Use these links to rapidly review the documentIsonics Corporation and Subsidiary TABLE OF CONTENTS FORM 10-QSB

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

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FORM 10-QSB

(Mark One)

|ý | Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934.
|- | ----------------------------------------------------------------------------------

For the quarterly period ended July 31, 2002

|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

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

(IRS Employer Identification No.)


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

(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 11,852,795 at August 30, 2002.

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

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Isonics Corporation and Subsidiary        TABLE OF CONTENTS        FORM 10-QSB



|Part I:                                                   |  | Financial Information
|--------------------------------------------------------- |  | ---------------------
|                                                          |  | Item 1:              
|                                                          |  |                      
|                                                          |  |                      
|                                                          |  |                      
|                                                          |  |                      
|                                                          |  | Item 2:              
|Part II:                                                  |  | Other Information    
|                                                          |  | Item 2:              
|                                                          |  | Item 6:              
|Signatures                                               
|Certificationsprincipal executive and financial officers





Part I: Financial Information

Item 1: Condensed Financial Statements

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

ASSETS

|                 |                                                                                 | (Unaudited)
July 31, 2002 |       | April 30, 2002
|---------------- | ------------------------------------------------------------------------------- | ------------------------- | ----- | --------------
|CURRENT ASSETS:  |                                                                                 |                           |       |               
|                 | Cash and cash equivalents                                                       |                           | $     | 2,436         
|                 | Accounts receivable (net of allowances of $29 and $30, respectively)            |                           |       | 922           
|                 | Inventories                                                                     |                           |       | 354           
|                 | Prepaid expenses and other current assets                                       |                           |       | 514           
|                 |                                                                                 |                           |       |               
|                 |                                                                                 | Total current assets      |       |               
|                 |                                                                                 |                           |       |               
|LONG-TERM ASSETS |                                                                                 |                           |       |               
|                 | Property and equipment, net                                                     |                           |       | 36            
|                 | Goodwill                                                                        |                           |       | 1,807         
|                 | Intangible assets (net of accumulated amortization of $15 and $0, respectively) |                           |       | 575           
|                 | Other assets                                                                    |                           |       | 65            
|                 |                                                                                 |                           |       |               
|                 |                                                                                 | Total long-term assets    |       |               
|                 |                                                                                 |                           |       |               
|TOTAL ASSETS     |                                                                                 | $                         | 6,709 |               
|                 |                                                                                 |                           |       |               

LIABILITIES AND STOCKHOLDERS' EQUITY

|                                           |                                                                                                                                                                                    | (Unaudited)
July 31, 2002  |       | April 30, 2002 |      
|------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ----- | -------------- | -----
|CURRENT LIABILITIES:                       |                                                                                                                                                                                    |                            |       |                |      
|                                           | Current portion of long-term debt                                                                                                                                                  |                            | $     |               |      
|                                           | Convertible notes payable (net of discount of $0 and $546, respectively)                                                                                                           |                            |       |               |      
|                                           | Accounts payable                                                                                                                                                                   |                            |       | 854            |      
|                                           | Accrued liabilities                                                                                                                                                                |                            |       | 278            |      
|                                           |                                                                                                                                                                                    |                            |       |                |      
|                                           |                                                                                                                                                                                    | Total current liabilities  |       |                | 1,132
|                                           |                                                                                                                                                                                    |                            |       |                |      
|STOCKHOLDERS' EQUITY:                      |                                                                                                                                                                                    |                            |       |                |      
|                                           | Class A Preferred Stockno par value; 10,000,000 shares authorized; 963,666 shares issued and outstanding on July 31, 2002 and April 30, 2002                                      |                            |       | 745            |      
|                                           | Common stockno par value; 40,000,000 shares authorized; 11,852,795 shares issued and outstanding on July 31, 2002, and 10,824,812 shares issued and outstanding on April 30, 2002 |                            |       | 11,383         |      
|                                           | Additional paid in capital                                                                                                                                                         |                            |       | 4,088          |      
|                                           | Deferred compensation                                                                                                                                                              |                            |       | (175           | )    
|                                           | Accumulated deficit                                                                                                                                                                |                            |       | (10,464        | )    
|                                           |                                                                                                                                                                                    |                            |       |                |      
|                                           |                                                                                                                                                                                    | Total stockholders' equity |       |                | 5,577
|                                           |                                                                                                                                                                                    |                            |       |                |      
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                                                                                    | $                          | 6,709 |                | $    
|                                           |                                                                                                                                                                                    |                            |       |                |      

See notes to condensed consolidated financial statements.



