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

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FORM 10-QSB

|(Mark One)                                      |                                                                                   
|----------------------------------------------- | ----------------------------------------------------------------------------------
|ý                                               | Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934.
|For the quarterly period ended October 31, 2002
|o                                               | Transition report under Section 13 or 15(d) of the Exchange Act.                  
|For the transition period from
 to             

Commission file number: 001-12531

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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)

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

The
number of shares outstanding of the registrant's Common Stock, no par value, was 11,852,795 at November 30, 2002.

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 October 31, 2002 and April 30, 2002                                    
|                                                          |  |                       |  | Condensed Consolidated Statements of Operations for the Three and Six Month Periods Ended October 31, 2002 and 2001
|                                                          |  |                       |  | Condensed Consolidated Statements of Cash Flows for the Six Month Periods Ended October 31, 2002 and 2001          
|                                                          |  |                       |  | Notes to Condensed Consolidated Financial Statements                                                               
|                                                          |  | 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 4:               |  | Submission of Matters to a Vote of Security Holders                                                                
|                                                          |  | Item 6:               |  | Exhibits and Reports on Form 8-K                                                                                   
|Signatures                                                |  | 27                   
|Certificationsprincipal executive and financial officers |  | 28                   

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)

|                                           |                                                                                                                                                                                      | October 31, 2002           |       | April 30, 2002 |      
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ----- | -------------- | -----
|
|ASSETS                                     |                                                                                                                                                                                     
|CURRENT ASSETS:                            |                                                                                                                                                                                      |                            |       |                |      
|                                           | Cash and cash equivalents                                                                                                                                                            |                            | $     | 1,463          |      
|                                           | Accounts receivable (net of allowances of $29 and $30, respectively)                                                                                                                 |                            |       | 736            |      
|                                           | Inventories                                                                                                                                                                          |                            |       | 456            |      
|                                           | Prepaid expenses and other current assets                                                                                                                                            |                            |       | 260            |      
|                                           |                                                                                                                                                                                      |                            |       |                |      
|                                           |                                                                                                                                                                                      | Total current assets       |       |                | 2,915
|                                           |                                                                                                                                                                                      |                            |       |                |      
|LONG-TERM ASSETS:                          |                                                                                                                                                                                      |                            |       |                |      
|                                           | Property and equipment, net                                                                                                                                                          |                            |       | 286            |      
|                                           | Goodwill                                                                                                                                                                             |                            |       | 1,807          |      
|                                           | Intangible assets (net of accumulated amortization of $29 and $0, respectively)                                                                                                      |                            |       | 561            |      
|                                           | Other assets                                                                                                                                                                         |                            |       | 103            |      
|                                           |                                                                                                                                                                                      |                            |       |                |      
|                                           |                                                                                                                                                                                      | Total long-term assets     |       |                | 2,757
|                                           |                                                                                                                                                                                      |                            |       |                |      
|TOTAL ASSETS                               |                                                                                                                                                                                      | $                          | 5,672 |                | $    
|                                           |                                                                                                                                                                                      |                            |       |                |      
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                                                                                                                                                                     
|CURRENT LIABILITIES:                       |                                                                                                                                                                                      |                            |       |                |      
|                                           | Current portion of long-term debt                                                                                                                                                    |                            | $     |               |      
|                                           | Convertible notes payable (net of discount of $0 and $546, respectively)                                                                                                             |                            |       |               |      
|                                           | Accounts payable                                                                                                                                                                     |                            |       | 475            |      
|                                           | Accrued liabilities                                                                                                                                                                  |                            |       | 287            |      
|                                           |                                                                                                                                                                                      |                            |       |                |      
|                                           |                                                                                                                                                                                      | Total current liabilities  |       |                | 762  
|                                           |                                                                                                                                                                                      |                            |       |                |      
|STOCKHOLDERS' EQUITY:                      |                                                                                                                                                                                      |                            |       |                |      
|                                           | Preferred stockno par value; 10,000,000 shares authorized; 963,666 shares issued and outstanding on October 31, 2002 and April 30, 2002                                             |                            |       | 745            |      
|                                           | Common stockno par value; 40,000,000 shares authorized; 11,852,795 shares issued and outstanding on October 31, 2002 and 10,824,812 shares issued and outstanding on April 30, 2002 |                            |       | 11,383         |      
|                                           | Additional paid in capital                                                                                                                                                           |                            |       | 4,088          |      
|                                           | Deferred compensation                                                                                                                                                                |                            |       | (165           | )    
|                                           | Accumulated deficit                                                                                                                                                                  |                            |       | (11,141        | )    
|                                           |                                                                                                                                                                                      |                            |       |                |      
|                                           |                                                                                                                                                                                      | Total stockholders' equity |       |                | 4,910
|                                           |                                                                                                                                                                                      |                            |       |                |      
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                                                                                      | $                          | 5,672 |                | $    
|                                           |                                                                                                                                                                                      |                            |       |                |      

See
notes to condensed consolidated financial statements.

