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, 1997



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

     For the transition period from _______ to ______

         Commission file number: 001-12531

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


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


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


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

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

The number of shares outstanding of the registrant's Common Stock, no par value,
was 5,360,268 at December 3, 1997.

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

         Item 1:      Financial Statements
<S>                                                                                                     <C>
                      Condensed Balance Sheets as of October 31, 1997 and April
                           30, 1997......................................................................3
                      Condensed Statements of Operations for the Three and Six
                           Month Periods Ended October 31, 1997 and 1996.................................4
                      Condensed Statements of Cash Flows for the Six Month Period
                           Ended October 31, 1997 and 1996...............................................5
                      Notes to Condensed Financial Statements............................................6

         Item 2:      Management's Discussion and Analysis of Financial Condition
                           and Results of Operations.....................................................8

Part II: Other Information

         Item 6:      Exhibits and Reports on Form 8-K..................................................14

Signatures .............................................................................................15
</TABLE>

                                                     2

<PAGE>


<TABLE>
                                                    Part I: Financial Information

Item 1: Condensed Financial Statements

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

<CAPTION>
                                                                                                         October 31,       April 30,
                                                                                                            1997             1997
                                                                                                           -------          -------
                                                                                                         (Unaudited)
                                                               ASSETS
<S>                                                                                                        <C>              <C>    
CURRENT ASSETS:
     Cash and cash equivalents                                                                             $ 1,241          $    28
     Accounts receivable                                                                                       484                4
      Inventories                                                                                            1,541            1,539
     Prepaid expenses                                                                                           47               14
                                                                                                           -------          -------

         Total current assets                                                                                3,313            1,585

Property and equipment, net                                                                                    132               70
Goodwill, net                                                                                                  276              315
Notes receivable from shareholders                                                                             167               41
Other assets                                                                                                    11               11
Debt issuance costs, net                                                                                      --                106
Deferred offering costs                                                                                       --                556
                                                                                                           -------          -------
Total                                                                                                      $ 3,899          $ 2,684
                                                                                                           =======          =======


                                           LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

CURRENT LIABILITIES:
     Current portion of long-term debt                                                                     $    74          $   403
     Accounts payable                                                                                          921            1,105
     Accrued liabilities                                                                                       475              518
                                                                                                           -------          -------

         Total current liabilities                                                                           1,470            2,026

Long-term debt                                                                                                  60            1,268

Commitments                                                                                                   --               --
Stockholders' Equity (Deficit):
     Class A Preferred Stock - no par value - 10,000,000
       shares authorized; none outstanding                                                                    --               --
     Common stock - no par value - 20,000,000 shares
       authorized; issued and outstanding: April 30, 1997,
       3,570,046; October 31,1997, 5,360,268                                                                 4,581            1,129
     Notes receivable from stockholders                                                                       (354)            (343)
     Accumulated deficit                                                                                    (1,858)          (1,396)
                                                                                                           -------          -------
         Total stockholders' equity (deficit)                                                                2,369             (610)
                                                                                                           -------          -------
Total                                                                                                      $ 3,899          $ 2,684
                                                                                                           =======          =======
</TABLE>

                                                                 3

<PAGE>


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


<CAPTION>
                                                                              Three Months Ended                Six Months Ended
                                                                                  October 31,                     October 31,
                                                                            -----------------------         -----------------------
                                                                             1997            1996            1997             1996
                                                                            -------         -------         -------         -------
<S>                                                                         <C>             <C>             <C>             <C>    
Net revenues                                                                $ 1,771         $   840         $ 3,306         $ 2,404
Cost of revenues                                                              1,174             714           2,340           1,837
                                                                            -------         -------         -------         -------
        Gross margin                                                            597             126             966             567

Operating expenses:
    Selling, general and administrative                                         368             321             636             587
    Research and development                                                    203              98             352             188
                                                                            -------         -------         -------         -------

        Total operating expenses                                                571             419             988             775
                                                                            -------         -------         -------         -------

