre Street, Golden, Colorado 80403. Our
telephone number is (303) 279-7900, and our facsimile number is (303) 279-7300.
Our web site is isonics.com.

RECENT BUSINESS ACQUISITIONS

     INTERNATIONAL PROCESS RESEARCH CORPORATION

     Effective April 30, 1998, we purchased all of the outstanding capital stock
of International Process Research Corporation ("Interpro") from a previously
unaffiliated corporation (Metallurgy International, Inc.) Interpro, which does
business as Colorado Minerals Research Institute, is a contract research and
development, and materials processing company. Interpro performed (through
December 1, 1999) key steps in Isonics' depleted zinc manufacturing process.
Interpro is also jointly developing new, lower-cost technologies to enable us to
better meet customer needs. The acquisition was made to assure future
availability of this critical manufacturing technology, and to provide an
infrastructure platform for performing value-added processing of other isotopes.
Our consolidated balance sheets at April 30, 1999 and 1998 include the assets
and liabilities of Interpro. Our consolidated statement of operations includes
Interpro only for fiscal 1999 since the acquisition occurred on the last day of
fiscal 1998. In connection with the acquisition, we issued 353,982 shares of our
Common Stock (valued at $708,000) in exchange for all of the outstanding shares
of Interpro. We accounted for the acquisition as a purchase.

     CHEMOTRADE GmbH

     Effective June 1, 1998, we acquired all of the outstanding shares of
Chemotrade GmbH, 75 percent of the outstanding shares of Chemotrade Leipzig GmbH
and 6 percent of the outstanding shares of IUT (collectively


                                       3
<PAGE>

"Chemotrade"). All three companies are located in Germany. Chemotrade GmbH is
located in Dusseldorf, Chemotrade Leipzig GmbH is located in Leipzig, and IUT is
located in Berlin. All three companies were owned by two common shareholders.
All three companies continue to be engaged in the distribution, development and
manufacture, of stable and radioactive isotopes. We paid the unaffiliated former
owners of Chemotrade $758,000 in cash, 357,730 restricted shares of our common
stock valued at $894,000, and two interest bearing notes, one for $924,000 which
was paid in September 1998, and a second note for $826,000 which was partially
paid in June 1999, with the balance due in July 2000.

     The sellers guaranteed Chemotrade's defined pre-tax earnings during the
sixteen months ended April 30, 1999, and the twelve months ended April 30, 2000,
and 2001. Chemotrade has met the initial pre-tax earnings goal for the sixteen
months ended April 30, 1999. If the defined pre-tax earnings for 2000 and 2001
are met, the sellers will receive additional consideration of $271,000. If the
defined pre-tax earnings are not met, the consideration will be reduced.

BUSINESS RECENTLY DISPOSED OF

     On December 1, 1999, we sold our depleted zinc business to Eagle-Picher
Technologies, LLC ("Eagle-Picher") for $8.2 million, including $1.5 million to
be paid over a period of three years. Eagle-Picher's obligation to pay the final
$1.5 million is subject to certain contingencies. We received cash of
approximately $6.7 million from Eagle-Picher at the closing, of which
approximately $1.2 million was used to pay certain accrued liabilities.

     The Agreement executed between us and Eagle-Picher provides for:

     (1)  Our sale of the depleted zinc business to Eagle-Picher for a purchase
          price including approximately $6.7 million in cash plus three
          additional payments of $500,000 over the next three years, and
     (2)  Eagle-Picher's sale to us of 200 kilograms of silicon-28 in
          consideration for a forty-two (42) month Warrant grant to Eagle-Picher
          for the purchase of 4,000,000 shares of our common stock at purchase
          price of $3.75 per share. The Warrant is subject to a registration
          rights agreement. The amount of the Warrant can be reduced if
          Eagle-Picher is unable to supply the full 200 kilograms of silicon-28
          during calendar year 2000.

     Related to, but separate from, the sale of the depleted zinc business, we
contemporaneously signed a ten-year Supply Agreement by which we will have the
exclusive right to purchase quantities of isotopically pure silicon-28,
silicon-29, and silicon-30, and a non-exclusive right to purchase quantities of
isotopically pure carbon-12 and carbon-13 produced by Eagle-Picher from its
Oklahoma-based facilities for a ten-year period. The Supply Agreement locks-in
what we believe is a favorable purchase price for the aforementioned isotopes.
As partial consideration for the exclusivity provision, we agreed to pay
Eagle-Picher a fee equal to 3.0% of the net revenues from all sales made by us
of products incorporating enriched silicon isotopes supplied by Eagle-Picher.
The ability of Eagle-Picher to produce isotopes meeting the specifications of
the Supply Agreement is contingent upon Eagle-Picher successfully beginning
production of silicon-28 as scheduled by March 2000.

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 because of mass and diameter variations. Eliminating this disorder by
using a single enriched


                                       4
<PAGE>

isotope (i.e. isotopically pure substance) 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 in the computer industry,
and for use as targets to produce radioisotopes for the medical and other
industries.

     Stable isotopes of an element do not differ significantly in their chemical
behavior. By varying the natural abundance of isotopes present in the material
the material can be "Tagged". Varying the natural abundance gives a material its
own unique mass or nuclear magnetic signature. Most importantly, tagging in this
manner does not change a given material's chemical properties. Though chemically
equivalent, the "tagged" or labeled material is discernible from its unlabeled
twin through the use of several types of instruments called spectrometers.

COMPANY STRATEGY

     We believe that our strength is the ability to bring the necessary
ingredients 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 depleted zinc from what
was initially a cost prohibitive concept to a commercial product. The worldwide
market for depleted zinc is now one of the largest for a stable isotope product.

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

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

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

     -    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;

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

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

PRODUCTS

     Depleted zinc sales have historically been our most significant source of
revenues. However, in fiscal 1999, our revenues were generated from a more broad
range of sources, including depleted zinc sales (approximately 35%),
radioisotopes sales (approximately 34%), and other stable isotopes sales
including our newly introduced silicon-28 isotope (approximately 15%). The
balance of our revenues comes from the operations of our subsidiary,
International Process Research Corporation (approximately 16%), who performs
metallurgical and mineral processing contract research and process analysis test
work. Because we sold our depleted zinc business in December 1999, depleted zinc
will continue to be a significant contributor to our revenues from operations in
FY 2000, however depleted zinc sales will cease to be a significant contributor
to our revenues in subsequent fiscal years.

     ISOTOPICALLY DEPLETED ZINC

     The U.S. Nuclear Regulatory Commission requires that nuclear power plants
reduce the radiation exposure of the nuclear power plant workers to levels as
low as reasonably achievable. Also of significant concern is cracking of nuclear
power plant structural materials because of the corrosive nature of the water
used to cool the


                                       5
<PAGE>

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.

     Effective December 1, 1999, we sold our depleted zinc business to
Eagle-Picher as described above.

     RADIOISOTOPES

     With the acquisition of Chemotrade GmbH in Germany, we have expanded our
product offerings to include radioisotopes produced at several facilities in
Russia and Uzbekistan. Radioisotopes are radioactive. These products are sold to
Isonics under territory-specific, exclusive distribution agreements with the
licensed representatives of the production facilities. Extensive export controls
effectively restrict the flow of these products to well-defined channels,
limiting the price competition more commonly observed with some stable isotope
products from countries which once were part of the former Soviet Union. Sales
of these products represented 34% of net revenues in fiscal 1999.

     Radioisotopes are used in fields as diverse as basic physics, biomedical
research, medical imaging and therapy, radioactive waste management technology
development, and inspection/verification technologies. Several of these market
segments are already experiencing strong growth, and with additional
radioisotope-based products in various stages of development and regulatory
approval, promise significant potential for further growth. Examples of existing
and emerging applications follow.

     BIOMEDICAL RESEARCH. Traditionally, numerous aspects of the many phases of
drug development have been carried out using radioisotope-labeled versions of
promising compounds. Metabolism, distribution, mode of action and elimination of
candidate drug compounds can be studied with the radioisotopes of hydrogen,
carbon, and phosphorus, among others. Isonics has been supplying several
precursor compounds labeled with Carbon-14 to a major manufacturer who
incorporates them into more complex radioisotope labeled compounds for use in
basic research and pharmaceutical development. The precursors are produced under
contract with a company in which we hold a small minority share. While rational
drug design and stable isotope labeled compounds represent competition for this
more traditional approach to research and drug development, we believe a
combination of increasing drug development activity and the large body of data
and experience will ensure a strong market for these products.

     MEDICAL IMAGING AND THERAPY. Radioisotopes have been used for years in the
diagnosis and treatment of many medical conditions in humans. The trend in these
two areas has been towards increasingly more specific chemicals which, after
labeling with the radioisotope and introduced into the patient, quickly
concentrate at the site of interest. In theory, the appropriate choice of
chemical and radioisotope labels would allow disease detection and determination
of extent, followed by therapy selection, administration and monitoring. Several
classes of chemical compounds ranging from monoclonal antibodies to peptides,
most recently, are being developed, tested and approved for use in the
detection, and eventually, the treatment of many disease states. While certain
isotopes will remain the dominant radioisotopes for imaging and therapy
monitoring, they typically have no role in therapy. We believe that with the
increased supply of new radioisotopes and the ongoing development of highly
specific biochemical therapies, this market segment represents a major growth
opportunity.

     BRACHYTHERAPY. Cancer therapy continues to evolve to more effectively
target the many different types of cancer. The radioisotope labeled compounds
mentioned above promise great advances in focused treatment, but are still well
in the future. Today, external beam radiotherapy and chemotherapy are the
predominant technologies used in cancer treatment, but another technology,
brachytherapy, is emerging in the treatment of specific disease states like
prostate cancer. In this technique, small sealed sources are inserted directly
into the tumor using a variety of minimally invasive surgical methods. The
radioisotope is chosen to ensure that only the tissue immediately adjacent to
the implanted seed is irradiated; this avoids irradiating nearby healthy tissue
as occurs with external beam radiotherapy. Several companies (Theragenics, North
American Scientific, International Isotopes, etc.) already offer or have
announced plans to offer brachytherapy products for the treatment of certain
forms of prostate cancer. Studies continue in the application of this technique
for other tumor types, including some breast cancers. We currently supply
several companies with radioisotopes for this application. We believe this
market segment represents one of the largest growth opportunities for
radioisotopes.


                                       6
<PAGE>

     Another form of brachytherapy involves the temporary introduction of a
sealed and shielded source of radioisotope into the body to deliver a localized,
high dose irradiation of tissue. One of the applications being evaluated is for
irradiation of vessel walls immediately following balloon angioplasty (with or
without stent) to reduce the occurrence of restenosis. We believe this
application and others like it will take several years to develop, but they
represent interesting and promising new opportunities for radioisotopes.

     INDUSTRIAL APPLICATIONS. Numerous industrial applications require
radioactive materials. One of the largest uses is in radioactive source
standards. These are employed as calibration tools for numerous radiation
detectors, with one of the largest standards users being the Nuclear Medicine
departments in the thousands of hospitals throughout the world. We supply many
isotopes used in the manufacture of these sources and distribute the finished
products of one of these manufacturers in parts of Europe. The continued growth
in the numbers and complexity of Nuclear Medicine imaging equipment, especially
PET (Positron Emission Tomography), should ensure growth in the demand for these
radioisotopes.

     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 15% and 16% of our
net revenues in fiscal 1999 and 1998. 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. We believe that greater availability of stable isotopes and advances in
instrumentation (improvements in sensitivity and reduced cost) will promote
increased demand for SILCs. We have expanded our ability to acquire some of
these isotopes as a result of the Supply Agreement we entered into with
Eagle-Picher. If Eagle-Picher is able to produce enriched carbon isotopes from
its facilities in Oklahoma, we will have expanded our supply of these isotopes
and we will no longer be solely dependent on facilities in the former Soviet
Union as suppliers of these isotopes. 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. We believe 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. We
believe 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.

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

     In addition to providing additional revenue potential and possibly higher
margins, we believe that developing or acquiring complex SILC synthesis
capability would be synergistic with our efforts to develop the


                                       7
<PAGE>

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.
We believe 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. We have elected to pursue what we believe 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:

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

     -    breath samples are collected at regular intervals; 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. We believe
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. We believe 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. We believe that several companies in Europe have received regulatory
approval.

     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.

<TABLE>
<CAPTION>
     BREATH TEST                               CONDITION DIAGNOSED
----------------------------  --------------------------------------------------
<S>                           <C>
(13)C-Urea                      Helicobacter pylori
(13)C-Triolein                  Fat malabsorption
(13)C-Spirulina                 Gastric emptying
(13)C-Galactose                 Liver function
(13)C-Xylose                    Small Bowel Bacterial  Overgrowth (the major cause
                                of chronic diarrhea)
(13)C-Aminopyrine               Liver function
(13)C-Caffeine                  Liver function
(13)C-Erythromycin              Cyclosporin dosage following transplantation
(13)C-Valine                    Genotype of MSUD (Maple Syrup Urine Disease)
(13)C-Sucrose                   Sucrose malabsorption  (sucrase-isomaltase complex
                                deficiency)
(13)C-Starch                    Pancreas amylase function
(13)C-Cholesteryl Octanoate     Pancreas esterase function
</TABLE>

     We have entered this market supplying carbon-13 to manufacturers. We are
considering a possibility of manufacturing pharmaceutical-grade substrates
sometime in the future. We purchase carbon-13 from 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.

     We are investigating the feasibility of building such plants and are
considering various strategic options, such as partnering or acquisition of
complementary technologies or businesses, to leverage our carbon-13


                                       8
<PAGE>

production capability. One such effort is the Supply Agreement we negotiated
with Eagle-Picher for the supply of various isotopes including carbon-13 as
described above.

     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. We believe that the production and marketing of DBTs are also
subject to similar regulatory controls in the foreign countries where we 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.

     To meet this demand, we announced in May 1999 a multi-year joint
cooperation agreement with Global Scientific Technologies in Russia, which is
the third largest producer of oxygen-18 in the world. With market demand
exceeding supply and increasing market prices, this agreement encompasses
current production, increased production through recycling, new production
facilities in the U.S. and elsewhere, and new value-added forms of the isotope.
The agreement has resulted in a shift in our sales and marketing strategy from
smaller buyers to larger commercial providers of irradiation equipment,
flourine-18, and FDG, who will likely dominate the market and whom we anticipate
will favor long-term supply partnerships.

     We will initially focus our sales efforts on the smaller buyer until
assured supplies permit us to aggressively pursue long-term supply agreements
with the large radiopharmacy companies, like PetNet, Syncor, Nycomed-Amersham,
etc., who we believe will dominate this market through their networks of
regional radiopharmacies. To supply this anticipated demand, we are exploring a
combination of options which include exclusive distribution rights for existing
production, investment in expansion of existing production facilities, and
investment in our 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.

     We believe that we are 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,
we have recently begun marketing our products, services and capabilities to the
existing and emerging manufacturers.


                                       9
<PAGE>

     ISOTOPICALLY PURE SEMICONDUCTORS

     Isotopic purification of carbon used to manufacture synthetic diamonds has
resulted in substantially improved physical properties. Published tests
conducted by General Electric Corporation 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 thermal conductivity of the diamond
at room temperature. Additionally the new diamond was found to be highly
transparent, and the transmission of certain frequencies of laser light was
increased by approximately ten times without the diamond sustaining damage.
General Electric Corporation 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.

     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
thermal conductivity of a thin film of isotopically pure silicon-28 was
demonstrated by a researcher at Brown University in 1997. The thermal
conductivity was found to be 60% higher than natural silicon at room temperature
and 40% higher at 100 degrees Centigrade. We believe that this level of thermal
conductivity improvement should significantly benefit the semiconductor
industry, and therefore we have decided to concentrate our development efforts
on silicon-28 for the near term future.

     According to the Semiconductor Industry Association, the 1998 market for
silicon wafers and other semiconductor substrates was approximately $7 billion.
Improvement in the thermal conductivity of silicon is important since as the
feature size of semiconductor devices continuously decreases, the power density
increases. As power density increases, more heat is generated per unit volume
causing the device-operating temperature to rise. The semiconductor industry is
moving toward lower operating voltages and is using mechanical means to remove
bulk heat, but we believe 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 deep sub-micron devices, the ability
to remove heat will be a prime consideration for the semiconductor industry.