3

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

|                                               |                                     | Three Months Ended
October 31,    |        | Six Months Ended
October 31, |      
|---------------------------------------------- | ----------------------------------- | --------------------------------- | ------ | ---------------------------- | -----
|
|Revenues                                       |                                     | $                                 | 2,256  |                              | $    
|Cost of revenues                               |                                     |                                   | 1,779  |                              |      
|                                               |                                     |                                   |        |                              |      
|                                               |                                     | Gross margin                      |        |                              | 477  
|Operating expenses:                            |                                     |                                   |        |                              |      
|                                               | Selling, general and administrative |                                   |        | 1,090                        |      
|                                               | Research and development            |                                   |        | 68                           |      
|                                               |                                     |                                   |        |                              |      
|                                               |                                     | Total operating expenses          |        |                              | 1,158
|                                               |                                     |                                   |        |                              |      
|Operating loss                                 |                                     |                                   | (681   | )                            |      
|                                               |                                     |                                   |        |                              |      
|Other income (expense):                        |                                     |                                   |        |                              |      
|                                               | Gain on legal settlement, net       |                                   |        |                             |      
|                                               | Amortization of debt offering costs |                                   |        |                             |      
|                                               | Foreign exchange                    |                                   |        | (3                           | )    
|                                               | Interest and other income, net      |                                   |        | 8                            |      
|                                               | Interest expense                    |                                   |        | (1                           | )    
|                                               |                                     |                                   |        |                              |      
|                                               |                                     | Total other income (expense), net |        |                              | 4    
|                                               |                                     |                                   |        |                              |      
|Income (loss) before income taxes              |                                     |                                   | (677   | )                            |      
|Income tax expense                             |                                     |                                   |       |                              |      
|                                               |                                     |                                   |        |                              |      
|NET INCOME (LOSS)                              |                                     | $                                 | (677   | )                            | $    
|                                               |                                     |                                   |        |                              |      
|Net income (loss) per sharebasic              |                                     |                                   |        |                              |      
|Net income (loss) per share                    |                                     | $                                 | (.06   | )                            | $    
|Shares used in computing per share information |                                     |                                   | 11,853 |                              |      
|Net income (loss) per sharediluted            |                                     |                                   |        |                              |      
|Net income (loss) per share                    |                                     | $                                 | (.06   | )                            | $    
|Shares used in computing per share information |                                     |                                   | 11,853 |                              |      

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)

|                                                                       |                                                  | Six Months Ended October 31,                               |      
|---------------------------------------------------------------------- | ------------------------------------------------ | ---------------------------------------------------------- | -----
|
|Net cash provided by (used in) operating activities                    |                                                  | $                                                          | 1,020
|CASH FLOWS FROM INVESTING ACTIVITIES:                                  |                                                  |                                                            |      
|                                                                       | Purchases of property and equipment              |                                                            |      
|                                                                       |                                                  |                                                            |      
|                                                                       |                                                  | Cash used in investing activities                          |      
|                                                                       |                                                  |                                                            |      
|CASH FLOWS FROM FINANCING ACTIVITIES:                                  |                                                  |                                                            |      
|                                                                       | Repayments of notes payable                      |                                                            |      
|                                                                       | Proceeds from issuance of notes payable          |                                                            |      
|                                                                       | Proceeds from issuance of common stock           |                                                            |      
|                                                                       |                                                  |                                                            |      
|                                                                       |                                                  | Cash provided by (used in) financing activities            |      
|                                                                       |                                                  |                                                            |      
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:                  |                                                  |                                                            | 738  
|                                                                       | 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: |                                                  |                                                            |      
|                                                                       |                                                  | Class B Preferred Stock issued for intangible assets       |      
|                                                                       |                                                  | Common stock warrants issued for services                  |      
|                                                                       |                                                  | Series 2002A Convertible Notes converted into common stock |      
|                                                                       |                                                  |                                                            |      

See
notes to condensed consolidated financial statements.

5

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ISONICS CORPORATION AND SUBSIDIARY        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

The accompanying condensed consolidated financial statements of Isonics Corporation and Subsidiary as of October 31, 2002, and for the three months
and six months ended October 31, 2002, and 2001, have been prepared on the same basis as the annual audited financial statements. In the opinion of management, such unaudited information
includes all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of this interim information. Operating results and cash flows for interim periods are not
necessarily indicative of results for the entire year. The information included in this report should be read in conjunction with our audited financial statements and notes thereto included in our
Annual Report on Form 10-KSB for the year ended April 30, 2002.

Net Income (Loss) Per Share

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

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

|                                                                          |                                                                                                              | Three Months Ended
October 31, |        | Six Months Ended
October 31,
|------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------------------------ | ------ | ----------------------------
|
|Denominator for basic net income (loss) per shareweighted average shares |                                                                                                              | 11,853                         |        | 9,360                       
|Effect of dilutive securities:                                            |                                                                                                              |                                |        |                             
|                                                                          | Dilutive effect of conversion of preferred stock                                                             |                                |       |                             
|                                                                          | Dilutive effect of stock options                                                                             |                                |       |                             
|                                                                          |                                                                                                              |                                |        |                             
|                                                                          | Denominator for diluted net income (loss) per shareadjusted weighted average shares and assumed conversions |                                | 11,853 |                             
|                                                                          |                                                                                                              |                                |        |                             

For
the three month period ended October 31, 2002, a total of 4,841,083 outstanding stock options and common stock warrants and 963,666 outstanding shares of Class A
Convertible Preferred Stock were excluded from the diluted net income (loss) per share calculation, as the inclusion would be anti-dilutive. For the six month period ended
October 31, 2002, a total of 4,633,743 outstanding stock options and common stock warrants and 441,667 common shares related to the $1,000,000 in face value of Series 2002A Convertible
Notes converted during the period were excluded from the diluted net income (loss) per share calculation, as the inclusion would be anti-dilutive. For both the three and six month periods
ended October 31, 2001, a total of 5,954,167 outstanding stock options and common stock warrants and 963,666 and 500,000 outstanding shares of Class A and Class B Convertible

6

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Preferred Stock, respectively were excluded from the diluted net income (loss) per share calculation, as the inclusion would be anti-dilutive. During the six month period ended
October 31, 2002, we issued the following shares of Common Stock:

