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

                                   FORM 10-QSB

(Mark One)

[X]  Quarterly  report under Section 13 or 15(d) of the Securities  Exchange Act
     of 1934.

     For the quarterly period ended January 31, 1998


[ ]  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                            (IRS Employer
    incorporation or organization)                          Identification No.)

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

                                 (408) 260-0155
                                 --------------
                           (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 X No ___

The number of shares outstanding of the registrant's Common Stock, no par value,
was 5,360,268 at March 4, 1998.

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


<PAGE>


                               Isonics Corporation

                                TABLE OF CONTENTS

                                   FORM 10-QSB


Part I:  Financial Information

      Item 1: Financial Statements

              Condensed Balance Sheets as of January 31, 1998 and April
                   30, 1997....................................................3

              Condensed Statements of Operations for the Three and Nine
                   Month Periods Ended January 31, 1998 and 1997...............4

              Condensed Statements of Cash Flows for the Nine Month
                   Periods Ended January 31, 1998 and 1997.....................5

              Notes to Condensed Financial Statements..........................6

      Item 2: Management's Discussion and Analysis of Financial Condition
                      and Results of Operations................................9

Part II: Other Information

      Item 6: Exhibits and Reports on Form 8-K................................15

Signatures ...................................................................16

                                       2

<PAGE>



                          Part I: Financial Information

Item 1:    Condensed Financial Statements

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

                                                          January 31,  April 30,
                                                              1998       1997
                                                             -------    -------
                                                           (Unaudited)
                                     ASSETS
CURRENT ASSETS:
     Cash and cash equivalents                               $ 1,272    $    28
     Accounts receivable                                         149          4
     Inventories                                               1,247      1,539
     Prepaid expenses                                             43         14
                                                             -------    -------

         Total current assets                                  2,711      1,585

Property and equipment, net                                      128         70
Goodwill, net                                                    256        315
Notes receivable from shareholders                               164         41
Other assets                                                       7         11
Debt issuance costs, net                                        --          106
Deferred offering costs                                         --          556
                                                             -------    -------
Total                                                        $ 3,266    $ 2,684
                                                             =======    =======


                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
     Current portion of long-term debt                       $    32    $   403
     Accounts payable                                            314      1,105
     Accrued liabilities                                         390        518
                                                             -------    -------

         Total current liabilities                               736      2,026

Long-term debt                                                    40      1,268

Commitments                                                     --         --
Stockholders' Equity (Deficit):
     Class A Preferred Stock - no par value - 10,000,000
       shares authorized; none outstanding                      --         --
     Common stock - no par value - 20,000,000 shares
       authorized; issued and outstanding: April 30, 1997,
       3,570,046; January 31,1998, 5,360,268                   4,581      1,129
     Notes receivable from stockholders                         (332)      (343)
     Accumulated deficit                                      (1,759)    (1,396)
                                                             -------    -------
         Total stockholders' equity (deficit)                  2,490       (610)
                                                             -------    -------
Total                                                        $ 3,266    $ 2,684
                                                             =======    =======


                  See notes to condensed financial statements.

                                       3

<PAGE>


<TABLE>
                                                         ISONICS CORPORATION
                                                 CONDENSED STATEMENTS OF OPERATIONS
                                                (in thousands, except per share data)
                                                             (Unaudited)


<CAPTION>
                                                                                Three Months Ended             Nine Months Ended
                                                                                    January 31,                    January 31,
                                                                               ----------------------        ----------------------
                                                                                1998           1997           1998            1997
                                                                               -------        -------        -------        -------
<S>                                                                            <C>            <C>            <C>            <C>    
Net revenues                                                                   $ 1,968        $   951        $ 5,274        $ 3,355
Cost of revenues                                                                 1,296            742          3,636          2,579
                                                                               -------        -------        -------        -------
        Gross margin                                                               672            209          1,638            776

Operating expenses:
    Selling, general and administrative                                            369            303          1,005            890
    Research and development                                                       227            133            579            321
                                                                               -------        -------        -------        -------

        Total operating expenses                                                   596            436          1,584          1,211
                                                                               -------        -------        -------        -------

Operating income (loss)                                                             76           (227)            54           (435)

Interest income                                                                     27              6             53              9
Interest expense                                                                    (4)          (138)          (217)          (235)
                                                                               -------        -------        -------        -------