     We believe that if commercial opportunities emerge, isotopically pure
silicon-28, deployed as wafers or substrates and as silane or trichlorosilane
gas for building epitaxial layers should find a niche in the manufacture of
high-performance silicon semiconductors. Even at a premium price, we believe
that silicon-28 can compete in high-performance, less cost-driven markets. We
have produced isotopically pure silicon-28 silane gas, and we have produced
silicon-28 epitaxial layers on natural silicon substrates.

     We believe that these materials meet industry standards for semiconductor
fabrication and have met the quality standards for microprocessor fabrication.
We have provided specimens to academic institutions and industrial semiconductor
manufacturers. These institutions have agreed to measure certain physical and
electrical properties of silicon-28, manufacture devices, and compare the
performance to devices made with natural silicon. Epitaxial wafers with layers
of silicon-28 made to custom specifications are currently for sale in
pilot-scale quantities. It is our goal to provide silicon-28 epitaxial wafers to
a wide variety of semiconductor manufacturers, but the best near term
opportunity appears to be microprocessors and certain power semiconductors. To
this end, we delivered wafers to Advanced Micro Devices in the fourth quarter of
fiscal 1999.

     During fiscal 1999, Isonics acquired an exclusive license to two U.S.
patents owned by Yale University, concerning isotopically pure semiconductor
devices. These patents expire in 2009 and 2012 and cover silicon, germanium,
gallium arsenide and most isotopically pure compound semiconductors. We believe
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 we will be able to commercialize
any such products or that a market will emerge for any such products.

     During fiscal 1999, we signed a joint research and development agreement
with Silex Systems Ltd. The agreement calls for Silex to partially fund some of
our development activities and for Silex to assess the feasibility of building a
silicon isotope separation plant using Silex's patented laser isotope separation
process. These agreements represent the launch of our efforts to ensure a large
supply of silicon isotopes at a reasonable cost to support the large-scale
manufacture of isotopically pure silicon wafers. In December 1999, we entered
into a


                                       10
<PAGE>

Supply Agreement with Eagle-Picher Technologies, LLC for the supply of
isotopically pure silicon-28 from its Oklahoma-based facility. This Supply
Agreement, described in detail above, superceded a prior agreement, signed in
fiscal 1999, with Eagle-Picher to cooperate on developing silicon-28 production
capabilities at the Oklahoma facility. As of February 10, 2000, no silicon-28
has been delivered by Eagle-Picher, however, shipments are scheduled for April
2000 per the terms of the agreement.

RESEARCH AND DEVELOPMENT

     Consistent with our product development strategy, we are seeking to
identify and evaluate a variety of new stable isotope products and potential
markets for economic and technical feasibility. We will continue to fund
research and development to improve technologies for isotope separation and
materials processing technologies. During fiscal 1999 and 1998, research and
development expenses were $1,155,000 and $811,000, respectively.

     We have focused our efforts on developing lower-cost, carbon-13 separation
methods and the production of high chemical-purity, silicon-28 silane gas and
epitaxial wafers made from that silane gas. To date this work has been performed
for us on a sub-contract basis by unaffiliated contractors. We attempt to
retain, to the maximum extent possible, ownership of any intellectual property
resulting from such work.

     We have been 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. During fiscal 1999, we signed an agreement with Voltaix, Inc. to be the
distributor of our products for the ion implantation industry. The first product
being sold in accordance with the Voltaix agreement is silicon tetrafluoride
enriched in the silicon-29 isotope. The isotopically enriched materials allow
higher beam currents and higher productivity than the natural silicon
tetrafluoride currently used in the industry.

PATENTS AND PROPRIETARY RIGHTS

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

     We currently have no patents in our own name and have not filed any patent
applications. We have rights to several isotopically engineered innovations
regarding electronic and optical materials which we believe may be patentable.
Ongoing work in the area of isotope separation by chemical means may also lead
to patentable inventions.

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

COMPETITION

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


                                       11
<PAGE>

     Depleted Zinc. During fiscal 1999, we were among the leading producers of
depleted zinc. We also believed that other entities or persons were expected to
begin producing depleted zinc in substantial quantities in the near future.
Several such possible producers have adequate technical and financial resources
to become viable competitors 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 supply source. UCN
also competes with us in the markets for medical target isotopes. This
competitive environment, along with many other factors, contributed to our
decision to sell our depleted zinc business to Eagle-Picher Technologies, LLC in
December 1999.

     SILCs and DBT materials. We have several larger and numerous smaller
competitors in the markets for the SILC products, and we will have additional
competitors if we offer 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 our
competitors produce some combination of SILCs and DBT substrates. Two recently
merged companies in the U.S. have received FDA approval for a carbon-13 UBT.
Several companies in Europe have also received regulatory approval. Our
principal current competitors and potential competitors also include MassTrace,
euriso-top, Aldrich Chemicals, Icon Services, Omicron, C/D/N Isotopes and Martek
Biosciences. We have in the past, and may in the future, sell products to or
purchase products from these companies.

     Semiconductor materials. Due to the early stage of the semiconductor
materials opportunities, we have not identified material competitors in these
markets. However, given the potential size and importance of these new potential
markets, we anticipate that substantial competition will emerge if these markets
develop.

     Many of the areas in which we are or intend 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 us from competing in our intended markets.

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

MANUFACTURING AND SUPPLY

     Consistent with our strategy to minimize capital expenditures, we obtain
isotopes through multi-year supply agreements. To a lesser extent, from time to
time, we also obtain stable isotopes from a variety of other Russian isotope
sources and may invest in our own isotope production facilities in the future
upon determining the optimum production technology. Currently, we obtain
substantially all of our isotopes from Russia, the Republic of Georgia, and
other locations within the former Soviet Union. In December 1999, we entered
into a Supply Agreement with Eagle-Picher Technologies, LLC, for the right to
purchase enriched silicon and carbon isotopes from its facilities in Oklahoma.
In addition, Eagle-Picher has an obligation to provide us 200 kilograms of
isotopically pure silicon-28 during calendar year 2000. The first deliveries
from the Eagle-Picher silicon facility are scheduled to begin in April 2000.

     We have entered into a 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
depleted zinc and other stable isotopes for us, will allocate its stable isotope
production capacity to us, and will produce other isotopes to respond to
marketplace demand for our 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 depleted zinc to third parties located in
          North America or to other parties for resale in North America;


                                       12
<PAGE>

     -    that as long as the plant is able to meet all of our requirements for
          depleted zinc at prices competitive with other potential suppliers we
          will not buy depleted zinc from other third parties located in the
          Russian Federation; and
     -    that disputes arising under the Supply Agreement 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, our
operations 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 we should fail to obtain and maintain all
necessary governmental approvals. We have assigned this supply agreement to
Eagle-Picher and we no longer have any rights under it.

     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 our relationship with our processor in
Russia will be successfully maintained. Disruption or termination of our supply
sources could delay shipments by us and could have a material adverse effect on
our business, financial condition and results of operations. We do not presently
maintain political risk insurance but we will evaluate the desirability and
availability of such insurance in the future.

     The plant with which we have the agreement described above is one of four
similar plants which were designed to address the former Soviet Union's 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 we
believe that additional capacity could be converted if the plant decided to do
so. We believe that the plant has the potential capacity to meet all of our
foreseeable needs for the processing of stable isotopes. We believe 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, we 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 in the countries that comprised the former Soviet Union. 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. This agreement also grants rights to us to employ the Institute's
separation technology at new production facilities anywhere in the world. The
two parties have also agreed to cooperate on development projects, which would
include new isotope production technologies, as well as, new applications of
isotope products.

     To increase capacity and to geographically diversify our production of
certain isotopes, on December 1, 1999, we entered into a Supply Agreement with
Eagle-Picher Technologies, LLC, for it to supply us with enriched isotopes of
silicon and carbon. We have already purchased 200 kilograms from Eagle-Picher to
be delivered during 2000. Eagle-Picher expects to produce these isotopes from
its facilities in Oklahoma, a portion of which are currently under construction.
There can be no guarantee, however, that the facility will be able to produce
high-purity isotopes on commercially reasonable terms. We believe that this
relationship with Eagle-Picher may improve our profitability and will improve
the security of our supply if the facility performs as expected.

     We have historically depended upon a single processor, located in Russia,
for one process involved in the manufacturing of our products, and upon a single
supplier or a limited number of suppliers and processors for certain other
manufacturing processes. Although we do have written agreements with certain of
our suppliers and processors, we do not have any written agreements with other
suppliers and processors. We seek to reduce our dependence on our 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 our business, financial condition and


                                       13
<PAGE>

results of operations. Moreover, a prolonged inability to obtain alternative
sources for processing could materially adversely affect our relations with our
customers. Although the relationship with Eagle-Picher should provide greater
security for our supply of silicon and carbon isotopes, if the facility performs
as expected, there can be no assurance that it will in fact to so.

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 our products and in our 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,
we are subject to various laws, regulations and requirements relating to such
matters as the import and export of our products, ensuring safe working
conditions, laboratory and manufacturing practices, the use and disposal of
hazardous or potentially hazardous substances used in connection with our
research, development and manufacturing activities. Some of the regulations are
summarized below.

     FDA REGULATION

     We are not currently subject to any FDA regulation because we do not
currently manufacture any DBTs, drug products, or other medical devices. Our
customers may, in many cases, be subject to FDA regulation. If we, in the
future, test, manufacture, market, distribute, export, or sell diagnostic
products (such as any DBTs) or medical devices, we will also likely be subject
to extensive and rigorous regulation by the United States and other countries in
which we may choose to test, manufacture or market our proposed diagnostic
products. As of the date of this Form 10-KSB, we have not determined those
countries, other than the United States, where we might seek regulatory
approvals to market any such products it may develop. The products we intend 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. We have
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 our own resources. The
various diagnostic products of which we are 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 products developed by us, or other
entities to which we 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 our ability to commercialize our
products and our 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.

     We, or the FDA, may suspend clinical trials or commercial distribution at
any time if either entity determines that the subjects or patients are being
exposed to an unacceptable health risk related to the manufacturing, testing and
use of our investigational or approved products, or if the FDA determines that
we have violated applicable laws or regulations. If clinical studies are
suspended, we 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 us or against our 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


                                       14
<PAGE>

approvals and the subsequent compliance with applicable federal and state
statutes and regulations, and any penalties imposed for their violation, could
adversely affect our ability to commercialize products.

     DIAGNOSTIC MEDICAL DEVICE PRODUCTS

     Certain of our contemplated diagnostic products, 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.

     No company can proceed with sales of products for human clinical use until
it receives notification from the FDA that the FDA agrees with an 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 a contemplated product, we will be required to seek marketing
approval of our product by the second procedure. This second procedure, a
Pre-Market Approval ("PMA") application, involves a lengthier and more
burdensome procedure, which would likely require clinical studies. Together with
the FDA review of the PMA, this application process may take three-to-five years
before commercial marketing can occur, if the PMA is approved. There can be no
assurance that any future product we develop which is 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 our future
contemplated and 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 us 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 our 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.

     We have not developed any product that requires any clearance procedure
with the FDA, and no product is currently under active development. We believe
that any DBT instruments that we may develop in the future will be eligible for
marketing under a 510(k) Pre-Market Notification, if cleared by FDA, but that
the substrate would require approval of a New Drug Application as described in
the following section. We believe that clinical studies would be required to
obtain FDA approval of the 510(k)/NDA for the DBT instrument/substrate, and
would be conducted under an IDE approved by the FDA. There can be no assurances
that FDA will allow us 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 we may develop, or that the 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 that we may
develop 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. Our ability to
successfully market diagnostic products within the U.S. may depend on our
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 us, and our operations.


                                       15
<PAGE>

     DRUG PRODUCTS

     We have not yet developed any drug products, and our research and
development efforts for such products are only in the very preliminary stages.
The development and marketing of drugs is highly regulated by the FDA. Certain
products that we may develop may be classified, depending on their
characteristics, as drugs regulated under the FDA. Development of a drug product
for use in humans is a multistep process. First, laboratory and animal testing
establish reasonable safety of the experimental product for testing in humans,
and suggest 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 the FDA notifies the sponsor to the
contrary within thirty (30) days of receipt of the IND. That approval may come
within thirty (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
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 us from commercializing our products and would have a material adverse
effect on our 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"). If we commence the manufacture of any products subject to FDA
regulation (and we are not currently manufacturing any such products), we will
have to comply with cGMPs and we will have to ensure, compliance by our
third-party manufactures. Compliance, and our 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 violators and its officers
and employees who are responsible for the activities that lead to the
violations.

     Our facilities and employees are also required to comply with environmental
and other regulations concerning the operations of and the materials we use, as
well as handling and distribution of products and waste


                                       16
<PAGE>

materials. Failure to ensure compliance with such federal, state or local laws
and regulations could have a material adverse effect on us

     In addition, the manufacture, distribution and export of some of our
current or potential products and technology may be subject to governmental
controls pertaining to materials and technology that 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 we 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 us and our operations.

     EXPORT AND ENVIRONMENTAL CONTROLS

     Certain of our products and technology, particularly those having potential
nuclear energy or military applications, such as depleted zinc 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 our products and
technology would be exported.

     Likewise, certain of our current and potential operations 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"). Additionally, we are required to
comply with stringent controls pertaining to the handling and distribution of
our 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 us to significant administrative civil and criminal penalties, including
loss of our approvals and licenses, or the imposition of additional restrictions
on our operations. There can be no assurances that we will be able to obtain and
maintain the approvals or licenses necessary to successfully market our 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 our business, financial condition and results of operations.

     REGULATION OF NON-MEDICAL CHEMICAL PRODUCTS

     The import, export, handling, transportation, sale, storage and other
activities undertaken in connection with our 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
constantly evolving. Our ability to effect and maintain compliance with these
controls is important to our commercial success.

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

     The shipments received at our 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, we are considered a small quantity generator of
hazardous waste and will rely on certified haulers to dispose of our minimal
amounts of hazardous waste. We believe we are in compliance, in all material
respects, with applicable federal and state environmental regulatory
requirements.


                                       17
<PAGE>

     Should the levels of hazardous waste increase as our inventory and handling
operations increase in volume, then we would have to comply with Environmental
Protection Agency ("EPA") requirements and obtain an EPA ID number, which is
costly and requires an increased investment of personnel and money. We have no
experience in this area of compliance and we 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, we 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, we cannot
assure that we 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 1:5,000. At present, the deuterium
containing compounds that we import 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. We will not be able to ship these chemicals to certain
countries that require a special license for such shipments; none of these
countries represent significant current or expected future markets for our
anticipated and present products. In addition, certain technology or products
that we have 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 our ability to broadly
market such products.

PRODUCT LIABILITY AND INSURANCE

     Our business exposes us to potentially substantial product, environmental,
occupational and other liability risks which are inherent in product research
and development, manufacturing, marketing distribution and use of our products
and operations, including, but not limited to, products used in nuclear power
plants and medical device products. We have product liability insurance in order
to protect ourselves from such potential exposures. There can be no assurance
that adequate insurance coverage will be available at an acceptable cost, if at
all, or, a product liability or other claim would not materially and adversely
affect our business or financial condition.

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

EMPLOYEES

     As of April 30, 1999, we had 34 full and part-time employees, of whom seven
have Ph.D.s and four others have advanced degrees in chemistry, engineering and
related fields. Approximately seven employees are involved in research and
product development, thirteen in manufacturing and sourcing, and fourteen in
business development and administration, but such employees' responsibilities
may also encompass areas other than their primary area of responsibility. We
consider our relations with our employees to be good. None of our employees are
covered by a collective bargaining agreement.

ITEM 2.  PROPERTIES

     We relocated our headquarters to Golden, Colorado in December 1998, and now
share facilities with our wholly-owned subsidiary, Interpro. Interpro leases
approximately 41,000 square feet of office, research and production facilities.
The lease expires in July 2000. The facility is used for contract research and
development and materials processing as well as administration. By combining our
headquarters into the facility of our subsidiary, we have significantly reduced
our costs for both space and administrative support. We also lease 650 square
feet for


                                       18
<PAGE>

an administrative office in Columbia, Maryland that expires November 30, 2001.
Chemotrade leases office space in Dusseldorf and Leipzig, Germany.

