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

---

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 January 31, 2005
|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 27,586,800 at February 28, 2005.

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)

|                  |                                                                      | January 31, 2005       |        | April 30, 2004
|----------------- | -------------------------------------------------------------------- | ---------------------- | ------ | --------------
|
|ASSETS            |                                                                      |                        |        |               
|CURRENT ASSETS:   |                                                                      |                        |        |               
|                  | Cash and cash equivalents                                            |                        | $      | 3,944         
|                  | Accounts receivable (net of allowances of $59 and $16, respectively) |                        |        | 958           
|                  | Inventories                                                          |                        |        | 2,178         
|                  | Prepaid expenses and other current assets                            |                        |        | 637           
|                  |                                                                      |                        |        |               
|                  |                                                                      | Total current assets   |        |               
|                  |                                                                      |                        |        |               
|LONG-TERM ASSETS: |                                                                      |                        |        |               
|                  | Property and equipment, net                                          |                        |        | 4,835         
|                  | Goodwill                                                             |                        |        | 1,807         
|                  | Intangible assets, net                                               |                        |        | 252           
|                  | Other assets                                                         |                        |        | 126           
|                  |                                                                      |                        |        |               
|                  |                                                                      | Total long-term assets |        |               
|                  |                                                                      |                        |        |               
|TOTAL ASSETS      |                                                                      | $                      | 14,737 |               
|                  |                                                                      |                        |        |               

3

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|                                                        |                                                                                                                                                                                                                                                             | January 31, 2005           |        | April 30, 2004 |       
|------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | -------------- | ------
|
|LIABILITIES AND STOCKHOLDERS' EQUITY                    |                                                                                                                                                                                                                                                             |                            |        |                |       
|CURRENT LIABILITIES:                                    |                                                                                                                                                                                                                                                             |                            |        |                |       
|                                                        | Current portion of obligation under capital leases                                                                                                                                                                                                          |                            | $      | 58             |       
|                                                        | Accounts payable                                                                                                                                                                                                                                            |                            |        | 1,766          |       
|                                                        | Accrued liabilities                                                                                                                                                                                                                                         |                            |        | 615            |       
|                                                        | Current portion of note payable                                                                                                                                                                                                                             |                            |        | 663            |       
|                                                        |                                                                                                                                                                                                                                                             |                            |        |                |       
|                                                        |                                                                                                                                                                                                                                                             | Total current liabilities  |        |                | 3,102 
|                                                        |                                                                                                                                                                                                                                                             |                            |        |                |       
|OBLIGATION UNDER CAPITAL LEASES, net of current portion |                                                                                                                                                                                                                                                             |                            | 50     |                |       
|NOTE PAYABLE, net of current portion                    |                                                                                                                                                                                                                                                             |                            | 825    |                |       
|                                                        |                                                                                                                                                                                                                                                             |                            |        |                |       
|TOTAL LIABILITIES                                       |                                                                                                                                                                                                                                                             |                            | 3,977  |                |       
|STOCKHOLDERS' EQUITY:                                   |                                                                                                                                                                                                                                                             |                            |        |                |       
|                                                        | Preferred Stock; 10,000,000 shares authorized                                                                                                                                                                                                               |                            |        |                |       
|                                                        | Series A Convertible Preferred Stockno par value; 6,666 and 963,666 shares issued and outstanding on January 31, 2005 and April 30, 2004, respectively; $9,999 and $1,445,499 liquidation preference on
January 31, 2005 and April 30, 2004, respectively  |                            |        | 5              |       
|                                                        | Series C Convertible Preferred Stockno par value; zero and 9,000 shares issued and outstanding on January 31, 2005 and April 30, 2004, respectively; zero and $900,000 liquidation preference on
January 31, 2005 and April 30, 2004, respectively         |                            |        |               |       
|                                                        | Series D Convertible Preferred Stockno par value; 1,900 and 32,950 shares issued and outstanding on January 31, 2005 and April 30, 2004, respectively; $190,000 and $3,295,000 liquidation preference on
January 31, 2005 and April 30, 2004, respectively |                            |        | 215            |       
|                                                        | Series E Convertible Preferred Stockno par value; 33,000 and zero shares issued and outstanding on January 31, 2005 and April 30, 2004, respectively; $3,300,000 and zero liquidation preference on
January 31, 2005 and April 30, 2004, respectively      |                            |        | 3,939          |       
|                                                        | Common stockno par value; 40,000,000 shares authorized; 27,586,800 and 15,344,913 shares issued and outstanding on January 31, 2005 and April 30, 2004, respectively                                                                                       |                            |        | 28,242         |       
|                                                        | Additional paid in capital                                                                                                                                                                                                                                  |                            |        | 7,693          |       
|                                                        | Deferred compensation                                                                                                                                                                                                                                       |                            |        | (74            | )     
|                                                        | Accumulated deficit                                                                                                                                                                                                                                         |                            |        | (29,260        | )     
|                                                        |                                                                                                                                                                                                                                                             |                            |        |                |       
|                                                        |                                                                                                                                                                                                                                                             | Total stockholders' equity |        |                | 10,760
|                                                        |                                                                                                                                                                                                                                                             |                            |        |                |       
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY              |                                                                                                                                                                                                                                                             | $                          | 14,737 |                | $     
|                                                        |                                                                                                                                                                                                                                                             |                            |        |                |       

See
notes to condensed consolidated financial statements.

4

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

|                                                       |                                              | Three Months Ended
January 31,    |        | Nine Months Ended
January 31, |      
|------------------------------------------------------ | -------------------------------------------- | --------------------------------- | ------ | ----------------------------- | -----
|
|Revenues                                               |                                              | $                                 | 2,348  |                               | $    
|Cost of revenues                                       |                                              |                                   | 3,002  |                               |      
|                                                       |                                              |                                   |        |                               |      
|                                                       |                                              | Gross margin                      |        |                               | (654 
|Operating expenses:                                    |                                              |                                   |        |                               |      
|                                                       | Selling, general and administrative          |                                   |        | 2,550                         |      
|                                                       | Impairment of goodwill and intangible assets |                                   |        | 875                           |      
|                                                       | Research and development                     |                                   |        | 245                           |      
|                                                       |                                              |                                   |        |                               |      
|                                                       |                                              | Total operating expenses          |        |                               | 3,670
|                                                       |                                              |                                   |        |                               |      
|Operating loss                                         |                                              |                                   | (4,324 | )                             |      
|                                                       |                                              |                                   |        |                               |      
|Other income (expense):                                |                                              |                                   |        |                               |      
|                                                       | Foreign exchange                             |                                   |        | 46                            |      
|                                                       | Interest and other income                    |                                   |        | 6                             |      
|                                                       | Interest expense                             |                                   |        | (29                           | )    
|                                                       |                                              |                                   |        |                               |      
|                                                       |                                              | Total other income (expense), net |        |                               | 23   
|                                                       |                                              |                                   |        |                               |      
|Loss before income taxes                               |                                              |                                   | (4,301 | )                             |      
|Income tax expense                                     |                                              |                                   |       |                               |      
|                                                       |                                              |                                   |        |                               |      
|NET LOSS                                               |                                              | $                                 | (4,301 | )                             | $    
|                                                       |                                              |                                   |        |                               |      
|DEEMED DIVIDEND ON PREFERRED STOCK                     |                                              | $                                 |       |                               | $    
|                                                       |                                              |                                   |        |                               |      
|DIVIDEND ON SERIES E CONVERTIBLE PREFERRED STOCK       |                                              | $                                 | (66    | )                             | $    
|                                                       |                                              |                                   |        |                               |      
|NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS           |                                              | $                                 | (4,367 | )                             | $    
|                                                       |                                              |                                   |        |                               |      
|Net loss per sharebasic and diluted                   |                                              |                                   |        |                               |      
|Net loss per share attributable to common stockholders |                                              | $                                 | (.17   | )                             | $    
|Shares used in computing per share information         |                                              |                                   | 26,311 |                               |      

See
notes to condensed consolidated financial statements.