Operating income (loss)                                                          26            (293)            (22)           (208)
Other income (expense)
    Interest income                                                              20               2              27               3
    Interest expense                                                            (78)            (84)           (214)            (97)
                                                                            -------         -------         -------         -------

        Total other expense, net                                                (58)            (82)           (187)            (94)
                                                                            -------         -------         -------         -------

Loss before extraordinary item and income taxes                                 (32)           (375)           (209)           (302)

Income tax expense                                                                1              23               1              53
                                                                            -------         -------         -------         -------

Loss before extraordinary item                                                  (33)           (398)           (210)           (355)
                                                                            -------         -------         -------         -------


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

NET LOSS                                                                    $  (285)        $  (398)        $  (462)        $  (355)
                                                                            =======         =======         =======         =======


Net loss per share before extraordinary item                                $ (0.01)        $ (0.07)        $ (0.04)        $ (0.06)
                                                                            =======         =======         =======         =======
Extraordinary item                                                          $ (0.05)        $  --           $ (0.04)        $  --
                                                                            =======         =======         =======         =======
Net loss per share                                                          $ (0.06)        $ (0.07)        $ (0.08)        $ (0.06)
                                                                            =======         =======         =======         =======
Shares used in computing per share information                                4,894           5,852           5,627           6,080
                                                                            =======         =======         =======         =======
Pro forma loss per share                                                    $ (0.06)        $ (0.05)        $ (0.05)        $ (0.04)
                                                                            =======         =======         =======         =======
Shares used in computing pro forma share information                          5,135           6,333           5,869           6,440
                                                                            =======         =======         =======         =======
</TABLE>

                                                                 4

<PAGE>


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

<CAPTION>
                                                                                                             Six Months Ended
                                                                                                                 October 31,
                                                                                                           ------------------------
                                                                                                            1997              1996
                                                                                                           -------          -------
<S>                                                                                                        <C>              <C>     
Net cash used in operating activities                                                                      $  (379)         $(1,429)

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of Property and Equipment                                                                       (71)             (10)

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from issuance of long-term debt and warrants                                                    --              1,320
     Repayments of debt                                                                                     (1,782)             (64)
     Proceeds from issuance of common stock, net                                                             3,452              202
     Payment of debt issuance costs                                                                             (7)            (106)
                                                                                                           -------          -------
                  Cash provided by financing activities                                                      1,663            1,352
                                                                                                           -------          -------


NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS                                                        1,213              (87)
Cash and cash equivalents at beginning of period                                                                28              116
                                                                                                           -------          -------
Cash and cash equivalents at end of period                                                                 $ 1,241          $    29
                                                                                                           =======          =======

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

        Interest                                                                                           $   209          $    30
                                                                                                           =======          =======
        Income taxes                                                                                       $     1          $     9
                                                                                                           =======          =======


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

                                                                 5

<PAGE>


                               ISONICS CORPORATION
                     NOTES TO CONDENSED FINANCIAL STATEMENTS

Basis of Presentation

The  accompanying  condensed  financial  statements of Isonics  Corporation (the
"Company") as of October 31, 1997 and for the three and six months ended October
31, 1997 and 1996 have been prepared on the same basis as the audited  financial
statements.  In the opinion of management,  such unaudited  information includes
all adjustments  (consisting only of normal recurring  accruals) necessary for a
fair presentation of this interim information.  Operating results and cash flows
for interim  periods are not  necessarily  indicative  of results for the entire
year. The information included in this report should be read in conjunction with
the Company's  audited  financial  statements and notes thereto  included in the
Company's Prospectus dated September 22, 1997.

