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

                                  -------------

                                   FORM 10-QSB

(Mark One)

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

          For the quarterly period ended October 31, 1998



[ ]       Transition report under Section 13 or 15(d) of the Exchange Act.

          For the transition period from _______ to ______

                        Commission file number: 001-12531

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

              California                                    77-0338561
              ----------                                    ----------
   (State or other jurisdiction of                        (IRS Employer
    incorporation or organization)                     Identification No.)

                       20 Great Oaks Boulevard, Suite 220
                           San Jose, California 95119
                           --------------------------
                    (Address of principal executive offices)

                                 (408) 350-0660
                                 --------------
                           (Issuer's telephone number)

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

The number of shares outstanding of the registrant's Common Stock, no par value,
was 6,166,539 at December 4, 1998.

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


<PAGE>

<TABLE>
                               Isonics Corporation

                                TABLE OF CONTENTS
 
                                   FORM 10-QSB
<CAPTION>
Part I:  Financial Information
<S>      <C>          <C>                                                                                <C>
         Item 1:      Financial Statements

                      Condensed Consolidated Balance Sheets as of October 31, 1998 and
                           April 30, 1998................................................................3
                      Condensed Consolidated Statements of Operations for the Three and
                           Six Month Periods Ended October 31, 1998 and 1997.............................4
                      Condensed Consolidated Statements of Cash Flows for the Six Month
                           Periods Ended October 31, 1998 and 1997.......................................5
                      Notes to Condensed Consolidated Financial Statements...............................6

         Item 2:      Management's Discussion and Analysis of Financial Condition and
                           Results of Operations........................................................10

Part II: Other Information

         Item 4:      Submission of Matters to a Vote of Security
                      Holders...........................................................................17

         Item 6:      Exhibits and Reports on Form 8-K..................................................17

Signatures..............................................................................................18
</TABLE>

                                       2

<PAGE>


Part I:  Financial Information

Item 1:    Condensed Financial Statements
<TABLE>
                                         ISONICS CORPORATION AND SUBSIDIARIES
                                         CONDENSED CONSOLIDATED BALANCE SHEETS
                                         (in thousands, except share amounts)
<CAPTION>
                                                                                   October 31,             April 30,
                                                                                      1998                   1998
                                                                                ------------------     -----------------
                                                                                   (Unaudited)
                                                        ASSETS
<S>                                                                                       <C>                  <C>
CURRENT ASSETS:
     Cash and cash equivalents                                                            $   308               $ 1,044
     Accounts receivable (Net of allowance of $164 and $130, respectively)                  2,051                 1,629
     Inventories                                                                            1,632                   456
     Prepaid expenses and other assets                                                        127                    45
     Deferred income taxes                                                                    155                   112
                                                                                ------------------     -----------------

         Total current assets                                                               4,273                 3,286

Property and equipment, net                                                                 1,111                 1,626
Goodwill, net                                                                               3,513                   236
Notes receivable from shareholders                                                            131                   170
Other assets                                                                                   90                    22
Deferred income taxes                                                                          97                   315
                                                                                ------------------     -----------------
Total                                                                                     $ 9,215               $ 5,655
                                                                                ==================     =================


                                         LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:                                                             
     Current portion of long-term debt                                                    $   279               $    80
     Notes payable - shareholders                                                             907                    --
     Accounts payable                                                                       3,247                   657
     Accrued liabilities                                                                    1,072                   738
                                                                                ------------------     -----------------
                                                                                                       
         Total current liabilities                                                          5,505                 1,475
                                                                                                       
Long-term debt                                                                                994                   312
Deferred income taxes                                                                         209                   427
Stockholders' Equity:                                                                                  
     Class A Preferred Stock - no par value - 10,000,000                                               
       shares authorized; none outstanding                                                     --                    --
     Common stock - no par value - 20,000,000 shares                                                   
       authorized; issued and outstanding: April 30, 1998,                                             
       5,714,250; October 31,1998, 6,166,539                                                6,200                 5,289
     Notes receivable from stockholders                                                      (348)                 (337)
     Accumulated deficit                                                                   (3,345)               (1,511)
                                                                                ------------------     -----------------
         Total stockholders' equity                                                         2,507                 3,441
                                                                                ------------------     -----------------
Total                                                                                     $ 9,215               $ 5,655
                                                                                ==================     =================
<FN>
                                See notes to condensed consolidated financial statements.
</FN>
</TABLE>

                                                            3

<PAGE>

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

                                                                     Three Months Ended                Six Months Ended
                                                                         October 31,                     October 31,
                                                             ------------------------------    -----------------------------
                                                                 1998             1997            1998              1997
                                                             ------------     -------------    -----------      ------------
<S>                                                              <C>            <C>             <C>                <C>     
Net revenues                                                     $ 3,706        $    1,771      $   7,639          $  3,306
Cost of revenues                                                   3,193             1,174          6,182             2,340
                                                             ------------     -------------    -----------      ------------
        Gross margin                                                 513               597          1,457               966

