~~UNITED~~ ~~STATES~~Use these links to rapidly review the document Table of Contents ISONICS CORPORATION AND SUBSIDIARIES Index to Financial Statements

~~SECURITIES~~ ~~AND~~ ~~EXCHANGE~~ Table ~~COMMISSION~~of Contents

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

FORM 10-K

(Mark One)


(Mark One)
ý		ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended April 30, 2008
o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended April 30, 2007

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to

Commission file number: 001-12531

ISONICS CORPORATION (Exact name of registrant as specified in its charter)

(Name of small business issuer in its charter)


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

5906 McIntyre Street Golden, Colorado		80403
(Address of principal executive offices)		(Zip Code)

California		77-0338561
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)
5906 McIntyre Street
Golden, Colorado		80403
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (303) 279-7900

Registrant’s telephone number, including area code: (303) 279-7900

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, no par value (Title of Class)

~~Common~~ Indicate ~~Stock~~by check mark if the registrant is a well-known seasoned issuer, noas ~~par~~defined ~~value~~in Rule 405 of the Securities Act. Yes o No ý

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act: o

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 twelve (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 ý No o

Check if there is no disclosure of delinquent filers in response to Item 405 of ~~Regulation~~ Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant’'s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. xo

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company (as defined in Exchange Act Rule 12b-2).

Large accelerated filer o Accelerated filer o Non-accelerated filer xo (Do not check if a smaller reporting company) Smaller reporting company ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No xý

The aggregate market value of the common stock held by non-affiliates of the Registrant as of October 31, ~~2006~~2007 was approximately $284,~~775~~800,000 based upon the closing sale price of the Registrant’'s Common Stock on such date, as reported on the Nasdaq Capital Market. Shares of Common Stock held by each executive officer and director and each person owning more than 10% of the outstanding Common Stock of the Registrant have been excluded in that such persons may be deemed to be affiliates of the Registrant. This determination of ~~affiliate~~ affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of the Registrant’'s Common Stock, no par value, as of July 2021, ~~2007~~2008, was 1220,~~658~~335,~~150~~698 shares.

The Registrant’s proxy statement is incorporated by reference into Part III of this Form 10-K.

Table of Contents

		Page
	Forward-Looking Statements	1
Part I		1
Item 1.	Business	1
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	22
Item 2.	Properties	22
Item 3.	Legal Proceedings	22
Item 4.	Submission of Matters to a Vote of Security Holders	22
Part II		23
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23
Item 6.	Selected Financial Data	30
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 8.	Financial Statements and Supplementary Data	51
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	51
Item 9A.	Controls and Procedures	51
Item 9B.	Other Information	51
Part III		51
Item 10.	Directors, Executive Officers and Corporate Governance	51
Item 11.	Executive Compensation	51
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	51
Item 13.	Certain Relationships and Related Party Transactions	51
Item 14.	Principal Accountants Fees and Services	52
Part IV		52
Item 15.	Exhibits and Financial Statement Schedules	52
	Signatures	55

Table of Contents



	Forward-Looking Statements	1
Part I
Item 1.	Business	1
Item 1A.	Risk Factors	10
Item 1B.	Unresolved Staff Comments	19
Item 2.	Properties	19
Item 3.	Legal Proceedings	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
Part II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	20
Item 6.	Selected Financial Data	22
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 8.	Financial Statements and Supplementary Data	38
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	38
Item 9A(T).	Controls and Procedures	38
Item 9B.	Other Information	40
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	41
Item 11.	Executive Compensation	46
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	56
Item 13.	Certain Relationships and Related Party Transactions	58
Item 14.	Principal Accountants Fees and Services	59
Part IV
Item 15.	Exhibits and Financial Statement Schedules	60
	Signatures	63

Table of Contents

FORWARD-LOOKING STATEMENTS

Certain statements in this report, other than purely historical information, including projections, estimates, objectives ~~projections~~and expected operating results, statements relating to our business plans, ~~objectives~~ and ~~expected operating results, and~~ the assumptions upon which those statements are based, are “"forward-looking statements”" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements ~~generally~~ generally are identified by the words “"believe,”" “"expect,”" “"intend,”" “"estimate,”" “"anticipate,~~” “project,”~~" “"will" "project,”" “"plan,”" “"will continue,”" “"will likely result”" and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially from the forward-looking statements. A ~~detailed~~ detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “ "Risk Factors”" (refer to Item 1A). We undertake no obligation to update or revise publicly any forward-looking statements, whether as a results of new information, future events or otherwise.

PART I

ITEM 1. BUSINESS

General Discussion

We are focused on the ~~development and~~ provision of homeland security ~~products and~~ services and ~~the manufacture of~~ 300-millimeter (and smaller diameter) ~~silicon~~test ~~wafer~~wafers ~~reclaim~~ and reclamation ~~test products~~services, wafer thinning and custom wafer products and services for the ~~semiconductor~~silicon industry. In June 2007 we sold our life sciences business (which supplied isotopes for life sciences and health-care applications) as it no longer fit our long-term strategy for building a sustainable and profitable homeland security and ~~semiconductor~~silicon company and because of deteriorating business conditions in the historical revenue producing products in this business.

We were formed in March 1992, as a partnership, and were subsequently incorporated in California in March 1993, as A&R Materials, Inc. In September 1996, we changed our name to ~~Isonics~~ Isonics Corporation. Our web site is www.isonics.com. Our common stock is traded on the ~~Nasdaq~~OTC ~~Capital~~Bulletin ~~Market~~Board under the symbol “ISON.~~” Although our common stock is quoted on the Nasdaq Capital Market, our stock has at times traded at prices below the $1~~OB.00 per share minimum Nasdaq maintenance requirements. In addition, we have at times failed to meet the listing requirement of stockholders’ equity of at least $2.5 million or market value of listed securities of at least $35 million. While we are currently in compliance with the Nasdaq maintenance requirements, if the price of our common stock were to drop or if we failed to meet the minimum stockholders’ equity and market value requirements, we would be at risk of Nasdaq action to remove our securities from its Capital Market. We cannot give any assurance that we will continue to meet the Nasdaq requirements to maintain our Capital Market listing, or that if we do, a stable trading market will develop for our stock.

~~Effective February 13, 2007 we implemented a~~ The ~~reverse~~address ~~stock split whereby every four shares~~ of our ~~common~~principal ~~stock~~executive ~~that~~offices ~~were issued~~ and ~~outstanding were automatically combined into one issued and outstanding share without any change in the par value of such shares. The reverse split affected all holders of~~ our ~~common~~telephone ~~stock uniformly~~ and ~~did~~facsimile ~~not affect~~numbers ~~any~~at ~~shareholder’s percentage ownership interest in Isonics, except to the extent the reverse split resulted in any holder being granted a whole share for any fractional share~~ that ~~resulted~~address ~~from~~are: the reverse split. All shares of our common stock and shares of common stock underlying options, warrants and convertible debentures were proportionately reduced and the exercise prices of any warrants or options and the conversion prices of any convertible debentures were proportionately increased by the reverse stock split.

~~Our outstanding Class B and Class C common~~Isonics ~~stock~~Corporation 5906 ~~warrants~~McIntyre ~~expired on December 29~~Street Golden, ~~2006,~~Colorado ~~and~~80403 Telephone asNo.: ~~a result are no longer~~(303) 279-7900 ~~exercisable~~Facsimile ~~for~~No.: ~~shares~~(303) 279-7300 ~~of common stock.~~

1 During our year ended April 30, 2007, we raised over $12,800,000 (net of expenses and $4,100,000 of payments on our 8% Convertible Debentures issued in 2005 (the "8% Debentures")) through the issuance of $16,000,000 of convertible debentures in 2006 (the "2006 Debentures") and $2,000,000 of convertible debentures in April 2007 (the "April 2007 Debenture") to YA Global Investments, L.P. ("YA Global"), formerly known as Cornell Capital Partners, LP. The 2006 Debentures and the April 2007 Debenture (as amended in April 2007 and June 2008) are due October 31, 2009, bear interest at 13% per annum and are collateralized by substantially all of our assets.

In June 2008 we raised an additional $1,000,000 (net of expenses) through the issuance of $1,175,000 of term debt to YA Global (the "Term Note"). The ~~address~~Term Note is due October 31, 2009, bears interest at 13% per annum and is collateralized by substantially all of our ~~principal~~assets. ~~executive~~The ~~offices~~Term ~~and~~Note however is not convertible into our ~~telephone~~ ~~and~~common ~~facsimile~~stock ~~numbers~~but atonly ~~that~~repayable ~~address~~in ~~are:~~cash.

~~Isonics Corporation 5906 McIntyre Street Golden, Colorado 80403 Telephone No.: (303) 279-7900 Facsimile No.: (303) 279-7300~~1

~~During~~Table ~~our year ended April 30, 2007, we raised over $12,800,000 (net~~ of expenses and $4,100,000 of payments on our 8% Convertible Debentures (“8% Debentures”)) through the issuance of both 13% Convertible Debentures and 6% Convertible Debentures, which were subsequently modified to 13% Convertible Debentures. The modified 13% Convertible Debentures with a face value of $16,000,000 (the “2006 Debentures”) along with the 13% Convertible Debentures with a face value of $2,000,000 issued in April 2007 (the “April 2007 Debenture”) are collectively referred to as (the “13% Debentures”). As a result of this financing, we believe we currently have enough working capital to finance our anticipated operations and projected negative cash flow into our quarter ending January 31, 2008.Contents

~~Subsidiaries~~ In June 2008, YA Global exchanged two of the 2006 Debentures having an aggregate principal balance of $5,970,000 into notes (the "Exchange Notes") with the same terms as the Term Note described above.

We As ~~currently~~a ~~conduct~~result, ~~some~~we ofnow ~~our~~have ~~operations through subsidiaries. The following chart provides some information about those subsidiaries:~~

•: $7,145,000 in outstanding non-convertible term debt (the Term Note and the Exchange Notes, collectively the "Term Notes"); and
•: $11,868,400 (net of conversions to common stock) of remaining convertible debentures (the 2006 Debentures and the April 2007 Debenture, collectively the "13% Debentures").

Name and Headquarters	Place of Formation	Ownership Percentage	Business
Isonics Homeland	Delaware,	100%	Isonics Homeland Security and Defense
Security and Defense Corporation	USA		Corporation (“HSDC”) was formed in October 2004 and it coordinates our efforts in the homeland security market and is attempting to commercialize the detection technology that we acquired from Institut fur Umwelttechnologien GmbH (“IUT”).
SenseIt Corp	Delaware, USA	90% by HSDC	Our joint venture with SenseIt Corp (“SenseIt”) was formed in October 2006 with the purpose of accelerating development and driving commercialization of next generation infrared imaging and night vision surveillance technology in connection with our development agreement with Lucent Technologies, Inc. (“Lucent”).
Protection Plus	New York,	100% by	Protection Plus Security Corporation
Security Corporation	USA	HSDC	(“PPSC”) is a provider of advanced security and investigative services for leading businesses and institutions.
Isonics Vancouver, Inc.	Washington, USA	100%	Isonics Vancouver, Inc. (“IVI”) operates our semiconductor operations in Vancouver, Washington.

In conjunction with its purchase of the Term Note, YA Global agreed to purchase an additional two notes, one in the principal amount of $50,000 and the second in the principal amount of $275,000. However, YA Global's obligation to purchase these notes is either conditioned on the occurrence of certain events or is in the sole discretion of YA Global and as such it is uncertain when or if either of these additional notes will be issued.

2 Currently, we may not be in compliance with certain covenants of the remaining 13% Debentures and, in the June financing, YA Global refused to waive any non-compliance with the earlier financing documents. In addition, it is likely that we will be unable to comply with certain financial covenants of the Term Notes during our fiscal year ending April 30, 2009 and as a result YA Global may potentially also be able to, in its discretion, declare an Event of Default on those notes. If YA Global were to declare an event of default under the 13% Debentures or the Term Notes it would likely have the legal right to foreclose against its security interest and take control of, and/or dispose of, the assets subject to its security interest. Although YA Global has not yet declared an event of default, and we are continuing to have discussions with YA Global with the aim to further our business operations, we can offer no assurance that YA Global will not declare an event of default under the 13% Debentures or the Term Notes.

~~Chemotrade~~ As a ~~GmbH~~result ~~Dusseldorf,~~of ~~Germany~~the ~~Germany~~financing ~~100%~~in ~~Chemotrade~~June ~~GmbH~~2008, ~~(“Chemotrade”)~~we ~~was~~believe awe ~~value-added~~currently ~~re-seller~~have ofenough ~~stable~~working ~~and~~capital ~~radioactive~~to ~~isotopes.~~finance Itour ~~supplied~~anticipated ~~radioactive~~operations ~~isotopes~~and ~~for~~projected ~~pharmaceutical~~negative ~~and~~cash ~~industrial~~flow ~~research~~into asour ~~well~~quarter ending asOctober 31, ~~for~~2008. ~~industrial~~In ~~and~~addition, ~~medical~~if ~~imaging,~~we ~~calibration~~are ~~sources~~able ~~and~~to secure an offer for ~~cancer~~asset ~~therapy~~based ~~(brachytherapy)~~financing ~~applications.~~from ~~Additionally,~~a ~~Chemotrade~~third ~~supplied~~party, ~~various~~YA ~~stable~~Global ~~isotope~~has ~~labeled~~agreed ~~compounds~~to ~~for~~review ~~pharmaceutical~~that ~~research~~proposed financing and ~~drug~~in ~~design,~~its assole discretion ~~well~~consider asreleasing ~~oxygen—18~~its ~~for~~security ~~use~~interest in ~~producing~~certain aof ~~radioisotope~~our ~~used~~assets into ~~positron~~secure ~~emission~~that ~~tomography~~financing. ~~Chemotrade’s~~If ~~market~~we ~~was~~are ~~primarily~~successful ~~Europe~~at obtaining a minimum of $1,000,000 ~~but~~of ~~sales~~additional ~~were~~financing, ~~also~~we ~~made~~believe we could have enough working capital to ~~North~~finance ~~America~~our anticipated operations and ~~Asia.~~projected ~~Effective~~negative ~~December~~cash ~~31,~~flow ~~2005~~into our fiscal year ending April 30, we2010. ~~elected~~Because toof ~~close~~the terms of the ~~Chemotrade~~existing ~~office~~YA Global ~~and~~financing, ~~consolidate~~we ~~its~~are ~~operation~~unable ~~with~~to ~~ours~~secure inany ~~the~~additional ~~United~~financing ~~States~~without YA Global's consent and approval.

~~The~~ ~~foregoing does not include our minority ownership in three companies:~~Subsidiaries

· We ~~have~~ acurrently ~~30%~~conduct ~~interest~~our inoperations ~~IUT,~~through ansubsidiaries. ~~entity~~The ~~based~~following inchart ~~Berlin,~~provides ~~Germany,~~information ~~which~~about ~~performs research~~those ~~and~~subsidiaries: ~~development and manufactures radioisotopes.~~

· We have a 25% interest in Interpro Zinc, LLC, a Colorado entity that engages in the research and development for the recovery and recycling of zinc metal from various sources. Interpro Zinc, LLC has suspended its operations due to a lack of funding and it is unclear as to if or when it will resume such operations.

Name and Headquarters		Place of Formation		Ownership Percentage			Business

Isonics Vancouver, Inc.		Washington, USA			100%		Isonics Vancouver, Inc. ("IVI") operates our silicon operations in Vancouver, Washington.

· We have an approximate 6% interest in ISCON Video Imaging, Inc. (“ISCON”), a company that is attempting to develop patent-pending infrared imaging-based technologies for the non-invasive detection of objects hidden under clothing as well as technology for the determination of the chemical composition of such objects to identify explosives and drugs2

~~The~~Table ~~purchase and ownership~~ of our common stock involves a high degree of risk. See Item 1A. “Risk Factors”, below. We have not authorized anyone to give you information or to make any representation other than those contained in this annual report.Contents

Trading Symbol

Name and Headquarters	Place of Formation		Business

Isonics Homeland Security and Defense Corporation	Delaware, USA	100%	Isonics Homeland Security and Defense Corporation ("HSDC") was formed in October 2004 and it coordinates our remaining efforts in the homeland security market.
Protection Plus Security Corporation	New York, USA	100% by HSDC	Protection Plus Security Corporation ("PPSC") is a provider of advanced security and investigative services for leading businesses and institutions.

~~Common~~ The foregoing ~~Stock~~does ~~“ISON”~~not include our ownership in the following companies:

•: We (through HSDC) have a 90% interest in SenseIt Corp ("SenseIt"), a Delaware entity that was formed in October 2006 with the purpose of accelerating development and driving commercialization of next generation infrared imaging and night vision surveillance technology in connection with a development agreement with Lucent Technologies, Inc. ("Lucent"). We did not make a required $1,000,000 payment that was due to Lucent on or before July 16, 2007. As a result of not making this payment, effective October 13, 2007, Lucent terminated the development agreement. As a result, our investment in SenseIt and the related development agreement with Lucent (in the cumulative amount of approximately $7,000,000) has little (if any) value.
•: We have a 25% interest in Interpro Zinc, LLC, a Colorado entity that engages in the research and development for the recovery and recycling of zinc metal from various sources. Interpro Zinc, LLC suspended its operations in 2003 due to a lack of funding and it is unclear as to if or when it will resume such operations.

~~Lines~~ The purchase and ownership of ~~Business~~our common stock involves a high degree of risk. See Item 1A."Risk Factors", below. We have not ~~and~~authorized ~~Products~~anyone to give you information or to make any representation other than those contained in this annual report.

~~During~~ ~~the~~Trading years ended April 30, 2007, 2006 and 2005, we generated sales from stable and radioactive isotopes, silicon wafer reclaim and test products, wafer thinning and custom wafer products for the semiconductor industry. Additionally, as a result of the acquisition of PPSC in May 2005, we also generated revenues from providing security services for leading businesses and institutions in healthcare, education, retail, manufacturing, banking and the art world. For information about revenue for similar classes of products or services, refer to Note 16 (Business Segment, Geographic, Customer and Product Symbol

3Common Stock ISON.OB

~~information)~~ toLines ~~the consolidated~~of ~~financial~~Business ~~statements located in Item 8. “Financial Statements~~ and ~~Supplementary~~ ~~Data”~~Products

In During ~~June 2007~~the weyears ~~sold~~ended ~~our~~April 30, ~~life~~2008, ~~sciences~~2007 ~~business (which~~and ~~supplied~~2006, ~~isotopes~~we ~~for~~generated ~~life~~sales ~~sciences~~from stable and ~~health-care~~radioactive ~~applications)~~isotopes ~~as it~~and ~~no longer fit our long~~300-~~term~~millimeter ~~strategy~~(and ~~for~~smaller ~~building~~diameter) atest ~~sustainable~~wafers and ~~profitable homeland~~reclamation ~~security~~services, ~~and~~wafer ~~semiconductor~~thinning ~~company~~ and ~~because~~custom ofwafer ~~deteriorating business~~products ~~conditions~~and inservices for the ~~historical~~silicon ~~revenue~~industry, ~~producing~~although ~~products~~sales infrom ~~this~~stable and ~~business.~~radioactive ~~Accounting~~isotopes ~~rules required~~were usreported toas ~~treat~~discontinued ~~the~~ operations ofin the ~~life sciences~~accompanying ~~business~~consolidated asstatements ~~discontinued~~of operations ~~whereby~~as ~~the~~described ~~net~~below. ~~financial~~Additionally, ~~impact of~~as ~~the~~a ~~operations~~result of the ~~business~~acquisition ~~(including~~of ~~revenue)~~PPSC isin ~~combined~~May 2005, ~~into~~we aalso ~~single line~~generated ~~item~~revenues ~~and~~from ~~prior~~providing ~~periods~~security ~~are~~services ~~reclassified~~ for ~~this~~leading ~~presentation.~~businesses ~~Revenue~~and ~~for the~~institutions ~~life~~in ~~sciences~~healthcare, ~~business~~education, ~~reported~~retail, inmanufacturing, ~~the~~banking ~~single~~and ~~line~~the ~~item~~art ofindustries. ~~discontinued~~For ~~operations~~information about segment revenue, ~~was~~refer $1to Note 17 (Business Segment,~~803,000,~~ $5Geographic,~~136,000~~ Customer and ~~$7,413,000~~Product ~~for~~information) to the ~~years~~consolidated ~~ended~~financial ~~April 30, 2007,~~statements ~~2006~~located ~~and~~in ~~2005, respectively~~Item 8.

~~The following is a more specific discussion of our current operations.~~3

~~Homeland~~Table ~~Security~~of Contents

~~HSDC~~ In June ~~focuses~~2007 ~~the~~we ~~majority~~sold of our ~~efforts~~life insciences ~~the homeland~~business ~~security~~(which ~~sector.~~supplied ~~These~~isotopes ~~efforts~~for ~~include~~life ~~entry~~sciences ~~into~~and ~~the~~health-care ~~security services~~applications) ~~market~~as ~~through~~it no longer fit our ~~acquisition~~long-term strategy for building a sustainable and profitable security and silicon company and because of ~~PPSC~~deteriorating business conditions in ~~May 2005,~~the ~~acquisition~~historical revenue producing products in this business. ~~and~~Accounting ~~continuing~~rules ~~development~~required us to treat the operations of ~~our~~the ~~Ion~~life ~~Mobility~~sciences ~~Spectrometry~~business ~~(“IMS”)~~as ~~based detection~~discontinued ~~technology~~operations ~~and~~whereby ~~our~~the ~~entry~~net ~~into~~financial animpact ~~agreement~~of ~~with~~the ~~Lucent~~operations ~~and~~of athe ~~90%~~business (including revenue) was ~~owned~~combined ~~joint~~into ~~venture~~a ~~named~~single ~~SenseIt~~line toitem ~~develop~~and ~~innovative~~prior ~~infrared~~periods ~~imaging~~were ~~and night~~reclassified ~~vision~~for ~~surveillance~~this ~~technology~~presentation. ~~HSDC’s~~Revenue ~~ownership~~for ~~also~~the ~~includes~~life ~~our~~sciences ~~30% minority~~business, ~~interest~~reported in ~~IUT.~~the ~~The~~single ~~following~~line isitem aof ~~detail~~gain on operations of discontinued ~~each~~operations, net of ~~our~~income ~~product lines~~taxes ~~within~~was ~~our~~$101,000 ~~homeland~~and ~~security~~$1,803,000 ~~operations:~~for the years ended April 30, 2008 and 2007, respectively.

~~Security Services—~~ In ~~May 2005,~~ weSeptember ~~acquired PPSC~~2007, awe ~~provider~~assigned ofour ~~security~~existing ~~services~~exclusive ~~located~~rights inregarding ~~New York,~~silicon-28 ~~New York.~~patents ~~Since~~(secured ~~the~~under ~~effective date of~~ the ~~acquisition,~~1997 ~~PPSC~~License ~~has~~Agreement ~~delivered significant~~with ~~revenue~~Yale University) to ~~our~~an ~~consolidated~~independent entity, ~~financial~~such ~~statements~~assignment ~~and~~receiving ~~has~~the ~~provided gross~~consent ~~margin~~ of ~~approximately~~Yale 23University.7% ofSilicon-28 ~~revenues~~is ~~for~~a ~~the~~naturally ~~year~~occurring ~~ended~~stable ~~April 30, 2007.~~isotope ~~The segment has, however, generated an operating loss for the years ended April 30, 2007 and 2006~~ of ~~$(425,000)~~silicon ~~and $(24~~which,~~000),~~ ~~respectively.~~in ~~During the~~a ~~years~~near ~~ended~~isotopically-pure ~~April 30~~form, ~~2007 and 2006, the operating loss includes~~may ~~non-cash~~have ~~amortization~~performance ofbenefits ~~acquisition-related~~as ~~customer~~compared ~~intangibles~~to ~~and stock~~multi-~~based~~isotopic ~~compensation~~materials ~~expense~~currently ~~(year~~prevalent ~~ended April 30, 2007 only)~~ in the ~~amount~~ ofsilicon ~~$230,000 and $138,000, respectively~~marketplace. ~~Included~~In inperiods ~~the~~presented, ~~operating~~proceeds ~~loss for~~from the ~~year~~sale ~~ended~~of ~~April 30,~~silicon-28 ~~2007,~~based isproducts have ~~enhanced~~been ~~staffing~~immaterial ~~for~~and ~~growth~~we inhave ~~the business~~not asinvested ~~well~~material asresources ~~the costs incurred~~ in ~~relocating~~ the ~~office of PPSC~~program.

~~During the fourth quarter of the year ended April~~ On December 306, 2007, ~~and~~we ~~the~~received ~~first~~notification ~~quarter~~from of the ~~subsequent~~Nasdaq ~~fiscal~~stating ~~year, we implemented cost cutting initiatives~~ that ~~are~~it ~~expected~~had determined to ~~positively~~delist ~~impact~~our ~~the~~securities ~~results~~from ~~of PPSC’s operations~~Nasdaq. ~~Additionally~~Trading wein ~~initiated~~our ~~plans~~shares toon ~~improve~~the ~~operating~~Nasdaq ~~margins at~~Capital ~~PPSC~~Market bywas ~~focusing~~suspended oneffective ~~customers~~with ~~that~~the ~~are~~open ~~willing~~of tobusiness ~~pay~~on ~~for premium security services~~December 10, a2007. ~~market~~In inJanuary ~~which~~2008 weour ~~believe~~common ~~that~~stock ~~PPSC~~began isbeing ~~able~~quoted toon ~~differentiate itself~~the ~~from~~OTC ~~its~~Bulletin ~~peers~~Board. AsOur acommon ~~result,~~stock wecurrently ~~have and will exit lower-margin business~~trades ~~areas~~under ~~for~~the ~~premium~~symbol ~~accounts that prefer higher quality of service~~ISON.OB. ~~While~~Although ~~we believe~~delisting ~~that~~from ~~these~~Nasdaq ~~cost~~makes ~~cutting~~it ~~initiatives~~more ~~and~~difficult ~~refocused~~for ~~sales~~us ~~and marketing efforts will enable PPSC~~ to ~~report~~use ~~positive~~our ~~operating~~equity ~~income~~ for ~~the~~financing ~~year ending April 30~~activities, ~~2008,~~the wedelisting ~~can~~had ~~offer~~ no ~~assurance~~direct ~~that~~financial ~~this will actually occur~~impact.

~~PPSC~~ In January ~~has~~2008 ~~successfully~~we ~~obtained~~sold ~~its~~our ~~federal~~30% ~~Government Contract~~interest ~~Schedule~~in ~~(“GSA~~Institute ~~Schedule”~~fur Umwelttechnologien GmbH ("IUT") for ~~security~~cash ~~services~~consideration of $527,000 (EUR 360,000). ~~Although~~As wea ~~have~~result of the transaction, we ~~selectively~~recorded ~~pursued~~a ~~and~~gain ~~continue~~on tothe ~~pursue~~disposition ~~government~~of ~~contracts~~the ininvestment ~~addition~~of ~~to commercial~~$208,000 ~~contracts~~during the year ended April 30, we2008. ~~have~~A ~~not~~significant ~~acquired~~portion ~~any~~of ~~federal~~the ~~government~~investment ~~security~~that was sold (representing $414,000 of the cash ~~contracts~~proceeds received) was subject to ~~date~~the ~~and~~security weinterest ~~can~~held ~~offer~~by noYA ~~assurance~~Global. ~~that~~In February 2008, at YA Global's request, we ~~will~~forwarded be$200,000 ~~able~~of these proceeds as a payment of outstanding interest. We retained the remaining $214,000 of proceeds to douse sofor working capital purposes.

~~Detection~~ Consistent ~~Technology—During~~with ~~our~~management focus during the year ended April 30, ~~2007~~ 2008 and subsequently, we ~~marketed~~continue to evaluate our ~~existing~~operating ~~IMS-based~~businesses ~~products~~and (technology portfolio with the ~~panel-mounted~~goal ~~IMS~~of operating our business more efficiently and monetizing assets as we deem to be appropriate and as our senior secured creditor may consent. Additionally, we have considered and will continue to ~~EnviroSecure)~~consider business expansion through merger, acquisition, joint venture or other means, although we ~~have~~can ~~not~~offer ~~engaged~~no inassurance ~~any~~as ~~significant~~to ~~marketing efforts~~our ~~for~~ultimate ~~either~~success ~~product~~in ~~during~~increasing the ~~second~~scope ~~half~~ of our ~~year~~business ~~ended April 30,~~through ~~2007~~such means. ~~Although~~Because wesubstantially ~~continue~~all of our assets are subject to ~~offer~~a ~~EnviroSecure™~~perfected security interest, awe ~~system~~have ~~that~~in ~~can~~the ~~monitor~~ past, and ~~identify~~will ~~chemical~~likely ~~weapons~~continue ~~and~~to ~~toxic~~engage in discussions on these issues with YA Global as our primary debt holder.

4 The following is a more specific discussion of our current operations.

~~substances~~ inHomeland the air in a variety of venues including airports, mass transit facilities, sports venues and public and private sector office buildings, we have not made any sales of this product or engaged in any significant marketing activities.Security

In HSDC ~~November 2005,~~has wehistorically ~~signed~~focused athe ~~development agreement~~majority ~~with~~of ~~DualDraw~~our ~~LLC~~efforts ~~(“Dual~~in ~~Draw”),~~the ahomeland ~~manufacturer~~security ~~of air quality equipment~~sector. ~~Under~~These ~~this~~efforts ~~agreement,~~have weincluded ~~worked~~entry ~~to incorporate our panel-mounted IMS-based system~~ into the ~~DualDraw mailroom inspection workstation, a downdraft~~ ~~workstation~~security ~~that~~services ~~keeps~~market ~~toxic~~through ~~substances~~our ~~away~~acquisition ~~from the breathing zone~~ of ~~mailroom~~ ~~workers~~PPSC ~~who~~in ~~are~~May ~~sorting~~2005, ~~or opening mail~~ and ~~captures such substances with a HEPA~~ (~~high~~prior ~~efficiency~~to ~~particulate~~August ~~air~~2007) ~~filtration~~development ~~system. The incorporation~~ of our ~~IMS~~Ion ~~capability~~Mobility ~~provides~~Spectroscopy ~~an alarm if certain toxic or explosive substances are detected. We completed seven commercial installations of our panel-mounted~~ ("IMS~~-based product~~") indetection ~~the~~technology ~~AirChx~~and ~~system manufactured by Dual Draw during the year ended April 30, 2007 as well as an additional eight units subsequent to year-end. We have not received any further purchase commitments for~~ our ~~product~~entry ~~to be incorporated~~ into ~~the~~a ~~AirChx system at this time. The proceeds related~~ project to ~~the~~develop ~~installation~~innovative ofinfrared ~~the~~imaging ~~first~~and ~~seven~~night ~~commercial units~~vision ~~during~~surveillance ~~the~~technology ~~year~~through ~~ended~~a ~~April~~Development ~~30,~~& ~~2007~~Licensing ~~are~~Agreement ~~primarily being classified as deferred revenue pending completion of certain tasks. We are continuing to work~~ with ~~Dual~~Lucent ~~Draw~~(the to"Lucent ~~resolve any remaining issues~~Agreement"), ~~and~~which wehas ~~are~~been ~~working with IUT to prepare a version of the panel-mounted product for a test by a different potential customer~~terminated.

During the latter half of the year ended April 30, 2007, we redefined and refocused the operations of HSDC to focus on the development of partnerships with leading prime contractors in the security and defense, industrial and transportation markets, although we have not yet developed any such partnerships. By working with these types of partners, we believe that we will be able to more effectively and efficiently complete the development of our IMS-based products with the goal of incorporating them into the products and systems of our partners. If we are successful in developing these types of strategic partnerships, we believe that we will be in a better position to compete with the current industry leaders through leveraging the marketing arms and customer bases of these partners. This change in strategic direction will delay the time frame for significant product sales but we are hopeful that it will allow for a significant reduction in development costs and a greater penetration of the market in the future.4

~~IMS~~Table is a “sniffer” technology originally developed by IUT. The IMS technology is designed to continuously monitor the air and almost immediately detect and identify harmful substances at the parts per billion (ppb) level, providing, in a matter of seconds, warning of a possible threat. Through both our ongoing funding of research and development efforts at IUT and related development and commercialization efforts in the United States, we are currently in the process of re-designing the IMS technology for low-cost, high-volume manufacturing in the United States. Additionally, we have received all regulatory licenses required for domestic sales of such products.Contents

We Security ~~have~~Services—Since ~~also~~the ~~investigated~~effective ~~our~~date ~~ability~~of toour ~~package~~acquisition ~~our IMS~~of ~~technology~~PPSC in aMay ~~hand-held “sniffer” designed for military and first responder use. Although we are not actively developing a final product for the hand-held product~~2005, wePPSC ~~may~~has dodelivered sosignificant inrevenue ~~the future when we determine that market~~to ~~conditions~~our ~~for~~consolidated ~~such~~financial astatements ~~product are favorable~~ and has provided wegross ~~have~~margins ~~sufficient resources~~of toapproximately ~~do so~~21. ~~Although~~1% weand ~~are~~23.7% ~~hopeful~~of ~~that our year ending April 30, 2008 will reflect significantly greater~~ revenues ~~from~~for ~~IMS-based products (as compared to~~ the ~~year~~ years ended April 30, 2008 and 2007), ~~we cannot offer any assurance that this will actually occur~~respectively.