Concentration of Credit Risk

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

Net Income (Loss) Per Share

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

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

Inventories

         Inventories consist of (in thousands):

                                                   October 31,         April 30,
                                                      1997               1997
                                                     ------             ------

Finished goods                                       $1,378             $1,387
Work in process                                        --                 --
Raw materials                                           163                152
                                                     ------             ------

 Inventories                                         $1,541             $1,539
                                                     ======             ======

                                       6

<PAGE>


                               ISONICS CORPORATION
               NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

Significant Customers and Suppliers

At October 31, 1997 two customers  accounted  for 68% and 23% of total  accounts
receivable.  One customer  accounted for 47% and 54% of net revenues  during the
six months  ended  October 31, 1997 and 1996,  respectively.  A second  customer
accounted  for 12% and 11% of net revenues  during the six months ended  October
31, 1997 and 1996,  respectively.  Two different customers accounted for 23% and
20% of net  revenues  during the six months  ended  October  31,  1997 and 1996,
respectively.

The  Company  currently  uses a single  source  processor  in its  manufacturing
process;  a disruption of this relationship  could have an adverse impact on the
operating results of the Company.  The Company has not experienced a disruption;
however,  the Company recognizes the risks and is actively pursuing  alternative
sources.

Extinguishment of Debt

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

Recent Issued Accounting Standards

In February 1997, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standards  ("SFAS") No. 128,  "Earnings  Per Share".  The
Company is required to adopt this  standard in the first  quarter of fiscal year
1999 and will  restate at that time  earnings  per share  ("EPS") data for prior
periods to conform with the standard. Earlier application is not permitted. This
new standard  replaces  current EPS reporting  requirements  and requires a dual
presentation  of basic and  diluted  EPS.  Basic EPS  excludes  dilution  and is
computed by dividing net income by the weighted  average amount of common shares
outstanding  for the period.  Diluted EPS reflects the  potential  dilution that
could  occur  if  securities  or other  contracts  to issue  common  stock  were
exercised  or  converted  into  common  stock.  As with  current  EPS  reporting
requirements,  the standard  requires common equivalent shares to be excluded in
loss periods as they are antidilutive.

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

                                       7

<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;  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.  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  is  supplying  stable  isotope  labeled  compounds
("SILCs"),  mainly  enriched  carbon for  pharmaceutical  research  and  medical
diagnostic test  development.  The Company is developing  advanced,  lower cost,
production  technology for enriched carbon which the Company believes will allow
it to become the cost leader in the  potentially  large  enriched  carbon market
supporting a new class of minimally  invasive  diagnostic  tests which are being
developed by others.  The Company  believes  that a  substantial  portion of its
revenues  in the future will  depend on its  success in  developing  and selling
products in the semiconductor and SILC markets.

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

Historically,  substantially all of the Company's net revenues in any particular
period have been  attributable to a limited number of customers and sales of DZ.
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 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 orders, and products shipments made to DZ 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.  The Company  expects that if it
continues to increase  sales of depleted  zinc  products to end users,  develops
additional  sources of SILCs and  commercializes  electronic  material products,
concentration  of net  revenues  from a  limited  number  of  customers  will be
reduced.

                                       8

<PAGE>


Results of Operations

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

<CAPTION>
                                                                              Three Months Ended               Six Months Ended
                                                                                  October 31,                     October 31,
                                                                             ---------------------           ---------------------
                                                                              1997           1996             1997           1996
                                                                             -----           -----           -----           -----
<S>                                                                          <C>             <C>             <C>             <C>   
Net revenues                                                                 100.0%          100.0%          100.0%          100.0%
Cost of revenues                                                              66.3            85.0            70.8            76.4
                                                                             -----           -----           -----           -----
               Gross Margin                                                   33.7            15.0            29.2            23.6
                                                                             -----           -----           -----           -----