Operating expenses:
    Selling, general and administrative                              936               368          1,618               636
    Research and development                                         389               203            712               352
    Restructuring and office closure                                 708                --            708                --
                                                             ------------     -------------    -----------      ------------

        Total operating expenses                                   2,033               571          3,038               988
                                                             ------------     -------------    -----------      ------------

Operating income (loss)                                           (1,520)               26         (1,581)              (22)

Other income (expense):
    Foreign exchange                                                 (96)               --            (96)               --
    Interest income                                                    6                20             30                27
    Interest expense                                                ( 91)              (78)          (167)             (214)
                                                             ------------     -------------    -----------      ------------

          Total other income (expense), net                         (181)              (58)          (233)             (187)
                                                             ------------     -------------    -----------      ------------

Loss before extraordinary item and income taxes                   (1,701)              (32)        (1,814)             (209)

Income tax expense                                                    --                 1             20                 1
                                                             ------------     -------------    -----------      ------------

Loss before extraordinary item                                    (1,701)              (33)        (1,834)             (210)


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

NET LOSS                                                         $(1,701)         $   (285)     $  (1,834)         $   (462)
                                                             ============     =============    ===========      ============

Net loss per share - basic and diluted
Net loss per share before extraordinary item                     $ (0.28)         $  (0.01)     $   (0.30)         $  (0.05)
                                                             ============     =============    ===========      ============
Extraordinary item                                               $    --          $  (0.05)            --          $  (0.05)
                                                             ============     =============    ===========      ============
Net loss per share                                               $ (0.28)         $  (0.06)     $   (0.30)         $  (0.10)
                                                             ============     =============    ===========      ============
Shares used in computing per share information                     6,167             4,892          6,072             4,721
                                                             ============     =============    ===========      ============
<FN>
                                  See notes to condensed consolidated financial statements.
</FN>
</TABLE>
                                                                    4

<PAGE>

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

<CAPTION>

                                                                                            Six Months Ended
                                                                                               October 31,
                                                                                    -----------------------------------
                                                                                         1998                1997
                                                                                    ---------------     ---------------
<S>                                                                                       <C>                <C>      
Net cash provided by (used in) operating activities                                       $     62           $   (379)

CASH FLOWS FROM INVESTING ACTIVITIES:                                               
     Purchases of Property and Equipment                                                      (108)                (71)
     Purchase of Chemotrade, net of cash acquired                                             (546)                 --
                                                                                    ---------------     ---------------
                  Cash used in investing activities                                           (654)                (71)
                                                                                    ---------------     ---------------

CASH FLOWS FROM FINANCING ACTIVITIES:                                               
     Line of credit, net                                                                     1,009
     Proceeds from issuance of long-term debt                                                  500                  --
     Repayments of debt                                                                     (1,640)             (1,782)
     Proceeds from issuance of common stock, net                                                17               3,452
     Payment of debt issuance costs                                                            (30)                 (7)
                                                                                    ---------------     ---------------
                  Cash provided by (used in) financing activities                              (44)              1,663
                                                                                    ---------------     ---------------


NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS                                         (736)              1,213
Cash and cash equivalents at beginning of period                                             1,044                  28
                                                                                    ---------------     ---------------
Cash and cash equivalents at end of period                                                $    308           $   1,241
                                                                                    ===============     ===============

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

        Interest                                                                          $    109           $     209
                                                                                    ===============     ===============
        Income taxes                                                                      $    151           $       1
                                                                                    ===============     ===============




Supplemental disclosure of noncash investing and financing activities:
        Equipment acquired under capital lease                                            $     14           $      --
                                                                                    ===============     ===============

        Purchase of Chemotrade
                  Cash paid, net of cash acquired                                         $    546
                  Stock issued to sellers                                                      894
                  Debt issued to sellers                                                     1,750
                  Liabilities assumed                                                        1,598
                                                                                    ---------------
                         Assets acquired (including goodwill of $ 3,385)                  $  4,788
                                                                                    ===============
<FN>
                                See notes to condensed consolidated financial statements.
</FN>
</TABLE>

                                                           5

<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

The  accompanying   condensed   consolidated  financial  statements  of  Isonics
Corporation and Subsidiaries (the "Company" or "Isonics") as of October 31, 1998
and for the three  and six  months  ended  October  31,  1998 and 1997 have been
prepared on the same basis as the audited financial  statements.  In the opinion
of management,  such unaudited information includes all adjustments  (consisting
only of normal  recurring  accruals)  necessary for a fair  presentation of this
interim  information.  Operating  results and cash flows for interim periods are
not  necessarily  indicative  of results for the entire  year.  The  information
included in this report should be read in conjunction with the Company's audited
financial  statements and notes thereto  included in the Company's Annual Report
on Form 10-KSB.