Description

Number of
Common Stock SharesBalance as of April 30, 2002

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

1,000,000Issuance of shares for consulting services

25,000Shares issued from employee stock purchase plan

2,983Balance as of October 31, 2002

11,852,795


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

Inventories

Inventories consist of (in thousands):

October 31, 2002

April 30, 2002Finished goods

$
94

$
248Work in progress


362


212Total inventories

$
456

$
460


Significant Customers

As of October 31, 2002, three customers accounted for approximately 66% of total net accounts receivable. Three customers accounted for approximately 37%
of total net accounts receivable at April 30, 2002. Three customers accounted for approximately 54% and 52% of revenues for the three and six months ended October 31, 2002,
respectively. Three customers accounted for approximately 53% and 49% of revenues for the three and six months ended October 31, 2001, respectively. Two customers accounted for
approximately 63% and 66% of the German operation's revenues for the three and six months ended October 31, 2002, respectively. Two customers accounted for approximately 59% and 53% of
the German operation's revenues for the three and six months ended October 31, 2001, respectively. Two customers accounted for approximately 58% of the German operation's accounts
receivable at October 31, 2002. Two customers accounted for approximately 37% of the German operation's accounts receivable at April 30, 2002.

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. Prior period segment information has been reclassified to conform with the current period presentation.

7

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

|                  |                                      | Three Months Ended
October 31, |   | Six Months Ended
October 31,
|----------------- | ------------------------------------ | ------------------------------ | - | ----------------------------
|
|Segment revenues: |                                      |                                |   |                             
|                  | Life sciences                        |                                | $ | 2,210                       
|                  | Semiconductor materials and products |                                |   | 46                          
|                  |                                      |                                |   |                             
|                  |                                      | Total                          |   | $                           
|                  |                                      |                                |   |                             

|                                 |                                      | Three Months Ended
October 31, |   | Six Months Ended
October 31, |     
|-------------------------------- | ------------------------------------ | ------------------------------ | - | ---------------------------- | ----
|
|Segment operating (loss) income: |                                      |                                |   |                              |     
|                                 | Life sciences                        |                                | $ | 307                          |     
|                                 | Semiconductor materials and products |                                |   | (234                         | )   
|                                 | Reconciling amounts                  |                                |   | (754                         | )   
|                                 |                                      |                                |   |                              |     
|                                 |                                      | Total                          |   | $                            | (681
|                                 |                                      |                                |   |                              |     

October 31, 2002

April 30, 2002Total Assets:Life sciences

$
3,408

$
3,543Semiconductor materials and products


838


598Reconciling amounts


1,426


1,073Total

$
5,672

$
5,214


A
summary of operations by geographic area is as follows:

|              |               | Three Months Ended
October 31, |   | Six Months Ended
October 31,
|------------- | ------------- | ------------------------------ | - | ----------------------------
|
|Net revenues: |               |                                |   |                             
|              | United States |                                | $ | 1,567                       
|              | Germany       |                                |   | 689                         
|              |               |                                |   |                             
|              |               | Total                          |   | $                           
|              |               |                                |   |                             

|                         |               | Three Months Ended
October 31, |   | Six Months Ended
October 31, |     
|------------------------ | ------------- | ------------------------------ | - | ---------------------------- | ----
|
|Operating (loss) income: |               |                                |   |                              |     
|                         | United States |                                | $ | (709                         | )   
|                         | Germany       |                                |   | 28                           |     
|                         |               |                                |   |                              |     
|                         |               | Total                          |   | $                            | (681
|                         |               |                                |   |                              |     

October 31, 2002

April 30, 2002Total Assets:United States

$
2,975

$
2,402Germany


2,697


2,812Total

$
5,672

$
5,214


8

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Sale of Depleted Zinc Business and Subsequent Dispute Settlement

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

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

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

Sale of Chemotrade Leipzig GmbH

On July 31, 2002, we sold our 75% interest in Chemotrade Leipzig GmbH ("CTL") to the 25% shareholder for 50,000 Euros. The transaction was
effective as of May 1, 2002. Under the terms of the agreement, we have received 38,000 Euros as of October 31, 2002 with the remaining 12,000 Euros due by December 31, 2002.

Conversion of Series 2002A Convertible Notes

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

Investment Banking Agreement with vFinance, Inc.

On June 10, 2002 we terminated our then current agreement with vFinance, Inc. ("vFinance") and entered into a new agreement whereby we issued 25,000
shares of restricted common stock (valued at $26,500 based upon the fair market value of the stock) and 200,000 common stock warrants (valued at $176,000 using the Black-Scholes pricing model) for
investment banking, market making and consulting services. The common stock warrants vested immediately, are exercisable at $2.32 per share and expire on June 10, 2006. The agreement is
cancelable by either party upon 30 days notification. The value of both the restricted common stock (which vested immediately) and the common stock warrants was being amortized to consulting
expense over the twelve-month period (the expected life) of the

9

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agreement. During the quarter ended October 31, 2002 a dispute arose between the two parties whereby vFinance has claimed that it is entitled to additional cash payments along with the shares
of restricted common stock and common stock warrants in order to perform the required services under the new agreement. We have determined that vFinance is not entitled to cash payments and have
refused to make such payment. It is doubtful that this dispute will be resolved and thus the value of the future services to be provided over the remaining life of the new agreement is expected to be
minimal. As a result of the uncertainty of future benefit under this agreement, we expensed the remaining $169,000 of value associated with the restricted common stock and common stock warrants to
consulting services during the quarter ended October 31, 2002.

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, IRSI disputed our termination of the agreement based upon nonperformance and has requested to mediate the matter. If a solution is not reached through
mediation the next step under the terms of the agreement would be to enter into binding arbitration. We intend to vigorously defend our position and believe that the outcome will not have a material
impact on the results of our operations or financial condition.

