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

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FORM 10-QSB

|(Mark One)                                      |                                                                                   
|----------------------------------------------- | ----------------------------------------------------------------------------------
|ý                                               | Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934.
|For the quarterly period ended October 31, 2003
|o                                               | Transition report under Section 13 or 15(d) of the Exchange Act.                  
|For the transition period
from            to   

Commission file number: 001-12531

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

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

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

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

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 ý    No o

The
number of shares outstanding of the registrant's Common Stock, no par value, was 13,717,457 at December 12, 2003.

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

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Isonics Corporation

TABLE OF CONTENTS

FORM 10-QSB



|Part I:    |  | Financial Information
|---------- |  | ---------------------
|           |  | Item 1:              
|           |  |                      
|           |  |                      
|           |  |                      
|           |  |                      
|           |  | Item 2:              
|           |  | Item 3:              
|Part II:   |  | Other Information    
|           |  | Item 2:              
|           |  | Item 6:              
|Signatures

2

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Part I: Financial Information

Item 1: Condensed Financial Statements

ISONICS CORPORATION AND SUBSIDIARIES        CONDENSED CONSOLIDATED BALANCE SHEETS        (in thousands, except share amounts)

ASSETS

|                  |                                                                      | October 31, 2003       |       | April 30, 2003
|----------------- | -------------------------------------------------------------------- | ---------------------- | ----- | --------------
|
|CURRENT ASSETS:   |                                                                      |                        |       |               
|                  | Cash and cash equivalents                                            |                        | $     | 478           
|                  | Accounts receivable (net of allowances of $16 and $29, respectively) |                        |       | 617           
|                  | Inventories                                                          |                        |       | 778           
|                  | Prepaid expenses and other current assets                            |                        |       | 901           
|                  |                                                                      |                        |       |               
|                  |                                                                      | Total current assets   |       |               
|                  |                                                                      |                        |       |               
|LONG-TERM ASSETS: |                                                                      |                        |       |               
|                  | Property and equipment, net                                          |                        |       | 519           
|                  | Goodwill                                                             |                        |       | 1,807         
|                  | Intangible assets, net                                               |                        |       | 749           
|                  | Other assets                                                         |                        |       | 59            
|                  |                                                                      |                        |       |               
|                  |                                                                      | Total long-term assets |       |               
|                  |                                                                      |                        |       |               
|TOTAL ASSETS      |                                                                      | $                      | 5,908 |               
|                  |                                                                      |                        |       |               

LIABILITIES AND STOCKHOLDERS' EQUITY

|                                                        |                                                                                                                                                                                                                    | October 31, 2003           |       | April 30, 2003 |      
|------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ----- | -------------- | -----
|
|CURRENT LIABILITIES:                                    |                                                                                                                                                                                                                    |                            |       |                |      
|                                                        | Current portion of obligation under capital leases                                                                                                                                                                 |                            | $     | 51             |      
|                                                        | Accounts payable                                                                                                                                                                                                   |                            |       | 477            |      
|                                                        | Accrued liabilities                                                                                                                                                                                                |                            |       | 366            |      
|                                                        |                                                                                                                                                                                                                    |                            |       |                |      
|                                                        |                                                                                                                                                                                                                    | Total current liabilities  |       |                | 894  
|                                                        |                                                                                                                                                                                                                    |                            |       |                |      
|OBLIGATION UNDER CAPITAL LEASES, net of current portion |                                                                                                                                                                                                                    |                            | 59    |                |      
|STOCKHOLDERS' EQUITY:                                   |                                                                                                                                                                                                                    |                            |       |                |      
|                                                        | Preferred stockno par value; 10,000,000 shares authorized; 963,666 shares issued and outstanding on October 31, 2003 and April 30, 2003; $1,445,499 liquidation preference on October 31, 2003 and April 30,
2003 |                            |       | 745            |      
|                                                        | Common stockno par value; 40,000,000 shares authorized; 13,717,457 shares issued and outstanding on October 31, 2003 and 12,113,533 shares issued and outstanding on April 30, 2003                               |                            |       | 12,849         |      
|                                                        | Additional paid in capital                                                                                                                                                                                         |                            |       | 5,086          |      
|                                                        | Deferred compensation                                                                                                                                                                                              |                            |       | (125           | )    
|                                                        | Accumulated deficit                                                                                                                                                                                                |                            |       | (13,600        | )    
|                                                        |                                                                                                                                                                                                                    |                            |       |                |      
|                                                        |                                                                                                                                                                                                                    | Total stockholders' equity |       |                | 4,955
|                                                        |                                                                                                                                                                                                                    |                            |       |                |      
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY              |                                                                                                                                                                                                                    | $                          | 5,908 |                | $    
|                                                        |                                                                                                                                                                                                                    |                            |       |                |      

See
notes to condensed consolidated financial statements.

3

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ISONICS CORPORATION AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        (in thousands, except per share data)        (Unaudited)

|                                               |                                     | Three Months Ended
October 31,    |        | Six Months Ended
October 31, |      
|---------------------------------------------- | ----------------------------------- | --------------------------------- | ------ | ---------------------------- | -----
|
|Revenues                                       |                                     | $                                 | 2,214  |                              | $    
|Cost of revenues                               |                                     |                                   | 1,741  |                              |      
|                                               |                                     |                                   |        |                              |      
|                                               |                                     | Gross margin                      |        |                              | 473  
|Operating expenses:                            |                                     |                                   |        |                              |      
|                                               | Selling, general and administrative |                                   |        | 986                          |      
|                                               | Research and development            |                                   |        | 165                          |      
|                                               |                                     |                                   |        |                              |      
|                                               |                                     | Total operating expenses          |        |                              | 1,151
|                                               |                                     |                                   |        |                              |      
|Operating loss                                 |                                     |                                   | (678   | )                            |      
|                                               |                                     |                                   |        |                              |      
|Other income (expense):                        |                                     |                                   |        |                              |      
|                                               | Gain on legal settlement, net       |                                   |        |                             |      
|                                               | Amortization of debt offering costs |                                   |        |                             |      
|                                               | Foreign exchange                    |                                   |        | (10                          | )    
|                                               | Interest and other income           |                                   |        | 6                            |      
|                                               | Interest expense                    |                                   |        | (5                           | )    
|                                               |                                     |                                   |        |                              |      
|                                               |                                     | Total other income (expense), net |        |                              | (9   
|                                               |                                     |                                   |        |                              |      
|Income (loss) before income taxes              |                                     |                                   | (687   | )                            |      
|Income tax expense                             |                                     |                                   |       |                              |      
|                                               |                                     |                                   |        |                              |      
|NET INCOME (LOSS)                              |                                     | $                                 | (687   | )                            | $    
|                                               |                                     |                                   |        |                              |      
|Net income (loss) per sharebasic              |                                     |                                   |        |                              |      
|Net income (loss) per share                    |                                     | $                                 | (.05   | )                            | $    
|Shares used in computing per share information |                                     |                                   | 12,651 |                              |      
|Net income (loss) per sharediluted            |                                     |                                   |        |                              |      
|Net income (loss) per share                    |                                     | $                                 | (.05   | )                            | $    
|Shares used in computing per share information |                                     |                                   | 12,651 |                              |      

See
notes to condensed consolidated financial statements.