~~Infrared~~ During ~~Imaging~~the ~~Technology—In~~fourth ~~December~~quarter of the year ended April 30, ~~2005~~2007, weand ~~approved~~the ~~a development~~year ~~plan~~ended ~~that~~April 30, ~~resulted~~2008, inwe usimplemented ~~becoming~~cost ~~obligated~~cutting ~~under~~initiatives athat ~~Development~~have ~~and~~positively impacted the ~~Licensing~~results ~~Agreement~~of PPSC's operations. Additionally we ~~entered~~initiated ~~into~~plans (with ~~Lucent~~limited insuccess) ~~September 2005~~to ~~(“the Lucent~~improve ~~Agreement”)~~operating ~~which,~~margins inat ~~October 2006,~~PPSC weby ~~assigned~~focusing on customers that are willing to ~~our~~pay ~~90%~~for ~~owned~~premium security ~~subsidiary~~services, ~~SenseIt,~~a market in which we believe that PPSC is ~~described~~able into ~~more~~differentiate ~~detail~~itself ~~below~~from its peers. ~~Under~~As a result of the ~~Lucent Agreement,~~impact weof ~~are~~our ~~attempting~~ongoing tocost ~~develop~~cutting ainitiatives, ~~next-generation~~the ~~infrared~~segment ~~imaging~~generated ~~and~~operating ~~night~~income ~~vision~~of ~~surveillance~~$277,000 ~~technology~~for ~~based~~the onyear ~~Lucent’s~~ended ~~micro~~April 30, ~~electro-mechanical systems~~2008, as compared to an operating loss of $(~~“MEMS”~~425,000) ~~technology~~for ~~under~~the ~~development~~year atended ~~its~~April 30, ~~nanotechnology fabrication facility~~2007. ~~Infrared~~For ~~technology~~the years ended April 30, ~~which~~2008 ~~converts~~and 2007, ~~infrared~~the ~~radiation~~operating loss includes non-cash amortization of acquisition-related customer intangibles and stock-based compensation expense in the aggregate amount of $194,000 and $230,000, respectively.

5 While these cost cutting initiatives and focused sales and marketing efforts have enabled PPSC to report positive operating income for the year ending April 30, 2008, the industry is cost competitive and customers switch security service providers on short notice. In addition, we have been notified that effective July 31, 2008, one of our significant customers (who accounted for $2,928,000 of revenue for the year ended April 30, 2008) will no longer use our services. As a result of these factors, we can offer no assurance that we will be able to generate positive operating income for the year ending April 30, 2009.

~~non-visible spectrum,~~ Detection ~~such~~Technology—During asour ~~body~~year ~~heat~~ended April 30, ~~into~~2007 aand ~~visible~~through ~~image~~August 2007, iswe ~~commonly~~offered ~~found~~our ~~in both~~IMS-based ~~commercial~~products (the panel-mounted IMS and ~~military/homeland~~EnviroSecure™), ~~security~~although ~~applications~~we ~~including~~did ~~night~~not ~~vision goggles~~engage ~~and~~in ~~cameras,~~any ~~rifle~~significant ~~scopes~~marketing ~~and~~efforts ~~threat~~for ~~detection~~these ~~devices~~products ~~used~~subsequent to ~~identify concealed~~late ~~weapons~~in orcalendar ~~explosives~~year 2006. ~~The~~Although ~~MEMS~~we continue ~~approach~~ to ~~infrared~~offer ~~imaging~~EnviroSecure™, ~~if successful,~~a ~~may~~system ~~lead~~that tocan ~~products~~monitor ~~which~~and weidentify ~~believe~~chemical ~~will~~weapons atand ~~least~~toxic ~~equal~~substances in the ~~performance~~ air in a variety of venues including airports, ~~with~~mass atransit ~~lower~~facilities, sports ~~power~~venues ~~consumption~~and public and ~~price~~private ~~than~~sector office buildings, ~~products currently~~we ~~available~~have not made any sales of this product and we have not engaged in ~~the~~any ~~marketplace~~significant ~~today~~marketing activities. ~~Additionally,~~Our asales ~~MEMS~~of the panel-~~based~~mounted IMS product ~~may~~were ~~also~~extremely ~~provide~~limited ~~for~~and ~~cost~~historically ~~efficiencies~~resulted in ~~the~~deferred ~~manufacturing~~revenue, ~~process.~~although ~~The development~~we ~~plan~~recognized ~~contemplates~~the adeferred ~~proof-of-concept~~revenue during ~~calendar~~the year ~~2007~~ended April 30, 2008, as a result of reaching an ~~followed~~accord bywith ~~steps~~our ~~towards~~sole ~~commercialization,~~customer ~~though~~for that product. We do not intend to recommence any marketing efforts until (if ever) we ~~can~~are ~~provide~~adequately nocapitalized, ~~assurance that~~have a ~~commercially~~commercial ~~attractive~~ product ~~will~~and ~~ultimately~~have beidentified ~~available~~a target market.

In August ~~October 2006~~2007, we ~~acquired~~elected ~~a 90% interest in SenseIt in exchange for assigning~~ to ~~SenseIt~~suspend ~~all of our interest under~~ the ~~Lucent~~ ~~Agreement~~development, ~~although~~manufacture ~~we will continue to be jointly~~ and ~~severally~~marketing ~~liable with~~of ~~SenseIt~~our toIMS ~~Lucent~~based ~~for amounts due to Lucent under the assigned Lucent agreement~~products. The ~~remaining~~suspension ~~10%~~was ofdue ~~SenseIt~~primarily isto ~~owned~~a bylack ~~Christopher Toffales (our Chairman~~ of ~~the~~working ~~Board),~~capital ~~who~~but ~~also serves as President and Chief Executive Officer of SenseIt. In addition~~ we ~~agreed~~also ~~to fund an additional $353,500 of~~had ~~working~~difficulty ~~capital~~competing toin ~~SenseIt~~the ~~which~~market ~~has yet to be paid~~space. AsWe ~~long~~continue ~~as SenseIt continues~~ to ~~make~~seek ~~its~~alternatives ~~quarterly $1,000,000 payments~~ to ~~Lucent,~~find ~~Lucent~~a ~~will continue~~means toof ~~work~~monetizing ~~with~~our ~~SenseIt~~investment toin ~~develop~~this ~~prototypes of its first~~ product line, ~~“direct view”~~including ~~thermal~~an ~~imagers~~outright ~~for~~sale ~~weapons~~of ~~sights~~the ~~and night vision goggles and anticipates completing these prototypes during calendar year 2007~~technology. InIt ~~addition,~~is ~~SenseIt,~~unclear inas ~~conjunction~~to ~~with~~when ~~Lucent,~~(if isat ~~also~~all) ~~pursuing~~we awill ~~more~~resume ~~traditional~~activity ~~focal plane~~on ~~array~~our ~~product~~IMS-based ~~suitable~~products ~~for~~and ~~integration~~we ~~into~~can ~~thermal~~offer ~~imaging~~no ~~cameras,~~assurance ~~as well~~that aswe anwill ~~advanced~~be ~~solid~~able ~~state imager approach~~ to ~~create~~monetize aany ~~“Multi-Spectral Sensor”~~portion ~~which~~of ~~can~~our ~~detect~~IMS ~~infrared and visible light (or two spectra of infrared~~technology ~~light) simultaneously~~investment.

~~The~~ Infrared ~~Lucent~~Imaging ~~Agreement~~Technology—In ~~provides~~December, ~~for~~2005, ~~SenseIt~~we toapproved ~~receive an~~a ~~exclusive~~development ~~right,~~plan ~~except~~that ~~for~~resulted ~~certain~~in ~~rights~~us ~~reserved~~becoming byobligated ~~Lucent,~~under ~~to make, use~~the ~~and~~Lucent ~~sell~~Agreement ~~licensed~~we ~~products~~entered ~~arising~~into ~~from~~with ~~technology~~Lucent ~~developed~~in ~~under~~September ~~the~~2005 ~~Lucent Agreement.~~which, Inin ~~exchange~~October ~~for this license~~2006, we ~~(through~~assigned ~~our obligations~~ to ~~SenseIt)~~ ~~are~~our ~~funding~~90% ~~certain~~owned ofsubsidiary, ~~Lucent’s~~SenseIt. ~~development~~Under ~~efforts for~~ the ~~project through~~Lucent ~~the~~Agreement, ~~periodic~~we ~~payment~~were ~~over~~attempting ato ~~two~~develop ~~and one-half year period of~~ a ~~development~~next-generation ~~fee~~infrared ~~totaling~~imaging ~~$12,000,000.~~and Wenight ~~(through~~vision ~~our~~surveillance ~~obligations~~technology tobased ~~SenseIt) paid~~on ~~$6,000,000~~Lucent's ofmicro ~~the~~electro-mechanical ~~original~~systems ~~$12,000,000~~("MEMS") ~~obligation~~technology under ~~this~~development ~~agreement through~~at ~~the~~its ~~date of this report. The remaining balance will be paid in quarterly~~nanotechnology ~~$1,000,000~~fabrication ~~installments~~facility.

We did not make the $1,000,000 payment that was due to Lucent on or before July 16, 2007 ~~as neither entity currently has sufficient working capital to make such payment~~. As a result of not making this payment, ~~(or~~effective ~~other payments when due)~~October 13, ~~Lucent may~~2007, ~~after certain steps of notification and periods~~Lucent toterminated ~~cure have been exhausted, cancel~~ the Lucent Agreement. ~~and~~Therefore, ~~all~~our ~~licenses granted~~investment toin usSenseIt ~~thereunder~~and orthe ~~cease~~related ~~working~~Lucent onAgreement (in the ~~project~~aggregate ~~and~~amount ~~then~~of ~~assess~~approximately us$7,000,000) ahas ~~“start-up” fee~~little (if ~~funding~~any) ~~was~~remaining ~~to resume~~value.

On July 26, 2007, we received official notification from Lucent that we failed to make the $1,000,000 payment to Lucent by July 16, 2007 and that in the event such non-payment continues for more than ten days, Lucent may at is discretion, suspend work on the development project. We are currently seeking additional financing to allow us to fund SenseIt so that SenseIt can make its contractual development payments to Lucent. We cannot offer any assurance that we will be able to raise the funds necessary to make all of the required payments to Lucent, or that the technology will be developed to a point where we want to continue to make such payments when due. Additionally, SenseIt may need to seek outside financing to make payments to Lucent and, if so elected, such outside financing would dilute our ownership interest in SenseIt. Lastly, although we are hopeful of a positive outcome, we can offer no assurance that the development activity underway with Lucent and SenseIt will yield technologically relevant or commercially viable products.5

6Table of Contents

~~SenseIt~~ ~~has~~Silicon ~~the~~Products right to terminate the development project for any reason (including if the development work is not proceeding up to our expectations) from time-to-time, so long as termination is prior to the first commercial sale of a licensed product. Additionally, upon the commencement of commercial sales, if ever, we would be obligated to pay royalties based on revenue, potentially a sales referral fee based on revenue and ~~also an annual exclusivity payment (to Lucent) to maintain our exclusive rights to the developed technology.~~Services

We Our ~~are~~silicon ~~hopeful~~operations, ~~that SenseIt~~based ~~will~~in ~~begin~~Vancouver, toWashington, ~~generate~~showed ~~revenue~~continued ~~from~~operational and financial improvement during the ~~next-generation~~years ~~infrared~~ended ~~imaging~~April 30, 2007 and ~~night~~2006, ~~vision~~although ~~surveillance~~we ~~technology~~experienced a softening of demand for our products and services during the ~~second~~year ~~half~~ended ofApril 30, ~~our~~2008. The segment generated operating income for the year ~~ending~~ended April 30, ~~2008~~2007, ~~although~~in wethe ~~can~~amount ~~offer~~of no$326,000 ~~assurance~~(which ~~that~~includes a non-cash charge of $122,000 for stock-based compensation expense) as compared to an operating loss for the ~~marketable~~year ~~product~~ended ~~will~~April 30, be2006, ~~developed~~in the amount of $(5,151,000). The positive operating income resulted primarily from our ongoing effort to reduce our reliance on low margin small diameter products and diversify into higher margin 300-millimeter products and services, wafer thinning and custom wafer products.

~~Semiconductor~~ The ~~Products~~large-diameter wafer segment has become one of the fastest growing segments of the silicon wafer market and ~~Services~~the revenues and gross margins associated with the services are greater than those associated with the small diameter market. As a result of our strategic realignment, revenue from 300-millimeter services comprised approximately 39% of segment revenue for the year ended April 30, 2008 ($3,092,000 of revenue) and 54% of segment revenue for the year ended April 30, 2007 ($7,049,000 of revenue), as compared to approximately 36% of segment revenue for the year ended April 30, 2006 ($2,053,000 of revenue). At the same time, there has also been a focus on operational efficiency and effectiveness, which has resulted in increased productivity and processing yields. Further, we continue to gain new customers (both large and smaller diameter) and are also in the process of attempting to qualify our products at others.

~~Our~~ While we ~~semiconductor~~reported ~~operations,~~significant ~~based~~revenue inand ~~Vancouver, Washington,~~operating ~~showed~~income ~~continued~~growth ~~operational~~in ~~and~~our ~~financial~~silicon ~~improvement~~operations ~~during~~for the ~~years~~ year ended April 30, 2007, ~~and~~many ~~2006,~~of ~~generating~~our ~~its~~top ~~third~~silicon ~~consecutive~~customers experienced ~~quarterly~~weakened ~~operating~~business ~~income~~results ~~for~~during ~~the~~our ~~three~~year ~~months~~ ended April 30, ~~2007~~2008. ~~The~~ ~~positive~~In ~~operating~~addition, ~~income~~some ~~results primarily~~customers ~~from~~reported ~~our~~inventory ~~ongoing~~buildup ~~effort~~in toreclaim ~~reduce our reliance on low margin small diameter products~~ and/or ~~focus~~test ~~mainly on higher margin 300-millimeter~~ products ~~and services, wafer thinning and custom wafer products~~. As a result, ~~for~~of these two factors, during the year ended April 30, ~~2007~~2008, ~~the~~we ~~segment~~experienced ~~generated~~a ~~operating~~slowdown ~~income~~ in ~~the~~orders ~~amount of~~and ~~$326,000~~a ~~(which~~reduction ~~includes~~in aaverage ~~non-cash~~selling ~~charge~~prices of ~~$122,000~~reclaim ~~for~~and ~~stock-based compensation~~test ~~expense) as compared to an operating loss for the years ended April 30~~materials, ~~2006~~ ~~and~~which ~~2005~~had ina ~~the~~negative ~~amounts~~impact ofon ~~$(5,151,000)~~our ~~and $(6,484,000), respectively~~results.

The ~~large-diameter wafer segment has become one of the~~ ~~fastest~~slowdown ~~growing~~significantly ~~segments~~impacted ofour ~~the silicon wafer market and the~~ revenues, ~~and~~results ~~gross margins associated with the services are greater than those associated with the small diameter market. As a result~~ of ~~our~~ ~~strategic~~operations ~~realignment,~~and ~~revenue~~cash ~~from~~flows ~~300-millimeter services comprised approximately 54% of segment revenue~~ for the year ended April 30, ~~2007 ($7~~2008,~~049,000~~ ofin ~~revenue),~~which aswe ~~compared~~generated toan ~~approximately~~operating ~~36%~~loss of ~~segment revenue for the year ended April 30, 2006 (~~$(2,~~053~~026,000 ~~of revenue~~)~~. There has also been a focus on operational efficiency and effectiveness~~, which ~~has~~includes ~~resulted~~a ~~in increased~~non-cash ~~productivity~~charge ~~and~~of ~~processing yields. Further~~$209,000 wefor ~~continue~~stock-based tocompensation ~~gain new customers and are also in the process of attempting to qualify our product at others~~expense.

~~While~~ In order weto ~~reported significant~~minimize ~~revenue~~the ~~and~~effect ~~operating~~of ~~income~~the ~~growth~~slowdown, induring our ~~semiconductor operations for the~~ year ended April 30, ~~2007,~~2008 many of our top semiconductor customers have experienced weakened business results in recent quarters. In addition, some customers have reported inventory buildup in reclaim and/or test products. As a result of these two factors, we ~~have~~implemented ~~recently~~many ~~seen~~cost acutting ~~slowdown~~measures in ~~orders of reclaim and test materials, which has had a negative impact on~~ our ~~operations.~~silicon ~~The slowdown will have a significant impact on our results of~~ operations and ~~cash flows~~are ~~for~~continuing ~~our quarter ending July 31, 2007, which we expect~~ to ~~reflect a~~do ~~significant reduction in revenue (as compared to the previous sequential quarter) and the reporting of an operating loss for that segment~~so. InWe ~~order to minimize the effect of the slowdown, we~~ have ~~implemented~~also ~~many~~increased ~~cost~~our ~~cutting procedures~~marketing ~~and~~efforts ~~will continue to do so. It is unclear as to when the market will rebound but we believe that this is a relatively short-term phenomenon~~ and are hopeful that we will ~~begin to~~ see a recovery during ~~our~~the ~~quarter~~year ending ~~October~~April 3130, ~~2007~~ 2009. We continue to monitor the situation closely and while we believe that we will see improving financial results in this operating segment (over the long-term), we cannot offer any assurance that we will be able to regain or sustain operating profitability in future periods.

Distribution Method

Prior to the sale of our life sciences business in June 2007, we operated our life sciences sales office in Golden, Colorado. Effective December 31, 2005, we closed our life sciences office in Dusseldorf, Germany. We currently manufacture and reclaim various types of silicon wafers at our ~~facilities~~facility in Vancouver, Washington. PPSC provides advanced security services from our New York office. We operate our homeland security products division in Golden, Colorado. We identify customers through industry sales journals, website identification and trade shows. In addition, many customers come to us by referral from existing customers.

~~Vancouver, Washington.~~Table ~~PPSC~~of provides advanced security services from our New York office. We operate our homeland security products division in Golden, Colorado. We identify customers through industry sales journals, website identification and trade shows. In addition, many customers come to us by referral from existing customers. Contents

Significant Customers

~~The following~~ As ~~tables~~of ~~set~~April 30, ~~forth~~2008, ~~information~~three ~~regarding~~customers ~~our~~accounted ~~significant~~for approximately 23%, 17% and 16% of total net accounts receivable. Three customers accounted for 28%, 13% and 10% of total net accounts receivable, respectively at April 30, 2007. For the year ended April 30, 2008, two security services customers accounted for 20% and 13% of revenues, respectively, and one silicon products and services customer accounted for 12% of revenues as compared to the ~~years~~year ended April 30, 2007, ~~2006~~in which two security services customers accounted for 14% and ~~2005~~11% ~~(information~~of ~~only~~revenues, ~~listed~~respectively, ~~if percentage~~and isone ~~greater~~silicon ~~than~~products 10and services customer accounted for 21%) of revenues. Significant reductions in sales to any of our large customers have had, and may in the future have, a material adverse effect on us by reducing our revenues and our gross margins. Present or future customers could terminate their purchasing patterns with us or significantly change, reduce or delay the amount of products or services ordered from us.

	Percentage of revenues during years ended April 30,
	2007			2006			2005
Qimonda Richmond LLC (formerly Infineon Technologies Richmond)		21	%		13	%		24	%
Consolidated Edison Company		—			12	%		—
Foot Locker Retail, Inc.		14	%		22	%		—
Citicorp North America, Inc.		11	%		—			—
SEH America, Inc.		—			—			11	%

For the year ended April 30, 2008, the silicon products and services customer mentioned above accounted for 34% of silicon products and services revenue as compared to 44% for the year ended April 30, 2007. Due to the relationship of revenues to the absorption of fixed facility costs, the elimination or even a significant reduction in sales to this customer would have a material adverse effect on our silicon products and services operations.

	Percentage of accounts receivable at April 30,
	2007			2006
Qimonda Richmond LLC (formerly Infineon Technologies Richmond)		28	%		14	%
Micron Technology, Inc		13	%		—
Silicon Wafer Enterprises, LLC		10	%		—
Citicorp North America, Inc.		—			11	%

Research and Development

A During ~~decision~~the byyears ~~a significant~~ended ~~customer~~April 30, to2008 ~~substantially~~and ~~decrease~~2007, orresearch ~~delay~~and ~~purchases~~development ~~from~~expenses uswere oras ~~an inability~~set toforth ~~collect~~in ~~significant~~the ~~amounts~~following ~~owed~~table: ~~to us could have a material adverse effect on our consolidated financial condition and results of operations.~~

Research and Development

Year Ended April 30,	Research and Development Expenses

2008	$	1,262,000
2007	$	4,950,000

~~Consistent~~ Our ~~with~~principal ~~our~~research ~~product~~and development ~~strategy,~~expenses weduring ~~are~~the ~~seeking~~years toended ~~identify~~April 30, 2008 and ~~evaluate new~~2007 ~~products~~consisted ~~for~~of ~~our~~work ~~homeland~~performed ~~security~~by ~~operations~~both Lucent and ~~potential~~IUT. ~~markets~~We ~~for~~stopped funding Lucent in ~~economic~~July 2007, and ~~technical~~we ~~feasibility.~~stopped ~~During~~funding ~~the~~IUT's ~~years~~research ~~ended~~and ~~April 30,~~development activities in May 2007~~, 2006~~. ~~and~~We ~~2005,~~recognized research and development ~~expenses~~expense ~~were~~of as$833,000 ~~set~~and ~~forth~~$4,462,000 inrelated to these two entities for the ~~following~~years ~~table:~~ended April 30, 2008 and 2007, respectively.

Year ended April 30,	Research and development expenses
2007		$	4,950,000
2006		$	5,018,000
2005		$	1,020,000

During the year ending April 30, 2009, we expect to focus our research and development efforts (which are expected to be minimal) on existing and new products for our silicon products operations. Additionally, through the Pacific Northwest National Laboratory, in partnership with the Highly Pure Biopreparation Lab in St. Petersburg, Russia we (at a minimal cost) are researching the effectiveness of a bioremediation system for advancement of cleanliness in U.S. hospitals. This program is sponsored by the United States Department of Energy as a threat reduction and proliferation effort. We have, as partners to the program, specific rights to the systems developed from these efforts. Although promising, we do not have sufficient results from testing to advance a prognosis as to the system's overall capability at this time.

~~Our~~ As a ~~principal~~result ~~research~~of ~~and~~our ~~development~~September ~~expenses~~2007 ~~during the~~assignment ~~years~~of ~~ended~~our ~~April 30,~~existing ~~2007~~exclusive ~~and~~rights ~~2006~~to ~~consisted~~silicon-28 ofpatents ~~work~~to ~~being~~an ~~performed by~~independent ~~both~~party, ~~Lucent~~we ~~and~~did ~~IUT.~~not Weincur ~~recognized~~any research and development ~~expense of~~ ~~$4,462,000~~costs ~~and~~associated ~~$3,390,000~~with ~~related~~silicon-28 toduring ~~these two entities for~~ the ~~years~~year ~~ended~~ending April 30, ~~2007~~ 2008 and ~~2006,~~do ~~respectively.~~not Weexpect ~~intend~~ to ~~continue~~incur ~~using~~any ~~IUT to the extent necessary~~ in ~~improving~~future ~~the performance of our panel-mounted IMS-based product for our existing customer and for any new opportunities that may develop~~years.

8 Patents and Proprietary Rights

~~During~~ Historically ~~the year ending April 30, 2008,~~ we ~~expect to~~relied ~~continue~~primarily ~~to focus our research and development efforts~~ on ~~existing~~a ~~and~~combination new products for our homeland security operations. These efforts continue the research and development we performed during the years ended April 30, 2007, 2006 and 2005. Trace detection technology and product development continues to focus on very low-level detection of ~~various~~patents ~~types of explosives utilizing IMS~~ and ~~other~~patent ~~low concentration analytics techniques. Additionally~~applications, ~~through~~ ~~the~~trade ~~Pacific Northwest National Lab~~secrets, inconfidentiality ~~partnership~~procedures ~~with the Highly Pure~~and ~~Biopreparation~~contractual ~~Lab~~provisions into ~~St. Petersburg,~~protect ~~Russia we (at a minimal cost) are researching the effectiveness of a bioremediation system for advancement of cleanliness in~~ our ~~hospitals~~technology. ~~This~~Despite ~~program~~our isefforts ~~sponsored by the United States Department of Energy as a threat reduction and proliferation effort. We have, as partners~~ to ~~the~~protect ~~program,~~our ~~specific~~ rights ~~to the systems developed from these efforts. Although promising~~, weunauthorized doparties ~~not~~may ~~have~~attempt ~~sufficient~~to ~~results~~copy ~~from~~aspects ~~testing~~of ~~to advance~~our aproducts ~~prognosis~~or as to ~~the~~obtain ~~systems~~and ~~overall capability at this time.~~

While we continue to offer silicon-28 wafers, we did not receive significant revenues in our years ended April 30, 2007, 2006 or 2005, and we are not aware of any plans by any company for the introduction of products based on silicon-28 wafers. As a result, we do not anticipate significant proceeds from silicon-28 product sales during the year ending April 30, 2008. We have also eliminated any further expenditures on research and development related to our silicon-28 technology.7

~~Patents~~Table ~~and Proprietary~~of ~~Rights~~Contents

We rely primarily on a combination of patents and patent applications, trade secrets, confidentiality procedures and contractual provisions to protect our technology. Despite our efforts to protect our rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our technology and products is difficult. In addition, the laws of many countries do not protect our rights in information, materials and intellectual property that we regard as proprietary to as great an extent as do the laws of the United States. There can be no assurance that our means of protecting our rights in proprietary information, materials and technology will be adequate or that our competitors will not independently develop similar information, technology or intellectual property. ~~See 1A. “Risk Factors.”~~

We currently have ~~six~~no United States patents in our own name ~~(US~~although ~~6,653,658~~we ~~dated November 2003, US 6,838,020 dated January 2005, US 6,867,459 dated March 2005, 6,926,876 dated August 2005, 6,979,630 dated December 2005 and 7,119,400 dated October 2006) and~~ have filed several ~~other~~ patent applications ~~regarding silicon-28 and other isotopically purified materials~~.

~~In 1999, we entered into an exclusive licensing~~ Several ~~agreement~~disclosures ~~with~~related ~~Yale~~to ~~University~~the ~~that~~trace ~~entitles~~detection ustechnology tounderlying ~~exclusive~~IMS ~~intellectual property~~have ~~rights~~been towritten ~~patents~~and ~~covering~~several ~~semiconductor~~patent ~~devices~~applications ~~derived~~have ~~from~~been ~~isotopically engineered materials~~filed. ~~The~~We ~~license~~can ~~requires~~offer ~~payment~~no byassurance usthat ofany ~~a royalty based on a percentage of our, or our sublicensees’, net sales of products derived from technology covered by the Yale~~ patents ~~(US 5,144,409, dated September 1,~~ ~~1992,~~will ~~and~~be USawarded ~~5,442,191,~~related ~~dated~~to ~~August 15, 1995). Each of~~ these ~~patents expires seventeen years after issuance~~developments.

~~Several~~ disclosures related to the trace detection technology underlying IMS have been written and several patent applications have been filed. We can offer no assurance that any patents will be awarded related to these developments.Competition

9 Many of our current and potential competitors are larger and have significantly greater financial, technical, marketing and other resources than we. Some of our competitors may form partnerships or alliances with other companies, with the resulting entity possessing greater market strength than we have. We face competition relative to many of our products, including:

~~Competition~~ Security Services

~~Many~~ There ofare ~~our~~a ~~potential~~ large number of competitors ~~are~~in ~~larger~~the ~~and~~security ~~have~~services ~~significantly~~business. ~~greater~~We ~~financial,~~compete ~~technical, marketing~~for business primarily in the states of New York and ~~other~~New ~~resources~~Jersey ~~than~~but we. ~~Some~~do ofsolicit ~~our~~business in other states as well. Larger competitors, ~~may~~such ~~form~~as ~~partnerships or~~Allied ~~alliances~~Barton ~~with~~Security ~~other~~Services ~~companies,~~and ~~with~~Securitas ~~the~~Security ~~resulting~~Services ~~entity~~provide ~~possessing~~a ~~greater~~wide range of services ~~market~~comparable ~~strength~~to ~~than~~us weand ~~have.~~compete Weon ~~face~~a ~~competition~~national ~~relative~~basis. toThere are many ofsmaller ~~our products,~~competitors ~~including:~~that provide similar services and compete on a local or regional basis.

~~Homeland~~ ~~Security~~Silicon Products and Services

A There ~~large~~are a number of ~~companies~~ ~~are~~competitors ~~involved~~ in the ~~homeland~~virgin ~~security~~test ~~industry,~~wafer anand ~~industry~~wafer ~~that received a~~reclamation ~~significant~~business. ~~impetus~~We ~~from~~compete ~~the~~for ~~events~~business ofprimarily ~~September 11,~~in ~~2001.~~North ~~Many~~America, ofbut ~~these~~also ~~companies~~solicit ~~(such~~business asfrom ~~OSI~~the ~~Systems, Inc.,~~European ~~Smiths Heimann, Inc~~Union. ~~and~~ ~~L-3~~Larger ~~Communications Holdings~~competitors, ~~Inc.)~~ ~~are~~such ~~significantly~~as ~~larger~~Pure ~~than are we and generally have greater financial resources at their disposal~~Wafer Ltd. Weprovide ~~believe that~~a ~~the~~wide ~~technology~~range ~~that~~of ~~we have acquired from IUT may result in better detection~~ products ~~that~~and ~~will~~services becomparable ~~attractive~~ to ~~the~~us ~~marketplace. Given the size~~ and ~~importance~~compete ofon ~~the~~a ~~homeland~~global basis. ~~security~~There ~~market,~~are wenumerous ~~anticipate~~smaller competitors that ~~even~~provide ~~greater competition~~a ~~will~~more ~~emerge.~~focused ~~Additionally,~~product ~~within~~or ~~the~~service ~~services~~offering ~~segment~~and ofcompete ~~homeland security,~~on ~~there~~a ~~will~~local ~~continue~~or toregional ~~be significant additions to security services required~~basis. ~~There~~Customers ~~will~~select bea ~~continued~~supplier ~~pressure~~based ~~within~~on ~~this~~a ~~business~~combination ~~segment by~~of ~~larger~~factors ~~service~~including ~~providers~~price, ~~such~~delivery ~~as Smith Heimann~~time, ~~Inc.,~~ ~~however~~and ~~there are niche segments that provide PPSC opportunities that otherwise could be underrepresented~~quality.

~~Semiconductor Materials~~ Summary of Competition

~~Silicon wafers—manufacturing~~ Many ~~and~~of ~~reclamation. There~~the ~~are~~areas ain ~~number~~which ofwe ~~competitors~~either incompete ~~the~~or ~~virgin~~intend ~~test wafer~~to ~~and~~compete ~~wafer~~are ~~reclamation~~rapidly ~~business~~evolving. WeOur ~~compete~~competition ~~for~~may ~~business~~develop ~~primarily~~a inpatentable ~~North~~product ~~America,~~or ~~but~~process ~~have~~that ~~begun~~may ~~soliciting~~prevent ~~business~~us from ~~the~~competing ~~European~~in ~~Union.~~our ~~Larger competitors,~~intended ~~such~~markets. asWhile ~~Pure~~we ~~Wafer~~expect ~~Ltd.~~to ~~and~~compete ~~Rasa~~primarily ~~Industries~~on ~~Ltd.,~~the ~~provide~~basis ~~a wide range~~ of ~~products~~product ~~and~~performance, ~~services~~proprietary ~~comparable~~position ~~to us~~ and ~~compete~~price, onin amany ~~global basis. There~~cases ~~are~~the ~~numerous~~first ~~smaller~~company ~~competitors~~to ~~that~~introduce ~~provide~~ a ~~more focused~~ product orto ~~service offering~~the ~~and~~market ~~compete~~will onobtain aat ~~local~~least ~~or regional basis. Customers select~~ a ~~supplier based~~temporary oncompetitive aadvantage ~~combination~~over ofsubsequent ~~factors~~market ~~including price, delivery time, and quality~~entrants.

~~Silicon-28. Although~~ weManufacturing ~~have not yet identified significant competitors, numerous companies in the United States~~ and throughout the world are currently manufacturing semiconductor materials and are working to improve the thermal conductivity and other beneficial characteristics of semiconductor materials. Many of these companies may be larger than are we and generally have significantly greater financial resources at their disposal. In addition, many types of technologies can address the issue of thermal management (i.e., better cooling technology, new designs, etc.). It remains to be seen which technologies, if any, will prove to be the most cost effective and gain market acceptance. Supply

~~Summary~~ We ~~of Competition~~manufacture and reclaim silicon wafers at our facilities in Vancouver, Washington.

~~Many of the areas in which~~ Prior ~~we either compete or intend~~ to ~~compete~~the ~~are~~August ~~rapidly~~2007 ~~evolving.~~suspension ~~Competition~~of ~~may develop~~the adevelopment, ~~patentable~~manufacture ~~product~~and orsale ~~process~~of ~~that may prevent us from competing in~~ our ~~intended~~IMS-based ~~markets.~~products, ~~While~~ we ~~expect~~entered tointo ~~compete~~contracts ~~primarily~~for on the ~~basis~~manufacturing of ~~product~~ ~~performance,~~such ~~proprietary~~products ~~position~~with independent, ~~and~~non-affiliated ~~price,~~contractors in ~~many cases~~ the ~~first company~~United toStates. ~~introduce~~In aeach ~~product~~case, to the ~~market~~contracts ~~will~~were ~~obtain~~with atunaffiliated ~~least~~entities aon ~~temporary competitive~~terms ~~advantage~~that ~~over~~we ~~subsequent market entrants~~negotiate.

~~Manufacturing and Supply~~8

~~While~~Table ~~we initially manufactured our IMS-based products using the existing IUT facilities and subcontractors, we entered into contracts for the manufacturing~~ of ~~such products with independent, non-affiliated contractors in the United States. In each case, the contracts are with unaffiliated entities on terms that we negotiate.~~Contents

10 The majority of the research and development work associated with our IMS-based products was performed at IUT (which outsourced the manufacturing work to various European entities) while the remaining work was performed by non-affiliated entities in the United States.

