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 January 31, 2004              
|o                                                             | Transition report under Section 13 or 15(d) of the Exchange Act.                  
|For the transition period
from                             to

Commission file number: 001-12531

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

|California(State or other jurisdiction of
incorporation or organization)            |  | 77-0338561(IRS Employer
Identification No.)
|----------------------------------------------------------------------------------- |  | -------------------------------------------
|5906 McIntyre Street
Golden, Colorado 80403(Address of principal executive offices)
|(303) 279-7900(Issuer's telephone number)                                          

Check
whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

The number of shares outstanding of the registrant's Common Stock, no par value, was 14,909,387 at March 12, 2004.

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



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Isonics Corporation        TABLE OF CONTENTS        FORM 10-QSB

|Part I:    | Financial Information                                                                                                |                                                                                       |  
|---------- | -------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | -
|           | Item 1:                                                                                                              | Financial Statements                                                                  |  
|           | Condensed Consolidated Balance Sheets as of January 31, 2004 and April 30, 2003                                      |                                                                                       | 3
|           | Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended January 31, 2004 and 2003 |                                                                                       | 4
|           | Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended January 31, 2004 and 2003           |                                                                                       | 5
|           | Notes to Condensed Consolidated Financial Statements                                                                 |                                                                                       | 6
|           | Item 2:                                                                                                              | Management's Discussion and Analysis of Financial Condition and Results of Operations |  
|           | Item 3:                                                                                                              | Controls and Procedures                                                               |  
|Part II:   | Other Information                                                                                                    |                                                                                       |  
|           | Item 2:                                                                                                              | Changes in Securities and Use of Proceeds                                             |  
|           | Item 6:                                                                                                              | Exhibits and Reports on Form 8-K                                                      |  
|Signatures |                                                                                                                      | 29                                                                                   

2

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PART I  FINANCIAL INFORMATION

Item 1: Condensed Financial Statements

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

|                  |                                                                      | (Unaudited)
January 31, 2004 |       | April 30, 2003
|----------------- | -------------------------------------------------------------------- | ---------------------------- | ----- | --------------
|ASSETS            |                                                                      |                              |       |               
|CURRENT ASSETS:   |                                                                      |                              |       |               
|                  | Cash and cash equivalents                                            |                              | $     | 1,429         
|                  | Accounts receivable (net of allowances of $18 and $29, respectively) |                              |       | 776           
|                  | Inventories                                                          |                              |       | 954           
|                  | Prepaid expenses and other current assets                            |                              |       | 827           
|                  |                                                                      |                              |       |               
|                  |                                                                      | Total current assets         |       |               
|                  |                                                                      |                              |       |               
|LONG-TERM ASSETS: |                                                                      |                              |       |               
|                  | Property and equipment, net                                          |                              |       | 482           
|                  | Goodwill                                                             |                              |       | 1,807         
|                  | Intangible assets, net                                               |                              |       | 727           
|                  | Other assets                                                         |                              |       | 55            
|                  |                                                                      |                              |       |               
|                  |                                                                      | Total long-term assets       |       |               
|                  |                                                                      |                              |       |               
|TOTAL ASSETS      |                                                                      | $                            | 7,057 |               
|                  |                                                                      |                              |       |               

|                                                        |                                                                                                                                                                                                     | (Unaudited)
January 31, 2004 |       | April 30, 2003 |      
|------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | ----- | -------------- | -----
|LIABILITIES AND STOCKHOLDERS' EQUITY                    |                                                                                                                                                                                                     |                              |       |                |      
|CURRENT LIABILITIES:                                    |                                                                                                                                                                                                     |                              |       |                |      
|                                                        | Current portion of obligation under capital leases                                                                                                                                                  |                              | $     | 52             |      
|                                                        | Accounts payable                                                                                                                                                                                    |                              |       | 488            |      
|                                                        | Accrued liabilities                                                                                                                                                                                 |                              |       | 360            |      
|                                                        |                                                                                                                                                                                                     |                              |       |                |      
|                                                        |                                                                                                                                                                                                     | Total current liabilities    |       |                | 900  
|                                                        |                                                                                                                                                                                                     |                              |       |                |      
|OBLIGATION UNDER CAPITAL LEASES, net of current portion |                                                                                                                                                                                                     |                              | 46    |                |      
|STOCKHOLDERS' EQUITY:                                   |                                                                                                                                                                                                     |                              |       |                |      
|                                                        | Preferred Stock; 10,000,000 shares authorized                                                                                                                                                       |                              |       |                |      
|                                                        | Series A Preferred stock  no par value; 963,666 shares issued and outstanding on January 31, 2004 and April 30, 2003; $1,445,499 liquidation preference on January 31, 2004 and April 30, 2003     |                              |       | 745            |      
|                                                        | Series C Preferred stock  no par value; 22,000 and zero shares issued and outstanding on January 31, 2004 and April 30, 2003, respectively; $2,200,000 liquidation preference on January 31, 2004. |                              |       | 2,788          |      
|                                                        | Common stock  no par value; 40,000,000 shares authorized; 13,751,492 and 12,113,533 shares issued and outstanding on January 31, 2004 and April 30, 2003, respectively                             |                              |       | 12,888         |      
|                                                        | Additional paid in capital                                                                                                                                                                          |                              |       | 5,427          |      
|                                                        | Deferred compensation                                                                                                                                                                               |                              |       | (114           | )    
|                                                        | Accumulated deficit                                                                                                                                                                                 |                              |       | (15,623        | )    
|                                                        |                                                                                                                                                                                                     |                              |       |                |      
|                                                        |                                                                                                                                                                                                     | Total stockholders' equity   |       |                | 6,111
|                                                        |                                                                                                                                                                                                     |                              |       |                |      
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY              |                                                                                                                                                                                                     | $                            | 7,057 |                | $    
|                                                        |                                                                                                                                                                                                     |                              |       |                |      

See
notes to condensed consolidated financial statements.

3

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

|                                                       |                                     | Three Months Ended
January 31,    |        | Nine Months Ended
January 31, |      
|------------------------------------------------------ | ----------------------------------- | --------------------------------- | ------ | ----------------------------- | -----
|
|Revenues                                               |                                     | $                                 | 2,094  |                               | $    
|Cost of revenues                                       |                                     |                                   | 1,707  |                               |      
|                                                       |                                     |                                   |        |                               |      
|                                                       |                                     | Gross margin                      |        |                               | 387  
|Operating expenses:                                    |                                     |                                   |        |                               |      
|                                                       | Selling, general and administrative |                                   |        | 1,251                         |      
|                                                       | Research and development            |                                   |        | 171                           |      
|                                                       |                                     |                                   |        |                               |      
|                                                       |                                     | Total operating expenses          |        |                               | 1,422
|                                                       |                                     |                                   |        |                               |      
|Operating loss                                         |                                     |                                   | (1,035 | )                             |      
|                                                       |                                     |                                   |        |                               |      
|Other income (expense):                                |                                     |                                   |        |                               |      
|                                                       | Gain on legal settlement, net       |                                   |        |                              |      
|                                                       | Amortization of debt offering costs |                                   |        |                              |      
|                                                       | Foreign exchange                    |                                   |        |                              |      
|                                                       | Interest and other income           |                                   |        | 9                             |      
|                                                       | Interest expense                    |                                   |        | 1                             |      
|                                                       |                                     |                                   |        |                               |      
|                                                       |                                     | Total other income (expense), net |        |                               | 10   
|                                                       |                                     |                                   |        |                               |      
|Loss before income taxes                               |                                     |                                   | (1,025 | )                             |      
|Income tax expense                                     |                                     |                                   |       |                               |      
|                                                       |                                     |                                   |        |                               |      
|NET LOSS                                               |                                     | $                                 | (1,025 | )                             | $    
|                                                       |                                     |                                   |        |                               |      
|DEEMED DIVIDEND ON PREFERRED STOCK                     |                                     | $                                 | (998   | )                             | $    
|                                                       |                                     |                                   |        |                               |      
|NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS           |                                     | $                                 | (2,023 | )                             | $    
|                                                       |                                     |                                   |        |                               |      
|Net loss per share  basic and diluted                 |                                     |                                   |        |                               |      
|Net loss per share attributable to common shareholders |                                     | $                                 | (.15   | )                             | $    
|Shares used in computing per share information         |                                     |                                   | 13,719 |                               |      