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, 1999, there
were no matters submitted to a vote of security holders.




















                                       19
<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,
we unbundled the Units and the Common Stock and Class A Redeemable Warrants
commenced trading on the OTC Electronic Bulletin Board under the symbols ISON
and ISONW, respectively.

     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, 1999 as
reported by OTC Electronic Bulletin Board.

<TABLE>
<CAPTION>
                                                Quarter Ended
                                --------------------------------------------
                                July 31,    Oct. 31,    Jan. 31,   Apr. 30,
                                  1998        1998        1999        1999
                                --------    --------    --------    --------
<S>                             <C>         <C>         <C>         <C>
Units (ISONU)
  High                              -        1  1/4     2 15/16      2 1/8
  Low                               -        1 1/16       15/16      2 1/8

Common Stock (ISON)
  High                           2 23/32     1 29/32        2        3 9/16
  Low                            1 21/32     1 1/32       25/32      1 7/16

Class A Redeemable Warrants
  (ISONW)
  High                             3/4        7/16         3/8        3/4
  Low                             9/32        3/16        3/32        9/32


<CAPTION>
                                                Quarter Ended
                                --------------------------------------------
                                July 31,    Oct. 31,    Jan. 31,    Apr. 30,
                                  1997        1997        1998        1998
                                --------    --------    --------    --------
<S>                             <C>         <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 February 10, 2000, there were approximately 250 holders of record of
our Common Stock.

     We have never declared or paid a cash dividend on our common stock. We
presently intend to retain our earnings to fund development and growth of our
business and, therefore, do 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.


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

OVERVIEW


                                       20
<PAGE>

     Founded in 1992, Isonics Corporation is a specialty chemical and advanced
materials company, which develops and commercializes products based on stable
isotopes. Stable isotopes are extremely pure materials engineered at the
molecular level to provide enhanced performance properties in semiconductors,
lasers and high performance lighting and energy production. Stable isotopes are
also widely used in basic research, pharmaceutical development and drug design,
as well as in medical diagnostics and imaging. By replacing materials
traditionally used in these industries with isotopically engineered versions of
the same materials, product performance, safety, and economics can be enhanced
significantly. Using state-of-the-art technology, we produce a wide range of
enriched stable isotopes, which are then converted into products, which meet the
specialized needs of our customers.

     Until December 1, 1999, our core business was the production and supply of
depleted zinc, a non-radioactive stable isotope, to the energy industry (see
below). In fiscal 1996, we expanded our business scope to include development of
isotopically engineered materials for the medical research, medical diagnostic
and semiconductor industries. In June 1997, we produced the world's first
isotopically pure silicon epitaxial wafer suitable for semiconductor
fabrication. In July 1997, we 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. In February 1998, we
announced the availability of isotopically pure silicon-28 epitaxial wafers in
prototype quantities.


RECENT TRANSACTIONS

     On December 1, 1999, we sold our depleted zinc business to Eagle-Picher
Technologies, LLC ("Eagle-Picher") for $8.2 million, including $1.5 million to
be paid over a period of three years. Eagle-Picher's obligation to pay the final
$1.5 million is subject to certain contingencies. We received cash of
approximately $6.7 million from Eagle-Picher at the closing, of which
approximately $1.2 million was used to pay certain accrued liabilities.

     The Agreement executed between us and Eagle-Picher provides for:

     (3)  Our sale of the depleted zinc business to Eagle-Picher for a purchase
          price including approximately $6.7 million in cash plus three
          additional payments of $500,000 over the next three years, and

     (4)  Eagle-Picher's sale to us of 200 kilograms of silicon-28 in
          consideration for a forty-two (42) month Warrant grant to Eagle-Picher
          for the purchase of 4,000,000 shares of our common stock at purchase
          price of $3.75 per share. The Warrant is subject to a registration
          rights agreement. The amount of the Warrant can be reduced if
          Eagle-Picher is unable to supply the full 200 kilograms of silicon-28
          during calendar year 2000.

     Related to, but separate from, the sale of the depleted zinc business, we
contemporaneously signed a ten-year Supply Agreement by which we will have the
exclusive right to purchase quantities of isotopically pure silicon-28,
silicon-29, and silicon-30, and a non-exclusive right to purchase quantities of
isotopically pure carbon-12 and carbon-13 produced by Eagle-Picher from its
Oklahoma-based facilities for a ten-year period. The Supply Agreement locks-in
what we believe is a favorable purchase price for the aforementioned isotopes.
As partial consideration for the exclusivity provision, we agreed to pay
Eagle-Picher a fee equal to 3.0% of the net revenues from all sales made by us
of products incorporating enriched silicon isotopes supplied by Eagle-Picher.
The ability of Eagle-Picher to produce isotopes meeting the specifications of
the Supply Agreement is contingent upon Eagle-Picher successfully begin
production of silicon-28 as scheduled in March 2000.

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.

<TABLE>
<CAPTION>
                                                          Year Ended
                                                           April 30,
                                                        --------------
                                                         1998     1999
                                                        -----    -----
<S>                                                     <C>      <C>
      Net revenues                                      100.0%   100.0%
      Cost of revenues                                   68.7     78.7
                                                        -----    -----


                                       21
<PAGE>

           Gross margin                                  31.3     21.3
      Operating expenses:
         Selling, general and administrative             19.8     21.4
         Research and development                        12.0      6.8
         Restructuring & office closure                    --      4.1
                                                        -----    -----
      Total operating expenses                           31.8     32.3
                                                        -----    -----
      Operating income (loss)                            (0.5)   (11.0)
      Other expense, net                                 (2.1)    (2.8)
                                                        -----    -----
      Income (loss) before extraordinary item and
        income taxes                                     (2.6)   (13.8)
      Income tax (expense) benefit                        4.6     (1.0)
                                                        -----    ------
      Income (loss) before extraordinary item             2.0    (14.8)
      Extraordinary item - loss on extinguishment of
        debt                                             (3.7)    (0.0)
                                                        -----    ------
      Net income (loss)                                  (1.7)%  (14.8)%
                                                        =====    ======
</TABLE>

NET REVENUES

     Net revenues increased from $6.78 million in fiscal 1998 to $17.00 million
in fiscal 1999, an increase of $10.22 million or 151%. The increase is primarily
due to additional net revenues from the Interpro and Chemotrade acquisitions.
Interpro 1999 revenues were $2.614 million. Chemotrade's fiscal 1999 revenue was
$10.181 million.

     Net depleted zinc revenues for fiscal 1999 increased by approximately
$323,000 from fiscal 1998 revenues of $5,636,000, on comparable unit sales.
Average unit sales prices of depleted zinc decreased slightly from fiscal 1998
to fiscal 1999 due to less refined product being sold during fiscal 1999. Net
revenues for SILCs in fiscal 1999 were approximately $2.599 million, an increase
of approximately $1.492 million, or 135% from fiscal 1998. The revenue growth
reflects the increasing demand for SILCs, specifically enriched carbon and
oxygen products; however, our revenue from SILCs is limited by the available
supply of enriched carbon and oxygen products. We have and intend 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 our SILC
products.

     International sales represented approximately 53% of revenues in fiscal
1999 and less than 10% of net revenues for fiscal 1998. This substantial
increase is primarily attributable to our acquisition of Chemotrade.

GROSS MARGIN

     Gross margin decreased to approximately 21.3% in fiscal 1999 from 31.3% in
fiscal 1998. The decrease is because of reduced unit sales prices of depleted
zinc, the increased proportion of net revenues generated from contract
manufacturing performed by Interpro, and stable and radioisotope revenues
generated by Chemotrade which typically have lower margins. Additionally, the
entrance to the O-18 market has been achieved by pursuing market share over
margin.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling, general and administrative expenses increased on a dollar basis by
approximately $2.3 million or 21.4% of net revenues for fiscal 1999 from $1.3
million or 19.8% of net revenues for fiscal 1998. The dollar increase in
selling, general and administrative expenses is primarily attributable to the
acquisitions of Interpro and Chemotrade.

RESEARCH AND DEVELOPMENT EXPENSES

     Research and development expenses increased by approximately $344,000 or
42.4% for fiscal 1999, while declining on a percentage basis to 6.8% of net
revenues in fiscal 1999, from 12.0% of net revenues in fiscal 1998. The dollar
increase during fiscal 1999 is primarily because of increased marketing and
material costs associated with the development of isotopically pure silicon
wafers and development costs incurred at Interpro. The decrease in research and
development expenses as a percentage of net revenues from fiscal 1998 to fiscal
1999 was because


                                       22
<PAGE>

of revenue growth associated with our acquisitions. We believe that the
development and introduction of new product applications is critical to our
future success and expect that research and development expenses will remain
stable (as measured in dollars), in the near term because of the timing of
material usage and outside services, but may vary as a percentage of revenues.

RESTRUCTURING AND OFFICE CLOSURE

On October 31, 1998, we announced a restructuring of our operations and
relocation of our headquarters from San Jose, California to Golden, Colorado,
the location of our subsidiary, Interpro. We recorded a net charge for fiscal
1999 of $691,000, of which $468,000 was related to the write-off of certain
fixed assets, $132,000 for the termination of certain lease agreements, and
$91,000 for severance and other costs. As of April 30, 1999, the only
significant restructuring costs remaining are the lease payments on the former
San Jose office, and certain moving costs for two executives who relocated to
Colorado. These costs are estimated to be $126,000, of which approximately
$61,000 was accrued at April 30, 1999, and will be incurred over the next 4.5
years.

OTHER INCOME (EXPENSE), NET

     Other income (expense), net reflects interest expense, amortization of debt
issuance costs, and foreign currency gains and losses. Other expense, net
increased by approximately $339,000 to $484,000 for fiscal 1999. The increase
was the result of foreign currency gains from liabilities denominated in German
Deutsche Marks due to the sellers of Chemotrade which was offset by a
significant increase in interest expense including charges for the fair value of
warrants and common shares issued in connection with debt and debt conversions.

INCOME TAXES

     The income tax benefit was $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 previously recorded valuation
allowance. The consolidated entity had an income tax expense of $171,000 for
fiscal 1999. Because the Chemotrade subsidiary had net income, income taxes were
paid in Germany. The two United States-based entities both had net losses and
did not owe income taxes. A valuation allowance has been provided against all
deferred tax assets, which relate primarily to net operating loss and research
and development credit carryforwards. We are exploring various tax minimization
strategies in an effort to conserve future cash flows.

LIQUIDITY AND CAPITAL RESOURCES

     Since inception, our principal sources of funding have been cash from
operations, borrowed funds and sales of common stock. We generated cash in
operating activities of approximately $357,000 during fiscal 1999, as compared
to a use of cash of $539,000 in fiscal 1998. Positive influences on fiscal 1999
cash flow were: a decrease in Accounts Receivable, $1,748,000, Depreciation and
Amortization expense, $520,000, and the loss on disposal of property
(restructuring related), $504,000. Negative influences, in addition to the net
loss of $2,521,000, were a decrease in accounts payable $112,000 and an increase
in inventory of $89,000.

     Our investing activities used cash of approximately $705,000 and $66,000
during fiscal 1999 and 1998, respectively. Investing activities in fiscal 1998
were primarily for purchases of property and equipment. Uses of cash in fiscal
1999, include approximately $159,000 for property and equipment, and $546,000
net cash used in the Chemotrade acquisition.

     Financing activities used cash of $244,000 in fiscal 1999, and provided
cash of $1,621,000 during fiscal 1999. In fiscal 1999, the primary use of cash
was the excess of repayments of debt, $1,000,000 over proceeds of debt,
$701,000. In fiscal 1998, the primary source of cash was the issuance of common
stock, $3,452,000 versus the use of cash for payments of debt, $1,852,000.

     At April 30, 1999, we had approximately $452,000 of cash equivalents a
decrease of $592,000 compared to $1,044,000 at April 30, 1998. At April 30,
1999, we had negative working capital of approximately $2,317,000 a


                                       23
<PAGE>

decrease of $4,128,000 compared to working capital of $1,811,000 at April 30,
1998. The decrease is primarily the result of our cash payments for the
acquisition of Chemotrade and the losses incurred for fiscal 1999. During fiscal
1999, we paid the sellers of Chemotrade approximately $1,686,000 in cash, and
had one note for approximately $826,000 outstanding due to the sellers on June
1, 1999, of which approximately $500,000 was repaid and approximately $326,000
was extended until July 2000.

     On July 24, 1998, we obtained a $3.0 million asset based credit facility
for our U.S. operations, secured by our U.S. assets, with a lender. The loan
consists of a $500,000 equipment term loan, payable over forty eight months; a
$250,000 term loan with interest only payments due monthly; and commencing
August 1, 1998, payable over twenty five months, a $500,000 revolving line of
credit, with borrowings limited to 35% of eligible inventory, a $1,250,000
revolving line of credit, with borrowings limited to 80% of eligible accounts
receivable and a $500,000 equipment acquisition term loan. The availability of
the equipment acquisition loan is conditioned upon the Company achieving and
maintaining minimum debt service coverage ratios. The proceeds of the new
facility were used to repay approximately $537,000 of debt outstanding and
$742,000 of accounts payable. Chemotrade has one unsecured revolving line of
credit for 400,000 DM (approximately $220,000 at April 30, 1999). We are
evaluating alternative secured credit facilities for Chemotrade.

     On July 29, 1999, we completed a private placement financing to accredited
investors and certain creditors valued in total at approximately $2.7 million.
We issued 1,830,000 units, each consisting of one share of Series A Convertible
Preferred Stock and one warrant. We received $2,250,000 in cash proceeds and
converted $425,000 of long-term debt in connection with the private placement.
Each share of the Series A Convertible Preferred Stock is convertible into one
share of our common stock at a conversion price of $1.50. The liquidation
preference for the Series A Convertible Preferred Stock is $1.50. Each warrant
allows the investor to purchase one share of the Company's common stock for
$3.75 through July 26, 2002.

     In addition to converting $425,000 of existing debt into equity as part of
the private placement we:

     -    issued 500,000 warrants to purchase shares of our common stock to an
          investment banker as a commission on this placement. The warrants are
          exercisable at $3.75 per share through July 29, 2002.
     -    issued 46,667 units in satisfaction of all current and future
          obligation under the Isoserve royalty agreement.
     -    Extended the payment due date for the remaining balance on the
          Chemotrade acquisition note to July 2000 and extended the payment due
          date for certain unsecured promissory notes to January 2000.

     We believe that the proceeds and the revised debt structure resulting from
the private placement and additional strategies currently being developed by us
will be sufficient to fund operations for the next twelve months.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

     In evaluating the our business, readers of this report should carefully
consider the following factors in addition to the other information presented in
this report and in our other reports filed with the SEC that attempt to advise
interested parties of the risks and factors that may affect our business.

RELATIONSHIP WITH CERTAIN SUPPLIERS AND AVAILABILITY OF RAW MATERIALS

     Through December 1, 1999, we depended upon an isotope enrichment plant,
located in Russia, which is owned by the Ministry of Atomic Energy of the
Russian Federation (the "Ministry"), which is part of the cabinet of the
government of the Russian Federation, for one process involved in the
manufacturing of depleted zinc. Through December 1, 1999, we also relied upon a
single supplier of raw material for depleted zinc. We had signed an agreement
with the commercial department of the Ministry to purchase certain isotope
separation services through 2001. This contract has now been assigned to
Eagle-Picher Technologies, LLC, who purchased our depleted zinc business on
December 1, 1999. However, historically speaking, disruption or termination of
services provided by


                                       24
<PAGE>

the Ministry or our single supplier of raw material could have had a material
and adverse affect upon our financial condition and results of operations.