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

|                                               |                                     | Three Months Ended
July 31,       |       
|---------------------------------------------- | ----------------------------------- | --------------------------------- | ------
|
|Revenues                                       |                                     | $                                 | 2,241 
|Cost of revenues                               |                                     |                                   | 1,656 
|                                               |                                     |                                   |       
|                                               |                                     | Gross margin                      |       
|Operating expenses:                            |                                     |                                   |       
|                                               | Selling, general and administrative |                                   |       
|                                               | Research and development            |                                   |       
|                                               |                                     |                                   |       
|                                               |                                     | Total operating expenses          |       
|                                               |                                     |                                   |       
|Operating loss                                 |                                     |                                   | (636  
|                                               |                                     |                                   |       
|Other income (expense):                        |                                     |                                   |       
|                                               | Gain on legal settlement, net       |                                   |       
|                                               | Amortization of debt offering costs |                                   |       
|                                               | Foreign exchange                    |                                   |       
|                                               | Interest and other income, net      |                                   |       
|                                               | Interest expense                    |                                   |       
|                                               |                                     |                                   |       
|                                               |                                     | Total other income (expense), net |       
|                                               |                                     |                                   |       
|Income (loss) before income taxes              |                                     |                                   | 752   
|Income tax expense                             |                                     |                                   |      
|                                               |                                     |                                   |       
|NET INCOME (LOSS)                              |                                     | $                                 | 752   
|                                               |                                     |                                   |       
|Net income (loss) per sharebasic              |                                     |                                   |       
|Net income (loss) per share                    |                                     | $                                 | .07   
|Shares used in computing per share information |                                     |                                   | 10,950
|Net income (loss) per sharediluted            |                                     |                                   |       
|Net income (loss) per share                    |                                     | $                                 | .06   
|Shares used in computing per share information |                                     |                                   | 12,524

See
notes to condensed consolidated financial statements.



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

|                                                                       |                                                            | Three Months Ended
July 31,                     |      
|---------------------------------------------------------------------- | ---------------------------------------------------------- | ----------------------------------------------- | -----
|
|Net cash provided by (used in) operating activities                    |                                                            | $                                               | 1,737
|CASH FLOWS FROM INVESTING ACTIVITIES:                                  |                                                            |                                                 |      
|                                                                       | Purchases of property and equipment                        |                                                 |      
|                                                                       |                                                            |                                                 |      
|                                                                       |                                                            | Cash used in investing activities               |      
|                                                                       |                                                            |                                                 |      
|CASH FLOWS FROM FINANCING ACTIVITIES:                                  |                                                            |                                                 |      
|                                                                       | Payments on borrowings                                     |                                                 |      
|                                                                       | Proceeds from issuance of common stock                     |                                                 |      
|                                                                       |                                                            |                                                 |      
|                                                                       |                                                            | Cash provided by (used in) financing activities |      
|                                                                       |                                                            |                                                 |      
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:                  |                                                            |                                                 | 1,711
|                                                                       | 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: |                                                            |                                                 |      
|                                                                       | Series 2002A Convertible Notes converted into common stock |                                                 | $    
|                                                                       |                                                            |                                                 |      

See
notes to condensed consolidated financial statements.





ISONICS CORPORATION AND SUBSIDIARY        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

The accompanying condensed consolidated financial statements of Isonics Corporation and Subsidiary as of July 31, 2002, and for the three months
ended July 31, 2002 and 2001 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, 2002.