See
notes to condensed consolidated financial statements.

4

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

|                                                                       |                                                                                                               | Nine Months Ended January 31,                   |       
|---------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ----------------------------------------------- | ------
|
|Net cash provided by (used in) operating activities                    |                                                                                                               | $                                               | (2,367
|CASH FLOWS FROM INVESTING ACTIVITIES:                                  |                                                                                                               |                                                 |       
|                                                                       | Purchases of property and equipment                                                                           |                                                 |       
|                                                                       |                                                                                                               |                                                 |       
|                                                                       |                                                                                                               | Cash used in investing activities               |       
|                                                                       |                                                                                                               |                                                 |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                                  |                                                                                                               |                                                 |       
|                                                                       | Payments on borrowings                                                                                        |                                                 |       
|                                                                       | Proceeds from issuance of notes payable                                                                       |                                                 |       
|                                                                       | Proceeds from issuance of common stock                                                                        |                                                 |       
|                                                                       | Proceeds from issuance of preferred stock and related warrants                                                |                                                 |       
|                                                                       | Principal payments under capital lease obligations                                                            |                                                 |       
|                                                                       |                                                                                                               |                                                 |       
|                                                                       |                                                                                                               | Cash provided by (used in) financing activities |       
|                                                                       |                                                                                                               |                                                 |       
|NET INCREASE IN CASH AND CASH EQUIVALENTS:                             |                                                                                                               |                                                 | 687   
|                                                                       | Cash and cash equivalents at beginning of period                                                              |                                                 |       
|                                                                       |                                                                                                               |                                                 |       
|                                                                       | Cash and cash equivalents at end of period                                                                    |                                                 | $     
|                                                                       |                                                                                                               |                                                 |       
|Supplemental disclosure of cash flow information:                      |                                                                                                               |                                                 |       
|                                                                       | Cash paid during the period for:                                                                              |                                                 |       
|                                                                       |                                                                                                               | Interest                                        |       
|                                                                       |                                                                                                               |                                                 |       
|                                                                       |                                                                                                               | Income taxes                                    |       
|                                                                       |                                                                                                               |                                                 |       
|Supplemental disclosure of noncash investing and financing activities: |                                                                                                               |                                                 |       
|                                                                       | Common stock issued to IUT for intangible assets                                                              |                                                 |       
|                                                                       | Capital lease obligations for property and equipment                                                          |                                                 |       
|                                                                       | Series 2002A Convertible Notes converted into common stock                                                    |                                                 |       
|                                                                       | Common stock issued in legal settlement                                                                       |                                                 |       
|                                                                       | Deemed dividend associated with beneficial conversion feature on Series C Convertible Preferred Stock         |                                                 |       
|                                                                       | Value of warrants for 227,701 shares of common stock issued to Series C Convertible Preferred Stock investors |                                                 |       

See
notes to condensed consolidated financial statements.

5

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ISONICS CORPORATION AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Isonics Corporation and Subsidiaries as of January 31, 2004, and for the three
months and nine months ended January 31, 2004 and 2003 have been prepared on the same basis as the annual audited financial statements. In the opinion of management, such unaudited information
includes all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of this interim information. Operating results and cash flows for interim periods are not
necessarily indicative of results for the entire year. The information included in this report should be read in conjunction with our audited financial statements and notes thereto (which include an
opinion from Grant Thornton LLP that expresses substantial doubt regarding our ability to continue as a going concern) included in our Annual Report on Form 10-KSB for the year
ended April 30, 2003.

Realization of Assets

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States
of America, which contemplate our continuation as a going concern. However, we have sustained substantial losses from operations in recent years, and such losses have continued through
March 12, 2004. In addition, historically we have used, rather than provided, cash in our operations, and have been unable to secure adequate financing to meet our future cash needs.

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

We
continue to pursue funding that will help us meet our future cash needs. We recently completed financings of $2,200,000 ($2,000,000 net of due diligence fees and related expenses) and
$1,200,000 ($1,080,000 net of placement fees) (seePrivate Placements) and we are currently working with several different sources, including both
strategic and financial investors to raise additional capital to finance both our continuing operations and our isotope-based trace detection technology. Although there is no assurance that additional
funding will be available, we believe that our current business plan, if successfully funded, will significantly improve our operating results and cash flow in the future.

Accounting for Stock-Based Compensation

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

6

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

|                                                          |                                                                                                                                    | Three Months Ended
January 31, |        | Nine Months Ended
January 31, |  
|--------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ------ | ----------------------------- | -
|
|Net loss attributable to common shareholders, as reported |                                                                                                                                    | $                              | (2,023 | )                             | $
|                                                          | Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects |                                |        | (178                          | )
|                                                          |                                                                                                                                    |                                |        |                               |  
|Adjusted net loss                                         |                                                                                                                                    | $                              | (2,201 | )                             | $
|                                                          |                                                                                                                                    |                                |        |                               |  

|                                                       |                                 | Three Months Ended
January 31, |   | Nine Months Ended
January 31, |  
|------------------------------------------------------ | ------------------------------- | ------------------------------ | - | ----------------------------- | -
|
|Net loss per share attributable to common shareholders |                                 |                                |   |                               |  
|                                                       | Basic and diluted  as reported |                                | $ | (.15                          | )
|                                                       | Basic and diluted  adjusted    |                                | $ | (.16                          | )

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.

As
of January 31, 2004, a total of 7,820,541 outstanding stock options and common stock warrants, 963,666 outstanding shares of Series A Convertible Preferred Stock and
22,000 outstanding shares of Series C Convertible Preferred Stock were excluded from the diluted net income (loss) per share calculations, as the inclusion would be anti-dilutive.
As of January 31, 2003, a total of 5,147,840 outstanding stock options and common stock warrants and 963,666 outstanding shares of Series A Convertible Preferred Stock were excluded from
the diluted net income (loss) per share calculations, as the inclusion would be anti-dilutive.