Lease Agreements Related to SOI Operations

In September 2002, we entered into several lease agreements related to building space, equipment and services in order to establish our own stand-alone
wafer manufacturing facilities ("Fab-1") in Vancouver, Washington. The various leases terminate December 31, 2003 and require minimum monthly payments totaling approximately $14,000
per month. In connection with the establishment of Fab-1, we agreed with Silicon Quest International, Inc. ("SQI") to terminate our alliance agreement effective November 22,
2002. Under the terms of the agreement, SQI is prohibited from producing SOI wafers until November 22, 2003.

Equipment Financing Agreement

In October 2002 we entered into an agreement with Fidelity Capital ("Fidelity") whereby Fidelity agreed to provide up to $1,000,000 in equipment financing.
Under the terms of the agreement, Fidelity

10

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will acquire equipment on our behalf and lease it to us over a term of 36 months at a current blended interest rate of approximately 7.5%. Each draw down on the lease will contain a $1 bargain
purchase option, payable at the end of the lease at which time title to the equipment will transfer to us, and as a result they will be accounted for as capital leases. There were no amounts
outstanding under this facility at October 31, 2002. Subsequent to October 31, 2002 through December 11, 2002, we have approximately $71,000 outstanding under this facility.

Dilution Adjustments to Preferred Shareholders

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

In
addition to anti-dilution rights, there are provisions associated with the Series A Convertible Preferred Stock that if triggered, would reduce the current
conversion price and effectively allow the preferred shares to convert to common stock at a ratio greater than a one for one basis. As a result of the issuance (and subsequent cancellation) of 250,000
shares of restricted common stock to IRSI (see"Consulting Agreement with Investor Relations Services, Inc.") at $.99 per share, the
Series A Convertible Preferred Stock at October 31, 2002 was convertible at approximately 1.52 shares of common stock for each share of Series A Convertible Preferred Stock
outstanding.

The
shareholders' of the Series A Convertible Preferred Stock asserted that our calculation of the conversion price was incorrect and that it should be convertible at a lower
price due to the issuance of the Series 2002A Convertible Notes in March 2002 while we maintained that our calculation was in accordance with the Series A Convertible Preferred
Stock agreement. In December 2002, we reached an oral settlement (which is in the process of being formally documented) whereby both parties agreed to a conversion price of $.90 per share. As a
result of the settlement, the Series A Convertible Preferred Stock is now convertible at approximately 1.67 shares of common stock for each share of Series A Convertible Preferred Stock
outstanding.

New Accounting Standards

Effective May 1, 2002 we adopted the Financial Accounting Standards Board ("the FASB") SFAS No. 141Business
Combinations,SFAS No. 142Goodwill and Other Intangible Assetsand SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived
Assets.

SFAS
No. 141 addresses the methods used to account for business combinations and requires the use of the purchase method of accounting for all combinations after June 30,
2001. We will account for any future business combinations in accordance with SFAS No. 141.

SFAS
No. 142 addresses the methods used to amortize intangible assets and to assess impairment of those assets, including goodwill resulting from business combinations accounted
for under the purchase method. We adopted SFAS No. 142 effective May 1, 2002, except that goodwill and intangible assets other than goodwill acquired after June 30, 2001 have been
amortized or not amortized in accordance with SFAS 142. We acquired intangible assets from Silicon Evolution, Inc. ("SEI") subsequent to June 30, 2001, and have accounted for
those assets in accordance with the requirements of SFAS No. 142 (see"Amortization of Intangible Assets"). Included in our assets at
October 31, 2002, 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.

11

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In
accordance with SFAS No. 142, we have completed step one of the impairment test 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 ("DCF") Method in which the reporting unit was valued by discounting the projected cash flows over a six-year period 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 and other intangibles
for impairment at least annually hereafter.

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

|                           |                                 | Three Months Ended
October 31, |      | Six Months Ended
October 31, |     
|-------------------------- | ------------------------------- | ------------------------------ | ---- | ---------------------------- | ----
|
|Reported net income (loss) |                                 | $                              | (677 | )                            | $   
|                           | Add back: Goodwill amortization |                                |      |                             |     
|                           |                                 |                                |      |                              |     
|                           |                                 | Adjusted net income (loss)     |      | $                            | (677
|                           |                                 |                                |      |                              |     

|                                  |                                 | Three Months Ended
October 31, |   | Six Months Ended
October 31, |     
|--------------------------------- | ------------------------------- | ------------------------------ | - | ---------------------------- | ----
|
|Basic net income (loss) per share |                                 |                                |   |                              |     
|                                  | Reported net income (loss)      |                                | $ | (.06                         | )   
|                                  | Add back: Goodwill amortization |                                |   |                             |     
|                                  |                                 |                                |   |                              |     
|                                  |                                 | Adjusted net income (loss)     |   | $                            | (.06
|                                  |                                 |                                |   |                              |     

|                                    |                                 | Three Months Ended
October 31, |   | Six Months Ended
October 31, |     
|----------------------------------- | ------------------------------- | ------------------------------ | - | ---------------------------- | ----
|
|Diluted net income (loss) per share |                                 |                                |   |                              |     
|                                    | Reported net income (loss)      |                                | $ | (.06                         | )   
|                                    | Add back: Goodwill amortization |                                |   |                             |     
|                                    |                                 |                                |   |                              |     
|                                    |                                 | Adjusted net income (loss)     |   | $                            | (.06
|                                    |                                 |                                |   |                              |     

SFAS
No. 144 supersedes SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. SFAS No. 121 did not address the accounting for a segment of a business accounted for as a discontinued operation, which resulted in two accounting models
for long-lived assets to be disposed of. SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale and requires that those
long-lived assets be measured at the lower of the carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Adoption of SFAS
No. 141 and SFAS No. 144 did not have an affect on the Company's financial statements.