Net Income (Loss) Per Share

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

The
following table reconciles the denominator for the diluted net income (loss) per share computation (in thousands):

Three Months Ended
July 31,2002

2001Denominator for basic net income (loss) per shareweighted average shares

10,950

9,108Effect of dilutive securities:Dilutive effect of conversion of preferred stock

1,465

Dilutive effect of stock options

109

Denominator for diluted net income (loss) per shareadjusted weighted-average shares and assumed conversions

12,524

9,108


For
the period ended July 31, 2002, a total of 4,213,743 outstanding stock options and common stock warrants and 883,000 common shares related to the $1,000,000 in face value of
Series 2002A Convertible Notes converted during the period were excluded from the diluted net income (loss) per share calculation, as the inclusion would be anti-dilutive. For the
period ended July 31, 2001, a total of 6,487,864 outstanding stock options and common stock warrants and 963,666 outstanding shares of Class A Convertible Preferred Stock were excluded
from the diluted net income (loss) per share calculation, as the inclusion would be anti-dilutive.

During
the three month period ended July 31, 2002, we issued the following shares of Common Stock:

Description

Number of Common Stock SharesBalance as of April 30, 2002

10,824,812Conversion of Series 2002A Convertible Notes

1,000,000Issuance of shares for consulting services

25,000Shares issued from employee stock purchase plan

2,983Balance as of July 31, 2002

11,852,795


The
aforementioned equity transactions increased common stock in the accompanying condensed consolidated balance sheet by $1,029,000 for the three months ended July 31,
2002.

Inventories

Inventories consist of (in thousands):

July 31, 2002

April 30, 2002Finished goods

$
62

$
248Work in process


292


212Total inventories

$
354

$
460


Significant customers

As of July 31, 2002, three customers accounted for approximately 61% of total net accounts receivable. Three customers accounted for approximately 37% of
total net accounts receivable at April 30, 2002. Three customers accounted for approximately 50% of revenues during the three months ended July 31, 2002. Three customers accounted
for approximately 43% of revenues during the three months ended July 31, 2001.    Two customers accounted for approximately 68% and 44% of the German segment's revenue for
the three months ended July 31, 2002 and 2001, respectively. Two customers accounted for approximately 72% of the German segment's accounts receivable at July 31, 2002. Two
customers accounted for approximately 37% of the German segment's accounts receivable at April 30, 2002.

Business Segments and Foreign Operations

We currently have three reportable segments: life sciences, semiconductor materials and products and corporate. Our life sciences segment sells stable and
radioisotopes in elemental and simple compound forms for use in life sciences applications. Our semiconductor materials and products segment sells silicon-on-insulator ("SOI")
wafers and is involved in several research and development projects including silicon-28. Our corporate segment has no revenues of its own. Prior period segment information has been
reclassified to conform with the current period presentation.

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

Three Months Ended
July 31,2002

2001Segment revenues:Life sciences

$
2,229

$
1,634Semiconductor materials and products


12


Total

$
2,241

$
1,634


Three Months Ended
July 31,2002

2001Segment operating (loss) income:Life sciences

$
262

$
74Semiconductor materials and products


(133
)

(102
)Corporate


(765
)

(585
)Total

$
(636
)
$
(613
)


July 31, 2002

April 30, 2002Total Assets:Life sciences

$
3,357

$
3,543Semiconductor materials and products


584


598Corporate


2,768


1,073Total

$
6,709

$
5,214


A
summary of operations by geographic area is as follows:

Three Months Ended
July 31,2002

2001Revenues:United States

$
1,595

$
904Germany


646


730Total

$
2,241

$
1,634


Three Months Ended
July 31,2002

2001Operating loss:United States

$
(613
)
$
(541
)Germany


(23
)

(72
)Total

$
(636
)
$
(613
)




July 31, 2002

April 30, 2002Total Assets:United States

$
4,100

$
2,402Germany


2,609


2,812Total

$
6,709

$
5,214


Sale of Depleted Zinc Business and Subsequent Dispute Settlement

On December 1, 1999, we sold our depleted zinc business to Eagle-Picher Technologies, LLC ("Eagle-Picher") for $8,230,000, including $1,500,000 due in
equal installments on November 30, 2000, 2001 and 2002. During the year ended April 30, 2001, we entered into a dispute with Eagle-Picher relating to, among other things, nonpayment of
the additional payments related to the alleged nonperformance of our former depleted zinc supplier under the terms of the supply agreement transferred to Eagle-Picher, Eagle Picher's failure to supply
us the required amount of silicon-28 to be used in our research and development activities and the validity of Eagle-Picher's exercise of the related common stock warrants into 3,130,435
shares of common stock under the net exercise provision of the warrant agreement. We have not recognized any gain with respect to the delinquent additional payments.