5

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

|                                                                       |                                                                                                               | Nine Months Ended January 31,         |       
|---------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------
|
|Net cash used in operating activities                                  |                                                                                                               | $                                     | (7,317
|CASH FLOWS FROM INVESTING ACTIVITIES:                                  |                                                                                                               |                                       |       
|                                                                       | Purchases of property and equipment                                                                           |                                       |       
|                                                                       | Acquisition of business, net of cash acquired                                                                 |                                       |       
|                                                                       |                                                                                                               |                                       |       
|                                                                       |                                                                                                               | Cash used in investing activities     |       
|                                                                       |                                                                                                               |                                       |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                                  |                                                                                                               |                                       |       
|                                                                       | Principal payments on notes payable                                                                           |                                       |       
|                                                                       | Proceeds from issuance of notes payable                                                                       |                                       |       
|                                                                       | Proceeds from issuance of common stock                                                                        |                                       |       
|                                                                       | Proceeds from issuance of preferred stock and related warrants                                                |                                       |       
|                                                                       | Principal payments under capital lease obligations                                                            |                                       |       
|                                                                       |                                                                                                               |                                       |       
|                                                                       |                                                                                                               | Cash provided by financing activities |       
|                                                                       |                                                                                                               |                                       |       
|NET INCREASE IN CASH AND CASH EQUIVALENTS:                             |                                                                                                               |                                       | 253   
|                                                                       | 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                                                                       |                                       | $     
|                                                                       | Capital lease obligation for property and equipment                                                           |                                       |       
|                                                                       | Accruals for property and equipment                                                                           |                                       |       
|                                                                       | Deemed dividend associated with beneficial conversion feature on Series C Convertible Preferred Stock         |                                       |       
|                                                                       | Value of warrants for 227,701 shares of common stock issued to Series C Convertible Preferred Stock investors |                                       |       
|                                                                       | Deemed dividend associated with beneficial conversion feature on Series E Convertible Preferred Stock         |                                       |       
|                                                                       | Value of warrants for 614,000 shares of common stock issued to Series E Convertible Preferred Stock investors |                                       |       
|                                                                       |                                                                                                               |                                       |       

See
notes to condensed consolidated financial statements.

6

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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 January 31, 2005, and for the three
and nine months ended January 31, 2005 and 2004 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 included in our
Annual Report on Form 10-KSB for the year ended April 30, 2004.

Realization of Assets and Liquidity

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States
of America, which contemplates our continuation as a going concern. However, we have sustained substantial losses from operations in recent years, and such losses have continued through
February 28, 2005. In view of this matter, recoverability of a major portion of the recorded asset amounts shown in the accompanying condensed consolidated 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.

As
of January 31, 2005, we had cash and cash equivalents of $3,944,000 and working capital of $4,615,000.

On
June 11, 2004, we acquired the silicon wafer manufacturing and recycling assets of EnCompass Materials Group, Ltd. ("EMG") (seeAcquisition of
Business and Assets of Encompass Materials Group, Ltd.). Upon acquisition, we implemented an integration plan, which we believed if successful, would result in
significant productivity improvements and cost reductions within our semiconductor segment. The integration plan however has not achieved the results we anticipated and consequently our semiconductor
materials and products segment has generated significant negative gross margins and an operating loss of $5,058,000 for the nine months ended January 31, 2005 (constituting a substantial
portion of the overall company wide operating loss of $8,657,000 for the nine months ended January 31, 2005).

As
the implementation of our integration plan for the semiconductor segment's operations has not achieved the results we anticipated, we have and are continuing to make several
additional changes (in addition to those contemplated in our original integration plan). It is our goal to achieve the substantial reduction in costs that is required to allow that business to operate
profitably or to reduce our losses within that segment. To accomplish this, we are considering a wide range of options including investing additional capital or completing acquisitions of synergistic
assets or technologies in order to compete in higher margin strategic product lines, scaling back the silicon wafer reclamation and silicon-in-insulator ("SOI") operations and
a partial or complete disposition of such assets.

As
a result of our ongoing business review of our semiconductor operations, we determined that the goodwill and certain of the intangible assets associated with this segment were
impaired and as a result we incurred an impairment charge of $875,000 (which is included in the operating losses discussed above) during the three months ended January 31, 2005 (see Impairment of Goodwill and

7

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Intangible Assets). We are continuing to review available options and we expect to make our decision as to the best course of action for our semiconductor operations during the
fourth quarter of our fiscal 2005.

On
February 24, 2005 we completed a convertible debt private placement (seeSubsequent Events)whereby we received $22,000,000
($21,340,000 net of placement fees). In addition, in October 2004 we completed an additional private placement whereby we received $3,330,000 ($3,049,000 net of due diligence fees and related
expenses). As a result, these proceeds, together with the exercise of common stock warrants whereby we received $6,708,000 during the nine months ended January 31, 2005, we have
sufficient cash available to fund our projected working capital requirements through our 2006 fiscal year.

The
assumptions underlying the above statements include, among other things, that there will be no material adverse developments in the business or market in general. There can be no
assurances however that those assumed events will occur. If our plans are not achieved, there may be further negative effects on the results of operations and cash flows, which could have a material
adverse effect on our financial position.

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 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 the vesting period.

The
following table illustrates the effect on net 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
January 31, |        | Nine Months Ended
January 31, |  
|----------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ------ | ----------------------------- | -
|
|Net loss, as reported                                 |                                                                                                                                    | $                              | (4,301 | )                             | $
|                                                      | Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects |                                |        | (160                          | )
|                                                      |                                                                                                                                    |                                |        |                               |  
|Adjusted net loss                                     |                                                                                                                                    |                                | (4,461 | )                             |  
|Less dividends on preferred stock                     |                                                                                                                                    |                                | (66    | )                             |  
|Less deemed dividends on preferred stock              |                                                                                                                                    |                                |       |                               |  
|                                                      |                                                                                                                                    |                                |        |                               |  
|Adjusted net loss attributable to common stockholders |                                                                                                                                    | $                              | (4,527 | )                             | $
|                                                      |                                                                                                                                    |                                |        |                               |  

8

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|                                                       |  | Three Months Ended
January 31, |      | Nine Months Ended
January 31, |  
|------------------------------------------------------ |  | ------------------------------ | ---- | ----------------------------- | -
|
|Net loss per share attributable to common stockholders |  |                                |      |                               |  
|Basic and dilutedas reported                          |  | $                              | (.17 | )                             | $
|Basic and dilutedadjusted                             |  | $                              | (.17 | )                             | $

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.

In
March 2004, the Financial Accounting Standards Board ("FASB") issued consensus on EITF 03-6Participating Securities and the
Two-Class Method Under FASB Statement No. 128, Earnings Per Sharerelated to calculating earnings per share with respect to using the
two-class method for participating securities. This pronouncement was effective for all periods after March 31, 2004 and required prior periods to be restated. As we have incurred
net losses in the current and prior periods, and as our preferred stock does not have a contractual obligation to share in our losses, the adoption of EITF 03-6 had no impact on our
financial condition or the results of our operations.

As
of January 31, 2005, a total of 6,023,257 outstanding stock options and common stock warrants and 6,666, 1,900 and 33,000 outstanding shares of Series A, D and E
Convertible Preferred Stock, respectively were excluded from the diluted net income (loss) per share calculation, as the inclusion would be anti-dilutive. As of January 31, 2004, a
total of 7,820,541 outstanding stock options and common stock warrants and 963,666 and 22,000 outstanding shares of Series A and C Convertible Preferred Stock, respectively were excluded from
the diluted net income (loss) per share calculations, as the inclusion would be anti-dilutive.