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

12

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Amortization of Intangible Assets

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

During
May 2002, events and circumstances suggested that the intangible assets no longer had an indefinite life and as a result, we determined that the assets should be amortized
over a useful life of ten years. We incurred amortization expense of $29,000 and $15,000 related to these intangible assets during the six months and three months ended
October 31, 2002, respectively. Amortization expense associated with these intangible assets is anticipated to be approximately $59,000 per year over the remaining useful life.

Subsequent Events

In December 2002 we acquired certain isotope-based trace detection technology to be used to detect explosives and chemical and biological weapons from
Institut of Umwelttechnologien GmbH ("IUT"), an entity in which we hold a 6% ownership interest. We issued to IUT 250,000 shares of restricted common stock for the isotope-based trace detection
technology. In addition, we granted IUT a 15 percent ownership interest in a newly created subsidiary that will own and commercialize the trace detection technology. The restricted common stock
was valued at $272,500 based upon the closing price of our common stock on December 4, 2002.

In
November 2002, we entered into an agreement with Park Capital Securities, LLC whereby we issued a common stock warrant (valued at $261,000 using the Black-Scholes pricing
model) to purchase 300,000 shares of common stock at $1.00 per share, for investment banking and consulting services. The common stock warrant vested immediately, expires in November 2005 and
will be expensed to consulting services over the life of the agreement. The agreement terminates on December 31, 2003.

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 carbon-13 is sold as carbon dioxide. Today our business addresses the
material needs of two primary markets:



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

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

SOI Operations

In September 2002, we entered into several lease agreements related to building space, equipment and services in order to establish our own stand-alone
wafer manufacturing facilities ("Fab-1") in Vancouver, Washington (See "Lease Agreements Related to SOI Operations"). In addition to leasing
the building space, we have acquired the equipment necessary to establish our operations through bankruptcy sales (of which the cost will ultimately be offset against our receivable from SEI), draws
against our equipment financing agreement (See "Equipment Financing Agreement") and approximately $200,000 in cash acquisitions. We currently have the
ability to produce SOI wafers at Fab-1 and with

14

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the proper increase in headcount, we believe that we have the capacity to produce up to 10,000 SOI wafers per month.

As
a result of the establishment of Fab-1, we agreed with SQI to terminate our alliance agreement effective November 22, 2002. We are currently increasing our sales
activities but the ramp-up in sales is anticipated to be a slow process as we still need to complete the certification process with most new potential customers and many potential
customers are proceeding cautiously with SOI wafers until the United States economy recovers from the current downturn. As a result, although we plan to gradually increase our revenues from the sale
of SOI wafers, we may not be able to generate significant revenue from the sale of SOI wafers until fiscal year 2004, if at all.

Results of Operations

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

|                                  |                                   | Three Months Ended
October 31, |      | Six Months Ended
October 31, |     
|--------------------------------- | --------------------------------- | ------------------------------ | ---- | ---------------------------- | ----
|
|Revenues                          |                                   | 100.0                          | %    | 100.0                        | %   
|Cost of revenues                  |                                   | 78.9                           |      | 75.2                         |     
|                                  |                                   |                                |      |                              |     
|                                  | Gross margin                      |                                | 21.1 |                              | 24.8
|                                  |                                   |                                |      |                              |     
|Operating expenses:               |                                   |                                |      |                              |     
|                                  | Selling, general & Administrative |                                | 48.3 |                              | 43.1
|                                  | Research & development            |                                | 3.0  |                              | 7.1 
|                                  |                                   |                                |      |                              |     
|                                  |                                   | Total operating expenses       |      | 51.3                         |     
|                                  |                                   |                                |      |                              |     
|Operating loss                    |                                   | (30.2                          | )    | (25.4                        | )   
|                                  |                                   |                                |      |                              |     
|Other income (expense), net       |                                   | ..2                            |      | 1.1                          |     
|                                  |                                   |                                |      |                              |     
|Income (loss) before income taxes |                                   | (30.0                          | )    | (24.3                        | )   
|                                  |                                   |                                |      |                              |     
|Income tax expense                |                                   |                               |      |                             |     
|                                  |                                   |                                |      |                              |     
|NET INCOME (LOSS)                 |                                   | (30.0                          | )%   | (24.3                        | )%  
|                                  |                                   |                                |      |                              |     

Revenues

Revenues increased from $2,017,000 for the three months ended October 31, 2001 to $2,256,000 for the three months ended October 31,
2002, an increase of $239,000 or 11.8%. The increase is due to a significant increase in domestic isotope product sales partially offset by a significant decrease in international isotope product
sales. Included in revenues for the three months ended October 31, 2002 were $46,000 of semiconductor materials and products sales as compared to zero for the three months ended
October 31, 2001.

Revenues
from domestic isotope product sales for the three months ended October 31, 2002 were $1,521,000, an increase of 57.6%, or $556,000, from $965,000 for the
three months ended October 31, 2001. The increase was primarily the result of additional product sales to our existing customers and an increase in our customer base for the
three months ended October 31, 2002.

Revenues
from international isotope product sales for the three months ended October 31, 2002 were $689,000, a decrease of 34.5%, or $363,000, from $1,052,000 for the
three months ended

15

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October 31, 2001. The decrease was primarily the result of the sale of CTL to the 25% shareholder effective May 1, 2002.