We Prior to ~~manufacture~~the ~~and~~sale ~~reclaim~~of ~~silicon~~our ~~wafers~~life atsciences ~~our facilities~~business, inwe ~~Vancouver~~obtained stable isotopes from a variety of isotope sources, ~~Washington~~primarily located in Russia. ~~The~~Other ~~majority~~facilities ofelsewhere in the ~~research and~~world, ~~development~~including ~~work~~the ~~associated~~Oak ~~with~~Ridge ~~our~~National ~~IMS-based~~Laboratory ~~products~~in isOak ~~performed~~Ridge, atTennessee, ~~IUT (which~~and ~~outsources~~private and pseudo-governmental facilities in Great Britain, Germany, the ~~manufacturing~~Netherlands ~~work~~and tothe ~~various~~Republic ~~European~~of ~~entities)~~South ~~while~~Africa, have the ~~remaining~~potential ~~work~~to isproduce ~~performed~~stable byisotopes. ~~non-affiliated~~These ~~entities~~suppliers are no longer material to our business operations since we sold our life sciences business in ~~the~~June ~~United States~~2007.

~~Prior~~ We do tonot ~~the~~have ~~sale~~any ofwritten agreements with our ~~life~~suppliers ~~sciences~~and ~~business,~~processors that are material to our operations. Although we ~~obtained~~ ~~stable~~attempt ~~isotopes~~to ~~from~~reduce aour ~~variety~~dependence ofon ~~isotope~~our ~~sources~~suppliers, ~~primarily~~disruption ~~located~~or intermination ~~Russia.~~of ~~Other~~any ~~facilities~~of ~~elsewhere~~the insources ~~the~~could ~~world~~occur, ~~including~~and ~~the~~such ~~Oak~~disruptions ~~Ridge National~~or ~~Laboratory~~terminations incould ~~Oak~~have ~~Ridge,~~at ~~Tennessee,~~least ~~and~~a ~~private~~temporary, ~~and pseudo-governmental~~materially ~~facilities~~adverse ineffect ~~Great~~on ~~Britain,~~our ~~Germany~~business, ~~the~~financial ~~Netherlands~~condition, and ~~the~~ ~~Republic~~results of operations. ~~South Africa~~Moreover, ~~have~~a ~~the~~prolonged ~~potential~~inability to ~~produce~~obtain ~~stable~~alternative ~~isotopes.~~sources ~~These suppliers~~for ~~are~~processing nocould ~~longer~~have ~~material~~a tomaterially ~~our~~adverse ~~business~~affect ~~operations~~on ~~since~~our werelations ~~sold~~with our ~~life~~ ~~sciences business in June 2007~~customers.

~~Except~~ Generally we ~~for~~find the ~~agreements~~raw ~~with~~materials necessary for our ~~homeland~~operations ~~security products~~to ~~manufacturers,~~be wereadily doavailable, ~~not~~either ~~have~~from ~~any~~the ~~written~~general ~~agreements~~market ~~with~~place ~~our suppliers~~for ~~and~~raw ~~processors~~materials that are ~~material~~commonly toavailable ~~our~~or ~~operations. Although we~~through ~~attempt to reduce~~ our ~~dependence on our~~ suppliers, ~~disruption~~although ~~or termination of any of~~ the ~~sources~~increased ~~could~~demand ~~occur,~~(driven ~~and~~by ~~such~~the ~~disruptions~~fast-growing orsolar ~~terminations~~market) ~~could~~in ~~have at~~the ~~least~~silicon amarket ~~temporary,~~has ~~materially~~decreased ~~adverse~~the ~~effect~~availability ~~on our business, financial condition,~~ and ~~results~~increased ofprices ~~operations. Moreover, a prolonged inability to obtain alternative sources~~ for ~~processing~~virgin ~~could~~test ~~have a materially adverse affect on our relations with our customers~~wafers.

~~Generally~~ weGovernment find the raw materials necessary for our operations to be readily available, either from the general market place for raw materials that are commonly available or through our suppliers, although the increased demand (driven by the fast-growing solar market) in the silicon market has decreased the availability (and increased the price) of raw materials for virgin test wafers.Regulation

~~Government~~ Before suspending the production of certain homeland security products, regulation by government authorities in the United States and ~~Regulation~~other countries was a significant consideration in the research, development, production, distribution and marketing of our homeland security products. In order to clinically test, manufacture, distribute, market and sell products, we must follow safety and other standards established by applicable regulatory authorities. We may be subject to various laws, regulations and requirements relating to such matters as the import and export of our products, ensuring safe working conditions, laboratory and manufacturing practices, and the use, storage and disposal of hazardous or potentially hazardous substances used in connection with our research, development and manufacturing activities. The regulations are potentially material to our business are summarized below.

~~Regulation by government authorities in the United~~ ~~States~~Security ~~and other countries is a significant consideration in the research, development, production, distribution and marketing of our homeland security products~~Services. Our ~~In order to clinically test~~subsidiary, ~~manufacture~~PPSC, ~~distribute,~~provides ~~market~~armed and ~~sell products,~~unarmed weguard ~~must~~services ~~follow~~primarily ~~safety~~in ~~and other standards established by applicable regulatory authorities. We may be subject to various laws, regulations and requirements relating to such matters as~~ the ~~import~~states ~~and export~~ of ~~our~~New ~~products~~York, ~~ensuring~~ ~~safe~~New ~~working~~Jersey ~~conditions, laboratory~~ and ~~manufacturing~~Connecticut. ~~practices,~~PPSC ~~and~~must ~~the~~obtain ~~use,~~licenses ~~storage~~from ~~and~~each ~~disposal~~state ~~of hazardous or potentially hazardous substances used~~ in ~~connection~~which ~~with~~it ~~our~~operates ~~research,~~for ~~development~~both armed and ~~manufacturing~~unarmed ~~activities~~guard services. ~~The~~ ~~regulations~~PPSC ~~potentially~~is ~~material~~current toin ~~our~~its ~~business~~licensing ~~are summarized below~~obligations.

~~Homeland~~ Homeland Security ~~Services~~Products. Our ~~subsidiary,~~ ~~PPSC,~~IMS-based ~~provides~~products ~~armed~~used ~~and~~a ~~unarmed~~radioactive ~~guard~~sealed ~~services~~source ~~primarily~~to inoperate—similar to the sealed sources used in ~~states~~in-home smoke detectors. We had received all regulatory licenses required for domestic sales of ~~New~~our ~~York,~~panel-mounted ~~New~~IMS-based ~~Jersey~~product ~~and~~used ~~Connecticut.~~on ~~PPSC~~the ~~must~~Dual ~~obtain~~Draw ~~licenses~~AirChx ~~from~~system, ~~each~~including ~~state~~a inSealed ~~which~~Source itDevice ~~operates~~Registration ~~for~~from ~~both~~the ~~armed~~Nuclear ~~and~~Regulatory ~~unarmed~~Commission ~~guard~~("NRC"). ~~services~~These regulatory requirements greatly slowed the sales process of bringing any other IMS-based products to market. ~~PPSC~~In isAugust ~~current~~2007, inwe ~~its~~elected ~~licensing~~to ~~obligations~~suspend the development, manufacture and sale of our IMS-based products.

~~Homeland~~ ~~Security~~Life Sciences Products. ~~Our IMS-based~~ We ~~products~~were ~~use~~not asubject ~~radioactive sealed source~~ to ~~operate—similar~~any toFDA ~~the sealed~~regulation ~~sources~~for ~~used~~our inlife ~~in-home~~sciences ~~smoke~~business ~~detectors.~~because Wewe ~~have~~merely ~~received~~supplied ~~all~~product ~~regulatory licenses~~and ~~required~~did ~~for~~not ~~domestic~~manufacture ~~sales of our panel-mounted IMS-based product~~any ~~used~~drug onproducts ~~the~~or ~~Dual~~other ~~Draw~~medical ~~AirChx~~devices. ~~system,~~As ~~including~~ a ~~Sealed~~result ~~Source~~of ~~Device Registration from~~ the ~~Nuclear~~sale ~~Regulatory~~of ~~Commission~~this ~~(“NRC”).~~business ~~These~~in ~~regulatory requirements~~June ~~greatly~~2007, ~~slow~~these ~~the~~issues ~~sales~~no ~~process~~longer ofare ~~bringing~~material ~~any other IMS-based products~~ to ~~market~~us.

Life Sciences Products. We were not subject to any FDA regulation for our life sciences business because we merely supplied product and did not manufacture any drug products or other medical devices. We no longer participate in the life sciences business and, therefore, these issues no longer are material to us.9

11Table of Contents

Product Liability and Insurance

Our business exposes us to substantial product, environmental, occupational and other liability risks. These risks are inherent in product research and development, manufacturing, marketing, distribution, and in the use of our products and operations. We have, and will attempt to renew product liability insurance (which currently expires April 30, ~~2008~~2009) in order to protect ourselves from such potential exposures, however there can be no guarantee that upon expiration of our current coverage that adequate insurance ~~coverage~~ coverage will be available, or, if available, the cost will be acceptable. Furthermore, a product liability or other claim could materially and adversely affect our business or financial condition. The terms of our customer agreements provide that liability is limited to our standard warranty to replace non-conforming product, and liability for consequential damages caused by the improper use of our products is limited by contractual terms. Nevertheless, one or more third parties could file suit against us based on product liability, breach of warranty or other claims. The foregoing contract clauses might effectively limit our liability in any such actions. Additionally, we are applying for Homeland Security product coverage under the United States Safety Act. If this application is accepted, we, our manufactures and our clients would be covered for certain liability of that product in the event the specified product were in place during a occurrence defined as a terrorism attack.

~~Financial~~ ~~Information About Geographic Areas~~Employees

~~The following~~ As ~~table~~of ~~sets~~July 21, ~~forth~~2008, ~~information~~we ~~for~~had ~~the~~four ~~last~~corporate ~~three~~employees, ~~years~~and ~~regarding revenues~~with ~~generated~~our ~~from~~subsidiaries ~~activities~~we ~~within~~had ~~the~~a ~~United~~total ~~States~~of ~~and~~384 ~~other~~full-time ~~geographic~~employees ~~regions~~as described in the following table:

Business	Number of Employees
	Revenues from customers in specified geographic regions for the year ended April 30,
	2007		2006		2005
Security Services		342
United States	$	27,731,000	$	18,580,000	$	2,692,000
Semiconductor operations		38
Other Countries	—		—		—
Corporate office		4

In ~~January 2007, we~~ ~~elected~~ ITEM ~~to discontinue the operation of our life sciences business and put the assets and business up for sale (which was sold in June 2007)~~1A. RISK As a result, we reclassified the operations of our life sciences business as discontinued operations. Prior year information has been reclassified to conform with the current year presentation. Substantially all of our assets are based in the United States. We have no material long-lived assets or other assets based outside of the United States.FACTORS

~~Employees~~ In addition to the other information set forth in this report, you should carefully consider the following factors, which could materially affect our business, financial condition or future results. The risks described below are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.

As ofWe ~~June 30,~~have ~~2007, we~~historically had ~~four~~working ~~employees~~capital shortages, ~~and~~even ~~with~~following ~~our~~significant ~~subsidiaries~~financing transactions and we ~~had~~received an opinion from our auditors indicating a substantial ~~total~~doubt ofregarding ~~477~~our ~~full-time~~ability ~~employees as~~to ~~described~~continue inas ~~the~~a ~~following~~going ~~table:~~concern.

Business	Number of employees
Homeland security operations		3
Security Services		423
Semiconductor operations		47
Corporate office		4

We have had working capital shortages in the past and, although we raised capital totaling more than $46,800,000 (net of expenses and $4,100,000 of payments related to our 8% Debentures) since May 1, 2004, we have generated significant losses, which have impacted working capital. As of April 30, 2008, our consolidated balance sheet reflects a working capital deficit of $(13,128,000). In addition, as a result of our continued operating losses and declining working capital balances during the year ending April 30, 2008, the auditors report included with our consolidated financial statements for the year ended April 30, 2008 includes an explanatory paragraph indicating substantial doubt about our ability to continue as a going concern (the "Going Concern Qualification"). This condition has continued since the date of those financial statements, and we expect that these conditions will continue for the foreseeable future unless we are able to raise a substantial amount of additional financing. In view of the matters described herein and in Note 1 to our consolidated financial statements, our ability to continue to pursue our plan of operations as described herein is dependent upon our ability to raise the capital necessary to meet our financial requirements on a continuing basis.

An employee’s responsibilities may also encompass areas other than his or her primary area of responsibility. We consider our relations with our employees to be good. None of our employees are covered by a collective bargaining agreement.10

~~Securities~~ Table ~~Exchange~~of ~~Act Reports~~Contents

We Based ~~maintain~~on anthe ~~internet~~amount ~~website~~of atcapital ~~www~~we have remaining and our expected negative cash flow from operations and investing activities, we anticipate that we will not be able to positively impact our working capital unless we are able to substantially increase our revenues or reduce our expenses thereby generating positive cash flow from operations and (ultimately) operating income.~~isonics~~ As a result of the financing in June 2008, we believe we currently have enough working capital to finance our anticipated operations and projected negative cash flow into our quarter ending October 31, 2008.~~com.~~ ~~The~~In addition, if we are able to secure an offer for asset based financing from a third party, YA Global has agreed to review that proposed financing and in its sole ~~information~~discretion onconsider releasing its security interest in certain of our ~~website~~assets isto ~~not~~secure ~~incorporated~~that byfinancing. ~~reference~~If inwe ~~this~~are ~~annual~~successful at obtaining a minimum of $1,000,000 of additional financing, we believe we ~~report~~could onhave ~~Form~~enough working capital to finance our anticipated operations and projected negative cash flow into our fiscal year ending April ~~10-K~~30, 2010. Because of the terms of the existing YA Global financing, we are unable to secure any additional financing without YA Global's consent and approval.

12 Because of the potential dilution associated with the 13% Debentures and the holder's security interest in substantially all of our assets, we believe that it is unlikely that we will be able to obtain additional financing unless we are able to reach an accommodation with our existing debenture holder.

We ~~make~~If ~~available~~YA onGlobal ~~or through~~declares ~~our~~an ~~website~~Event ~~certain reports and amendments to those reports that we file with or furnish to the Securities and Exchange Commission (the “SEC”) in accordance with the Securities Exchange Act~~ of ~~1934,~~Default as amended. These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and Section 16 filings. We make this information available on our website free of charge as soon as reasonable practicable after we ~~electronically~~may ~~file~~not ~~the~~be ~~information~~able ~~with, or furnish it~~ to, ~~the~~cure ~~SEC.~~or ~~Alternatively,~~contest ~~you~~such ~~may~~a ~~read~~default and ~~copy~~few ~~any~~or ~~information~~no weassets ~~file~~would ~~with the~~remain ~~SEC~~for atour ~~its public reference room at 100 “F” Street NE, Washington, D~~shareholders.~~C. 20549. You may obtain information about the operation of the public reference room by calling 1-800-SEC-0330. You may also obtain this information from the SEC’s website, http://www.sec.gov.~~

~~ITEM~~ We 1Acurrently may be non-compliant with certain covenants of the 13% Debentures and as a result, YA Global may potentially be able to, in its discretion, declare an Event of Default. ~~RISK~~In ~~FACTORS~~addition, it is likely that we will be unable to comply with certain financial covenants of the Term Notes during our fiscal year ending April 30, 2009 and as a result YA Global may potentially also be able to, in its discretion, declare an Event of Default on those notes. Remedies for an Event of Default include the option to accelerate payment of the full principal amount of the 13% Debentures and Term Notes, together with interest and other amounts due (a cumulative amount of $20,901,000 at April 30, 2008), to the date of acceleration and the holder will have the right to request such payment in cash or in shares (as it relates to the YA Global Debentures) of our common stock.

In The 13% ~~addition~~Debentures toand ~~the~~Term ~~other information~~Notes ~~set~~are ~~forth~~secured inby ~~this report~~all, ~~you~~or ~~should~~substantially ~~carefully~~all, ~~consider~~of ~~the following~~our ~~factors,~~assets. ~~which~~If ~~could~~YA ~~materially~~Global ~~affect~~declares ~~our~~an ~~business,~~event ~~financial condition~~of ordefault ~~future~~on ~~results.~~any ~~The~~of ~~risks~~the ~~described~~13% ~~below~~Debentures ~~are~~or ~~not~~ the ~~only~~Term ~~risks we~~Notes, ~~face.~~it ~~Additional~~is probable ~~risks~~that ~~and~~we ~~uncertainties~~will not ~~currently~~be ~~known~~able to uscure the default or contest any efforts that we ~~currently~~YA ~~deem~~Global may take to beforeclose ~~immaterial~~against ~~also~~its ~~may~~security ~~materially~~interest ~~adversely~~in ~~affect~~substantially all of our assets. Following such ~~business~~foreclosure, ~~financial~~it ~~condition~~is likely that few or ~~results~~no ofassets ~~operations~~would remain for distribution to our shareholders.

We ~~have~~identified ~~historically~~material ~~had~~weaknesses ~~working~~in ~~capital shortages,~~our ~~even~~disclosure ~~following~~controls ~~significant~~and ~~financing~~procedures ~~transactions~~ and ~~we received an opinion from~~ our ~~auditors~~Internal ~~indicating~~Controls aOver ~~substantial~~Financial ~~doubt regarding our ability to continue as a going concern~~Reporting.

We Section 404 ~~have~~of ~~had~~the ~~working~~Sarbanes-Oxley ~~capital~~Act ~~shortages~~of in2002 ~~the~~requires ~~past~~management ~~and,~~to assess our internal control over financial reporting ~~although~~("ICFR") wepursuant ~~raised~~to ~~capital~~a ~~totaling~~defined ~~more~~framework. ~~than~~In ~~$45~~making that assessment,~~800,000~~ ~~(net~~management ofidentified ~~expenses~~a ~~and $4,100,000~~material weakness in our disclosure controls as a result of ~~payments~~several ~~related~~material toweaknesses identified in our ICFR 8%as ~~Debentures)~~described ~~since~~in ~~May~~Item 1,9A ~~2004,~~below. ~~we have~~There ~~generated~~are ~~significant~~inherent ~~losses,~~limitations ~~which~~in ~~have~~the ~~impacted~~effectiveness ~~working~~of ~~capital.~~any Assystem of ~~April 30~~ internal control, ~~2007~~and accordingly, ~~our~~even ~~consolidated~~effective ~~balance~~ICFR ~~sheet~~can ~~reflects~~provide ~~working~~only ~~capital~~reasonable assurance with respect of ~~$3,310,000~~ financial statement preparation and may not prevent or detect misstatements. AsMaterial aweaknesses ~~result~~make ofit ~~our~~more ~~continued~~likely ~~operating~~that ~~losses~~a ~~and~~material ~~projected~~misstatement of annual or interim ~~declining~~financial ~~working~~statements ~~capital~~will ~~balances~~not ~~during~~be ~~the~~prevented ~~year~~or ~~ending~~detected. ~~April 30,~~In ~~2008~~addition, effective ICFR at any point in time may become ineffective in future periods because of changes in conditions or due to deterioration in the ~~auditors~~degree ~~report~~of ~~included~~compliance with our ~~financial~~ ~~statements~~established ~~includes~~policies ~~the~~and ~~following~~procedures. ~~explanatory paragraph:~~

“The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and will continue to require funding from investors for working capital. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.”11

~~Our~~Table ability to continue as a going concern is dependent upon raising capital through debt or equity financing and ultimately by increasing revenue and achieving profitable operations. We can offer no assurance that we will be successful in our efforts to raise additional proceeds or achieve profitable operations. The consolidated financial statements located in Item 8. “Financial Statements and Supplementary Data” have been prepared on a going concern basis, which contemplates the realization of ~~assets and the settlement of liabilities in the normal course of business.~~Contents

~~Based~~ onOur ~~the~~ability ~~amount of capital we have remaining, our current negative cash flow from operations and investing activities, we anticipate that we will continue~~ to ~~incur~~obtain afurther ~~working~~necessary ~~capital deficit~~financing ~~unless~~is ~~we are able to substantially increase our revenue or reduce our expenses thereby generating positive cash flow from operations and (ultimately) operating income~~limited. Nevertheless, as a result of our fund raising activities during the year ended April 30, 2007, other anticipated cash flows and certain cost-saving measures we have instituted, we believe we have sufficient working capital to finance our anticipated operations and projected negative cash flow into our quarter ending January 31, 2008.

We have historically financed our operating losses and cash flow deficits through private placements of our equity and debt securities. Our outstanding 13% Debentures and Term Notes contain significant restrictions on our ability to raise any additional capital for so long as the 13% Debentures and Term Notes are outstanding. While ultimately our ability to finance our operations will depend on our ability to generate revenues that exceed our expenses, we may in the future have short-term needs for significant additional financing which may not be available because of the outstanding 13% Debentures and Term Notes, as well as the significant number of outstanding options and warrants which contain adjustment provisions should we issue shares of our common stock at prices below the current exercise prices. We do not believe that we would be able to obtain additional financing without the cooperation of our principal debenture holder. Ultimately, if capital is needed, our only source of additional capital may be the holder of our 13% Debentures and Term Notes, and if YA Global declines (for any reason) to invest additional amounts into Isonics Corporation, we likely will not be able to continue as a going concern.

~~Our~~ Additionally, our ~~ability~~common tostock is currently quoted on the OTC Bulletin Board and securities traded on the OTC Bulletin Board generally have limited liquidity. Because our financing ~~obtain~~activities ~~further~~are dependent to a large extent on eventual liquidity for the investors, the delisting from the Nasdaq Stock Market will make future financing ~~when~~activities ~~necessary~~significantly ismore ~~limited~~difficult and may raise liquidity issues for current investors.

We have ~~historically financed~~three ~~our~~business ~~operating~~segments ~~losses~~ and, ~~cash flow deficits through private placements of our equity and debt securities. Our outstanding 13% Debentures contain significant restrictions on our ability to raise any additional capital~~ for ~~so long as~~ the ~~convertible~~year ~~debentures~~ended ~~are~~April 30, ~~outstanding and ultimately~~2008, ~~our~~two ~~ability to~~of ~~finance~~ our ~~operations~~three ~~will~~segments ~~depend~~operated onat ~~our ability to generate revenues that exceed our expenses. Although we believe we are on~~ a ~~path to that end, we cannot offer any assurance that we will be able to succeed in reaching that goal~~loss.

We For ~~may~~the beyears ~~delisted~~ended ~~from~~April 30, ~~the~~2008 ~~Nasdaq~~and ~~Capital~~2007, ~~Market~~our ~~and delisting~~operating ~~may~~segments ~~adversely~~incurred ~~impact~~operating ~~our~~(loss) ~~ability~~income toas ~~raise~~follows: ~~capital.~~

During the year ended April 30, 2007, we received four notifications from Nasdaq identifying listing deficiencies, which, if not cured timely, could have resulted in our delisting from the Nasdaq Capital Market. While we cured these deficiencies, we continue to be subject to all of Nasdaq’s continued listing requirements, including requirements for either a minimum level of stockholders’ equity or market value of listed securities and maintenance of a $1.00 per share minimum bid price. Unless circumstances change, there is a significant risk that we may not meet either of the minimum stockholders’ equity or market value of listed securities requirement at July 31, 2007, although we will not be able to confirm whether we meet certain of the requirements until later in August or early September 2007. Nevertheless, we are developing plans to deal with this situation should it occur, although we cannot offer any assurance that we will be able to implement any such plans should it become necessary to do so.

	Year Ended April 30,

	2008			2007
Homeland security products	$	(2,135,000	)	$	(6,644,000	)
Security services		277,000			(425,000	)
Silicon products and services		(2,026,000	)		326,000
Reconciling amounts		(2,710,000	)		(8,785,000	)

Total	$	(6,594,000	)	$	(15,548,000	)

(1): Reconciling amounts for the operating (loss) income information includes corporate expenses consisting primarily of corporate salaries and benefits, professional and consulting fees, investor relations costs, insurance and directors' compensation. In January 2007, we elected to discontinue the operation of our life sciences business and put the assets and business up for sale (which was sold in June 2007). As a result, we reclassified the operations of our life sciences business as discontinued operations.

If We expect wethat ~~were~~these tolosses ~~receive~~(on a ~~notice~~consolidated ~~from~~basis) ~~Nasdaq~~will continue for ~~failure to comply with~~ the ~~requirements,~~foreseeable ~~and~~future. ifAs itdescribed ~~was~~in ~~not~~the ~~cured~~next ~~timely~~risk factor, itunless ~~could result~~we inare ~~our~~able ~~delisting~~to ~~from~~sell ~~the~~new ~~Nasdaq~~products ~~Capital~~and ~~Market. We can offer no~~services ~~assurance~~profitably, ~~that~~ we ~~will~~may be ~~able~~unable to ~~cure~~remain ~~any~~competitive ~~future~~and ~~listing~~it ~~deficiencies~~is orlikely ~~sustain compliance~~that ~~with~~our ~~all~~losses ~~continued~~and ~~listing~~negative ~~requirements~~cash flow will continue.

Because our financing activities are dependent to a large extent on eventual liquidity for the investors, any such delisting, if it should occur, will make future financing activities significantly more difficult, may raise liquidity issues for current investors and may place some of our existing obligations into default.12

WeTable ~~have three business segments and, for the year ended April 30, 2007, two~~ of ~~our three segments operated at a loss.~~Contents

~~For the~~ ~~years~~Unless ~~ended~~we ~~April 30,~~are ~~2007,~~able ~~2006~~to sell our products and ~~2005~~services profitably, ~~our~~we ~~operating~~may ~~segments incurred~~be ~~operating~~unable to remain competitive, furthering the likelihood that our losses asand ~~follows:~~negative cash flow will continue.

	Year ended April 30,
	2007			2006			2005
Homeland security products	$	(6,664,000	)	$	(5,989,000	)	$	(1,728,000	)
Security services	(425,000		)	(24,000		)	—
Semiconductor products and services	326,000			(5,151,000		)	(6,484,000		)
Reconciling amounts(1)	(8,785,000		)	(4,499,000		)	(3,744,000		)
Total	$	(15,548,000	)	$	(15,663,000	)	$	(11,956,000	)

Our ability to generate positive cash flow, additional revenues, and ultimately net income, is dependent upon the success of our security services and silicon products and services operations and accommodations from YA Global as our principal creditor. We have suspended development of our IMS-based products and our agreement with Lucent has been cancelled.

~~(1) Reconciling~~ While we ~~amounts~~reported ~~for the~~significant revenue and operating ~~loss~~income ~~information~~growth ~~includes~~in ~~corporate~~our ~~expenses~~silicon ~~consisting~~operations ~~primarily of~~for ~~corporate~~the ~~salaries~~year ~~and~~ended ~~benefits~~April 30, ~~professional~~2007, ~~and~~many ~~consulting~~of ~~fees,~~our ~~investor relations~~top ~~costs,~~silicon ~~warrant~~customers ~~amendment~~experienced weakened ~~expense,~~business ~~insurance~~results ~~and~~during ~~directors’ compensation.~~our Inyear ~~January~~ended April ~~2007~~30, ~~we elected~~2008. toIn ~~discontinue~~addition, ~~the~~some ~~operation~~customers ofreported ~~our~~inventory ~~life~~buildup ~~sciences~~in ~~business~~reclaim and/or ~~put~~test ~~the assets~~products. ~~and~~As ~~business~~a upresult ~~for~~of ~~sale~~these ~~(which~~two ~~was~~factors, ~~sold~~during the inyear ~~June~~ended April ~~2007).~~30, ~~As a result~~2008, we ~~reclassified~~experienced ~~the~~a ~~operations~~slowdown ofin ~~our~~orders ~~life~~and ~~sciences~~a ~~business~~reduction ~~as discontinued~~in ~~operations.~~average ~~Prior~~selling ~~year~~prices ~~information~~of ~~has~~reclaim ~~been~~and ~~reclassified~~test ~~to conform~~materials, ~~with~~which ~~the~~had ~~current~~a ~~year~~negative ~~presentation~~impact on our results.

14 The slowdown significantly impacted our revenues, results of operations and cash flows for the year ended April 30, 2008, in which we generated an operating loss of $(2,026,000), which includes a non-cash charge of $209,000 for stock-based compensation expense.

We In order ~~expect~~to ~~that~~minimize ~~these losses~~the ~~(on~~effect aof ~~consolidated~~the ~~basis)~~slowdown, ~~will~~during ~~continue~~our ~~through~~year ~~the~~ended ~~remainder~~April 30, of2008 we implemented many cost cutting measures in our silicon operations and are continuing to do so. We have increased our marketing efforts and are hopeful that we will see a recovery during the year ending April 30, ~~2008~~2009. AsWe ~~described~~continue into monitor the ~~next~~situation ~~risk~~closely ~~factor,~~and ~~unless~~while we believe that we ~~are~~will ~~able~~see toimproving ~~develop~~financial ~~and~~results ~~sell~~in ~~new~~this ~~products~~operating ~~profitably~~segment (over the long-term), we ~~may~~cannot beoffer ~~unable~~any ~~to remain~~assurance ~~competitive~~that ~~and~~we itwill isbe ~~likely~~able ~~that~~to ~~our~~regain ~~losses~~or ~~and~~sustain ~~negative~~operating ~~cash~~profitability in ~~flow~~future ~~will continue~~periods.

~~Unless~~ We had weminimal ~~are~~success ~~able~~in marketing our homeland security products, having sold to ~~develop~~date ~~and~~only ~~sell~~fifteen units of our ~~products~~panel-mounted IMS-based product. In August 2007, we elected ~~profitably~~to suspend the development, manufacture and marketing of our IMS based products. The suspension was due primarily to a lack of working capital but we ~~may~~also behad ~~unable~~difficulty competing in the market space. We continue to ~~remain~~seek ~~competitive~~alternatives to find a means of monetizing our investment in this product line, ~~furthering~~including an outright sale of the ~~likelihood~~technology. It is unclear as to when (if at all) we will resume ~~that~~activity on our ~~losses~~IMS-based products and ~~negative~~we ~~cash~~can ~~flow~~offer no assurance that we will ~~continue~~be able to monetize any portion of our IMS technology investment.

~~Our~~ ~~ability~~Because tothere ~~generate~~are ~~positive~~outstanding ~~cash~~debentures ~~flow, additional revenues,~~ and ~~ultimately~~warrants ~~net~~convertible ~~income,~~into isa ~~dependent~~significant ~~upon~~number ~~the success~~ of ~~our homeland~~shares security products, security services and semiconductor operations. While we reported significant revenue and operating income growth in our semiconductor operations for the year ended April 30, 2007, many of our ~~top~~common ~~semiconductor customers have experienced weakened business results in recent quarters. In addition~~stock, ~~some~~holders ~~customers have reported inventory buildup in reclaim and/or test products. As a result~~ of ~~these two factors, we have recently seen a slowdown in orders of reclaim and test materials, which has had a negative impact on~~ our ~~operations.~~common ~~The~~stock ~~slowdown will~~ have ~~a significant impact on our results of operations and cash flows for our quarter ending July 31~~been, ~~2007, which we expect to reflect a significant reduction in revenue (as compared to the previous sequential quarter)~~ and ~~the~~likely ~~reporting of an operating loss for that segment. In order to minimize the effect of the slowdown, we have implemented many cost cutting procedures and~~ will continue to dobe ~~so.~~subject ~~It is unclear as~~ to ~~when~~significant ~~the~~dilution ~~market will rebound but we believe that this is a relatively short-term phenomenon~~ and ~~are~~risk ~~hopeful~~ that ~~we will begin to see a recovery during our quarter ending October 31~~, ~~2007. We continue to monitor the situation closely and while we believe that we will see improving financial results~~ in ~~this operating segment (over the long-term)~~liquidation, ~~we cannot~~there ~~offer~~will ~~any~~be ~~assurance~~no ~~that~~assets wefor ~~will~~distribution ~~be able~~ to ~~regain~~shareholders orafter ~~sustain~~all ~~operating profitability~~creditors inhave ~~future~~received ~~periods~~their repayment.

We Since ~~have~~May 1, ~~had~~2004, ~~limited success~~we have raised in ~~marketing~~excess ~~our~~of ~~homeland~~$46,800,000 ~~security~~(net ~~products~~of expenses and $4,100,000 ~~having~~of ~~sold~~payments related to ~~date~~our ~~only~~8% ~~fifteen~~Debentures ~~units~~which ofwere issued in 2005) to finance our ~~panel-mounted~~business ~~IMS-based~~operations ~~product~~and acquisitions. ~~Although~~We wehave ~~continue~~also ~~to market~~issued ~~products~~a ~~based~~number onof ~~our~~shares, ~~IMS~~options, ~~technology~~and warrants, weto ~~are~~acquire ~~not~~services ~~doing~~and soassets ~~aggressively.~~from Wethird ~~are~~parties ~~attempting~~and pursuant to ~~resolve~~our ~~certain~~stock ~~issues~~option ~~that~~plans. weSince ~~confronted~~February 29, ~~with~~2008 YA Global, as our ~~earlier version~~primary debt holder, has converted a total of $161,600 in the ~~panel-mounted~~face ~~IMS-based~~amount ~~product.~~of ~~Consequently,~~the we13% ~~cannot~~Debentures ~~offer~~it ~~any~~holds ~~assurance~~into ~~that~~7,527,548 shares of our ~~marketing~~common ~~efforts~~stock ~~will~~based ~~result~~on inrepresentations ~~any~~that ~~additional~~it ~~sales~~is ~~or that~~not ~~additional~~affiliated ~~sales~~with ~~would~~Isonics. ~~result~~In inaccordance ~~significant~~with ~~revenues~~the toterms ~~us.~~of ~~While~~the we13% Debentures these conversions are effected at ~~considering~~below market prices. YA Global now holds debentures in the ~~development~~face amount of ~~other~~$11,868,400 ~~IMS-based~~that ~~products~~are ~~(such~~convertible asinto ~~the~~shares ~~hand-held~~of ~~‘sniffer’ discussed~~our ~~above~~common stock (plus approximately $2,000,000 in interest), weand doholds warrants ~~not~~to ~~have~~acquire ~~the~~shares ~~capital~~of ~~resources~~our ~~necessary~~common stock, including a warrant to ~~develop~~acquire ~~or manufacture~~13,000,000 ~~these~~shares ~~other~~of ~~products~~common stock at $0.03 Weper ~~cannot~~share. ~~offer~~The ~~any~~below-market ~~assurance~~conversions ~~that~~to wedate ~~will~~by beYA Global, and any future ~~able~~conversions tohave, doand sowill, incause ~~the~~significant ~~future~~dilution to our shareholders.