Net Income (Loss) Per Share

Net income  (loss) per share is based on the weighted  average  number of common
and common equivalent shares  outstanding  during the period.  Common equivalent
shares  include  common  stock  options and warrants  (using the treasury  stock
method).  Basic net income  (loss) per share is computed by dividing  net income
(loss) by the number of weighted average common shares outstanding.  Diluted net
income per share reflects  potential dilution from outstanding stock options and
warrants,  using the  treasury  stock  method.  Outstanding  stock  options  and
warrants are excluded from the diluted  earnings per share  calculation  in loss
periods.

Inventories

         Inventories consist of (in thousands):

                                   October 31,             April 30,
                                      1998                    1998
                                 ----------------       -----------------

Finished goods                           $ 1,511                  $  250
Work in process                              111                      --
Raw materials                                 10                     206
                                 ----------------       -----------------

 Inventories                             $ 1,632                  $  456
                                 ================       =================


Goodwill

Goodwill  resulted from the Isoserve,  Inc., and Chemotrade  GmbH and subsidiary
acquisitions  (See Business  Developments)  and is being amortized on a straight
line basis over six and twenty years, respectively.

Notes payable - shareholders

Two notes were issued to each of the sellers of Chemotrade  GmbH and  subsidiary
as consideration for a portion of the purchase price. One note with an aggregate
value of 1,663,000 DM ($924,000),  bearing interest at 2% per month, and secured
by  certain  accounts  receivable  was  issued in June 1998 and repaid in August
1998.  A second note for  1,500,000  DM valued at  $826,000  upon  issuance  and
reflected  at its dollar  equivalent  of $907,000 at October 31,  1998,  bearing
interest at 10%,  secured by the common  stock  purchased  by Isonics,  due June
1999, was also issued in connection with the purchase.

                                        6

<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Long term debt

  Long term debt consists of the following (in thousands):

                                                 October 31,     April 30,
                                                    1998           1998 
                                                 ----------     -----------

  Bank term loan -  guaranteed by the SBA        $      --      $        40
  Bank term loan                                        469             147
  Bank term loan                                        250             --
  Revolving line of credit                              525             159
  Capital leases                                         29              46
                                                 -----------     ----------
                                                      1,273             392
  Less current maturities                               279              80
                                                 ----------      ----------

                                                 $      994     $       312
                                                 ==========     ===========

The bank term loan is  collateralized  by all of Isonics' U.S.  assets and bears
interest at prime (8.0% at October 31, 1998) plus 2.25%.  Principal and interest
payments are due monthly based upon 48 monthly payments. The balance of the note
is due July 2000.

The bank term loan is  collateralized  by all of Isonics' U.S.  assets and bears
interest at prime (8.0% at October 31, 1998) plus 5.0%.  Interest  only payments
were due through  October 31, 1998,  commencing  November 1, 1998  principal and
interest payments are due monthly based upon 25 monthly payments. The balance of
the note is due July 2000.

The revolving line of credit is  collateralized  by all of Isonics' U.S.  assets
and bears  interest at prime (8.0% at October 1998) plus 2.25%.  Borrowings  are
limited to 35% of eligible inventory up to $500,000 and 80% of eligible accounts
receivable  up  to  $1,250,000.  Interest  payments  are  due  monthly  and  the
outstanding balance is due July 2000.

The bank term loan, guaranteed by the SBA, bank term loan, and revolving line of
credit  outstanding  at April 30, 1998 was repaid from the  proceeds of the debt
issued in August 1998.

Maturities  of  long-term  debt  as of  October  31,  1998  are as  follows  (in
thousands):

         1999                                      $     279
         2000                                            125
         2001                                            869
                                                    --------

                                                   $   1,273
                                                    ========

                                       7

<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Restructuring and office closure costs

On October 31, 1998,  the Company  announced a corporate  restructuring  and the
relocation of its headquarters to Golden, Colorado, the site of its wholly-owned
subsidiary,  International Process Research Corporation  (Interpro).  On October
31, 1998, the Company recorded a $708,000 charge of which $468,000 is related to
the  write-off of certain  fixed  assets,  $132,000 to terminate  certain  lease
agreements  and $108,000  for  severance  and other  costs.  At October 31, 1998
accrued   restructuring   costs  totaling   $212,000  are  included  in  accrued
liabilities. The Company anticipates additional charges in subsequent periods of
approximately $170,000 to $260,000 related to the relocation of personnel.

Significant Customers and Suppliers

At October 31, 1998 one customer accounted for 27% of total accounts  receivable
(See Related Party Transactions). One customer accounted for 25% of net revenues
during  the six  months  ended  October  31,  1998.  Three  different  customers
accounted  for 47%,  23%,  and 12% of net  revenues  during the six months ended
October 31, 1997.