Revenues
increased from $3,651,000 for the six months ended October 31, 2001 to $4,497,000 for the six months ended October 31, 2002, an increase of $846,000
or 23.2%. The increase is due to a significant increase in domestic isotope product sales partially offset by a significant decrease in international isotope product sales. Included in revenues for
the six months ended October 31, 2002 were $58,000 of semiconductor materials and products sales as compared to zero for the six months ended October 31, 2001.

Revenues
from domestic isotope product sales for the six months ended October 31, 2002 were $3,104,000, an increase of 66.1%, or $1,235,000, from $1,869,000 for the
six months ended October 31, 2001. The increase was primarily the result of additional product sales to our existing customers and an increase in our customer base for the
six months ended October 31, 2002.

Revenues
from international isotope product sales for the six months ended October 31, 2002 were $1,335,000, a decrease of 25.1%, or $447,000, from $1,782,000 for the
six months ended October 31, 2001. The decrease was primarily the result of the sale of CTL to the 25% shareholder effective May 1, 2002.

Included
in revenues from international isotope product sales for the three and six months ended October 31, 2001 was $373,000 and $709,000 of revenues from CTL,
respectively. Effective May 1, 2002 we sold our 75% interest in CTL to the 25% shareholder for 50,000 Euros. CTL, which primarily resells oxygen-18, was notified in the quarter
ended July 31, 2002 that its current distribution agreement (which expires on December 31, 2002) would not be renewed. The loss of this agreement is significant as it accounted for
approximately 80% of CTL's revenue and as a result, CTL's ability to generate revenues after December 31, 2002 is extremely uncertain. In conjunction with this
disposition, Chemotrade is now free to pursue other opportunities (including selling oxygen-18 throughout the European market) that may have been in conflict with the interests of CTL.
While we fully anticipate replacing the lost revenue during the year ending April 2003 with additional product sales to new and existing customers both domestically and in Europe, we can offer
no assurances that this will come to fruition.

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

Gross Margin

Gross margin for the three months ended October 31, 2002 was $477,000, a decrease of 4.8%, or $24,000, from $501,000 for the three months
ended October 31, 2001. On a percentage of revenues basis, gross margin decreased 3.7 percentage points to 21.1%, for the three months ended October 31, 2002, from 24.8%,
for the three months ended October 31, 2001. The dollar decrease is directly attributable to a $26,000 negative margin on semiconductor materials and products sales. The negative margin
resulted primarily from a $42,000 write-off of deferred costs associated with warrants granted to SQI in December 2001. The write-off resulted from the early termination
of our alliance agreement with SQI (see "Lease Agreements Related to SOI Operations"). The percentage of revenues decrease is due to the combination of
the negative margin achieved on semiconductor materials and products sales and a decrease in margin percentage on domestic isotope product sales due to change in product mix (resulting in an increase
in lower margin radioisotope sales) partially offset by an overall increase in

16

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higher margin domestic isotope sales and a decrease in lower margin international isotope sales due to the disposition of CTL effective May 1, 2002.

Gross
margin for the six months ended October 31, 2002 was $1,062,000, an increase of 15.2%, or $140,000, from $922,000 for the six months ended October 31,
2001. On a percentage of revenues basis, gross margin decreased 1.7 percentage points to 23.6%, for the six months ended October 31, 2002, from 25.3%, for the six months
ended October 31, 2001. The dollar increase is directly attributable to an increase in higher margin domestic isotope product sales partially offset by a decrease in lower margin international
isotope sales primarily due to the disposition of CTL effective May 1, 2002 and a $39,000 negative margin on semiconductor materials and products sales. The percentage of revenues decrease is
due to the combination of the negative margin achieved on semiconductor materials and products sales and a decrease in margin percentage on domestic isotope product sales due to change in product mix
(resulting in an increase in lower margin radioisotope sales) partially offset by an overall increase in higher margin domestic isotope sales and a decrease in lower margin international isotope sales
due to the disposition of CTL effective May 1, 2002.

Included
in gross margin for the three and six months ended October 31, 2001 was $101,000 and $155,000 of gross margin from CTL, respectively. While we fully anticipate
replacing the lost gross margin from the sale of CTL during the year ending April 30, 2003 with additional product sales, at a higher gross margin percentage, to both new and existing
customers, both domestically and in Europe, we can offer no assurances that this will come to fruition.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $220,000, to $1,090,000, for the three months ended October 31, 2002, from $870,000, for the
three months ended October 31, 2001. On a percentage of revenues basis, selling, general and administrative expenses increased 5.2 percentage points to 48.3%, for the three months
ended October 31, 2002, from 43.1%, for the three months ended October 31, 2001.
The dollar increase is primarily attributable to the expensing of the value of the restricted common stock and common stock warrants issued to vFinance (See "Investment Banking
Agreement with vFinance, Inc.")and an increase in headcount and facility costs related to the semiconductor materials and products business segment. The percentage
increase is attributable to the expensing of the value of the restricted common stock and common stock warrants issued to vFinance and an increase in headcount and facility costs related to the
semiconductor materials and products business segment partially offset by an increase in revenues.

Selling,
general and administrative expenses increased $451,000, to $2,250,000, for the six months ended October 31, 2002, from $1,799,000, for the six months ended
October 31, 2001. On a percentage of revenues basis, selling, general and administrative expenses increased .7 percentage points to 50%, for the six months ended
October 31, 2002, from 49.3%, for the six months ended October 31, 2001. The dollar increase is primarily attributable to the expensing of the value of the restricted common stock
and common stock warrants issued to vFinance (See "Investment Banking Agreement with vFinance, Inc."),increased legal costs associated with the
Eagle-Picher dispute and an increase in headcount and facility costs related to the semiconductor materials and products business segment. The percentage increase is attributable to the expensing of
the value of the restricted common stock and common stock warrants issued to vFinance,,increased legal costs associated with the Eagle-Picher dispute
and an increase in headcount and facility costs related to the semiconductor materials and products business segment partially offset by an increase in revenues.