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

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

Sale of Chemotrade Leipzig GmbH

On July 31, 2002, we sold our 75% interest in Chemotrade Leipzig GmbH ("CTL") to the 25% shareholder for 50,000 Euros. The transaction is
effective as of May 1, 2002. Under the terms of the agreement, we received 20,000 Euros on August 10, 2002 and the remaining 30,000 Euros are being paid in five equal monthly
installments at the end of each month beginning August 31, 2002.

Conversion of Series 2002A Convertible Notes

On March 20, 2002 we completed a financing arrangement whereby we issued $1,000,000 of Series 2002A Convertible Notes. The notes were convertible at
a ratio of one common share for each dollar of note outstanding, bore interest at 4% per annum and were due March 1, 2003. During the quarter ended July 31, 2002, the $1,000,000 of
convertible notes were converted to 1,000,000 shares of common stock. Due to the conversion of the notes, we incurred interest expense of $546,000 as a result of expensing the remaining unamortized
discount during the quarter ended July 31, 2002. In addition, we expensed the remaining debt offering costs of $182,000 during the quarter ended July 31, 2002.

Investment Banking Agreement with vFinance, Inc.

On June 10, 2002 we terminated our then current agreement with vFinance, Inc. ("vFinance") and entered into a new agreement whereby we issued 25,000
shares of restricted common stock (valued at $26,500 based upon the fair market value of the stock) and 200,000 common stock warrants (valued at $176,000 using the Black-Scholes pricing model) for
investment banking, market making and consulting services. The common stock warrants vested immediately, are exercisable at $2.32 per share and expire on June 10, 2006. The agreement is
cancelable by either party upon 30 days notification. The value of both the restricted common stock (which vested immediately) and the common stock warrants is being amortized to consulting
expense over the twelve-month period (the expected life) of the agreement. As of July 31, 2002 approximately $169,000 has not been amortized and is recorded as prepaid expenses and other
current assets in the accompanying condensed consolidated balance sheet.

Consulting Agreement with Investor Relations Services, Inc.

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

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

Dilution Adjustments to Preferred Shareholders

Under the terms of the Series A Convertible Preferred Stock private placement, the related shareholders had anti-dilution rights if we issued
or sold common stock after July 29, 1999 for a per share consideration less than the current exercise price of the related warrants. The 3,085,622 common stock warrants associated with this
private placement expired unexercised on July 29, 2002.

In
addition to anti-dilution rights, there are provisions associated with the Series A Convertible Preferred Stock that if triggered, would reduce the current
conversion price and effectively allow the preferred shares to convert to common stock at a ratio greater than a one for one basis. As a result of the issuance (and subsequent cancellation) of 250,000
shares of restricted common stock to IRSI (see"Consulting Agreement with Investor Relations Services, Inc.") at $.99 per share, the
Series A Convertible Preferred Stock is now convertible at approximately 1.52 shares of common stock for each share of Series A Convertible Preferred Stock outstanding.

New Accounting Standards

In June 2001, the Financial Accounting Standards Board adopted SFAS No. 141Business Combinationsand SFAS No. 142Goodwill and Other Intangible Assets.SFAS No. 141 addresses the methods used to account for business combinations and
requires the use of the purchase method of accounting for all combinations after June 30, 2001. SFAS No. 142 addresses the methods used to amortize intangible assets and to assess
impairment of those assets, including goodwill resulting from business combinations accounted for under the purchase method. We adopted SFAS No. 142 effective May 1, 2002, except that
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
Silicon Evolution, Inc. ("SEI") subsequent to June 30, 2001, and have accounted for those assets in accordance with the requirements of SFAS No. 142 (see "Amortization of Intangible Assets").

