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 July 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 Blvd., Suite 220
                           San Jose, California 95119
                    (Address of principal executive offices)

                                 (408) 260-0155
                           (Issuer's telephone number)

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

The number of shares outstanding of the registrant's Common Stock, no par value,
was 6,166,539 at September 14, 1998.

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


<PAGE>


                               Isonics Corporation

                                TABLE OF CONTENTS

                                   FORM 10-QSB


Part I:  Financial Information

         Item 1: Financial Statements

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

         Item 2: Management's Discussion and Analysis or Plan of Operations....9

Part II: Other Information

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

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

                                       2

<PAGE>


<TABLE>
                                                    Part I: Financial Information

Item 1:    Condensed Financial Statements

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

                                                                                                        July 31,           April 30,
                                                                                                          1998               1998
                                                                                                         --------          --------
                                                                                                       (Unaudited)
                                                               ASSETS
<S>                                                                                                      <C>               <C>     
CURRENT ASSETS:
     Cash and cash equivalents                                                                           $    397          $  1,044
     Accounts receivable (net of allowances of $ 259 and $130, respectively)                                3,354             1,629
     Inventories                                                                                            1,018               456
     Prepaid expenses and other assets                                                                        323                45
     Deferred income taxes                                                                                    146               112
                                                                                                         --------          --------

         Total current assets                                                                               5,238             3,286

Property and equipment, net                                                                                 1,602             1,626
Goodwill, net                                                                                               3,517               236
Notes receivable from shareholders                                                                            142               170
Other assets                                                                                                   62                22
Deferred income taxes                                                                                         293               315
                                                                                                         --------          --------
Total                                                                                                    $ 10,854          $  5,655
                                                                                                         ========          ========

                                                LIABILITIES AND STOCKHOLDERS' EQUITY


CURRENT LIABILITIES:
     Current portion of long-term debt                                                                   $    173          $     80
     Notes payable                                                                                          1,750              --
     Accounts payable                                                                                       2,754               657
     Accrued liabilities                                                                                    1,064               738
                                                                                                         --------          --------

         Total current liabilities                                                                          5,741             1,475

Long-term debt                                                                                                495               312

Deferred income taxes                                                                                         405               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: July 31,1998, 6,166,539                                                                   6,200             5,289
     Notes receivable from stockholders                                                                      (343)             (337)
     Accumulated deficit                                                                                   (1,644)           (1,511)
                                                                                                         --------          --------
         Total stockholders' equity                                                                         4,213             3,441
                                                                                                         --------          --------
Total                                                                                                    $ 10,854          $  5,655
                                                                                                         ========          ========

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

                                                                 3

<PAGE>


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


                                                            Three Months Ended
                                                                 July 31,
                                                           --------------------
                                                            1998         1997
                                                           -------      -------
Net revenues                                               $ 3,933      $ 1,535
Cost of revenues                                             2,989        1,179
                                                           -------      -------
        Gross margin                                           944          356

Operating expenses:
    Selling, general and administrative                        682          267
    Research and development                                   323          149
                                                           -------      -------

        Total operating expenses                             1,005          416
                                                           -------      -------

Operating loss                                                 (61)         (60)

Interest income                                                 24            6
Interest expense                                               (76)        (135)
                                                           -------      -------

             Total interest income (expense), net              (52)        (129)
                                                           -------      -------

Loss before income taxes                                      (113)        (189)

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


NET LOSS                                                   $  (133)     $  (190)
                                                           =======      =======

Net income (loss) per share
Basic                                                      $  (.02)     $  (.04)
                                                           =======      =======
Diluted                                                    $  (.02)     $  (.04)
                                                           =======      =======

Shares used in computing per share amounts:
Basic                                                        5,978        4,550
                                                           =======      =======
Diluted                                                      5,978        4,550
                                                           =======      =======

            See notes to condensed consolidated financial statements.