Related party transactions

The Company has a 6% ownership  interest in IUT Institute GmbH ("IUT"),  located
in Berlin,  Germany.  IUT  purchases  certain  raw  materials  from  Chemotrade,
processes  the  materials  and sells the  finished  material to  Chemotrade.  At
October 31, 1998  accounts  receivable  totaling  $556,000  was due from IUT and
accounts payable totaling $609,000 was due to IUT. The Company has also advanced
IUT $54,000 for services to be  performed  in the future.  During the six months
ended  October  31,  1998,  Chemotrade  sold  $284,000  of  material  to IUT and
purchased $406,000 of material from IUT, respectively.

Acquisition of Chemotrade GmbH and Subsidiary

On July,  21,  1998,  the  Company  acquired  all of the  outstanding  shares of
Chemotrade GmbH and subsidiary (collectively  "Chemotrade"),  which was owned by
two common shareholders. Chemotrade is engaged in the distribution,  development
and  manufacture  of stable  and radio  isotopes.  The  purchase  price has been
accounted  for effective  June 1, 1998,  the date control was  transferred.  The
purchase price was denominated in German Deutche Marks,  and all amount reported
below are translated at the historical  conversion rate unless otherwise stated.
The purchase  price  consideration  on June 1, 1998  consisted of $2.576 million
paid at closing  and $1.07  million to be paid  through  June 2001.  Transaction
costs as of October 31, 1998 were $125,000.  Imputed interest from the effective
date of the acquisition,  June 1, 1998, to the date that  consideration was paid
or interest began accruing on  consideration,  June 30 , 1998,  totaled $28,000.
Imputed interest is reflected as interest expense in the consolidated statements
of operation  for the six month period ended October 31, 1998 and a reduction in
the purchase price.  The  consideration  paid upon closing  consisted of cash of
$758,000,  357,730 restricted shares of common stock with a fair market value of
$894,000,  two notes, one for $924,000 (1,663,000 DM) bearing interest at 2% per
month,  which was paid in August,  and a second note of $826,000  (1,500,000 DM)
bearing  interest  at 10%,  due  June  1,  1999.  The  sellers  have  guaranteed
Chemotrade's  defined pre tax earnings will be at least 1,000,000 DM (the dollar
equivalent  of $606,000 at October 31, 1998) for the sixteen  months ended April
30,  1999 and  twelve  months  ended  April 30,  2000 and  2001.  If the pre tax
earnings of Chemotrade  are less than  1,000,000 DM for the sixteen month period
ended April  30,1999 or year ended April 30, 2000,  the note  payable  valued at
$826,000  upon  issuance and  reflected at its dollar  equivalent of $907,000 at
October 31, 1998 (1,500,000 DM) due June 1, 1999, will be reduced by 0.75 DM for
each 1.00 DM shortfall  of earnings.  If  Chemotrade  has pretax  earnings of at
least  1,000,000 DM for the fiscal year ended April 30,  2001,  the sellers will
receive additional

                                       8

<PAGE>

                      ISONICS CORPORATION AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


consideration  of 500,000 DM (the dollar  equivalent  of $303,000 at October 31,
1998).  If the pre tax  earnings  are less than  1,000,000  DM during the twelve
months ended April 30, 2001, the consideration  will be reduced 0.50 DM for each
1.00 DM shortfall in earnings.  The contingent  consideration for the year ended
April 30, 2001 will be recorded as additional  goodwill upon Chemotrade  meeting
the pre tax  earnings  requirement.  The excess of the $3.499  million  purchase
price over the fair value of the tangible assets acquired,  $1.712 million, less
liabilities  assumed of $1.598  million,  $3.385  million has been  allocated to
goodwill and will be amortized  over twenty years.  The  difference  between the
note valued at  $907,000  at October  31, 1998 and  $826,000 at June 30, 1998 as
well as other  foreign  currency  gains and losses has been  included in foreign
exchange expense in the condensed consolidated statements of operations.

Acquisition of International Process Research Corporation ("Interpro")

Effective  April 30, 1998, the Company  acquired all of the  outstanding  common
stock of Interpro dba Colorado Minerals Research  Institute.  The purchase price
was paid in 353,982  shares of the  Company's  common  stock with a fair  market
value of $708,000.  Transaction  costs were $70,000.  No goodwill was recognized
upon completing the transaction.
<TABLE>
The  reported  results of  operations  of the Company  for the six months  ended
October 31, 1998 includes the operating results of Chemotrade commencing June 1,
1998 and the operating  results of Interpro  commencing  May 1, 1998.  Pro forma
results of operations are as follows (in thousands, except per share data):
<CAPTION>
                                                                    Six Months Ended
                                                                       October 31,
                                                            ---------------------------------
                                                                 1998               1997
                                                            -------------       -------------
<S>                                                           <C>                 <C>    
Net revenues                                                  $  8,432            $ 8,237
Gross margin                                                     1,570              1,891
Net loss                                                        (1,793)              (556)
Net loss per share - basic and diluted                        $  (0.29)           $ (0.10)
                                                            =============       =============
Number of shares used in computing per share information:        6,132              5,433
                                                            =============       =============
</TABLE>