     Related to, but separate from, the sale of the depleted zinc business, we
contemporaneously signed a ten-year Supply Agreement by which we will have the
exclusive right to purchase quantities of isotopically pure silicon-28,
silicon-29, and silicon-30, and a non-exclusive right to purchase quantities of
isotopically pure carbon-12 and carbon-13 produced by Eagle-Picher from its
current and planned facilities in Oklahoma for a ten-year period. The Supply
Agreement locks-in what we believe is a favorable purchase price for the
aforementioned isotopes. As partial consideration for the exclusivity provision,
we agreed to pay Eagle-Picher a fee equal to 3.0% of the net revenues from all
sales made by us of products incorporating enriched silicon isotopes supplied by
Eagle-Picher. The ability of Eagle-Picher to produce isotopes meeting the
specifications of the Supply Agreement is contingent upon Eagle-Picher
successfully beginning production of silicon-28 as scheduled by March 2000.

OPERATIONS IN RUSSIA AND THE REPUBLIC OF GEORGIA

     Operations in Russia and the Republic of Georgia ("Georgia") entail certain
risks. Recently, the former republics of the Soviet Union including Georgia have
experienced political, social and economic change as they sought independence
from the former central government in Moscow, and certain of the republics,
including Russia and Georgia, have attempted to transition from a central
controlled economy toward a market-based economy. These changes have involved,
in certain cases, armed conflict. 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 and Georgia. Accordingly, our operations could be
materially adversely affected if hostilities in Russia should occur, if trade
between Russia or Georgia and the United States were interrupted, if political
conditions in Russia or Georgia disrupt transportation or processing concerning
our goods, if laws or government policies concerning foreign business operations
in Russia or Georgia change substantially, or if tariffs are introduced.

DEPENDENCE ON FUTURE PRODUCT DEVELOPMENT

On December 1, 1999, we sold our depleted zinc business, which had historically
provided 35% of our revenues in FY 1999. As a result our future operations will
be more heavily dependent upon our ability to develop new products using stable
and radioisotopes and market and sell those products profitably. While we have a
high degree of confidence we can be successful, we can expect to incur
significant operating losses until we are able to do so. Our ability to develop,
market and sell these products will depend on our suppliers' (including
Eagle-Picher) ability to meet our demand for stable and radioisotopes, as well
as, other suppliers who modify the chemical and physical forms of these
isotopes. There can be no assurance that we will be able to develop products
that can be profitably marketed and sold.

CUSTOMER CONCENTRATION

     Historically, substantially all of our net revenues in any particular
period have been attributable to a limited number of customers, primarily
General Electric Corporation, prior to fiscal 1999. Consistent with our
historical experience, our quarterly results during fiscal year 2000 were
affected materially by the level of orders received from a limited number of
significant depleted zinc users during such quarters and product shipments by us
to our depleted zinc customers during such period. We continue to be subject to
a certain degree of variability based on the timing of sales of our stable and
radioisotopes orders. We cannot be assured that our principal customers will
continue to purchase our products. A decrease in or loss of orders from one or
more major customers would have a material and adverse effect on our financial
condition and results of operations.

FACTORS AFFECTING OPERATING RESULTS; VARIABILITY OF ORDERS

     We operate with little backlog. A significant portion of our net revenues
have been, and we believe 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


                                       25
<PAGE>

cause, material fluctuations in our operating results. Our expense levels are
relatively fixed, and as has been the case in prior quarters, these factors will
affect our operating results for future periods.

MANAGEMENT OF GROWTH

     We have experienced periods of rapid growth that have placed a significant
strain on our financial and managerial resources. Our ability to manage growth
effectively, particularly given our increasing scope of operations, will require
us to continue to implement and improve our management, operational, and
financial information systems, as well as to develop the management skills of
our personnel and to train, motivate and manage our employees. Our failure to
effectively manage growth could have a material adverse effect on our business,
financial condition and results of operations.

DEPENDENCE ON KEY PERSONNEL

     Our future success will depend in significant part upon the continued
service of our key technical, sales and senior management personnel, including
James E. Alexander, our President and Chief Executive Officer, Boris
Rubizhevsky, our Senior Vice President, Isotope Production and Supply, Robert
Cuttriss, President of Interpro, and Herbert Hegener, Managing Director of
Chemotrade. We maintain $1 million of key man life insurance on the lives of
Messrs. Alexander, Rubizhevsky and Cuttriss and all are covered by employment
agreements extending through September 2001, 2001, and 2003, respectively. Mr.
Hegener is covered by an employment agreement extending through the year 2001.
We believe that our future success will depend in large part upon our ability to
attract and retain qualified personnel for our operations. The failure to
attract or retain such persons could materially adversely affect our business,
financial condition and results of operations.

DATES FOLLOWING DECEMBER 31, 1999 (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. We rely on our 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. We have
evaluated such systems and have implemented appropriate changes to our systems
to ensure Y2K compatibility. We believe the cost of addressing any unidentified
issues with the Year 2000 Problem will not have a material adverse affect on our
results of operations or financial position. Additionally, we have evaluated the
potential impact of a Year 2000 problem on the part of our important third party
vendors and have found none. However, even though our internal systems are not
materially affected by the Year 2000 issue, we could be affected through
disruption in the operation of the enterprises with which we interact. Based on
published reports, and Year 2000 disclosures provided to us by suppliers and
vendors, we do not anticipate that the Year 2000 problem will have a material
impact on our business or operations.

VOLATILITY OF STOCK PRICE

     The trading price of our securities has been subject to wide fluctuations
in response to quarter-to-quarter variations in operating results, our
announcements of technological innovations or new products or our 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 our common stock
and common stock warrants.

SHARES ELIGIBLE FOR FUTURE SALE

     Our officers and directors, and all other stockholders have agreed,
pursuant to lock-up agreements expiring September 2000, that without the prior
written consent of Monroe Parker Securities, Inc. (the "Representative") and


                                       26
<PAGE>

the Company, that they will not sell or otherwise dispose of common stock
beneficially owned by them. We were advised by officials of the Representative,
that on December 22, 1997, the Representative ceased market-making activities;
therefore, we may, in the future at our sole discretion and without the
Representative's consent, 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.






















                                       27
<PAGE>

                                    PART III

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

      (a)   IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
        NAME          AGE   POSITION
        ----          ---   --------
<S>                   <C>   <C>
James E. Alexander    50    President, Chief Executive Officer and
                            Chairman of the Board

Boris Rubizhevsky     48    Senior Vice President, Vice Chairman and
                            Director

Daniel J. Grady       44    Vice President, Medical, Research and
                            Diagnostics

Stephen J. Burden     50    Vice President, Semiconductor Materials

Brantley J. Halstead  41    Chief Financial Officer

Robert Cuttriss       50    President of Interpro

Herbert Hegener       53    Managing Director of Chemotrade

Lindsay A. Gardner    46    Director
(1)(2)

Richard Parker (1)(2) 55    Director

Larry J. Wells (1)(2) 53    Director
</TABLE>

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


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

     Mr. Alexander is our co-founder and has served as our President, Chief
Executive Officer and a director since our inception. He has worked full-time
for us since January 1994. From June 1972 to December 1993, he worked in a
variety of technology positions at General Electric Corporation in the aircraft
engine and nuclear power 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 also a co-founder of the Company and has been a Senior
Vice President and a director 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 General Electric Corporation as Business Development Manager in various
international locations. He received his Bachelors degree in Engineering from
Stevens Institute of Technology.

     Dr. Grady joined us as Vice President, Medical, Research and Diagnostics in
1995. From March 1994 through September 1995, Dr. Grady was Vice President of
Research and Development at Sopha Medical Systems, a medical diagnostic imaging
equipment manufacturer. From April 1991 until March 1994, he served as Marketing
Manager, Nuclear Energy for General Electric Corporation ("GE"). From May 1988
through March 1991, Dr. Grady served as Software Engineer Manager, Nuclear
Medicine for GE in England. From October 1984 through


                                       28
<PAGE>

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 degrees, and Ph.D. in
Nuclear Engineering from the University of Michigan.

     Dr. Burden joined us in 1997. Prior to joining us Dr. Burden was Director
of Product Development at sp3, Inc., a manufacturer of diamond-coated tools.
From 1984 to 1993, he was Manager of Advanced Materials R&D at GTE Valenite, a
subsidiary of GTE Corporation, a manufacturer of cutting tools. From 1974 to
1984, Dr. Burden was employed by General Electric Corporation in various
capacities. Dr. Burden has a Ph.D. and a Masters of Science degree, both in
Materials Science, and both from Drexel University. Dr. Burden has a Bachelors
degree in Science Engineering, and an MBA from the University of Michigan.

     Mr. Halstead joined us as Chief Financial Officer in 1999. Most recently,
Mr. Halstead was Chief Financial Officer of Bio-Medical Automation, Inc.
(formerly OZO Diversified Automation, Inc.), from 1997 through 1999. Mr.
Halstead also has nine years of management consulting experience, including five
years with Deloitte & Touche LLP. Prior to earning his Masters of Business
Administration in Finance from the University of Denver, Mr. Halstead worked as
a metallurgical engineer. Mr. Halstead received his Bachelors degree in
Metallurgical Engineering from the Colorado School of Mines, and his Masters of
Accountancy from the University of Denver.

     Dr. Cuttriss has served as the President of Interpro since 1993. With 29
years experience in process operations in the mining and metallurgical
industries, Dr. Cuttriss' experience includes holding the title of principal
consultant and director of Metallurgy International Pty Ltd., from 1983 through
1993. He has undertaken management and technical assignments covering the
design, commissioning and operation of mineral treatment plants, technical
audits and evaluations, pilot plant testing and process development for projects
throughout the world. Dr. Cuttriss received his Bachelors and Ph.D. degrees in
Metallurgy from the University of Melbourne and his Masters in Metallurgy from
the University of Queensland.

     Mr. Hegener is a co-founder of Chemotrade and has served the President
since its formation in 1991. From 1988 to 1991, Mr. Hegener was with Medgenix
Deutschland GmbH-Dusseldorf, and his last position with this firm was Managing
Director. From 1973 to 1988, Mr. Hegener worked at the Hempel Group, Dusseldorf,
Germany, in various management positions. Mr. Hegener is a specialist in stable
and radioactive isotopes. He has degrees in Chemistry and Economics.

     Ms. Gardner was elected a director 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 of Business Administration from the University of Louisville.

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

     Mr. Wells was elected a director of the Company in January 2000. Since
1989, Mr. Wells has been a general partner of Anderson and Wells Company, the
management company for Sundance Venture Partners, L.P. a venture capital fund.
From 1983 to 1989, Mr. Wells serviced as Vice President of Citicorp Venture
Capital then became Senior Vice president of Inco Venture Capital. Mr. Wells is
a director of Cellegy Pharmaceuticals, as well as several privately held
companies. Mr. Wells received his bachelors degree in Economics and earned a
masters degree in Business Administration from Stanford University. Mr. Well was
previously a director of Isonics Corporation from September 1996 through
December 1998.

     (b) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES


                                       29
<PAGE>

         N/A


     (c) FAMILY RELATIONSHIPS

     As of April 30, 1999, and subsequently, there were no family relationships
between any director, executive officer, or person nominated or chosen by the
Company to become a director or executive officer.


     (d) INVOLVEMENT IN LEGAL PROCEEDINGS

         N/A


     (e) SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

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

     To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended April 30, 1999, all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten percent beneficial owners were complied with exception (or in addition to)
the following:

     1.   Mr. Rubizhevsky filed a Form 4 in February 2000 reporting a purchase
          that took place in July 1999.

     2.   Mr. Parker filed a Form 3 in February 2000. He became subject to the
          Section 16(a) reporting requirements when he became a director of the
          Company in August 1998.

     3.   Dr. Cuttriss and his affiliate, Metallurgy International, Inc.,
          jointly filed a Form 3 in February 2000. Dr. Cuttriss became subject
          to the Section 16(a) reporting requirements when he became an
          executive officer of the Company in May 1998. A joint filing of two
          Form 4s was also made in February 2000 reporting transactions that
          occurred in July and September of 1999. These transactions indicated
          that Dr. Cuttriss may have obtained a short-swing profit of $4,218.00.
          Dr. Cuttriss resolved these alleged liability to the Company in
          February 2000 by paying the Company $500.00 and entering into a
          promissory note for the balance payable with interest over eight
          quarters beginning June 1, 2000, at the rate of $499.92 per quarter.

     4.   Mr. Halstead filed a Form 3 in February 2000. He became subject to the
          Section 16(a) reporting requirements when he became an executive
          officer of the Company in March 1999.

     5.   Dr. Burden filed a Form 3 in February 2000. He became subject to the
          Section 16(a) reporting requirements when he became an executive
          officer of the Company in January 1999. Dr. Burden also filed a Form 4
          in February 2000 reporting a purchase that took place in July 1999.

     6.   Mr. Herbert Hegener filed a Form 3 in February of 2000. He became
          subject to the Section 16(a) reporting requirements when he became an
          executive officer of the Company's subsidiary, Chemotrade, Inc., in
          June 1998. Mr. Hegener has represented to the Company that he will be
          filing a Form 4 no later than February 29, 2000, reporting g a warrant
          acquired in June 1999.

     7.   Eagle Picher Technologies, LLC became subject to the Section 16(a)
          reporting requirements when it became a greater than 10% beneficial
          owner in December of 1999. Eagle Picher has not filed a Form 3, but
          based on representations by the reporting entity, the Company expects
          such filing to occur no later than February 29, 2000.


                                       30
<PAGE>

     8.   Mr. Paul Catuna, a former executive officer of the company, was
          subject to the reporting requirements of Section 16(a) of the 1934 Act
          during the course of his employment. Mr. Catuna has represented to the
          Company that he will be filing a Form 4 no later than February 15,
          2000, reporting a stock bonus received in January 1999.

          In addition to the foregoing, several directors and executive officers
filed Form 4s in February 2000, which voluntarily reported the acquisition of
certain common stock options which are exempt from the reporting requirements
pursuant to Rule 16b-3.

     (a)  Mr. Alexander voluntarily filed three Form 4s in February 2000
          reporting transactions that took place in January, April, and December
          of 1999. The Company's Board approved the January and April
          transactions in minutes effective October 31,1999.

     (b)  Mr. Rubizhevsky voluntarily filed two Form 4s in February 2000
          reporting transactions that took place in January and April 1999. The
          January and April transactions were approved by the Company's Board in
          minutes effective October 31,1999.

     (c)  Ms. Gardner voluntarily filed one Form 4 in February 2000 reporting
          transactions that took place in May and October of 1998.

     (d)  Mr. Parker voluntarily filed a Form 4 in February 2000 reporting
          transactions that occurred in October 1998.

     (e)  Mr. Halstead voluntarily filed two Form 4s in February 2000 reporting
          transactions that took place in April 1999 and in January 2000. The
          Company's Board approved these transaction in minutes effective
          October 31,1999, and in January 30, 2000.

     (f)  Dr. Burden voluntarily filed one Form 4 in February 2000 reporting a
          transaction that took place in April 1999. The Company's Board
          approved this transaction in minutes effective October 31,1999.

     (g)  Dr. Grady voluntarily filed two Form 4s in February 2000 reporting
          transactions that took place in January and April 1999 and were
          approved by the Company's Board in minutes effective October 31,1999.