             Total interest income (expense), net                                   23           (132)          (164)          (226)
                                                                               -------        -------        -------        -------

Income (loss) before extraordinary item and income taxes                            99           (359)          (110)          (661)

Income tax expense                                                                --             --                1             53
                                                                               -------        -------        -------        -------

Income (loss) before extraordinary item                                             99           (359)          (111)          (714)


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

NET INCOME (LOSS)                                                              $    99        $  (359)       $  (363)       $  (714)
                                                                               =======        =======        =======        =======

Net income (loss) per share - basic
Net income (loss) per share before extraordinary item                          $  0.02        $ (0.06)       $ (0.02)       $ (0.12)
                                                                               =======        =======        =======        =======
Extraordinary item                                                             $  --          $  --          $ (0.04)       $  --
                                                                               =======        =======        =======        =======
Net income (loss) per share                                                    $  0.02        $ (0.06)       $ (0.06)       $ (0.12)
                                                                               =======        =======        =======        =======
Shares used in computing per share information                                   5,360          6,138          5,836          6,109
                                                                               =======        =======        =======        =======

Net income (loss) per share - diluted
Net income (loss) per share before extraordinary item                          $  0.01        $ (0.06)       $ (0.02)       $ (0.12)
                                                                               =======        =======        =======        =======
Extraordinary item                                                             $  --          $  --          $ (0.04)       $  --
                                                                               =======        =======        =======        =======
Net income (loss) per share                                                    $  0.01        $ (0.06)       $ (0.06)       $ (0.12)
                                                                               =======        =======        =======        =======
Shares used in computing per share information                                   6,625          6,138          5,836          6,109
                                                                               =======        =======        =======        =======

Pro forma net income (loss) per share - diluted
Net income (loss) per share                                                    $  0.01        $ (0.04)       $ (0.03)       $ (0.08)
                                                                               =======        =======        =======        =======
Shares used in computing pro forma per share information                         6,625          6,378          5,997          6,440
                                                                               =======        =======        =======        =======

<FN>
                                            See notes to condensed financial statements.
</FN>
</TABLE>

                                                                 4

<PAGE>



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


                                                              Nine Months Ended
                                                                 January 31,
                                                             ------------------
                                                               1998       1997
                                                             -------    -------
Net cash used in operating activities                        $  (285)   $(1,811)

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of Property and Equipment                         (72)       (10)

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from issuance of long-term debt and warrants      --        1,741
     Repayments of debt                                       (1,844)       (66)
     Proceeds from issuance of common stock, net               3,452        202
     Payment of debt issuance costs                               (7)      (106)
                                                             -------    -------
                  Cash provided by financing activities        1,601      1,771
                                                             -------    -------


NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS          1,244        (50)
Cash and cash equivalents at beginning of period                  28        116
                                                             -------    -------
Cash and cash equivalents at end of period                   $ 1,272    $    66
                                                             =======    =======

Supplemental  disclosure of cash flow  information:
 Cash paid during the period for:

        Interest                                             $   171    $   123
                                                             =======    =======
        Income taxes                                         $     1    $     9
                                                             =======    =======


                  See notes to condensed financial statements.

                                       5

<PAGE>


                               ISONICS CORPORATION
                     NOTES TO CONDENSED FINANCIAL STATEMENTS

Basis of Presentation

The  accompanying  condensed  financial  statements of Isonics  Corporation (the
"Company")  as of  January  31,  1998 and for the  three and nine  months  ended
January  31,  1998 and 1997 have been  prepared on the same basis as the 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 the Company's  audited  financial  statements and notes thereto
included in the Company's Prospectus dated September 22, 1997.

Concentration of Credit Risk

Financial  instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash equivalents and trade accounts receivable.
Cash equivalents are maintained with high quality institutions and are regularly
monitored by management.  The Company  extends credit to its customers,  most of
whom are large,  established  companies.  Credit risk is mitigated by performing
ongoing credit evaluations of its customers'  financial  condition and generally
does not require collateral.