7

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During
the nine month period ended January 31, 2004, we issued the following shares of Common Stock:

|Description                                       |  | Number of Common Stock Shares
|------------------------------------------------- |  | -----------------------------
|Balance as of April 30, 2003                      |  | 12,113,533                   
|Shares issued from employee stock purchase plan   |  | 7,959                        
|Shares issued in September 2003 private placement |  | 1,500,000                    
|Shares issued in legal settlement                 |  | 100,000                      
|Shares issued as employee bonus                   |  | 30,000                       
|                                                  |  |                              
|Balance as of January 31, 2004                    |  | 13,751,492                   
|                                                  |  |                              

The
aforementioned equity transactions increased common stock in the accompanying condensed consolidated balance sheet by $1,220,000 for the nine months ended January 31, 2004.

Inventories

Inventories consist of (in thousands):

|                       |                   | January 31, 2004 |     | April 30, 2003
|---------------------- | ----------------- | ---------------- | --- | --------------
|Finished goods         |                   | $                | 353 |               
|Work in progress       |                   |                  | 523 |               
|Materials and supplies |                   |                  | 78  |               
|                       |                   |                  |     |               
|                       | Total inventories |                  | $   | 954           
|                       |                   |                  |     |               

Significant Customers

As of January 31, 2004, three customers accounted for approximately 40% of total net accounts receivable. Three customers accounted for approximately 46%
of total net accounts receivable at April 30, 2003. One customer (Eastern Isotopes) accounted for approximately 33% of revenues for the nine months ended January 31, 2004. One customer
(Eastern Isotopes) accounted for approximately 34% of revenues for the three months ended January 31, 2004. Two customers (Eastern Isotopes and Perkin Elmer Life Sciences) accounted for
approximately 30% and 17%, respectively of revenues for the nine months ended January 31, 2003. Two customers (Eastern Isotopes and Perkin Elmer Life Sciences) accounted for approximately 34%
and 13%, respectively of revenues for the three months ended January 31, 2003.

Three
customers (Perkin Elmer Life Sciences, IBT SA and International Isotopes) accounted for approximately 35%, 24% and 20%, respectively of the German operation's revenues for the nine
months ended January 31, 2004. Three customers (Perkin Elmer Life Sciences, IBT SA and International Isotopes) accounted for approximately 30%, 20% and 17%, respectively of the German
operation's revenues for the three months ended January 31, 2004. Two customers (Perkin Elmer Life Sciences and Reviss Ltd.) accounted for approximately 43% and 14%, respectively of the
German operation's revenues for the nine months ended January 31, 2003. Two customers (Perkin Elmer Life Sciences and IBT SA.) accounted for approximately 37% and 11%, respectively of the
German operation's revenues for the three months ended January 31, 2003. Two customers accounted for approximately 51% of the German operation's accounts receivable at January 31, 2004.
Two customers accounted for approximately 52% of the German operation's accounts receivable at April 30, 2003.

8

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Business Segments and Foreign Operations

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

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

|                  |                                      | Three Months Ended
January 31, |   | Nine Months Ended
January 31,
|----------------- | ------------------------------------ | ------------------------------ | - | -----------------------------
|
|Segment revenues: |                                      |                                |   |                              
|                  | Life sciences                        |                                | $ | 2,030                        
|                  | Semiconductor materials and products |                                |   | 64                           
|                  |                                      |                                |   |                              
|                  |                                      | Total                          |   | $                            
|                  |                                      |                                |   |                              

|                                 |                                      | Three Months Ended
January 31, |   | Nine Months Ended
January 31, |       
|-------------------------------- | ------------------------------------ | ------------------------------ | - | ----------------------------- | ------
|
|Segment operating (loss) income: |                                      |                                |   |                               |       
|                                 | Life sciences                        |                                | $ | 85                            |       
|                                 | Semiconductor materials and products |                                |   | (351                          | )     
|                                 | Reconciling amounts                  |                                |   | (769                          | )     
|                                 |                                      |                                |   |                               |       
|                                 |                                      | Total                          |   | $                             | (1,035
|                                 |                                      |                                |   |                               |       

|              |                                      | January 31, 2004 |   | April 30, 2003
|------------- | ------------------------------------ | ---------------- | - | --------------
|Total Assets: |                                      |                  |   |               
|              | Life sciences                        |                  | $ | 3,814         
|              | Semiconductor materials and products |                  |   | 1,035         
|              | Reconciling amounts                  |                  |   | 2,208         
|              |                                      |                  |   |               
|              |                                      | Total            |   | $             
|              |                                      |                  |   |               

9

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A
summary of operations by geographic area is as follows:

|              |               | Three Months Ended
January 31, |   | Nine Months Ended
January 31,
|------------- | ------------- | ------------------------------ | - | -----------------------------
|
|Net revenues: |               |                                |   |                              
|              | United States |                                | $ | 1,415                        
|              | Germany       |                                |   | 679                          
|              |               |                                |   |                              
|              |               | Total                          |   | $                            
|              |               |                                |   |                              

|                         |               | Three Months Ended
January 31, |   | Nine Months Ended
January 31, |       
|------------------------ | ------------- | ------------------------------ | - | ----------------------------- | ------
|
|Operating (loss) income: |               |                                |   |                               |       
|                         | United States |                                | $ | (1,060                        | )     
|                         | Germany       |                                |   | 25                            |       
|                         |               |                                |   |                               |       
|                         |               | Total                          |   | $                             | (1,035
|                         |               |                                |   |                               |       

|              |               | January 31, 2004 |   | April 30, 2003
|------------- | ------------- | ---------------- | - | --------------
|Total Assets: |               |                  |   |               
|              | United States |                  | $ | 4,369         
|              | Germany       |                  |   | 2,688         
|              |               |                  |   |               
|              |               | Total            |   | $             
|              |               |                  |   |               

Private Placements

On January 27, 2004 we completed a financing arrangement whereby we issued 22,000 shares of our Series C Convertible Preferred Stock and 200,000
common stock warrants to accredited investors who are affiliated with Mercator Advisory Group, LLC ("MAG") for $2,200,000. In addition, we paid MAG $200,000 in due diligence fees and related expenses
and issued them a common stock warrant to acquire 227,701 shares of our common stock. Each common stock warrant issued in this transaction is exercisable for one share of common stock at $1.25 per
share and expires on January 27, 2007. The Series C Convertible Preferred Stock is convertible (or has since been converted) at a price to be determined at 80% of the market price (which
is defined as the average of the lowest three inter-day trading prices of our common stock for the five consecutive trading days immediately preceding the conversion date) of our common
stock on the day of conversion, but not greater than $1.25 per share nor less than $0.95 per share (equating to a range of 1,760,000 to 2,315,790 shares of common stock). On February 17, 2004,
11,000 shares of Series C Convertible Preferred Stock were converted (at $.95 per share) into 1,157,895 shares of common stock.

In
accordance with the securities purchase agreement, we gained effectiveness on a registration statement associated with the common stock and the common stock underlying the common
stock warrants on March 8, 2004.

10

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We
have allocated the proceeds received between the Series C Convertible Preferred Stock and related warrants based on the relative fair value of each instrument. In addition, in
accordance with EITF 00-27 "Application of Issue No. 98-5 to Certain Convertible Instruments" we have calculated the intrinsic value of the conversion option by using
the effective conversion price based on the proceeds allocated to the convertible instrument. As a result, we determined that the value of the beneficial conversion feature contained in our
Series C Convertible Preferred Stock to be $998,000, which has been reported as a deemed dividend for the three and nine months ended January 31, 2004.