                                       4

<PAGE>


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

<CAPTION>
                                                                                                             Three Months Ended
                                                                                                                   July 31,
                                                                                                           ------------------------
                                                                                                            1998              1997
                                                                                                           -------          -------
<S>                                                                                                        <C>              <C>    
Net cash provided by (used in) operating activities                                                        $  (305)         $   373

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of Property and Equipment                                                                       (32)             (57)

CASH FLOWS FROM FINANCING ACTIVITIES:
     Line of credit, net                                                                                       187             --
     Repayments of debt                                                                                        (25)            (257)
     Purchase of Chemotrade, net of cash acquired                                                             (489)            --
                                                                                                           -------          -------
                  Cash used in financing activities                                                           (310)            (257)
                                                                                                           -------          -------


NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS                                                         (647)              59
Cash and cash equivalents at beginning of period                                                             1,044               28
                                                                                                           -------          -------
Cash and cash equivalents at end of period                                                                 $   397          $    87
                                                                                                           =======          =======

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

        Interest                                                                                           $    60          $    63
                                                                                                           =======          =======
        Income taxes                                                                                       $     1          $     1
                                                                                                           =======          =======


Supplemental disclosure of noncash investing and financing activities:
        Equipment acquired under capital lease                                                             $    10          $  --
                                                                                                           =======          =======
        Purchase of Chemotrade
                 Cash paid, net of cash acquired                                                           $   489   
                 Stock issued to sellers                                                                       894
                 Debt issued to sellers                                                                      1,750 
                 Liabilities assumed                                                                         1,598
                                                                                                           ------- 
                         Assets acquired (including goodwill of $3,328)                                    $ 4,731
                                                                                                           =======

<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  financial  statements of Isonics  Corporation  and
Subsidiaries  (the "Company" or "Isonics") as of July 31, 1998 and for the three
months ended July 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 equivalent shares outstanding during the period. 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):

                                                   July 31,          April 30,
                                                     1998              1998
                                                    ------             ------
Finished goods                                      $  740             $  250
Work in process                                       --                 --
Raw materials                                          278                206
                                                    ------             ------
Inventories                                         $1,018             $  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

Two notes payable were issued to the sellers of Chemotrade  GmbH and  subsidiary
as consideration  for a portion of the purchase price. One note is for $924,000,
bears interest at 2% per month, and is secured by certain  accounts  receivable.
The note was repaid in August 1998. A second note for $826,000  bearing interest
at 10%, secured by the common stock purchased by Isonics, is due June 1999.

Significant Customers and Suppliers

At July 31,  1998  three  customers  accounted  for 30%,  14%,  and 14% of total
accounts  receivable.  Two  customers  accounted for 30% and 14% of net revenues
during the three months ended July 31, 1998. Three different customers accounted
for 51%,  19%,  and 17% of net  revenues  during the three months ended July 31,
1997.

                                       6

<PAGE>


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

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

Business Developments

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 has been accounted
for effective June 1, 1998, the date control of Chemotrade was transferred.  The
purchase  price  consideration  consisted of $2.576  million paid at closing and
$1.107  million to be paid through June 2001.  Transaction  costs as of July 31,
1998  were  $68,000  and  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
operations  for the three month period ended July 31, 1998 as 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  bearing interest at 2% per month,  which
was paid in August,  and a second note of $826,000  bearing interest at 10%, due
June 1, 1999. The sellers have guaranteed  Chemotrade's defined pre tax earnings
will be at least $550,000 during each of 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  $550,000 for the sixteen month period ended April 30,
1999 or year ended April 30,  2000,  the note  payable of  $826,000  due June 1,
1999,  will be  reduced  by $0.75  for each  $1.00  shortfall  of  earnings.  If
Chemotrade  has pretax  earnings of at least  $550,000 for the fiscal year ended
April 30, 2001, the sellers will receive  additional  consideration of $281,000.
If the pre tax earnings are less than  $550,000  during the twelve  months ended
April 30, 2001,  the  consideration  will be reduced $0.50 for each 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 $3.442 million purchase price over the fair value
of the tangible assets acquired,  $1.712 million,  less  liabilities  assumed of
$1.598  million,  $3.328  million has been  allocated  to  goodwill  and will be
amortized over twenty years.

                                       7

<PAGE>


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

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.