We have issued securities during the years ended April 30, 2007, 2006 and 2005, and subsequently which has resulted (and will in the future when warrant exercises or conversions occur) in dilution to our existing shareholders. This was accomplished to provide necessary working capital or obtain assets and services. We will likely issue more securities to raise additional capital or to obtain other services or assets, any of which may result in substantial additional dilution.13

~~During~~Table ~~the course~~ of the last three fiscal years, we have raised in excess of $45,800,000 (net of expenses and $4,100,000 of payments related to our 8% Debentures) to finance our business operations and acquisitions. During that period and subsequently, we have also issued a number of shares, options, and warrants, to acquire services and assets from third parties and pursuant to our stock option plans. We expect to raise additional financing during our year ending April 30, 2008 if we can do so on terms that we believe to be appropriate, given our financial condition and other circumstances. We also expect to issue additional shares, options, and warrants where we can to obtain necessary services. Some of the issuances we have made in the past and are likely to make in the future have been issued at prices below market and (as is frequently the case with declining market prices) at prices below our historical market prices. Consequently, our shareholders have suffered dilution in the value of their shares and can expect that we Contents

15 Additionally, if possible under terms that we believe to be appropriate given our financial condition and other circumstances (including our existing capital structure), we may seek to raise additional financing during our year ending April 30, 2009. We also may issue additional shares, options, and warrants where we can to obtain necessary services. Because of the terms of our agreements with YA Global, we will not be able to obtain any additional equity or debt financing without the consent of YA Global.

Some of the issuances we have made in the past and are likely to make in the future have been issued at prices below market and (as is frequently the case with declining market prices) at prices below our historical market prices. Consequently, our shareholders have suffered dilution in the value of their shares and can expect that we will be issuing additional securities on similar terms. Further dilution can be expected to occur when our outstanding options and warrants are exercised or debentures are converted at prices below the market.

~~Two~~ ~~former~~Our ~~holders~~financing oftransactions awith ~~portion~~YA Global potentially obligate us to issue more shares of ~~the~~common ~~then outstanding~~stock 8%than ~~Debentures~~the ~~have~~shares ~~asserted~~of authorized capital that aare ~~default~~currently ~~existed~~available for issuance.

~~Two~~ Our ~~entities~~Articles ~~who~~of ~~held~~Incorporation ~~8% Debentures~~permit ~~(which~~us ~~have~~to ~~been~~issue ~~paid~~up into ~~full~~175,000,000 asshares of ~~February 1,~~common ~~2007)~~stock. ~~have previously~~Were ~~asserted~~YA ~~that~~Global ~~the~~to ~~issuance~~convert of the 13% Debentures that ~~constituted~~remain ~~a default~~convertible (~~due~~approximately to$12,000,000 aplus ~~potential~~approximately ~~variable~~$2,000,000 ~~conversion~~in ~~provision~~interest ~~contained~~currently ~~within~~due) ~~the 13% Debentures which gives the 13% Debenture holder the right to convert the 13% Debentures~~ into common stock atit ~~the~~would ~~lower~~require ~~of $5.00 or at a discount to market, subject to certain limitations and as defined) under~~ the 8%issuance ~~Debentures. We~~of ~~have~~over ~~contested~~one ~~that~~billion ~~allegation~~shares (~~based~~using ~~on such clause not surviving the final~~current ~~agreement~~ and arecent ~~defense~~market ~~of in pari delicto~~prices), ~~and~~ ~~will~~which ~~defend~~is itsubstantially inmore ~~court if necessary. Although we have not had any further communication from the former holders regarding this issue other~~ than the ~~allegation of default~~175,000,000 ~~any~~shares ~~litigation~~of ~~would~~common bestock ~~time~~currently ~~consuming~~authorized ~~and~~for ~~expensive~~issuance. ~~and~~Additionally, ~~although we~~YA ~~believe~~Global ~~that~~holds wea ~~have~~warrant ~~significant grounds~~ to ~~contest~~purchase ~~the~~13,000,000 shares ~~existence~~ of ~~any default,~~our wecommon ~~cannot~~stock beat ~~assured of success~~$0.03 Ifper ~~they~~share ~~were~~issued toas ~~prove~~part ~~a default, we could be liable for 130%~~ of the ~~principal~~June ~~amount~~2008 offinancing, ~~their~~and 8%in ~~Debentures~~addition onholds ~~the closing~~warrants ~~date~~to ofpurchase ~~the~~2,250,000 ~~13%~~shares ~~Debenture~~of ~~transaction~~common stock (anat ~~amount~~exercise ofprices ~~approximately~~ranging from $~~1,200,000,~~5.00 ~~including~~to ~~accrued interest~~$8.00).

Accounting charges resulting from our issuance (and modification) of the 13% Debentures and Term Notes may lead to significant non-cash charges which would ~~adversely~~ adversely impact future interest expense, net income and earnings per share and may also lead to future volatility in our financial statement components.

As a result of the issuance (and modification) of the 13% Debentures and Term Notes, we will be required to record significant non-cash interest charges over ~~the~~their ~~life~~respective oflives ~~the 13% Debentures~~ (in addition to interest expense relating to the 13% interest rate borne by the 13% Debentures ~~which~~ ~~will~~and beTerm ~~paid in cash or shares of our common stock, at our option~~Notes). This will likely result in a significant adverse impact to future net income and earnings per share and will likely introduce additional volatility to our future operating results.

Historically we depended upon few customers for a significant portion of our revenues and our business could have been materially and adversely affected if we lost any one of those customers.

We have been dependent on a few significant customers who have purchased our products or services in amounts greater than 10% of our consolidated revenues. A decision by any significant customer to substantially decrease or delay purchases from us or an inability to collect significant amounts owed to us could have a material adverse effect on our consolidated financial condition and results of operations.

We have ~~realized~~been ~~increased~~informed ~~expenses~~that a significant security services customer will cease using our services effective July 31, ~~reduced~~2008. ~~revenues~~The ~~and longer~~loss ~~than~~of ~~anticipated~~this ~~delays~~customer will cause us to re-evaluate our recorded goodwill in ~~integrating~~the ~~past~~first ~~business~~quarter ~~acquisitions~~of ~~into~~ our ~~operations~~year ending April 30, ~~and~~2009, wewhich ~~may~~could ~~face~~result ~~similar~~in ~~difficulties~~an ~~with~~impairment ~~future~~of ~~acquisitions as well~~goodwill.

We experienced increased costs and delays in integrating the operations of the business and assets we acquired from EnCompass Materials Group, Ltd. (“EMG”) in June 2004, and we also realized revenues that were significantly reduced from that which we had anticipated which adversely affected the operations of our semiconductor division. Regardless of the extent of our planning, we may recognize increased costs and delays, and reduced revenues, when integrating future business acquisitions into our business operations and strategy. While we believe that we have and will continue to plan for integration of acquired business operations to the best of our ability, we cannot offer any assurance that any or all such efforts will proceed as anticipated.14

16Table of Contents

~~If demand~~ ~~for~~We ~~any~~realized ofincreased ~~our~~expenses, ~~products~~reduced ~~grows~~revenues ~~suddenly,~~and welonger ~~may~~than ~~lack~~anticipated ~~the~~delays ~~resources~~in ~~to meet~~integrating ~~demand~~past orbusiness acquisitions into our operations, and we may beface ~~required~~similar difficulties towith ~~increase~~future ~~our~~acquisitions ~~capital~~as ~~spending significantly~~well.

If We weexperienced ~~are~~increased ~~able~~costs ~~to develop~~ and ~~market~~delays ~~our~~in ~~products~~integrating ~~successfully,~~the weoperations ~~may experience periods~~ of ~~rapid~~the ~~growth that~~business ~~place~~and aassets ~~significant~~we ~~strain~~acquired onfrom ~~our~~EnCompass ~~financial~~Materials Group, Ltd. ~~and~~("EMG") ~~managerial~~in ~~resources.~~June ~~Through our~~2004, ~~research~~ and ~~development efforts~~ we ~~are~~ also ~~attempting~~realized torevenues ~~develop additional~~that ~~products~~were ~~and~~significantly ~~lines~~reduced offrom ~~business.~~that ~~Our~~which ~~ability~~we tohad ~~manage~~anticipated ~~growth effectively,~~which ~~particularly~~adversely ~~given~~affected ~~our~~the ~~increasing~~operations ~~scope~~ of ~~operations,~~our ~~will~~semiconductor ~~require~~division. usRegardless toof ~~continue~~the toextent ~~implement~~of ~~and improve~~ our ~~management~~planning, ~~operational~~we ~~and financial~~may ~~information~~recognize ~~systems~~increased costs and delays, and ~~will~~reduced ~~require~~revenues, uswhen tointegrating ~~develop~~future ~~the~~business ~~management skills~~acquisitions ofinto our ~~personnel~~business operations and strategy. toWhile ~~train,~~we ~~motivate~~believe ~~and~~that ~~manage~~we ~~our~~have ~~employees.~~and ~~Our failure~~will continue to ~~effectively~~plan ~~manage~~for ~~growth~~integration ~~could~~of ~~increase~~acquired ~~our~~business ~~costs of~~ operations ~~and reduce~~to ~~our~~the ~~margins~~best ~~and~~of ~~liquidity~~our ability, ~~which~~we ~~could~~cannot ~~have~~offer aany ~~material~~assurance ~~adverse~~that ~~effect~~any ~~on our~~or ~~business,~~all ~~financial~~such ~~condition~~efforts will ~~and~~proceed ~~results~~as ~~of operations~~anticipated.

~~Because we~~ ~~are~~If ~~dependent~~demand ~~upon~~for ~~our~~any ~~key~~of ~~personnel for~~ our ~~future~~products ~~success~~grows suddenly, if we ~~fail~~may lack the resources to ~~retain~~ meet demand or ~~attract~~we ~~key~~may ~~personnel,~~be ~~our~~required ~~business~~to ~~will~~increase beour ~~adversely~~capital ~~affected~~spending significantly.

~~Our~~ If ~~future~~we ~~success~~are ~~will depend~~able into ~~significant~~develop ~~part~~and ~~upon~~market ~~the~~our ~~continued~~products ~~service~~successfully, ofwe ~~our~~may ~~key~~experience ~~technical, sales~~periods ~~and~~of ~~senior~~rapid ~~management~~growth ~~personnel~~that ~~and~~place ~~consultants,~~a ~~including Christopher~~significant ~~Toffales,~~strain on our ~~Chairman~~financial ofand ~~the~~managerial ~~Board~~resources. ~~Currently~~Our ~~Mr. Toffales~~ability isto ~~covered~~manage ~~by a~~growth ~~two-year~~effectively ~~employment~~will ~~agreement~~require ~~that~~us isto ~~renewable~~continue onto animplement ~~annual~~and ~~basis.~~improve Weour ~~believe~~management, ~~that~~operational ~~our~~and ~~future~~financial ~~success~~information systems, and will ~~also depend~~require ~~upon~~us ~~our~~to ~~ability~~develop tothe ~~attract~~management skills of our personnel and ~~retain~~to ~~other~~train, ~~qualified~~motivate ~~personnel~~and ~~for~~manage our ~~operations~~ employees. ~~The~~Our failure to ~~attract~~effectively ormanage ~~retain~~growth ~~such~~could ~~persons~~increase ~~could~~our ~~materially~~costs of ~~adversely~~operations ~~affect~~and reduce our margins and liquidity, which could have a material adverse effect on our business, financial condition and results of operations.

~~The reorganization~~ ofBecause ~~our~~we ~~Company~~are ~~and~~dependent ~~the~~upon ~~changes~~our inkey ~~our~~personnel ~~senior~~for ~~management~~our ~~may result~~future insuccess, aif ~~disruption~~we offail ~~operations~~to retain or ~~have~~attract ~~adverse~~key ~~impacts~~personnel, on our business will be adversely affected.

As Our ~~part~~future ofsuccess ~~the~~will ~~our management~~depend ~~reorganization~~ in ~~February 2007,~~significant ~~James~~part E.upon ~~Alexander~~the ~~and~~continued ~~Boris Rubizhevsky,~~service ~~resigned~~of ~~from~~our ~~their~~key ~~positions~~technical, assales ~~officers~~ and ~~directors;~~senior ~~Lindsay A~~management ~~Gardner,~~personnel aand ~~vice president~~consultants, ~~resigned~~including ~~from~~Christopher ~~her~~Toffales, ~~position~~our asChief aExecutive ~~director~~Officer and ~~later as~~Chairman ~~vice~~of ~~president.~~the ~~Both Mr~~Board. ~~Alexander~~ ~~and~~Currently Mr. ~~Rubizhevsky~~Toffales ~~were founding~~is ~~members~~covered ofby ~~Isonics~~a ~~and~~one-year ~~actively managed our operations since formation,~~employment ~~and~~agreement ~~Ms. Gardner~~that ~~had~~is ~~been~~renewable aon ~~director~~an ofannual ~~Isonics since 1993~~basis. We ~~terminated several~~believe ~~other~~that ~~employees~~our ~~and~~future ~~officers~~success ~~during~~will ~~that~~also ~~period~~depend ofupon ~~time.~~our ~~The~~ability ~~departure of~~to ~~these~~attract ~~directors~~ and ~~officers~~retain ~~and~~other ~~the~~qualified ~~introduction~~personnel offor ~~new~~our ~~officers~~operations. ~~and directors~~The failure to attract ~~fill~~or ~~their~~retain ~~positions~~such ~~may~~persons ~~disrupt~~could ~~our~~materially ~~operations and~~ adversely ~~effect~~ affect our business, financial condition and results of operations.

We ~~may~~face ~~not~~technological bechange ~~able~~and tointense ~~protect~~competition ~~our~~both ~~intellectual property,~~domestically and internationally which ~~would~~may ~~reduce~~adversely affect our ~~competitive~~ability ~~advantage~~to sell our products profitably.

We The ~~rely~~markets ~~primarily~~for onour ~~a combination~~silicon ofproducts ~~patents~~ and ~~patent~~services ~~applications,~~are ~~trade~~characterized ~~secrets,~~by ~~confidentiality procedures,~~evolving technology and ~~contractual~~a ~~provisions~~continuing toprocess ~~protect~~of ~~our technology~~development. ~~Despite our~~Our ~~efforts~~future tosuccess ~~protect~~will ~~our~~depend ~~technology,~~upon ~~unauthorized parties may attempt to copy aspects of~~ our ~~products~~ability or to ~~obtain~~develop and ~~use~~market ~~information~~products that wemeet ~~regard~~changing ~~as proprietary.~~customer ~~Policing~~and ~~unauthorized~~technological ~~use~~needs ofon ~~our~~a ~~technology~~cost effective and ~~products~~timely ~~is difficult~~basis. InIf ~~addition,~~we ~~the~~fail ~~laws of many countries do not protect our rights~~ to ~~information,~~ ~~materials~~remain ~~and~~competitive ~~intellectual property that we regard as proprietary~~by ~~and~~anticipating ~~that are protected under~~ the ~~laws~~needs of ~~the~~our ~~United~~customers ~~States.~~and Weour ~~may~~customers ~~not~~contract bewith ~~able to~~other ~~protect our proprietary interests~~suppliers, or our ~~competitors~~revenues ~~may~~and ~~independently develop~~resulting ~~similar~~cash ~~technology~~flow orcould ~~intellectual~~be ~~property.~~materially ~~If either one of these situations occurs, we may lose existing customers~~ and ~~our~~adversely ~~business may suffer~~affected.

~~The~~ ~~validity~~Our ofsilicon ~~any~~products ofand ~~the patents~~services ~~licensed~~segment tois ~~us,~~dependent oron ~~that may in~~ the ~~future~~performance beof ~~owned~~several bykey ~~us,~~pieces ~~may~~of ~~not be upheld if challenged by others in litigation~~equipment. ~~Further,~~If ~~our products or technologies, even if covered by our patents, may infringe upon patents owned by others. We could incur substantial costs in defending suits brought against us, or~~ any of ~~our~~these ~~licensors,~~items ~~for~~were ~~infringement,~~not into ~~suits~~perform byto ustheir ~~against~~ability ~~others~~or ~~for~~were ~~infringement,~~taken orout ~~in suits contesting the validity~~ of aservice ~~patent.~~for ~~Any such proceeding may be protracted. In~~ any ~~suit~~significant ~~contesting~~amount ~~the validity~~ of ~~a patent~~time, ~~the~~ ~~patent~~our ~~being~~ability ~~contested would be entitled~~ to aproduce ~~presumption~~product ofwould ~~validity~~be severely compromised.

17 The performance of our silicon products and services segment is directly tied to the performance of several key pieces of equipment, which are typically intricate and expensive. The average time between failures is typically long and the corresponding time for repair is typically short; as a result, most of the time the issues are routine and are quickly repaired. However, this is not always the case

and the contesting party would be required to demonstrate invalidity of such patent by clear and convincing evidence. If the outcome of any such litigation were adverse to our interests, our liquidity and business operations would be materially and adversely affected.15

~~We face~~Table ~~technological~~of ~~change and intense competition both domestically and internationally which may adversely affect our ability to sell our products profitably.~~Contents

~~The~~and there ~~markets~~have ~~for~~been ~~our homeland~~times ~~security~~in ~~and~~the ~~semiconductor~~past ~~products~~when ~~and~~critical ~~services~~tools ~~are~~have ~~characterized~~been ~~by rapidly~~out ~~evolving~~of ~~technology~~service ~~and~~for a ~~continuing~~period ~~process~~ of ~~development.~~time, ~~Our~~which ~~future success~~had ~~will~~a ~~depend~~negative ~~upon~~impact ~~our~~on ~~ability~~revenues toin ~~develop~~the ~~and~~short ~~market~~term. ~~products~~Further, ~~that~~due ~~meet~~to our historical ~~changing~~working ~~customer~~capital shortages and ~~technological~~the ~~needs~~significant onhistorical anet ~~cost~~losses, ~~effective~~we ~~and~~are ~~timely~~unable ~~basis~~to purchase the necessary equipment redundancy. If weAny ~~fail~~future toequipment ~~remain~~issues ~~competitive~~could byhave ~~anticipating~~a ~~the~~significant ~~needs~~impact ofon our ability ~~customers~~to produce and ~~our~~ ~~customers~~ship ~~contract~~the ~~with~~products ~~other~~to ~~suppliers,~~ our ~~revenues~~customers, ~~and~~thereby ~~resulting~~potentially ~~cash flow~~impacting ~~could~~both beour ~~materially~~revenues and ~~adversely~~related ~~affected~~cash flows.

~~Our semiconductor~~ ~~products~~We ~~and~~are ~~services~~controlled ~~segment~~by isour ~~dependent~~Board ~~on the performance~~ of ~~several~~ ~~key~~Directors ~~pieces~~and ofYA ~~equipment.~~Global Ifhas ~~any~~a ofsecurity ~~these~~interest ~~items~~in ~~were~~substantially ~~not~~all toof ~~perform~~our ~~to their~~assets; ~~ability~~individual orpurchasers ~~were taken out~~ of ~~service~~our ~~for~~shares ~~any~~will ~~significant~~have ~~amount of time,~~little ~~our~~ ability to ~~produce~~elect ~~product~~directors ~~would~~or becontrol ~~severely~~our ~~compromised~~management.

~~The~~ Our ~~performance~~shares ofare widely-held, and our ~~semiconductor~~ ~~products~~officers and ~~services~~directors ~~segment~~who isbeneficially ~~directly~~own ~~tied~~our tosecurities ~~the~~in ~~performance of~~an ~~several~~amount ~~key~~of approximately ~~pieces~~36% of ~~equipment,~~the ~~which~~outstanding ~~are~~votes ~~typically~~at ~~intricate~~any ~~and~~shareholders' ~~expensive~~meeting. ~~The~~ ~~average~~Furthermore, ~~time~~YA ~~between~~Global ~~failures~~holds issecured ~~typically~~indebtedness ~~long~~collateralizing ~~and~~substantially ~~the~~all ~~corresponding~~of ~~time~~ our assets for ~~repair~~payment isof ~~typically~~our ~~short;~~debt asand interest ato ~~result,~~YA ~~most~~Global ofin the ~~time~~total ~~the~~amount ~~issues~~in ~~are routine~~excess ~~and~~of ~~are~~$19,000,000 ~~quickly~~plus ~~repaired~~accrued interest. ~~However,~~It ~~this~~ is ~~not~~likely ~~always~~that the ~~case~~Board ~~and there~~of ~~have~~Directors ~~been~~will ~~times~~be inable ~~the~~to ~~past~~influence ~~when~~all ~~critical~~matters ~~tools~~submitted ~~have~~to ~~been~~stockholders ~~out~~for approval, ofunless ~~service for~~YA aGlobal ~~period~~were ofto ~~time,~~foreclose ~~which~~on ~~had~~our aassets ~~negative~~and ~~impact~~take onthe ~~revenues~~authority inwith ~~the~~respect ~~short~~to ~~term~~our assets away from our Board of Directors and, consequently, our shareholders. As our senior secured ~~Further~~creditor, ~~due~~YA Global may also attempt to influence our ~~historical~~Board ~~working~~of ~~capital~~Directors. ~~shortages~~Such control by the Board of Directors and YA Global's security interest may have the ~~significant~~effect of delaying, deferring or ~~historical~~preventing ~~net~~a ~~losses~~change in control, weimpeding ~~are~~a ~~unable~~merger, toconsolidation ~~purchase~~or ~~the~~takeover ~~necessary~~or ~~equipment redundancy.~~other ~~Any~~business ~~future~~combination ~~equipment~~involving ~~issues~~us ~~could~~or ~~have~~discouraging a ~~significant~~potential ~~impact~~acquirer onfrom ~~our~~making a tender offer or otherwise ~~ability~~attempting to ~~produce~~obtain ~~and~~control ~~ship~~of ~~the~~our ~~products~~business unless such transaction was acceptable to ~~our~~YA ~~customers~~Global, ~~thereby~~even ~~potentially impacting~~if ~~both~~such ~~our~~a ~~revenues~~transaction ~~and~~would ~~related~~be ~~cash~~beneficial ~~flows~~to other stockholders.

We ~~could~~ berisk ~~subject~~exposing ourselves to ~~environmental~~an ~~regulation~~above-policy bylimit ~~federal,~~product ~~state and local agencies, including laws that impose~~ liability ~~without fault~~claim, which could ~~produce~~ ~~working~~adversely ~~capital~~affect ~~shortages~~our ~~and~~working ~~lessen~~capital, shareholders’' equity and profitability.

Our ~~IMS-based~~prior ~~products~~sale and use ~~radioactive~~ ~~sources.~~of Asexplosive aand ~~result,~~chemical wedetection ~~are~~products ~~subject~~may toexpose aus ~~variety~~to ofpotential ~~federal, state,~~liability ~~and~~risks ~~local~~that ~~environmental~~are ~~regulations~~inherent ~~relating to~~ with the ~~use,~~operation ~~storage, discharge~~of ~~and~~these ~~disposal~~types of ~~hazardous~~products ~~chemicals~~(including, ~~used~~but ~~during~~not ~~manufacturing processes.~~limited ~~Regulations~~to ~~that~~failed ~~become~~detection). ~~applicable~~We tocurrently ~~our~~have ~~operations~~product inliability ~~the~~insurance; ~~future could~~however, ~~restrict~~there ~~our~~is ~~ability~~a torisk ~~expand~~that our ~~facilities~~insurance orwould ~~could~~not ~~require~~cover completely usor would fail to ~~acquire~~ ~~costly~~cover ~~equipment~~a orclaim, toin ~~incur~~which ~~other~~case ~~significant~~we ~~expenses~~may tonot ~~comply~~have ~~with governmental~~the ~~regulations.~~financial ~~Historically,~~resources ~~our~~to ~~costs~~satisfy ofsuch ~~compliance~~claims, ~~with environmental~~and ~~regulations~~the ~~have~~payment ~~not~~of ~~been~~claims ~~significant~~would ~~because~~require weus to use ~~licensed~~funds that are otherwise ~~manufacturers~~needed into ~~connection~~conduct ~~with~~our ~~the~~business ~~manufacture~~and ofmake ~~these~~our products.

~~We are~~ ~~controlled~~Our bycommon stock is vulnerable to pricing and purchasing actions that are beyond our ~~Board~~control ofand, ~~Directors;~~therefore, ~~individual~~persons ~~purchasers~~acquiring ofor holding our shares ~~will~~ ~~have~~or ~~little~~warrants ~~ability~~may be unable to ~~elect~~resell ~~directors~~their orshares ~~control~~at ~~our~~a ~~management~~profit as a result of this volatility.

~~Our~~ The ~~shares~~trading ~~are widely-held,~~price ~~and~~of our ~~management~~securities ~~beneficially~~has ~~owns~~been ~~our~~subject ~~securities~~to wide fluctuations in anresponse ~~amount~~to quarter-to-quarter ~~less~~variations ~~than~~in ~~10%~~our operating results, our announcements of ~~the~~technological ~~outstanding~~innovations ~~votes~~or atnew ~~any~~products ~~shareholders’~~by ~~meeting. Nevertheless,~~us itor isour ~~likely~~competitors, ~~that~~delays ~~the~~in ~~Board~~our ofproduct ~~Directors~~development ~~will~~and bemarketing, ~~able~~and ~~to influence~~other ~~all~~events ~~matters~~and factors ~~submitted~~over towhich ~~stockholders~~we ~~for~~have ~~approval,~~no ~~including~~influence ~~the election~~or ~~and~~control. ~~removal~~The ofsecurities ~~directors~~markets ~~and~~themselves ~~any~~have ~~merger,~~experienced ~~consolidation~~significant orprice ~~sale~~and ~~of substantially~~volume ~~all~~fluctuations ofthat ~~our~~may ~~assets,~~be ~~and~~unrelated to ~~control~~the ~~our~~operating ~~management~~performance ~~and~~of particular ~~affairs~~companies. ~~Such~~ ~~control~~Regulatory ~~may~~developments ~~have~~in the ~~effect~~United ofStates ~~delaying~~and foreign countries, ~~deferring~~public orconcern ~~preventing~~as ato ~~change in~~the ~~control,~~safety ~~impeding~~of aproducts ~~merger,~~containing ~~consolidation~~radioactive orcompounds, ~~takeover~~economic orand other ~~business~~external ~~combination~~factors, ~~involving~~all usaffect orthe ~~discouraging~~market aprice ~~potential~~of ~~acquirer~~our ~~from~~securities. ~~making~~In ~~a tender~~addition, ~~offer~~the orrealization ~~otherwise~~of ~~attempting~~any toof ~~obtain~~the ~~control~~risks ofdescribed ~~our~~in ~~business,~~these ~~even~~"Risk ~~if such~~Factors" could have a ~~transaction~~significant ~~would~~and beadverse impact ~~beneficial~~on tosuch ~~other~~market ~~stockholders~~prices.

1816

WeTable ~~risk~~of ~~exposing ourselves to an above-policy limit product liability claim, which could adversely affect our working capital, shareholders’ equity and profitability.~~Contents

~~The~~ ~~sale~~SEC ~~and~~penny ~~use~~stock ~~of explosive~~regulations ~~and chemical detection products~~ may ~~expose~~limit ~~us to potential liability risks that are inherent with~~ the ~~operation~~ability ~~of these types of products (including, but not limited~~ to ~~failed~~trade ~~detection). We currently have product liability insurance; however, there is a risk that~~ our insurance would not cover completely or would fail to cover a claim, in which case we may not have the financial resources to satisfy such claims, and the payment of claims would require us to use funds that are otherwise needed to conduct our business and make our productssecurities.

~~Our~~ Because Nasdaq delisted our securities from the Nasdaq Capital Market, our common stock is ~~vulnerable~~subject to ~~pricing~~additional ~~and~~disclosure ~~purchasing~~requirements ~~actions~~for penny stocks mandated by the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. The SEC Regulations generally define a penny stock to be an equity security that ~~are~~is not ~~beyond~~traded ~~our~~on ~~control~~the Nasdaq Stock Market and has a market price of less than $5.00 per share. Our stock is included within the SEC Rule 3a-51 definition of a penny stock and, ~~therefore~~as such, ~~persons~~trading is covered by ~~acquiring~~Rule 15g-9 orpromulgated ~~holding~~under ~~our~~the ~~shares~~Securities orExchange ~~warrants~~Act ~~may~~of be1934, ~~unable~~adding a significant amount of broker-dealer compliance to ~~resell~~transactions ~~their~~in penny stocks. Many brokers are unwilling ~~shares~~to atengage ain ~~profit~~transactions asin apenny ~~result~~stocks and, therefore, the marketability of ~~this~~our ~~volatility~~securities may weaken significantly.

~~The trading price of our~~ We ~~securities~~cannot ~~has~~give ~~been~~any ~~subject~~assurance tothat ~~wide~~a ~~fluctuations~~stable intrading ~~response~~market towill ~~quarter-to-quarter variations~~develop infor our ~~operating~~stock. ~~results,~~Since before our ~~announcements~~securities ofwere ~~technological innovations~~delisted orfrom ~~new~~the ~~products~~Nasdaq byCapital ~~us or our competitors~~Market, ~~delays~~trading in our ~~product~~common ~~development~~stock ~~and~~has ~~marketing,~~been ~~and~~characterized ~~other~~by ~~events~~volatility ~~and~~in ~~factors~~both ~~over~~pricing ~~which we have no influence or control. The securities markets themselves have experienced significant price~~ and volume, ~~fluctuations~~and ~~that~~a ~~may~~steady bedownward ~~unrelated~~trend ~~to the operating performance of particular companies. Regulatory developments~~ in ~~the United~~our ~~States~~stock ~~and~~price ~~foreign~~since ~~countries,~~our ~~public~~reverse ~~concern~~stock assplit tocompleted ~~the~~in ~~safety~~February ~~of products~~2007 ~~containing~~(when ~~radioactive~~our ~~compounds,~~stock ~~economic and other external factors,~~was ~~all~~trading ~~affect~~for ~~the~~about ~~market price of our securities~~$2.00 ~~In addition,~~per ~~the~~share) ~~realization~~to ofpresent ~~any~~(when ofour ~~the~~stock ~~risks~~is ~~described~~trading inat ~~these~~about ~~“Risk~~$0.01 ~~Factors” could~~per ~~have a significant and adverse impact on such market prices~~share).

~~SEC~~ ~~penny~~There ~~stock regulations~~ may ~~limit~~be ~~the~~a ~~ability~~greater torisk ~~trade~~of ~~our~~fraud ~~securities~~on the OTC Bulletin Board.

~~Although~~ OTC ~~our~~Bulletin ~~common~~Board ~~stock~~securities isare ~~currently~~more ~~quoted~~frequently ontargets ~~the Nasdaq~~for ~~Capital~~fraud ~~Market,~~or ~~our~~market ~~common~~manipulation ~~stock~~because ~~has~~they inare ~~the~~not ~~past~~regulated ~~been~~as ~~subject~~closely toas ~~additional~~securities ~~disclosure~~listed ~~requirements~~on ~~for~~exchanges. ~~penny~~Dealers ~~stocks~~may ~~mandated~~dominate by the ~~Securities Enforcement~~market ~~Remedies~~ and ~~Penny~~set ~~Stock~~prices ~~Reform Act of 1990. The SEC Regulations generally define a penny stock to be an equity security~~ that isare not ~~traded~~based on ~~the~~ ~~Nasdaq~~competitive ~~Stock~~forces. ~~Market~~Individuals ~~and~~or ~~has~~groups amay ~~market~~create ~~price~~fraudulent ofmarkets ~~less~~and ~~than~~control ~~$5.00~~the ~~per share. We have~~sudden, sharp atincrease ~~times~~of inprice ~~the~~and ~~past,~~trading ~~been~~volume ~~included~~and ~~within~~ the ~~SEC~~equally ~~Rule 3a-51 definition~~sudden collapse of amarket ~~penny stock~~prices. ~~When~~While ~~our~~there ~~common stock~~ is ~~considered~~regulation toof bethe aOTC ~~“penny stock~~Bulletin Board,” ~~trading~~it is ~~covered~~not byas ~~Rule 15g-9~~comprehensive ~~promulgated~~as ~~under~~ the ~~Securities~~ ~~Exchange~~regulation ~~Act~~ of ~~1934, for non-Nasdaq and non-national securities~~the ~~exchange~~ listed ~~securities, adding a significant amount of broker-dealer compliance to transactions in penny stocks~~exchange. ~~Many~~If ~~brokers~~this ~~are~~should ~~unwilling to engage in transactions in penny stocks and~~occur, ~~therefore, if we lose our listing on~~ the ~~Nasdaq~~value ~~Capital~~of ~~Market,~~an ~~the~~investment ~~marketability~~in of our ~~securities~~common ~~may~~stock ~~weaken~~ could decline significantly.