During
the nine month period ended January 31, 2005, we issued the following shares of common stock:

Description

Number of Common Stock SharesBalance as of April 30, 2004

15,344,913Conversion of preferred stock

5,684,094Exercise of common stock warrants

5,734,177Shares issued from employee stock purchase plan

8,686Exercise of employee stock options

83,000Shares issued for acquisition of assets

731,930Balance as of January 31, 2005

27,586,800


The
aforementioned equity transactions increased common stock in the accompanying condensed consolidated balance sheet by $13,425,000 for the nine months ended January 31,
2005.

9

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Inventories

Inventories consist of (in thousands):

January 31, 2005

April 30, 2004Finished goods

$
1,035

$
407Work in process


765


508Materials and supplies


378


70Total inventories

$
2,178

$
985


Property and equipment

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

January 31, 2005

April 30, 2004Office furniture and equipment

$
388

$
304Production equipment


4,703


648Leasehold improvements


419


30Construction in process


574


6,084


982Accumulated depreciation and amortization


(1,249
)

(511
)Total property and equipment

$
4,835

$
471


Accrued liabilities

Accrued liabilities consist of the following (in thousands):

January 31, 2005

April 30, 2004Compensation

$
246

$
103Customer advances and deposits


30


67Series E Convertible Preferred Stock registration penalty


134


Other


205


86Total accrued liabilities

$
615

$
256


Significant Customers

As of January 31, 2005, three customers accounted for approximately 34% of total net accounts receivable. Three customers accounted for approximately 34%
of total net accounts receivable at April 30, 2004. One customer (Eastern Isotopes) accounted for approximately 16% and 19% of revenues for the three and nine months ended January 31,
2005, respectively. One customer (Eastern Isotopes) accounted for approximately 34% and 33% of revenues for the three and nine months ended January 31, 2004, respectively.

Three
customers (Perkin Elmer Life Sciences, International Isotopes and IBT SA) accounted for approximately 42%, 17% and 15%, respectively of the German operation's revenues for the
nine months ended January 31, 2005. Three customers (Perkin Elmer Life Sciences, International

10

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Isotopes
and IBT SA) accounted for approximately 29%, 14% and 15%, respectively of the German operation's revenues for the three months ended January 31, 2005. Three customers (Perkin
Elmer Life Sciences, IBT SA and International Isotopes) accounted for approximately 35%, 24% and 20%, respectively of the German operation's revenues for the nine months ended
January 31, 2004. Three customers (Perkin Elmer Life Sciences, IBT SA and International Isotopes) accounted for approximately 30%, 20% and 17%, respectively of the German operation's revenues
for the three months ended January 31, 2004. Two customers accounted for approximately 52% of the German operation's accounts receivable at January 31, 2005. Two customers
accounted for approximately 49% of the German operation's accounts receivable at April 30, 2004.

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 manufactures and reclaims silicon wafers, sells SOI wafers and is involved
in several research and development projects including silicon-28. Reconciling items consist primarily of corporate and homeland security expenses that have not been allocated to a
specific reportable segment.

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

|                  |                                      | Three Months Ended
January 31, |   | Nine Months Ended
January 31,
|----------------- | ------------------------------------ | ------------------------------ | - | -----------------------------
|
|Segment revenues: |                                      |                                |   |                              
|                  | Life sciences                        |                                | $ | 1,609                        
|                  | Semiconductor materials and products |                                |   | 739                          
|                  |                                      |                                |   |                              
|                  |                                      | Total                          |   | $                            
|                  |                                      |                                |   |                              

|                                 |                                      | Three Months Ended
January 31, |   | Nine Months Ended
January 31, |       
|-------------------------------- | ------------------------------------ | ------------------------------ | - | ----------------------------- | ------
|
|Segment operating (loss) income: |                                      |                                |   |                               |       
|                                 | Life sciences                        |                                | $ | 45                            |       
|                                 | Semiconductor materials and products |                                |   | (2,450                        | )     
|                                 | Reconciling amounts                  |                                |   | (1,919                        | )     
|                                 |                                      |                                |   |                               |       
|                                 |                                      | Total                          |   | $                             | (4,324
|                                 |                                      |                                |   |                               |       

|              |                                      | January 31, 2005 |   | April 30, 2004
|------------- | ------------------------------------ | ---------------- | - | --------------
|Total Assets: |                                      |                  |   |               
|              | Life sciences                        |                  | $ | 4,800         
|              | Semiconductor materials and products |                  |   | 6,016         
|              | Reconciling amounts                  |                  |   | 3,921         
|              |                                      |                  |   |               
|              |                                      | Total            |   | $             
|              |                                      |                  |   |               

11

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A
summary of operations by geographic area is as follows:

|              |               | Three Months Ended
January 31, |   | Nine Months Ended
January 31,
|------------- | ------------- | ------------------------------ | - | -----------------------------
|
|Net revenues: |               |                                |   |                              
|              | United States |                                | $ | 1,720                        
|              | Germany       |                                |   | 628                          
|              |               |                                |   |                              
|              |               | Total                          |   | $                            
|              |               |                                |   |                              

|                         |               | Three Months Ended
January 31, |   | Nine Months Ended
January 31, |       
|------------------------ | ------------- | ------------------------------ | - | ----------------------------- | ------
|
|Operating (loss) income: |               |                                |   |                               |       
|                         | United States |                                | $ | (4,324                        | )     
|                         | Germany       |                                |   |                              |       
|                         |               |                                |   |                               |       
|                         |               | Total                          |   | $                             | (4,324
|                         |               |                                |   |                               |       

|              |               | January 31, 2005 |   | April 30, 2004
|------------- | ------------- | ---------------- | - | --------------
|Total Assets: |               |                  |   |               
|              | United States |                  | $ | 11,912        
|              | Germany       |                  |   | 2,825         
|              |               |                  |   |               
|              |               | Total            |   | $             
|              |               |                  |   |               

Acquisition of Business and Assets of Encompass Materials Group, Ltd.

On June 11, 2004, we acquired the silicon wafer manufacturing and recycling assets of EMG. The results of the operations associated with the acquired
assets have been included in the condensed consolidated financial statements since that date. EMG was engaged in the business of manufacturing and reclamation of silicon wafers. As a result of the
acquisition, we not only entered into the business of manufacturing and reclamation of silicon wafers but we also expected to use the acquired assets as a platform to launch our full scale SOI
operations. In conjunction with this acquisition, in May 2004 we established our wholly owned subsidiary Isonics Vancouver, Inc. ("Isonics Vancouver"). Isonics Vancouver is a Washington
based entity that now conducts our SOI and manufacturing and reclamation of silicon wafer operations.

The
aggregate purchase price was $2,920,000, which consisted of a $1,700,000 promissory note (secured by the assets acquired and certain other assets owned by us relating to our SOI
business) payable over 33 months with an interest rate of 6%, 731,930 shares of our restricted common stock (valued at $1,171,000 based upon the fair market value of the common stock on
June 11, 2004) and $49,000 of legal and accounting fees. In addition, we assumed operating leases (that expire in various years through fiscal year 2011) with future commitments of
approximately $1,200,000.

12

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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition including property and
equipment, which was based on an independent third party valuation.

Current assets

$
604,000Property and equipment


2,497,000Other assets


16,000Intangible assets


50,000Goodwill


447,000Total assets acquired


3,614,000Current liabilities


(694,000
)Net assets acquired

$
2,920,000


The
$447,000 of goodwill (which was subsequently written off during the three months ended January 31, 2005, seeImpairment of Goodwill and Intangible
Assets)was assigned to the semiconductor materials and products segment and is expected to be deductible for tax purposes. The $50,000 of intangible assets relates to customer
lists and is being amortized ratably over its estimated life of 3 years. There was no in-process research and development acquired in this transaction

The
$1,700,000 promissory note is payable by our subsidiary, Isonics Vancouver. In accordance with the terms of the acquisition of the business and assets of EMG, we have guaranteed all
payments (totaling $1,854,000 including interest) of such loan should Isonics Vancouver be in default at any point over the life of the loan.