Included
in our assets at July 31, 2002, is goodwill related to the acquisition of Chemotrade in 1998 with a net carrying value of $1,807,000. Upon adoption of SFAS No. 142
on May 1, 2002, we no longer amortize this goodwill, decreasing our amortization expense by approximately $110,000 per year. We are required to assess this goodwill for impairment in the year
of adoption, effective as of the beginning of the year, and at least annually thereafter. We will not be able to determine the full effect of these new pronouncements on our financial position or our
results of operations until we are able to complete our analysis of the impairment provisions of the new standards. In the event our analysis under the new guidance indicates this goodwill is
impaired, we will be required to record a charge to our earnings. We will finalize such determination in the second quarter of the year ending April 30, 2003.

A
reconciliation of previously reported net income (loss), basic net income (loss) per share and diluted net income (loss) per share to the amounts adjusted for the exclusion of
amortization related to goodwill is as follows (in thousands, except per share data):

Three Months Ended
July 31,2002

2001Reported net income (loss)

$
752

$
(687
)Add back: Goodwill amortization





44Adjusted net income (loss)

$
752

$
(643
)


Three Months Ended
July 31,2002

2001Basic net income (loss) per shareReported net income (loss)

$
.07

$
(.08
)Add back: Goodwill amortization





.01Adjusted net income (loss)

$
.07

$
(.07
)




Three Months Ended
July 31,2002

2001Diluted net income (loss) per shareReported net income (loss)

$
.06

$
(.08
)Add back: Goodwill amortization





.01Adjusted net income (loss)

$
.06

$
(.07
)


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

Amortization of Intangible Assets

On September 14, 2001 we entered into a perpetual, exclusive technology license agreement with SEI whereby we issued 500,000 shares of restricted common
stock (valued at $590,000 based upon the closing price of our common stock on September 14, 2001) for the right to indefinitely use intellectual property assets owned or leased by SEI. We
initially determined that the acquired intangible assets had an indefinite useful life as they were not bound by any legal time periods or otherwise limited due to competing technologies, and
therefore in accordance with SFAS No. 142Goodwill and Other Intangible Assetsthey were not amortized but rather tested annually for impairment.

During
the three months ended July 31, 2002, events and circumstances suggested that the intangible assets no longer had an indefinite life and as a result, we determined
that the asset should be amortized over a useful life of ten years. We incurred amortization expense of approximately $15,000 related to these intangible assets during the three months ended
July 31, 2002. Amortization expense associated with these intangible assets is anticipated to be approximately $59,000 per year over the remaining useful life.





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

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

General Discussion

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

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



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

Our
revenues in the future will depend on our success in developing and selling products in the semiconductor and stable and radioactive isotope markets. Consistent with our historical
experience, our quarterly results have been materially affected by the size, timing, and quantity of orders and product shipments during a given quarter. In addition, our quarterly results have been
significantly impacted by one-time events including the July 2002 settlement of the Eagle-Picher dispute and sale of CTL. We cannot offer any assurance that these types of events
will occur in the future.

Results of Operations

The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of revenues. 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
July 31,2002

2001Revenues

100.0
%
100.0
%Cost of revenues

73.9

74.3Gross margin

26.1

25.7Operating expenses:Selling, general & administrative

51.8

56.9Research & development

2.7

6.5Total operating expenses

54.5

63.4Operating loss

(28.4
)
(37.7
)Other income (expense), net

61.9

(4.3
)Income (loss) before income taxes

33.5

(42.0
)Income tax expense



NET INCOME (LOSS)

33.5
%
(42.0
)%


Revenues

Revenues increased from $1,634,000 for the three months ended July 31, 2001 to $2,241,000 for the three months ended July 31, 2002, an
increase of $607,000 or 37.1%. The increase is due to a significant increase in domestic isotope product sales partially offset by a decrease in international isotope product sales. Included in
revenues for the three months ended July 31, 2002 were approximately $12,000 of semiconductor materials and products sales as compared to zero for the three months ended
July 31, 2001.