ITEM 10.  EXECUTIVE COMPENSATION

          The following table sets forth information regarding compensation
awarded, or paid to, or earned by our Chief Executive Officer, and our five
other most highly compensated executive officers for the three fiscal years
ended April 30, 1997, 1998, and 1999. No other person who is currently an
executive officer of Isonics earned salary and bonus compensation exceeding
$100,000 during any of those years. The table below includes all compensation
paid to by the Company and any subsidiary.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
----------------------------- ------------------------------------ ---------------------------------------
                                      Annual compensation                  Long-term Compensation
                                                                                   Awards

----------------------------- ------------------------------------ ---------------------------------------
                                                                            Awards              Payout
------------------------------------------------------------------ ------------------------- -------------
                                                                                Securities
                                                                       ($)      Underlying                  All Other
     Name and        Fiscal       ($)         ($)         ($)      Restricted    Options &       LTIP      Compensation
Principal Position    Year      Salary       Bonus     Other (a)     Awards      SARs (#)       Payout
------------------- --------- ------------ ----------- ----------- ------------ ------------ ------------- ------------
<S>                 <C>       <C>          <C>         <C>         <C>          <C>          <C>           <C>
James E. Alexander    1997      174,000        0           0            0            0            0             0
President & CEO       1998      204,870        0       60,553 (b)       0            0            0             0
                      1999      200,000      50,000    35,016 (b)       0       25,000 (f)        0             0
------------------- --------- ------------ ----------- ----------- ------------ ------------ ------------- ------------

------------------- --------- ------------ ----------- ----------- ------------ ------------ ------------- ------------
Boris Rubizhevsky     1997      147,000        0           0            0                         0             0
Senior Vice           1998      176,975        0       25,946 (b)       0                         0             0
                      1999      184,100      45,000    25,404 (b)       0       22,500 (g)        0             0
------------------- --------- ------------ ----------- ----------- ------------ ------------ ------------- ------------

                                       31
<PAGE>

President
------------------- --------- ------------ ----------- ----------- ------------ ------------ ------------- ------------
Daniel J. Grady       1997      107,000        0           0            0            0            0             0
Vice President        1998      125,603        0           0            0            0            0             0
                      1999      127,188      16,000        0            0       15,625 (h)        0             0
------------------- --------- ------------ ----------- ----------- ------------ ------------ ------------- ------------

------------------- --------- ------------ ----------- ----------- ------------ ------------ ------------- ------------
Stephen J. Burden     1997        N/A         N/A         N/A          N/A      71,459 (i)       N/A           N/A
Vice President (c)    1998        N/A         N/A         N/.A         N/A          N/A          N/A           N/A
                      1999        ???         ???0         0            0       121,458 (j)       0             0
------------------- --------- ------------ ----------- ----------- ------------ ------------ ------------- ------------

------------------- --------- ------------ ----------- ----------- ------------ ------------ ------------- ------------
Paul J Catuna         1997      58,208                     0            0       138,227 (k)       0             0
Chief Financial       1998      116,394                    0            0       120,000 (l)       0             0
Officer (d)           1999      109,792      24,000        0            0            0            0             0
------------------- --------- ------------ ----------- ----------- ------------ ------------ ------------- ------------

------------------- --------- ------------ ----------- ----------- ------------ ------------ ------------- ------------
Robert H. Cuttriss    1997        N/A         N/A         N/A          N/A          N/A          N/A           N/A
President of          1998        N/A         N/A         N/A          N/A          N/A          N/A           N/A
Interpro (e)          1999      92,872       80,000        0            0       20,000 (m)        0             0
------------------- --------- ------------ ----------- ----------- ------------ ------------ ------------- ------------
</TABLE>


(a)  Excludes other compensation, the aggregate amount of which does not exceed
     the lesser of $50,000 or 10% of such Named Executive Officers' annual
     compensation.
(b)  Mr. Alexander's amounts represent $35,016 for interest and taxes payable as
     a result of a loan in fiscal year 1999, and $60,553 for interest and taxes
     payable as a result of a loan in fiscal year 1998. Mr. Rubizhevsky's
     amounts represent $25,404 for interest and taxes payable as a result of a
     loan in fiscal year 1999, and $25,946 for interest and taxes payable as a
     result of a loan in fiscal year 1998.
(c)  Dr. Burden became an officer of the Company effective January 1999.
(d)  Resigned effective March 1999.
(e)  Interpro was acquired effective May 1, 1998. Prior to May 1, 1998, Dr.
     Cuttriss was not an Isonics Corporation employee. The bonus paid to Dr.
     Cuttriss in fiscal year 1999 was for back pay accrued prior to the
     acquisition of Interpro by Isonics Corporation.
(f)  Options to purchase 25,000 shares of common stock were granted in April
     1999 as consideration for delaying salary in March and April 1999, and are
     currently exercisable at $1-7/16 per share and expire April 26, 2004.
(g)  Options to purchase 22,500 shares of common stock were granted in April
     1999 as consideration for delaying salary in March and April 1999, and are
     currently exercisable at $1-7/16 per share and expire April 26, 2004.
(h)  Options to purchase 15,625 shares of common stock were granted in April
     1999 as consideration for delaying salary in March and April 1999, and are
     currently exercisable at $1-7/16 per share and expire April 26, 2004.
(i)  Options to 71,429 shares of common stock underlying options granted upon
     beginning employment with the Company (of which 42,854 have vested as of
     February 10, 2000, and continue to vest at a rate of 5% per quarter). Dr.
     Burden was not an executive officer at the time of this award. Dr. Burden
     became an executive officer in January 1999.
(j)  Options to purchase 100,000 shares of common stock were granted in January
     1999 as consideration for Dr. Burden's to vice president in January 1999
     with an exercise price of $1.10 per share (of which 40,000 have vested as
     of February 10, 2000, and continue to vest at a rate of 5% per quarter).
     Options to purchase 21,458 shares of common stock were granted in April
     1999 as consideration for delaying salary in March and April 1999, and are
     currently exercisable at $1-7/16 per share and expire April 26, 2004.
(k)  Options to purchase 138,227 shares of common stock were granted in July
     1996 upon beginning employment with the Company. The options have a vesting
     schedule beginning of October 1, 1996, and are exercisable at $0.868 per
     share.
(l)  Options to purchase 120,000 shares of common stock were granted in
     September 1997 in connection with the initial public offering. The options
     have a vesting date of September 22, 1997, and are exercisable at $6.38 per
     share and expire September 22, 2007.
(m)  Options granted in May 1998 in connection with the acquisition of Interpro
     by Isonics Corporation are currently exercisable at $2.00 per share and
     expire May 1, 2003.


     In October 1996, we adopted an employee benefit plan under Internal Revenue
Code Section 401(k). The 401(k) plan is a profit sharing plan under which both
employees and the Company are entitled (at their own discretion) to contribute a
portion of compensation and earnings, respectively, to investment funds to
supplement


                                       32
<PAGE>

employee retirement benefits. On November 1, 1999, the Isonics Corporation
401(k) plan was merged with the Interpro 401(k) plan.

     There are no written plans to pay bonuses or deferred compensation to
employees of the Company except those expressly stated in the following section.

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

STOCK OPTION PLANS

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

(a)  1996 Stock Option Plan which has been terminated, but as to which, there
     are options outstanding.

(b)  1996 Executives' Equity Incentive Plan (the "Executives' Plan") authorized
     the grant of options to purchase 225,000 stock options, which after being
     adjusted for stock splits that occurred following the adoption of the plan
     resulted in 570,000 shares. The options granted may be either incentive
     stock options if they meet the requirements of Section 422 of the Internal
     Revenue Code, or non-qualified stock options. This plan was approved by the
     directors in November 1996 and by the shareholders in October 1996.

(c)  1996 Equity Incentive Plan (the "Employees' Plan") authorized the grant of
     options to purchase 50,000 stock options, which after being adjusted for
     stock splits that occurred following the adoption of the plan resulted in
     150,000 shares. The options granted may be either incentive stock options
     if they meet the requirements of Section 422 of the Internal Revenue Code,
     or non-qualified stock options. This plan was approved by the directors in
     November 1996 and by the shareholders in October 1996.

(d)  1998 Employee Stock Purchase Plan (the ("Stock Purchase Plan") authorized
     employee purchase of up to 200,000 shares of the Company's common stock ,
     none of which has been purchased to date, although funds therefor have been
     received by the Company. This plan was approved by the directors in August
     1998, and by the shareholders in October 1998.

(e)  1998 Directors' Plan (the "Directors' Plan) authorized each person serving
     as a member of the Board who is not an employee of the Company to receive
     options to purchase 20,000 shares of Isonics' common stock when such person
     accepts his position as a Director and to receive an additional option to
     purchase 10,000 shares when such person is re-elected as a Director
     provided such person is not an employee of Isonics. The exercise price for
     the options is the Fair Market Value (as defined in the Executives' Plan)
     on the date such person becomes a director and the options are exercisable
     for five years from such date. The options granted under the Directors'
     plan vest immediately upon the date of the grant. In the event a Director
     resigns or is not re-elected to the Board, failure to exercise the options
     in three months results in the options' termination prior to the expiration
     of their term. Although the Directors adopted the plan in 1998, the Board
     formalized the plan by resolution in January 2000.

     As of February 10, 2000, options to purchase a total of 558,765 shares,
79,638 shares, and 488,356 shares, respectively, were outstanding under the
Executives' Plan, Employees' Plan and 1996 Stock Option Plan; and options to
purchase 11,235 shares, 70,362 and 0 shares, respectively, remained available
for grant.

OPTIONS/SAR GRANTS IN LAST FISCAL YEAR

The following options were granted to executive officers named in the
compensation table during the fiscal year ended April 30, 1999. We did not grant
any stock appreciation rights to any person during fiscal year 1999 or
subsequently. There was no exercise of options or SARs during the fiscal year
ended April 30, 1999.


                                       33
<PAGE>
<TABLE>
<CAPTION>
                                         Number of         Percent of
                                         securities          total
                                         underlying       options/SARs
                                        options/SARs       granted to    Exercise price   Expiration
  Name and Principal Position            granted (#)       employees in      ($/Sh)          date
                                                          fiscal year
<S>                                     <C>               <C>            <C>            <C>
James E. Alexander
President & CEO                             25,000            7.1%           $1-7/16      April 2004

Boris Rubizhevsky
Senior Vice President                       22,500            6.3%           $1-7/16      April 2004

Daniel J. Grady
Vice President                              15,625            4.4%           $1-7/16      April 2004

Stephen J. Burden                           21,458                           $1-7/16      April 2004
Vice President                             100,000           33.9%             $1.10    January 2004

Paul J Catuna
Chief Financial Officer                          0            0.0%

Robert H. Cuttriss
President of Interpro                       20,000            5.6%             $2.00      April 2003
</TABLE>

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES

<TABLE>
<CAPTION>
                              Shares                Number of securities      Value of unexercised
                             acquired              underlying unexercised         in-the-money
                                on                  options/SARs at April     options/SARs at April
   Name and Principal        exercise    Value             30, 1999                  30, 1999
        Position                (#)     realized  Exercisable/Unexercisable  Exercisable/Unexercisable
<S>                          <C>        <C>       <C>                        <C>

James E. Alexander
President & CEO                   0         0                  25,000/0          $53,125.00/$0.00

Boris Rubizhevsky
Senior Vice President (a)         0         0                  22,500/0          $47,812.50/$0.00

Daniel J. Grady
Vice President                    0         0                 222,965/0         $651,851.78/$0.00

Stephen J. Burden
Vice President                    0         0            78,599/114,288         $166,991/$257,822

Paul J Catuna
Chief Financial Officer           0         0                       0/0                     $0/$0

Robert H. Cuttriss
President of Interpro             0         0                  20,000/0                $31,350/$0
</TABLE>

(a)  Does not include 33,333 warrants obtained in a private transaction
     completed in July 1999.


LONG-TERM INCENTIVE COMPENSATION PLANS; DEFINED BENEFIT OR ACTUARIAL PLANS

     We have no long-term incentive compensation plans, defined benefit, or
actuarial plans


                                       34
<PAGE>

COMPENSATION OF DIRECTORS

     The Company's directors were not compensated for their services during
fiscal year 1999, or subsequently during calendar year 1999. However, each
director was reimbursed for travel and related expenses associated with Board of
Directors' meetings. In January 2000, it was agreed to compensate non-employee
directors $2,000 for attending Board of Directors' meetings in person and $500
for attending Board of Directors' meetings telephonically beginning January 1,
2000.

     Under the Directors' Plan the following individuals have been granted
options:

(a)  On May 21, 1998, Lindsay Gardner received 20,000 options exercisable at
     $2.3750 per share through May 21, 2003.

(b)  On August 1, 1998, Richard Parker received 20,000 options exercisable at
     $1.7500 per share through August 1, 2003.

(c)  On October 5, 1998, as a result of their re-election to the Board of
     Directors Ms. Gardner and Mr. Parker each received options to acquire an
     additional 10,000 shares exercisable at $1.1560 per share through October
     5, 2003.

We have no other arrangements pursuant to which we compensate our Directors for
acting in their capacities as such.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS

In September 1997, the Company entered into employment agreements with James E.
Alexander and Boris Rubizhevsky. The agreements have a term of four years and
provide for annual salaries of $200,000 and $180,000, respectively. By
resolution of the Board made on January 30, 2000, both Mr. Alexander and Mr.
Rubizhevsky received salary increase commencing February 1, 2000, equal to 20%
of their current salary. The salary increases were granted in recognition of
their performance for the Company and the fact that neither Mr. Alexander nor
Mr. Rubizhevsky had received salary increase in approximately two and one-half
years. Either the Company or the officer may terminate the agreement at any time
upon notice to the other party. Under the agreements, the officer is entitled to
receive incentive compensation up to 50% of the officer's annual salary, as
approved by the Company pursuant to such executive compensation plan as the
Company may approve. The agreements provide that upon a termination of
employment other than for cause (as defined in the agreements), the officer is
entitled to severance compensation of 18 months of his salary, paid at the same
time as salary payments, 25% of the officer's annual prevailing salary, paid
upon termination, and in addition all outstanding stock options held by the
officer will be accelerated and will become exercisable in full and the
Company's right of repurchase will terminate with respect to such shares. The
agreements provide for similar accelerated vesting of outstanding stock options,
upon a change in control of the Company.

The Company has also entered into an employment agreement with Dr. Daniel J.
Grady. The agreement has an indefinite term and provides for at-will employment,
terminable at any time by either party. The agreement provides for a rate of
annual compensation, which the Company will review annually. Under the
agreement, Dr. Grady is entitled to participate in the Company's standard plans
and policies. The agreement also includes confidentiality and invention
assignment provisions.

Upon Mr. Catuna's resignation from the Company, Mr. Brantley J. Halstead was
hired as Chief Financial Officer in March 1999. Mr. Halstead has entered into an
employment agreement with the Company. The agreement has an indefinite term and
provides for at-will employment, terminable at any time by either party. The
agreement provides for a rate of annual compensation of $96,000, which the
Company will review annually. Under the agreement, Mr. Halstead is entitled to
participate in the Company's standard plans and policies. The agreement also
includes confidentiality and invention assignment provisions.


                                       35
<PAGE>

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


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the ownership of
the Company's Common Stock as of February 10, 2000, by: (i) each nominee for
director; (ii) each of the executive officers named in the Summary Compensation
Table; (iii) all executive officers and directors of the Company as a group; and
(iv) all those known by the Company to be beneficial owners of more than five
percent of its Common Stock.


<TABLE>
<CAPTION>
-------------------------------------------------------------------------
                                          BENEFICIAL OWNERSHIP (1)
-------------------------------------------------------------------------
          BENEFICIAL OWNER           NUMBER OF SHARES  PERCENT OF TOTAL
-------------------------------------------------------------------------
<S>                                  <C>               <C>
James E. Alexander (2)                       2,106,520             31.8%
-------------------------------------------------------------------------
Boris Rubizhevsky (3)                        1,925,034             28.7%
-------------------------------------------------------------------------
Stephen J. Burden (4)                          300,504              4.3%
-------------------------------------------------------------------------
Daniel J. Grady (5)                            237,510              3.5%
-------------------------------------------------------------------------
Paul J. Catuna (6)                              30,918              0.5%
-------------------------------------------------------------------------
Brantley J. Halstead (7)                        51,000              2.1%
-------------------------------------------------------------------------
Robert H. Cuttriss (8)                         373,982              5.7%
-------------------------------------------------------------------------
Herbert Hegener (9)                            213,865              3.2%
-------------------------------------------------------------------------
Lindsay Gardner (10)                           293,784              4.4%
-------------------------------------------------------------------------
Richard Parker (11)                             30,000              0.5%
-------------------------------------------------------------------------
Larry Wells (12)                                20,000              0.3%
-------------------------------------------------------------------------
All executive officers and                  5,673,1175             74.4%
directors as a group (11 persons).
The address for all of the above
directors and executives officers is:
5906 McIntyre Street, Golden, CO 80401
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Jacques Delente (13)                           376,339              5.6%
-------------------------------------------------------------------------
Richard Grossman (14)                        1,873,336             28.2%
-------------------------------------------------------------------------
Anfel Trading (15)                             666,668              9.2%
-------------------------------------------------------------------------
Fairway Investors (16)                         400,000              5.7%
-------------------------------------------------------------------------
Eagle-Picher Technologies, LLC (17)          4,000,000             37.7%
-------------------------------------------------------------------------
</TABLE>

(1)  This table is based upon information supplied by officers, directors and
     principal shareholders and Schedules 13D and 13G filed with the Securities
     and Exchange Commission ("SEC"). Unless otherwise indicated in the
     footnotes to this table and subject to community property laws where
     applicable, the Company believes that each of the shareholders named in
     this table has sole voting and investment power with respect to the shares
     indicated as beneficially owned. Applicable percentages are based on
     6,605,414 shares of Common Stock outstanding on February 10, 2000, adjusted
     as required by rules promulgated by the SEC.