We ~~cannot~~have ~~give~~never paid any ~~assurance~~ ~~that~~cash wedividends ~~will~~on ~~be able to meet the Nasdaq requirements to maintain~~ our ~~Capital~~ ~~Market~~common ~~listing,~~stock orand ~~that if~~ we do, anot ~~stable~~anticipate ~~trading~~paying ~~market~~cash ~~will~~dividends ~~develop for~~on our common stock orin ~~our warrants. See “We may be delisted from~~ the ~~Nasdaq~~foreseeable ~~Capital Market and delisting may adversely impact our ability to raise capital” for additional risk factors associated with potential Nasdaq listing deficiencies~~future.

~~Future~~ We ~~sales~~have ofnever declared or paid a cash dividend on our common stock. ~~may~~We ~~cause~~presently intend to retain our ~~stock~~earnings, ~~price~~if any, to ~~decline~~fund development and growth of our business and, therefore, we do not anticipate paying cash dividends in the foreseeable future. Additionally, the terms of the 13% Debentures contain restrictions on our ability to pay dividends to holders of our common stock.

~~Our~~ ~~stock~~If ~~price~~we ~~has~~fail ~~declined~~to ~~from~~effect aand ~~price~~maintain ~~of approximately~~registration ~~$24.00 (adjusted for the reverse split) per share at the beginning~~ of ~~2005 to prices of less than $1.50 (adjusted for~~ the ~~reverse~~common ~~split) at various times since May 2006. Our~~ stock ~~price~~issued ~~may~~or ~~decline~~issuable ~~further~~pursuant asto ~~a result~~conversion of ~~future sales of~~ our ~~shares,~~convertible ~~the perception that such sales may occur~~debentures, ~~our~~ ~~financial~~ or ~~operational~~certain ~~performance, or other reasons. As~~ of ~~July 20, 2007,~~our ~~approximately 940,000 shares of~~ outstanding common stock ~~held~~warrants, bywe ~~existing stockholders~~may ~~constitute~~be ~~“restricted~~obligated ~~shares”~~to aspay ~~defined in Rule 144 under~~ the ~~Securities~~investors ~~Act.~~of ~~The~~those ~~restricted~~securities ~~shares~~liquidated ~~may only be sold if they are~~ damages.

19 We have various obligations to file and obtain the effectiveness of certain registration statements, which include certain outstanding common stock and common stock underlying outstanding convertible debentures and common stock warrants. Once effective, the prospectus contained within a registration statement can only be used for a period of time as specified by statute without there being a post-effective amendment filed that has become effective under the Securities Act of 1933. If we are unable to meet these obligations, we may be obligated to pay liquidated damages. We cannot offer any assurance that we will be able to maintain the currency of the information contained in a prospectus or to obtain the effectiveness of any registration statement or post-effective amendments that we may file.

~~registered under the Securities Act, or sold under Rule 144, or another exemption from registration under the Securities Act.~~17

~~Approximately~~Table ~~90%~~ of the restricted shares of our common stock are either eligible for sale pursuant to Rule 144 or have been registered under the Securities Act for resale by the holders. We are unable to estimate the amount, timing, or nature of future sales of outstanding common stock. Sales of substantial amounts of our common stock in the public market may cause the stock’s market price to decline.Contents

We As a public company, we are subject to a significant amount of regulation. In the past we have ~~never~~received ~~paid~~requests ~~any~~for ~~cash~~information ~~dividends~~from onthe ~~our~~Securities ~~common stock~~and Exchange Commission and wefrom dothe ~~not~~enforcement ~~anticipate~~arm ~~paying~~of ~~cash~~FINRA. ~~dividends~~Any onsuch ~~our~~inquiry ~~common~~or ~~stock~~investigation inthat may result may adversely affect the ~~foreseeable~~ ~~future~~market for our stock or our Company.

We Regulators of public companies such as Isonics Corporation have ~~never~~the ~~declared~~authority orto commence inquiries and investigations where the ~~paid~~regulators ahave ~~cash~~concerns. ~~dividend~~The oninvestigations, while involving the company, may not have anything to do with actions taken by the company or our ~~common~~failure ~~stock~~to act. WeFurthermore, ~~presently~~the ~~intend~~regulators may not inform us when the issues they were addressing are resolved. From October 2004 through February 2005, both the NASD (now known as FINRA) and the SEC requested documents from us with respect to inquiries ~~retain~~they were undertaking (related primarily to questions regarding our ~~earnings~~ press releases, ifpublic ~~any~~relations advisors, tocertain ~~fund~~other ~~development~~disclosures that were made publicly and ~~growth~~the termination of Grant Thornton LLP as our independent auditor). We also met with representatives of Nasdaq to discuss issues related to market activity, press announcements, SEC filings, status of our business and, ~~therefore~~other issues. We provided information, which we dobelieve ~~not~~to ~~anticipate~~be ~~paying~~responsive ~~cash~~to ~~dividends~~all of the questions posed in the ~~foreseeable~~Nasdaq ~~future~~inquiry and to the SEC. We have not received any requests for additional ~~Additionally,~~information from either the ~~terms~~SEC ofor ~~the~~Nasdaq ~~13%~~relating ~~Debentures~~to ~~contain~~those ~~restrictions~~earlier oninquiries ~~our~~since February 2005 and while we believe these issues are behind us, if any action results from these inquiries in the ~~ability~~future, toit ~~pay~~may ~~dividends~~adversely toimpact ~~holders~~us, ofand our ~~common~~ability ~~stock~~to carry on our business.

~~Outstanding~~ ~~debentures,~~Provisions ~~options~~in ~~and~~our ~~warrants~~charter ~~may~~documents ~~make it~~could ~~difficult~~prevent ~~for~~or usdelay toa ~~obtain~~change ~~additional~~in ~~capital~~control, onwhich ~~reasonable~~could ~~terms~~delay or prevent a takeover.

We Our ~~have~~Articles aof ~~significant~~Incorporation ~~amount~~authorize the issuance of ~~securities~~"blank ~~outstanding that~~check" ~~are~~preferred ~~convertible~~stock ~~into~~with orsuch ~~exercisable~~designations, ~~for~~rights, ~~shares~~and ofpreferences, as ~~our~~may ~~common~~be ~~stock,~~determined ~~in some~~by ~~cases~~our atBoard ~~prices~~of ~~below~~Directors. Accordingly, the ~~market~~Board ~~price~~of ~~for~~Directors ~~our~~may, ~~shares.~~without ~~The~~shareholder ~~existence~~approval, issue shares of ~~these~~ ~~convertible~~preferred stock with dividend, liquidation, conversion, voting, or ~~exercisable~~other ~~securities~~rights ~~have~~that incould adversely affect the ~~past~~voting ~~and~~power ~~may~~or inother rights of the ~~future~~ ~~make~~holders itof ~~more~~our ~~difficult~~common ~~for~~stock. usPreferred stock could also be issued to ~~raise~~discourage, ~~any~~delay, ~~further~~or ~~financing~~prevent ~~because~~a ~~any~~change in our ~~new~~control, ~~investors~~although ~~will~~we ~~perceive~~do ~~that~~not ~~the~~currently ~~securities~~intend ~~offer~~to aissue ~~risk~~any additional series of ~~substantial potential~~our ~~future~~preferred ~~dilution~~stock.

In ~~addition,~~Provisions ~~the continuously~~in ~~adjustable~~our ~~conversion~~bylaws ~~price~~provide ~~feature~~for indemnification of ~~our~~officers ~~13% Debentures,~~ and ~~any similar~~directors ~~features~~to ofthe ~~any~~full ~~debentures~~extent wepermitted ~~may~~by ~~subsequently~~California ~~issue~~law, which could require us to ~~issue a large number of shares, which would cause dilution~~ to ~~our~~direct ~~existing stockholders~~funds ~~and may encourage investors to make short sales of our common~~away ~~stock,~~from ~~which could depress the price of~~ our ~~common~~business ~~stock~~ and ~~adversely impact our ability to raise capital when necessary~~products.

If Our weBylaws ~~fail~~provide tofor ~~effect~~indemnification ~~and~~of ~~maintain~~officers ~~registration~~and ofdirectors to the full extent permitted by California law, our state of ~~common~~incorporation. ~~stock~~We ~~issued~~may be required to pay judgments, fines, and expenses incurred by an officer or ~~issuable~~director, ~~pursuant~~including toreasonable ~~conversion~~attorneys' fees, as a result of ~~our~~actions ~~convertible~~or proceedings in which such ~~debentures,~~officers orand ~~certain~~directors are involved by reason of ~~our~~being ~~outstanding~~or ~~common~~having ~~stock~~been ~~warrants~~an officer or director. Funds paid in satisfaction of judgments, wefines and expenses may be ~~obligated~~ tofunds ~~pay~~we need for the ~~investors~~operation of ~~those~~our business ~~securities~~and ~~liquidated~~the ~~damages~~development of our products, thereby affecting our ability to attain profitability. This could cause our stock price to drop.

We ~~have~~As various obligations to file and obtain the effectiveness of certain registration statements which include certain outstanding common stock and common stock underlying outstanding convertible debentures and common stock warrants. Once effective, the prospectus contained within a ~~registration~~result ~~statement can only be used for a period~~ of ~~time as specified by statute without there being a post-effective amendment filed that has become effective under~~ the ~~Securities~~resignation ~~Act~~ of ~~1933.~~two ~~If we~~directors ~~are~~during ~~unable~~our tofiscal ~~meet~~year ~~these~~ended ~~obligations~~April 30, we2008, ~~may~~our beAudit ~~obligated~~Committee ~~to pay liquidated damages~~ of ~~1% of~~ the ~~principal~~Board ~~amount~~ of ~~the~~Directors ~~13%~~is ~~Debentures~~no ~~outstanding~~longer ~~per~~comprised ~~month~~solely ~~(up~~of toindependent ~~$180,000~~directors ~~per~~and ~~month).~~our Wecorporate ~~cannot~~governance ~~offer~~policies ~~any~~and ~~assurance~~procedures ~~that~~may wenot ~~will~~ be ~~able~~ toas ~~maintain the currency of the information contained in a prospectus or to obtain the effectiveness of any registration statement or post-~~effective ~~amendments~~ ~~that~~as wethey ~~may~~previously ~~file~~were.

As In aDecember ~~public~~2007 ~~company,~~two weof ~~are~~our ~~subject~~independent todirectors aresigned ~~significant amount~~from the Board of ~~regulation~~Directors. InBoth ~~the~~of ~~past~~these directors were members of our Audit, Compensation, and Nominating Committees. Since then, Dr. Hagman has become more deeply involved in our day-to-day operations and is consulting with management while we have ~~received~~learned ~~requests~~that ~~for~~Mr. O'Leary, ~~information from~~a ~~the~~director ~~Securities~~appointed ~~and~~in ~~Exchange~~April ~~Commission~~2008, ~~and~~works ~~from~~with ~~Nasdaq~~Frank Angelo, brother of the managing director of YA Global. ~~Any~~In ~~such~~July ~~inquiry~~2008 an independent director resigned oras ~~investigation~~well. ~~that~~As ~~may~~a result our shareholders may ~~adversely~~not ~~affect~~enjoy the ~~market~~same ~~for~~benefits ~~our stock~~ or ~~our~~protections ~~Company.~~associated

Regulators of public companies such as Isonics have the authority to commence inquiries and investigations where the regulators have concerns. The investigations, while involving the company, may not have anything to do with actions taken by the company or our failure to act. Furthermore, the regulators may not inform us when the issues they were addressing are resolved. From October 2004 18

20Table of Contents

~~through February 2005, both Nasdaq and the SEC requested documents from us~~ with ~~respect to inquiries~~ ~~they~~corporate ~~were~~governance ~~undertaking~~controls ~~(related~~and ~~primarily to questions regarding our press releases, public relations advisors, certain~~ other ~~disclosures~~corporate ~~that~~oversight ~~were~~mechanisms ~~made publicly~~overseen ~~and~~by ~~the~~companies ~~termination of Grant Thornton LLP as our independent auditor). We also met~~ with ~~representatives~~a ~~of Nasdaq~~larger topanel ~~discuss issues related to market activity, press announcements, SEC filings, status~~ of ~~our~~independent ~~business and other issues~~directors. We provided information, which we believe to be responsive to all of the questions posed in the Nasdaq inquiry and to the SEC. We have not received any requests for additional information from either the SEC or Nasdaq relating to those earlier inquiries since February 2005 and while we believe these issues are behind us, if any action resulted from these inquiries in the future, it may adversely impact us, and our ability to carry on our business.

We ~~failed to provide necessary funding to SenseIt to~~ ~~make~~ ITEM ~~the most recent development payment to Lucent and, as a result, Lucent could terminate the agreement and our investment in SenseIt would be impaired~~1B. UNRESOLVED ~~Even if~~STAFF we are able to make the development payment we have missed or future development payments when due, there is no guarantee that the development activity will yield technologically relevant or commercially viable products.COMMENTS

~~SenseIt failed to make the development payment due to Lucent on July 16, 2007~~ None. SenseIt was unable to make this payment because we were unable to provide adequate funding to SenseIt. Consequently, Lucent may in its discretion take steps to terminate the agreement and all licenses granted to us thereunder or cease working on the project and then assess SenseIt a “start-up” fee if funding was to resume. On July 26, 2007, we received official notification from Lucent that we failed to make the $1,000,000 payment to Lucent by July 16, 2007 and that in the event such non-payment continues for more than ten days, Lucent may at is discretion, suspend work on the development project. Because of our continuing working capital shortages, we may not be able to provide SenseIt funding for future (or current) development payments to Lucent, and SenseIt may not be able to find third-party investors to provide it the necessary capital. If the Lucent agreement were to be canceled, our investment in SenseIt would be impaired. Lastly, although we are hopeful of a positive outcome, we can offer no assurance that the development activity underway with Lucent and SenseIt will yield technologically relevant or commercially viable products.

~~Provisions~~ ~~in our charter~~ ~~documents~~ ITEM ~~could prevent or delay a change in control, which could delay or prevent a takeover~~2. PROPERTIES

Our ~~Articles~~corporate ~~of Incorporation~~office ~~authorize~~is ~~the~~located ~~issuance~~in ofGolden, ~~“blank~~Colorado. ~~check”~~In ~~preferred~~April ~~stock with such designations~~2007, ~~rights,~~we ~~and~~renewed ~~preferences,~~our asmonth-to-month ~~may~~lease be(at ~~determined by our Board of~~a ~~Directors.~~rate ~~Accordingly, the Board~~ of ~~Directors may~~$3,077 ~~without~~per ~~shareholder approval,~~month) ~~issue shares of preferred stock~~ with ~~dividend, liquidation, conversion, voting, or other rights that could adversely affect~~ the ~~voting power~~Colorado orSchool ~~other rights~~ of ~~the~~Mines ~~holders~~Research ofInstitute ~~our common stock. Preferred stock could also be issued~~ to ~~discourage,~~continue ~~delay,~~leasing oroffice ~~prevent~~and astorage ~~change~~space inat our ~~control, although~~current ~~we do not currently intend to issue any additional series of our preferred stock~~location.

~~Provisions~~ We conduct our silicon operations in ~~our~~two ~~bylaws~~facilities ~~provide~~leased ~~for~~in ~~indemnification of~~Vancouver, ~~officers~~Washington. ~~and~~The ~~directors~~first tolease ~~the~~requires ~~full~~a ~~extent~~minimum ~~permitted~~payment byof ~~California~~$10,670 ~~law~~per month and terminates August 31, ~~which~~2012 ~~could~~while ~~require~~the ussecond tolease ~~direct~~requires ~~funds~~a ~~away~~minimum ~~from~~payment ~~our~~of ~~business~~$6,335 per month and ~~products~~terminates 1/31/2013.

~~Our Bylaws provide for~~ PPSC ~~indemnification~~is oflocated ~~officers~~in ~~and directors to the full extent permitted by California law~~Manhattan, ~~our~~New ~~state of incorporation~~York. WePPSC ~~may~~operates beunder ~~required~~a tolease ~~pay judgments~~agreement, ~~fines,~~which ~~and~~requires ~~expenses incurred by an officer or director, including reasonable attorneys’ fees, as~~ a ~~result~~minimum ofpayment ~~actions or proceedings in which such officers and directors are involved by reason~~ of ~~being or having been an officer or director. Funds paid in satisfaction of judgments~~$14,587 ~~fines~~per ~~and expenses~~month ~~may~~(escalating beon ~~funds~~an weannual ~~need~~basis) ~~for the operation of our business~~ and ~~the~~terminates ~~development of our products~~September 30, ~~thereby affecting our ability to attain profitability~~2013. ~~This could cause our stock price to drop.~~

21 ITEM 3. LEGAL PROCEEDINGS

We On ~~will~~July 22, ~~need~~2008 toJames ~~make~~E. ~~substantial~~Alexander, ~~financial~~our former Chief Executive Officer and Chairman of the Board of Directors, filed a ~~man-power~~complaint ~~investments~~against us in ~~order~~the toJefferson ~~assess~~County, ~~our~~Colorado, ~~internal~~District ~~controls~~Court. ~~over~~The ~~financial~~complaint alleges that we breached the Settlement Agreement and Mutual General Release entered into by Mr. Alexander ~~reporting~~and the Company in February 2007. In his complaint Mr. Alexander is seeking amounts allegedly due under the agreement, monetary damages and ~~our~~penalties. ~~internal~~Contemporaneously ~~controls~~with ~~over~~his ~~financial~~complaint Mr. Alexander ~~reporting~~filed ~~may~~a bemotion ~~found~~to compel arbitration of the matter. We are evaluating Mr. Alexander's claims and determining how we will respond to ~~be deficient~~Mr. Alexander's complaint.

~~Section 404~~ ~~of the~~ ~~Sarbanes-Oxley~~ ITEM ~~Act of 2002 requires management to assess our internal controls over financial reporting and requires auditors to attest to that assessment~~4. ~~Current~~ SUBMISSION ~~regulations~~OF ofMATTERS ~~the~~TO ~~Securities~~A ~~and~~VOTE ~~Exchange~~OF ~~Commission,~~SECURITY or SEC, will require us to include this assessment and attestation in our Annual Report on Form 10-K commencing with the annual report for our fiscal year ending April 30, 2008. We will incur significant increased costs in implementing and responding to these requirements. In particular, the rules governing the standards that must be met for management to assess its internal controls over financial reporting under Section 404 are complex, and require significant documentation, testing and possible remediation. Our process of reviewing, documenting and testing our internal controls over financial reporting may cause a significant strain on our management, information systems and resources. We may have to invest in additional accounting and software systems. We may be required to hire additional personnel and to use outside legal, accounting and advisory services. In addition, we will incur additional fees from our auditors as they perform the additional services necessary for them to provide their attestation. If we are unable to favorably assess the effectiveness of our internal control over financial reporting when we are required to, or if our independent auditors are unable to provide an unqualified attestation report on such assessment (if applicable for the fiscal year ending April 30, 2008), we may be required to change our internal control over financial reporting to remediate deficiencies. In addition, investors may lose confidence in the reliability of our financial statements causing our stock price to decline.HOLDERS

~~ITEM~~ None ~~1B. UNRESOLVED STAFF COMMENTS~~

~~None.~~19

~~ITEM~~ Table 2.of ~~PROPERTIES~~Contents

~~Our~~ ~~corporate and HSDC office is located in Golden,~~ ~~Colorado.~~ ~~In April 2007, we renewed our month-to-month lease (at a rate of~~ ~~$3,077~~ PART ~~per month) with the Colorado School of Mines Research Institute to continue leasing office and storage space at our current location.~~II

We ~~conduct our semiconductor~~ ~~operations~~ ITEM ~~in two facilities leased in Vancouver, Washington~~5. MARKET ~~The~~FOR ~~first lease~~REGISTRANT'S ~~requires~~COMMON ~~a minimum payment of $9~~EQUITY,~~700~~ ~~(which~~RELATED ~~increases~~STOCKHOLDER toMATTERS ~~$10,670~~AND onISSUER ~~September 1, 2007)~~PURCHASES ~~per~~OF ~~month~~EQUITY ~~and terminates August 31, 2012 while the second lease requires a minimum payment of $6,150 per month and terminates January 31, 2008.~~SECURITIES

(a): Market Information.

~~PPSC~~ Until isDecember 10, ~~located~~2007 ~~in Manhattan,~~our ~~New~~common ~~York~~stock was traded on the Nasdaq Capital Market. ~~PPSC~~Our ~~operates~~common ~~under~~stock ais ~~lease~~currently ~~agreement,~~quoted ~~which~~on ~~requires~~the ~~a minimum~~OTC ~~payment~~-Bulletin Board. As of July 21, ~~$13~~2008,~~750~~ ~~per~~there ~~month~~were ~~(escalating~~20,335,698 onshares anof ~~annual~~our ~~basis)~~common ~~and terminates~~stock ~~September 30, 2013~~outstanding. The trading symbol for our common stock is ISON.OB.

~~ITEM~~ The following 3table sets forth, for each of the fiscal periods indicated, the range of the high and low sale prices per share. ~~LEGAL~~The ~~PROCEEDINGS~~prices quoted through December 9, 2007 were reported by the NASDAQ Capital Market whereas the prices on and after December 10, 2007 were reported on Yahoo Finance (http://finance.yahoo.com). The quotations may reflect inter-dealer prices without retail mark-up, mark-down or commission and may not reflect actual transactions.

~~None~~ Effective February 13, 2007 we implemented a reverse stock split whereby every four shares of our common stock that were issued and outstanding were automatically combined into one issued and outstanding share without any change in the par value of such shares. The prices below have been adjusted for the reverse stock split that was completed in February 2007.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

		Three Months Ended July 31, 2008

		(through July 21, 2008)
Common Stock
	High	$	.04
	Low	$	.01

We did not hold a meeting of our shareholders during the fourth quarter of the year ended April 30, 2007.

		Three Months Ended

		July 31, 2007		October 31, 2007		January 31, 2008		April 30, 2008
Common Stock
	High	$	1.63	$	.91	$	.40	$	.09
	Low	$	1.07	$	.35	$	.07	$	.03

		Three Months Ended

		July 31, 2006		October 31, 2006		January 31, 2007		April 30, 2007
Common Stock
	High	$	5.00	$	4.44	$	3.52	$	2.24
	Low	$	1.64	$	2.40	$	2.28	$	1.05

(b): and (c) Shareholders and Dividends.

~~PART~~ As of April II30, 2008, and as of the most recent practicable date there were approximately 70 shareholders of record of our common stock. This does not include an indeterminate number of persons who hold our common stock in brokerage accounts and otherwise in "street name."

~~ITEM~~ We have 5never declared or paid a cash dividend on our common stock. ~~MARKET~~We ~~FOR~~presently ~~REGISTRANT’S~~intend ~~COMMON~~to ~~EQUITY~~retain our earnings, ~~RELATED~~if ~~STOCKHOLDER~~any, ~~MATTERS~~to ~~AND~~fund ~~ISSUER~~development ~~PURCHASES~~and OFgrowth ~~EQUITY~~of ~~SECURITIES~~our business and, therefore, we do not anticipate paying cash dividends in the foreseeable future.

~~(a) Market Information.~~20

~~Our~~Table ~~common stock is quoted on the Nasdaq Capital Market. Our Class B and C warrants expired on December 29, 2006. As~~ of ~~July 20, 2007, we had outstanding 12,658,150 shares of our common stock. The trading symbol for our common stock is ISON.~~Contents

(d): Securities Authorized for Issuance Under Equity Compensation Plans.

The following ~~table~~is ~~sets~~provided ~~forth,~~with ~~for~~respect ~~each~~to ofcompensation ~~the~~plans ~~fiscal~~(including ~~periods~~individual ~~indicated,~~compensation ~~the~~arrangements) ~~range of~~under ~~the~~which ~~high~~equity ~~and~~securities ~~low~~are ~~sale~~authorized ~~prices~~for issuance ~~per share~~ as ~~reported~~of by the ~~NASDAQ~~year ~~Capital Market.~~ended ~~These prices do not include adjustments for retail markups~~April 30, ~~markdowns or commissions~~2008. ~~These prices have been adjusted for the reverse stock split that was completed in February 2007.~~

Equity Compensation Plan Information(1)(2)(3)(4)

Plan Category and Description	Number of Securities to be issued upon exercise of outstanding options, warrants, and rights (a)			Weighted-average exercise price of outstanding options, warrants, and rights (b)			Number of Securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
	Three months ended
	July 31, 2006					October 31, 2006			January 31, 2007			April 30, 2007
Equity compensation plans approved by security holders		500,750		$	2.39			—
Common Stock (ISON)
Equity compensation plans not approved by security holders(5)		16,575,000		$	0.03			8,425,000
High		$	5.00				$	4.44		$	3.52		$	2.24
Total		17,075,750		$	0.10			8,425,000
Low		$	1.64				$	2.40		$	2.28		$	1.05

(1): This does not include options or warrants held by management and directors that were not granted as compensation. In each case, the disclosure refers to options or warrants unless otherwise specifically stated.
(2): During the year ended April 30, 2008, our Board of Directors approved an increase in the authorized shares in the 2005 Stock Option Plan from 875,000 to 2,875,000. The effectiveness of this increase was subject to stockholder approval. In February 2008, our Board of Directors decided that we would not seek shareholder approval of this amendment to the 2005 Stock Option Plan. As a result, the options granted within the increased number of shares previously authorized expired immediately, and became void and of no further force or effect. As a result of the establishment of the 2008 Isonics Equity Plan (see below), we will no longer grant any additional options under the 2005 Stock Option Plan.
(3): During the year ended April 30, 2008, our Board of Directors adopted and approved the establishment of the 2007 Restructuring Equity Plan. The plan had 3,500,000 authorized shares and the effectiveness of such plan was subject to shareholder approval. In February 2008, our Board of Directors decided that we would not seek shareholder approval of the 2007 Restructuring Equity Plan and terminated the plan. As a result, the options granted pursuant to such plan (all of which were also subject to shareholder approval) expired immediately, and became void and of no further force or effect.
(4): During the year ended April 30, 2008, our Board of Directors adopted and approved the establishment of the 2007 Non-Employee Directors Stock Option Plan. The plan has 1,500,000 authorized shares and the effectiveness of such plan is subject to shareholder approval. We did not grant any options pursuant to this plan, and as a result of the establishment of the 2008 Isonics Equity Plan (see below), we will not grant any options under the 2007 Non-Employee Directors Stock Option Plan.
(5): The 2008 Isonics Equity Plan was adopted and approved by our Board of Directors during the year ended April 30, 2008. The plan has 25,000,000 authorized shares. The effectiveness of such plan is not subject to shareholder approval and we do not intend to seek shareholder approval of this plan.

	Three months ended
	July 31, 2005		October 31, 2005			January 31, 2006			April 30, 2006
Common Stock (ISON)
High	$	14.16		$	13.48		$	9.20		$	8.40
Low	$	6.88		$	7.96		$	7.16		$	5.04

~~(b) and~~Table ~~(c) Shareholders~~of ~~and Dividends.~~Contents

As In February ~~of April 30~~2008, ~~2007,~~ ~~and~~we asalso ofissued ~~the~~150,000 ~~most~~shares ~~recent~~of ~~practicable~~restricted ~~date~~stock ~~there~~as ~~were approximately~~compensation 80to ~~shareholders~~VFinance ~~of record of our common stock~~Investments, Inc. ~~This~~("vFinance") ~~does~~and ~~not include~~certain anaffiliates ~~indeterminate number~~ of ~~persons~~VFinance, ~~who~~as ~~hold~~required ~~our~~by ~~common stock in~~a ~~brokerage~~financial ~~accounts~~advisory ~~and~~agreement ~~otherwise~~with ~~in “street name~~VFinance.”

(f): Recent Sales of Unregistered Securities—Item 701 Disclosure.

We During ~~have~~the ~~never~~three ~~declared~~months ~~or paid~~ended aApril 30, ~~cash~~2008 ~~dividend~~(and onsubsequently) ~~our~~we ~~common~~did ~~stock.~~not Weenter ~~presently~~into ~~intend~~any totransactions ~~retain~~that ~~our earnings,~~were ifnot ~~any,~~registered tounder ~~fund~~the ~~development~~Securities ~~and~~Act ~~growth~~ of 1933, ~~our~~as ~~business~~amended and~~, therefore,~~ wewere do not ~~anticipate~~previously ~~paying~~reported ~~cash~~within ~~dividends~~a inForm 10-Q ~~the~~or ~~foreseeable future~~a Form 8-K.

23 ITEM 6. SELECTED FINANCIAL DATA

~~(d) Securities~~ Not ~~Authorized for Issuance Under Equity Compensation Plans~~applicable.

~~The~~ ~~following is provided~~ ~~with~~ ITEM ~~respect~~7. MANAGEMENT'S toDISCUSSION ~~compensation~~AND ~~plans~~ANALYSIS ~~(including~~OF ~~individual~~FINANCIAL ~~compensation arrangements)~~CONDITION ~~under~~AND ~~which~~RESULTS ~~equity~~OF ~~securities are authorized for issuance as of the year ended April 30, 2007.~~OPERATIONS

	Equity Compensation Plan Information(1)(2)(3)
Plan Category and Description	Number of Securities to be issued upon exercise of outstanding options, warrants, and rights (a)		Weighted-average exercise price of outstanding options, warrants, and rights (b)			Number of Securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders		401,000		$	5.90		251,000
Equity compensation plans not approved by security holders(4)		3,250,000		$	1.82		250,000
Total		3,651,000		$	2.54		501,000

General Discussion

~~(1) This~~ During ~~does~~the ~~not~~past ~~include options~~several oryears, ~~warrants~~our ~~held~~operations have been characterized by ~~management~~working capital and ~~directors~~cash ~~that~~flow ~~were~~shortfalls, ~~not~~and ~~granted~~the asneed for a ~~compensation~~significant amount of third party investment to enable us to meet our financial obligations. InAlthough ~~each~~we ~~case~~have met our core obligations to date, we have frequently been required to allocate our available cash among various obligations. We have had working capital shortages in the ~~disclosure~~past ~~refers~~and, although we raised capital totaling more than $46,800,000 (net of expenses and $4,100,000 of payments related to ~~options~~our or8% ~~warrants~~Debentures) ~~unless~~since May 1, 2004 (including more than $12,800,000 during our year ended April 30, 2007 and an additional $1,000,000 in ~~otherwise~~June ~~specifically~~2008, ~~stated~~in both cases net of certain expenditures). As a result, we owe YA Global in excess of $19,000,000 plus accrued interest, all of which is due October 31, 2009.

During this period, we have also generated significant losses, which have impacted working capital. As of April 30, 2008, our consolidated balance sheet reflects a working capital deficit of $(213,128,000) ~~Subsequent~~ and we recorded a net loss of $(11,214,000) for the year ended April 30, 2008 as compared to $(13,165,000) for the year~~-end~~ ended April 30, 2007. In addition, as a result of our ~~Board~~continued ofoperating ~~Directors~~losses ~~approved~~and andeclining ~~increase~~working incapital balances during the ~~authorized~~year ~~shares~~ended inApril 30, ~~the 2005~~2008, ~~Stock~~our ~~Option~~auditors ~~Plan~~report ~~from~~included ~~875~~with our consolidated financial statements for the year ended April 30,~~000~~ 2008 includes an explanatory paragraph indicating substantial doubt about our ability to 2continue as a going concern. This condition has continued since those financial statements,~~875,000~~ and we expect that these conditions will continue for the foreseeable future unless we are able to raise a substantial amount of additional financing. ~~The~~In ~~effectiveness~~view of ~~this~~the matters described ~~increase~~herein and in Note 1 to our consolidated financial statements, our ability to continue to pursue our plan of operations as described herein is ~~subject~~dependent upon our ability to ~~stockholder~~raise ~~approval~~the capital necessary to meet our financial requirements on a continuing basis.

~~(3) Subsequent~~ In an effort to ~~year-end~~reduce expenses and to consolidate our business operations, during early calendar 2007, we changed our ~~Board~~emphasis from research and development activities on a variety of products ~~Directors~~to ~~adopted~~a more focused business plan, and ~~approved~~to reduce costs associated with senior management and our business operations. Accordingly, we are currently focused on the ~~establishment~~provision of ~~the~~homeland ~~2007~~security ~~Non~~services and 300-~~Employee~~millimeter ~~Directors~~(and ~~Stock~~smaller ~~Option~~diameter) ~~Plan.~~test ~~The~~wafers ~~plan~~and ~~has~~reclamation 1services,~~500,000~~ ~~authorized~~wafer ~~shares~~ thinning and custom wafer products and services for the ~~effectiveness~~silicon ofindustry. ~~such~~Going ~~plan~~forward iswe expect ~~subject~~to continue to ~~shareholder~~focus ~~approval~~on these business segments.