The
following table summarizes our pro forma results of operations for the three and nine months ended January 31, 2005 and 2004 as if the acquisition of the business and assets
of EMG had occurred on May 1, 2004 and 2003, respectively.

|                                                                                   |  | Three Months Ended
January 31, |        | Nine Months Ended
January 31, |  
|---------------------------------------------------------------------------------- |  | ------------------------------ | ------ | ----------------------------- | -
|
|Pro forma revenues                                                                 |  | $                              | 2,348  |                               | $
|                                                                                   |  |                                |        |                               |  
|Pro forma net loss attributable to common stockholders                             |  | $                              | (4,367 | )                             | $
|                                                                                   |  |                                |        |                               |  
|Pro forma net loss attributable to common stockholders per sharebasic and diluted |  | $                              | (.17   | )                             | $
|                                                                                   |  |                                |        |                               |  

Impairment of Goodwill and Intangible Assets

As discussed inRealization of Assets and Liquidity,given the poor performance in our semiconductor operations,
we began (and are still in the process of) conducting a business review of this segment whereby we are considering a wide range of options in order to reduce the operating losses of this segment. As
part of this process, we determined that given the ongoing operating losses, there had been a significant adverse change to that acquired business that was not currently correctible. Based on this
premise, we determined that the $447,000 of goodwill associated with this business segment had been impaired and as a result, the entire amount was written off to impairment of goodwill and intangible
assets during the three months ended January 31, 2005.

13

---



On
September 14, 2001 we entered into a perpetual, exclusive technology license agreement with Silicon Evolution, inc. ("SEI") whereby we issued 500,000 shares of common
stock (valued at $590,000) for the right to indefinitely use intellectual property assets owned or leased by SEI. In connection with our ongoing business review of our semiconductor operations, we
determined that over the years our SOI technology had been substantially modified to adapt to our current manufacturing plant and that the current processes are substantially removed from those
acquired from SEI. As a result, we wrote off the remaining balance of $428,000 to impairment of goodwill and intangible assets during the three months ended January 31, 2005.

Private Placement

On October 4, 2004 we completed a financing arrangement whereby we issued 33,000 shares of our Series E Convertible Preferred Stock
("Series E Stock") and 614,000 common stock warrants to Asset Managers, Inc. ("AMI") for $3,300,000. In addition, we paid AMI $251,000 in due diligence fees and related expenses. Each
common stock warrant is exercisable for one share of common stock through October 4, 2007. One-half (307,000) of the common stock warrants have an exercise price of $1.24 per share
while the remaining half (307,000) of the common stock warrants have an exercise price of $1.35 per share.

The
Series E Stock is convertible into common stock at a price equal to 85% of Market Price on the conversion date, but at a price no higher than $1.24 per share (the "Ceiling
Price") and no lower than $1.00 per share (the "Floor Price"). For purposes of determining the Conversion Price, the "Market Price" shall be the average of the lowest three intra-day
trading prices of Isonics' common stock (which need not occur on consecutive trading days) during the 5 trading days immediately preceding the conversion date.

We
had an obligation to register the shares underlying the Series E Stock and the common stock warrants, including the obligation to file a registration statement by
November 7, 2004 and to obtain effectiveness of the registration statement within 70 days after the filing of the registration statement. We are currently in default of our obligation
and as a result, we are incurring a penalty of $2,200 per day until the registration statement is filed. The amount outstanding under this penalty provision at January 31, 2005 was $134,200 and
is included in accrued liabilities in the accompanying Condensed Consolidated Balance Sheet. In addition, as a result of not meeting the deadline to file the registration statement, the preferred
stock is now convertible into common stock at a price equal to 75% of the Market Price on the conversion date (subject to the same Floor and Ceiling Prices) as discussed above.

We
have allocated the proceeds received between the Series E Stock and related warrants based on the relative fair value of each instrument. In addition, in accordance with EITF
00-27 "Application of Issue No. 98-5 to Certain Convertible Instruments" we have calculated the intrinsic value of the conversion option by using the effective
conversion price based on the proceeds allocated to the convertible instrument. As a result, we determined that the value of the beneficial conversion feature (based upon a $1.24 conversion price)
contained in our Series E Stock to be $1,206,000, which has been reported as a deemed dividend for the three and nine months ended January 31, 2005. We determined that there was
no additional beneficial conversion feature associated with the new conversion percentage as 75% of the then Market Price was well above the Ceiling Price of $1.24.

The
Series E Stock is non-voting and has a liquidation preference equal to $100 per share. In addition, the Series E Stock bears a dividend of 8% per annum,
payable in cash, in arrears, monthly, commencing on October 4, 2004. The dividend obligation terminates after one year or earlier if the Series E Stock is converted to common stock.

14

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Convertible Preferred Stock

There are provisions associated with the Series A Convertible Preferred Stock ("Series A 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. The Series A Stock is convertible at two shares of common stock for each share
of Series A Stock outstanding. During the nine months ended January 31, 2005, 957,000 shares of Series A Stock were converted into 1,914,000 shares of common stock. As of
February 28, 2005, there were 6,666 shares of Series A Stock outstanding convertible into 13,332 shares of common stock based upon the current conversion ratio.

During
the nine months ended January 31, 2005, 9,000 shares of Series C Convertible Preferred Stock ("Series C Stock") were converted into 947,368 shares of
common stock. As a result of these conversions, there are no shares of Series C Stock outstanding.

During
the nine months ended January 31, 2005, 31,050 shares of Series D Convertible Preferred Stock ("Series D Stock") were converted into 2,822,726 shares
of common stock. As of February 28, 2005, there were 1,900 shares of Series D Stock outstanding convertible into 172,727 shares of common stock.

Commitments and Contingencies

In June 2004, we entered into an agreement with Institut of Umwelttechnologien GmbH ("IUT") whereby we agreed to fund $275,000 of research and development
expenses on behalf of IUT Detection Technology, Inc. ("IUTDT") during the year ending April 30, 2005. The research and development work is being completed by IUT and has been funded in
steps based upon completion of various milestones. We have funded $200,000 of this commitment (which was recorded as research and development expense on the accompanying condensed consolidated
statement of operations) as of January 31, 2005. In addition, we funded an additional $47,000 during February 2005.

We
are currently responding to requests for information received from the Nasdaq Stock Market ("Nasdaq") and the Securities and Exchange Commission ("SEC"). These requests appear to be
directed toward the significant trading volume and volatility that occurred in October following announcements related to our homeland security and defense division and our dismissal of Grant
Thornton LLP. While we have and will continue to provide all information and documents as requested by both Nasdaq and the SEC, it is currently unclear as to when both Nasdaq and the SEC will be
completed with this process.

As
of January 31, 2005, we had commitments outstanding for capital expenditures of approximately $525,000.

Isonics Homeland Security and Defense Corporation

On October 7, 2004, we established Isonics Homeland Security and Defense Corporation ("HSDC"), a wholly owned Delaware corporation to consolidate our
efforts in the homeland security market. In connection with the establishment of HSDC, we created an advisory board, which provides guidance and advice to HSDC in matters of technology, business and
applications as we develop technologies and products for the homeland security marketplace. In November 2004 we issued 300,000 common stock warrants (valued at $669,000 using the Black-Scholes
pricing model) to three newly hired advisory board members. The common stock warrants vested immediately, are exercisable at $4.00 per share, expire on November 1, 2007 and were expensed to
selling, general and administrative expenses during the three months ended January 31, 2005.

15

---



Letter of Intent to Acquire Protection Plus Security Consultants, Inc.