The
Series C Convertible Preferred Stock is non-voting and has a liquidation preference equal to $100 per share. In addition, the holders of the Series C
Convertible Preferred stock are entitled to receive dividends (if declared) subject to the prior rights of holders of all classes of stock at the time outstanding.

In
conjunction with pursuing the financing agreement with MAG, we were simultaneously working with vFinance Investments, Inc. ("vFinance") as an alternate source of funding. In
order to compensate vFinance for their services, on February 27, 2004 we issued them a common stock warrant (valued at $84,000 using the Black-Scholes pricing model) to purchase 150,000 shares
of our restricted common stock at $1.25 per share. The common stock warrant vested immediately and expires April 30, 2006.

On
September 25, 2003, we completed a private placement to accredited investors whereby we sold 300,000 units for $1,200,000 ($1,080,000 net of placement fees). Each unit
consisted of five shares of common stock and three common stock warrants. Each common stock warrant is exercisable for one share of our common stock at $1.25 per share until December 31, 2005.
In accordance with the securities purchase agreement, we gained effectiveness on a registration statement associated with the common stock and the common stock underlying the common stock warrants on
December 31, 2003.

Consulting Agreement with Investor Relations Services, Inc.

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

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

During
October 2002 and again in August 2003, IRSI disputed our termination of the agreement based upon nonperformance and requested to mediate the matter. On
September 18, 2003, we settled the dispute in its entirety by issuing to IRSI 100,000 shares of our restricted common stock (valued at $97,000 based upon the fair market value of the stock).
The value of the restricted common stock was expensed to selling, general and administrative expenses during the quarter ended October 31, 2003.

11

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Financial Advisory Agreement

On October 22, 2003, we extended our existing financial advisory agreement with Park Capital Securities, LLC ("Park Capital") through December 31,
2004. In connection with this agreement, we issued a common stock warrant (valued at $355,000 using the Black-Scholes pricing model of which $325,417 is included in prepaid expenses and other current
assets in the accompanying condensed consolidated balance sheet as of January 31, 2004) to purchase 500,000 shares of our restricted common stock at $1.25 per share. The common stock warrant
vested immediately, expires on October 21, 2006 and is being expensed to selling, general and administrative expenses ratably over the twelve-month period beginning January 1, 2004.

Investment Banking Agreement

On October 22, 2003, we entered into a non-exclusive investment banking agreement with vFinance whereby we issued a common stock warrant
(valued at $369,600 using the Black-Scholes pricing model of which $231,000 is included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheet as of
January 31, 2004) to purchase 560,000 shares of our restricted common stock at $1.25 per share. The common stock warrant vested immediately, expires on April 30, 2006 and is considered
full payment for services to be provided through June 30, 2004. The common stock warrant is being expensed to selling, general and administrative expenses ratably over the eight-month period
beginning November 1, 2003.

Investor Relations Agreement

On November 1, 2003 we entered into a twelve-month agreement with Lippert/Heilshorn & Associates, Inc. ("Lippert/Heilshorn") to provide us
with investor relations services through October 31, 2004. In connection with this agreement, we agreed to make monthly payments of $10,500 and we issued a common stock warrant to acquire
120,000 shares of our restricted common stock at $1.35 per
share. The common stock warrant (valued at $76,800 using the Black-Scholes pricing model of which $57,600 is included in prepaid expenses and other current assets in the accompanying condensed
consolidated balance sheet as of January 31, 2004) vested immediately, expires on November 1, 2006 and is being expensed ratably to general and administrative expenses over the
twelve-month period beginning November 1, 2003.

Conversion Price of Series A Convertible Preferred Stock

There are provisions associated with the Series A Convertible Preferred Stock that if triggered, would reduce the current conversion price and effectively
allow the preferred shares to convert to common stock at a more favorable ratio. Prior to our September 2003 financing, the preferred stock was convertible at 1.67 shares of common stock for
each share of Series A Convertible Preferred Stock outstanding. We did not believe that the financing completed in September 2003 (seePrivate
Placements) caused any further adjustment to the conversion price, but the holders of the Series A Convertible Preferred Stock expressed their disagreement. In
November 2003, we entered into a settlement agreement with the holders of the Series A Convertible Preferred Stock and as a result, the preferred shares are now convertible at two shares
of common stock for each share of Series A Convertible Preferred Stock outstanding. As of March 12, 2004 there were 963,666 shares of Series A Convertible Preferred Stock
outstanding convertible into 1,927,332 shares of common stock based on the settlement agreement.

12

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Related Party Transactions

On December 23, 2003, we borrowed $40,000 from James E. Alexander, our President and Chief Executive Officer. We repaid the loan in full, plus interest at
12% per annum, on January 30, 2004.

On
September 9, 2003, we borrowed $100,000 from Stephen Burden, our Vice President of Semiconductor Materials and Products. We repaid the loan in full, plus interest at 12% per
annum, on September 11, 2003. On November 19, 2003 we borrowed an additional $100,000 from Stephen Burden. The loan bore interest at a rate of 12% per annum and was due the earlier of
one year or the collection of certain accounts receivable, as defined. The loan was repaid in full, plus interest at 12% per annum, in January 2004.

On
August 26, 2003 and July 30, 2003, we borrowed $120,000 and $80,000, respectively from Daniel Grady, our Vice President of Life Sciences. We repaid the loans in full,
plus interest at 12% per
annum, on September 11, 2003 and August 4, 2003, respectively. On November 18, 2003, we borrowed an additional $120,000 from Daniel Grady. The loan bore interest at a rate of 12%
per annum and was due the earlier of one year or the collection of certain accounts receivable, as defined. The loan was repaid in full, plus interest at 12% per annum, in January 2004.

Lease Agreement

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

New Accounting Standards

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

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

13

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

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

General Discussion

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

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



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

While
we are currently focusing on these two markets, we continue to evaluate other applications for both stable and radioisotopes and non-isotopic materials. During our 2003
fiscal year, we commenced our SOI wafer manufacturing operation in Vancouver, Washington, and acquired detection technology from the Institut of Umwelttechnologien GmbH ("IUT"). As a result, we have
been required to make a significant cash investment in our SOI wafer manufacturing operations and we may be required to make additional investments of cash, personnel, and materials in either of these
operations in the future. These have strained our working capital resources and as a result our auditors issued their opinion to our audited financial statements for the year ended April 30,
2003, which expressed substantial doubt regarding our ability to continue as a going concern. Although investments in January 2004 and September 2003 by accredited investors (see Private Placements) helped to temporarily alleviate our working capital shortage, we need a significant amount of additional financing to achieve our
business goals and we cannot offer any assurance that we will be able to obtain such financing on reasonable terms, if at all. We expect that our present available capital will be able to finance our
operations through July 2004 and thereafter we will need additional financing.

Our
revenues in the future (assuming we will be able to continue as a going concern) will depend on our success in developing and selling products in the semiconductor and stable and
radioactive isotope markets. Consistent with our historical experience, our quarterly results have been materially

14

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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 Technologies, LLC ("Eagle-Picher") dispute and sale of Chemotrade Leipzig ("CTL"). We cannot offer any assurance that these
types of events will occur in the future.