We
anticipate that we will increase our selling, general and administrative expenses significantly during the last six months of our fiscal year ending April 30, 2003 and
into the next fiscal year 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 recently acquired (See

17

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"Subsequent Events"). There can be no assurance that our anticipated increased selling, general and administrative expenses will result in increased
revenues from product sales.

Research and Development Expenses

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

Research
and development expenses decreased $74,000, to $68,000, for the three months ended October 31, 2002, from $142,000, for the three months ended October 31,
2001. On a percentage of revenues basis research and development expenses decreased 4.1 percentage points to 3% for the
three months ended October 31, 2002, from 7.1%, for the three months ended October 31, 2001. The dollar decrease is primarily related to an increase in the revenue
generated by the sale of silicon 28 epitaxial wafers to different companies for testing purposes. This revenue is recorded as an offset to research and development expenses in the accompanying
statement of operations. The percentage decrease is also primarily related to the increase in the revenue generated by the sale of silicon 28 epitaxial wafers to different companies for testing
purposes and an increase in revenues.

Research
and development expenses decreased $118,000, to $129,000, for the six months ended October 31, 2002, from $247,000, for the six months ended October 31,
2001. On a percentage of revenues basis research and development expenses decreased 3.9 percentage points to 2.9% for the six months ended October 31, 2002, from 6.8%, for the
six months ended October 31, 2001. The dollar decrease is primarily related to an increase in the revenue generated by the sale of silicon 28 epitaxial wafers to different companies for
testing purposes. This revenue is recorded as an offset to research and development expenses in the accompanying statement of operations. The percentage decrease is also primarily related to the
increase in the revenue generated by the sale of silicon 28 epitaxial wafers to different companies for testing purposes and an increase in revenues.

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

Other Income (Expense), net

For the three months ended October 31, 2002 and 2001, other income (expense), net includes interest income and expense and foreign currency gains
and losses. Other income (expense), net decreased $17,000, to $4,000, for the three months ended October 31, 2002, from $21,000, for the three months ended October 31,
2001.

For
the six months ended October 31, 2002 and 2001, other income (expense), net includes net gains from a legal settlement, amortization of debt offering costs, gains or
losses on the sale of lines of businesses or subsidiaries, interest income and expense, and foreign currency gains and losses. Other income (expense), net increased $1,441,000, to $1,392,000, for the
six months ended October 31, 2002, from ($49,000), for the six months ended October 31, 2001. The increase is primarily attributable to the gain (net of the contingency
portion of legal fees) of $2,140,000 related to the settlement of the Eagle-

18

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Picher dispute (See "Sale of Depleted Zinc Business and Subsequent Dispute Settlement") and the gain resulting from the disposition of CTL, partially
offset by the expensing of $546,000 of previously
unamortized discount related to the Series 2002A Convertible Notes to interest expense and $182,000 of previously capitalized debt offering costs as a result of the conversion of the notes to
common stock.

Income Taxes

With the exception of the Eagle-Picher settlement, we currently operate at a loss and expect to operate at a loss until the products currently under development
begin to generate sufficient revenue. The losses we anticipate incurring during the remaining portion of the current year are not expected to generate an income tax benefit because of the uncertainty
of the realization of the deferred tax asset. As such, we have also provided a valuation allowance against our net deferred tax asset as realization is uncertain. We have not recorded any income tax
expense associated with the net income generated in the six months ended October 31, 2002 as we have sufficient net operating loss carryforwards to offset this taxable income, and we
anticipate generating a loss for the year ending April 30, 2003.

Net Loss

We recognized a net loss of $677,000 for the three months ended October 31, 2002, as compared to a net loss of $490,000 for the three months
ended October 31, 2001. We recognized net income of $75,000 for the six months ended October 31, 2002, as compared to a net loss of $1,177,000 for the six months ended
October 31, 2001. With the exception of the Eagle-Picher settlement, we anticipate that losses will continue until revenues increase from our current operations or until we generate revenues
from products introduced as a result of our research and development projects.

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

Liquidity and Capital Resources

Our working capital and liquidity increased significantly during the six months ended October 31, 2002 due to the resolution of our dispute with
Eagle-Picher via the July 24, 2002 settlement agreement whereby we received $2,500,000 ($2,140,000 net of the contingency portion of our legal fees). Working capital increased $1,087,000, to
$2,153,000 at October 31, 2002, from $1,066,000, at April 30, 2002.

Our
principal source of funding for the six months ended October 31, 2002 has been from the settlement of the Eagle-Picher dispute. Our principal sources of funding for the
six months ended October 31, 2001 have been from the exercise of stock warrants and proceeds from the sale of shares under our employee stock purchase program. We provided cash from
operating activities of $1,020,000 during the six months ended October 31, 2002 and used cash in operating activities of $993,000 during the six months ended October 31,
2001. Cash provided by operating activities during the six months ended October 31, 2002 was principally the result of the settlement of the Eagle-Picher dispute partially offset by
operating losses. Cash used in operating activities for the six months ended October 31, 2001 was principally the result of a net loss of $1,177,000.

Our
investing activities used cash of $260,000 and $2,000 for the six months ended October 31, 2002 and 2001, respectively. Cash used in investing activities for the
six months ended October 31, 2002 and October 31, 2001, resulted from purchases of property and equipment.