                                       9

<PAGE>


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

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

Overview

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

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

Effective April 30, 1998, Isonics acquired all of the outstanding  capital stock
of Interpro dba Colorado  Minerals  Research  Institute.  Interpro is a contract
research  and  development  and  materials  processing  company  which  has been
performing key steps in Isonics' DZ manufacturing process and jointly developing
new, lower cost  technologies to better meet customer needs. The acquisition was
made to assure future availability of this critical manufacturing technology and
to provide an  infrastructure  platform for performing value added processing of
other isotopes.

                                       10

<PAGE>

Effective  June 1,  1998,  Isonics  acquired  Chemotrade  GmbH  and  subsidiary,
headquartered in Dusseldorf,  Germany,  to expand Isonics' product offerings and
to enter the  European  market for stable and radio  isotopes.  Chemotrade  is a
value-added  re-seller of stable and radio isotopes.  It supplies radio isotopes
for pharmaceutical and industrial research as well as for industrial and medical
imaging, calibration sources and for brachytherapy applications. Chemotrade also
distributes calibration sources, manufactured by duPont with Chemotrade supplied
radio isotopes, in Germany and other European countries.

Chemotrade  supplies various stable isotope labeled compounds for pharmaceutical
research  and drug  design,  as well as  oxygen-18  for use in producing a radio
isotope used in positron emmission tomography.  Chemotrade's market is primarily
Europe  but  frequently  sales are made to North  America  and  Asia;  customers
include duPont, Amersham, and New England Nuclear Life Sciences.

Historically,  substantially all of the Company's net revenues in any particular
period have been  attributable  to a limited number of customers and sales of DZ
and SILCs. The Company operates with little backlog and a significant portion of
the Company's  total revenues to date have been,  and the Company  believes will
continue to be in the near term,  derived  from a limited  number of DZ and SILC
orders in any  particular  quarter.  Consistent  with the  Company's  historical
experience,  the  Company's  quarterly  results are  expected  to be  materially
affected by the size,  timing and  quantity of DZ and SILC  orders,  and product
shipments  made to DZ and SILC users  during such quarter as was the case during
the three months ended  October 31,  1998.  As a result,  a lost or delayed sale
could  have a  significant  impact  on the  Company's  operating  results  for a
particular  period,  and such fluctuations could materially and adversely affect
the Company's business, financial condition and results of operations.

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


                                                                 Three Months Ended               Six Months Ended,
                                                                     October 31,                     October 31,
                                                             ----------------------------    ----------------------------
                                                                1998            1997            1998            1997
                                                             -----------    -------------    ------------    ------------
<S>                                                            <C>             <C>             <C>             <C>   
Net revenues                                                   100.0%          100.0%          100.0%          100.0%
Cost of revenues                                                86.2            66.3            80.9            70.8
                                                             -----------    -------------    ------------    ------------
               Gross Margin                                     13.8            33.7            19.1            29.2
                                                             -----------    -------------    ------------    ------------

Operating expenses:
               Selling, general and administrative              25.3            20.7            21.2            19.2
               Research and development                         10.5            11.5             9.3            10.7
               Restructuring and office closure                 19.1             --              9.3             --
                                                             -----------    -------------    ------------    ------------
                 Total operating expenses                       54.9            32.2            39.8            29.9
                                                             -----------    -------------    ------------    ------------
Operating income (loss)                                        (41.1)            1.5           (20.7)           (0.7)
Other income (expense) net                                      (4.8)           (3.3)           (3.0)           (5.7)
                                                             -----------    -------------    ------------    ------------
Loss before extraordinary item and income taxes                (45.9)           (1.8)          (23.7)           (6.4)
Income tax expense                                                --             0.1             0.3             --
                                                             -----------    -------------    ------------    ------------
Loss before extraordinary item                                 (45.9)           (1.9)          (24.0)           (6.4)
Extraordinary item - loss on extinguishment of debt               --           (14.2)             --            (7.6)
                                                             -----------    -------------    ------------    ------------
NET LOSS                                                       (45.9)%         (16.1)%         (24.0)%         (14.0)%
                                                             ===========    =============    ============    ============
</TABLE>

                                       11

<PAGE>

Net Revenues

Net  revenues  for the three and six months  ended  October  31, 1998 were $3.71
million and $7.64 million,  respectively,  an increase of 109.3% and 131.1% over
$1.77 million and $3.31 million for the  comparable  periods in the prior fiscal
period.  The  growth  on a  quarterly  and  year-to-date  basis  is  due  to the
additional  net  revenues  from the Interpro and  Chemotrade  acquisitions.  Net
revenues from DZ decreased by approximately  $387,000 for the three months ended
October 31, 1998,  on decreased  unit sales of  approximately  3 %. Net revenues
from DZ decreased  approximately  $505,000 for the six months ended  October 31,
1998 on decreased unit sales of approximately 10 %. Average unit sales prices of
DZ decreased  for the three and six months ended  October 31, 1998 in comparison
to the  previous  year's  fiscal  quarter  and year to date period due to a less
refined product being sold during the periods.