Net Income (Loss) Per Share

Net income  (loss) per share is based on the weighted  average  number of common
and common equivalent shares  outstanding  during the period.  Common equivalent
shares  include  common  stock  options and warrants  (using the treasury  stock
method).  Common  equivalent  shares are excluded from the  computation  in loss
periods as their effect is antidilutive, except that, pursuant to Securities and
Exchange  Commission  rules,  all shares  issuable from the exercise of warrants
issued and stock options granted by the Company at a price less than the initial
public  offering  price during the twelve months  preceding the offering date of
September  23, 1997 have been  included in the  calculation  (using the treasury
stock method) as if they had been outstanding for all periods.

In February 1997, the Financial  Accounting Standards Board issued SFAS No. 128.
"Earnings  Per Share." The  Company has adopted  SFAS 128 for the quarter  ended
January 31,  1998 and  restated  earnings  per share data for periods to conform
with SFAS 128. SFAS 128 replaces  current  earnings per share ("EPS")  reporting
requirements  and requires a dual  presentation  of basic and diluted EPS. Basic
EPS excludes  dilution and is computed by dividing  net income  attributable  to
common stockholders by the weighted average of common shares outstanding for the
period.  Diluted  EPS  reflects  the  potential  dilution  that  could  occur if
securities or other  contracts to issue common stock were exercised or converted
into common stock.  However,  the SEC rules regarding share issuances and option
and other rights granted to acquire shares prior to an initial public  offering,
as stated  above,  are still  applicable  and such  amounts are included in both
basic and diluted EPS.

Pro forma net loss per share has been  presented  to depict  what the net income
(loss)  per  share  would  have been had the  common  shares  issuable  for debt
repayment been outstanding during that period.

                                       6

<PAGE>


<TABLE>
The  following  table  illustrates  the  reconciliation  of the  numerators  and
denominators of the basic and diluted earnings per share computation:


<CAPTION>
                                                                             Three Months                       Nine Months
                                                                                Ended                              Ended
                                                                              January 31,                        January 31,
                                                                         1998            1997              1998              1997
                                                                       -------          -------           -------           -------
<S>                                                                    <C>              <C>               <C>               <C>     
BASIC EPS
Net income (loss) before
    extraordinary item                                                 $    99          $  (359)          $  (111)          $  (714)
Extraordinary item                                                        --               --                (252)             --
                                                                       -------          -------           -------           -------
Net income (loss)                                                      $    99          $  (359)          $  (363)          $  (714)
                                                                       =======          =======           =======           =======
Weighted average common
    stock outstanding                                                    5,360            4,471             4,934             3,972
Stock options, warrants and convertible
    preferred stock issued twelve
    months preceding the initial
    public offering                                                       --              1,667               902             2,137
                                                                       -------          -------           -------           -------
Number of shares                                                         5,360            6,138             5,836             6,109
                                                                       =======          =======           =======           =======


DILUTED EPS
Net income (loss) before
    extraordinary item                                                 $    99          $  (359)          $  (111)          $  (714)
Extraordinary item                                                        --               --                (252)             --
                                                                       -------          -------           -------           -------
Net income (loss)                                                      $    99          $  (359)          $  (363)          $  (714)
                                                                       =======          =======           =======           =======
Weighted average common
    stock outstanding                                                    5,360            4,471             4,934             3,972
Stock options,  warrants and convertible
    preferred  stock issued  twelve
    months preceding the initial
    public offering                                                       --              1,667               902             2,137
Dilutive effect of stock options                                           515             --                --                --
Dilutive effect of warrants                                                750             --                --                --
                                                                       -------          -------           -------           -------
Number of shares                                                         6,625            6,138             5,836             6,109
                                                                       =======          =======           =======           =======
</TABLE>


Inventories

         Inventories consist of (in thousands):

                                                   January 31,         April 30,
                                                      1998               1997
                                                     ------             ------
Finished goods                                       $1,041             $1,387
Work in process                                        --                 --
Raw materials                                           206                152
                                                     ------             ------

Inventories                                          $1,247             $1,539
                                                     ======             ======

                                       7

<PAGE>


                               ISONICS CORPORATION
               NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Significant Customers and Suppliers

At January 31, 1998 one customer accounted for 95% of total accounts receivable.
One customer  accounted  for 53% and 67% of net revenues  during the nine months
ended  January  31,  1998 and  1997,  respectively.  Three  different  customers
accounted  for 15%,  12% and 12% of net  revenues  during the nine months  ended
January 31, 1998.