Results of Operations

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

|                            |                                     | Three Months Ended
January 31, |      | Nine Months Ended
January 31, |     
|--------------------------- | ----------------------------------- | ------------------------------ | ---- | ----------------------------- | ----
|
|Revenues                    |                                     | 100.0                          | %    | 100.0                         | %   
|Cost of revenues            |                                     | 81.5                           |      | 75.8                          |     
|                            |                                     |                                |      |                               |     
|                            | Gross margin                        |                                | 18.5 |                               | 24.2
|                            |                                     |                                |      |                               |     
|Operating expenses:         |                                     |                                |      |                               |     
|                            | Selling, general and administrative |                                | 59.7 |                               | 45.1
|                            | Research and development            |                                | 8.2  |                               | 2.5 
|                            |                                     |                                |      |                               |     
|                            |                                     | Total operating expenses       |      | 67.9                          |     
|                            |                                     |                                |      |                               |     
|Operating loss              |                                     | (49.4                          | )    | (23.4                         | )   
|                            |                                     |                                |      |                               |     
|Other income (expense), net |                                     | .5                             |      | (1.3                          | )   
|                            |                                     |                                |      |                               |     
|Loss before income taxes    |                                     | (48.9                          | )    | (24.7                         | )   
|                            |                                     |                                |      |                               |     
|Income tax expense          |                                     |                               |      |                              |     
|                            |                                     |                                |      |                               |     
|NET LOSS                    |                                     | (48.9                          | )%   | (24.7                         | )%  
|                            |                                     |                                |      |                               |     

Revenues

Revenues generally decreased during both the three and nine months ended January 31, 2004 as compared to the same periods of our prior fiscal year,
although our revenues from our semiconductor materials and products segment did reflect increases during those periods as compared to revenues from our life sciences segment which reflected decreases,
as described in the following table:

|                                     |               | Three months ended
January 31, |           | Nine months ended
January 31,
|------------------------------------ | ------------- | ------------------------------ | --------- | -----------------------------
|
|Life sciences                        |               |                                |           |                              
|                                     | Domestic      |                                | $         | 1,351,000                    
|                                     | International |                                | $         | 679,000                      
|Semiconductor materials and products |               | $                              | 64,000    |                              
|                                     |               |                                |           |                              
|Total                                |               | $                              | 2,094,000 |                              
|                                     |               |                                |           |                              

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

15

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The
decrease in revenues from domestic isotope product sales for the three months ended January 31, 2004 was primarily the result of a decrease in the unit price of
oxygen-18, which was partially offset by an increase in volume. The decrease in revenues from domestic isotope product sales
for the nine months ended January 31, 2004 was primarily the result of a significant decrease in the sale of radioisotopes partially offset by an increase in the sale of stable isotopes
(consisting mainly of oxygen-18).

While
the substantial majority of our revenues at our German subsidiary are derived from the sale of radioisotopes, we have had difficulty in the United States with our ability to enter
the radioisotope market. The difficulty arises from the fact that our potential customers have long established relationships with their suppliers (who are mostly foreign) and as a result they are
hesitant to change. While we continue to work towards increasing our share in the domestic radioisotope market to a meaningful number, we can offer no assurances that this will come to fruition.

The
substantial majority of our domestic isotope product sales result from the sale of oxygen-18 and while our volume continues to increase, the increases have not been as
significant as the overall unit price decreases experienced in the market. As a result, in order to increase our revenues from the sale of oxygen-18, we will need to increase our volume at
a rate greater than the continuing decreases in the anticipated future market price. While we believe that we will be successful in this endeavor in the future, we can offer no assurance that this
will come to fruition.

The
decrease in revenues from international isotope product sales for the three and nine months ended January 31, 2004 was primarily the result of a significant decrease in sales
of one specific radioisotope due to a worldwide decrease in demand. It is uncertain if the demand for this radioisotope will return to previous levels.

In
general, our German subsidiary has had difficulty entering the oxygen-18 market in Europe as many of its potential customers are under long-term supply
contracts with their current suppliers and the market is relatively flat (unlike the United States which is growing at a significant rate). The quality of our product is high but we must wait until
our potential customers' current supply agreements terminate before we will be able to bid on new supply contracts. Our ability to increase the revenues in our German subsidiary (and ultimately its
gross margin) is directly related to how successful we can be in gaining market share in the European oxygen-18 market. While we anticipate that we will begin obtaining European
oxygen-18 customers in the first two quarters of calendar 2004 (we have already obtained one new customer as of March 12, 2004), the process is expected to be slow and we cannot
provide any assurance that this will come to fruition at all.

The
increase in revenues from semiconductor materials and products sales for the nine months ended January 31, 2004 was primarily due to a $200,000 sale of silicon-28
as a bulk isotope in the first quarter of fiscal 2004.

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

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Gross Margin

Our gross margins decreased during the three and nine months ended January 31, 2004 as compared to the same periods of our prior fiscal year, both on a
dollar amount and on a percentage of revenues as reflected in the following table:

|                    |  | Three months ended
January 31, |  | Nine months ended
January 31,
|------------------- |  | ------------------------------ |  | -----------------------------
|
|Dollar amount       |  | $387,000                       |  | $571,000                     
|Percent of revenues |  | 18.5%                          |  | 24.2%                        

In
general, we anticipate that our margins will continue to decline as oxygen-18 prices decrease and until we can generate a positive margin for the semiconductor materials
and products segment. We anticipate that the gross margin from sales of semiconductor materials and products (both in dollar value and as a percentage of revenues) will increase over time as sales
increase and minimize the overall effect of fixed costs, but we can offer no assurances that this will come to fruition.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses increased during the three and nine months ended January 31, 2004 as compared to the same periods of our
prior fiscal year, both on a dollar amount and on a percentage of revenues basis as reflected in the following table:

|                    |  | Three months ended
January 31, |  | Nine months ended
January 31,
|------------------- |  | ------------------------------ |  | -----------------------------
|
|Dollar amount       |  | $1,251,000                     |  | $1,065,000                   
|Percent of revenues |  | 59.7%                          |  | 45.1%                        

The
dollar increase for the three months ended January 31, 2004 is attributable primarily to an increase in the expensing of the market value of common stock warrants issued for
consulting and other professional services expenses and an increase in headcount and facility costs related to the expansion of our SOI operations. The percentage increase for the three months ended
January 31, 2004 is also attributable primarily to an increase in the expensing of the market value of common stock warrants issued for consulting and other professional services expenses, an
increase in headcount and facility costs related to the expansion of our SOI operations and a decrease in revenues.

The
dollar increase for the nine months ended January 31, 2004 is attributable primarily to an increase in the expensing of the market value of common stock warrants issued for
consulting and other professional services expenses and an increase in headcount and facility costs related to the expansion of our SOI operations partially offset by a decrease in legal costs
associated with the Eagle-Picher dispute. The percentage increase for the nine months ended January 31, 2004 is also attributable primarily to an increase in the expensing of the market value
of common stock warrants issued for consulting and other professional services expenses, an increase in headcount and facility costs related to the expansion of our SOI operations and a decrease in
revenues partially offset by a decrease in legal costs associated with the Eagle-Picher dispute.