Gross Margin

Gross  margin for the three and six months ended  October 31, 1998  decreased to
13.8% and 19.1% of net revenues from 33.7% and 29.2% for the same periods in the
prior  fiscal  year.  The decrease is due to reduced unit sales prices of DZ and
the increased  proportion of net revenues generated from contract  manufacturing
performed  by  Interpro  and  stable and radio  isotope  revenues  generated  by
Chemotrade which typically have lower gross margins.

Selling, General and Administrative Expenses

Selling,  general and  administrative  expenses  increased  on a dollar basis to
approximately  $936,000,  or 25.3% of net  revenues  for the three  months ended
October 31, 1998,  from  $368,000,  or 20.7% of net  revenues in the  comparable
period of the prior year. The dollar  increase for the quarter ended October 31,
1998 was primarily  attributable  to the acquisition of Interpro and Chemotrade,
while the  percentage  increase was due mainly to reduced net  revenues  from DZ
sales. For the six months ended October 31, 1998, these expenses  increased on a
dollar  basis  to  approximately  $1,618,000,  or  21.2%  of net  revenues  from
$636,000,  or 19.2% of net revenues on the comparable  period of the prior year.
The dollar  increase was primarily  attributable  to the acquisition of Interpro
and  Chemotrade,  while the percentage  increase was due to reduced net revenues
from DZ sales. The Company anticipates that selling,  general and administrative
expenses will generally remain stable or decrease in absolute dollars due to the
restructuring  and San Jose office  closure and may vary as a percentage  of net
revenues (See Restructuring and office closure).

Research and Development

Research and development expenses increased by approximately $186,000, or 91.7%,
to  $389,000  for the quarter  ended  October  31,  1998 from  $203,000  for the
comparable period in fiscal 1998, while declining on a percentage basis to 10.5%
of net revenues from 11.5%. For the six months ended October 31, 1998,  research
and development  expenses  increased by approximately  $360,000,  or 102.3%,  to
$712,000 from $352,000 for the  comparable  period in the previous  fiscal year,
while  decreasing on a percentage  basis to 9.3% of net revenues from 10.7%. The
dollar  increase  during the quarter and six months  ended  October 31, 1998 was
primarily  due to  increased  staffing and material  costs  associated  with the
development of isotopically  pure silicon wafers and development  costs incurred
at Interpro.  The decrease in research and development  expenses as a percentage
of net revenues for the quarter and six months ended  October 31, 1998  compared
to the same period of the previous  fiscal year was due to revenue  growth.  The
Company   believes  that  the  development  and   introduction  of  new  product
applications  is critical to its future  success and expects  that  research and
development  expenses  will remain  stable in the near term due to the timing of
material usage and outside services, but may vary as a percentage of revenues.

                                       12

<PAGE>

Restructuring and office closure

On October 31, 1998, the Company announced a restructuring of its operations and
relocation of its headquarters to Golden, Colorado, the site of its wholly-owned
subsidiary,  International Process Research Corporation (Interpro).  The Company
recorded a $708,000  charge of which  $468,000  is related to the  write-off  of
certain  fixed  assets,  $132,000 to  terminate  certain  lease  agreements  and
$108,000 for  severance  and other  costs.  The Company  anticipates  additional
charges in subsequent  periods of approximately  $170,000 to $260,000 related to
the relocation of personnel.

Other income (expense), net

Other expense,  net reflects interest  expense,  amortization on issuance costs,
and foreign currency gains and losses.  Other expense, net increased by $123,000
to $181,000 for the quarter  ended  October 31, 1998 from net other  expenses of
$58,000 for the comparable  period of the previous fiscal year. The increase was
the result of foreign  currency losses from notes payable  denominated in German
Deutche  Marks due to the  sellers of  Chemotrade  and an  increase  in interest
expense on the notes  payable  to the  sellers  to  Chemotrade  and bank line of
credit and term loans.  Other  expense, net increased by $46,000 to $233,000 for
the six months ended October 31, 1998 from $187,000 during the comparable period
of the previous fiscal year. The increase was due mainly to the foreign exchange
losses.