The  Company  currently  uses a single  source  processor  in its  manufacturing
process;  a disruption of this relationship  would have an adverse impact on the
operating  results of the Company.  To date,  the Company has not  experienced a
disruption; however, the Company is actively pursuing alternative sources. There
can  be no  assurance  that  such  alternative  sources  will  be  available  on
commercially reasonable terms or at all.

Extinguishment of Debt

The terms of the Company's $1,397,000 non-convertible promissory notes issued in
September  1996  stated that in the event of an initial  public  offering of the
Company's stock, all principal and interest would be due within five days of the
closing of such initial  public  offering.  Accordingly,  the Company repaid the
notes and interest during the second quarter ended October 31, 1997. At the time
of the  repayment,  unamortized  debt  issuance  costs  and  discounts  totaling
approximately $252,000 were charged to earnings as an extraordinary item.

Recent Issued Accounting Standards

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

                                       8

<PAGE>


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  the  Company's   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  the  Company's  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 the  Company on the date  hereof,  and the Company  undertakes  no
obligation  to update any such forward  looking  statements.  It is important to
note that the Company's  actual  results could differ  materially  from those in
such forward looking statements.

Overview

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

Isonics'  core  business  is  production  and supply of  depleted  zinc (DZ),  a
non-radioactive  stable isotope, to the energy industry. In fiscal 1996, Isonics
expanded its business scope to include  development of  isotopically  engineered
materials  for  the  medical  research,  medical  diagnostic  and  semiconductor
industries.  In June 1997 Isonics produced the world's first  isotopically  pure
silicon  epitaxial wafer suitable for  semiconductor  fabrication.  In July 1997
Isonics  exercised an option for an exclusive license for two U.S. patents owned
by Yale  University  concerning  isotopically  pure  silicon and a wide range of
other  semiconductor  materials.  In February  1998,  the Company  announced the
availability  of  isotopically  pure  silicon-28  epitaxial  wafers in prototype
quantities.  The Company is  currently  evaluating  potential  applications  for
isotopically  pure  silicon  in  collaboration   with  certain   industrial  and
university partners and is developing strategies for commercialization.  Isonics
currently supplies stable isotope labeled compounds  ("SILCs"),  mainly enriched
carbon, for pharmaceutical research and medical diagnostic test development.  In
February  1998,  the Company  announced  its  intention to enter a joint venture
agreement with the Institute of Stable Isotopes in Tblisi, Georgia, for enriched
carbon-13  production.  The partners anticipate first increasing capacity of the
existing  facilities  located in Tblisi,  followed  by  establishing  additional
production  facilities  in Europe and the  United  States.  The  Company is also
independently   developing  advanced,  lower  cost,  production  technology  for
enriched carbon for use in minimally  invasive  diagnostic tests which are being
developed by others.  The Company  believes  that a  substantial  portion of its
revenues  in the future will  depend on its  success in  developing  and selling
products in the semiconductor and SILC markets.

In September 1997,  Isonics completed its initial public offering.  The proceeds
of the  offering  are  being  used to fund  the  Company's  silicon  and  carbon
development  efforts,  to selectively add key technical personnel and to perform
engineering  studies  prior to  adopting a plan to increase  and  geographically
diversify manufacturing capacity necessary to support planned sales growth.

Historically,  substantially all of the Company's net revenues in any particular
period have been  attributable  to a limited number of customers and sales of DZ
and SILCs. The Company operates with little backlog and a significant portion of
the Company's  total revenues to date have been,  and the Company  believes will
continue to be in the near term,  derived  from a limited  number of DZ and SILC
orders in any  particular  quarter.  Consistent  with the  Company's  historical
experience,  the  Company's  quarterly  results are  expected  to be  materially
affected by the size,  timing and  quantity of DZ and SILC  orders,  and product
shipments made to DZ and SILC users during such quarter.

                                       9

<PAGE>


As a result,  a lost or  delayed  sale could  have a  significant  impact on the
Company's operating results for a particular period, and such fluctuations could
materially and adversely affect the Company's business,  financial condition and
results of operations.

Results of Operations

<TABLE>
The following table sets forth, for the periods indicated,  certain 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  financial
statements and the notes thereto appearing elsewhere in this report.