On December 2, 2004, we entered into a non-binding letter of intent to acquire Protection Plus Security Consultants, Inc. ("Protection
Plus"), an international provider of advanced security and investigative services. The letter of intent contemplates a purchase price of 1,000,000 shares of restricted common stock and a contingent
amount consisting of 500,000 common stock warrants exercisable at $4.00 per share. The common stock warrants may be earned in the future by meeting predetermined future earnings goals. The closing of
this proposed transaction is subject to standard due diligence procedures and closing conditions.

New Accounting Standards

In December 2004, the FASB issued SFAS No. 123 (revised 2004)Share-Based Payments(SFAS 123R). This statement requires that the Company record stock option expense in its financial statements based on a fair value methodology beginning no later than the first fiscal quarter
beginning after December 15, 2005, our fourth quarter for the year ending April 30, 2006. We are evaluating the impact of the new standard and the method and timing of adoption. Although
we have not completed our analysis, we anticipate that the expense would not exceed the amounts disclosed inAccounting for Stock-Based Compensationhad
we been expensing under the new rule.

We
have an Employee Stock Purchase Plan ("ESPP") that allows eligible employees to purchase our common stock at a discount. The provisions of SFAS 123R will cause the ESPP to be a
compensatory
plan. Although we have not completed our analysis, we anticipate that the change in accounting for the ESPP is not expected to have a material impact on our financial position.

In
November 2004, the FASB issued SFAS 151,Inventory Costs, which revised ARB 43, relating to inventory costs. This
revision is to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage). This statement requires that these items be recognized as a
current period charge regardless of whether they meet the criterion specified in ARB 43. In addition, this statement requires the allocation of fixed production overheads to the costs of conversion be
based on normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during our fiscal year beginning May 1, 2006. Although we have not completed our
analysis, we don't believe the adoption of SFAS 151 will have a material impact on our financial statements.

The
FASB issued SFAS 153,Exchanges of Nonmonetary Assets, which changes the guidance in APB Opinion 29, Accounting for Nonmonetary
Transactions. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary
assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange.
SFAS 153 is effective for our fiscal year beginning May 1, 2006. Although we have not completed our analysis, we don't believe the adoption of SFAS 151 will have a material impact
on our financial statements.

Subsequent Events

On February 24, 2005, we completed a private placement pursuant to which we issued to accredited investors 8% convertible debentures ("Debentures") in the
aggregate principal amount of $22,000,000 and 1,540,000 common stock warrants, each of which can be exercised for $6.25 per share for a period of three years. In addition to the Debentures and
warrants issued to the investors, we paid a placement agent a 6.5% fee consisting of $660,000, a $770,000 Debenture and 53,900 warrants. The

16

---



terms
of both the Debenture and the warrant are the same as those for the accredited investors, as described above. The Debentures are required to be reduced by 1/12th per month
beginning March 1, 2006. Both the principal and interest are payable, at our option in common stock or cash, subject to various requirements.

On
February 22, 2005 we issued 475,000 stock options to three key employees. The stock options are exercisable at $4.64 per option and 98,700 were vested immediately with the
remaining shares vesting ratably over the next three or four years.

17

---





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

We are an advanced materials and technology company focusing on the supply of isotopes for life sciences and health-care applications, homeland
security and the manufacturing and reclamation of silicon wafers and the manufacturing of silicon-on-insulator ("SOI") wafers to the semiconductor industry. 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.

In
our life sciences and health care applications division, we acquire isotopes from several manufacturers who are located primarily in republics that were part of the former Soviet
Union. 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. We sell these isotopes for use in basic scientific research and industrial applications. 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. We continue to evaluate possible applications for stable isotopes, radioisotopes and non-isotopic materials.

At
the present time, our life sciences division is being adversely affected by increased domestic and international competition. The oxygen-18 market continues to be dynamic
and volatile. Established suppliers have increased capacity and reputable suppliers have entered the market with a comparable high quality product. The market is currently in a surplus state and we
expect it to be so for several years to come. Prices have declined 50% from highs of approximately 18 months ago and additional price erosion should be expected. Compounding this
problem, our production partner's current economics and operations are optimized for production that does not utilize used or recycled water. We currently have a significant supply of used water
(approximately $700,000) and we are developing plans with our production partner that will allow us to utilize this inventory for future production. In the meantime, as our current contracts with our
customers expire, we are no longer offering our customers the option of recycling their used oxygen-18. While this new policy will allow us to gradually decrease the used water in our
inventory, this approach, however does bear some commercial risk as one of the new, large competitors continues to offer a recycling option to customers.

While
we continue to develop strategies to address these issues and gain a competitive advantage, we cannot offer any assurances that we will succeed in doing so.

In
October 2004 we formed a new subsidiary, Isonics Homeland Security and Defense Corporation ("HSDC"), to focus and consolidate our efforts in the homeland security sector. HSDC
owns 85% of

18

---



the
outstanding equity in IUT Detection Technology, Inc. ("IUTDT"). Institut of Umwelttechnologien GmbH ("IUT"), discussed below, owns the remaining 15% of IUTDT.

In
December 2002, through IUTDT, we acquired certain isotope-based trace detection technology that can be used to detect explosives and chemical and biological weapons. We
acquired this technology from IUT, an entity in which we hold an 8.5% ownership interest. We are continuing to pursue research and development opportunities with respect to the technology we acquired
from IUT under a research and development agreement we entered into with IUT.

Utilizing
the technology from IUT and other technology, we have developed a hand-held explosive detection device (in a prototype form) named "NeutroTest," which
we recently began marketing commercially although we have not made any sales of "NeutroTest."

In
November 2002, we commenced manufacturing SOI wafers in a facility in Vancouver, Washington. In June 2004 we acquired the business and assets of Encompass Materials
Group Ltd. ("EMG") which was
engaged in the business of manufacturing and reclamation of silicon and SOI wafers, and we continue to conduct those operations from that plant, also in Vancouver, Washington. Prior to our acquisition
of the business and assets of EMG, we developed an integration plan which was predicated on making numerous changes to the related business that we believed if successful, would result in significant
productivity improvements and cost reductions within our semiconductor segment. Our original plan required a structured three to five month implementation process, and was started within the first
three weeks after the acquisition of the business and assets of EMG in June 2004. While we didn't anticipate we would start seeing the benefits of our cost reduction program until the end of
our second fiscal quarter, we did incur costs associated with the integration of the business, establishing processes and procedures (aimed at lowering the overall future costs of the operation)
within the plant and hiring the proper personnel necessary to bring the assets to their full operating capacity. In addition, our revenues from the semiconductor segment during the nine months
ended January 31, 2005 were at times significantly less than the historical run rates at EMG (due mainly to the unavailability of a key production tool, which has since been corrected). These
integration expenses, reduced revenues and the fact that we haven't begun to see the results of our cost savings program have generated significant negative gross margins and an operating loss of
$5,058,000 in our semiconductor materials and products segment for the nine months ended January 31, 2005, and those losses are expected to continue through our next fiscal quarter.

As
the implementation of our integration plan for the semiconductor segment's operations has not achieved the results we anticipated, we have and are continuing to make several
additional changes (in addition to those contemplated in our original integration plan). It is our goal to achieve the substantial reduction in costs that is required to allow that business to operate
profitably or to reduce our losses within that segment. To accomplish this, we are considering a wide range of options including investing additional capital or completing acquisitions of synergistic
assets or technologies in order to compete in higher margin strategic product lines, scaling back certain of the silicon wafer reclamation and SOI operations and a partial or complete disposition of
such assets.

As
a result of our ongoing business review of our semiconductor operations, we determined that the goodwill and certain of the intangible assets associated with this segment were
impaired and as a result we incurred an impairment charge of $875,000 (which is included in the operating losses discussed above) during the three months ended January 31, 2005 (see Impairment of Goodwill and
Intangible Assets). We are continuing to review available options and we expect to make our decision as to the best course of
action for our semiconductor operations during the fourth quarter of our fiscal 2005.