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ISONICS CORPORATION AND SUBSIDIARIES        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        (in thousands)        (Unaudited)

|                                                                       |                                                    | Six Months Ended October 31,                               |       
|---------------------------------------------------------------------- | -------------------------------------------------- | ---------------------------------------------------------- | ------
|
|Net cash provided by (used in) operating activities                    |                                                    | $                                                          | (1,320
|CASH FLOWS FROM INVESTING ACTIVITIES:                                  |                                                    |                                                            |       
|                                                                       | Purchases of property and equipment                |                                                            |       
|                                                                       |                                                    |                                                            |       
|                                                                       |                                                    | Cash used in investing activities                          |       
|                                                                       |                                                    |                                                            |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                                  |                                                    |                                                            |       
|                                                                       | Payments on borrowings                             |                                                            |       
|                                                                       | Proceeds from issuance of notes payable            |                                                            |       
|                                                                       | Proceeds from issuance of common stock             |                                                            |       
|                                                                       | Principal payments under capital lease obligations |                                                            |       
|                                                                       |                                                    |                                                            |       
|                                                                       |                                                    | Cash provided by (used in) financing activities            |       
|                                                                       |                                                    |                                                            |       
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:                  |                                                    |                                                            | (264  
|                                                                       | Cash and cash equivalents at beginning of period   |                                                            |       
|                                                                       |                                                    |                                                            |       
|                                                                       | Cash and cash equivalents at end of period         |                                                            | $     
|                                                                       |                                                    |                                                            |       
|Supplemental disclosure of cash flow information:                      |                                                    |                                                            |       
|                                                                       | Cash paid during the period for:                   |                                                            |       
|                                                                       |                                                    | Interest                                                   |       
|                                                                       |                                                    |                                                            |       
|                                                                       |                                                    | Income taxes                                               |       
|                                                                       |                                                    |                                                            |       
|Supplemental disclosure of noncash investing and financing activities: |                                                    |                                                            |       
|                                                                       |                                                    | Common stock issued in legal settlement                    |       
|                                                                       |                                                    | Series 2002A Convertible Notes converted into common stock |       
|                                                                       |                                                    |                                                            |       

See
notes to condensed consolidated financial statements.

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ISONICS CORPORATION AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Isonics Corporation and Subsidiaries as of October 31, 2003, and for the three
months and six months ended October 31, 2003 and 2002 have been prepared on the same basis as the annual audited financial statements. In the opinion of management, such unaudited information
includes all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of this interim information. Operating results and cash flows for interim periods are not
necessarily indicative of results for the entire year. The information included in this report should be read in conjunction with our audited financial statements and notes thereto (which include an
opinion from Grant Thornton LLP that expresses substantial doubt regarding our ability to continue as a going concern) included in our Annual Report on Form 10-KSB for the year
ended April 30, 2003.

Realization of Assets

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States
of America, which contemplate our continuation as a going concern. However, we have sustained substantial losses from operations in recent years, and such losses have continued through
December 12, 2003. In addition, historically we have used, rather than provided, cash in our operations, and have been unable to secure adequate financing to meet our future cash needs.

In
view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon our
continued operations, which in turn is dependent upon our ability to meet our financing requirements on a continuing basis, to maintain present financing, and to succeed in our future operations. The
condensed consolidated financial statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence.

We
continue to pursue funding that will help us meet our future cash needs. We recently completed a $1,200,000 ($1,080,000 net of placement fees) financing (see Private Placement) and we are currently
working with several different sources, including both strategic and financial investors to raise additional
capital to finance both our continuing operations and our isotope-based trace detection technology. Although there is no assurance that additional funding will be available, we believe that our
current business plan, if successfully funded, will significantly improve our operating results and cash flow in the future.

Accounting for Stock-Based Compensation

We account for stock-based compensation to employees and directors using the intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25,Accounting for Stock Issued to Employeesand related interpretations, as permitted by SFAS No. 123 Accounting for Stock-Based Compensation, as amended. Compensation expense for stock options is measured as the excess, if any, of the quoted market
price of our stock at the date of grant over the amount an employee must pay to acquire the stock. No stock-based employee compensation costs relating to options is reflected within our net income
(loss) as all options granted had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. We record compensation expense for restricted stock
awards based on the quoted market price of our stock at the date of the grant and recognize the expense ratably over the vesting period. The following table illustrates the effect on net

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loss
and net loss per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation to employees and directors (in thousands, except per share data):

|                               |                                                                                                                                    | Three Months Ended
October 31, |      | Six Months Ended
October 31, |  
|------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ---- | ---------------------------- | -
|
|Net income (loss), as reported |                                                                                                                                    | $                              | (687 | )                            | $
|                               | Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects |                                |      | (60                          | )
|                               |                                                                                                                                    |                                |      |                              |  
|Adjusted net income (loss)     |                                                                                                                                    | $                              | (747 | )                            | $
|                               |                                                                                                                                    |                                |      |                              |  

|                            |                     | Three Months Ended
October 31, |   | Six Months Ended
October 31,
|--------------------------- | ------------------- | ------------------------------ | - | ----------------------------
|
|Net income (loss) per share |                     |                                |   |                             
|                            | Basicas reported   |                                | $ | (.05                        
|                            | Basicadjusted      |                                | $ | (.06                        
|                            | Dilutedas reported |                                | $ | (.05                        
|                            | Dilutedadjusted    |                                | $ | (.06                        

Net Income (Loss) Per Share

Basic net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Contingently issued shares are
included in the computation of basic net income (loss) per share when the related conditions are satisfied. Diluted net income (loss) per share is computed using the weighted average number of common
shares and potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of contingently issued shares, the common shares issuable upon conversion of preferred
stock or convertible debt (using the "if converted" method) and shares issuable upon the exercise of stock options and common stock warrants (using the "treasury stock" method). Potentially dilutive
securities are excluded from the computation if their effect is anti-dilutive. The following table reconciles the denominator for the diluted net income (loss) per share computation (in
thousands):

|                                                                          |                                                                                                              | Three Months Ended
October 31, |        | Six Months Ended
October 31,
|------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------------------------ | ------ | ----------------------------
|
|Denominator for basic net income (loss) per shareweighted average shares |                                                                                                              | 12,651                         |        | 11,853                      
|Effect of dilutive securities:                                            |                                                                                                              |                                |        |                             
|                                                                          | Dilutive effect of conversion of preferred stock                                                             |                                |       |                             
|                                                                          | Dilutive effect of stock options                                                                             |                                |       |                             
|                                                                          |                                                                                                              |                                |        |                             
|                                                                          | Denominator for diluted net income (loss) per shareadjusted weighted average shares and assumed conversions |                                | 12,651 |                             
|                                                                          |                                                                                                              |                                |        |                             

As
of October 31, 2003, a total of 7,102,840 outstanding stock options and common stock warrants and 963,666 outstanding shares of Class A Convertible
Preferred Stock were excluded from the diluted

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net
income (loss) per share calculations, as the inclusion would be anti-dilutive. For the three month period ended October 31, 2002, a total of 4,841,083 outstanding stock options
and common stock warrants and 963,666 outstanding shares of Class A Convertible Preferred Stock were excluded from the diluted net income (loss) per share calculation, as the inclusion would be
anti-dilutive. For the six month period ended October 31, 2002, a total of 4,633,743 outstanding stock options and common stock warrants and 441,667 common shares related to the
$1,000,000 in face value of Series 2002A Convertible Notes converted during the period were excluded from the diluted net income (loss) per share calculation, as the inclusion would be
anti-dilutive.