<CAPTION>
                                                                        Three Months Ended                Nine Months Ended
                                                                            January 31,                      January 31,
                                                                    ----------------------------     ----------------------------
                                                                       1998            1997             1998            1997
                                                                    -----------    -------------     -----------    -------------
<S>                                                                   <C>             <C>              <C>              <C>   
Net revenues                                                          100.0%          100.0%           100.0%           100.0%
Cost of revenues                                                       65.9            78.0             68.9            76.9
                                                                    -----------    -------------     -----------    -------------
               Gross Margin                                            34.1            22.0             31.1            23.1
                                                                    -----------    -------------     -----------    -------------

Operating expenses:
               Selling, general and administrative                     18.8            31.9             19.0            26.5
               Research and development                                11.4            14.0             11.0             9.6
                                                                    -----------    -------------     -----------    -------------
                 Total operating expenses                              30.2            45.9             30.0            36.1
                                                                    -----------    -------------     -----------    -------------
Operating income (loss)                                                 3.9           (23.9)             1.1           (13.0)
Interest income (expense)
               Interest income                                          1.4             0.7              1.0             0.3
               Interest expense                                        (0.2)          (14.5)            (4.2)           (7.0)
                                                                    -----------    -------------     -----------    -------------
                  Total interest income (expense), net                  1.2           (13.8)            (3.2)           (6.7)
                                                                    -----------    -------------     -----------    -------------
Income (loss) before extraordinary item and income taxes                5.1           (37.7)            (2.1)          (19.7)
Income tax expense                                                      --              --               --             (1.6)
                                                                    -----------    -------------     -----------    -------------
Income (loss)  before extraordinary item                                5.1           (37.7)            (2.1)          (21.3)
Extraordinary item - loss on extinguishment of  debt                      --              --            (4.8)             --
                                                                    ===========    =============     ===========    =============
NET INCOME (LOSS)                                                       5.1%          (37.7)%           (6.9)%         (21.3)%
                                                                    ===========    =============     ===========    =============
</TABLE>


Net Revenues

Net  revenues  for the three and nine months  ended  January 31, 1998 were $1.97
million  and $5.27  million,  respectively,  an  increase  of 106.9%  and 57.2%,
respectively for the comparable  periods in the prior fiscal period.  The growth
on a quarterly and year-to-date  basis is due primarily to increased sales of DZ
and SILC products.  Net revenues from DZ increased by approximately $807,000 and
$1.80  million,  respectively  for the three and nine months  ended  January 31,
1998,  on  increased  unit  sales of  approximately  43% and 44%,  respectively.
Average unit sales prices for DZ increased in comparison to the previous  fiscal
years comparable  quarter.  Net revenues from SILCs were approximately  $225,000
for the three  months  ended  January 31,  1998,  an  increase of  approximately
$210,000  from the same period of the previous  year.  For the nine months ended
January 31, 1998,  SILC revenues  were  approximately  $852,000,  an increase of
approximately  $548,000 or 181% for the comparable  period of the previous year.
The  revenue  growth  reflects  the  increasing  sales of  SILCs,  specifically,
enriched carbon products.

International  sales represented less than 10% of net revenues for the three and
nine months ended January 31, 1998 and 1997.

                                       10

<PAGE>


Gross Margin

Gross margin for the three and nine months ended  January 31, 1998  increased to
34.1% and 31.1% of net revenues respectively,  from 22.0% and 23.1% for the same
periods in the prior fiscal year. The  improvement  is due to increased  average
unit sales prices for DZ, increased proportion of net revenues generated from DZ
and to a lesser extent  increased  gross margins from SILCs.  Increases in gross
margins were offset in part by charges associated with writing off the Company's
cadmium  inventory  and certain  SILCs during the nine months ended  January 31,
1998.

Selling, General and Administrative Expenses

Selling,  general and  administrative  expenses  increased  on a dollar basis to
approximately  $369,000 for the quarter ended January 31, 1998,  from  $303,000,
while  declining  on a  percentage  basis to 18.8% of net revenues for the third
quarter of fiscal 1998 from 31.9% of net revenues for the  comparable  period in
fiscal  1997.  For the nine  months  ended  January  31,  1998,  these  expenses
increased on a dollar basis to $1.0  million  from  $890,000 for the  comparable
period in fiscal 1997,  while  declining  on a percentage  basis to 19.0% of net
revenues  for the  nine  months  ended  January  31,  1998  from  26.5%  for the
comparable  period in fiscal 1997. The dollar  increase for the quarter and nine
months ended January 31, 1998 was primarily  attributable to  professional  fees
and media  relations costs  associated  with being a public  company,  while the
decrease  as a  percentage  of net  revenues  was due to  growth  in DZ and SILC
product   revenues.   The  Company   anticipates   that  selling,   general  and
administrative  expenses will generally continue to increase in absolute dollars
to support  anticipated  revenue  growth,  but may vary as a  percentage  of net
revenues.