Revenues
from domestic isotope product sales for the three months ended July 31, 2002 were $1,583,000, an increase of 75.1%, or $679,000, from $904,000 for the
three months ended July 31, 2001. The increase was primarily the result of additional product sales to our existing customers and an increase in our customer base for the
three months ended July 31, 2002.

Revenues
from international isotope product sales for the three months ended July 31, 2002 were $646,000, a decrease of 11.5%, or $84,000, from $730,000 for the
three months ended July 31, 2001. The decrease was primarily the result of the sale of CTL to the 25% shareholder effective May 1, 2002.

Included
in revenues from international isotope product sales for the three months ended July 31, 2001 was approximately $336,000 of revenues from CTL. Effective
May 1, 2002 we sold our 75% interest in CTL to the 25% shareholder for 50,000 Euros. CTL, which primarily resells oxygen-18, was recently notified that its current distribution
agreement (which expires on December 31, 2002) would not be
renewed. The loss of this agreement is significant as it accounts for approximately 80% of CTL's revenue and as a result, CTL's ability to generate revenues after
December 31, 2002 is extremely uncertain. In conjunction with this disposition, Chemotrade is now free to pursue other opportunities (including selling oxygen-18 throughout the
European market) that may have been in conflict with the interests of CTL. While we fully anticipate replacing the lost revenue during the year ending April 2003 with additional product sales
to new and existing customers both domestically and in Europe, we can offer no assurances that this will come to fruition.

Although
we generated limited revenue from our SOI business during the three months ended July 31, 2002, there are still several additional items that need to be resolved,
including the refining of our processes and procedures and obtaining certification from our future customers before we will be able to operate our SOI business on a full scale basis. Additionally, if
we aren't able to extend our working agreement with Silicon Quest International, Inc. ("SQI"), we may be required to raise funds in order to construct our own manufacturing facilities. While we
anticipate being able to produce SOI wafers on a full-scale basis, we can offer no assurance that we will be able to complete the steps necessary to do so.

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

Gross Margin

Gross margin for the three months ended July 31, 2002 was $585,000, an increase of 38.9%, or $164,000, from $421,000 for the three months
ended July 31, 2001. On a percentage of revenues basis, gross margin increased 0.4 percentage points to 26.1%, for the three months ended July 31, 2002, from 25.7%, for the
three months ended July 31, 2001. The dollar increase is directly attributable to an increase in higher margin domestic isotope product sales partially offset by a decrease in lower
margin international isotope sales primarily due to the disposition of CTL effective May 1, 2002. The percentage of revenues increase is due to the combination of an increase in higher margin
domestic isotope sales and a decrease in lower margin international isotope sales.

Included
in gross margin for the three months ended July 31, 2001 was approximately $54,000 of gross margin from CTL. While we fully anticipate replacing the lost gross
margin from the sale of CTL during the year ending April 30, 2003 with additional product sales, at a higher gross margin percentage, to both new and existing customers, both domestically and
in Europe, we can offer no assurances that this will come to fruition.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $231,000, to $1,160,000, for the three months ended July 31, 2002, from $929,000, for the
three months ended July 31, 2001. On a percentage of revenues basis, selling, general and administrative expenses decreased 5.1 percentage points to 51.8%, for the
three months ended July 31, 2002, from 56.9%, for the three months ended July 31, 2001. The dollar increase is primarily attributable to the increased usage of consulting
services related to the issuance of common stock to IRSI (See "Consulting Agreement with Investor Relations Services, Inc.),increased legal costs
associated with the Eagle-Picher dispute and an increase in headcount related to the semiconductor materials and products business segment. The percentage decrease is attributable to an increase in
revenues partially offset by the increased usage of consulting services related to the issuance of common stock to IRSI, increased legal costs associated with the Eagle-Picher dispute and an increase
in headcount related to the semiconductor materials and products business segment.

Research and Development Expenses

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

Research
and development expenses decreased $44,000, to $61,000, for the three months ended July 31, 2002, from $105,000, for the three months ended July 31, 2001.
On a percentage of revenues basis research and development expenses decreased 3.8 percentage points to 2.7% for the three months ended July 31, 2002, from 6.5%, for the
three months ended July 31, 2001. The dollar decrease is primarily related to the revenue generated by the sale of silicon 28 epitaxial wafers to different companies for testing
purposes. This revenue is recorded as an offset to research and development expenses in the accompanying statement of operations. The percentage decrease is also primarily related to the revenue
generated by the sale of silicon 28 epitaxial wafers to different companies for testing purposes and an increase in revenues.