(2)  Includes (i) 25,000 shares of Common Stock underlying options granted as
     compensation for volunteering to defer salary in March and April 1999, and
     (ii) 45,455 shares of Common Stock held in the name of The James & Carol
     Alexander Family Foundation. Mr. Alexander disclaims beneficial ownership
     of warrants exercisable for 91,002 shares of Common Stock issued in
     connection with a private placement (the "Placement I") of 12%
     nonconvertible promissory notes and warrants to purchase Common Stock of
     the Company held by the brother-in-law, mother-in-law and father-in-law of
     Mr. Alexander, none of which live with Mr. Alexander.

(3)  Includes (i) 91,730 shares of Common Stock held by Mr. Rubizhevsky's wife,
     (ii) 22,500 shares of Common Stock underlying options granted as
     compensation for volunteering to defer salary in March and April 1999, and
     (iii) 66,666 shares of Common Stock underlying 33,333 shares of Series A
     convertible preferred stock and 33,333 warrants issued in connection with a
     second private placement (the "Placement II") of Series A convertible
     preferred stock and warrants to purchase Common Stock of the Company. Mr.
     Rubizhevsky disclaims beneficial ownership of warrants exercisable for
     91,002 shares of Common Stock issued in connection with the Placement I
     held by the mother, father, mother-in-law and father-in-law of Mr.
     Rubizhevsky, none of which live with Mr. Rubizhevsky.


                                       36
<PAGE>

(4)  Includes (i) 21,458 shares of Common Stock underlying options granted as
     compensation for volunteering to defer salary in March and April 1999, (ii)
     71,429 shares of Common Stock underlying options granted upon beginning
     employment with the Company (of which 42,854 have vested as of February 10,
     2000, and continue to vest at a rate of 5% per quarter), (iii) warrants
     exercisable for 40,951 shares of Common Stock issued in connection with the
     Placement I, (iv) 100,000 shares of Common Stock underlying options granted
     as compensation for promotion to vice-president in January 1999 (of which
     40,000 have vested as of February 10, 2000, and continue to vest at a rate
     of 5% per quarter), and (v) 66,666 shares of Common Stock underlying 33,333
     shares of convertible preferred stock and 33,333 warrants issued in
     connection with the Placement II.

(5)  Includes (i) 207,340 shares of Common Stock subject to stock options
     currently exercisable, and (ii) 15,625 shares of Common Stock underlying
     options granted as compensation for volunteering to defer salary in March
     and April 1999.

(6)  Includes (i) 2,071 shares held by Mr. Catuna's parents Helen and Paul
     Catuna, Sr., and (ii) 7,029 shares of Common Stock underlying warrants
     issued in connection with the Placement I and held jointly by Mr. Catuna's
     parents Helen and Paul Catuna, Sr. Mr. Catuna resigned as Chief Financial
     Officer effective March 1, 1999.

(7)  Includes (i) 100,000 shares of Common Stock underlying options granted upon
     beginning employment with the Company (of which 40,000 have vested as of
     February 10, 2000, and continue to vest at a rate of 5% per fiscal
     quarter), (ii) 16,000 shares of Common Stock underlying options granted as
     compensation for volunteering to defer salary in March and April 1999, and
     (iii) 25,000 shares of Common Stock underlying options granted upon
     promotion to Vice President, Finance on January 30, 2000. Mr. Halstead
     replaced Mr. Catuna as Chief Financial Officer, Secretary and Treasurer in
     March 1999.

(8)  Includes (i) 353,382 shares of Common Stock held in the name of Metallurgy
     International Pty Ltd. In which Dr. Cuttriss and his wife, P. D. Cuttriss,
     are controlling shareholders, and (ii) 20,000 shares of Common Stock
     underlying options granted at acquisition of Interpro by Isonics
     Corporation.

(9)  Includes 35,000 shares of Common Stock underlying warrants currently
     exercisable granted as compensation for late loan repayments.

(10) Includes (i) warrants exercisable for 91,001 shares of Common Stock issued
     in connection with the Placement I, and (ii) 30,000 shares of Common Stock
     underlying stock options currently exercisable given for service as a
     non-employee member of the Board of Directors.

(11) Includes 30,000 shares of Common Stock underlying stock options currently
     exercisable given for service as a non-employee member of the Board of
     Directors.

(12) Includes 20,000 shares of Common Stock underlying stock options currently
     exercisable given for service as a non-employee member of the Board of
     Directors.

(13) Includes (i) 37,272 shares of Common Stock held by the Jacques Delente
     Revocable Trust, (ii) warrants exercisable for 85,581 shares of Common
     Stock issued in connection with the Placement I, (iii) 15,000 options
     granted as compensation for volunteering to a reduction in salary from
     November 1, 1998, through April 30, 1999, and (iv) 5,938 shares of Common
     Stock underlying options granted as compensation for volunteering to defer
     salary in March and April 1999. Dr. Delente's address is c/o Isonics
     Corporation, 5906 McIntyre Street, Golden, CO 80403.

(14) Includes beneficial ownership of the following shares: (i) 40,000 shares of
     Common Stock underlying 20,000 shares of convertible preferred stock and
     20,000 warrants owned of record and beneficially by Richard Grossman, (ii)
     40,000 shares of Common Stock underlying 20,000 shares of convertible
     preferred stock and 20,000 warrants owned of record and beneficially by
     Orin Hirschman (of which shares Mr. Grossman disclaims beneficial
     ownership), (iii) 1,106,668 shares of Common Stock underlying 553,334
     shares of convertible preferred stock and 553,334 warrants owned of record
     and beneficially by Adam Smith Investment Partners, L.P., (iv) 226,668
     shares of Common Stock underlying 113,334 shares of convertible preferred
     stock and 113,334 warrants owned of record and beneficially by Adam Smith
     Investments, Ltd., and (v) 500,000 shares of Common Stock underlying
     500,000 warrants owned of record and beneficially by Adam Smith & Company,


                                       37
<PAGE>

     Inc., all as set forth on the Schedule 13D filed by such persons on August
     12, 1999. The business addresses of Richard Grossman and Orin Hirschman,
     and the principal executive offices of Adam Smith Investment Partners, L.P.
     and Adam Smith & Company, Inc., are located at 101 East 52nd Street, New
     York, New York 10022. The principal executive offices of Adam Smith
     Investments, Ltd. are c/o Insinger Fund Administration (BVI) Limited,
     Tropic Isle Building, P.O. Box 438, Road Town, Tortola, British Virgin
     Islands.

(15) Includes 666,668 shares of Common Stock underlying 333,334 shares of
     convertible preferred stock and 333,334 warrants. The principal executive
     offices of Anfel Trading Ltd. are c/o Me. Andre Zolty, 24 Route De
     Malagnou, 1208 Geneva, Switzerland.

(16) Includes 400,000 shares of Common Stock underlying 200,000 shares of
     convertible preferred stock and 200,000 warrants, as set forth on the
     Schedule 13G filed on August 13, 1999. The principal executive offices of
     Fairway Investors are located at 8707 Skokie Boulevard, Skokie, Illinois
     60077.

(17) Includes 4,000,000 shares of Common Stock underlying warrants given in the
     Eagle-Picher Transaction in which the Company sold its depleted zinc
     business to Eagle-Picher Technologies, LLC, and described in more detail
     elsewhere in this document and on Form 8K filed by the Company on December
     1, 1999. The principal executive offices of Eagle-Picher Technologies, LLC
     are located at 250 East Fifth Street, Suite 500, Cincinnati, Ohio 45202.












                                       38
<PAGE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     CORPORATE LOANS TO OFFICERS. During the fiscal years ended April 30, 1998
and 1999, the Company had loans outstanding to two officers. The funds had been
advanced to the officers to allow them to exercise options prior to the
Company's Initial Public Offering. Interest was charged on these loans at a rate
of 6.6% per annum. In minutes effective October 31, 1999 and January 30, 2000,
the Board of Directors agreed to forgive a portion of the current interest and
principal due and to accept the Company's common stock, owned by the officers,
in payment of the remaining balance owed. The amount owed by Mr. Alexander, that
was forgiven by the Board of Directors, in October 1999, was $74,038.54. The
amount owed by Mr. Rubizhevsky, that was forgiven by the Board of Directors, in
October 1999, was $60,534.23. Both amounts were paid in December 1999. In both
cases the amount forgiven was treated as bonus compensation to Mr. Alexander and
Mr. Rubizhevsky. Both officers surrendered 30,437 shares of the Company's common
stock each to pay off $175,012.33 in accumulated interest and principal
($10,012.33 in interest and $165,000.00 in principal each). As of February 10,
2000 the Company had no loans receivable outstanding with its officers or
employees. Please refer to the following schedule.

<TABLE>
<CAPTION>
                               James E. Alexander      Boris Rubizhevsky
                                 President & CEO     Senior Vice President
<S>                            <C>                   <C>
Balance as of May 1, 1997               $198,570.46          $167,570.46
FY 1998 Borrowings (a)                    86,662.35            59,812.86
FY 1998 Repayments (a)                    53,207.42             4,040.88
                                          ---------             --------
Balance as of April 30, 1998            $232,025.39           223,342.44
FY 1999 Borrowings (a)                     8,360.78             3,750.51
FY 1999 Repayments (a)                     4,025.79             3,767.73
                                           --------             --------
Balance as of April 30, 1998            $236,360.38          $223,325.22
FY 2000 Borrowings (a)                     7,690.49             7,221.34
FY 2000 Repayments (a)                   244,050.87           230,546.56
                                         ----------           ----------
Balance as of Feb. 10, 2008                   $0.00                $0.00
</TABLE>

(a)  Includes interest accrued and paid. Amounts are aggregated.


     CORPORATE LOANS FROM OFFICERS AND EMPLOYEES. On occasion during the fiscal
years ended April 30, 1998 and 1999, officers and employees of the Company
loaned the Company funds. The following schedule summarizes these borrowing and
repayments.

<TABLE>
<CAPTION>
                               Balance as of      FY 1998         FY 1998      Balance as of
 Name and Principal Position    May 1, 1997    Borrowings (a)  Repayments (a)  April 30, 1998
<S>                            <C>             <C>             <C>             <C>
James E. Alexander                      $0.00      $25,000.00      $25,000.00           $0.00
President & CEO

Boris Rubizhevsky                       $0.00           $0.00           $0.00           $0.00
Senior Vice President

Daniel J. Grady                         $0.00      $15,600.00      $15,600.00           $0.00
Vice President

Stephen J. Burden                       $0.00      $86,821.92      $86,821.92           $0.00
Vice President (b)

Paul J Catuna                           $0.00      $10,176.59       $3,176.59       $7,000.00
Chief Financial Officer (c)

Lindsay Gardner                         $0.00     $122,880.28     $122,880.28           $0.00
Director (d)


                                       39
<PAGE>

Jacques J. Delente                $150,000.00      $13,020.55     $163,020.55           $0.00
</TABLE>

(a)  Includes interest accrued and paid through April 30, 1998. Amounts are
     aggregated.

(b)  Dr. Burden was also granted warrants exercisable for 40,951 shares of
     Common Stock issued in connection with a private placement (the "Placement
     I") of 12% nonconvertible promissory notes and warrants to purchase Common
     Stock of the Company in September 1997.

(c)  Mr. Catuna was also granted warrants exercisable for 2,071 shares of Common
     Stock issued in connection with "Placement I" of 12% nonconvertible
     promissory notes and warrants to purchase Common Stock of the Company in
     September 1997.

(d)  Ms. Gardner was also granted warrants exercisable for 91,001 shares of
     Common Stock issued in connection with "Placement I" of 12% nonconvertible
     promissory notes and warrants to purchase Common Stock of the Company in
     September 1997.

(e)  Dr. Delente was also granted warrants exercisable for 122,853 shares of
     Common Stock issued in connection with "Placement I" of 12% nonconvertible
     promissory notes and warrants to purchase Common Stock of the Company in
     September 1997.

<TABLE>
<CAPTION>
                               Balance as of      FY 1999         FY 1999      Balance as of
 Name and Principal Position    May 1, 1998    Borrowings (a)  Repayments (a)  April 30, 1999
<S>                            <C>             <C>             <C>             <C>
James E. Alexander                      $0.00           $0.00           $0.00           $0.00
President & CEO

Boris Rubizhevsky                       $0.00      $44,290.20           $0.00      $44,290.20
Senior Vice President

Daniel J. Grady                         $0.00      $47,100.00      $47,100.00           $0.00
Vice President

Stephen J. Burden                       $0.00           $0.00           $0.00           $0.00
Vice President

Paul J Catuna                       $7,000.00      $5,1500.00      $12,150.00           $0.00
Chief Financial Officer

Lindsay Gardner                         $0.00           $0.00           $0.00           $0.00
Director

Jacques J. Delente                      $0.00      $93,000.00      $48,000.00      $45,000.00
</TABLE>

(a)  Includes interest accrued and paid through April 30, 1999. Amounts are
     aggregated.

<TABLE>
<CAPTION>
                               Balance as of      FY 2000         FY 2000      Balance as of
 Name and Principal Position    May 1, 1999    Borrowings (a)  Repayments (a)  Feb. l0, 2000
<S>                            <C>             <C>             <C>            <C>
James E. Alexander                      $0.00           $0.00           $0.00           $0.00
President & EO

Boris Rubizhevsky                  $44,290.20       $8,858.04      $53,214.24           $0.00
Senior Vice President (b)

Daniel J. Grady                         $0.00           $0.00           $0.00           $0.00
Vice President

Stephen J. Burden                       $0.00      $57,500.00      $57,500.00           $0.00
Vice President


                                       40
<PAGE>

Paul J Catuna                           $0.00           $0.00           $0.00           $0.00
Chief Financial Officer

Lindsay Gardner                         $0.00           $0.00           $0.00           $0.00
Director

Jacques J. Delente                 $45,000.00      $13,500.00      $58,500.00           $0.00
</TABLE>


     (a)  Includes interest accrued and paid through February 10, 2000. Amounts
          are aggregated.

     (b)  Mr. Rubizhevsky's note to the company was converted into 66,666 shares
          of Common Stock underlying 33,333 shares of Series A convertible
          preferred stock and 33,333 warrants issued in connection with a second
          private placement (the "Placement II") of Series A convertible
          preferred stock and warrants to purchase Common Stock of the Company
          on July 30, 1999.

     (c)  Dr. Burden's note to the company was converted into 66,666 shares of
          Common Stock underlying 33,333 shares of Series A convertible
          preferred stock and 33,333 warrants issued in connection with
          "Placement II" on July 30, 1999.

Mr. Hegener also had a loan payable from the Company resulting from the purchase
of Chemotrade by Isonics. This transaction is described in more detail in the
prior section, RECENT BUSINESS ACQUISITIONS. Mr. Hegener was also granted 35,000
warrants to compensate him for a late loan payment. This transaction is
described in more detail in the prior section, ITEM 10. EXECUTIVE COMPENSATION.

     COMPENSATION AGREEMENTS. Please refer to the prior section, ITEM 10.
EXECUTIVE COMPENSATION, describing the employment agreements between the Company
and Messrs. Alexander, Rubizhevsky, and Hegener, and Drs. Grady and Cuttriss.
Also described in this section is the directors' compensation policy.