19

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Our
revenues in the future will depend on our success in developing and selling products in the semiconductor and stable and radioactive isotope markets, and (ultimately, if and when
product development has been completed) in our homeland security division. Our profitability will be dependent upon our ability to manage our costs and to increase our revenues in all of our business
segments. 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.

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
January 31, |       | Nine Months Ended
January 31, |     
|--------------------------- | -------------------------------------------- | ------------------------------ | ----- | ----------------------------- | ----
|
|Revenues                    |                                              | 100.0                          | %     | 100.0                         | %   
|Cost of revenues            |                                              | 127.9                          |       | 81.5                          |     
|                            |                                              |                                |       |                               |     
|                            | Gross margin                                 |                                | (27.9 | )                             | 18.5
|                            |                                              |                                |       |                               |     
|Operating expenses:         |                                              |                                |       |                               |     
|                            | Selling, general and administrative          |                                | 108.6 |                               | 59.7
|                            | Impairment of goodwill and intangible assets |                                | 37.3  |                               |    
|                            | Research and development                     |                                | 10.4  |                               | 8.2 
|                            |                                              |                                |       |                               |     
|                            |                                              | Total operating expenses       |       | 156.3                         |     
|                            |                                              |                                |       |                               |     
|Operating loss              |                                              | (184.2                         | )     | (49.4                         | )   
|                            |                                              |                                |       |                               |     
|Other income (expense), net |                                              | 1.0                            |       | .5                            |     
|                            |                                              |                                |       |                               |     
|Loss before income taxes    |                                              | (183.2                         | )     | (48.9                         | )   
|                            |                                              |                                |       |                               |     
|Income tax expense          |                                              |                               |       |                              |     
|                            |                                              |                                |       |                               |     
|NET LOSS                    |                                              | (183.2                         | )%    | (48.9                         | )%  
|                            |                                              |                                |       |                               |     

Revenues

The increases and decreases in life sciences and semiconductor materials and products for the three and nine months ended January 31, 2005 are
described in the following table:

Three Months Ended January 31,

Nine Months Ended January 31,2005

2004

2005

2004Life sciencesDomestic

$
981,000

$
1,351,000

$
3,690,000

$
4,368,000International

$
628,000

$
679,000

$
2,026,000

$
1,766,000Semiconductor materials and products

$
739,000

$
64,000

$
1,982,000

$
459,000Total

$
2,348,000

$
2,094,000

$
7,698,000

$
6,593,000


20

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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.

The
decrease in revenues from domestic isotope product sales for the three months ended January 31, 2005 was primarily the result of a decrease in both the unit price
received and volume of oxygen-18 sold. The decrease in volume was due to a delay in one monthly shipment to our largest customer. This delay is timing in nature and the shipment has been
made up in the fourth quarter of our fiscal year ending April 30, 2005. The decrease in revenues from domestic isotope product sales for the nine months ended January 31, 2005 was
primarily the result of a decrease in the unit price of oxygen-18, which was partially offset by an increase in volume.

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 the domestic radioisotope market to a meaningful number, we can offer no assurances that we will be able to do so.

The
substantial majority of our domestic isotope product sales result from the sale of oxygen-18. Our sales volume in general continues to increase, but because the
per-unit price of oxygen-18 has been decreasing as a result of increasing competition, we have not been able to increase total sales revenue in this market. As a result, in
order to increase our revenues from the sale of oxygen-18, we will need to increase our volume at a rate greater than the continuing decreases in the anticipated future market price for
that product. While the market for oxygen-18 in the United States continues to expand, it appears that the supply for oxygen-18 may be growing at an even faster rate, which
will continue to depress the price of oxygen-18. We are actively bidding to become the supplier for additional customers and while we hope that we will be successful in increasing our
gross revenues and margin in sales of oxygen-18 in the future (notwithstanding the decreasing per-unit margins), we can offer no assurance that we will be able to do so in the
face of the domestic and international competition in this market.

The
decrease in revenues from international isotope product sales for the three months ended January 31, 2005 was primarily the result of a decrease in sales of radioisotopes. The
increase in revenues from international isotope product sales for the nine months ended January 31, 2005 was primarily the result of an increase in the sales of radioisotopes.

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 where the volume of sales (although not the per-unit price) 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
significantly 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 continue to obtain European oxygen-18 customers in fiscal year 2005 (we have obtained two new customers as of
February 28, 2005), the process is expected to be slow and we cannot provide any assurance that we will be able to do so.

21

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The
increase in revenues from semiconductor materials and products sales for the three and nine months ended January 31, 2005 was primarily due to the additional revenues
generated from the business and assets acquired from EMG in June 2004, but the increase in revenues in this segment was not as large as we had anticipated and the costs of integrating the new
business into our operations were greater than expected. Included in revenues for the nine months ended January 31, 2004 was $200,000 related to the sale of silicon-28 as a
bulk isotope; no comparable transaction in silicon-28 was included in revenues for the nine months ended January 31, 2005 and we do not anticipate any significant sales of
silicon-28 during the remainder of fiscal 2005.

As
a result of our acquisition of the business and assets of EMG in June 2004, we believed we had the platform to not only continue and improve the EMG legacy manufacturing and
reclamation of silicon wafers business but also to launch a full scale SOI operation. As discussed above, we are considering all available strategic options and while it is currently unclear as to
what impact any of these decisions may have on future revenues from our semiconductor materials and products segment, if we elect to scale back our silicon wafer reclamation or SOI operations (without
a corresponding increase in other potential semiconductor product lines), it is probable that revenues from this line of business will decrease.

We
do not anticipate significant revenues from sales of silicon-28 based products during the remainder of fiscal year 2005. 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.

Gross Margin

Our gross margins decreased by approximately $1,000,000 during the three months and by approximately $3,200,000 during the nine months ended
January 31, 2005 as compared to the same periods of our prior fiscal year, as reflected in the following table:

Three Months Ended
January 31,

Nine Months Ended
January 31,2005

2004

2005

2004Dollar amount

$
(654,000
)
$
387,000

$
(1,798,000
)
$
1,415,000Percent of revenues


(27.9
)%

18.5
%

(23.4
)%

21.5
%


The
decrease in gross margin for the three and nine months ended January 31, 2005 is due mainly to the negative margins generated by the business and assets acquired from
EMG in June 2004 notwithstanding our efforts to improve the performance of the assets in that segment.

The
decrease in gross margin was also due to reduced gross margins in our life sciences segment due to a continuing degradation of the price of oxygen-18 (and a decrease in
volume for the three months ended January 31, 2005). These factors resulted in operating income for our life sciences segment of $10,000 for the nine months ended
January 31, 2005 as compared to operating income from that segment of $554,000 for the nine months ended January 31, 2004.

Our
ability to increase our gross margin for the life sciences division in the future is directly related to our ability to increase our volume of sales of oxygen-18 or other
higher gross margin related isotopes. We can offer no assurances that we will be able to do so.

22

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As
a result of our acquisition of the business and assets of EMG in June 2004, we believed we had the platform to not only continue and improve the EMG legacy manufacturing and
reclamation of silicon wafers business but to launch a full scale SOI operation. As discussed above, our integration and operation of these assets have not been successful, and we are considering
various options for the business segment.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses increased during the three and nine months ended January 31, 2005 as compared to the same periods of our
prior fiscal year, both on a dollar amount and on a percentage of revenues basis as reflected in the following table:

Three Months Ended January 31,

Nine Months Ended January 31,2005

2004

2005

2004Dollar amount

$
2,550,000

$
1,251,000

$
5,371,000

$
3,320,000Percent of revenues


108.6
%

59.7
%

69.8
%

50.4
%


Both
the dollar and percentage increase for the three and nine months ended January 31, 2005 is attributable to an increase in consulting and other professional services
expenses, an increase in headcount and facility costs related to the expansion of our SOI operations (primarily due to the acquisition of the business and assets of EMG in June 2004) and an
increase in headcount in our homeland security operations (partially offset by an increase in revenues as it relates to the percentage increases).