During
the six month period ended October 31, 2003, we issued the following shares of Common Stock:

Description

Number of Common Stock SharesBalance as of April 30, 2003

12,113,533Shares issued from employee stock purchase plan

3,924Shares issued in September 2003 private placement

1,500,000Shares issued in legal settlement

100,000Balance as of October 31, 2003

13,717,457


The
aforementioned equity transactions increased common stock in the accompanying condensed consolidated balance sheet by $1,181,000 for the six months ended
October 31, 2003.

Inventories

Inventories consist of (in thousands):

October 31, 2003

April 30, 2003Finished goods

$
252

$
312Work in progress


492


414Materials and supplies


34


22Total inventories

$
778

$
748


Significant Customers

As of October 31, 2003, three customers accounted for approximately 56% of total net accounts receivable. Three customers accounted for approximately 46%
of total net accounts receivable at April 30, 2003. One customer (Eastern Isotopes) accounted for approximately 33% of revenues for the six months ended October 31, 2003. One customer
(Eastern Isotopes) accounted for approximately 35% of revenues for the three months ended October 31, 2003. Two customers (Eastern Isotopes and Perkin Elmer Life Sciences) accounted for
approximately 27% and 19%, respectively of revenues for the six months ended October 31, 2002. Two customers (Eastern Isotopes and Perkin Elmer Life Sciences) accounted for approximately 32%
and 19%, respectively of revenues for the three months ended October 31, 2002.

Three
customers (Perkin Elmer Life Sciences, IBT SA and Idaho Isotopes) accounted for approximately 36%, 25% and 21%, respectively of the German operation's revenues for the six months
ended October 31, 2003. Three customers (Perkin Elmer Life Sciences, IBT SA and Idaho Isotopes) accounted for approximately 27%, 26% and 26%, respectively of the German operation's revenues for
the three months ended October 31, 2003. Two customers (Perkin Elmer Life Sciences and Reviss Ltd.)

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accounted
for approximately 46% and 19%, respectively of the German operation's revenues for the six months ended October 31, 2002. Two customers (Perkin Elmer Life Sciences and
Reviss Ltd.) accounted for approximately 47% and 16%, respectively of the German operation's revenues for the three months ended October 31, 2002. Two customers accounted for
approximately 78% of the German operation's accounts receivable at October 31, 2003. Two customers accounted for approximately 52% of the German operation's accounts receivable at
April 30, 2003.

Business Segments and Foreign Operations

We currently have two reportable segments: life sciences and semiconductor materials and products. Our life sciences segment sells stable and radioisotopes in
elemental and simple compound forms for use in life sciences applications. Our semiconductor materials and products segment sells silicon-on-insulator ("SOI") wafers and is
involved in several research and development projects including silicon-28. Reconciling items consist primarily of corporate expenses that have not been allocated to a specific reportable
segment.

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

|                  |                                      | Three Months Ended
October 31, |   | Six Months Ended
October 31,
|----------------- | ------------------------------------ | ------------------------------ | - | ----------------------------
|
|Segment revenues: |                                      |                                |   |                             
|                  | Life sciences                        |                                | $ | 2,082                       
|                  | Semiconductor materials and products |                                |   | 132                         
|                  |                                      |                                |   |                             
|                  |                                      | Total                          |   | $                           
|                  |                                      |                                |   |                             

|                                 |                                      | Three Months Ended
October 31, |   | Six Months Ended
October 31, |     
|-------------------------------- | ------------------------------------ | ------------------------------ | - | ---------------------------- | ----
|
|Segment operating (loss) income: |                                      |                                |   |                              |     
|                                 | Life sciences                        |                                | $ | 303                          |     
|                                 | Semiconductor materials and products |                                |   | (265                         | )   
|                                 | Reconciling amounts                  |                                |   | (716                         | )   
|                                 |                                      |                                |   |                              |     
|                                 |                                      | Total                          |   | $                            | (678
|                                 |                                      |                                |   |                              |     

October 31, 2003

April 30, 2003Total Assets:Life sciences

$
3,558

$
3,807Semiconductor materials and products


1,105


1,193Reconciling amounts


1,245


747Total

$
5,908

$
5,747


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A
summary of operations by geographic area is as follows:

|              |               | Three Months Ended
October 31, |   | Six Months Ended
October 31,
|------------- | ------------- | ------------------------------ | - | ----------------------------
|
|Net revenues: |               |                                |   |                             
|              | United States |                                | $ | 1,681                       
|              | Germany       |                                |   | 533                         
|              |               |                                |   |                             
|              |               | Total                          |   | $                           
|              |               |                                |   |                             

|                         |               | Three Months Ended
October 31, |   | Six Months Ended
October 31, |     
|------------------------ | ------------- | ------------------------------ | - | ---------------------------- | ----
|
|Operating (loss) income: |               |                                |   |                              |     
|                         | United States |                                | $ | (686                         | )   
|                         | Germany       |                                |   | 8                            |     
|                         |               |                                |   |                              |     
|                         |               | Total                          |   | $                            | (678
|                         |               |                                |   |                              |     

October 31, 2003

April 30, 2003Total Assets:United States

$
3,331

$
2,956Germany


2,577


2,791Total

$
5,908

$
5,747


Consulting Agreement with Investor Relations Services, Inc.

On December 18, 2001 we entered into a one-year consulting agreement with Investor Relations Services, Inc. ("IRSI") whereby we issued
500,000 shares of restricted common stock for consulting services consisting of financial advisory, strategic business planning and investor and public relations services. The shares of restricted
common stock vested immediately and were considered full payment for services (including IRSI expenses) to be performed during the first six months of calendar 2002. During the last six months of
calendar 2002 IRSI was to act as an advisor but to the extent that we requested IRSI to incur any expenses on our behalf, we would have been required to reimburse IRSI for such costs.

On
July 1, 2002 we amended the agreement whereby we issued 250,000 shares of restricted common stock (valued at $247,500 based upon the fair market value of the stock) so that
IRSI would continue to perform consulting services consisting of financial advisory, strategic business planning and investor and public relations services. The shares of restricted common stock
vested immediately and were considered full payment for services (including IRSI expenses) to be performed during the last six months of calendar 2002. In August 2002, the contract was
terminated due to nonperformance by IRSI and as a result, effective as of July 1, 2002, the 250,000 shares of restricted common stock were cancelled and returned to the "authorized, unissued"
category.