~~(4) The~~ Consistent ~~2007~~with ~~Restructuring~~management ~~Equity~~focus ~~Plan~~during ~~was~~the ~~adopted~~year ended April 30, 2008 and ~~approved~~subsequently, bywe continue to evaluate our ~~board~~operating businesses and technology portfolio with the goal of ~~directors~~operating ~~during~~our ~~the~~business ~~year~~more ~~ended~~efficiently ~~April 30,~~and ~~2007~~monetizing assets as we deem to be appropriate and as our senior secured creditor may consent. ~~The~~Additionally, ~~effectiveness~~we ofhave ~~such plan~~considered isand ~~subject~~will continue to consider ~~shareholder~~business ~~approval.~~expansion through merger, acquisition, joint venture or other means, although we can offer no

2422

~~(e) Performance~~Table ~~Graph.~~of Contents

~~The following line graph~~assurance ~~compares~~as ~~cumulative~~to ~~total stockholder returns for the five years ended April 30, 2007 for (i)~~ our ~~common~~ultimate ~~stock,~~success ~~the~~in ~~(ii) the~~increasing ~~Russell 2000 index, and (iii)~~ the ~~Philadelphia~~ ~~Semiconductor~~scope ~~Index, a published industry index for the semiconductor market. The graph assumes an investment~~ of ~~$100 on April 30, 2002. The calculation of cumulative stockholder return on~~ our ~~common~~business ~~stock~~through ~~does not~~such ~~include reinvestment of dividends because we did not pay any dividends during the measurement period~~means. Because substantially all of our ~~diverse~~assets ~~business,~~are ~~which~~subject ~~includes semiconductor~~to ~~operations,~~a ~~the~~perfected ~~development of homeland~~ security ~~products~~interest, ~~and security~~we ~~services~~have, and ~~previously~~will likely ~~life~~continue ~~sciences operations~~to, weengage ~~did~~in ~~not~~discussions ~~compare our~~on ~~stock~~these ~~performance~~issues ~~against~~with aYA ~~peer~~Global oras ~~peer~~our ~~group~~primary ~~because~~debt ~~we do not believe we can reasonably select a peer or peer group that would provide an accurate comparison to us~~holder. ~~The performance shown is not necessarily indicative of future performance.~~

~~COMPARISON~~ Examples of OFour ~~FIVE YEAR~~efforts ~~CUMULATIVE~~to ~~TOTAL~~reduce ~~RETURN~~cash outflow and to monetize our assets include:

•: In February and March 2007, we entered into agreements with three former executive officers, which resulted in a termination of their employment with us, and a reduction of our salary obligation to them. In August 2007, we renegotiated reduced severance payments to two of the former executive officers, and we stopped paying the third. In March 2007, we also terminated several other employees to reduce further our salary obligations. In January 2008, our former Chief Financial Officer resigned and we have not replaced him, but allocated his responsibilities to our three remaining executive officers. Throughout 2007 and into 2008 calendar years, we also have restructured management of our two operating subsidiaries to reduce expenses while attempting to maintain the operational capabilities of those subsidiaries.
•: In June 2007 we sold our life sciences business (which supplied isotopes for life sciences and health-care applications) to an unaffiliated party as the life sciences business no longer fit our long-term strategy for building a sustainable and profitable security and silicon company and because of deteriorating business conditions in the historical revenue producing products in this business for $850,000.
•: In August 2007, we elected to suspend the development, manufacture and sale of our IMS based products. The suspension was due primarily to a lack of working capital but we also had difficulty competing in the market space. We continue to seek alternatives to find a means of monetizing our investment in this product line, including an outright sale of the technology. It is unclear as to when (if at all) we will resume activity on our IMS-based products and we can offer no assurance that we will be able to monetize any portion of our IMS technology investment.
•: In September 2007, we assigned our existing exclusive rights regarding silicon-28 patents (secured under the 1997 License Agreement with Yale University) to an independent entity, such assignment receiving the consent and agreement of Yale University. Silicon-28 is a naturally occurring stable isotope of silicon which, in a near isotopically-pure form, may have performance benefits as compared to multi-isotopic materials currently prevalent in the silicon marketplace. In periods presented, proceeds from the sale of silicon-28 based products have been immaterial and we have not invested material resources in the program.
•: In July 2007 we determined not to complete our investment obligations in our development project with Lucent regarding a next-generation infrared imaging and night vision surveillance technology, which we had made through our 90%-owned subsidiary SenseIt. As a result, in October 2007, Lucent terminated our interest in the development project and our investment in SenseIt and the related Lucent Agreement (in the cumulative amount of approximately $7,000,000) has little (if any) remaining value.
•: In January 2008 we sold our 30% interest in IUT for cash consideration of $527,000 (EUR 360,000). As a result of the transaction, we recorded a gain on the disposition of the investment of $208,000 during the year ended April 30, 2008. A significant portion of the investment that was sold (representing $414,000 of the cash proceeds received) was subject to the security interest held by YAGlobal. In February 2008, at YA Global's request, we forwarded $200,000 of these proceeds as a payment of outstanding interest. We retained the remaining $214,000 of proceeds to use for working capital purposes.

~~Among~~ Notwithstanding ~~Isonics~~these ~~Corporation~~changes, and for the ~~Russell~~factors ~~2000~~discussed ~~Index and~~in more detail below, we are still unable to support our operations without additional financing, including the ~~Philadelphia~~$1,000,000 obtained ~~Semiconductor~~from ~~Index.~~

2523

~~(f) Recent~~Table ~~Sales~~ of ~~Unregistered Securities—Item 701 Disclosure.~~Contents

~~Employee~~YA Global in June 2008. Our operating plan reflects that we need significant additional financing in order to continue operations into our 2010 fiscal year (commencing May 1, 2009), at which time, if our projections are accurate and there are no adverse market developments in either our silicon products and services segment or our security services segment, we may become ~~Director~~cash-flow ~~Offerings~~positive. Because of our agreements with YA Global, however, we are unable to obtain any additional financing without YA Global's consent. As a result, we are working with representatives of YA Global on a regular basis and keeping them informed as appropriate so that, should we be able to negotiate the necessary financing on reasonable terms (of which there can be no assurance), we believe that YA Global would be more likely to grant us its consent.

~~Employee~~ ~~Offerings~~Critical Accounting Estimates

~~(a) During~~ Our ~~the~~consolidated ~~past~~financial ~~years,~~statements weare ~~issued~~prepared ~~shares~~in ofaccordance ~~common~~with ~~stock~~generally ~~and options~~accepted toaccounting ~~purchase~~principles ~~shares~~in ofthe ~~common~~Unites ~~stock~~States, which ~~pursuant~~require management to ~~existing~~make ~~employee benefit~~estimates, ~~plans.~~judgments Asand ~~noted~~assumptions that affect the amounts reported in the ~~following~~consolidated ~~discussion,~~financial ~~these~~statements ~~plans~~and ~~(except~~accompanying ~~the~~notes. We consider an accounting ~~2007~~estimate ~~Restructuring~~to ~~Equity~~be ~~Plan~~critical ~~which~~if ~~has~~1) the ~~not~~accounting ~~been~~estimate ~~approved~~requires byus ~~shareholders~~to ~~or included~~make ~~within~~assumptions aabout ~~registration~~matters ~~statement)~~that ~~have~~were ~~been~~highly ~~included~~uncertain ~~within registration~~at ~~statements on Form S-8~~the ~~(file nos. 333-128592~~time the accounting estimate was made, ~~333-74339~~ and ~~333-52514~~ 2). changes ~~The~~in ~~following~~the ~~table~~estimate ~~sets~~that ~~forth information~~are ~~about~~reasonably ~~the~~likely ~~options~~to ~~outstanding~~occur ~~and~~from ~~available~~period ~~for~~to ~~issuance~~period, ~~under~~or ~~each~~ use of different estimates that we reasonably could have used in the ~~plans~~current asperiod, would have a material impact on our financial condition or results of ~~April 30,~~operations. ~~2007:~~

Plan Name	Issued Options/Shares	Available for Grant or Issuance
1996 Stock Option Plan	20,000 options	0 options
1996 Executives Equity Incentive Plan	47,500 options 63,750 shares	0 options/shares
1996 Equity Incentive Plan	102,000 options 3,750 shares	0 options/shares
1998 Employee Stock Purchase Plan	22,860 shares	0 shares
2005 Stock Option Plan	174,000 options 450,000 shares	251,000 options/shares
2007 Restructuring Equity Plan	3,250,000 stock options	250,000 options

Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors and the Audit Committee has reviewed the foregoing disclosure. In addition, there are other items within our financial statements that require estimation, but are not deemed critical as defined above. Changes in estimates used in these and other items could have a material impact on our financial statements. We believe that our most critical accounting policies and estimates are as follows:

As aGoodwill result of the adoption of the 2005 Stock Option Plan by our stockholders on April 19, 2005, we will issue no additional shares or options under either the 1996 Executives Equity Incentive Plan or the 1996 Equity Incentive Plan. Effective May 1, 2006, the ESPP plan was terminated. In June 2007, we issued 200,000 and ~~150,000~~ ~~shares~~Intangible ~~to a key consultant and employee from the 2005 Stock Option Plan and the 2007 Restructuring Equity Plan, respectively.~~Assets

~~Issuances~~ Goodwill is recorded on our books when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. The assignment of fair value to the identified tangible and intangible assets requires significant judgment and may require independent valuations ~~Officers~~of orcertain ~~Directors~~identified ~~Not~~assets. ~~Previously~~Once ~~Reported~~goodwill and other intangible assets are established on our balance sheet, we evaluate the assets for impairment as described in the following paragraphs.

~~(a) On~~ In accordance ~~October~~with SFAS No. 30142 Goodwill and Other Intangible Assets, ~~2006~~goodwill weis ~~granted~~not 5amortized,~~000~~ ~~stock~~but ~~options~~instead ~~each~~is totested for ~~Richard~~impairment Hon an annual basis or more frequently if the presence of certain circumstances indicates that impairment may have occurred. ~~Hagman~~The impairment review process, C.which ~~Stewart~~is ~~Verdery~~subjective and requires significant judgment at many points during the analysis, Jr compares the fair value of the reporting unit in which goodwill resides to its carrying value. If the carrying value of a reporting unit exceeds its fair value, ~~Russell~~then Wthe amount of the impairment loss must be measured. ~~Weiss~~The ~~and~~impairment ~~Richard~~loss is calculated by comparing the implied fair value of reporting unit goodwill to its carrying ~~Parker~~amount. ~~under~~In calculating the ~~1998~~implied ~~Directors’~~fair ~~Plan~~value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The ~~options~~excess ~~are~~of ~~exercisable~~the atfair $2value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill.~~68,~~ An impairment loss would be recognized when ~~expire~~the ~~October~~carrying amount of goodwill exceeds its implied fair value. We have goodwill in the amount of $3,631,000 on our consolidated balance sheet as of April 2930, ~~2011~~2008, related to the acquisition of PPSC in May 2005. We performed our annual impairment review on the aforementioned goodwill during our third fiscal quarter and ~~vested~~concluded ~~immediately~~that the goodwill is not impaired.

~~Applicable to the Offerings to the Employees, Officers and Directors~~24

~~(a) Not~~Table ~~applicable.~~of Contents

~~(b) No~~ A decision ~~underwriters~~by ~~were~~any ~~involved~~significant customer to substantially decrease or delay purchases from us or an inability to collect significant amounts owed to us could have a material adverse effect on our consolidated financial condition and results of operations. We have been informed that a significant security services customer will cease using our services effective July 31, 2008. The loss of this customer will cause us to re-evaluate our recorded goodwill in the ~~transactions~~ first quarter of our year ending April 30, 2009, which could result in an impairment of goodwill.

For intangible assets other than goodwill, SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (c"SFAS 144") ~~The~~ ~~stock~~is ~~options~~the ~~issued~~authoritative standard on the accounting for the impairment of such intangible assets. As required, we perform tests for impairment of intangible assets other than goodwill ~~outside~~whenever events or circumstances suggest that such assets may be impaired. To evaluate potential impairment, SFAS No. 144 requires us to assess whether the future cash flows related to these assets will be greater than their carrying value at the time of the test. Accordingly, while our ~~employee~~cash ~~benefit~~flow assumptions are consistent with the plans ~~were~~and estimates we are using to manage the underlying businesses, ~~for~~there is significant judgment in determining the ~~most~~cash ~~part~~flows attributable to our other intangible assets over their respective estimated useful lives. We have remaining other net intangible assets in the amount of $6,000 ~~issued~~on our consolidated balance sheet as of April 30, 2008, comprised of the customer base acquired in ~~consideration~~ our acquisition of ~~services~~PPSC ~~rendered~~in May 2005. InWe ~~some~~are ~~cases~~required ~~they~~to periodically ~~were~~evaluate ~~issued~~our other intangible assets balances for impairments. Due to ~~encourage~~our election to suspend operations regarding our IMS-based products, during the year ended April 30, 2008, we reviewed for impairment the ~~performance~~trace and bulk detection technology intangible asset associated with the IMS technology. We determined that the carrying amount of ~~services~~the intangible asset was not recoverable and its carrying amount exceeded its fair value, as determined using the expected present value of future cash flows. As such, during the year ended April 30, 2008, we recognized an impairment loss in the amount of $145,000, such impairment loss representing the full carrying value of the intangible asset prior to impairment. If we were to incur additional impairments to our other intangible assets, it could have an adverse impact on our future earnings, if any.

~~(d) The~~ ~~transactions~~Valuation ~~were exempt from registration under the Securities Act~~ of ~~1933,~~Equity ~~as amended by reason of Sections 4(2) and 4(6) of the Securities Act of 1933 or Rule 701.~~Transactions

~~(e) There~~ We ~~are~~value notransactions ~~conversion~~associated ~~rights~~with common or ~~exchange rights~~preferred ~~associated~~stock ~~with~~that is convertible into common stock based on the market value of the underlying common stock on the date of the signing of the agreement (or, sometimes, at the date of conversion). ToWe value transactions associated with common stock warrants at the ~~extent~~appropriate measurement ~~vested~~date utilizing at a minimum, the ~~options~~Black-Scholes ~~are~~pricing model, with assumptions as to volatility, risk-free interest rate and estimated life of the warrants based on historical ~~exercisable~~information related to ~~purchase~~the ~~shares~~life of ~~common~~the ~~stock~~underlying warrant. If the assumptions used, as ~~described~~they ~~above~~relate to volatility, risk-free interest rate and estimated life of the warrants, were materially different, the overall valuation of these transactions could change significantly.

~~(f) Where proceeds~~ ~~were~~Valuation ~~received,~~of ~~the~~Convertible ~~proceeds~~Debenture ~~were utilized for working capital purposes.~~Transactions

26 We enter into transactions that include debentures that are convertible into common stock at rates that may be fixed or variable and also include detachable common stock warrants. We allocate the proceeds from the debenture transactions based on the estimated fair values of the debentures and the warrants. If the assumptions used, as they relate to volatility, risk-free interest rate and estimated life of the warrants (including any anti-dilution adjustment provisions) and the fair value of the debentures (included the specific conversion features) were materially different, the overall allocation of proceeds for these transactions could change significantly. Further, at times we have classified certain embedded conversion features or warrants issued in convertible debenture transactions as derivative liabilities in accordance with US GAAP. The estimates of fair value of these derivative liabilities involve complex assumptions in the initial recording of the liabilities and in the mark-to-market required for each

~~Purchase of Equity Securities by Issuer and Affiliated Purchaser~~25

~~During~~Table ~~the years ended April 30, 2007, 2006 and 2005, and subsequently, neither Isonics or any executive officer or director purchased any shares~~ of ~~our common stock in a Rule 10b-18 transaction or otherwise. Certain of our officers made purchases through our Employee Stock Purchase Plan or the employee stock option plans~~Contents

~~The~~reporting ~~Employee~~period. ~~Stock~~If ~~Purchase Plan contemplated that each employee had~~ the ~~right~~assumptions ~~to withhold~~used ~~a portion of his or her salary and have that portion applied~~ to ~~purchase~~ ~~our~~determine ~~common stock directly from us at a discount to~~ the ~~market~~fair ~~price~~value ~~on June 1 and December 1~~ of ~~each~~these ~~year.~~liabilities ~~Officer~~were ~~purchases~~materially ~~under~~different, the ~~ESPP are~~valuation ~~summarized~~of ~~as follows (~~the ~~ESPP~~liabilities ~~was~~could ~~terminated~~change onsignificantly. ~~May 1, 2006):~~

Period	Total number of shares purchased		Average price paid per share			Total number of shares purchased as part of publicly announced plans or programs		Maximum number of shares that may yet be purchased under the plans or programs
June 1, 2004		297		$	3.64		none		none
December 1, 2004		108		$	6.12		none		none
June 1, 2005		196		$	6.12		none		none
December 1, 2005		491		$	6.12		none		none
May 1, 2006		422		$	4.40		none		none

Stock-Based Compensation Expense

~~Recent~~ We ~~Sales~~account for stock-based compensation in accordance with SFAS 123(R). Under the fair value recognition provisions of ~~Unregistered~~SFAS 123(R), ~~Securities~~stock-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of stock-based awards, which includes estimates of stock price volatility, forfeiture rates and expected lives, requires judgment that could materially impact our operating results.

~~During~~ ~~the~~Recent ~~three~~Accounting ~~months ended April 30, 2007 (and subsequently) we entered into the following transactions that were not registered under the Securities Act of 1933, as amended:~~Pronouncements

~~Clayton~~ See ~~Dunning Capital~~Note 1 ~~Partners,~~to the consolidated financial statements located in Item ~~Inc~~8. "Financial Statements and Supplementary Data" for a description of certain other recent accounting pronouncements including the expected dates of adoption and effects on our results of operations and financial condition.

As ~~consideration for~~Results ~~entering into a financial advisory agreement on March 4, 2007 we granted Clayton Dunning Capital Partners, Inc. (“Clayton Dunning”) a warrant to purchase 100,000 shares~~ of ~~our common stock. The following is the information required by Item 701 of Regulation S-K.~~Operations

~~(a) On~~ The ~~March 5~~following table sets forth, for the periods indicated, consolidated statements of operations data expressed as a percentage of revenues. The table and the discussion below should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. In January 2007, we ~~granted~~elected to ~~Clayton~~discontinue ~~Dunning~~the aoperation ~~warrant~~of our life sciences business and put the assets and business up for sale (which was ~~simultaneously~~sold ~~transferred to~~in ~~Roadrunner~~June ~~Capital Group~~2007). toAs ~~purchase~~a ~~100~~result,~~000~~ ~~shares~~we reclassified the operations of our ~~common~~life ~~stock at~~sciences ~~$1.65~~business ~~per~~as ~~share~~discontinued ~~exercisable for two years~~operations.

(b) There was no placement agent or underwriter for the transaction.

			Year Ended April 30,

			2008			2007
Revenues				100	%		100.0	%
Cost of revenues				90.3			78.6

	Gross margin			9.7			21.4
Operating expenses:
	Selling, general and administrative			33.1			59.6
	Impairment loss on intangible assets			0.7			—
	Research and development			5.7			17.9

		Total operating expenses		39.5			77.5

Operating loss				(29.8	)		(56.1	)
Other income (expense), net				(23.8	)		9.6

Loss from continuing operations before income taxes and minority interest				(53.6	)		(46.5	)
Income tax expense				—			—
Minority interest in operations of consolidated subsidiary				0.5			(.2	)

Loss from continuing operations				(53.1	)		(46.7	)
Gain (loss) from discontinued operations, net of income taxes				2.5			(.8	)

NET LOSS				(50.6	)%		(47.5	)%

~~(c) The warrant was issued in consideration for Clayton Dunning entering into a financial consulting agreement with us.~~26

~~(d) We~~Table ~~relied on the exemption from registration provided by Sections 4(2) and 4(6) under the Securities Act~~ of 1933 and Regulation D for the issuance of the common stock. We did not engage in any public advertising or general solicitation in connection with this transaction. The investor represented to us that it was an accredited investor and had access to all of our reports filed with the Securities and Exchange Commission, our press releases and other financial, business and corporate information. Based on our investigation, we believe that the investor obtained all information regarding Isonics it requested, received answers to all questions it posed, and otherwise understood the risks of accepting our securities for investment purposes.Contents

~~(e) The~~ ~~warrant is exercisable or exchangeable into shares of common stock.~~Revenues

~~(f) No~~ Revenues ~~cash~~from ~~proceeds~~our security services and silicon products and services segments decreased for the year ended April 30, 2008 as compared to the year ended April 30, 2007, while revenues from homeland security products were ~~received.~~minimal, as reflected in the following table:

	Year Ended April 30,

	2008		2007
Homeland security products	$	195,000	$	28,000
Security services		13,973,000		14,682,000
Semiconductor products and services		7,996,000		13,021,000

Total	$	22,164,000	$	27,731,000

~~CEOcast~~ The decrease ~~Inc~~in revenue from the security services segment for the year ended April 30, 2008, is due to the effect of the loss of several security services contracts during the year partially offset by the addition of new customers as well as by increases in work performed at certain existing customers. We continue to market our services aggressively by seeking premium accounts that prefer higher quality of service. While we are hopeful that in the long-term we will be able to grow revenue in this segment by securing additional new security contracts in our PPSC subsidiary and retaining existing customers under contract currently with PPSC, we cannot provide any assurance that we will be able to do so and we may in the short-term fail to retain certain of our customers.

On While we ~~May~~reported significant revenue and operating income growth in our silicon operations for the year ended April 2230, 2007, wemany ~~entered~~of ~~into~~our atop ~~consulting~~silicon ~~agreement~~customers ~~with~~experienced weakened ~~CEOcast~~business ~~Inc~~results during our year ended April 30, 2008. ~~(“CEOcast”)~~In addition, some customers reported inventory buildup in reclaim and as/or ~~partial~~test ~~consideration~~products. ~~for~~As ~~the~~a ~~investor~~result ~~relation~~of ~~services~~these ~~CEOcast~~two ~~will~~factors, during ~~provide~~the toyear usended April 30, 2008, we ~~issued~~saw ~~CEOcast~~a ~~18,750~~slowdown ~~shares~~in oforders ~~our~~and ~~restricted~~a ~~common~~reduction ~~stock.~~in ~~The following~~average isselling ~~the~~prices ~~information~~of ~~required~~reclaim byand ~~Item~~test ~~701~~materials, ofwhich ~~Regulation~~has ~~S-K~~had a negative impact on our results.

~~(a) On~~ The slowdown ~~May~~in the silicon products and services segment significantly impacted our revenues, which decreased by approximately 39% to $7,996,000 for the year ended April 2230, ~~2007~~2008, weas ~~issued~~compared ~~CEOcast~~to 18$13,~~750~~021,000 ~~shares~~for ofthe ~~our~~year ~~restricted~~ended ~~common~~April 30, ~~stock~~2007.

In order to minimize the effect of the slowdown, we implemented many cost cutting measures and are continuing to do so. We have also increased our marketing efforts and are hopeful that we will see a recovery during the year ending April 30, 2009. We continue to monitor the situation closely and while we believe that we will see improving financial results in this operating segment (~~b) There~~over ~~was~~the nolong-term), ~~placement~~we ~~agent~~cannot offer any assurance that we will be able to regain or ~~underwriter~~sustain ~~for~~operating ~~the~~profitability ~~transaction~~in future periods.

~~(c)~~ Our homeland security products segment recorded $195,000 of revenue for the year ended April 30, 2008, as compared to no revenue during the year ended April 30, 2007. The revenue ~~shares~~relates to the installation of fifteen commercial units of our panel-mounted IMS-based product in the AirChx system manufactured by DualDraw LLC, eight of which were installed during the year ended April 30, 2008, and seven of which were ~~issued~~installed induring ~~consideration~~the ~~for~~year ~~CEOcast~~ended ~~entering~~April 30, ~~into~~2007. The proceeds from the sale of the units had been classified as deferred revenue pending completion of certain tasks. Based upon an agreement entered into with usDualDraw LLC during the year ended April 30, 2008, our obligations to DualDraw LLC were materially fulfilled and we ~~received~~recognized nothe ~~cash~~revenue ~~therefore~~related to the sale of the IMS-based products.

(d) We relied on the exemption from registration provided by Sections 4(2) and 4(6) under the Securities Act of 1933 and Regulation D for the issuance of the common stock. We did not engage in any public advertising or general solicitation in connection with this transaction. The investor represented to us that it was an accredited investor had access to all of our reports filed with the Securities and Exchange Commission, our press releases and other financial, business and corporate information. Based on our investigation, we believe that the investor obtained all information regarding Isonics it requested, received answers to all questions it posed, and otherwise understood the risks of accepting our securities for investment purposes.27

~~(e) The shares~~ ~~were~~Table ~~common stock and, therefore, are not exercisable or exchangeable into shares~~ of ~~common~~Contents ~~stock.~~

In August 2007, we elected to suspend the development, manufacture and sale of our IMS-based products. The suspension was due primarily to a lack of working capital but we also had difficulty competing in the market space. We continue to seek alternatives to find a means of monetizing our investment in this product line, including an outright sale of the technology. It is unclear as to when (fif at all) No ~~cash~~we ~~proceeds~~will ~~were~~resume ~~received~~activity on our IMS-based products and we can offer no assurance that we will be able to monetize any portion of our IMS technology investment.

~~Sound~~ Although we ~~Business~~have diversified our sources of revenue, we continue to have concentrations of revenue with certain customers. For the year ended April 30, 2008, two security services ~~Solutions~~customers accounted for 20% and 13% of revenues, respectively, and one silicon products and services customer accounted for 12% of revenues as compared to the year ended April ~~Inc~~30, 2007, in which two security services customers accounted for 14% and 11% of revenues, respectively, and one silicon products and services customer accounted for 21% of revenues. Significant reductions in sales to any of our large customers have had, and may in the future have, a material adverse effect on us by reducing our revenues and our gross margins. Present or future customers could terminate their purchasing patterns with us or significantly change, reduce or delay the amount of products or services ordered from us.

On For the ~~June~~year ended April 1930, ~~2007~~ we2008, ~~entered~~the ~~into~~silicon aproducts ~~consulting~~and ~~agreement~~services ~~with~~customer ~~Sound~~mentioned ~~Business~~above ~~Solutions,~~accounted ~~Inc, a~~for ~~corporation~~34% ~~controlled~~of bysilicon ~~Joanna~~products ~~Lohkamp.~~and ~~Ms. Lohkamp~~services ~~serves~~revenue as compared to 44% for the ~~Chief~~year ~~Operating~~ended ~~Officer~~April 30, of2009. ~~our~~Due ~~wholly~~to ~~owned~~the ~~subsidiary~~relationship ~~IVI.~~of ~~Pursuant~~revenues to ~~that agreement~~the weabsorption ~~granted~~of ~~Sound~~fixed ~~Business~~facility ~~Solutions~~costs, ~~Inc.~~ ~~options~~the toelimination ~~purchase 200,000~~or ~~shares~~even ofa ~~our~~significant ~~common~~reduction ~~stock.~~in ~~The~~sales ~~following~~to isthis ~~the~~customer ~~information~~would ~~required~~have a bymaterial ~~Item~~adverse ~~701~~effect ofon ~~Regulation~~our ~~S-K~~silicon products and services operations.

~~(a) On~~ ~~June 19, 2007~~Gross we granted Sound Business Solutions Inc. options to purchase 200,000 shares of our common stock pursuant to our 2005 Equity Plan (a portion not yet subject to a registration statement). The options are exercisable at $1.45 and expire on June 18, 2011. Options to acquire 66,667 shares vested immediately, options to acquire 66,667 shares vest on September 7, 2007, and 66,666 of the options vest on January 31, 2008.Margin

~~(b) There~~ Our ~~was~~gross margin decreased for the year ended April 30, 2008, as compared to the year ended April 30, 2007, both on a nodollar ~~placement~~amount ~~agent~~and oras ~~underwriter~~a ~~for~~percentage of revenues as reflected in the ~~transaction.~~following table:

(c) The options were granted in consideration for Sound Business Solutions Inc. entering into the consulting agreement by which it agreed to provide services to Isonics. We received no cash for the issuance of the options.

	Year Ended April 30,

	2008			2007
Dollar amount	$	2,148,000		$	5,921,000
Percent of revenues		9.7	%		21.4	%

~~(d) We relied~~ The ondecrease ~~the~~in ~~exemption~~gross ~~from~~margin ~~registration~~on ~~provided~~a bypercentage ~~Sections~~basis ~~4(2) and~~is ~~4(6) under~~ due primarily to the ~~Securities~~downturn ~~Act~~in ofour ~~1933~~silicon ~~for~~products ~~the~~and ~~issuance~~services ofsegment whereby the ~~stock~~downturn ~~options.~~led Weto ~~did~~a ~~not engage~~significant decrease in revenue, ~~any~~which ~~public~~has ~~advertising~~forced orus ~~general~~to ~~solicitation~~allocate inour ~~connection~~fixed ~~with this~~facility ~~transaction,~~costs ~~and~~over wea ~~provided~~lower ~~the~~revenue ~~investor~~base, ~~with~~correspondingly ~~disclosure~~decreasing ofgross ~~all~~margins ~~aspects of~~on ~~our~~a ~~business,~~percentage ~~including~~basis. ~~providing~~To ~~the~~a ~~investor~~lesser ~~with~~extent, ~~our~~the ~~reports~~decrease ~~filed~~on ~~with~~a ~~the~~percentage ~~Securities~~basis ~~and~~is ~~Exchange~~also ~~Commission,~~due ~~our~~to ~~press~~the ~~releases,~~provision ~~access~~of tolower ~~our auditors,~~prices ~~and~~in ~~other~~order ~~financial,~~to ~~business,~~obtain ~~and~~new ~~corporate~~or ~~information.~~keep Weexisting ~~believe that Ms~~business. ~~Lohkamp,~~ ~~the~~The ~~sole~~decrease ~~owner~~in ofgross ~~Sound~~margin ~~Business~~on ~~Solutions,~~a isdollar ~~an accredited~~basis ~~investor.~~is Wedue ~~believe~~mainly ~~that~~to the ~~investor~~decrease ~~obtained~~in ~~all information~~revenue ~~regarding~~for ~~Isonics~~our itsilicon ~~requested,~~products and services segment.

28 On a dollar basis, gross margin is expected to increase correspondingly with increases in revenue, if any, with dependencies on customer and supplier pricing. Our ability to positively impact consolidated gross margin will in a large part be dependent upon our ability to grow sales in our security service segment through increased sales of security services and in our silicon products and services segment through increased sales of 300-millimeter products and services and wafer thinning services.

~~received~~ On a ~~answers~~percentage toof ~~all questions~~revenues itbasis, in general we anticipate that the gross margin percentage in our security services segment (~~and~~within ~~its~~1-2 percentage ~~advisors~~points) ~~posed~~will remain relatively stable. However, ~~and~~as ~~otherwise~~a ~~understood~~result of the ~~risks~~recent ~~of accepting~~downturn in our ~~securities~~silicon ~~for~~products ~~investment~~and ~~purposes~~services segment, we have experienced and expect to continue to experience increased competition and lower prices. As a result, there has been a focus on operational efficiency and effectiveness, which has resulted in increased productivity and processing yields in order to reduce our costs. In addition, due to fixed facility costs included in cost of

~~(e) The stock options are exercisable to purchase shares of common stock as described above.~~28

~~(f) No~~Table ~~proceeds~~of ~~were received.~~Contents

~~Michael~~revenues in ~~Caridi~~the silicon products and services segment, the gross margin percentage is particularly sensitive to volume and revenue changes.

~~On June 22,~~ We ~~2007~~have increased our ~~wholly~~marketing ~~owned~~efforts ~~subsidiary~~and ~~PPSC~~are ~~entered~~hopeful ~~into~~that anwe ~~employment~~will ~~agreement~~see a rebound in our customers demand and we have (~~the “Employment~~and ~~Agreement”)~~are ~~with~~hopeful ~~Michael~~to ~~Caridi~~continue to) ~~serve~~added asseveral ~~PPSC’s~~new ~~Senior~~silicon ~~Vice~~products ~~President.~~and ~~Pursuant~~services tocustomers during the ~~Employment~~year ~~Agreement~~ending April 30, 2009. While we ~~granted~~are ~~Mr. Caridi options~~hopeful tothat ~~purchase~~revenues ~~150,000~~(and corresponding ~~shares~~gross ofmargins) ~~our~~will ~~common~~increase ~~stock~~(as ~~pursuant~~compared to ~~our~~the ~~2007 Restructuring~~year ~~Equity~~ended ~~Plan~~April 30, ~~which~~2008) ~~plan~~during isthe ~~subject~~year toending ~~shareholder~~April 30, ~~approval.~~2009, ~~The following~~we iscan ~~the~~offer ~~information~~no ~~required~~assurance bythat ~~Item~~this ~~701~~will ofactually ~~Regulation S-K~~occur.

~~(a) On~~ ~~June 22~~Selling, ~~2007~~ weGeneral ~~granted Michael Caridi options to purchase 150,000 shares of our common stock. The options are exercisable at $1.50~~ and ~~expire~~Administrative on June 21, 2012. The options are subject to the following vesting schedule: (i) 50,000 options vested immediately; (ii) 25,000 shares vest six months from the date of the Employment Agreement; (iii) 25,000 options vest nine months from the date of the Employment; and (iv) 50,000 shares vest upon achieving certain operating income levels for the fiscal year ending April 30, 2008. Options shall only vest if Mr. Caridi is an employee of PPSC on each vesting date.Expenses

~~(b) There~~ Our ~~was no~~selling, ~~placement~~general ~~agent~~and oradministrative ~~underwriter~~expenses decreased for the ~~transaction.~~year ended April 30, 2008, as compared to the year ended April 30, 2007, both on a dollar amount and as a percentage of revenues as reflected in the following table:

(c) The stock options were granted in consideration for Mr. Caridi entering into the employment agreement with our wholly-owned subsidiary, PPSC. We received no cash for the issuance of the options.

	Year Ended April 30,

	2008			2007
Dollar amount	$	7,335,000		$	16,519,000
Percent of revenues		33.1	%		59.6	%

~~(d) We relied~~ The on$9,184,000 ~~the~~decrease ~~exemption from registration provided by Section 4(2) under the Securities Act of 1933 for the issuance of the stock options. We did not engage~~ in ~~any~~selling, ~~public advertising or~~ general ~~solicitation in connection with this transaction,~~ and weadministrative ~~provided~~expenses ~~the~~for ~~investor with disclosure of all aspects of our business, including providing~~ the ~~investor~~year ~~with~~ended ~~our reports filed with the Securities and Exchange Commission~~April 30, ~~our press releases~~2008, ~~access~~compared to ~~our~~the ~~auditors, and~~year ~~other~~ended ~~financial~~April 30, ~~business,~~2007 ~~and~~is ~~corporate~~attributable ~~information. We believe that the investor obtained all information regarding Isonics it requested, received answers~~ to ~~all questions he (and its advisors) posed, and otherwise understood~~a ~~the~~combination ~~risks~~ of ~~accepting~~factors, ~~our securities for investment purposes.~~including:

•: approximately $2,189,000 due to a decrease in staffing and expenditures at the corporate office;
•: approximately $1,216,000 due to a decrease in staffing and expenditures in the security services segment;
•: approximately $1,771,000 due to a decrease in staffing and operations in the homeland security products segment;
•: approximately $445,000 due to a decrease in staffing and operations in the silicon products and services segment;
•: inclusion in the year ended April 30, 2007, of a noncash charge in the amount of $878,000 related to the amendment to the number of shares issuable and exercise price of certain warrants with ratchet provisions;
•: an approximate $2,686,000 decrease in noncash stock-based compensation expense.