The  reported  results of  operations  of the Company for the three months ended
July 31, 1998  includes two months of the operating  results of  Chemotrade  and
three  months  of the  operating  results  of  Interpro.  Pro forma  results  of
operations  as if the  acquisition  had  occurred at the  beginning of the three
month period ended July 31, 1998 and 1997 are as follows (in  thousands,  except
per share data):


                                                            Three Months Ended
                                                                 July 31,
                                                           --------------------
                                                            1998         1997
                                                           -------      -------
Net revenues                                               $ 4,854      $ 3,867 
Gross margin                                                 1,051          777
Net loss                                                       (64)        (269)
Net loss per share:
     basic                                                 $ (0.01)     $ (0.05)
     diluted                                               $ (0.01)     $ (0.05)
Number of shares used in computing per share information                        
     basic                                                   6,099        5,262
                                                           =======      ========
     diluted                                                 6,099        5,262
                                                           =======      ========

                                       8

<PAGE>


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

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

Overview

Founded in 1992, Isonics Corporation ("Isonics" or the "Company") is a specialty
chemical and  advanced  materials  company  which  develops  and  commercializes
products  based on stable and radio  isotopes.  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.  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 isotopes which are then converted into
products which meet the specialized needs of Isonics' customers.

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

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

Effective  April 30, 1998,  Isonics  purchased  International  Process  Research
Corporation  ("Interpro") dba Colorado Minerals Research  Institute by acquiring
all of the  outstanding  capital  stock  of  Interpro.  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.

                                       9

<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 labelled 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 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

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.

                                                             Three Months Ended
                                                                  July 31,
                                                             -----------------
                                                             1998        1997
                                                             -----       ----- 
Net revenues                                                 100.0%      100.0%
Cost of revenues                                              76.0        76.8
                                                             -----       ----- 
               Gross Margin                                   24.0        23.2
                                                             -----       ----- 

Operating expenses:
               Selling, general and administrative            17.4        17.4
               Research and development                        8.2         9.7
                                                             -----       ----- 
                 Total operating expenses                     25.6        27.1
                                                             -----       ----- 
Operating loss                                                (1.6)       (3.9)
Interest income (expense) net                                 (1.3)       (8.4)
                                                             -----       ----- 
Loss before income taxes                                      (2.9)      (12.3)
Income tax expense                                             0.5         0.1
                                                             -----       ----- 
NET LOSS                                                      (3.4)%     (12.4)%
                                                             =====       ===== 

Net Revenues

Net  revenues  for the three  months  ended  July 31,  1998 were  $3.93  million
compared to $1.53  million for the three months ended July 31, 1997, an increase
of $2.40  million or 157%.  The  increase  was  primarily  due to  increases  in
revenues  from DZ sales and the net revenues  from the  Interpro and  Chemotrade
acquisitions.  Net revenues from DZ increased by approximately  $903,000 for the
three months ended July 31, 1998, on increased unit sales of

                                       10

<PAGE>


approximately  35%.  Average unit sales prices for DZ increased in comparison to
the previous fiscal years' comparable quarter.

Gross Margin

Gross margin for the three  months  ended July 31, 1998  increased to 24.0% from
23.2%  of  net  revenues  in  the  comparable  period  of the  prior  year.  The
improvement is due to increased average unit sales prices for DZ, offset in part
by lower margins on contract manufacturing  performed by Interpro and stable and
radio isotope revenues generated by Chemotrade.

Selling, General and Administrative Expenses

Selling,  general and  administrative  expenses  increased  on a dollar basis to
approximately $682,000, or 17.4% of net revenues for the three months ended July
31, 1998,  from $267,000,  or 17.4% of net revenues in the comparable  period of
the prior year.  The dollar  increase  for the  quarter  ended July 31, 1998 was
primarily  attributable to the acquisition of Interpro and Chemotrade as well as
professional  fees and media  relations  costs  associated  with  being a public
company,  while the amount as a percentage  of net revenues did not change.  The
Company  anticipates  that  selling,  general and  administrative  expenses will
generally  continue  to  increase  in  absolute  dollars to support  anticipated
revenue growth, but may vary as a percentage of net revenues.

Research and Development Expenses

Research and development  expenses  increased by $174,000,  or 117%, to $323,000
for the quarter ended July 31, 1998 from $149,000 for the  comparable  period of
the prior year,  while  declining on a percentage  basis to 8.2% of net revenues
from 9.7%. The dollar increase  during  the  quarter  ended  July 31,  1998 were
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  ended July 31, 1998 compared to the same period
of the previous year was due to revenue  growth.  The Company  believes that the
development  and  introduction  of new product  applications  is critical to its
future success and expects that research and development  expenses will increase
on a dollar basis, but may vary as a percentage of net revenues.