During
October 2002 and again in August 2003, IRSI disputed our termination of the agreement based upon nonperformance and requested to mediate the matter. On
September 18, 2003, we settled the dispute in its entirety by issuing to IRSI 100,000 shares of our restricted common stock (valued at

10

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$97,000
based upon the fair market value of the stock). The value of the restricted common stock has been expensed to selling, general and administrative expenses during the six months ended
October 31, 2003.

Private Placement

On September 25, 2003, we completed a private placement to accredited investors whereby we sold 300,000 units for $1,200,000 ($1,080,000 net of placement
fees). Each unit consisted of five shares of common stock and three common stock warrants. Each common stock warrant is exercisable for one share of our common stock at $1.25 per share until
December 31, 2005. In accordance with the securities purchase agreement, we are required to gain effectiveness on a registration statement associated with the common stock and the common stock
underlying the common stock warrants by January 22, 2004. If we are unable to meet this commitment, we are required to pay investors, as liquidated damages, 2% of the purchase price for every
30 day period, or portion thereof, that the registration statement is not declared effective.

Financial Advisory Agreement

On October 22, 2003, we extended our existing financial advisory agreement with Park Capital Securities, LLC ("Park Capital") through December 31,
2004. In connection with this agreement, we issued a common stock warrant (valued at $355,000 using the Black-Scholes pricing model and included in prepaid expenses and other current assets in the
accompanying condensed consolidated balance sheets) to purchase 500,000 shares of our restricted common stock at $1.25 per share. The common stock warrant vested immediately, expires on
October 21, 2006 and will be expensed to selling, general and administrative expenses ratably over the twelve-month period beginning January 1, 2004.

Investment Banking Agreement

On October 22, 2003, we entered into a non-exclusive investment banking agreement with vFinance Investments, Inc. ("vFinance") whereby
we issued a common stock warrant (valued at $369,600 using the Black-Scholes pricing model and included in prepaid expenses and other current assets in the accompanying condensed consolidated balance
sheets) to purchase 560,000 shares of our restricted common stock at $1.25 per share. The common stock warrant vested immediately, expires on April 30, 2006 and is considered full payment for
services to be provided through June 30, 2004. The common stock warrant will be expensed to selling, general and administrative expenses ratably over the eight-month period beginning
November 1, 2003.

Conversion Price of Series A Convertible Preferred Stock

There are provisions associated with the Series A Convertible Preferred Stock that if triggered, would reduce the current conversion price and effectively
allow the preferred shares to convert to common stock at a more favorable ratio. Prior to our September 2003 financing, the preferred stock was convertible at 1.67 shares of common stock for
each share of Series A Convertible Preferred Stock outstanding. We did not believe that the financing completed in September 2003 (seePrivate
Placement) caused any further adjustment to the conversion price, but the holders of the Series A Convertible Preferred Stock expressed their disagreement. In
November 2003, we entered into a settlement agreement with the holders of the Series A Convertible Preferred Stock and as a result, the preferred shares are now convertible at two shares
of common stock for each share of Series A Convertible Preferred Stock outstanding. As of December 12, 2003 there were 963,666 shares of

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Series A
Convertible Preferred Stock outstanding convertible into 1,927,332 shares of common stock based on the settlement agreement.

Related Party Transactions

On July 30, 2003, we entered into an agreement with our Vice President of Life Sciences whereby he loaned us $80,000. The loan bore interest at a rate of
12% per annum and was repaid on August 4, 2003.

On
August 26, 2003, we entered into an agreement with our Vice President of Life Sciences whereby he loaned us $120,000. The loan bore interest at a rate of 12% per annum and was
repaid on September 11, 2003.

On
September 9, 2003, we entered into an agreement with our Vice President of Semiconductor Materials and Products whereby he loaned us $100,000. The loan bore interest at a rate
of 12% per annum and was repaid on September 11, 2003.

On
November 18, 2003, we entered into an agreement with our Vice President of Life Sciences whereby he loaned us $120,000. The loan bears interest at a rate of 12% per annum and
is due the earlier of one year or the collection of certain accounts receivable, as defined. This loan has not, as of December 12, 2003, been repaid.

On
November 19, 2003, we entered into an agreement with our Vice President of Semiconductor Materials and Products whereby he loaned us $100,000. The loan bears interest at a rate
of 12% per annum and is due the earlier of one year or the collection of certain accounts receivable, as defined. This loan has not, as of December 12, 2003, been repaid.

Lease Agreement

In August 2003, we entered into a month-to-month lease (at a rate of $2,800 per month) with the Colorado School of Mines Research
Institute to continue leasing office and storage space at our current location.

New Accounting Standards

In May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equitywhich was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective for us as of
August 1, 2003. SFAS No. 150 changes the classification in the condensed consolidated balance sheets of certain common financial instruments from either equity or mezzanine presentation
to liabilities presentation, and requires an issuer of those financial statements to recognize changes in fair value or redemption amounts as applicable in earnings. The adoption of SFAS
No. 150 did not have a material impact on our condensed consolidated financial statements.

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

Subsequent Event

On November 1, 2003 we entered into a twelve-month agreement with Lippert/Heilshorn & Associates, Inc. ("Lippert/Heilshorn") to provide us
with investor relations services through October 31, 2004. In connection with this agreement, we agreed to make monthly payments of $10,500 and we issued a common stock warrant to acquire
120,000 shares of our restricted common stock at $1.35 per share. The common stock warrant vested immediately, expires on November 1, 2006 and will be expensed ratably to general and
administrative expenses over the period November 1, 2003 through October 31, 2004.

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Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

The statements contained in this Report on Form 10-QSB that are not purely historical are forward looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, hopes, intentions
or strategies regarding the future. Forward-looking statements include: statements regarding future products or product development; statements regarding future selling, general and administrative
costs and research and development spending and our product development strategy; and statements regarding future capital expenditures and financing requirements. All forward-looking statements
included in this document are based on information available to us on the date hereof, and we undertake no obligation to update any such forward-looking statements. It is important to note that our
actual results could differ materially from those in such forward-looking statements.

General Discussion

Founded in 1992, we are an advanced materials and technology company. We are developing and we anticipate commercializing products created from materials whose
natural isotopic ratios have been modified as well as non-isotopic (natural) materials. An isotope is one of two or more species (or nuclides) of the same chemical element that differ from
one another only in the number of neutrons in the atom's nucleus. The different number of neutrons can create significantly different nuclear properties. The most well-known of these
properties is radioactivity. Radioactive isotopes (or radioisotopes) can be found in nature. Most of our radioisotopes, however, are man-made. Stable isotopes, as distinguished from
radioisotopes, are not radioactive.