Research and Development Expenses

Research and development expenses increased by approximately $94,000, or 70.7% ,
to  $227,000  for the quarter  ended  January  31,  1998 from  $133,000  for the
comparable period in fiscal 1997, while declining on a percentage basis to 11.4%
of net revenues from 14.0%. For the nine months ended January 31, 1998, research
and  development  expenses  increased  by  $258,000 or 80.4%,  to $579,000  from
$321,000 for the comparable period in the previous fiscal year, while increasing
on a percentage  basis to 11.0% of net revenues  from 9.6%.  Both the dollar and
percentage  increases  during the quarter and nine months ended January 31, 1998
were primarily due to increased  staffing and consulting  costs  associated with
the development of isotopically pure silicon wafers;  costs to develop advanced,
lower cost  production  technology for enriched  carbon;  and  commencement of a
feasibility study to increase isotope  production.  The decrease in research and
development  expenses as a  percentage  of net  revenues  for the quarter  ended
January 31, 1998 compared to the same period of the previous fiscal year was due
to revenue growth. The Company believes that the development and introduction of
new product  applications  is critical  to its future  success and expects  that
research and development  expenses will increase on a dollar basis, but may vary
as a percentage of net revenues.

Interest income (expense), net

Interest  expense,  reflects  interest and prior to the Company's initial public
offering,  amortization  of issuance  costs and discounts on  outstanding  debt.
Interest expense,  net,  decreased by $155,000 to net interest income of $23,000
for the quarter ended January 31, 1998 from net interest expense of $132,000 for
the  comparable  period of the previous  fiscal year.  For the nine months ended
January 31, 1998, interest expense, net, decreased to $164,000 from $226,000 for
the comparable period in fiscal 1997. During the quarter ended October 31, 1997,
the  Company  repaid  approximately  $1.78  million  of  outstanding  debt which
resulted in reduced  interest  expense  for the  quarter  and nine months  ended
January 31, 1998.

Income taxes

There is no provision  for income taxes for the quarters  ended January 31, 1998
and  1997,   respectively.   The  Company  has  sufficient  net  operating  loss
carryforwards  to eliminate net income  generated  during the three months

                                       11

<PAGE>

ended January 31, 1999. For the nine months ended January 31, 1998, income taxes
decreased  $52,000 to $1,000 for the  comparable  period of the  previous  year.
Fiscal  1998 taxes are the result of minimum  state  taxes.  The  provision  for
income  taxes for the  quarter and nine  months  ended  January 31, 1997 was the
result of providing a valuation allowance on deferred tax assets.

Extraordinary Item

In  accordance  with the terms of  certain  outstanding  notes the  Company  was
required to repay debt  totaling  $1,397,000  upon the closing of the  Company's
initial public  offering in September  1997. Upon repayment of the notes, in the
quarter ended October 31, 1997,  unamortized  debt issuance  costs and discounts
totaling $252,000 were charged to earnings as an extraordinary item.

Liquidity and Capital Resources

Since inception,  the Company's  principal sources of funding have been its cash
from operations, borrowed funds and sales of common stock. The Company used cash
in operating  activities of  approximately  $285,000 and $1.8 million during the
nine  months  ended  January  31,  1998 and  1997,  respectively.  Cash  used by
operating  activities  during  the  nine  months  ended  January  31,  1998  was
principally  the  result  of a net  loss of  $363,000,  net of  adjustments  for
non-cash items, primarily  depreciation,  amortization and extraordinary loss on
extinguishment of debt. Cash used by operating activities during the nine months
ended January 31, 1997,  was  principally  the result of a net loss of $714,000,
adjusted for non-cash items,  increases in accounts  receivable and inventories,
offset in part by increases in accounts payable.

The Company's investing activities used cash of $72,000 and $10,000 for the nine
months ended January 31, 1998 and 1997, respectively.  Investing activities were
for purchases of property and equipment.