Income taxes

There was no provision  for income taxes for the quarter  ended October 31, 1998
due to losses  sustained in the quarter.  The provision for the six months ended
October 31, 1998 of $20,000 was the result of Foreign  taxes.  The  provision of
$1,000 for the three and six months  ended  October  31,  1997 was the result of
state taxes.

Liquidity and Capital Resources

The  Company's  principal  sources  of funding  have been cash from  operations,
borrowed  funds and sales of  common  stock.  The  Company  generated  cash from
operations  of  approximately  $62,000 and used cash in operating  activities of
$379,000  during the six months ended  October 31, 1998 and 1997,  respectively.
Cash generated from operating activities during the six months ended October 31,
1998 was  principally the result of a net loss of $1.70 million and increases in
inventory,  offset by adjustments for non-cash items, primarily the write-off of
fixed assets in the restructuring,  depreciation and amortization, and increases
in accounts payable.  Cash used from operating  activities during the six months
ended October 31, 1997, was principally  the result of a net loss $462,000,  net
of adjustments  for non-cash items,  primarily  depreciation,  amortization  and
extraordinary  loss  on  extinguishment  of  debt,  and  increases  in  accounts
receivable and other current assets.

The Company's investing activities used cash of $654,000 and $71,000 for the six
months ended October 31, 1998 and 1997,  respectively.  Cash used during the six
months ended October 31, 1998 resulted primarily from the purchase of Chemotrade
and  property  and  equipment.  Investing  activities  for the six months  ended
October 31, 1997 were for purchases of property and equipment.

Financing  activities  used cash of $44,000  during the six months ended October
31, 1998 and provided cash of $1.63 million during the comparable  period of the
previous  fiscal year.  Cash used during the six months  ended  October 31, 1998
resulted  primarily  from the  payment of debt  associated  with the  Chemotrade
acquisition  which was offset in part by  proceeds  from line of credit and term
loan. Cash provided by financing  activities during the six months ended October
31, 1997 resulted  primarily from the completion of the Company's initial public
offering which was offset in part by the repayment of outstanding debt.

At October 31, 1998,  the Company had $308,000 of cash and cash  equivalents,  a
decrease of $736,000 compared to $1,044,000 as of April 30, 1998. At October 31,
1998,  the Company had negative  working  capital of  $1,232,000,  a decrease of
$3,546,000  compared to working  capital of $1,811,000 as of April 30, 1998. The
decrease  is  primarily  the  result  of the  Company's  cash  payments  for the
acquisition  of  Chemotrade  and the losses  incurred  for the six

                                       13

<PAGE>

months ended October 31, 1998. During the six months ended October 31, 1998, the
Company paid the sellers of  Chemotrade  $1,601,000 of cash and has one note for
$907,000 outstanding due to the sellers on June 1, 1999.

On July 24,  1998,  the  Company  obtained a $3.0  million  asset  based  credit
facility for its U.S. operations, secured by its U.S. assets, with a lender. The
loan  consists  of a $500,000  equipment  term loan,  payable  over forty  eight
months,  a $250,000 term loan with  interest  only payments due monthly  through
October  31,  1998,  and  commencing  August 1, 1998,  payable  over twenty five
months, a $500,000  revolving line of credit,  with borrowings limited to 35% of
eligible  inventory,  a $1,250,000  revolving  line of credit,  with  borrowings
limited  to  80%  of  eligible  accounts  receivable  and a  $500,000  equipment
acquisition  term loan. The  availability of the equipment  acquisition  loan is
conditioned  upon the Company  achieving  and  maintaining  minimum debt service
coverage  ratios.   The  proceeds  of  the  new  facility  were  used  to  repay
approximately  $537,000 of debt  outstanding  and $742,000 of accounts  payable.
Chemotrade  has one unsecured  revolving line of credit for 400,000 DM ($242,000
at October 31, 1998). The Company is in the process of evaluating secured credit
facilities for Chemotrade.

Factors That May Affect Future Results

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

Relationship With Certain Suppliers and Availability of Raw Materials

The Company depends upon an isotope enrichment plant,  located in Russia,  which
is owned by the  Ministry  of  Atomic  Energy  of the  Russian  Federation  (the
"Ministry"),  which is part of the  cabinet  of the  government  of the  Russian
Federation,  for one process  involved in the  manufacturing  of DZ. The Company
also relies upon a single supplier of raw material for DZ. The Company signed an
agreement  with the  commercial  department of the Ministry to purchase  certain
isotope separation services through 2001.  Disruption or termination of services
provided by the Ministry or the Company's  single supplier of raw material could
have a material and adverse  affect upon the Company's  financial  condition and
results of operations.