Several
manufacturers, located primarily in republics that once were part of the Soviet Union, produce radioactive and stable isotopes. We buy these isotopes from the manufacturers and
resell them in the form of common chemical compounds. For example, oxygen-18 is sold as water, and zinc-68 is sold as zinc oxide. Today our business addresses the material
needs of two primary markets:



We
also sell isotopes for use in basic scientific research and industrial applications. We believe our core competency is our ability to identify, develop, source, and commercialize
products and services based on isotopically engineered materials as well as non-isotopic semiconductor materials.

While
we are currently focusing on these two markets, we continue to evaluate other applications for both stable and radioisotopes and non-isotopic materials. During our 2003
fiscal year, we commenced our SOI wafer manufacturing operation in Vancouver, Washington, and acquired detection technology from the Institut of Umwelttechnologien GmbH ("IUT"). As a result, we have
been required to make a significant cash investment in our SOI wafer manufacturing operations and we may be required to make additional investments of cash, personnel, and materials in either of these
operations in the future. These have strained our working capital resources and as a result our auditors issued their opinion to our audited financial statements for the year ended April 30,
2003, which expressed substantial doubt regarding our ability to continue as a going concern. Although an investment in September 2003 by accredited investors (see Private Placement) helped to
temporarily alleviate our working capital shortage, we need a significant amount of additional financing to achieve our
business goals and we cannot offer any assurance that we will be able to obtain such financing on reasonable terms, if at all.

Our
revenues in the future (assuming we will be able to continue as a going concern) will depend on our success in developing and selling products in the semiconductor and stable and
radioactive isotope markets. Consistent with our historical experience, our quarterly results have been materially affected by the size, timing, and quantity of orders and product shipments during a
given quarter. In

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addition,
our quarterly results have been significantly impacted by one-time events including the July 2002 settlement of the Eagle-Picher Technologies, LLC ("Eagle-Picher") dispute
and sale of Chemotrade Leipzig ("CTL"). We cannot offer any assurance that these types of events will occur in the future.

Results of Operations

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

|                                  |                                     | Three Months Ended
October 31, |      | Six Months Ended
October 31, |     
|--------------------------------- | ----------------------------------- | ------------------------------ | ---- | ---------------------------- | ----
|
|Revenues                          |                                     | 100.0                          | %    | 100.0                        | %   
|Cost of revenues                  |                                     | 78.6                           |      | 78.9                         |     
|                                  |                                     |                                |      |                              |     
|                                  | Gross margin                        |                                | 21.4 |                              | 21.1
|                                  |                                     |                                |      |                              |     
|Operating expenses:               |                                     |                                |      |                              |     
|                                  | Selling, general and Administrative |                                | 44.5 |                              | 48.3
|                                  | Research and development            |                                | 7.5  |                              | 3.0 
|                                  |                                     |                                |      |                              |     
|                                  |                                     | Total operating expenses       |      | 52.0                         |     
|                                  |                                     |                                |      |                              |     
|Operating loss                    |                                     | (30.6                          | )    | (30.2                        | )   
|                                  |                                     |                                |      |                              |     
|Other income (expense), net       |                                     | (.4                            | )    | .2                           |     
|                                  |                                     |                                |      |                              |     
|Income (loss) before income taxes |                                     | (31.0                          | )    | (30.0                        | )   
|                                  |                                     |                                |      |                              |     
|Income tax expense                |                                     |                               |      |                             |     
|                                  |                                     |                                |      |                              |     
|NET INCOME (LOSS)                 |                                     | (31.0                          | )%   | (30.0                        | )%  
|                                  |                                     |                                |      |                              |     

Revenues

Revenues decreased from $2,256,000 for the three months ended October 31, 2002 to $2,214,000 for the three months ended October 31, 2003, a decrease
of $42,000 or 1.9%. The decrease is due to a decrease in international isotope product sales partially offset by an increase in domestic isotope product sales and semiconductor materials and products
sales. Included in revenues for the three months ended October 31, 2003 were $132,000 of semiconductor materials and products sales as compared to $46,000 for the three months ended
October 31, 2002.

As
a significant portion of our revenues are derived from a small concentration of customers (seeSignificant Customers), if one or more
of these customers were to discontinue or reduce their purchases of our isotope products, the result could have a material effect on both our revenues and related cash flows.

Revenues
from domestic isotope product sales for the three months ended October 31, 2003 were $1,549,000, an increase of 1.8%, or $28,000, from $1,521,000 for the three months
ended October 31, 2002. The increase was primarily the result of additional product sales to our existing customers and an increase in our customer base for the three months ended
October 31, 2003.

Revenues
from international isotope product sales for the three months ended October 31, 2003 were $533,000, a decrease of 22.6%, or $156,000, from $689,000 for the three months
ended October 31, 2002. The decrease was primarily the result of a significant decrease in sales of one specific

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radioisotope
due to a worldwide decrease in demand. It is uncertain if the demand for this radioisotope will return to previous levels.

In
general, our German subsidiary has had difficulty entering the oxygen-18 market in Europe as many of its potential customers are under long-term supply
contracts with their current suppliers and the market is relatively flat (unlike the United States which is growing at a significant rate). The quality of our product is high but we must wait until
our potential customers' current supply agreements terminate before we will be able to bid on new supply contracts. Our ability to increase the revenues in our German subsidiary (and ultimately its
gross margin) is directly related to how successful we can be in gaining market share in the European oxygen-18 market. While we anticipate that we will begin obtaining European
oxygen-18 customers in the first two quarters of calendar 2004, we cannot provide any assurance that this will come to fruition.

Revenues
were essentially flat between periods as we generated $4,497,000 for the six months ended October 31, 2002 compared to $4,499,000 for the six months ended
October 31, 2003. We experienced a decrease in international isotope product sales, which was offset by an increase in semiconductor materials and products sales. The increase in semiconductor
materials and product sales was mostly due to a $200,000 sale of silicon-28 as a bulk isotope in the first quarter of fiscal 2004. Included in revenues for the six months ended
October 31, 2003 were $395,000 of semiconductor materials and products sales as compared to $58,000 for the six months ended October 31, 2002.

Revenues
from domestic isotope product sales for the six months ended October 31, 2003 were $3,017,000, a decrease of 2.8%, or $87,000, from $3,104,00 for the six months ended
October 31, 2002. The decrease was primarily the result of a significant decrease in the sale of radioisotopes partially offset by an increase in the sale of stable isotopes (consisting mainly
of oxygen-18). While the substantial majority of our revenues at our German subsidiary are derived from the sale of radioisotopes, we have had difficulty in the United States with our
ability to enter the radioisotope market. The difficulty arises from the fact that our potential customers have long established relationships with their suppliers (who are mostly foreign) and as a
result they are hesitant to change. While we continue to work towards increasing our share in this domestic market to a meaningful number, we can offer no assurances that this will come to fruition.

The
substantial majority of our domestic isotope product sales result from the sale of oxygen-18 and while our volume continues to increase, it has been offset by a
continuation of price decreases in the market. As a result, in order to increase our revenues from the sale of oxygen-18, we will need to continue to increase our volume at a rate greater
than the continuing decreases in the anticipated future market price. While we believe that we will continue to be successful in this endeavor in the future, we can offer no assurance that this will
come to fruition.