Operating expenses:
               Selling, general and administrative                            20.7            38.2            19.2            24.4
               Research and development                                       11.5            11.7            10.7             7.9
                                                                             -----           -----           -----           -----
                 Total operating expenses                                     32.2            49.9            29.9            32.3
                                                                             -----           -----           -----           -----
Operating income (loss)                                                        1.5           (34.9)           (0.7)           (8.7)
Other income (expense)
               Interest income                                                 1.1             0.2             0.8             0.1
               Interest expense                                               (4.4)          (10.0)           (6.5)           (4.0)
                                                                             -----           -----           -----           -----
                  Total other expense, net                                    (3.3)           (9.8)           (5.7)           (3.9)
                                                                             -----           -----           -----           -----
Loss before extraordinary item and income taxes                               (1.8)          (44.7)           (6.3)          (12.6)
Income tax expense                                                             0.1             2.7             0.0             2.2
                                                                             -----           -----           -----           -----
Loss before extraordinary item                                                (1.9)          (47.4)           (6.4)          (14.8)
Extraordinary item - loss on extinguishment of  debt                         (14.2)            0.0            (7.6)           (0.0)
                                                                             -----           -----           -----           -----
NET LOSS                                                                     (16.1)%         (47.4)%         (14.0)%         (14.8)%
                                                                             =====           =====           =====           =====
</TABLE>


Net Revenues

Net  revenues  for the three and six months  ended  October  31, 1997 were $1.77
million and $3.31  million,  respectively,  an increase of 110.8% and 37.5% over
$840,000 and $2.40 million for the  comparable  periods in prior fiscal  period.
The growth on a quarterly  and year-to -date basis is due primarily to increased
demand for DZ and SILC products. Net revenues from DZ increased by approximately
$951,000 and $992,000  for the three and six months ended  October 31, 1997,  on
increased unit sales of approximately 152% and 45%,  respectively.  Average unit
sales  prices for DZ  increased  in  comparison  to the  previous  fiscal  years
comparable quarter. Net revenues from SILCs were approximately  $323,000 for the
three months ended October 31, 1997, an increase of approximately $91,000 or 39%
from the same period of the previous  year. For the six months ended October 31,
1997, SILC revenues were  approximately  $627,000,  an increase of approximately
$338,000 or 117% for the  comparable  period of the previous  year.  The revenue
growth reflects the increasing demand for SILCs,  specifically,  enriched carbon
products.

International  sales represented less than 10% of net revenues for the three and
six months ended October 31, 1997 and 1996.

                                       9


<PAGE>


Gross Margin

Gross  margin  percentage  for the three and six months  ended  October 31, 1997
increased to 33.7% and 29.2% of net  revenues  from 15.0% and 23.6% for the same
periods in the prior fiscal year. The  improvement  is due to increased  average
unit sales prices for DZ and the increased  proportion of net revenues generated
from DZ,  which at present has a higher  gross  margin than SILCs.  Increases in
gross  margins  were  offset in part by charges  associated  with  reducing  the
Company's  cadmium  inventory  to market  value  during the three  months  ended
October 31, 1997.

Selling, General and Administrative Expenses

Selling,  general and  administrative  expenses  increased  on a dollar basis to
approximately  $368,000 for the quarter ended October 31, 1997,  from  $321,000,
while  declining on a  percentage  basis to 20.7% of net revenues for the second
quarter of fiscal 1998 from 38.2% of net revenues for the  comparable  period in
fiscal 1997. For the six months ended October 31, 1997, these expenses increased
on a dollar basis to $636,000 from $587,000 for the comparable  period in fiscal
1997 while declining on a percentage  basis to 19.2% of net revenues for the six
months  ended  October 31, 1997 from 24.4% for the  comparable  period in fiscal
1997.  The dollar  increase  during the quarter and six months ended October 31,
1997 was  primarily  attributable  to  professional  and media  relations  costs
associated  with being a public  company,  while the decrease as a percentage of
net revenues was due to growth in energy and SILC product revenues.  The Company
anticipates  that selling,  general and  administrative  expenses will generally
continue to increase in absolute  dollars,  but may vary as a percentage  of net
revenues.