~~(e) The stock~~ We ~~options~~continue to be actively focused on reducing selling, general and administrative expenses and are ~~exercisable~~hopeful that we will be able to ~~purchase~~further ~~shares~~reduce ofthese ~~common~~expenses ~~stock~~for the year ending April 30, 2009 as ~~described~~compared ~~above~~to the year ended April 30, 2008. However, any reduction in selling, general and administrative expenses would be less significant as compared to the reductions realized for the year ended April 30, 2008 as compared to the year ended April 30, 2007.

~~(f) No~~ ~~proceeds~~Impairment ~~were~~Loss ~~received.~~on Intangible Assets

29 We recognized an impairment loss on intangible assets during the year ended April 30, 2008 as reflected in the following table:

ITEM 6. SELECTED FINANCIAL DATA

	Year Ended April 30,

	2008			2007
Dollar amount	$	145,000		$	—
Percent of revenues		0.7	%		—	%

The following selected financial data should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and consolidated financial statements and notes thereto contained in Item 8. “Financial Statements and Supplementary Data” of this report. The historical results are not necessarily indicative of results to be expected in any future period. In January 2007, we elected to discontinue the operation of our life sciences business and to put the assets and business up for sale. As a result, we reclassified the operations of our life sciences business as discontinued operations. Prior year information has been reclassified to conform with the current year presentation.29

	Year Ended
	April 30, 2007			April 30, 2006			April 30, 2005			April 30, 2004			April 30, 2003
	(in thousands, except share amounts)
Summary of Operations
Revenues	$	27,731		$	18,580		$	2,692		$	519		$	197
Operating loss	$	(15,548	)	$	(15,663	)	$	(11,956	)	$	(4,658	)	$	(3,655	)
Loss from continuing operations	$	(12,941	)	$	(31,381	)	$	(13,024	)	$	(4,675	)	$	(2,055	)
Income (loss) from discontinued operations, net of income taxes	$	(224	)	$	(960	)	$	(2,153	)	$	(512	)	$	949
Net loss attributable to common stockholders	$	(13,165	)	$	(32,442	)	$	(16,515	)	$	(7,025	)	$	(1,106	)
Life sciences segment revenue included in income (loss) from discontinued operations, net of income taxes	$	1,803		$	5,136		$	7,413		$	8,202		$	8,854
Per Share Data
Net loss per share—basic and diluted attributable to common stockholders	$	(1.11	)	$	(4.00	)	$	(2.95	)	$	(2.12	)	$	(0.38	)
Weighted average common shares used in computing per share information	11,898			8,103			5,596			3,313			2,929
Balance Sheet Data
Cash and cash equivalents	$	1,566		$	1,586		$	20,598		$	3,213		$	199
Working capital (deficit)	$	3,310		$	(6,445	)	$	18,203		$	6,571		$	1,056
Total assets	$	18,960		$	17,863		$	31,181		$	8,681		$	5,747
Long-term debt	$	9,344		$	174		$	15,740		$	—		$	—
Preferred stock	$	—		$	—		$	4,033		$	5,613		$	745
Stockholders’ equity	$	3,555		$	2,643		$	9,588		$	7,711		$	4,308

Table of Contents

30 The impairment loss relates to a write off of the unamortized balance of the trace and bulk detection technology intangible asset. Due to suspension of development, manufacture and sale of our IMS-based products, we determined that the trace and bulk detection technology intangible asset was fully impaired.

~~ITEM~~ 7.Research ~~MANAGEMENT’S~~and ~~DISCUSSION~~Development ~~AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~Expenses

~~General~~ Our ~~Discussion~~research and development expenses decreased for the year ended April 30, 2008, as compared to the year ended April 30, 2007, both on a dollar amount and as a percentage of revenues as reflected in the following table:

We are focused on the development and provision of homeland security products and services and the manufacture of 300-millimeter (and smaller diameter) silicon wafer reclaim and test products, wafer thinning and custom wafer products for the semiconductor industry. During the past several years, our operations have been characterized by working capital and cash flow shortfalls, and the need for a significant amount of third party investment to enable us to meet our financial obligations. Although we have met our obligations to date (except for the $1,000,000 payment that was due to Lucent on July 16, 2007), we have frequently been required to allocate our available cash among various obligations. During the year ended April 30, 2007 and subsequently, we have also refocused our operations and we have attempted to reduce significantly our expenses, including the cash flow necessary to pay our overhead.

	Year Ended April 30,

	2008			2007
Dollar amount	$	1,262,000		$	4,950,000
Percent of revenues		5.7	%		17.9	%

We The majority ~~redefined and refocused the operations~~ of ~~HSDC~~research ~~to focus~~and ~~on the~~ development ofexpenses ~~partnerships~~for ~~with leading prime contractors in~~ the ~~security~~ ~~and~~years ~~defense~~ended April 30, ~~industrial~~2008 and ~~transportation~~2007 ~~markets,~~relate ~~although~~primarily weto ~~have not~~(1) the ~~yet~~development ~~developed any such partnerships. By working with these types~~ of next-generation ~~partners,~~infrared weimaging ~~believe~~and ~~that~~night wevision ~~will~~surveillance betechnology ~~able~~through toour ~~more~~Lucent ~~effectively~~relationship and ~~efficiently complete the development of~~ (2) our IMS-based products. ~~with~~However, ~~the~~due ~~goal~~to ~~of incorporating them into~~ the ~~products~~termination ~~and systems~~ of ~~our~~the ~~partners.~~Lucent IfAgreement ~~we are~~and ~~successful~~the insuspension ~~developing~~of ~~these~~development ~~types~~ of ~~strategic~~our ~~partnerships~~IMS-based products, we ~~will~~did benot inincur ~~a better~~material ~~position~~research toand ~~compete~~development ~~with~~expense ~~the~~during ~~current industry leaders through leveraging~~ the ~~marketing~~second ~~arms~~half ~~and customer bases~~ of ~~these~~our ~~partners.~~year ~~This~~ended ~~change~~April 30, ~~in strategic~~2008 ~~direction will delay the time frame~~ for ~~significant products sales~~these ~~but~~projects and we ~~are~~do ~~hopeful~~not ~~that~~expect itto ~~will~~incur ~~allow~~material ~~for~~additional aresearch ~~significant~~and ~~reduction in~~ development ~~costs~~expense ~~and~~related ato ~~greater~~these ~~penetration~~projects ofduring ~~the~~our ~~market~~year inending ~~the~~April 30, ~~future~~2009 and beyond.

We Historically a ~~have~~significant ~~continued~~amount toof ~~pursue~~the ~~our~~research and development ~~project with~~on ~~Lucent~~the ~~through~~IMS-based ~~our~~products ~~90%-owned~~was ~~subsidiary,~~performed ~~SenseIt~~by IUT. We ~~(partially~~funded ~~through~~ $80,000 and $1,099,000 under our ~~obligations~~agreement towith IUT ~~SenseIt)~~for ~~paid~~the $6years ended April 30,~~000~~ 2008 and 2007,~~000~~ respectively. As a result of the ~~original~~suspension ~~$12~~of the development,~~000~~ manufacture and sale of our IMS-based products as described above,~~000~~ ~~obligation~~we ~~under~~intend ~~this~~to ~~agreement~~provide ~~through~~no ~~the~~further ~~date~~funds ofpursuant to this ~~report~~agreement.

We Except for ~~did~~work ~~not~~being ~~make~~performed ~~the~~on ~~$1,000,000~~our ~~payment~~silicon ~~that~~products ~~was~~at ~~due~~our ~~to Lucent~~facilities onin orVancouver, ~~before July 16~~Washington, ~~2007~~we asoperate ~~neither~~no ~~entity~~other ~~currently~~facilities ~~has sufficient~~of ~~working~~our ~~capital~~own tofor ~~make~~research ~~such~~and ~~payment~~development. AsAlthough ~~a result of not making this~~we ~~payment~~have ~~(or~~in ~~other~~the ~~payments~~past ~~when~~expended ~~due),~~significant ~~Lucent~~resources ~~may,~~on ~~after~~research ~~certain steps of notification~~ and ~~periods to cure have been exhausted~~development, ~~cancel~~we ~~the~~cannot ~~Lucent Agreement~~offer ~~and~~any ~~all~~assurance ~~licenses~~that ~~granted~~we towill usreceive ~~thereunder~~future orfinancial ~~cease~~benefit ~~working~~from onour ~~the project~~research and ~~then~~development ~~assess~~efforts ~~us a “start-up” fee if funding was~~ made to ~~resume~~date.

On ~~July 26,~~Operating ~~2007,~~Income we received official notification from Lucent that we failed to make the $1,000,000 payment to Lucent by July 16, 2007 and that in the event such non-payment continues for more than ten days, Lucent may at is discretion, suspend work on the development project. We are currently seeking additional financing to allow us to fund SenseIt so that SenseIt can make its contractual development payments to Lucent. We cannot offer any assurance that we will be able to raise the funds necessary to make all of the required payments to Lucent, or that the technology will be developed to a point where we want to continue to make such payments when due. Additionally, SenseIt may need to seek outside financing to make payments to Lucent and, if so elected, such outside financing would dilute our ownership interest in SenseIt. Lastly, although we are hopeful of a positive outcome, we can offer no assurance that the development activity underway with Lucent and SenseIt will yield technologically relevant or commercially viable products.(Loss)

~~During~~ For the ~~fourth~~years ~~quarter of the year~~ ended April 30, ~~2007~~ 2008 and ~~the first quarter of the subsequent fiscal year~~2007, ~~we implemented cost cutting initiatives that are expected to positively impact the results of PPSC’s operations and reduce expenses at~~ our ~~corporate~~operating ~~offices.~~segments ~~Additionally~~incurred ~~we initiated plans to improve~~ operating ~~margins~~income at(loss) ~~PPSC~~as byfollows: ~~focusing on customers that are willing to pay for premium security services, a market in which we believe that PPSC is able to differentiate itself from its peers. As a result, we have~~

	Year Ended April 30,

	2008			2007
Homeland security products	$	(2,135,000	)	$	(6,664,000	)
Security services		277,000			(425,000	)
Silicon products and services		(2,026,000	)		326,000
Reconciling amounts		(2,710,000	)		(8,785,000	)

Total	$	(6,594,000	)	$	(15,548,000	)

(1): Reconciling amounts for the operating (loss) income information includes corporate expenses consisting primarily of corporate salaries and benefits, professional and consulting fees, investor relations costs, insurance and directors' compensation. In January 2007, we elected to discontinue the operation of our life sciences business and put the

and will continue to exit lower-margin business areas for premium accounts that prefer higher quality of service. While we believe that these cost cutting initiatives and refocused sales and marketing efforts will enable PPSC to report positive operating income for the year ending April 30~~, 2008, we can offer no assurance that this will actually occur.~~

~~Many~~Table of the more significant cost-cutting steps were taken late in the year ended April 30, 2007 and the beneficial impact is only partially reflected in the results of operations for the year ended April 30, 2007. While we believe that these measures may have a significant beneficial impact during our year ended April 30, 2008, this cannot be assured and, as discussed above and below, certain negative impacts to the semiconductor market may offset any beneficial impacts of our restructuring and cost-cutting measures.Contents

Inassets and ~~June 2007~~business weup ~~sold~~for ~~our~~sale ~~life sciences business~~ (which ~~supplied~~was ~~isotopes~~sold ~~for~~in ~~life~~June ~~sciences and health-care applications~~2007). asAs ~~it no longer fit our long-term strategy for building~~ a ~~sustainable~~result, ~~and~~we ~~profitable homeland~~reclassified ~~security~~the ~~and~~operations ~~semiconductor~~of ~~company~~our ~~and~~life ~~because~~sciences ~~of deteriorating~~ business ~~conditions~~as indiscontinued ~~the historical revenue producing products in this business~~operations.

We Our homeland ~~recorded~~security aproducts ~~net~~segment ~~loss~~generated ofsignificant ~~$(13,165,000)~~operating ~~for~~losses during the year ended April 30, ~~2007~~2008 as ~~compared~~our effort to ~~$(32,341,000)~~develop and ~~$(15,177,000)~~commercialize ~~for~~our ~~the~~IMS-based ~~years~~products ~~ended~~and ~~April 30,~~our ~~2006~~effort to develop next generation infrared imaging and ~~2005,~~night ~~respectively.~~vision ~~Our~~surveillance ~~net~~technology ~~loss~~has isnot ~~improved~~been assuccessful. ~~compared~~As toa result of the ~~years~~suspension ~~ended~~of ~~April 30~~the development, ~~2006~~manufacture and ~~2005~~sale ~~partly~~of ~~due to~~our ~~increasing~~IMS-based ~~revenues~~products and ~~improved~~the ~~gross~~cancellation ~~margins~~of the Lucent Agreement, asthe ~~described~~operating ~~below.~~loss ~~Included~~was insignificantly decreased for the ~~net~~last ~~loss~~six ~~for~~months of the year ended April 30, ~~2007~~2008 ~~were~~and ~~net~~we ~~non-cash~~expect ~~gains~~that future operating losses will continue to decrease as we seek alternatives towards finding a means of $2monetizing our investment in this product line,~~643,000~~ ~~associated~~including ~~with~~an ~~our~~outright ~~convertible~~sale ~~debentures~~of the technology. ~~Included~~It inis ~~the~~unclear ~~net loss~~as ~~for~~to ~~the~~when ~~year~~(if ~~ended~~at ~~April 30,~~all) ~~2006~~we ~~were~~will ~~non-cash~~resume ~~charges~~activity ofon our IMS-based ~~$14,166,000~~products ~~associated~~and ~~with~~we can offer no assurance that we will be able to monetize any portion of our 8%IMS ~~Debentures~~technology investment.

~~Our~~ For the ~~working~~years ~~capital~~ended April 30, 2008 and ~~liquidity~~2007, ~~increased~~our by security services segment delivered revenue of $913,~~755~~973,000 ~~during~~and $14,682,000, respectively. The operating income for the year ended April 30, ~~2007~~2008, is due primarily to the benefits received from athe ~~working~~cost ~~capital deficit~~cutting ofinitiatives ~~$(6,445,000)~~we implemented at ~~April 30,~~PPSC ~~2006~~during tothe ~~positive~~fourth ~~working~~quarter ~~capital~~ of ~~$3,310,000~~ atthe year ended April 30, 2007. ~~This~~and ~~improvement~~the ~~was~~year ended ~~due~~April 30, ~~mostly~~2008 to(see ~~the capital~~below ~~raising~~for ~~that~~additional ~~occurred~~discussion). ~~during~~The ~~our~~operating loss for the year ended April 30, 2007. ~~However, due~~is toinclusive ~~continuing~~of ~~operating~~a ~~losses~~write-off ~~and~~of ~~projected~~a ~~declining~~single ~~working~~customer's ~~capital~~accounts ~~balances~~receivable balance in the amount of $114,000 (of which the majority was subsequently collected during the year ~~ending~~ended April 30, 2008,). ~~the~~Although ~~auditors~~we ~~report~~continue ~~included~~to pursue selected domestic government ~~with~~contracts, we have taken steps to reduce our ~~financial~~spending ~~statements~~on ~~includes~~sales ~~the~~and ~~following~~marketing ~~explanatory~~in ~~paragraph:~~this area.

~~“The~~ During the ~~accompanying~~fourth ~~financial~~quarter ~~statements~~of ~~have~~the ~~been prepared~~fiscal ~~assuming~~year ~~that~~ended April 30, 2007, and the ~~Company~~year ~~will~~ended ~~continue~~April 30, as2008, awe ~~going~~implemented ~~concern.~~significant Ascost cutting initiatives that positively ~~discussed~~impacted inthe ~~Note~~results 1of PPSC's operations. Additionally we initiated plans (with limited success) to ~~the~~improve ~~financial~~operating ~~statements,~~margins ~~the~~at ~~Company~~PPSC ~~has~~by ~~suffered~~focusing on customers that are willing to pay for premium ~~recurring~~security ~~losses~~services, ~~from~~a ~~operations~~market ~~and~~in ~~will~~which ~~continue~~we believe that PPSC is able to ~~require~~differentiate ~~funding~~itself from its peers. While these cost cutting initiatives and focused sales and marketing efforts have enabled PPSC ~~investors~~to ~~for~~report ~~working~~positive ~~capital.~~operating ~~This~~income ~~raises~~for ~~substantial~~the ~~doubt~~year ~~about~~ending April 30, 2008, the ~~Company’s ability~~industry tois ~~continue~~cost ascompetitive aand ~~going~~customers ~~concern.~~switch ~~Management’s~~security ~~plans~~service inproviders ~~regard~~on toshort ~~these~~notice. In addition, we have ~~matters~~been ~~are~~notified ~~also~~that ~~described~~effective inJuly 31, ~~Note~~2008, 1.one ~~The~~of ~~financial~~our ~~statements~~significant docustomers ~~not~~(who ~~include~~accounted for $2,928,000 of revenue for the year ended April 30, 2008) will no longer use our services. ~~any~~As ~~adjustments~~a result of these factors, we can offer no assurance that ~~might~~we ~~result~~will ~~from~~be able to generate positive operating income for the ~~outcome~~year ofending ~~this~~April 30, ~~uncertainty~~2009.”

Our silicon ~~ability~~operations, tobased ~~continue~~in asVancouver, aWashington, ~~going~~showed ~~concern~~continued ~~is dependent~~operational ~~upon~~and ~~raising~~financial ~~capital~~improvement ~~through~~during ~~debt~~the oryears ~~equity~~ended ~~financing~~April 30, 2007 and ~~ultimately~~2006, although we byexperienced ~~increasing~~a ~~revenue~~softening of demand for our products and ~~achieving~~services ~~profitable~~during ~~operations.~~the Weyear ~~can~~ended ~~offer~~April 30, ~~no assurance~~2008. ~~that~~The wesegment ~~will~~generated beoperating ~~successful~~income infor ~~our~~the ~~efforts~~year toended ~~raise~~April 30, ~~additional~~2007, in the ~~proceeds~~amount orof ~~achieve~~$326,000 ~~profitable~~(which ~~operations.~~includes ~~The~~a ~~consolidated~~non-cash ~~financial statements~~charge ~~located~~of in$122,000 ~~Item~~for 8.stock-based ~~“Financial~~compensation ~~Statements~~expense) ~~and~~as ~~Supplementary~~compared ~~Data” have~~to ~~been~~an ~~prepared~~operating onloss afor ~~going~~the ~~concern~~year ~~basis~~ended April 30, ~~which~~2006, ~~contemplates~~in the ~~realization~~ amount of ~~assets~~$(5,151,000). The positive operating income resulted primarily from our ongoing effort to reduce our reliance on low margin small diameter products and ~~the~~diversify ~~settlement~~into ofhigher ~~liabilities~~margin 300-millimeter inproducts ~~the~~and ~~normal~~services, ~~course~~wafer ofthinning ~~business~~and custom wafer products.

~~Based~~ The large-diameter onwafer ~~the~~segment ~~amount~~has ~~of capital~~become weone ~~have~~of ~~remaining,~~the ~~our~~fastest ~~current~~growing ~~and~~segments ~~projected~~of ~~negative~~the ~~cash~~silicon ~~flow~~wafer ~~from operations,~~market weand ~~anticipate~~the ~~that~~revenues weand ~~may~~gross ~~incur~~margins aassociated ~~working~~with ~~capital~~the ~~deficit~~services ~~unless~~are wegreater ~~are~~than ~~able~~those toassociated ~~substantially~~with ~~increase~~the ~~our~~small ~~revenue~~diameter ormarket. ~~reduce~~As a result of our ~~expenses~~strategic ~~further~~realignment, ~~thereby~~ ~~generating~~revenue ~~positive~~from ~~cash~~300-millimeter ~~flow~~services ~~from~~comprised ~~operations~~approximately ~~and~~39% ~~(ultimately)~~of segment revenue for the ~~operating~~year ~~income.~~ended ~~Nevertheless~~April 30, as2008 a($3,092,000 ~~result~~ of ~~our~~revenue) ~~fund~~and ~~raising~~54% ~~activities during~~of segment revenue for the year ended April 30, 2007 ($7,049,000 ~~other~~of ~~anticipated~~revenue), ~~cash~~as ~~flows~~compared ~~and certain~~to ~~cost-saving~~approximately ~~measures~~36% weof ~~have~~segment revenue ~~instituted,~~for wethe ~~believe~~year weended ~~have~~April 30, ~~sufficient working~~2006 ~~capital~~($2,053,000 toof ~~finance~~revenue). ~~our~~At ~~anticipated~~the ~~operations~~same ~~and~~time, ~~projected~~there ~~negative cash~~has ~~flow~~also ~~into~~been ~~our~~a ~~quarter~~focus ~~ending~~on ~~January 31,~~operational ~~2008.~~

3231

~~Critical~~Table ~~Accounting Estimates~~of Contents

~~Our~~efficiency and ~~consolidated~~effectiveness, ~~financial~~which ~~statements~~has ~~are~~resulted ~~prepared~~ in ~~accordance~~ ~~with~~increased ~~generally~~productivity ~~accepted~~and ~~accounting~~processing ~~principles~~yields. ~~in the Unites States~~Further, ~~which~~ ~~require~~we ~~management~~continue to ~~make~~gain ~~estimates,~~new ~~judgments~~customers ~~and~~(both ~~assumptions~~large ~~that affect the amounts reported in the consolidated financial statements~~ and ~~accompanying~~ ~~notes.~~smaller ~~We consider an accounting estimate to be critical if 1~~diameter) ~~the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made,~~ and ~~2) changes in the estimate that~~ are ~~reasonably~~also ~~likely to occur from period to period, or use of different estimates that we reasonably could have used~~ in the ~~current~~ ~~period,~~process ~~would~~of ~~have~~attempting ato ~~material~~qualify ~~impact on~~ our ~~financial~~products ~~condition~~at ~~or results of operations~~others.

~~Management~~ While we ~~has~~reported ~~discussed the~~significant ~~development~~revenue and ~~selection~~operating ofincome ~~these~~growth ~~critical~~in ~~accounting~~our ~~estimates~~silicon ~~with~~operations for the ~~Audit~~ ~~Committee~~year ended April 30, 2007, many of our ~~Board~~top ofsilicon ~~Directors~~customers ~~and~~experienced weakened ~~the~~business ~~Audit~~results ~~Committee~~during ~~has~~our ~~reviewed the~~year ~~foregoing~~ended ~~disclosure~~April 30, 2008. In addition, ~~there~~some ~~are~~customers ~~other~~reported ~~items~~inventory ~~within~~buildup ~~our financial~~in ~~statements~~reclaim ~~that~~and/or ~~require~~test ~~estimation,~~products. ~~but~~As ~~are~~a ~~not~~result ~~deemed~~of ~~critical~~these astwo factors, during ~~defined~~the ~~above.~~year ~~Changes~~ended inApril 30, ~~estimates~~2008, ~~used~~we experienced a slowdown in ~~these~~orders and ~~other~~a ~~items~~reduction ~~could~~in ~~have~~average ~~a material~~selling ~~impact~~prices onof ~~our~~reclaim ~~financial~~and ~~statements. We believe~~test ~~that~~materials, ~~our~~which ~~most~~has ~~critical~~had ~~accounting~~a ~~policies~~negative ~~and~~impact ~~estimates~~on ~~are~~our ~~as follows:~~results.

~~Goodwill~~ The slowdown significantly impacted our revenues, results of operations and cash flows for the year ended April 30, 2008, in which we generated an operating loss of $(2,026,000), ~~Intangible~~which ~~Assets~~includes a non-cash charge of $209,000 for stock-based compensation expense.

~~Goodwill~~ In order isto ~~recorded~~minimize onthe ~~our~~effect ~~books~~of ~~for~~the ~~acquisitions where~~slowdown, ~~the~~we ~~purchase~~implemented ~~price~~many iscost incutting ~~excess~~measures ofand ~~the~~are ~~cumulative~~continuing ~~fair~~to ~~values~~do ofso. ~~the identified~~We ~~tangible~~have increased our marketing efforts and ~~intangible~~are ~~assets.~~hopeful ~~The~~that ~~assignment~~we will ofsee ~~fair~~a ~~value~~recovery toduring the ~~identified~~ ~~tangible~~year ~~and~~ending ~~intangible~~April 30, ~~assets~~2009. ~~requires~~We ~~significant~~continue ~~judgment~~to monitor the situation closely and ~~may require~~while ~~independent~~we ~~valuations~~believe ofthat ~~certain~~we ~~identified~~will ~~assets.~~see ~~Once~~improving ~~goodwill~~financial ~~and~~results in this operating ~~other~~segment ~~intangible~~(over ~~assets~~the ~~are~~long-term), ~~established~~we oncannot ~~our~~offer ~~balance~~any ~~sheet,~~assurance that we ~~evaluate~~will ~~the assets~~be ~~for~~able ~~impairment~~to asregain ~~described~~or insustain ~~the~~operating ~~following~~profitability ~~paragraphs~~in future periods.

In ~~accordance with SFAS No. 142 Goodwill and~~ Other ~~Intangible~~income ~~Assets~~(expense), ~~goodwill~~ is not amortized, but instead is tested for impairment on an annual basis or more frequently if the presence of certain circumstances indicates that impairment may have occurred. The impairment review process, which is subjective and requires significant judgment at many points during the analysis, compares the fair value of the reporting unit in which goodwill resides to its carrying value. If the carrying value of a reporting unit exceeds its fair value, then the amount of the impairment loss must be measured. The impairment loss is calculated by comparing the implied fair value of reporting unit goodwill to its carrying amount. In calculating the implied fair value of reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value. We have goodwill in the amount of $3,631,000 on our consolidated balance sheet as of April 30, 2007, related to the acquisition of PPSC in May 2005. We performed our annual impairment review on the aforementioned goodwill during our third fiscal quarter and concluded that the goodwill is not impaired.net

~~For~~ Other ~~intangible~~income ~~assets other than goodwill, SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets~~ (~~“SFAS 144”~~expense) ~~is the authoritative standard on the accounting for the impairment of such intangible assets. As required~~, wenet ~~perform tests~~ for impairment of intangible assets other than goodwill whenever events or circumstances suggest that such assets may be impaired. To evaluate potential impairment, SFAS No. 144 requires us to assess whether the ~~future~~years ~~cash~~ended ~~flows related to these assets will be greater than their carrying value at the time of the test. Accordingly~~April 30, ~~while~~2008 ~~our~~and ~~cash flow~~2007 ~~assumptions~~both ~~are~~on ~~consistent~~a ~~with~~dollar ~~the~~amount ~~plans~~ and ~~estimates~~as wea ~~are~~percentage ~~using~~of torevenues ~~manage the underlying businesses, there~~ is ~~significant~~reflected ~~judgment~~ in ~~determining~~ the ~~cash~~following ~~flows~~table: attributable to our other intangible assets over their respective estimated useful lives. We have remaining other net intangible assets in the amount of $303,000 on our consolidated balance sheet as of April 30, 2007, comprised of our IMS-based detection technology

	Year Ended April 30,

	2008			2007
Dollar amount	$	5,284,000		$	2,651,000
Percent of revenues		(23.8	)%		9.6	%

~~acquired~~ For inthe ~~December~~year ended April ~~2002~~30, ~~for~~2008, ~~customer~~other ~~lists~~income ~~acquired~~(expense), innet ~~our~~includes ~~acquisition~~interest expense of $(6,386,000), the ~~business~~ ~~and~~amortization ~~assets~~ of ~~EMG~~debt inissuance ~~June 2004~~costs ~~and~~of ~~the~~$(198,000) ~~customer~~and ~~base~~equity ~~acquired~~ in the ~~our~~net ~~acquisition~~loss of ~~PPSC~~an ininvestee ~~May 2005.~~of We$(69,000) ~~are~~partially ~~required~~offset toby ~~periodically evaluate~~a ~~our~~gain on sale of an equity method investment of $208,000, interest and other ~~intangible~~income ~~assets~~of ~~balances~~$115,000 ~~for~~and ~~impairments.~~a Ifgain weon ~~were~~derivative toinstruments of ~~incur~~$1,021,000. ~~additional~~Included ~~impairments~~in tointerest ~~our~~expense ~~other~~for ~~intangible~~the ~~assets~~year ended April 30, it2008 ~~could~~are ~~have~~non-cash ~~an adverse~~charges ~~impact~~of $6,062,000 related to the amortization of the discount and the accrual of interest on our ~~future~~outstanding ~~earnings,~~convertible ~~if any~~debentures.

~~Valuation~~ For the year ended April 30, 2007, other income (expense), net consists primarily of ~~Equity~~gains on derivative instruments of $5,905,000 related to the change in the fair value and ~~Transactions~~reclassification of certain derivative liabilities and the extinguishment of debt of $227,000 partially offset by interest expense of $3,320,000 and the amortization of debt issuance costs of $232,000. Included in interest expense for fiscal year 2007 are non-cash charges of $3,129,000 related primarily to the amortization of the discount and the accrual of interest on the 13% Debentures.

We ~~value transactions~~ ~~associated~~expect ~~with~~that ~~common~~our orother ~~preferred~~expenses ~~stock~~will ~~that~~be isvolatile ~~convertible into common stock~~ based on the ~~market~~future ~~value~~timing of ~~the~~repayment ~~underlying~~, ~~common~~if ~~stock~~ever, ~~on the date~~ of the ~~signing~~ ofremaining ~~the~~13% ~~agreement~~Debentures (~~or,~~see ~~sometimes, at~~ the ~~date~~Liquidity ofand ~~conversion).~~Capital WeResources ~~value~~discussion ~~transactions~~below) ~~associated with common stock warrants at the appropriate measurement date utilizing at a minimum, the Black-Scholes pricing model, with assumptions as to volatility, risk-free interest rate~~ and ~~estimated life of~~ the ~~warrants~~ ~~based~~fluctuations onin ~~historical~~fair ~~information~~value ~~related to the life~~ of ~~the underlying warrant. If the assumptions used, as they relate to volatility, risk-free interest rate~~ and ~~estimated~~classification ~~life~~ of the ~~warrants,~~instruments ~~were~~underlying ~~materially~~our ~~different, the~~derivative ~~overall valuation of these transactions could change significantly~~liabilities.

~~Stock-Based Compensation~~ ~~Expense~~Income Taxes

We ~~account~~currently ~~for~~operate ~~stock-based compensation~~at ina ~~accordance~~loss ~~with~~and ~~SFAS~~expect ~~123(R).~~to ~~Under~~operate ~~the~~at ~~fair~~a ~~value~~loss ~~recognition provisions~~until ~~of SFAS 123~~(Rif ever), ~~stock-based~~our ~~compensation~~operations ~~cost~~begin isto ~~estimated~~generate atsufficient ~~the~~revenue. The ~~grant~~losses ~~date~~incurred ~~based~~in on the ~~fair~~current ~~value~~year ofare ~~the~~not ~~award~~expected ~~and~~to isgenerate ~~recognized~~an asincome ~~expense ratably~~tax ~~over~~benefit ~~the~~because ~~requisite service period~~ of the ~~award.~~uncertainty ~~Determining~~of the ~~appropriate~~ ~~fair~~realization ~~value~~of ~~model and calculating~~ the ~~fair~~deferred ~~value~~tax ofasset. ~~stock-based awards,~~As ~~which~~a ~~includes estimates of stock price volatility~~result, ~~forfeiture rates and expected lives, requires judgment that could materially impact our operating results.~~

~~Recent Accounting Pronouncements~~32

~~See~~Table ~~Note 1 to the consolidated financial statements located in Item 8. “Financial Statements and Supplementary Data” for a description~~ of ~~certain other recent accounting pronouncements including the expected dates of adoption and effects on our results of operations and financial condition.~~Contents

34we have provided a valuation allowance against our net deferred tax asset because, based on available evidence including our continued operating losses, it is more likely than not that all of the deferred tax assets will not be realized. Additionally, due to certain "change in ownership" rules (as defined by the IRS), utilization of our federal net operating losses may be subject to certain annual limitations.