Revenues
from international isotope product sales for the six months ended October 31, 2003 were $1,087,000, a decrease of 18.6%, or $248,000, from $1,335,000 for the six months
ended October 31, 2002. The decrease was primarily the result of a significant decrease in sales of one specific radioisotope due to a worldwide decrease in demand. It is uncertain if the
demand for this radioisotope will return to previous levels.

We
do not anticipate significant revenues from sales of silicon-28 based products during the remainder of fiscal 2004 (although we did complete a $200,000 transaction for the
sale of silicon-28 as a bulk isotope in the first quarter of fiscal 2004). We are collaborating with academia and industry to evaluate the benefits of isotopically pure
silicon-28. We believe that if evaluations demonstrate the commercial feasibility of one or more products, demand could emerge in the high-performance microprocessor segment of
the semiconductor market. We can offer no assurance, however that these evaluations will demonstrate the commercial feasibility of any products, that we will be able to commercialize any such
products, or that a market will emerge for any such products.

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Gross Margin

Gross margin was essentially flat between three-month periods as we generated $473,000 for the three months ended October 31, 2003 as compared to $477,000
for the three months ended October 31, 2002. On a percentage of revenues basis, gross margin increased .3 percentage points to 21.4%, for the three months ended October 31, 2003,
from 21.1%, for the three months ended October 31, 2002. Gross margin was also essentially flat between six-month periods as we generated $1,028,000 for the six months ended
October 31, 2003 as compared to $1,062,000 for the six months ended October 31, 2002. On a percentage of revenues basis, gross margin decreased .8 percentage points to 22.8%, for
the six months ended October 31, 2003, from 23.6%, for the six months ended October 31, 2002. In general, margins will continue to decline as oxygen-18 prices decrease and
until we can generate a positive margin for the semiconductor materials and products business line. We anticipate that the gross margin from sales of semiconductor materials and products (both in
dollar value and as a percentage of revenues) will increase over time as sales increase and minimize the overall effect of fixed costs, but we can offer no assurances that this will come to fruition.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $104,000, to $986,000, for the three months ended October 31, 2003, from $1,090,000, for the three
months ended October 31, 2002. On a percentage of revenues basis, selling, general and administrative expenses decreased 3.8 percentage
points to 44.5%, for the three months ended October 31, 2003, from 48.3%, for the three months ended October 31, 2002. The dollar decrease is attributable mainly to a decrease in
consulting and other professional services expenses partially offset by an increase in headcount and facility costs related to the expansion of our SOI operations. The percentage decrease is
attributable mainly to a decrease in consulting and other professional services expenses partially offset by an increase in headcount and facility costs related to the expansion of our SOI operations
and a decrease in revenues.

Selling,
general and administrative expenses decreased $181,000, to $2,069,000, for the six months ended October 31, 2003, from $2,250,000, for the six months ended
October 31, 2002. On a percentage of revenues basis, selling, general and administrative expenses decreased 4.0 percentage points to 46.0%, for the six months ended October 31,
2003, from 50.0%, for the six months ended October 31, 2002. Both the dollar and percentage of revenues decrease is primarily attributable to decreases in both legal costs associated with the
Eagle-Picher dispute and consulting and other professional services expenses partially offset by an increase in headcount and facility costs related to our SOI operations.

If
we are able to obtain the necessary funding, we anticipate that we will increase our selling, general and administrative expenses during the remainder of fiscal year 2004 through
anticipated increased marketing efforts for our semiconductor materials and products segment and in an effort to market the isotope-based trace detection technology that we acquired from IUT. There
can be no assurance that our anticipated increased selling, general and administrative expenses will result in increased revenues from product sales.

Research and Development Expenses

Consistent with our product development strategy, we are seeking to identify and evaluate new stable and radioactive isotope products, SOI products and potential
markets for economic and technical feasibility. We anticipate that we may incur research and development costs associated with the detection technology that we acquired from IUT only if we are able to
obtain adequate additional financing. We will, in addition, continue funding research and development to improve technologies for isotope separation and material processing technologies. Because of
the uniqueness of our business, the unique chemicals and processes we deal with and the handling precautions required, these expenses can

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be
significant. We cannot offer any assurance that our current or future lines of business or products resulting from our research and development efforts will be profitable or generate significant
revenues.

Research
and development expenses increased $97,000, to $165,000, for the three months ended October 31, 2003, from $68,000, for the three months ended October 31, 2002. On
a percentage of revenues basis research and development expenses increased 4.5 percentage points to 7.5% for the three months ended October 31, 2003, from 3.0%, for the three months
ended October 31, 2002. Both the
dollar and percentage increase is primarily related to an increase in research and development expenses associated with our thin-film SOI product.

Research
and development expenses increased $101,000, to $230,000, for the six months ended October 31, 2003, from $129,000, for the six months ended October 31, 2002. On a
percentage of revenues basis research and development expenses increased 2.2 percentage points to 5.1% for the six months ended October 31, 2003, from 2.9%, for the six months ended
October 31, 2002. Both the dollar and percentage increase is primarily related to an increase in research and development expenses associated with our thin-film SOI product.

We
believe that the development and introduction of new product applications is critical to our future success. We expect that research and development expenses may increase assuming
sufficient cash remains available and we are able to procure necessary materials and outside services, but will likely continue to vary as a percentage of revenues because of the timing and amount of
future revenues. Except for work being performed on our SOI thin-film product at our facilities in Vancouver, Washington, we operate no other facilities of our own for research and
development. All other research and development work is performed by outside entities, none of which we control. None of the companies that currently perform research and development work for us does
so on an exclusive basis.

Other Income (Expense), net

For the three months ended October 31, 2003 and 2002, other income (expense), net includes interest income and expense and foreign currency gains and
losses. Other income (expense), net decreased $13,000, to ($9,000), for the three months ended October 31, 2003, from $4,000, for the three months ended October 31, 2002.

For
the six months ended October 31, 2003 and 2002, other income (expense), net includes net gains from a legal settlement, amortization of debt offering costs, gains or losses on
the sale of lines of businesses or subsidiaries, interest income and expense, and foreign currency gains and losses. Other income (expense), net decreased $1,399,000, to ($7,000), for the six months
ended October 31, 2003, from $1,392,000 for the six months ended October 31, 2002. The decrease is primarily attributable to the gain (net of the contingency portion of legal fees) of
$2,140,000 related to the settlement of the Eagle-Picher dispute and the gain resulting from the disposition of CTL, partially offset by the expensing of $546,000 of previously unamortized discount
related to the Series 2002A Convertible Notes to interest expense and $182,000 of previously capitalized debt offering costs as a result of the conversion of the notes to common stock during
the six months ended October 31, 2002.