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

Other Income (Expense), net

Other income (expense), net includes net gains from a legal settlement, amortization of debt offering costs, gains or losses on the sale of lines of businesses or
subsidiaries, interest income and expense, and foreign currency gains and losses. Other income (expense), net increased $1,458,000, to $1,388,000, for the three months ended July 31,
2002, from ($70,000), for the three months ended July 31, 2001. The increase is primarily attributable to the gain (net of the contingency portion of legal fees) of $2,140,000 related to
the settlement of the Eagle-Picher dispute (See "Sale of Depleted Zinc Business and Subsequent Dispute Settlement") and the gain resulting from the
disposition of CTL, partially offset by the expensing of $546,000 of previously unamortized discount related to the Series 2002A Convertible Notes to interest expense and $182,000 of previously
capitalized debt offering costs as a result of the conversion of the notes to common stock.

Income Taxes

With the exception of the Eagle-Picher settlement, 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 provided a valuation allowance against the deferred tax assets for the amount in excess of the taxes paid in prior years that are
subject to refund. We have not recorded any income tax expense associated with the net income generated in the three months ended July 31, 2002 as we have sufficient net operating loss
carryforwards to offset this taxable income, and we anticipate generating a loss for the year ending April 30, 2003.

Net Income (Loss)

We recognized net income of $752,000 for the three months ended July 31, 2002, as compared to a net loss of $687,000 for the three months
ended July 31, 2001. With the exception of the Eagle-Picher settlement, we anticipate that losses will continue until revenues increase from our current operations or until we generate revenues from products introduced as a result of our research and
development projects.

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

Liquidity and Capital Resources

Our working capital and liquidity increased significantly due to the resolution of our dispute with Eagle-Picher via the July 24, 2002 settlement agreement
whereby we received $2,500,000 ($2,140,000 net of the contingency portion of our legal fees). Working capital increased $2,028,000, to $3,094,000 at July 31, 2002, from $1,066,000, at
April 30, 2002.

Our
principal sources of funding for the three months ended July 31, 2002 and 2001 have been from the settlement of the Eagle-Picher dispute, the exercise of stock
warrants, the exercise of stock options and proceeds from the sale of shares under our employee stock purchase program. We provided cash from operating activities of $1,737,000 during the
three months ended July 31, 2002 and used cash in operating activities of $755,000 during the three months ended July 31, 2001. Cash provided by operating activities during
the three months ended July 31, 2002 was principally the result of the settlement of the Eagle-Picher dispute partially offset by operating losses. Cash used in operating activities for
the three months ended July 31, 2001 was principally the result of a net loss of $687,000.

Our
investing activities used cash of $2,000 for the three months ended July 31, 2002 and 2001, respectively. Cash used in investing activities for the three months
ended July 31, 2002 and July 31, 2001, resulted from purchases of property and equipment.

Financing
activities used cash of $24,000 for the three months ended July 31, 2002 and provided cash of $327,000 for the three months ended July 31, 2001.
Cash used in financing activities for the three months ended July 31, 2002 resulted primarily from payments on borrowings of $25,000. Cash provided by financing activities for the
three months ended July 31, 2001 resulted primarily from the exercise of stock warrants for $322,000 and proceeds of $5,000 from the sale of shares under our employee stock purchase
program.

At
July 31, 2002, we had $2,436,000 of cash and cash equivalents, an increase of $1,711,000, compared to $725,000, at April 30, 2002.

On
March 20, 2002 we completed a financing arrangement whereby we issued $1,000,000 of Series 2002A Convertible Notes. The notes were convertible at a ratio of one common
share for each
dollar of note outstanding, bore interest at 4% per annum and were due March 1, 2003. During the quarter ended July 31, 2002, the $1,000,000 of convertible notes were converted to
1,000,000 shares of common stock.