19

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Financing
activities used cash of $22,000 for the six months ended October 31, 2002 and provided cash of $512,000 for the six months ended October 31, 2001.
Cash used in financing activities for the six months ended October 31, 2002 resulted primarily from payments on borrowings of $25,000. Cash provided by financing activities for the
six months ended October 31, 2001 resulted primarily from the exercise of stock warrants for $473,000, proceeds of $5,000 from the sale of shares under our employee stock purchase
program and $34,000 from the net issuance and repayments of notes payable.

At
October 31, 2002, we had $1,463,000 of cash and cash equivalents, an increase of $738,000, compared to $725,000, at April 30, 2002.

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

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

In
addition to anti-dilution rights, there are provisions associated with the Series A Convertible Preferred Stock that if triggered, would reduce the current
conversion price and effectively allow the preferred shares to convert to common stock at a ratio greater than a one for one basis. As a result of a
December 2002 oral settlement with the holders of the Series A Convertible Preferred Stock over the proper calculation of the conversion ratio (which is in the process of being formally
documented) the conversion price is currently $.90 per share and, as a result, the Series A Convertible Preferred Stock is now convertible at approximately 1.67 shares of common stock for each
share of Series A Convertible Preferred Stock outstanding.

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

Critical Accounting Policies

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

Goodwill and Intangible Assets

Effective May 1, 2002 we adopted SFAS No. 142Goodwill and Other Intangible Assets.SFAS
No. 142 addresses the methods used to amortize intangible assets and to assess impairment of those assets, including goodwill resulting from business combinations accounted for under the
purchase method. Although we adopted SFAS No. 142 effective May 1, 2002, goodwill and intangible assets other than goodwill acquired after June 30, 2001 have been amortized or not
amortized in accordance with SFAS 142. We acquired intangible assets from SEI subsequent to June 30, 2001, and have accounted for those assets in accordance with the requirements of SFAS
No. 142 (see"Amortization of Intangible Assets"). Included in our assets at October 31, 2002, is goodwill related to the acquisition of

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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 step one of the impairment test on our Life Sciences reporting unit, which has recorded goodwill. In completing our analysis of
the Life Sciences reporting unit, we used the 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 and other intangibles for impairment at least annually hereafter.

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.

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

Valuation of Equity Transactions

We value transactions associated with common or preferred stock that is convertible into common stock based on the market value of the underlying common stock on
the date of the signing of the agreement. We value transactions associated with common stock warrants at the appropriate measurement date utilizing the Black-Scholes pricing model, with assumptions as
to volatility (150%), risk-free interest rate (4.0%) and estimated life of the warrants based on historical information. If the

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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, the
company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's principal executive officer as well as the Company's principal financial officer, who concluded that the Company's disclosure controls and procedures are effective.
There have been no significant changes in the Company's internal controls or in other factors, which could significantly affect internal controls subsequent to the date the Company carried out its
evaluation.

Disclosure
controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company 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 Company reports filed under the Exchange Act is accumulated and
communicated to management, including the Company's principal executive officer and the Company's 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

1.IUTIn December 2002, we acquired from IUT, certain isotope-based trace detection technology to be
used to detect explosives and chemical and biological weapons. We agreed to issue 250,000 shares of our restricted common stock as consideration for the technology. In addition, we granted IUT a
15 percent ownership interest in a newly created subsidiary that will own and commercialize the trace detection technology. The following sets forth the information required by Item 701 in
connection with that transaction:



2.Park Capital Securities, LLC.In November 2002, we entered into an agreement with Park Capital
Securities, LLC whereby we issued a common stock warrant to purchase 300,000 shares of common stock at $1.00 per share, for investment banking and consulting services through December 31, 2003.
The common stock warrant vested immediately and expires in November 2005. The following sets forth the information required by Item 701 in connection with that transaction:



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3.Employee Offerings.



4.Investor Relations Services, Inc.Effective July 1, 2002, we agreed to pay 250,000 shares of our
restricted common stock as consideration for consulting services consisting of financial advisory, strategic business
planning and investor and public relations to be provided by IRSI of New Smyrna Beach, Florida. IRSI never rendered any such services and we have terminated the agreement and have advised IRSI that
the Company has no obligation to issue the shares (see "Consulting Agreement With Investor Relations Services, Inc."). The following sets forth
the information required by Item 701 in connection with that transaction:



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5.vFinance Investments, Inc.On June 10, 2002, we entered into an agreement with vFinance of Boca
Raton, Florida, a member of the National Association of Securities Dealers, Inc. The agreement provided for the issuance to vFinance of 25,000 shares of common stock and a warrant to purchase
200,000 shares of common stock in exchange for vFinance's agreement to provide financial advisory and
other services to Isonics. The following sets forth the information required by Item 701 in connection with that transaction:



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Item 4: Submission of Matters to a Vote of Security Holders.

The Company held its annual meeting of shareholders on November 19, 2002, after the date covered by this report. The shareholders relected the following
directors:

Name

Shares FOR

Shares WITHHELDJames E. Alexander

8,706,040

73,527Boris Rubizhevsky

8,704,540

75,027Lindsay A. Gardner

8,706,040

73,527Richard Parker

8,706,040

73,527


Larry
Wells, formerly a director of the Company, did not stand for relection. The shareholders did not vote on any other matters at the meeting.

Item 6: Exhibits and 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 sixteenth day of December, 2002.

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

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CERTIFICATIONSprincipal executive and financial officers

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



|Date: December 16, 2002 | /s/JAMES E. ALEXANDERJames E. Alexander,Chief Executive Officer
(principal executive officer)
|----------------------- | ---------------------------------------------------------------------------------------------

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



|Date: December 16, 2002 | /s/JOHN V. SAKYSJohn V. Sakys,Chief Financial Officer
(principal financial officer)
|----------------------- | -----------------------------------------------------------------------------------

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