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

17

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Research and Development Expenses

Consistent with our product development strategy, we are seeking to identify and evaluate new stable and radioactive isotope products, SOI products and potential
markets for economic and technical feasibility. We anticipate that we may incur research and development costs associated with the detection technology that we acquired from IUT only if we are able to
obtain adequate additional financing. We will, in addition, continue funding research and development to improve technologies for isotope separation and material processing technologies. Because of
the uniqueness of our business, the unique chemicals and processes we deal with and the handling precautions required, these expenses can be significant. We cannot offer any assurance that our current
or future lines of business or products resulting from our research and development efforts will be profitable or generate significant revenues.

Our
research and development expenses increased during the three and nine months ended January 31, 2004 as compared to the same periods of our prior fiscal year, both on a dollar
amount and on a percentage of revenues basis as reflected in the following table:

|                    |  | Three months endede
January 31, |  | Nine months ended
January 31,
|------------------- |  | ------------------------------- |  | -----------------------------
|
|Dollar amount       |  | $171,000                        |  | $60,000                      
|Percent of revenues |  | 8.2%                            |  | 2.5%                         

Both
the dollar and percentage increases for the three and nine months ended January 31, 2004 are primarily related to an increase in research and development expenses associated
with our thin-film SOI product.

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

Other Income (Expense), net

Other Income (Expense), net increased and decreased during the three and nine months ended January 31, 2004 as compared to the same periods of our prior
fiscal year, respectively as reflected in the following table:

|              |  | Three months ended
January 31, |  | Nine months ended
January 31,
|------------- |  | ------------------------------ |  | -----------------------------
|
|Dollar amount |  | $10,000                        |  | $(30,000)                    

For
the three months ended January 31, 2004 and 2003, other income (expense), net includes interest income and expense and foreign currency gains and losses.

For
the nine months ended January 31, 2004 and 2003, 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. The decrease is primarily attributable to the gain (net of the contingency
portion of legal fees) of $2,140,000 related to the settlement of the Eagle-Picher dispute and the gain resulting from the disposition of CTL, partially offset by the expensing of $546,000 of
previously unamortized discount related to the

18

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Series 2002A
Convertible Notes to interest expense and $182,000 of previously capitalized debt offering costs as a result of the conversion of the notes to common stock during the nine months
ended January 31, 2003.

Income Taxes

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

Net Loss

Our net losses increased during the three and nine months ended January 31, 2004 as compared to the same periods of our prior fiscal year, as reflected in
the following table:

|              |  | Three months ended
January 31 |  | Nine months ended
January 31
|------------- |  | ----------------------------- |  | ----------------------------
|
|Dollar amount |  | $(1,025,000)                  |  | $(584,000)                  

We
anticipate that losses will continue until (if ever): (i) revenues from our current operations substantially increase or (ii) we generate substantial revenues from
products introduced as a result of our research and development projects. Included in the net loss for the nine months ended January 31, 2003 was a net gain of $2,140,000 related to the
settlement of the Eagle-Picher dispute.

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

Liquidity and Capital Resources

Our working capital and liquidity increased significantly during the nine months ended January 31, 2004 due to the private placements completed in
January 2004 and September 2003 whereby we received $2,200,000 ($2,000,000 net of due diligence fees and related expenses) and $1,200,000 ($1,080,000 net of placement fees),
respectively. Working capital increased $1,992,000, to $3,086,000 at January 31, 2004, from $1,094,000, at April 30, 2003.

Our
principal source of funding for the nine months ended January 31, 2004 was from the private placements completed in January 2004 and September 2003. Our
principal source of funding for the nine months ended January 31, 2003 was from the settlement of the Eagle-Picher dispute. We used cash in operating activities of $2,367,000 during the nine
months ended January 31, 2004 and provided cash from operating activities of $513,000 during the nine months ended January 31, 2003. Cash used in operating activities for the nine months
ended January 31, 2004 was principally the result of a net loss of $2,303,000. Cash provided by operating activities during the nine months ended January 31, 2003 was principally the
result of the settlement of the Eagle-Picher dispute partially offset by operating losses.

19

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

Our
investing activities used cash of $12,000 and $369,000 for the nine months ended January 31, 2004 and 2003, respectively. Cash used in investing activities for the nine months
ended January 31, 2004 and January 31, 2003 resulted from purchases of property and equipment.

Financing
activities provided cash of $3,066,000 for the nine months ended January 31, 2004 and used cash of $40,000 for the nine months ended January 31, 2003. Cash
provided by financing activities for the nine months ended January 31, 2004 resulted primarily from the private placements of $2,200,000 ($2,000,000 net of due diligence fees and related
expenses) and $1,200,000 ($1,080,000 net of placement fees) completed in January 2004 and September 2003, respectively. Cash used in financing activities for the nine months ended
January 31, 2003 resulted primarily from payments on borrowings of $46,000.

At
January 31, 2004, we had $1,429,000 of cash and cash equivalents, an increase of $687,000, compared to $742,000, at April 30, 2003. As a result of our financing
activities, we issued a number of shares of our capital stock and common stock warrants as described in Item 2 of Part II, below, and notes to the condensed consolidated financial statements,
above.

There
are provisions associated with the preferred stock private placement completed on July 29, 1999 that if triggered, would reduce the current conversion price and effectively
allow the preferred shares to convert to common stock at a more favorable ratio. Prior to our September 2003 financing, the preferred stock was convertible at 1.67 shares of common stock for
each share of Series A Convertible Preferred Stock outstanding. We did not believe that the financing completed in September 2003 caused any further adjustment to the conversion price,
but the holders of the Series A Convertible Preferred Stock expressed their disagreement. In November 2003, we entered into a settlement agreement with the holders of the Series A
Convertible Preferred Stock and as a result, the preferred shares are now
convertible at two shares of common stock for each share of Series A Convertible Preferred Stock outstanding. As of March 12, 2004 there were 963,666 shares of Series A
Convertible Preferred Stock outstanding convertible into 1,927,332 shares of common stock based on the settlement agreement.

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

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

We
are currently working with several different sources, including both strategic and financial investors to raise sufficient additional capital to finance both our continuing operations
and our proposed homeland security business. Although there is no assurance that funding will be available, we

20

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

Critical Accounting Policies

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

Goodwill and Intangible Assets

Effective May 1, 2002 we adopted SFAS No. 142Goodwill and Other Intangible Assets.SFAS
No. 142 addresses the methods used to amortize intangible assets and to assess impairment of those assets, including goodwill resulting from business combinations accounted for under the
purchase method. Although we adopted SFAS No. 142 effective May 1, 2002, goodwill and intangible assets other than goodwill acquired after June 30, 2001 have been amortized or not
amortized in accordance with SFAS No.142. We acquired intangible assets from Silicon Evolution, Inc. ("SEI") and IUT subsequent to June 30, 2001, and have accounted for those assets in
accordance with the requirements of SFAS No. 142. Included in our assets at January 31, 2004, is goodwill related to the acquisition of Chemotrade in 1998 with a net carrying value of
$1,807,000. Effective with the adoption of SFAS No. 142, we no longer amortize this goodwill, decreasing our amortization expense by approximately $110,000 per year.