Under
the terms of the Series A Convertible Preferred Stock private placement, the related shareholders had anti-dilution rights if we issued or sold common stock
after July 29, 1999 for a per share consideration less than the current exercise price of the related warrants. The 3,085,622 common stock warrants associated with this private placement
expired unexercised on July 29, 2002.

In
addition to anti-dilution rights, there are provisions associated with the Series A Convertible Preferred Stock that if triggered, would reduce the current
conversion price and effectively allow the preferred shares to convert to common stock at a ratio greater than a one for one basis. As a result of the issuance (and subsequent cancellation) of 250,000 shares of restricted common stock to IRSI
(see"Consulting Agreement with Investor Relations Services, Inc.") at $.99 per share, the Series A Convertible Preferred Stock is now
convertible at approximately 1.52 shares of common stock for each share of Series A Convertible Preferred Stock outstanding.

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

Critical Accounting Policies

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

Goodwill and Intangible Assets

In June 2001, the Financial Accounting Standards Board adopted SFAS No. 142Goodwill and Other Intangible
Assets.SFAS No. 142 addresses whether intangible assets should be amortized, the methods used to amortize intangible assets and the methods used to assess impairment of
those assets, including goodwill resulting from business combinations accounted for under the purchase method. We adopted SFAS No. 142 effective May 1, 2002, except that goodwill and
intangible assets other than goodwill
acquired after June 30, 2001 have been amortized or not amortized in accordance with SFAS 142. Included in our assets at July 31, 2002, is goodwill related to the acquisition of
Chemotrade in 1998 with a net carrying value of $1,807,000. Upon adoption of SFAS No. 142 on May 1, 2002, we are required to assess this goodwill for impairment in the year of adoption,
effective as of the beginning of the year, and at least annually thereafter. We will not be able to determine the full effect of this new pronouncement on our financial position or our results of
operations, until we are able to complete our analysis of the impairment provisions of the new standard. In the event our analysis under the new guidance indicates this goodwill is impaired, we will
be required to record a charge to our earnings in the second quarter of the year ending April 30, 2003.

Our
intangible assets result from the perpetual, exclusive technology license agreement with SEI that we entered into on September 14, 2001. As the intangible assets were acquired
after June 30, 2001, we adhere to the guidance provided by SFAS No. 142Goodwill and Other Intangible Assets.We initially determined that
these assets had an indefinite useful life as they were not bound by any legal time periods or otherwise limited due to competing technologies and, therefore in accordance with SFAS No. 142
they were not amortized but rather tested annually for impairment. During the three months ended July 31, 2002, events and circumstances suggested that the intangible assets no longer
had an indefinite life and as a result, we determined that the asset should be amortized over a useful life of ten years. We will continue to evaluate each reporting period whether events and
circumstances continue to support our assessment of a ten-year life for these intangible assets. Additionally, at least annually or if indicators of impairment do arise, 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 (150%), risk-free interest rate (4.0%) and estimated life of the warrants based on historical information.





PART II  OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

Although there were changes in securities to report during the quarter ended July 31, 2002, these were all disclosed in the annual report on
Form 10-KSB that was filed on August 5, 2002.

Item 6. Exhibits and Reports on Form 8-K

None

Isonics
filed no reports on Form 8-K during the quarter ended July 31, 2002 or subsequently.





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 thirteenth day of September, 2002.

| |  | Isonics Corporation
(Registrant)
| |  | --------------------------------
| |  | By:                             
| |  | By:                             





CERTIFICATIONSprincipal executive and financial officers

I, James E. Alexander, Chief Executive Officer of Isonics Corporation, certify that:





|Date: September 13, 2002 |  | /s/JAMES E. ALEXANDERJames E. Alexander, Chief Executive Officer (principal executive officer)
|------------------------ |  | ----------------------------------------------------------------------------------------------



I,
John V. Sakys, Chief Financial Officer of Isonics Corporation, certify that:





|Date: September 13, 2002 |  | /s/JOHN V. SAKYSJohn V. Sakys, Chief Financial Officer (principal financial officer)
|------------------------ |  | ------------------------------------------------------------------------------------