     PURCHASE OF PREFERRED STOCK, COMMON STOCK AND WARRANTS. Please refer to the
prior section, ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT, for more information regarding purchases of equity instruments by
management and directors.

     SHORT-SWING LIABILITY. Dr. Cuttriss and his affiliate, Metallurgy
International, Inc., as a result of acquiring and selling shares in July and
September of 1999 respectively, may have obtained a short-swing profit of
$4,218.00. Dr. Cuttriss resolved these alleged liability to the Company in
February 2000 by paying the Company $500.00, and entering into a promissory note
for the balance payable with interest over eight quarters beginning June 1,
2000, at the rate of $499.92 per quarter. Please refer to the prior section,
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE, for more information.



                                       41
<PAGE>

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

     (a)  Exhibits Pursuant to Item 601 of Regulation S-B:

<TABLE>
<CAPTION>
Exhibit                                    Title
   No.
-----------
<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)
  10.18    Certificate of Determination of Preferences and Rights of the Series
           A Preferred Stock. (4)
  10.19    Form of Subscription Agreement. (4)
  10.20    Form of Warrant. (4)

-------------------------
(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.

(4)  Filed with Isonics' Current Report on Form 8-K (File No. 001-12531), dated
     July 29 and filed August 12, 1999, and incorporated herein by reference.


                                       42
<PAGE>

  10.21    Investment Banking Agreement. (4)
  10.22    Form of Registration Rights Agreement. (4)
  23.10    Consent of independent accountants
  24.01     Power of Attorney (see page 27).
  27.01    Financial Statement Schedule.
</TABLE>

(b)         Reports on Form 8-K. No Report on Form 8-K was filed by the Company
            in the quarter ended April 30, 1999. The following reports on Form
            8-K were filed subsequently:

            Report on Form 8-K reporting an event of July 29, 1999, reporting an
            event under Item 5.

            Report on Form 8-K reporting an event of December 1, 1999, reporting
            an event under Items 2 and 7.
























                                       43
<PAGE>

                       ISONICS CORPORATION AND SUBSIDIARY
                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>                                                                       <C>
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 ......................F-5

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

     Notes to Consolidated Financial Statements...........................F-7
</TABLE>





                                      F-1
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS





Board of Directors
Isonics Corporation and Subsidiaries

We have audited the accompanying consolidated balance sheets of Isonics
Corporation and Subsidiaries as of April 30, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with 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 Subsidiaries as of April 30, 1999 and 1998, and the
consolidated results of its operations and its cash flows for the years then
ended, in conformity with generally accepted accounting principles.

GRANT THORNTON LLP

San Jose, California
July 23, 1999, except for Note 13 as to which the date is July 29, 1999


                                      F-2
<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                                   APRIL 30,
                                                                                              1998         1999
                                                                                            --------     ---------
<S>                                                                                         <C>          <C>
                                            ASSETS
CURRENT ASSETS:
   Cash and cash equivalents                                                                $  1,044     $     452
   Accounts receivable (net of allowances of $130 and $82, respectively)                       1,629           932
   Inventories                                                                                   456           651
   Prepaid expenses                                                                               45           160
   Deferred income taxes                                                                         112             -
                                                                                            --------     ---------
           Total current assets                                                                3,286         2,195

PROPERTY AND EQUIPMENT, net                                                                    1,626         1,018
GOODWILL, net                                                                                    236         3,388
NOTES RECEIVABLE FROM SHAREHOLDERS                                                               170           130
OTHER ASSETS                                                                                      22            75
DEFERRED INCOME TAXES                                                                            315             -
                                                                                            --------     ---------

TOTAL                                                                                       $  5,655     $   6,806
                                                                                            --------     ---------
                                                                                            --------     ---------

                             LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Current portion of long-term debt and line of credit                                     $     80     $   1,136
   Notes payable to related parties                                                                -           922
   Accounts payable                                                                              657         1,368
   Accrued liabilities                                                                           738         1,086
                                                                                            --------     ---------
           Total current liabilities                                                           1,475         4,512

LONG-TERM DEBT                                                                                   312             -
DEFERRED INCOME TAXES                                                                            427             -
COMMITMENTS                                                                                        -             -

STOCKHOLDERS' EQUITY
   Common stock -no par value; 20,000,000 shares authorized; issued and
     outstanding: 1998 - 5,714,250; 1999 - 6,607,760                                           5,289         6,795
   Notes receivable from shareholders                                                           (337)         (469)
   Accumulated deficit                                                                        (1,511)       (4,032)
                                                                                            --------     ----------
           Total stockholders' equity                                                          3,441         2,294
                                                                                            --------     ---------

TOTAL                                                                                       $  5,655     $   6,806
                                                                                            --------     ---------
                                                                                            --------     ---------
</TABLE>

                 See Notes to Consolidated Financial Statements.

                                       F-3

<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                                  Year Ended
                                                                                                   April 30,
                                                                                            ----------------------
                                                                                              1998         1999
                                                                                            --------     ---------
<S>                                                                                         <C>          <C>
Net revenues                                                                                $  6,783     $  16,998
Cost of revenues                                                                               4,662        13,375
                                                                                            --------     ---------

         Gross margin                                                                          2,121         3,623

Operating expenses:
   Selling, general and administrative                                                         1,342         3,643
   Research and development                                                                      811         1,155
   Restructuring and office closure                                                                -           691
                                                                                            --------     ---------

         Total operating expenses                                                              2,153         5,489
                                                                                            --------     ---------

Operating loss                                                                                   (32)       (1,866)

Other income (expense)
   Interest income                                                                                74            36
   Interest expense                                                                             (219)         (575)
   Foreign currency gain                                                                           -            55
                                                                                            --------     ---------

         Total other expense, net                                                               (145)         (484)
                                                                                            --------     ---------

Loss before extraordinary item and taxes                                                        (177)       (2,350)

Income tax expense (benefit)                                                                    (314)          171
                                                                                            --------     ---------

Income (loss) before extraordinary item                                                          137        (2,521)

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

NET LOSS                                                                                    $   (115)    $  (2,521)
                                                                                            --------     ---------
                                                                                            --------     ---------

NET INCOME (LOSS) PER SHARE - BASIC
   Net income (loss) per share before extraordinary item                                    $   0.03     $   (0.41)
   Extraordinary item                                                                       $  (0.05)    $   -
   Net loss per share                                                                       $  (0.02)    $   (0.41)
   Shares used in computing per share information                                              5,039         6,210

NET INCOME (LOSS) PER SHARE - DILUTED
   Net income (loss) per share before extraordinary item                                    $   0.02     $   (0.41)
   Extraordinary item                                                                       $  (0.04)    $   -
   Net loss per share                                                                       $  (0.02)    $   (0.41)
   Shares used in computing per share information                                              6,469         6,210
</TABLE>

                 See Notes to Consolidated Financial Statements.

                                       F-4

<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                      Notes
                                                                  Common Stock     Receivable
                                                                -----------------     from     (Accumulated
                                                                Shares     Amount  Shareholders   Deficit)   Total
                                                              ---------    ------  ------------   --------   -----
<S>                                                           <C>          <C>     <C>         <C>         <C>
BALANCES, May 1, 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

   Issuance of common stock in connection with
     Chemotrade acquisition                                     357,730       894           -           -      894

   Issuance of common stock in lieu of salaries                 118,182       130           -           -      130

   Conversion of debt into common stock                         127,209       191           -           -      191

   Exercise of stock options and warrants                       290,389       147        (130)          -       17

   Fair value of warrants issued with debt                            -       144           -           -      144

   Interest on notes receivable from stockholders                     -         -         (24)          -      (24)

   Repayment of interest from stockholders                            -         -          22           -       22

   Net loss                                                           -         -           -      (2,521)  (2,521)
                                                              ---------   -------   ---------   ---------  -------

BALANCES, April 30, 1999                                      6,607,760    $6,795   $    (469)  $  (4,032) $ 2,294
                                                              ---------   -------   ---------   ---------  -------
                                                              ---------   -------   ---------   ---------  -------
</TABLE>


                 See Notes to Consolidated Financial Statements.

                                       F-5

<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                 Year Ended
                                                                                                   April 30,
                                                                                            ----------------------
                                                                                              1998         1999
                                                                                            --------     ---------
<S>                                                                                         <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                                                 $   (115)    $  (2,521)
   Adjustments to reconcile net loss to net cash provided by (used in)
    operating activities:
     Depreciation and amortization                                                               200           520
     Interest on notes receivable from shareholders                                              (22)          (24)
     Fair value of warrants issued with debt                                                     -             144
     Interest recognized upon conversion of debt to equity                                       -              64
     Deferred income taxes                                                                      (315)          -
     Loss on disposal of property and equipment                                                  -             504
     Issuance of common stock in lieu of salaries                                                -             130
     Extraordinary item - loss on extinguishment of debt                                         252           -
     Changes in operating assets and liabilities:
       Accounts and notes receivable                                                          (1,232)        1,748
       Inventories                                                                             1,083           (89)
       Prepaid expenses                                                                            5            98
       Other assets                                                                                5           (30)
       Accounts payable                                                                         (283)         (112)
       Accrued liabilities and other                                                            (117)          (75)
                                                                                            --------     ---------
           Net cash provided by (used in) operating activities                                  (539)          357

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property and equipment                                                           (72)         (159)
   Cash acquired in purchase of Interpro                                                           6           -
   Purchase of Chemotrade, net of cash acquired                                                  -            (546)
                                                                                            --------     ---------
           Net cash used in investing activities                                                 (66)         (705)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net borrowings from line of credit                                                            -              16
   Proceeds from issuance of debt                                                                -             701
   Repayment of notes receivable from shareholders                                                28            22
   Payments of debt                                                                           (1,852)       (1,000)
   Proceeds from issuance of common stock                                                      3,452            17
   Payment of debt issuance costs                                                                 (7)            -
                                                                                            --------     ---------
           Net cash provided by (used in) financing activities                                 1,621          (244)
                                                                                            --------     ---------

           NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS                                     1,016          (592)

Cash and cash equivalents at beginning of period                                                  28         1,044
                                                                                            --------     ---------

Cash and cash equivalents at end of period                                                  $  1,044     $     452
                                                                                            --------     ---------
                                                                                            --------     ---------
</TABLE>

                 See Notes to Consolidated Financial Statements.

                                       F-6

<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                      ISONICS CORPORATION AND SUBSIDIARIES

                   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 one of the Company's subsidiaries, it also provides contract research
and development services.

PRINCIPALS OF CONSOLIDATION

     The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, International Process Research
Corporation ("Interpro"), acquired April 30, 1998, and Chemotrade GmbH
("Chemotrade"), acquired June 1, 1998. The consolidated balance sheet at
April 30, 1998 includes the assets and liabilities of Isonics Corporation and
Interpro. The consolidated statement of operations for the fiscal year ended
April 30, 1998, 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. The consolidated balance sheet at April 30, 1999,
includes the assets and liabilities of Isonics Corporation, Interpro and
Chemotrade. The consolidated statement of operations for the fiscal year
ended April 30, 1999, includes the results of Isonics and Interpro for the
year then ended and the results of Chemotrade for the eleven months then
ended. All significant intercompany accounts have been eliminated in
consolidation. A pro forma income statement for the year ended April 30,
1999, has not been presented as the proforma results of operations for the
year would not have been materially different from the results reported.

CASH EQUIVALENTS

     Cash equivalents include investments purchased with a maturity of less
than ninety days. Cash balances held in foreign bank accounts were $405,000
at April 30, 1999.

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.

                                      F-7
<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

GOODWILL

     Goodwill resulted from the acquisitions of Isoserve, Inc. and
Chemotrade, and is being amortized on a straight-line basis over six years
and twenty years, respectively. The Company evaluates the realizability of
goodwill 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 impairment of goodwill exists as of
April 30, 1999.

INCOME TAXES

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

REVENUE RECOGNITION

     Revenue from product sales is recognized upon shipment. Product returns
and warranty costs have not been material in any period. Revenue from
research contracts is recognized ratably as services are performed and costs
are incurred.

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, trade receivables and trade
payables approximates carrying value due to the short maturity of such
instruments. The fair value of debt with third-party financial institutions
is not determinable due to the default status of the debt. The fair value of
debt with related parties and promissory notes is not determinable due to the
terms of the debt and no comparable market for such debt.

TRANSLATION OF FOREIGN CURRENCIES

     The Company conducts substantially all of its transactions in U.S.
dollars, except for transactions by its foreign subsidiary. The financial
statements of the Company's foreign subsidiary are denominated in the
country's local currency and remeasured for purposes of consolidation, with
the U.S. dollar as the functional currency. Gains and losses from
remeasurement and transaction gains and losses are included in the statement
of operations.

ACCOUNTING FOR STOCK-BASED COMPENSATION

     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.

                                      F-8
<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SEGMENT REPORTING

     The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, effective May 1, 1998. SFAS No. 131
establishes new rules for presenting reportable business segments. The
adoption had no effect on the Company's net loss or stockholders' equity.

NET INCOME (LOSS) PER SHARE

     Basic earnings per share is computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of options and warrants. The Company did not have any common
equivalent shares for 1999.

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

<TABLE>
<CAPTION>
                                                                                    Year Ended April 30,
                                                                                   ----------------------
                                                                                     1998         1999
                                                                                   ---------    ---------
<S>                                                                                <C>          <C>
         Basic shares outstanding                                                      5,039        6,210
         Stock options and warrants                                                    1,430            -
                                                                                   ---------    ---------

           Diluted shares outstanding                                                  6,469        6,210
                                                                                   ---------    ---------
                                                                                   ---------    ---------
</TABLE>

NOTE 2 - FINANCIAL STATEMENT COMPONENTS

     Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                          April 30,
                                                                                   ----------------------
                                                                                     1998         1999
                                                                                   ---------    ---------
<S>                                                                                <C>          <C>
         Finished goods                                                            $     250    $     420
         Raw Materials                                                                   206          231
                                                                                   ---------    ---------

                                                                                   $     456    $     651
                                                                                   ---------    ---------
                                                                                   ---------    ---------
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                          April 30,
                                                                                   ----------------------
                                                                                     1998         1999
                                                                                   ---------    ---------
<S>                                                                                <C>          <C>
         Office furniture and equipment                                            $     118    $     159
         Production equipment                                                          1,549        1,094
         Leasehold Improvements                                                            4           19
                                                                                   ---------    ---------
                                                                                       1,671        1,272
         Accumulated depreciation and amortization                                       (45)        (254)
                                                                                   ---------    ---------

                                                                                   $   1,626    $   1,018
                                                                                   ---------    ---------
                                                                                   ---------    ---------
</TABLE>

                                      F-9
<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - FINANCIAL STATEMENT COMPONENTS (CONTINUED)

     Goodwill related to acquisitions consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                          April 30,
                                                                                   ----------------------
                                                                                     1998         1999
                                                                                   ---------    ---------
<S>                                                                                <C>          <C>
         Isoserve, net of accumulated amortization of $236 and $315                $     236    $     157
         Chemotrade, net of accumulated amortization of $0 and $155                        -        3,231
                                                                                   ---------    ---------

                                                                                   $     236    $   3,388
                                                                                   ---------    ---------
                                                                                   ---------    ---------
</TABLE>

     Accrued liabilities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                          April 30,
                                                                                   ----------------------
                                                                                     1998         1999
                                                                                   ---------    ---------
<S>                                                                                <C>          <C>
         Compensation                                                              $     419    $     391
         Accrued interest                                                                 12           68
         Customer advances and deposits                                                   76           97
         Other                                                                           231          530
                                                                                   ---------    ---------