Operations in Russia and the Republic of Georgia

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

Customer Concentration

Historically,  substantially all of the Company's net revenues in any particular
period have been attributable to a limited number of customers.  Consistent with
the Company's  historical  experience,  the Company's  quarterly  results during
fiscal  1999 and 2000 are  expected to be  affected  materially  by the level of
orders  received  from  significant  DZ users  during  such  quarter and product
shipments  by the Company to DZ customers  during such  period.  There can be no
assurance  that the  Company's  principal  customers  will  continue to purchase
products. A decrease in or loss of

                                       14

<PAGE>

orders from one or more major customers would have a material and adverse effect
on the Company's financial condition and results of operations.

Factors Affecting Operating Results; Variability of Orders

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

Management of Growth

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

Dependence on Key Personnel

The Company's  future success will depend in significant part upon the continued
service of its key technical,  sales and senior management personnel,  including
James E. Alexander,  the Company's President and Chief Executive Officer,  Boris
Rubizhevsky, the Company's Senior Vice President, Isotope Production and Supply,
Robert Cuttriss,  President of Interpro, and Herbert Hegener,  Managing Director
of Chemotrade. The Company maintains $1 million of key man life insurance on the
lives of Messrs.  Alexander,  Rubizhevsky  and  Cuttriss  and all are covered by
employment  agreements with the Company  extending through September 2001, 2001,
and 2003,  respectively.  Messr.  Hegener is covered by an employment  agreement
with the Company  extending through the year 2001. The Company believes that its
future  success will depend in large part upon its ability to attract and retain
qualified  personnel for its  operations.  The failure to attract or retain such
persons could  materially  adversely  affect the Company's  business,  financial
condition and results of operations.

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

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

Volatility of Stock Price

The  trading  price  of the  Company's  securities  has  been  subject  to  wide
fluctuations in response to quarter to quarter  variations in operating results,
announcements of technological innovations or new products by the Company or its
competitors,  and other  events or factors.  In  addition,  the stock market has
experienced  wide  price  and  volume

                                       15

<PAGE>

fluctuations, which have at times been unrelated to the operating performance of
the companies whose securities are traded.  These broad market  fluctuations may
adversely effect the market price of the Company's common stock and common stock
warrants.

Shares Eligible for Future Sale

The  officers  and  directors  of the  Company and all other  stockholders  have
agreed, pursuant to lock-up agreements expiring September 2000, that without the
prior written consent of Monroe Parker Securities,  Inc. (the  "Representative")
and the Company,  that they will not sell or  otherwise  dispose of common stock
beneficially  owned by  them.  The  Company  was  advised  by  officials  of the
Representative,   that  on  December  22,  1997,   the   Representative   ceased
market-making activities;  therefore, the Company may, in the future at its sole
discretion, release a portion of securities subject to these lock-up agreements.

                                       16

<PAGE>

                           Part II: Other Information


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

        A.   The annual meeting of shareholders was held on October 6, 1998

        B.   The following matters were voted upon at the annual meeting:

        1.   To elect the  following  directors  to serve  until the next annual
             meeting:
                                                            For       Withheld
                                                            ---       --------
                 James E. Alexander, Chairman            4,866,165       0
                 Boris Rubizhevsky, Vice Chairman        4,866,165       0
                 Lindsay A. Gardner, Director            4,866,165       0
                 Larry J. Wells, Director                4,866,165       0
                 Richard Parker, Director                4,866,165       0

        2.   To approve the 1998 Employee Stock Purchase Plan

             For - 4,866,165       Against - 0         Abstain - 0

        3.   To ratify the  appointment  of Grant  Thornton  LLP as  independent
             auditors for the fiscal year ending April 30, 1998.

             For - 4,866,165       Against - 0         Abstain - 0


Item 6: Exhibits and Reports on Form 8-K

        (a)  Exhibits.


                  Exhibit
                   Number         Description                            Page(s)
                 --------         ----------------------------------     -------
                   27.01          Financial Data Schedule                19


        (b)        (b) Reports on Form 8-K.

             An amended Current Report on Form 8-K/A was filed by the Registrant
             on October 5, 1998 to submit the audited  financial  statements  of
             Chemotrade GmbH and subsidiary and pro forma financial  information
             for the year ended April 30, 1998.

             A Current  Report on Form 8-K was filed by the Registrant on August
             8,  1998 to file the  Sale and  Purchase  Agreement  among  Isonics
             Corporation  and Mr.  Helmut  Swyen and Mr.  Herbert  Hegener,  the
             sellers,   and  press   releases   announcing   the  execution  and
             consummation of the Chemotrade acquisition.


                                       17

<PAGE>

                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized, in the City of San Jose, County of Santa
Clara, State of California, on the 15h day of December, 1998.

         Isonics Corporation
              (Registrant)



        By                                        /s/James E. Alexander
           ------------------------------------------------------------
           James E. Alexander
           President, Chief Executive Officer and Director




        By                                        /s/Paul J. Catuna
           ------------------------------------------------------------
           Paul J. Catuna
           Vice President, Finance
           Chief Financial Officer

                                       18