As
a result of the proceeds generated from the financings and exercises of common stock warrants during the current fiscal year and our acquisition of the business and assets of EMG in
June 2004, we anticipate that we will increase our selling, general and administrative expenses during the remainder of fiscal year 2005 through anticipated increased marketing efforts for our
semiconductor materials and products segment. In addition, we will increase our selling, general and administrative expenses during the remainder of fiscal year 2005 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.

Impairment of Goodwill and Intangible Assets

Impairment of goodwill and intangible assets increased during the three and nine months ended January 31, 2005 as compared to the same periods of our prior
fiscal year, both on a dollar amount and on a percentage of revenues basis as reflected in the following table:

Three Months Ended January 31,

Nine Months Ended January 31,2005

2004

2005

2004Dollar amount

$
875,000

$


$
875,000

$
Percent of revenues


37.3
%


%

11.3
%


%


Impairment
of goodwill and intangible assets relates to the write off of $447,000 associated with the acquisition of the net assets of EMG and $428,000 associated with the acquisition of
technology from SEI.

23

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Research and Development Expenses

Our research and development expenses increased both on a dollar amount and on a percentage of revenues basis during the three and nine months ended
January 31, 2005 as compared to the same period in our prior fiscal year as reflected in the following table:

Three Months Ended January 31,

Nine Months Ended January 31,2005

2004

2005

2004Dollar amount

$
245,000

$
171,000

$
613,000

$
401,000Percent of revenues


10.4
%

8.2
%

8.0
%

6.1
%


Both
the dollar and percentage increase for the three and nine months ended January 31, 2005 is primarily related to an increase in research and development expenses
associated with our isotope-based detection technology partially offset by a decrease in research and development expenses associated with our thin-film SOI product (and an increase in
revenues as it relates to the percentage decreases).

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. In June 2004, we entered into an agreement with IUT to fund $275,000 of research and development expenses on behalf of IUTDT in fiscal 2005 (of which $247,000 has been
funded as of February 28, 2004) and we anticipate that we may incur additional research and development costs associated with the detection technology that we acquired from IUT. We will, in
addition, continue funding research and development to improve technologies for isotope separation and material processing technologies and our semiconductor processes. Because of the uniqueness of
our business,
the unique chemicals and processes we deal with and the handling precautions required, these expenses can 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.

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. It is likely that research and development expenditures will 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

Other income (expense), net increased during the three and nine months ended January 31, 2005 as compared to the same period of our prior fiscal
year as reflected in the following table:

Three Months Ended January 31,

Nine Months Ended January 31,2005

2004

2005

2004Dollar amount

$
23,000

$
10,000

$
16,000

$
3,000


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For the three and nine months ended January 31, 2005 and 2004, other income (expense), net includes interest income and expense and foreign currency gains and losses.

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.

Net Loss

Our net losses increased by more than three-fold during the three and nine months ended January 31, 2005 as compared to the same periods of our
prior fiscal year, as reflected in the following table:

Three Months Ended January 31,

Nine Months Ended January 31,2005

2004

2005

2004Dollar amount

$
(4,301,000
)
$
(1,025,000
)
$
(8,641,000
)
$
(2,303,000
)


We
anticipate that losses will continue until (if ever): (i) revenues from our current operations substantially increase (ii) we generate substantial revenues from products
introduced as a result of our research and development projects or (iii) we acquire businesses and are able successfully integrate and develop them into profitable entities. We expect that our
net loss will continue during at least the short term as we continue to incorporate and integrate the business and assets acquired from EMG into our operations or take another approach to reduce the
negative impact those operations are having on our operating results, as we continue our marketing and research efforts to expand sales and develop new products in our life sciences segment and as we
continue research and development efforts to commercialize the NeutroTest technology for the homeland security market.

In
accordance with the issuance of our Series E Stock (seePrivate Placement), we determined that the value of the beneficial
conversion feature (based upon a $1.24 conversion price) to be $1,206,000, which has been reported as a deemed dividend for the nine months ended January 31, 2005. In accordance with the
issuance of our Series C Stock, we determined that the value of the beneficial conversion feature to be $998,000, which has been reported as a deemed dividend for the three and
nine months ended January 31, 2004.

Net
income in future years will be dependent upon our ability to increase net revenues (and related margins) faster than we increase our operating expenses. As a result of our
acquisition of the business and assets of EMG in June 2004, we believed we had the platform to not only continue and improve the EMG legacy manufacturing and reclamation of silicon wafers
business but to launch a full scale SOI operation. As discussed above, we are considering all available strategic options but it is currently unclear as to what impact, if any these decisions may have
on future results from our semiconductor materials and products segment. We anticipate that our operations during the remainder of fiscal year 2005 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.

25

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Liquidity and Capital Resources

Our working capital and liquidity have eroded slightly during the nine months ended January 31, 2005. Working capital decreased $117,000, to
$4,615,000 at January 31, 2005, from $4,732,000, at April 30, 2004.

Our
principal source of funding for the nine months ended January 31, 2005 was from the private placement completed in October 2004 whereby we received $3,300,000
($3,049,000 net of due diligence fees and related expenses) and the exercise of common stock warrants whereby we received $6,708,000. Our principal source of funding for the nine months ended
January 31, 2004 was from private placements completed in January 2004 and September 2003. We used cash in operating activities of $7,317,000 and $2,367,000 during the
nine months ended January 31, 2005 and 2004, respectively. Cash used in operating activities for the nine months ended January 31, 2005 and 2004 was principally the result
of a net loss during the periods of $8,641,000 and $2,303,000, respectively.

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 $2,057,000 and $12,000 for the nine months ended January 31, 2005 and 2004, respectively. Cash used in investing activities for the
nine months ended January 31, 2005 and 2004, resulted primarily from purchases of property and equipment.

Financing
activities provided cash of $9,627,000 and $3,066,000 for the nine months ended January 31, 2005 and 2004, respectively. Cash provided by financing activities for
the nine months ended January 31, 2005 resulted primarily from the private placement completed in October 2004 whereby we received $3,300,000 ($3,049,000 net of due diligence fees
and related expenses) and the exercise of common stock warrants whereby we received $6,708,000. Cash provided by financing activities for the nine months ended January 31, 2004 resulted
primarily from the private placements of $2,200,000 ($2,000,000 net of due diligence fees and related expenses) and $1,200,000 ($1,080,000 net of placement fees) completed in January 2004 and
September 2003, respectively.

At
January 31, 2005, we had $3,944,000 of cash and cash equivalents, an increase of $253,000, compared to $3,691,000, at April 30, 2004.

On
June 11, 2004, we acquired the silicon wafer manufacturing and recycling assets of EMG. The aggregate purchase price was $2,920,000 which consisted of a $1,700,000 promissory
note (secured by the assets acquired and certain other assets owned by us relating to our SOI business) payable over
33 months with an interest rate of 6%, 731,930 shares of our restricted common stock (valued at $1,171,000 based upon the fair market value of the common stock on June 11, 2004) and
$49,000 of legal and accounting fees. In addition, we assumed operating leases (that expire in various years through fiscal year 2011) with future commitments of approximately $1,200,000.

There
are provisions associated with the Series A Convertible Preferred Stock ("Series A 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. The Series A Stock is convertible at two shares of common stock for each share of Series A
Stock outstanding. During the nine months ended January 31, 2005, 957,000 shares of Series A Stock were converted into 1,914,000 shares of common stock. As of February 28,
2005, there were 6,666 shares of Series A Stock outstanding convertible into 13,332 shares of common stock based upon the current conversion ratio.