In
accordance with SFAS No. 142, we have completed our annual impairment test (as of April 30, 2003) on our life sciences reporting unit, which has recorded goodwill. In
completing our analysis of the life sciences reporting unit, we used the Discounted Cash Flow Method ("DCF Method") in which the reporting unit was valued by discounting the projected cash flows to
its present value based upon a risk-adjusted discount rate. As a result of the testing, we determined that there is no impairment of goodwill. We are required to assess goodwill for
impairment annually, or earlier if indicators of impairment do arise. We are not aware of any indicators of possible impairment as of March 12, 2004.

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

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

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Our
intangible assets result from the perpetual, exclusive technology license agreement with SEI that we entered into on September 14, 2001 and the isotope-based trace detection
technology we acquired from IUT in December 2002. As the intangible assets were acquired after June 30, 2001, we adhere to the guidance provided by SFAS No. 142. Both the
intangible assets acquired from SEI and the isotope-based trace detection technology are being amortized over their estimated useful lives of ten years (which are based upon many factors including the
time it will take to develop the technology, the expected life of the finalized product(s) and the estimated lives of similar products). We will continue to evaluate each reporting period whether
events and circumstances continue to support our assessment of a ten-year life for these intangible assets. Additionally, if indicators of impairment do arise in the future, the intangible
assets will be tested for impairment and may result in an impairment charge in the future. We are not aware of any indicators of possible impairment as of March 12, 2004.

Valuation of Equity Transactions

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

Item 3: Controls and Procedures

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

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

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PART II  OTHER INFORMATION

Item 2: Changes in Securities and Use of Proceeds

2004 Transaction with vFinance Investments, Inc.

On February 27, 2004, we issued a warrant to purchase 150,000 shares of our restricted common stock to vFinance with an office at 3010 North Military
Trail, Suite 300, Boca Raton, FL 33431 and at 880 Third Avenue, 4th Floor, New York, NY 10022, a member of the National Association of Securities Dealers, Inc. The issuance was
for payment for services provided by vFinance. The following sets forth the information required by Item 701 in connection with that transaction:

(a)   The
transaction was effective February 27, 2004. We issued a warrant to acquire 150,000 shares of our restricted common stock.

(b)   No
underwriters were involved in the transaction. The only entity who received securities from us in this transaction was vFinance (who subsequently transferred its
right to a portion of those warrants to persons who are directors or executive officers of vFinance).

(c)   The
securities were not sold for cash. We issued a warrant to acquire 150,000 shares of our restricted common stock as payment for services provided.

(d)   The
issuance of the warrant was accomplished pursuant to the exemptions from registration contained in Sections 4(2) and 4(6) of the Securities Act of 1933. We did not
engage in any public advertising or general solicitation in connection with this transaction. We provided vFinance with disclosure of all aspects of our business, including providing vFinance and its
management with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our
investigation, we believe that the management and the board of directors of vFinance obtained all information regarding Isonics they requested, received answers to all questions they posed, and
otherwise understood the risks of accepting our securities in exchange for services to be provided.

(e)   There
are no conversion rights or exchange rights associated with the warrant. The warrant is exercisable to purchase shares of our common stock until April 30,
2006 at $1.25 per share. We have agreed to include the common stock underlying the warrants issued in this transaction in a registration statement to be filed with the SEC not later than May 5,
2004.

(f)    We
received no proceeds from the issuance of this warrant and, therefore, we have no use of proceeds.

Series C Convertible Preferred Stock

On January 27, 2004, we issued 22,000 shares of our Series C Convertible Preferred Stock and 200,000 common stock warrants to two accredited
investors in exchange for their investment of $2,200,000. In addition, we paid a due diligence fee of $185,000, reimbursement of $15,000 in expenses and issued 227,701 common stock warrants to MAG, an
affiliate of the two investors. Each common stock warrant issued in this transaction is exercisable for one share of common stock at $1.25 per share and expires on January 27, 2007. The
following sets forth the information required by Item 701 in connection with that transaction:

(a)   The
transaction was completed effective January 27, 2004. We issued 22,000 shares of our Series C Convertible Preferred Stock and 200,000 common stock
warrants to two accredited investors. We issued 227,701 common stock warrants to MAG as a portion of its due diligence fee.

(b)   There
was no placement agent or underwriter for the transaction. The two accredited investors are affiliated with the MAG.

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(c)   The
total offering price was $2,200,000. No underwriting discounts or commissions were paid. We paid a fee of $185,000 to MAG as part of its due diligence fee.

(d)   We
relied on the exemption from registration provided by Sections 4(2) and 4(6) under the Securities Act of 1933 for this transaction and Regulation D. We did not
engage in any public advertising or general solicitation in connection with this transaction that was in negotiation for more than two months. We provided the accredited investors with disclosure of
all aspects of our business, including providing the accredited investors with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other
financial, business, and corporate information. Based on our investigation, we believe that the accredited investors obtained all information regarding Isonics they requested, received answers to all
questions they posed, and otherwise understood the risks of accepting our securities for investment purposes.

(e)   The
Series C Convertible Preferred Stock has a liquidation preference of $100 per share, and is convertible into common stock at a price to be determined, but not
lower than $0.95 per share (that is, not more than 105.27 shares of common stock for each share of Series C Preferred Stock). Each warrant is exercisable to purchase one share of common stock
at an exercise price of $1.25 through January 27, 2007. We had an obligation to register the shares included in the units and underlying the warrants, including the obligation to file a
registration statement within 30 days of January 27, 2004 (subject to a fifteen day extension). We met this obligation as the registration statement was effective March 8, 2004.

(f)    We
will use the proceeds for our life sciences business, repayment of certain accrued liabilities and general corporate purposes.

Investor Awareness, Inc.

On December 12, 2003 we entered into an agreement with Investor Awareness, Inc. ("Investor Awareness") to provide us with investor relations
services through July 31, 2004. In connection with this agreement, we issued a common stock warrant to acquire 50,000 shares of our restricted common stock at $1.50 per share. The common stock
warrant vested immediately and expires on December 12, 2006.

(a)   The
transaction was effective December 12, 2003. We issued a warrant to acquire 50,000 shares of our restricted common stock.

(b)   No
underwriters were involved in the transaction. The only entity who received securities from us in this transaction was Investor Awareness.

(c)   The
securities were not sold for cash. The securities were issued to Investor Awareness as part of the consideration for entering into the investor relations agreement
and providing services thereunder.

(d)   The
issuance of the warrant was accomplished pursuant to the exemptions from registration contained in Sections 4(2) and 4(6) of the Securities Act of 1933. We did not
engage in any public advertising or general solicitation in connection with this transaction. We provided Investor Awareness with disclosure of all aspects of our business, including providing
Investor Awareness and its management with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate
information. Based on our investigation, we believe that the management and the board of directors of Investor Awareness obtained all information regarding Isonics they requested, received answers to
all questions they posed, and otherwise understood the risks of accepting our securities in exchange for services to be provided.

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(e)   There
are no conversion rights or exchange rights associated with the warrant. The warrant is exercisable to purchase shares of our restricted common stock until
December 12, 2006 at $1.50 per share.

(f)    We
received no proceeds from the issuance of this warrant and, therefore, we have no use of proceeds.

Lippert/Heilshorn &Associates, Inc.