Research and Development Expenses

Research and  development  expenses  increased  by  approximately  $105,000,  or
107.1%,  to $203,000 for the quarter ended October 31, 1997 from $98,000 for the
comparable period in fiscal 1997, while declining on a percentage basis to 11.5%
of net revenues from 11.7%. For the six months ended October 31, 1997,  research
and  development  expenses  increased  by  $164,000 or 87.2%,  to $352,000  from
$188,000 for the comparable period in the previous fiscal year, while increasing
on a percentage  basis to 10.7% of net revenues  from 7.9%.  Both the dollar and
percentage  increases  during the quarter and six months ended  October 31, 1997
were primarily due to increased  staffing and consulting  costs  associated with
the development of isotopically pure silicon wafers;  costs to develop advanced,
lower cost,  production  technology for enriched  carbon;  and commencement of a
feasibility study to increase isotope  production.  The decrease in research and
development  expenses as a  percentage  of net  revenues  for the quarter  ended
October 31, 1997 compared to the same period of the previous fiscal year was due
to revenue growth. The Company believes that the development and introduction of
new product  applications  is critical  to its future  success and expects  that
research and development  expenses will increase on a dollar basis, but may vary
as a percentage of net revenues.

Other Expense, Net

Other expense  reflects  interest and,  prior to the  Company's  initial  public
offering,  amortization  of issuance  costs and discounts on  outstanding  debt.
Other expense, net decreased by $24,000 to $58,000 for the quarter ended October
31, 1997 from $82,000 for the comparable period of the previous fiscal year. For
the six months ended October 31, 1997, other expense,  net increased to $187,000
from $94,000 for the comparable  period in fiscal 1997. During the quarter ended
October 31, 1997, the Company repaid  approximately $1.78 million of outstanding
debt  which  resulted  in  reduced  interest  expense.  Interest  expense,  net,
increased for the six months ended October 31, 1997, as the debt was outstanding
for four months  during  fiscal  1998  versus two months  during the prior years
comparable period.

                                       10

<PAGE>


Income taxes

The  provision  for income  taxes was $1,000 for the quarter  ended  October 31,
1997, a decrease of $22,000 from the  comparable  period of the prior year.  For
the six months ended October 31, 1997,  income taxes decreased $52,000 to $1,000
for the comparable period of the previous year. Fiscal 1998 taxes are the result
of minimum  state taxes.  The provision for income taxes for the quarter and six
months ended October 31, 1996 were the result of providing a valuation allowance
on deferred tax assets.

Extraordinary Item

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

Liquidity and Capital Resources

Since inception,  the Company's  principal sources of funding have been its cash
from operations, borrowed funds and sales of common stock. The Company used cash
in operating activities of approximately  $379,000 and $1,146,000 during the six
months  ended  October 31, 1997 and 1996,  respectively.  Cash used by operating
activities  during the six months  ended  October 31, 1997 was  principally  the
result  of a net  loss of  $462,000,  net of  adjustments  for  non-cash  items,
primarily depreciation, amortization and extraordinary loss on extinguishment of
debt, and increases of accounts  receivable and other current assets.  Cash used
by  operating  activities  during the six months  ended  October 31,  1996,  was
principally  the result of a net loss of $355,000,  adjusted for non-cash items,
increases  in accounts  receivable  and  inventories  and  decreases  in accrued
liabilities, offset in part by increases in accounts payable.

The Company's investing  activities used cash of $71,000 and $10,000 for the six
months ended October 31, 1997 and 1996, respectively.  Investing activities were
for purchases of property and equipment.

Financing  activities  provided cash of $1,663,000 and $1,069,000 during the six
months ended October 31, 1997 and 1996, respectively. 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. Financing activities during the six months
ended October 31, 1996 consisted of the issuance of notes and common stock which
was  offset  in  part by debt  issuance  costs,  deferred  offering  costs,  and
principal payments on debt.