26

---



As
of January 31, 2005, we had commitments outstanding for capital expenditures of approximately $525,000.

On
October 7, 2004, we established HSDC, a wholly owned Delaware corporation to consolidate our efforts in the homeland security market. In connection with the establishment of
HSDC, we created an advisory board, which provides guidance and advice to HSDC in matters of technology, business and applications as we develop technologies and products for the homeland security
marketplace. In November 2004 we issued 300,000 common stock warrants (valued at $669,000 using the Black-Scholes pricing model) to three newly hired advisory board members. The common stock
warrants vested immediately, are exercisable at $4.00 per share, expire on November 1, 2007 and were expensed to selling, general and administrative expenses during the three months
ended January 31, 2005.

On
December 2, 2004, we entered into a non-binding letter of intent to acquire Protection Plus, an international provider of advanced security and investigative
services. The letter of intent contemplates a purchase price of 1,000,000 shares of restricted common stock and a contingent amount consisting of 500,000 common stock warrants exercisable at $4.00 per
share. The common stock warrants may be earned in the future by meeting predetermined future earnings goals. The closing of this proposed transaction is subject to standard due diligence procedures
and closing conditions.

On
February 24, 2005, we completed a private placement pursuant to which we issued to accredited investors 8% convertible debentures ("Debentures") in the aggregate principal
amount of $22,000,000 and 1,540,000 common stock warrants, each of which can be exercised for $6.25 per share for a period of three years. In addition to the Debentures and warrants issued to the
investors, we paid a placement agent a 6.5% fee consisting of $660,000, a $770,000 Debenture and 53,900 warrants. The terms of both the Debenture and the warrant are the same as those for the
accredited investors, as described above. The Debentures are required to be reduced by 1/12th per month beginning March 1, 2006. Both the
principal and interest are payable, at our option in common stock or cash, subject to various requirements.

At
the present time, our working capital is primarily dependent on financing received from accredited investors. 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 from activities other than
our financing activities until (if ever) we are able to increase our revenues to exceed our cash out-flows (assuming we are able to increase our revenues) or complete a financing
arrangement. As a result of the private placements completed in February 2005 whereby we received $22,000,000 ($21,340,000 net of placement agent fees) and October 2004 whereby we
received $3,300,000 ($3,049,000 net of due diligence fees and related expenses) and the exercise of common stock warrants and options whereby we received $6,708,000 during the nine months ended
January 31, 2005, we have sufficient cash available to fund our working capital requirements through our 2006 fiscal year.

Contractual Cash Obligations

We have no material changes to the disclosure on this matter made in our Annual Report on Form 10-KSB for the year ended April 30, 2004.

27

---



Critical Accounting Estimates

We consider an accounting estimate to be critical if 1) the accounting estimate requires us to make assumptions about matters that were highly uncertain at
the time the accounting estimate was made, and 2) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have
used in the current period, would have a material impact on our financial condition or results of operations.

Management
has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed the
foregoing disclosure. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and
other items could have a material impact on our financial statements.

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 142. We acquired intangible assets from IUT and EMG 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 January 31, 2005, is goodwill related to the acquisition of Chemotrade in 1998 with a net carrying value of $1,807,000.

In
accordance with SFAS No. 142, we have completed our annual impairment test (as of April 30, 2004) 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 at
least annually, or when circumstances indicate that impairment may have occurred.

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. If we had 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 sixteen 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

28

---



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.

Our
intangible assets result from the isotope-based trace detection technology we acquired from IUT in December 2002 and customer lists associated with the acquisition of the
business and assets of EMG in June 2004. The isotope-based trace detection technology is being amortized over its estimated useful life of ten years (which is 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) while the customer list is being amortized over
its estimated useful life of three years. We will continue to evaluate each reporting period whether events and circumstances continue to support our assessment of useful lives 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.

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.

29

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Part II: Other Information

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

Exercise of Common Stock Warrants

During the three months ended January 31, 2005, we issued 1,405,677 shares of common stock as a result of the exercise of common stock warrants. The
following sets forth the information required by Item 701 in connection with these transactions:



Conversion of Preferred Stock

During the three months ended January 31, 2005, 3 holders of our Series D Stock (each of whom is an accredited investor) converted 3,100
shares of Series D Stock into 350,780 shares of common stock. The following sets forth the information required by Item 701 in connection with that transaction:



30

---





Issuance of 8% Convertible Debentures

On February 24, 2005, we completed a private placement pursuant to which we issued to accredited investors 8% convertible debentures ("Debentures") in the
aggregate principal amount of $22,000,000 and 1,540,000 common stock warrants, each of which can be exercised for $6.25 per share for a period of three years. In addition to the Debentures and
warrants issued to the investors, we paid a placement agent a 6.5% fee consisting of $660,000, a $770,000 Debenture and 53,900 warrants. The terms of both the Debenture and the warrant are the same as
those for the accredited investors, as described above. The Debentures are required to be reduced by 1/12th per month beginning March 1, 2006. Both the principal and interest are
payable, at our option in common stock or cash, subject to various requirements. The following sets forth the information required by Item 701 in connection with this transaction:



Acquisition of Business and Assets of EMG

On June 11, 2004, we issued 731,930 shares of our restricted common stock to EMG as partial consideration for the completion of the transaction described
above. EMG represented that it, and its two equity holders, were accredited investors. The following sets forth the information required by Item 701 in connection with that transaction:



31

---





Series E Convertible Preferred Stock

On October 4, 2004, we issued 33,000 shares of our Series E Stock and 614,000 common stock warrants to a single, offshore, accredited investor in
exchange for its investment of $3,300,000. In addition, we paid a due diligence fee of $231,000 and reimbursement of $20,000 in expenses, and (after our own expenses) received net proceeds of
$3,049,000. The accredited investor is AMI of Dublin, Ireland. The following sets forth the information required by Item 701 in connection with that transaction:



The
Series E Stock has a liquidation preference of $100 per share plus any accrued but unpaid dividends.

32

---



The
Series E Stock is convertible into common stock at a price equal to 75% of Market Price on the conversion date, but at a price no higher than $1.24 per share (the "Ceiling
Price") and no lower than $1.00 per share (the "Floor Price"). (The conversion price ratio was reduced from 85% because we were unable to meet our obligation to register the underlying shares of
common stock) For purposes of determining the Conversion Price, the "Market Price" shall be the average of the lowest three intra-day trading prices of Isonics' common stock (which need
not occur on consecutive trading days) during the 5 trading days immediately preceding the conversion date. The 5 trading day period shall be extended by the number of trading days
during such period on which



Each
common stock warrant is exercisable to purchase one share of common stock through October 4, 2007. One-half (307,000) of the common stock warrants have an
exercise price of $1.24 per share; the remaining one-half of the common stock warrants have an exercise price of $1.35 per share. (At the time we reached agreement for the transaction on
September 30, 2004, the market price for our stock was $1.31 per share and the twenty-day average closing price of our common stock ending at the close of market on
September 30, 2004, was $1.27 per share.)

We
had an obligation to register the shares underlying the Series E Stock and the common stock warrants, including the obligation to file a registration statement by
November 7, 2004 and to obtain effectiveness of the registration statement within 70 days after the filing of the registration statement. We are currently in default of our obligation
and as a result, we are incurring a penalty of $2,200 per day until the registration statement is filed.



Item 6: Exhibits



31.

Certification pursuant to Sarbanes-Oxley Section 30232.

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


33

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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 9th day of March 2005.

| |  | Isonics Corporation
(Registrant) | 
| |  | -------------------------------- | 

| |  | By | /s/JAMES E. ALEXANDERJames E. Alexander
President, Chief Executive Officer and Director
| |  | -- | ---------------------------------------------------------------------------------------
| |  | By | /s/JOHN V. SAKYSJohn V. Sakys
Chief Accounting Officer and Chief Financial Officer     

34

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