                                                                                   $     738    $   1,086
                                                                                   ---------    ---------
                                                                                   ---------    ---------
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                          April 30,
                                                                                   ----------------------
                                                                                     1998         1999
                                                                                   ---------    ---------
<S>                                                                                <C>          <C>
         Stock issued for note receivable                                          $       -    $     130
                                                                                   ---------    ---------
                                                                                   ---------    ---------
         Conversion of trade payables into debt                                    $       -    $      95
                                                                                   ---------    ---------
                                                                                   ---------    ---------
         Forgiveness of note receivable from shareholder                           $      33    $       -
                                                                                   ---------    ---------
                                                                                   ---------    ---------
         Purchase of subsidiary
           Cash paid, net of cash acquired                                         $       -    $     546
           Stock issued to seller                                                        708          894
           Debt issued to seller                                                           -        1,750
           Liabilities assumed                                                         1,464        1,598
           Goodwill                                                                        -       (3,385)
                                                                                   ---------    ---------
           Assets acquired, net of cash                                            $   2,172    $   1,403
                                                                                   ---------    ---------
                                                                                   ---------    ---------
</TABLE>

     Supplemental disclosures of cash flow information (in thousands):

<TABLE>
<CAPTION>
                                                                                          April 30,
                                                                                   ----------------------
                                                                                     1998         1999
                                                                                   ---------    ---------
<S>                                                                                <C>          <C>
         Cash paid during the period for:
           Interest                                                                $     177    $     475
           Income taxes                                                                    1          227
</TABLE>


                                      F-10
<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 - INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                                          April 30,
                                                                                   -----------------------
                                                                                     1998         1999
                                                                                   ----------   ----------
<S>                                                                                <C>          <C>
       Deferred tax assets
         Accruals and expenses deductible in future periods                        $     297    $   1,269
         Net operating loss carryforwards                                                211          435
                                                                                   ---------    ---------
              Total deferred tax assets                                                  508        1,704
         Valuation allowance                                                             (81)      (1,178)
                                                                                   ---------    ---------
                                                                                         427          526
       Deferred tax liabilities
         Amortization and depreciation                                                  (427)        (526)
                                                                                   ----------   ----------

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

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

<TABLE>
<CAPTION>
                                                                                          April 30,
                                                                                   -----------------------
                                                                                     1998         1999
                                                                                   ----------   ----------
<S>                                                                                <C>          <C>
       Current
         Federal                                                                   $       -    $       -
         State                                                                             1            -
         Foreign                                                                           -          171
                                                                                   ---------    ---------
                                                                                           1          171
       Deferred
         Federal                                                                        (230)           -
         State                                                                           (85)           -
                                                                                   ---------    ---------
                                                                                        (315)           -
                                                                                   ---------    ---------

                                                                                   $    (314)   $     171
                                                                                   ----------   ----------
                                                                                   ----------   ----------
</TABLE>

The primary differences between the statutory federal tax rate and the
effective rate in 1999 are the taxable earnings of the Company's foreign
subsidiary, the non-deductibility of certain expenses associated with
warrants and commons shares issued with debt and upon debt conversion and the
valuation allowance provided against deferred tax assets. In 1998, the
primary differences resulted from the non-deductibility of certain expenses
associated with the extinguishment of debt and the valuation allowance
provided against the deferred tax assets. The change in the valuation
allowance for deferred tax assets for the years ended April 30, 1998 and 1999
was $81,000 and $1,097,000, 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 $1,086,000 of net operating loss carryforwards for
federal purposes and associated state net operating loss carryforwards, which
expire at various dates through 2019. 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 SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 4 - DEBT AND LINE OF CREDIT

     Debt and line of credit consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                          April 30,
                                                                                   ----------------------
                                                                                     1998         1999
                                                                                   ---------    ---------
<S>                                                                                <C>          <C>
       Bank term loan - guaranteed by the SBA, repaid in 1999                      $      40    $       -
       Bank term loan, repaid in 1999                                                    306            -
       Revolving line of credit                                                            -          514
       Notes payable to related parties                                                    -          922
       10% Subordinated promissory note                                                    -           92
       Unsecured promissory notes                                                          -          494
       Other                                                                              46           36
                                                                                   ---------    ---------
                                                                                         392        2,058
       Less current maturities                                                            80        2,058
                                                                                   ---------    ---------

              Long-term debt                                                       $     312    $       -
                                                                                   ---------    ---------
                                                                                   ---------    ---------
</TABLE>

     The revolving line of credit with Coast Business Credit ("Coast"), the
Company's primary lender, is secured by substantially all of the assets of
the Company. Interest is at prime (7.75% at April 30, 1999) plus 4%. The loan
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 April 1999, Coast sent notification that Isonics was in default of
the terms of the loan agreements. As a result, Coast placed substantial
restrictions on the availability of funds and established revised repayment
terms. Because of this default, the entire outstanding balance has been
classified as current. Borrowings under the loan are presently limited to
eligible receivables and inventory amounts.

     Notes payable to related parties consist of an $812,000 (DM1,500,000)
note payable to the sellers of Chemotrade and other unsecured notes to
officers and directors amounting to $110,000. The Chemotrade note is secured
by the shares of Chemotrade, bears interest at 10% and was due in June 1999.
The Company paid $550,000 towards the Chemotrade note principal in July 1999
and extended the due date of the balance to July 31, 1999. In consideration
for the extension, the Company will grant one $3 warrant for each $5 of
deferred payment. The unsecured notes to officers and directors bear interest
at 5% per month and are payable upon demand.

     Unsecured promissory notes consist of two notes bearing interest at
prime plus 4% for $200,000 each to a vendor and a $94,500 note to a different
vendor. The $200,000 notes were due in April 1999. The Company issued 75,000
warrants to the vendor in connection with the $200,000 notes. The fair value
of these warrants, $144,000, was recorded as additional interest expense for
the period. The $94,500 note represents the conversion of certain trade
payables into a non-interest bearing note due in seven equal monthly
installments beginning in June 1999.

                                      F-12
<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 5 - COMMITMENTS

     The Company rents office, production facilities and equipment under
operating leases expiring through July 2003. Rent expense for operating
leases was approximately $39,000 and $202,000 for the years ended April 30,
1998 and 1999, respectively. Future minimum annual operating lease
commitments are as follows (in thousands):

<TABLE>
<S>                                                                   <C>
                                 2000                                  $  197,000
                                 2001                                     161,000
                                 2002                                      44,000
                                 2003                                      18,000
                                 2004                                       9,000
                                                                      -----------

                                                                       $  429,000
                                                                      -----------
                                                                      -----------
</TABLE>

     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. The Company paid royalties of $192,000
and $110,000 for the years ended April 30, 1998 and 1999, respectively, and
has paid $633,000 of royalties since inception through April 30, 1999. At
April 30, 1999, the company had accrued royalties payable under this
agreement amounting to $88,000.

NOTE 6 - STOCKHOLDERS' EQUITY

     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 stock split.

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.

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

<TABLE>
<CAPTION>
                                                              April 30,
                                                                1999
                                                             -----------
<S>                                                          <C>
         Exercise of stock options                             1,208,356
         Exercise of warrants                                  2,442,475
         Employee stock purchase plan                            200,000
                                                             -----------

                                                               3,850,831
                                                             -----------
                                                             -----------
</TABLE>

                                      F-13

<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)

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 grants made from the plans. Had
compensation cost for the plans 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, 1998 and 1999 would have been changed to the pro
forma amounts indicated below.

<TABLE>
<CAPTION>
                                                     1998             1999
                                                 ------------     -------------
<S>                                              <C>              <C>
         Net loss
           As reported                           $  (115,000)     $ (2,521,000)
           Pro forma                                (379,000)       (3,174,000)

         Loss per share (diluted)
           As reported                           $     (0.02)     $      (0.41)
           Pro forma                                   (0.06)            (0.51)
</TABLE>

                                      F-14
<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)

     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; 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, 1998 and 1999, and
changes during the years ending on these dates is presented below.

<TABLE>
<CAPTION>
                                                                                                  Weighted
                                                                                                   Average
                                                                                  Number of       Exercise
                                                                                   Shares           Price
                                                                                 -----------      --------
<S>                                                                              <C>              <C>
       Outstanding, May 1, 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
         Granted                                                                     480,721        $1.71
         Exercised                                                                  (195,830)       $0.66
         Canceled                                                                   (343,123)       $3.35
                                                                                 -----------

       Outstanding, April 30, 1999                                                   996,577        $1.49
                                                                                 -----------
                                                                                 -----------
</TABLE>

     The weighted  average fair value of options  granted  during the years
ended April 30, 1998 and 1999 was $3.25 and $1.56, respectively.

     The following information applies to options outstanding at April 30, 1999:

<TABLE>
<S>                                                              <C>      <C>           <C>            <C>
       Range of exercise prices                                    $0.58  $1.00-$1.44   $1.62-$2.38    $2.56-$3.50

       Options outstanding                                       336,927      255,721       223,929        180,000
       Weighted average exercise price                             $0.58        $1.25         $1.95          $2.98
       Weighted average remaining contractual life (years)             7           10             9              9

       Options exercisable                                       336,927      144,721        59,072        105,000
       Weighted average exercise price                             $0.58        $1.36         $1.89          $3.28
</TABLE>


                                      F-15
<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)

     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 fiscal 1999, two other executive officers exercised
stock options to acquire 57,603 and 138,227 shares of common stock at
exercise prices of $0.87 and $0.58, respectively. In each case, the Company
loaned the executive officer the aggregate amount 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 two executive officers
related to the fiscal 1997 option exercises, 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, 1998, principal and interest due on
the loans to acquire the common stock totaled $330,000 and $7,000,
respectively. At April 30, 1999, principal and interest due on the loans to
acquire the common stock totaled $460,000 and $9,000, 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. At April 30, 1999, principal and interest on the
loans to pay the federal and state tax liability incurred as a result of
exercising such option totaled $126,000 and $4,000, 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.

EMPLOYEE STOCK PURCHASE PLAN

The Company has in effect an employee stock purchase plan under which 200,000
shares of the Company's common stock are reserved for issuance to all
permanent employees who have met minimum employment criteria. Employees who
do not own 5% or more of the outstanding shares are eligible to participate
through payroll deductions. At the end of each offering period, shares are
purchased by the participants at 85% of the lower of the fair market value at
the beginning or the end of the offering period. No stock has been issued
under the plan as of April 30, 1999.

NOTE 7 - 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 8 - 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 approximately $3,000 and $30,000 for 1998 and 1999.

                                      F-16
<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9 - CONCENTRATIONS

     Four  separate  customers  accounted  for 10% or more of net revenues in
fiscal 1998:  47%,  18%, 12% and 11%. Two separate customers accounted for
10% or more of net revenues in fiscal 1999: 23% and 13%.

     Sales by geographic region are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                 1998            1999
                                                                            -------------     -----------
<S>                                                                         <C>               <C>
         United States                                                       $      6,354     $     8,072
         Europe                                                                       331           8,348
         Other                                                                         98             578
</TABLE>

NOTE 10 - BUSINESS SEGMENTS AND FOREIGN OPERATIONS

     The Company operates in two business segments: Stable Isotope Production
and Contract Research and Development Services. The Company's reportable
segments are strategic business units that offer different products and
services. They are managed based on the fundamental differences in their
operations.

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

<TABLE>
<CAPTION>
                                                                                 1998            1999
                                                                            -------------     -----------
<S>                                                                         <C>               <C>
         Net revenues
           Stable Isotope Production                                         $      6,783     $    14,384
           Contract Research and Development Services                                   -           2,614

         Operating income (loss)
           Stable Isotope Production                                         $        (32)    $    (1,035)
           Contract Research and Development Services                                   -            (831)

         Identifiable assets
           Stable Isotope Production                                         $      4,189     $     5,713
           Contract Research and Development Services                               1,466           1,093

         Depreciation and amortization
           Stable Isotope Production                                         $        200     $       263
           Contract Research and Development Services                                   -             257

         Net capital expenditures
           Stable Isotope Production                                         $         72     $        88
           Contract Research and Development Services                                   -              71
</TABLE>

                                      F-17

<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10 - BUSINESS SEGMENTS AND FOREIGN OPERATIONS (CONTINUED)

     A summary of the Company's operations by geographic area is presented below
(in thousands):

<TABLE>
<CAPTION>
                                                                                 1998            1999
                                                                            -------------     -----------
<S>                                                                         <C>               <C>
         Net revenues
           United States                                                     $      6,783     $     6,817
           Germany                                                                      -          10,181

         Operating income (loss)
           United States                                                     $        (32)    $    (2,322)
           Germany                                                                      -             456

         Identifiable assets
           United States                                                     $      5,655     $     5,507
           Germany                                                                      -           1,299
</TABLE>

NOTE 11 - RESTRUCTURING

     In October 1998, the Company recorded a charge to operations amounting
to $708,000 relating to a planned restructuring of the Company's operations.
This charge consisted primarily of lease termination costs, employee
severance pay and the write down of fixed assets. As of April 30, 1999, the
company had implemented nearly all of the changes in the operations and
expected to incur approximately $65,000 of additional costs to be expensed in
the year ending April 30, 2000. The Company reduced the accrual for
restructuring costs by $17,000 in the quarter ended April 30, 1999, to
reflect the actual costs incurred. A liability amounting to $61,000 remains
as a recorded liability at April 30, 1999 relating to the lease termination
costs.

NOTE 12 - ACQUISITIONS

     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 results of operations for Interpro are included from May 1,
1998, as the acquisition occurred on the last day of the fiscal year ended
April 30, 1998.

     On July 21, 1998, the Company acquired all of the outstanding shares of
Chemotrade GmbH and subsidiary (collectively "Chemotrade"), which was owned
by two shareholders. Chemotrade is engaged in the distribution, development
and manufacturing of stable and radio isotopes. The purchase price has been
accounted for effective June 1, 1998, the date control was transferred. The
purchase price was denominated in German Deutsche Marks, and all amounts
reported below are translated at the historical conversion rate. The purchase
price consideration on June 1, 1998 consisted of $3.402 million. Transaction
costs were $125,000. Imputed interest from the effective date of the
acquisition, June 1, 1998, totaled $28,000.

                                      F-18
<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 12 - ACQUISITIONS (CONTINUED)

     The purchase agreement provides for the selling shareholders to receive
additional consideration in the event certain levels of pretax earnings are
achieved in the periods ending through April 30, 2001. The agreement also
contains a provision to reduce the consideration given if the pretax earnings
are not achieved for each of the years ended April 30, 2000 and 2001. The
maximum additional consideration that can be earned is $271,000 (DM500,000).
Any additional consideration will be recorded as additional goodwill.

     Pro forma results of operations as if the acquisitions of Interpro and
Chemotrade had occurred at the beginning of fiscal 1998, combining the
audited results of operations of Isonics for the year ended April 30, 1998
with the results of operations of Interpro and Chemotrade for the years ended
April 29, 1998 and May 31, 1998, respectively, are as follows (in thousands):

<TABLE>
<S>                                                                    <C>
         Net revenues                                                  $16,990
         Gross margin                                                    3,998
         Net loss                                                         (174)
         Net loss per share                                               (.03)
         Number of shares used in computing per share information        5,751
</TABLE>

NOTE 13 - SUBSEQUENT EVENTS

     On July 29, 1999, the Company completed a private placement financing to
accredited investors and certain creditors valued in total at $2.7 million.
The Company issued 1,830,000 units, each consisting of one share of Series A
Convertible Preferred Stock and one warrant. The Company received $2,250,000
cash proceeds and converted $425,000 of long-term debt in connection with the
private placement. Each share of the Series A Convertible Preferred Stock is
convertible into one share of the Company's common stock at a conversion
price of $1.50. The liquidation preference for the Series A Convertible
Preferred Stock is $1.50. Each warrant allows the investor to purchase one
share of the Company's common stock for $3.75 through July 29, 2002.

     In addition to converting $425,000 of existing debt into equity as part
of the private placement, the Company:

      -    issued 500,000 warrants to purchase shares of the Company's common
           stock to an investment banker as a commission on this placement. The
           warrants are exercisable at $3.75 per share through July 29, 2002.
      -    issued 46,667 units in satisfaction of all currents and future
           obligations under the Isoserve royalty agreement.
      -    extended the payment due date for the remaining balance on the
           Chemotrade acquisition note to July 2000 and extended the payment due
           date for certain unsecured promissory notes to January 2000.

     Management believes that the proceeds and the revised debt structure
resulting from the private placement and additional strategies currently
being developed by management will be sufficient to fund operations for the
next twelve months.

                                      F-19