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

(a)   The
transaction was effective November 1, 2003. We issued a warrant to acquire 120,000 shares of our restricted common stock.

(b)   No
underwriters were involved in the transaction. The only entity who received securities from us in this transaction was Lippert/Heilshorn.

(c)   The
securities were not sold for cash. The securities were issued to Lippert/Heilshorn as part of the consideration for entering into the investor relations agreement
and providing services thereunder.

(d)   The
issuance of the warrant was accomplished pursuant to the exemptions from registration contained in Sections 4(2) and 4(6) of the Securities Act of 1933. We did not
engage in any public advertising or general solicitation in connection with this transaction. We provided Lippert/Heilshorn with disclosure of all aspects of our business, including providing
Lippert/Heilshorn and its management with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate
information. Based on our investigation, we believe that the management and the board of directors of Lippert/Heilshorn obtained all information regarding Isonics they requested, received answers to
all questions they posed, and otherwise understood the risks of accepting our securities in exchange for services to be provided.

(e)   There
are no conversion rights or exchange rights associated with the warrant. The warrant is exercisable to purchase shares of our restricted common stock until
November 1, 2006 at $1.35 per share.

(f)    We
received no proceeds from the issuance of this warrant and, therefore, we have no use of proceeds.

2003 Transaction with Park Capital Securities, LLC

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

(a)   The
transaction was effective October 22, 2003. We issued a warrant to acquire 500,000 shares of restricted common stock.

(b)   No
underwriters were involved in the transaction. The only entity who received securities from us in this transaction was Park Capital.

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(c)   The
securities were not sold for cash. The securities were issued to Park Capital as part of the consideration for Park Capital extending the terms of the financial
advisory agreement entered into in November 2002.

(d)   The
issuance of the warrant was accomplished pursuant to the exemptions from registration contained in Sections 4(2) and 4(6) of the Securities Act of 1933. We did not
engage in any public advertising or general solicitation in connection with this transaction. We provided Park Capital with disclosure of all aspects of our business, including providing Park Capital
and its management with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on
our investigation, we believe that the management and the board of directors of Park Capital obtained all information regarding Isonics they requested, received answers to all questions they posed,
and otherwise understood the risks of accepting our securities in exchange for services to be provided.

(e)   There
are no conversion rights or exchange rights associated with the warrant. The warrant is exercisable to purchase shares of our restricted common stock until
October 21, 2006 at $1.25 per share.

(f)    We
received no proceeds from the issuance of this warrant and, therefore, we have no use of proceeds.

2003 Transaction with vFinance Investments, Inc.

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

(a)   The
transaction was effective October 22, 2003. We issued a warrant to acquire 560,000 shares of restricted common stock.

(b)   No
underwriters were involved in the transaction. The only entity who received securities from us in this transaction was vFinance (who subsequently transferred its
right to a portion of those warrants to persons who are directors or executive officers of vFinance).

(c)   The
securities were not sold for cash. The securities were issued to vFinance as part of the consideration for vFinance entering into the agreement and agreeing to
provide consulting services related to corporate finance and other financial service matters and make available qualified personnel for this purpose and devote such business time and attention to such
matters as it shall determine is required. Such services shall include, but not be limited to, strategic planning, planning meetings with the investment community, assisting our management in
designing our business plan and "growth-by-acquisition" strategy. Additionally, vFinance agreed to prepare or assist in the preparation of a company corporate profile, fact
sheets, and shareholder letters.

(d)   The
issuance of the warrant was accomplished pursuant to the exemptions from registration contained in Sections 4(2) and 4(6) of the Securities Act of 1933. We did not
engage in any public advertising or general solicitation in connection with this transaction. We provided vFinance with disclosure of all aspects of our business, including providing vFinance and its
management with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our
investigation, we believe that the management and the board of directors of vFinance obtained all information regarding Isonics they requested, received answers to all questions they posed, and
otherwise understood the risks of accepting our securities in exchange for services to be provided.

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(e)   There
are no conversion rights or exchange rights associated with the warrant. The warrant is exercisable to purchase shares of our restricted common stock until
April 30, 2006 at $1.25 per share.

(f)    We
received no proceeds from the issuance of this warrant and, therefore, we have no use of proceeds.

2003 Transaction with Investor Relations Services, Inc.

(a)   The
transaction was completed effective September 18, 2003. We issued 100,000 shares of our restricted common stock to IRSI, an accredited investor as part of a
Settlement Agreement and Mutual Release executed September 18, 2003.

(b)   The
transaction occurred without the use of any underwriters or finders. The only person who received securities from us in this transaction was IRSI.

(c)   We
issued 100,000 shares of our restricted common stock to IRSI, as part of a Settlement Agreement and Mutual Release, by which IRSI agreed to, among other things,
cancel the Renewal Consulting Agreement entered into on July 1, 2002. No cash or other consideration was paid by IRSI for the shares.

(d)   We
relied on the exemption from registration provided by Sections 4(2) and 4(6) under the Securities Act of 1933 for this transaction. We did not engage in any public
advertising or general solicitation in connection with this transaction that was in negotiation for more than two months. We provided IRSI with disclosure of all aspects of our business, including
providing IRSI with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information. Based on our
investigation, we believe that IRSI obtained all information regarding Isonics they requested, received answers to all questions they posed, and otherwise understood the risks of accepting our
securities as a condition of the Settlement Agreement and Mutual Release.

(e)   There
are no conversion rights or exchange rights associated with the common stock.

(f)    We
received no proceeds from the issuance of these shares and, therefore, we have no use of proceeds.

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

(a)   The
transaction was completed effective September 25, 2003. We issued 1,500,000 shares of our common stock and 900,000 common stock warrants to three accredited
investors, two of which are non-US persons.

(b)   The
placement agents for the transaction were Park Capital Securities, LLC with an office at 216 East 45th Street, 9th Floor, New York, NY
10017 and vFinance, Inc. with an office at 3010 North Military Trail, Suite 300, Boca Raton, FL 33431.

(c)   The
total offering price was $1,200,000. A fee of $120,000 was paid to the placement agents.

(d)   We
relied on the exemption from registration provided by Sections 4(2) and 4(6) under the Securities Act of 1933 for this transaction. We did not engage in any public
advertising or general solicitation in connection with this transaction that was in negotiation for more than two months. We provided the accredited investors with disclosure of all aspects of our
business, including providing the accredited investors with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business,
and corporate information. Based on our investigation, we believe that the accredited investors obtained all information regarding Isonics they requested, received answers to all questions they posed,
and otherwise understood the risks of accepting our securities for investment purposes.

(e)   There
are no conversion rights or exchange rights associated with the common stock. Each warrant is exercisable to purchase one share of common stock at an exercise
price of $1.25 through December 31, 2005. We had an obligation to register the shares included in the units and underlying the warrants by January 22, 2004. We met this obligation as the
registration statement was effective December 31, 2003.

(f)    We
will use the proceeds for working capital purposes.

Item 6: Exhibits and Reports on Form 8-K

(a)   Exhibits.



(b)   Reports
on Form 8-K



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Golden, County of Jefferson, State of Colorado, on the 16th day of March 2004.

| |  | ISONICS CORPORATION (Registrant)
| |  | --------------------------------
| |  | By                              
| |  | By                              

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