At October 31, 1997, the Company had $1,241,000 of cash equivalents, an increase
of  $1,213,000  compared to $28,000 as of October 31, 1996. At October 31, 1997,
the Company had $1,843,000 working capital,  an increase of $2,276,000  compared
to negative  $432,000 as of October 31, 1996.  The increases  were primarily the
result of the Company's  initial public  offering in September 1997. At present,
the Company has no credit  facility with a bank or other  financial  institution
and no  in-place  source of capital,  however,  the Company is in the process of
evaluating  credit facilities and anticipates  securing  financing by the end of
the Company's  third quarter,  January 31, 1998. The Company  believes that cash
equivalents  on hand at October  31,1997 will be sufficient to allow the Company
to continue its expected level of operations for at least 12 months.

Factors That May Affect Future Results

In evaluating the Company's  business,  prospective  investors  should carefully
consider the following factors in addition to the other information presented in
this report and in the Company's other reports filed with the Securities

                                       11

<PAGE>


and Exchange  Commission that attempt to advise interested  parties of the risks
and factors that may affect the Company's business.

Relationship With Certain Suppliers and Availability of Raw Materials

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

Operations in Russia

Operations in Russia entail certain risks. In recent years the former  republics
of the Soviet Union have  experienced  political,  social and economic change as
constituent  republics sought independence from the former central government in
Moscow,  and certain of the  republics,  including  Russia,  have  attempted  to
transition  from a central  controlled  economy toward  market-based  economics.
These  changes  have  involved,  in certain  cases,  armed  conflict  in certain
republics.  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.
Accordingly the operations of the Company could be materially adversely affected
if  hostilities  in Russia should occur,  if trade between Russia and the United
States  were   interrupted,   if   political   conditions   in  Russia   disrupt
transportation  or  processing  concerning  the  Company's  goods,  if  laws  or
government  policies  concerning  foreign  business  operations in Russia change
substantially, or if tariffs are introduced.

Customer Concentration

Historically,  substantially all of the Company's net revenues in any particular
period have been attributable to a limited number of customers.  Consistent with
the Company's  historical  experience,  the Company's  quarterly  results during
fiscal  1998 and 1999 are  expected to be  affected  materially  by the level of
orders  received  from  significant  DZ users  during  such  quarter and product
shipments  by the  Company to DZ  customers  during  such  period.  The  Company
believes that if it continues to increase sales of depleted zinc products to end
users, if SILC revenues  continue to grow, and if it develops and sells products
in the electronic  materials  industries,  concentration  of net revenues from a
limited number of customers will be reduced.  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 of more major  customers  could 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.

                                       12

<PAGE>


Management of Growth

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

Dependence on Key Personnel

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

No Prior  Public  Market;  Determination  of  Public  Offering  Price;  Possible
Volatility of Stock Price

Prior to the Company's  initial public offering on September 23, 1997, there was
no public market for the Company's securities.  Consequently, the initial public
offering  price  was  determined  by  negotiations  among  the  Company  and its
underwriter.  There can be no  assurance  that an active  public  market for the
Company's  Common  Stock and Warrants  will  develop or be  sustained  after the
offering  or that the market  price of the Common  Stock and  Warrants  will not
decline  below the initial  public  offering  price.  The  trading  price of the
Company's  securities  could be  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,  or
other events or factors.  In addition,  the stock  market has  experienced  wide
price  and  volume  fluctuations,  which  have at times  been  unrelated  to the
operating  performance of the companies whose securities are traded. These broad
market  fluctuations  may adversely  effect the market price of the Common Stock
and Warrants.

                                       13

<PAGE>


                           Part II: Other Information

Item 6. Exhibits and Reports on Form 8-K

<TABLE>
     (a)   Exhibits.


<CAPTION>
               Exhibit
                Number         Description                                                  Page(s)
                ------         -----------                                                  -------
<S>             <C>                                                                           <C>
                11.01   Statement Regarding Calculation of Net Income (Loss) Per Share        16

                27.0    Financial Data Schedule                                               17
</TABLE>


     (b)  Reports on Form 8-K.  The Company did not file any Reports on Form 8-K
     during the quarter ended October 31, 1997.

                                       14

<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 12th day of December, 1997.

         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

                                       15