Interest income (expense), net

Interest  expense,  reflects  interest costs and, prior to the Company's initial
public offering in September 1997,  amortization of issuance costs and discounts
on outstanding debt. Interest expense,  net, decreased by $77,000 to $52,000 for
the quarter  ended July 31, 1998 from net  interest  expense of $129,000 for the
comparable  period of the  previous  fiscal  year.  The  decrease was due to the
Company  repaying  approximately  $1.78  million  of  outstanding  debt from the
proceeds of its initial public  offering  offset in part by interest  charged on
notes payable issued to the sellers of Chemotrade,  imputed  interest of $28,000
recorded  from  the  effective  date  of  the  acquisition  to the  actual  date
consideration  was paid to the  sellers,  and  interest on debt  outstanding  at
Interpro.

Income taxes

The  provision  for income taxes was $20,000 and $1,000 for the  quarters  ended
July 31, 1998 and 1997, respectively.  The provision for income taxes of $20,000
for the three  months ended July 31,  1998,  was the result of foreign  taxes on
Chemotrade's net income. The provision of $1,000 for the three months ended July
31, 1997 was the result of state taxes.

                                       11

<PAGE>


Liquidity and Capital Resources

Since inception,  the Company's principal sources of funding have been cash from
operations,  borrowed  funds and sales of common  stock.  The Company  used cash
in operating  activities  of  approximately  $305,000 and  generated  cash  from
operating activities of $373,000 during the three months ended July 31, 1998 and
1997,  respectively.  Cash used in operating  activities during the three months
ended July 31, 1998 was principally the result of a net loss of $133,000, offset
by adjustments  for non-cash items,  primarily  depreciation  and  amortization,
imputed  interest,  and increases in accounts  receivable  and  inventory.  Cash
generated from operating activities during the three months ended July 31, 1997,
was  principally  the result of decreases in inventory and increases in accounts
payable and accrued  liabilities,  offset by the net loss of $190,000,  adjusted
for non-cash expense items and increases in accounts receivable.

The  Company's  investing  activities  used cash of $32,000  and $57,000 for the
three months ended July 31, 1998 and 1997,  respectively.  Investing  activities
were for purchases of property and equipment.

Financing  activities used cash of $310,000 and $257,000 during the three months
ended July 31, 1998 and 1997,  respectively.  Cash used by financing  activities
during the three months ended July 31, 1998 resulted  primarily from the payment
of the cash portion of the Chemotrade  consideration which was offset in part by
proceeds  from line of credit  borrowings.  Cash  used in  financing  activities
during the three months ended July 31, 1997, consisted of repayment of debt.

At July 31, 1998, the Company had $397,000 of cash and  equivalents,  a decrease
of $647,000  compared to $1,044,000 as of April 30, 1998. At July 31, 1998,  the
Company had  negative  working  capital of  $503,000,  a decrease of  $2,314,000
compared to working  capital of $1,811,000 as of April 30, 1998. The decrease is
primarily  the result of the Company's  acquisition  of  Chemotrade.  During the
three  months ended July 31,  1998,  the Company paid the sellers of  Chemotrade
$758,000 of cash and issued two notes payable for an aggregate $1,750,000.

On July 24, 1998, the Company  obtained a $3.0 million  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 and principal due October 31, 1998,
$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  at July 31, 1998 and $742,000 of accounts  payable.  Chemotrade has
two  unsecured  revolving  lines of credit that  combined  total  $395,000.  The
Company is in the process of evaluating  several  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

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<PAGE>


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 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

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<PAGE>


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  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,  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.

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<PAGE>


                           Part II: Other Information

Item 6: Exhibits and Reports on Form 8-K

         (a)   Exhibits.


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


         (b) Reports on Form 8-K.

              An  amended  Current  Report  on  Form  8-K/A  was  filed  by  the
              Registrant  on July  29,  1998 to  submit  the  audited  financial
              statements of International  Process Research  Corporation 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 May
              27, 1998 to put on file the Stock Purchase Agreement among Isonics
              Corporation,  Metallurgy  International,  Inc.  and  International
              Process Research  Corporation;  the Escrow Agreement among Isonics
              Corporation,  Metallurgy  International,  Inc., Robert H, Cuttriss
              (as Agent),  and Colorado Business Bank as Escrow Agent, and press
              releases   announcing  the  execution  and   consummation  of  the
              acquisition.

                                       15

<PAGE>


                                   SIGNATURES


Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized, in the City of San Jose, County of Santa
Clara, State of California, on the 18th day of September, 1998.

         Isonics Corporation
              (Registrant)



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




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

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