Financing  activities  provided cash of $1.6 million and $1.8 million during the
nine months  ended  January 31, 1998 and 1997,  respectively.  Cash  provided by
financing  activities  during the nine months  ended  January 31, 1998  resulted
primarily from the completion of the Company's initial public offering which was
offset in part by the repayment of outstanding debt. Financing activities during
the nine months  ended  January 31, 1997  consisted of the issuance of notes and
common  stock  which was  offset in part by debt  issuance  costs and  principal
payments on debt.

At January 31, 1998,  the Company had $1.3 million of cash and  equivalents,  an
increase of $1.2 million  compared to $28,000 as of April 30,  1997.  At January
31, 1998,  the Company had $2.0  million  working  capital,  an increase of $2.4
million  compared to negative  $441,000 as of April 30, 1997. The increases were
primarily the result of the Company's initial public offering in September 1997.
At present,  the Company has no credit  facility with a bank or other  financial
institution  and no in-place source of capital,  however,  the Company is in the
process of evaluating several credit facilities.  The Company believes that cash
and  equivalents  on hand at January  31, 1998 will be  sufficient  to allow the
Company to continue its expected level of operations for at least 12 months.

Factors That May Affect Future Results

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

Relationship With Certain Suppliers and Availability of Raw Materials

The Company depends upon an isotope enrichment plant,  located in Russia,  which
is owned by the  Ministry  of Atomic  Energy  of the  Russian  Federation  ("the
Ministry"),  which  is part of the  cabinet  of the  government  of the  Russian
Federation,  for one process  involved in the  manufacturing  of DZ. The Company
also relies upon a single or

                                       12

<PAGE>


limited  number of suppliers  and  processors  for certain  other  manufacturing
processes. The Company signed an agreement with the commercial department of the
Ministry  to  purchase  certain  isotope   separation   services  through  2001.
Disruption or termination of services  provided by the Ministry or the Company's
single or limited  suppliers  and  processors  could have a material and adverse
affect upon the Company's financial condition and results of operations.

Operations in Russia and the Republic of Georgia

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

Customer Concentration

Historically,  substantially all of the Company's net revenues in any particular
period have been attributable to a limited number of customers.  Consistent with
the Company's  historical  experience,  the Company's  quarterly  results during
fiscal  1998 and 1999 are  expected to be  affected  materially  by the level of
orders  received  from  significant  DZ and SILC users  during such  quarter and
product  shipments by the Company to DZ and SILC  customers  during such period.
There can be no assurance that the Company's  principal  customers will continue
to  purchase  products.  A decrease  in or loss of orders from one or more major
customers  would have a material and adverse  effect on the Company's  financial
condition and results of operations.

Factors Affecting Operating Results; Variability of Orders

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

Management of Growth

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

                                       13

<PAGE>


Dependence on Key Personnel

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

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

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

Volatility of Stock Price

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

Shares Eligible for Future Sale

The  officers  and  directors  of the  Company and all other  stockholders  have
agreed,  pursuant to lock-up agreements,  that without the prior written consent
of Monroe Parker Securities,  Inc. (the  Representative)  and the Company,  that
they will not sell or otherwise  dispose of common stock  beneficially  owned by
them.  The Company has been advised by officials  of the  Representative  in the
initial public offering,  that on December 22, 1997, the  Representative  ceased
market-making activities;  therefore, the Company may, in the future at its sole
discretion, release a portion of securities subject to these lock-up agreements.

                                       14

<PAGE>


                           Part II: Other Information

Item 6: Exhibits and Reports on Form 8-K

         (a)   Exhibits.


                  Exhibit
                   Number       Description                              Page(s)
                   ------       -----------                              -------
                  27.01         Financial Data Schedule                    17


         (b)   Reports on Form 8-K. The Company did not file any Reports on Form
               8-K during the quarter ended January 31, 1998.

                                       15

<PAGE>


                                   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 San Jose, County of Santa
Clara, State of California, on the 16th day of March, 1998.

         Isonics Corporation
             (Registrant)


         By_______________________________________________
           James E. Alexander
           President, Chief Executive Officer and Director




         By_______________________________________________
           Paul J. Catuna
           Vice President, Finance
           Chief Financial Officer

                                       16