Income Taxes

We currently operate at a loss and expect to operate at a loss until the products currently under development begin to generate sufficient revenue. The losses we
anticipate incurring during the remaining portion of the current year are not expected to generate an income tax benefit because of the uncertainty of the realization of the deferred tax asset. As
such, we have also provided a valuation allowance against our net deferred tax asset as realization is uncertain.

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Net Loss

We recognized a net loss of $687,000 for the three months ended October 31, 2003, as compared to a net loss of $677,000 for the three months ended
October 31, 2002. We recognized a net loss of $1,278,000 for the six months ended October 31, 2003, as compared to net income of $75,000 for the six months ended October 31, 2002.
We anticipate that losses will continue until (if ever): (i) revenues from our current operations substantially increase or (ii) we generate substantial revenues from products introduced
as a result of our research and development projects.

Net
income in future years will be dependent upon our ability to increase net revenues faster than we increase our selling, general and administrative expenses, research and development
expense and other expenses. Assuming we obtain the necessary funding, we anticipate expanding our SOI operations and generating additional revenues during the remainder of fiscal year 2004. However,
because of our continuing research and development efforts on new products (possibly including products based on our homeland security technology), we anticipate that our operations during the
remainder of fiscal year 2004 will result in a loss since we are not likely to increase our revenues from our existing products or generate additional sales from the new products we may develop in a
sufficient amount (if at all) to offset our operating expenses.

Liquidity and Capital Resources

Our working capital and liquidity increased significantly during the six months ended October 31, 2003 due to the private placement completed in
September 2003 whereby we received $1,200,000 ($1,080,000 net of placement fees). Working capital increased $786,000, to $1,880,000 at October 31, 2003, from $1,094,000, at
April 30, 2003.

Our
principal source of funding for the six months ended October 31, 2003 was from the private placement completed in September 2003. Our principal source of funding for
the six months ended October 31, 2002 was from the settlement of the Eagle-Picher dispute. We used cash in operating activities of $1,320,000 during the six months ended October 31, 2003
and provided cash from operating activities of $1,020,000 during the six months ended October 31, 2002. Cash used in operating activities for the six months ended October 31, 2003 was
principally the result of a net loss of $1,278,000. Cash provided by operating activities during the six months ended October 31, 2002 was principally the result of the settlement of the
Eagle-Picher dispute partially offset by operating losses.

As
a significant portion of our revenues and accounts receivable are derived from a small concentration of customers (seeSignificant
Customers), if one or more of these customers were to discontinue or reduce their purchases of our isotope products or fail to pay our accounts receivable, the result could
have a material effect on both our revenues and related cash flows.

Our
investing activities used cash of $4,000 and $260,000 for the six months ended October 31, 2003 and 2002, respectively. Cash used in investing activities for the six months
ended October 31, 2003 and October 31, 2002, resulted from purchases of property and equipment.

Financing
activities provided cash of $1,060,000 for the six months ended October 31, 2003 and used cash of $22,000 for the six months ended October 31, 2002. Cash provided
by financing activities for the six months ended October 31, 2003 resulted primarily from the private placement of $1,200,000 ($1,080,000 net of placement fees) completed in
September 2003. Cash used in financing activities for the six months ended October 31, 2002 resulted primarily from payments on borrowings of $25,000.

At
October 31, 2003, we had $478,000 of cash and cash equivalents, a decrease of $264,000, compared to $742,000, at April 30, 2003.

In
September 2003 we completed a financing arrangement whereby we issued 1,500,000 shares of restricted common stock and 900,000 common stock warrants to accredited investors for
$1,200,000

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($1,080,000
net of placement fees). Each common stock warrant is exercisable for one share of common stock at $1.25 per share and expire on December 31, 2005. We paid the placement agents a 10%
commission related to this arrangement.

On
October 22, 2003, we extended our existing financial advisory agreement with Park Capital through December 31, 2004. In connection with this agreement, we issued a
common stock warrant to purchase 500,000 shares of our restricted common stock at $1.25 per share. The common stock warrant vested immediately and expires on October 21, 2006.

On
October 22, 2003, we entered into a non-exclusive investment banking agreement with vFinance whereby we issued a common stock warrant to purchase 560,000 shares of
our restricted common stock at $1.25 per share. The common stock warrant vested immediately, expires on April 30, 2006 and was considered full payment for services to be provided through
June 30, 2004.

On
November 1, 2003, we entered into a twelve-month agreement with Lippert/Heilshorn & Associates, Inc. to provide us with investor relations services through
October 31, 2004. In connection with this agreement, we agreed to make monthly payments of $10,500 and we issued a common stock warrant to acquire 120,000 shares of our restricted common stock
at $1.35 per share. The common stock warrant vested immediately and expires on November 1, 2006.

There
are provisions associated with the preferred stock private placement completed on July 29, 1999 that if triggered, would reduce the current conversion price and effectively
allow the preferred shares to convert to common stock at a more favorable ratio. Prior to our September 2003 financing, the preferred stock was convertible at 1.67 shares of common stock for
each share of Series A Convertible Preferred Stock outstanding. We did not believe that the financing completed in September 2003 caused any further adjustment to the conversion price,
but the holders of the Series A Convertible Preferred Stock expressed their disagreement. In November 2003, we entered into a settlement agreement with the holders of the Series A
Convertible Preferred Stock and as a result, the preferred shares are now convertible at two shares of common stock for each share of Series A Convertible Preferred Stock outstanding. As of
December 12, 2003 there were 963,666 shares of Series A Convertible Preferred Stock outstanding convertible into 1,927,332 shares of common stock based on our calculation.

Our
stock was trading at prices significantly below the $1.00 per share Nasdaq minimum bid price requirement at times during the last half of the calendar year ended December 31,
2002 and has again at times been trading below $1.00 per share since late February 2003. The volatility of our stock price, our current price and our financial condition may result in our
failing to meet Nasdaq's requirements. As a result, we could potentially be at risk of Nasdaq action to remove our securities from its SmallCap market. We cannot give any assurance that we will be
able to meet the Nasdaq requirements to maintain our SmallCap listing, or that if we do, a stable trading market will develop for our stock.

In
general, we expect that our working capital will decrease over time as we continue to use our capital and cash flows from revenues for operations, research and development, and
investing activities. We do not expect working capital to increase until we are able increase our revenues to exceed our cash out-flows (assuming we are able to increase our revenues) or
complete a financing arrangement. With our anticipated revenues from operations during the period and projecting our cash flow on the basis of our historical expenditures and the financing completed
in September 2003, we have sufficient cash available to fund our short-term working capital requirements through February 2004.

We
are currently working with several different sources, including both strategic and financial investors to raise sufficient capital to finance both our continuing operations and our
proposed homeland security business through the use of the isotope-based trace detection technology we acquired from IUT. Although there is no assurance that funding will be available, we believe that
our

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current
business plan, if successfully funded, will significantly improve our operating results and cash flow in the future.

Critical Accounting Policies

The material accounting policies that we believe are the most critical to an investor's understanding of our financial results and condition and require complex
management judgment have been expanded and are discussed below.

Goodwill and Intangible Assets

Effective May 1, 2002 we adopted SFAS No. 142Goodwill and Other Intangible Assets.SFAS
No. 142 addresses the methods used to amortize intangible assets and to assess impairment of those assets, including goodwill resulting from business combinations accounted for under the
purchase method. Although we adopted SFAS No. 142 effective May 1, 2002, goodwill and intangible assets other than goodwill acquired after June 30, 2001 have been amortized or not
amortized in accordance with SFAS No.142. We acquired intangible assets from Silicon Evolution, Inc. ("SEI") and IUT subsequent to June 30, 2001, and have accounted for those assets in
accordance with the requirements of SFAS No. 142. Included in our assets at October 31, 2003, is goodwill related to the acquisition of Chemotrade in 1998 with a net carrying value of
$1,807,000. Effective with the adoption of SFAS No. 142, we no longer amortize this goodwill, decreasing our amortization expense by approximately $110,000 per year.

In
accordance with SFAS No. 142, we have completed our annual impairment test (as of April 30, 2003) on our life sciences reporting unit, which has recorded goodwill. In
completing our analysis of the life sciences reporting unit, we used the Discounted Cash Flow Method ("DCF Method") in which the reporting unit was valued by discounting the projected cash flows to
its present value based upon a risk-adjusted discount rate. As a result of the testing, we determined that there is no impairment of goodwill. We are required to assess goodwill for
impairment annually, or earlier if indicators of impairment do arise. We are not aware of any indicators of possible impairment as of December 12, 2003.

In
performing the calculation under SFAS No. 142, we made several assumptions, including the use of the DCF Method, the number of years used in the projection, the discount rate
and growth
assumptions. Had we elected to use different variables, the outcome of the calculation could have been different.

We
utilized the DCF Method in order to calculate the fair value of our life sciences reporting unit. We had the option to utilize the market capitalization method but given the
complexity of our business, we determined that we couldn't reasonably bifurcate the market value of the life sciences reporting unit from our other operations based upon our market value as a whole.
In utilizing the DCF Method, we based our calculation over a conservative six-year life with no projected growth over the final four years. The final four years were kept constant in order
to ensure that we did not overestimate the potential of the reporting unit. The six-year life was utilized as a result of the fact that the life sciences reporting unit has been selling
isotopes for over fifteen years and that demand for isotopes is projected to increase over the next ten years. Given the history of the reporting unit and the projected future of the industry, we
determined that it was reasonable to utilize a six-year life. Had we utilized a life of less than six years, the calculation may have suggested that impairment was present. In addition, we
discounted the projected cash flows at a rate of 12%. The 12% was deemed reasonable given the current low market interest rate and the extremely low risk of the life sciences business offset by the
higher cost of capital for a small company and the related difficulties we have had in raising necessary capital over the years. Had we utilized a discount rate that was substantially larger than 12%,
the calculation may have suggested that impairment was present.

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Our
intangible assets result from the perpetual, exclusive technology license agreement with SEI that we entered into on September 14, 2001 and the isotope-based trace detection
technology we acquired from IUT in December 2002. As the intangible assets were acquired after June 30, 2001, we adhere to the guidance provided by SFAS No. 142. Both the
intangible assets acquired from SEI and the isotope-based trace detection technology are being amortized over their estimated useful lives of ten years (which are based upon many factors including the
time it will take to develop the technology, the expected life of the finalized product(s) and the estimated lives of similar products). We will continue to evaluate each reporting period whether
events and circumstances continue to support our assessment of a ten-year life for these intangible assets. Additionally, if indicators of impairment do arise in the future, the intangible
assets will be tested for impairment and may result in an impairment charge in the future. We are not aware of any indicators of possible impairment as of December 12, 2003.

Valuation of Equity Transactions

We value transactions associated with common or preferred stock that is convertible into common stock based on the market value of the underlying common stock on
the date of the signing of the agreement. We value transactions associated with common stock warrants at the appropriate measurement date utilizing the Black-Scholes pricing model, with assumptions as
to volatility (100%), risk-free interest rate (4.0%) and estimated life of the warrants based on historical
information. If the assumptions used, as they relate to volatility, risk-free interest rate and estimated life of the warrants, were materially different, the overall valuation of these
transactions could change significantly.

Item 3: Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, within the 90 days prior to the filing date of this report, we
carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation
of our principal executive officer as well as our principal financial officer, who concluded that our disclosure controls and procedures are effective. There have been no significant changes in our
internal controls or in other factors, which could significantly affect internal controls subsequent to the date we carried out our evaluation.

Disclosure
controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the
Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated
to management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

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PART II  OTHER INFORMATION

Item 2: Changes in Securities and Use of Proceeds

Lippert/Heilshorn &Associates, Inc.

On November 1, 2003 we entered into a twelve-month agreement with Lippert/Heilshorn to provide us with investor relations services through
October 31, 2004. In connection with this agreement, we issued a common stock warrant to acquire 120,000 shares of our restricted common stock at $1.35 per share. The common stock warrant
vested immediately and expires on November 1, 2006.



2003 Transaction with Park Capital Securities, LLC

On October 22, 2003, we extended our existing financial advisory agreement with Park Capital, a member of the National Association of Securities
Dealers, Inc. with offices at 216 East 45th Street, 9th Floor, New York, NY 10017. The agreement to extend the financial advisory agreement provided for the issuance
to Park Capital of a warrant to purchase 500,000 shares of common stock in exchange for Park Capital's agreement to continue to provide financial advisory and other services to Isonics. The following
sets forth the information required by Item 701 in connection with that transaction:



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2003 Transaction with vFinance Investments, Inc.

On October 22, 2003, we entered into an agreement with vFinance with an office at 3010 North Military Trail, Suite 300, Boca Raton, FL 33431 and at 880
Third Avenue, 4th Floor, New York, NY 10022, a member of the National Association of Securities Dealers, Inc. The agreement provided for the issuance to vFinance of a warrant to
purchase 560,000 shares of common stock in exchange for vFinance's agreement to provide financial advisory and other services to Isonics. The following sets forth the information required by Item 701
in connection with that transaction:



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2003 Transaction with Investor Relations Services, Inc.



Reback Living Trust Feb 20, 2001; Yorkshire Limited; and Southshore Capital Fund Ltd.



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Item 6: Exhibits and Reports on Form 8-K



31.

Certification pursuant to Sarbanes-Oxley Section 30232.

Certification pursuant to 18 U.S.C. Section 1350




On
September 26, 2003 we filed a report on Form-8K which detailed the issuance of 1,500,000 shares of our restricted common stock and 900,000 common stock warrants to
three accredited investors for $1,200,000.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Golden, County of Jefferson, State of Colorado, on the 12th day of December 2003.

Isonics Corporation
(Registrant)By:
/s/JAMES E. ALEXANDERJames E. Alexander
President, Chief Executive Officer and DirectorBy:
/s/JOHN V. SAKYSJohn V. Sakys
Chief Accounting Officer and Chief Financial Officer


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