~~Results~~ of Minority Interest in Operations of Consolidated Subsidiary

~~The following~~ Minority ~~table~~interest ~~sets~~in ~~forth, for the periods indicated, consolidated statements of~~ operations ~~data expressed as a percentage~~ of ~~revenues.~~consolidated ~~The~~subsidiary ~~table~~for ~~and~~ the ~~discussion~~ ~~below~~years ~~should~~ended beApril 30, ~~read~~2008 ~~in conjunction with the consolidated financial statements~~ and ~~notes thereto appearing elsewhere in this report. In January~~ 2007, we ~~elected~~both toon ~~discontinue~~a ~~the~~dollar ~~operation of our life sciences business and put~~amount ~~the assets~~ and ~~business~~as ~~up for sale (which was sold in June 2007). As~~ a ~~result,~~ wepercentage ~~reclassified the operations~~ of ~~our~~revenues ~~life~~is ~~sciences~~reflected ~~business~~in ~~as discontinued operations. Prior year information has been reclassified to conform with~~ the ~~current~~following ~~year~~table: ~~presentation.~~

	2008			2007
	Year Ended April 30,
	2007		2006				2005
Revenues	100.0	%		100.0	%		100.0	%
Dollar amount	$	111,000		$	(44,000	)
Cost of revenues	78.6			96.9			242.6
Percent of revenues		0.5	%		(.2	)%
Gross margin	21.4			3.1			(142.6	)
Operating expenses:
Selling, general and administrative	59.6			57.9			231.1
Impairment loss on assets held for sale	—			2.5			—
Impairment of goodwill and intangible assets	—			—			32.5
Research and development	17.9			27.0			37.9
Total operating expenses	77.5			87.4			301.5
Operating loss	(56.1	)		(84.3	)		(444.1	)
Other income (expense), net	9.6			(84.6	)		(39.7	)
Loss from continuing operations before income taxes and minority interest	(46.5	)		(168.9	)		(483.8	)
Income tax expense	—			—			—
Minority interest in operations of consolidated subsidiary	(.2	)		—			—
Loss from continuing operations	(46.7	)		(168.9	)		(483.8	)
Loss from discontinued operations, net of income taxes	(.8	)		(5.2	)		(80.0	)
NET LOSS	(47.5	)%		(174.1	)%		(563.8	)%

~~Revenues~~ The amount of minority interest in operations of consolidated subsidiary recorded for the years ended April 30, 2008 and 2007, relates to our purchase of a 90% interest in SenseIt in October 2006 and the subsequent operation of the business. Due to the cancellation of the Lucent Agreement, we do not expect minority interest in operations of SenseIt to be material in future periods.

~~Revenues from~~ ~~our~~Gain ~~security~~(Loss) ~~services~~On ~~and~~Discontinued ~~semiconductor products and services increased over the past three years while revenues from homeland security products were minimal~~Operations, asnet ~~reflected~~of inIncome ~~the following table:~~Taxes

	Year Ended April 30,
	2007		2006		2005
Homeland security products	$	28,000	$	35,000	$	—
Security services	14,682,000		12,814,000		—
Semiconductor products and services	13,021,000		5,731,000		2,692,000
Total	$	27,731,000	$	18,580,000	$	2,692,000

Gain (loss) from discontinued operations, net of income taxes for the years ended April 30, 2008 and 2007, both on a dollar amount and as a percentage of revenues is reflected in the following table:

The revenue for our security services segment is generated by PPSC, a business that we acquired in May 2005. Pro forma revenue for the year ended April 30, 2006 would have been approximately $13,361,000 if the PPSC acquisition had occurred on the first day of that quarter. The increase in revenue from the security services segment for the year ended April 30, 2007, is due to the net addition of additional security services contracts since the acquisition of PPSC. While we anticipate that we will continue to grow revenue in this segment by securing additional new security contracts in our PPSC

	Year Ended April 30,

	2008			2007
Dollar amount	$	553,000		$	(224,000	)
Percent of revenues		2.5	%		(.8	)%

35 In January 2007, we decided to discontinue the operation of our life sciences business and to put the assets and business up for sale (which was sold in June 2007). We decided to sell this business as it no longer fit our long-term strategy and because of deteriorating business conditions in the historical revenue producing products in the segment. Accounting rules required us to treat the operations of the life sciences business as discontinued operations whereby the net financial impact of the operations of the business is combined into a single line item and prior periods are reclassified for this presentation. The gain, net of income taxes, resulting from operations of the life sciences business was $37,000 for the year ended April 30, 2008 as compared to a loss, net of income taxes, in the amount of $(224,000) for the year ended April 30, 2007. The gain on sale of the life sciences business was recorded in the year ended April 30, 2008, in the amount of $516,000. Revenue for the life sciences business, reported in the single line item of gain on operations of discontinued operations, net of income taxes, was $101,000 and $1,803,000 for the years ended April 30, 2008 and 2007, respectively.

~~subsidiary and~~ ~~retaining~~Net ~~existing customers under contract currently with PPSC, we cannot provide any assurance that we will be able to do so.~~Loss

~~Our~~ Net ~~semiconductor~~loss ~~products and services segment has experienced a rapid increase in revenue during the past two years. Revenue~~ for ~~the~~ ~~years ended April 30, 2007 and 2006, was 127% and 113% higher than revenue for~~ the years ended April 30, ~~2006~~2008 and 2005, respectively. The increases are predominately due to the expansion of sales of higher-margin 300-millimeter products and services. Our 300-millimeter business provided revenue of $7,049,000, $2,053,000 and $0 for the years ended April 30, 2007, ~~2006~~both ~~and 2005, respectively. While we believe that continued expanded focus~~ on ~~the~~a ~~300-millimeter, wafer~~dollar ~~thinning~~amount and ~~other~~as ~~semiconductor~~a ~~products~~percentage ~~and~~of ~~services~~revenues ~~markets~~is ~~will~~reflected ~~allow~~in ~~us to continue to increase revenue over~~ the ~~long-term,~~following wetable: ~~can provide no assurance that we will be able to do so.~~

While we reported significant revenue and operating income growth in our semiconductor operations for the year ended April 30, 2007, many of our top semiconductor customers have experienced weakened business results in recent quarters. In addition, some customers have reported inventory buildup in reclaim and/or test products. As a result of these two factors, we have recently seen a slowdown in orders of reclaim and test materials, which has had a negative impact on our operations. The slowdown will have a significant impact on our results of operations and cash flows for our quarter ending July 31, 2007, which we expect to reflect a significant reduction in revenue (as compared to the previous sequential quarter) and the reporting of an operating loss for that segment. In order to minimize the effect of the slowdown, we have implemented many cost cutting procedures and will continue to do so. It is unclear as to when the market will rebound but we believe that this is a relatively short-term phenomenon and are hopeful that we will begin to see a recovery during our quarter ending October 31, 2007. In addition, due to this slowdown in orders of reclaim and/or test wafers during our quarter ending July 31, 2007, it is unclear if we will be successful in maintaining or increasing our revenue in our semiconductor products and services segment for the year ending April 30, 2008. We continue to monitor the situation closely and while we believe that we will see improving financial results in this operating segment (over the long-term), we cannot offer any assurance that we will be able to regain or sustain operating profitability in future periods.

	Year Ended April 30,

	2008			2007
Dollar amount	$	(11,214,000	)	$	(13,165,000	)
Percent of revenues		(50.6	)%		(47.5	)%

Our homeland security products segment has recorded minimal or no revenue for the years ended April 30, 2007, 2006 and 2005. The proceeds related to the installation of the first seven commercial units during the year ended April 30, 2007 are primarily being classified as deferred revenue pending completion of certain tasks. Although we have installed an additional eight units subsequent to year-end, we have not received any further purchase commitments for our product to be incorporated into the AirChx system at this time. Consequently, our ability to generate significant revenue related to the sale of our IMS-based products is highly dependent to our success in obtaining the strategic partnerships discussed in Item 1. “Business”. Although we are hopeful that our year ending April 30, 2008 will reflect significantly greater revenues from IMS-based products (as compared to fiscal year 2007), we cannot offer any assurance that this will actually occur.33

~~Although we~~Table ~~have diversified our sources~~ of ~~revenue, we continue to have concentrations of revenue with certain customers as reflected in the following table (information only listed if percentage is greater than 10%):~~Contents

	Percentage of revenues during years ended April 30,
	2007			2006			2005
Qimonda Richmond LLC (formerly Infineon Technologies Richmond)		21	%		13	%		24	%
Consolidated Edison Company		—			12	%		—
Foot Locker Retail, Inc.		14	%		22	%		—
Citicorp North America, Inc.		11	%		—			—
SEH America, Inc.		—			—			11	%

We anticipate that consolidated losses will continue until (if ever) revenues from our current operations substantially increase or we increase the scope of our operations through a merger, acquisition or other means. Further, the revenue increases must increase faster than any increases in operating and research and development expenses. Additionally, we expect that our consolidated net loss will continue as we continue to work through the downturn in the silicon market. As noted above, we suspended development and marketing of our IMS-based products and we suspended operations at our SenseIt subsidiary due to the cancellation of the Lucent Agreement. Therefore, we can offer no assurance that we will be able to proceed with either of these projects or that the development and commercialization of these technologies will ever occur.

36 We anticipate that our operations during the year ending April 30, 2009 will result in a net loss since we are not likely to increase our revenues from our existing products or generate additional sales from the new products we may develop in a sufficient amount (if at all) to offset our operating and interest expenses.

A ~~decision~~Liquidity by a significant customer to substantially decrease or delay purchases from us or an inability to collect significant amounts owed to us could have a material adverse effect on our consolidated financial condition and ~~results~~Capital ~~of operations.~~Resources

~~Gross~~ Included ~~Margin~~in the following table are consolidated balance sheet and cash flow items for the years ended April 30, 2008 and 2007:

Our gross margins increased for the past two years, both on a dollar amount and on a percentage of revenues basis as reflected in the following table:

		Year Ended

(in thousands)		April 30, 2008			Change			April 30, 2007			Change			April 30, 2006
Cash and cash equivalents		$	927		$	(629	)	$	1,556		$	(30	)	$	1,586
Working capital (deficit)			(13,128	)		(16,438	)		3,310			9,755			(6,445	)
Current convertible debentures, net of discount			10,515			10,515			—			(10,432	)		10,432
Convertible debentures, net of discount and current portion			—			(8,634	)		8,634			8,634			—

	Total convertible debentures, net of discount	$	10,515		$	1,881		$	8,634		$	(1,798	)	$	10,432

Total convertible debentures, face value outstanding		$	17,902		$	(98	)	$	18,000		$	8,025		$	9,975
Net cash used in operating activities		$	(694	)	$	9,123		$	(9,817	)	$	5,583		$	(15,400	)
Net cash provided by (used in) investing activities			1,276			2,411			(1,135	)		3,303			(4,438	)
Net cash provided by (used in) financing activities			(1,211	)		(12,133	)		10,922			10,096			826

Net decrease in cash and cash equivalents		$	(629	)	$	(599	)	$	(30	)	$	18,982		$	(19,012	)

	Year Ended April 30,
	2007			2006			2005
Dollar amount	$	5,921,000		$	571,000		$	(3,839,000	)
Percent of revenues	21.4		%	3.1		%	(142.6		)%

Working Capital

~~The~~ We ~~increase~~had ina ~~gross~~working ~~margin~~capital ~~for~~deficit ~~the~~of ~~year~~$(13,128,000) ~~ended~~as of April 30, ~~2007~~ is2008, ~~due~~as ~~mainly~~compared to ~~continued~~working ~~improvement~~capital ~~in the operations~~ of ~~our semiconductor~~$3,310,000 ~~products~~as ~~and services segment where there were significant improvements to gross margin on a dollar amount and on a percentage~~ of ~~revenues~~ ~~basis~~April 30, 2007. ~~The~~This ~~increase~~$16,438,000 decrease in ~~gross~~working ~~margin~~capital for the year ended April 30, ~~2006 was due mainly to two factors: (1) the impact of PPSC’s operations~~2008, ~~which~~is ~~were acquired~~due ~~in May 2005 and (2) improvement in operations in our semiconductor products and services segment where there were improvements~~ to ~~gross~~ ~~margin on both~~ a ~~dollar~~combination ~~amount and on a percentage~~ of ~~revenues~~factors, ~~basis. As a result~~ of which the ~~slowdown~~significant infactors ~~orders~~are ofset ~~reclaim~~out ~~and/or~~below: test wafers during our quarter ending July 31, 2007 (as discussed above) it is currently unclear if we will be successful in maintaining or increasing gross margins (on a dollar basis) in our semiconductor products and services segment for the year ending April 30, 2008.

On aFactors ~~dollar~~which basis, overall gross margin is expected to increase correspondingly with increases in revenue, if any, with dependencies on customer and supplier pricing. Our ability to positively impact consolidated gross margin will in large be dependent upon our ability to grow sales in our homeland security segments through increased ~~sales~~working ~~of security services and detection products and in our semiconductor products and services segment through increased sales of 300-millimeter products and services and wafer thinning services.~~capital

•: cash of $516,000 received in excess of the carrying amount upon the sale of our life sciences business in June, 2007;

On a percentage of revenues basis, in general we anticipate that the gross margin percentage in our security services segment will remain relatively stable. As a result of the current downturn which may lead to increased competition and lower prices, our semiconductor products and services segment will most likely experience a decrease in gross margins as a percentage of revenues during the year ending April 30, 2008 as compared to the year ended April 30, 2007. In addition, due to fixed facility costs included in cost of revenues in the semiconductor products and services segment, the gross margin percentage is particularly sensitive to changes in revenue. Lastly, the gross margin percentage on our homeland security products segment is likely to be volatile as well as we attempt to increase revenue in that segment, though we can offer no assurances that we will be able to do so.34

37Table of Contents

•: cash of $206,000 received in excess of the carrying amount upon the sale of our 30% interest in IUT (although we subsequently remitted $200,000 of these proceeds as a payment of outstanding interest on the 13% Debentures);
•: net cash of $60,000 received from the assignment of our silicon-28 license;
•: expiration of warrants resulting in the write-off of derivative liability of $1,021,000;
•: $212,000 related to assets held for sale that were reclassified from property and equipment.

~~Selling,~~ ~~General and~~Factors ~~Administrative~~which ~~Expenses~~decreased working capital

•: Classification of $10,515,000 of our outstanding convertible debentures, net of discount and related accrued interest as a current liability in the accompanying consolidated balance sheet
•: $6,760,000 of cash used directly in operating activities (calculated as $694,000 of cash used in operating activities, increased by $5,045,000 of the cash impact of net changes in other current assets or liabilities (excluding derivative liability of $1,021,000) included therein);
•: $116,000 related to purchases of fixed assets;
•: $180,000 representing the current portion of capital lease entered into during the year ended April 30, 2008;
•: $30,000 in reclassification of capital leases from long-term to current;
•: $538,000 of cash paid for principal on capital leases.

Our ~~selling,~~working ~~general~~capital ~~and~~was ~~administrative~~$3,310,000 ~~expenses~~at ~~increased~~April 30, 2007, as acompared ~~dollar~~to ~~amount~~a ~~for the~~working ~~last~~capital ~~two~~deficit ~~years~~of ~~ended~~$(6,445,000) at April 30, ~~2007~~2006. ~~Our~~The ~~selling~~$9,755,000 ~~general~~increase ~~and administrative~~in ~~expenses~~working ~~as a percentage of revenues remained fairly constant~~capital ~~during~~for the year ended April 30, 2007, ~~(as~~is ~~compared~~due to ~~the~~a ~~year~~combination ~~ended~~of ~~April 30~~factors, ~~2006)~~ ~~but~~of ~~decreased~~which ~~significantly as compared to~~ the ~~year~~significant ~~ended~~factors ~~April 30, 2005~~are asset ~~reflected~~out ~~in the following table~~below:

	Year Ended April 30,
	2007			2006			2005
Dollar amount	$	16,519,000		$	10,750,000		$	6,222,000
Percent of revenues	59.6		%	57.9		%	231.1		%

Factors which increased working capital

•: $16,930,000 due to the issuance of the 2006 Debentures, which are classified as long-term liabilities;
•: $5,648,000 due to a decrease in the current portion of the 8% Debentures related to principal payments made in shares of our common stock ;
•: cash of $112,000 received in excess of carrying amount upon the sale of assets held for sale at April 30, 2007.

~~Selling,~~ ~~general~~Factors and administrative expenses increased on a dollar and percentage basis for the year ended April 30, 2007 as compared to the year ended April 30, 2006 primarily due to severance costs (mostly non-cash) associated with the termination of several key executives, increases in staffing and commissions at PPSC due to the pursuit of new contracts, personnel and related expenses in our homeland security products segment, the consolidation of operating expenses at SenseIt and significant non-cash charges associated with registration rights penalties, amendments to the number of shares issuable and the exercise price of certain warrants with ratchet provisions, the retention of a 10% equity interest in SenseIt by its chief executive officer and stock based compensation expense associated with our adoption of SFAS 123(R) (significantly offset by an increase in revenues as it relates to the percentage increase). The total costs incurred during the year ended April 30, 2007 associated with severance and compensation expense related to the adoption of SFAS 123(R) approximates $3,930,000 (of which ~~approximately~~decreased ~~$3,330,000~~working ~~is non-cash) of which zero was incurred in either of the years ended April 30, 2006 or 2005.~~capital

•: $9,893,000 of cash used directly in operating activities (calculated as $9,817,000 of cash used in operating activities, increased by $76,000 of the cash impact of changes in other current assets or liabilities included therein);
•: $1,707,000 related to purchases of fixed assets;
•: approximately $325,000 representing the current portion of capital lease entered into during the year ended April 30, 2007;
•: $100,000 related to an investment into a business (subsequently written off in its entirety);
•: Net impact of $1,021,000 related to warrants reclassified from equity to derivative liabilities;
•: approximately $100,000 in reclassification of notes payable from long term to current.

Both the dollar and percentage increase for the year ended April 30, 2005 is attributable to an increase in consulting and other professional services expenses, an increase in headcount and facility costs related to the expansion of our semiconductor operations (primarily due to the acquisition of the business and assets of EMG in June 2004) and an increase in headcount in our homeland security and corporate operations (partially offset by an increase in revenues as it relates to the percentage increase).35

AsTable ~~a result~~ of our restructuring activities completed during the end of the year ended April 30, 2007 and the first quarter of the year ending April 30, 2008 and the refocusing of our homeland security product development operations, we are hopeful (although we can offer no assurance) that selling, general and administrative costs will be reduced during the year ending April 30, 2008 (as compared to the prior year).Contents

~~Impairment~~ Based on ~~Loss~~the onamount of capital we have remaining and our expected negative cash flow from operations and investing activities, we anticipate that we will not be able to positively impact ~~Assets~~our ~~Held~~working ~~for~~capital ~~Sale~~unless we are able to substantially increase our revenues or reduce our expenses thereby generating positive cash flow from operations and (ultimately) operating income.

We As ~~recognized~~a anresult ~~impairment~~of ~~loss~~the onfinancing in June 2008, we believe we currently have enough working capital to finance our anticipated operations and projected negative cash flow into our quarter ending October 31, 2008. In addition, if we are able to secure asset based financing, YA Global has agreed to review that proposed financing and in its sole discretion consider releasing its security interest in certain of our assets ~~held~~to ~~for~~secure ~~sale~~that ~~during~~financing. ~~the~~If we are successful at obtaining a minimum of $1,000,000 of additional financing, we believe we could have enough working capital to finance our anticipated operations and projected negative cash flow into our fiscal year ~~ended~~ending April 30, ~~2006~~ as2010. ~~reflected~~Because inof the terms of the existing YA Global financing, we are unable to ~~following~~secure ~~table:~~any additional financing without YA Global's consent and approval.

	Year Ended April 30,
	2007				2006			2005
Dollar amount		$	—		$	466,000			$	—
Percent of revenues		—		%	2.5		%		—		%

13% Debentures and Term Debt

During ~~the~~our year ended April 30, ~~2006~~ 2007, aswe ~~part~~raised ofover a$12,800,000 ~~review~~(net of ~~our~~expenses ~~semiconductor~~and ~~products~~$4,100,000 ~~and~~of ~~services~~payments ~~segment~~on ~~that~~our 8% ~~resulted~~Debentures inthrough ~~operational~~the ~~changes~~issuance of $16,000,000 ~~certain~~of ~~equipment~~2006 ~~was~~Debentures ~~identified~~and ~~as unnecessary~~a ~~for~~$2,000,000 April ~~our~~2007 ~~planned~~Debenture ~~future~~to ~~operations~~YA Global. AsThe a2006 ~~result,~~Debentures ~~certain~~and of the ~~identified~~ ~~equipment~~April ~~whose~~2007 ~~book~~Debenture ~~value~~(as ~~exceeded~~amended ~~estimated~~in ~~net~~April ~~realizable value~~2007 ~~were~~and ~~individually~~June ~~written~~2008) ~~down~~mature toOctober 31, ~~estimated net realizable value~~2009, ~~resulting~~bear ~~in a~~interest ~~cumulative~~at ~~impairment~~13% ~~charge~~per ofannum ~~$466,000.~~and Weare ~~subsequently~~collateralized ~~sold~~by ~~this~~substantially ~~equipment in~~all ~~February 2007~~of ~~for $672,000~~our assets.

38 In June 2008 we raised an additional $1,000,000 (net of expenses) through the issuance of a $1,175,000 Term Note. The Term Note matures October 31, 2009, bears interest at 13% per annum and is collateralized by substantially all of our assets. The Term Note however is not convertible into our common stock but only repayable in cash.

~~Impairment~~ In June 2008, YA Global exchanged two of ~~Goodwill~~ ~~and~~the ~~Intangible~~2006 ~~Assets~~Debentures having an aggregate principal balance of $5,970,000 into the Exchange Notes with the same terms as the Term Note described above.

We As ~~recognized~~a ~~an impairment loss on goodwill and intangible assets during the year ended April 30~~result, ~~2005~~we ~~as reflected~~now inhave ~~the following table:~~

•: $7,145,000 in Term Notes; and
•: $11,868,400 (net of conversions to common stock) of remaining 13% Debentures.

	Year Ended April 30,
	2007				2006				2005
Dollar amount		$	—			$	—		$	875,000
Percent of revenues		—		%		—		%	32.5		%

~~Impairment~~ Currently, we may not be in compliance with certain covenants of ~~goodwill~~the remaining 13% Debentures and, in the June financing, YA Global refused to waive any non-compliance with ~~intangible~~the ~~assets~~earlier ~~for~~financing documents. In addition, it is likely that we will be unable to comply with certain financial covenants of the Term Notes during our fiscal year ~~ended~~ending April 30, ~~2005~~2009 ~~relates~~and as a result YA Global may potentially also be able to, in its discretion, declare an Event of Default on those notes. If YA Global were to declare an event of default under the 13% Debentures or the ~~write-off~~Term ofNotes ~~$447,000~~it ~~associated~~would ~~with~~likely have the ~~acquisition~~legal right to foreclose against its security interest and take control of, and/or dispose of, the assets ofsubject ~~EMG~~to ~~and~~its security interest. Although YA Global has ~~$428~~not yet declared an event of default,~~000~~ ~~associated~~and we are continuing to have discussions with YA Global with the ~~acquisition~~aim ofto ~~technology~~further ~~from~~our ~~Silicon~~business ~~Evolution~~operations, ~~Inc~~ there can be no assurance that YA Global will not declare an event of default under the 13% Debentures or the Term Notes.

~~Research and Development Expenses~~36

~~Research and~~Table ~~development expenses for the years ended April 30, 2007, 2006 and 2005 on both a dollar amount and as a percentage~~ of ~~revenues are reflected in the following table:~~Contents

	Year Ended April 30,
	2007			2006			2005
Dollar amount	$	4,950,000		$	5,018,000		$	1,020,000
Percent of revenues	17.9		%	27.0		%	37.9		%

Cash Flows

As of April 30, 2008, we had $927,000 of cash and cash equivalents, a decrease of $629,000 as compared to $1,556,000 at April 30, 2007. The ~~majority~~balance of ~~research~~cash and ~~development~~cash ~~expenses~~equivalents ~~for~~at April 30, 2007, was $30,000 decreased from the balance of $1,586,000 at April 30, 2006. Our principal source of funding for the ~~years~~year ended April 30, 2008 was from existing working capital at April 30, 2007, ~~and~~along ~~2006~~with ~~relate~~$805,000 ~~primarily~~(net toof ~~the development~~selling costs of ~~next-generation~~$45,000) ~~infrared~~received ~~technology~~for ~~through~~the sale of our ~~Lucent~~life sciences ~~relationship~~business ~~and~~in ~~SenseIt~~June ~~subsidiary~~2007 and ~~our~~$527,000 ~~IMS~~received ~~technology.~~from ~~The~~the ~~majority~~sale of ~~research~~ ~~and~~our ~~development~~30% ~~expenses~~interest in IUT. Our principal source of funding for ~~fiscal~~the year ~~2005~~ended ~~relates~~April 30, ~~primarily~~2007 towas from the ~~development~~ issuance of ~~our~~the ~~IMS~~13% Debentures ~~technology~~for ~~and~~which ~~other~~we ~~bulk~~received ~~detection~~cumulative ~~technologies~~net proceeds of $16,930,000.

~~A significant amount of the research and development~~ Cash onused ~~IMS~~in ~~technology~~operating ~~was~~activities ~~performed~~of ~~by IUT. We funded~~ $1(694,~~099,~~000,) and $1(9,~~312~~817,000) ~~and $496,000~~for ~~under our agreement with IUT during~~ the years ended April 30, ~~2007,~~ ~~2006~~2008 and ~~2005~~2007, respectively., ~~While~~was weprimarily ~~expect~~the toresult ~~significantly~~of ~~reduce~~net ~~our research~~losses ~~and~~of ~~development expenses performed by IUT during the year ending April 30~~$(11,214,000) ~~2008~~(which asincluded wenoncash ~~continue~~expenses toand ~~focus~~gains onin ~~our~~the ~~new~~net ~~strategic,~~amount ~~customer-based focus instead~~ of approximately a ~~product orientation~~$6,188,000 weexpense) dopartially ~~intend~~offset toby ~~continue~~changes ~~using~~in ~~IUT~~other tocurrent ~~the~~assets ~~extent necessary~~and toliabilities ~~improve~~of ~~the~~$5,045,000 ~~performance~~and of$(13,165,000) (which ~~our~~included ~~panel-mounted~~noncash ~~IMS-based~~expenses ~~product~~and ~~for our~~gains ~~existing~~in ~~customer~~the ~~and~~net ~~any~~amount ~~new~~of ~~opportunities~~approximately ~~that~~a ~~may~~$3,251,000 ~~develop~~expense), respectively.

In Investing activities ~~December 2005,~~provided wecash ~~approved~~of a$1,276,000 ~~development~~and ~~plan with~~used ~~Lucent~~cash ~~that~~of ~~obligated~~$(1,135,000) usfor ~~under~~ the ~~Lucent~~years ~~Agreement.~~ended ~~Under the Lucent Agreement~~April 30, we2008 ~~are~~and ~~attempting~~2007, torespectively. ~~develop~~Cash aprovided ~~next-generation~~by ~~imaging~~investing ~~and~~activities ~~night~~for ~~vision~~the ~~surveillance~~year ~~technology.~~ended ~~In October~~April ~~2006~~30, we2008, ~~acquired~~consisted aof ~~90%~~$805,000 ~~interest~~(net inof ~~SenseIt~~selling incosts ~~exchange for~~of ~~assigning~~$45,000) toreceived ~~SenseIt~~for ~~all~~the sale of our ~~interest~~life ~~under~~sciences ~~the~~business ~~Lucent~~in ~~Agreement~~June ~~(such assignment~~2007, ~~was~~$527,000 ~~approved~~from bythe ~~Lucent)~~sale ~~and~~of weour ~~also~~30% interest ~~entered~~in ~~into~~IUT aand ~~new~~$60,000 ~~statement~~from ~~of work~~the ~~with~~assignment ~~Lucent~~of ~~(which~~our ~~was~~silicon-28 ~~also~~licenses ~~transferred~~partially tooffset ~~SenseIt).~~by ~~SenseIt~~$116,000 ~~will coordinate~~expended ~~the~~on ~~development~~additions of ~~the~~property ~~next-generation~~and ~~infrared~~equipment. ~~imaging~~Cash ~~technology and~~used ~~work~~in ~~towards~~investing ~~commercialization~~activities for ofthe ~~any~~year ~~resultant~~ended ~~products.~~April 30, ~~The development~~2007, ~~plan~~consisted ~~contemplates~~of ~~for~~$1,707,000 ~~prototype~~expended ~~products~~on toadditions beof ~~available~~property ~~during calendar~~and ~~year~~equipment ~~2007~~and $100,000 ~~although~~expended weon ~~can~~a ~~provide~~minority noinvestment ~~assurance~~in ~~that~~ a ~~commercially attractive~~business ~~product~~(which ~~will~~was ~~ultimately~~subsequently written beoff ~~available~~in its entirety).

~~For~~ Financing activities ~~the~~used ~~year~~cash ~~ended~~of ~~April 30~~$(1, ~~2007~~211,000) ~~we recognized research~~ and ~~development~~provided ~~expense~~cash ~~related~~of to$10,922,000 for the ~~Lucent~~years ~~Agreement~~ended ~~of $3~~April 30,~~000,000 as~~ ~~compared~~2008 toand $22007,~~500,000~~ ~~recognized~~respectively. ~~for~~Cash used in financing activities for the year ended April 30, ~~2006. Under~~2008, ~~the~~consisted ~~Lucent~~of ~~agreement,~~payments ~~SenseIt~~of ~~must~~principal ~~provide~~on ~~funding~~capital leases and notes payable in the amounts of $1538,000 and $673,000, ~~per quarter~~respectively. inCash ~~development~~provided ~~funding~~by financing activities for the ~~next~~year ~~five~~ended ~~quarters~~April 30, ~~(in~~2007 ~~addition~~resulted ~~to funding~~primarily from the ~~payment~~issuance ~~not~~of ~~made~~the ~~that~~13% ~~was~~Debentures, ~~due~~which onyielded orcumulative ~~before~~net ~~July~~ proceeds of $16,930,000 ~~2007)~~offset ~~or risk~~primarily ~~losing~~by ~~its~~principal payments ~~rights~~on ~~under~~borrowings ~~the~~of ~~Lucent Agreement~~$5,889,000. ~~Although the funding is an obligation~~

39 Additional Liquidity Considerations

of As ~~SenseIt, we have a right~~ of ~~first refusal to provide SenseIt the necessary funding by purchasing additional shares of SenseIt Series~~April ~~A Common Stock at $10 per share. We believe that our interest in SenseIt could be significantly diluted were SenseIt to seek funding from third parties at this stage. Also under the Lucent Agreement~~30, ~~SenseIt has the right to terminate the development project for any reason from time-to-time~~2008, ~~so long as termination is prior to the first commercial sale of a licensed product. As such, assuming SenseIt continues with the development program,~~ we ~~expect~~had ~~our~~no ~~quarterly~~commitments ~~research~~outstanding ~~and development expense~~ for ~~this~~capital ~~purpose to remain elevated~~expenditures. IfFurther, wedue ~~are unable~~ to ~~provide SenseIt with~~ the ~~funds~~ ~~necessary~~cancellation toof ~~make~~ the ~~quarterly~~ Lucent ~~payments due to Lucent~~ Agreement, ~~SenseIt will~~we behave ~~required~~no tofurther ~~seek~~commitments ~~funding~~under ~~from~~that ~~outside sources~~contract.

We The assumptions ~~believe~~underlying ~~that~~ the ~~development~~ ~~and~~above ~~introduction~~statements ofinclude, ~~new~~among ~~product~~other applications is critical to our future success. While we expect to continue to incur significant research and development expenses over time (assuming sufficient cash remains available and we are able to procure necessary materials and outside services)things, ~~we anticipate~~ that ~~expenditures~~there ~~on research and development with IUT~~ will ~~decrease.~~be ~~However, research~~no ~~and~~material ~~development~~adverse ~~expenses~~developments ~~are~~in ~~expected to increase at SenseIt as work continues under~~ the ~~Lucent~~business ~~Agreement~~or ~~and~~market in ~~ancillary~~general ~~efforts~~(see ~~to produce a marketable infrared imaging product~~Item 1. ~~It is likely that research and development~~ ~~expenditures~~"Business" ~~will~~in ~~continue~~this toForm 10-K ~~vary~~for asdiscussion aof ~~percentage~~current ofmarket ~~revenues~~conditions ~~because~~impacting ofour ~~the timing~~operations). ~~and~~There ~~amount~~can ofbe ~~future~~no ~~revenues~~assurances ~~and~~however ~~the~~that ~~timing~~those ofassumed ~~research~~events ~~and~~will ~~development expenses~~occur. ~~Except~~If ~~for work being performed on~~ our ~~semiconductor products at our~~ ~~facilities~~plans inare ~~Vancouver,~~not ~~Washington~~achieved, wethere ~~operate~~may nobe ~~other~~further ~~facilities~~negative ofeffects ~~our~~on ~~own for~~the ~~research~~results ~~and~~of ~~development.~~operations ~~Significantly all other research~~ and ~~development work~~cash ~~is performed by outside entities~~flows, ~~none of~~ which wecould ~~control (although we~~ have ana ~~ownership~~material ~~position~~adverse ineffect ~~IUT of 30%). Although we expend significant resources~~ on ~~research and development, we cannot offer any assurance that~~ our ~~current~~ orfinancial ~~future lines of business or products resulting from our research and development efforts will be profitable or generate significant revenues~~position.

~~Operating~~ ~~Income (Loss)~~Contractual Cash Obligations

~~Our operating~~ Not ~~income~~applicable. ~~(loss) for the years ended April 30, 2007, 2006 and 2005 is reflected in the following table:~~

	Year Ended April 30,
	2007			2006			2005
Homeland security products	$	(6,664,000	)	$	(5,989,000	)	$	(1,728,000	)
Security services	(425,000		)	(24,000		)	—
Semiconductor products and services	326,000			(5,151,000		)	(6,484,000		)
Reconciling amounts(1)	(8,785,000		)	(4,499,000		)	(3,744,000		)
Total	$	(15,548,000	)	$	(15,663,000	)	$	(11,956,000	)

Off-Balance Sheet Arrangements

~~(1) Reconciling~~ From ~~amounts~~time-to-time, ~~for the~~we ~~operating~~enter ~~loss~~into ~~information~~off-balance ~~includes~~sheet ~~corporate~~arrangements ~~expenses consisting primarily of corporate salaries~~ and ~~benefits,~~transactions ~~professional~~that ~~and~~can ~~consulting~~give ~~fees, investor~~rise ~~relations~~to ~~costs,~~off-balance ~~warrant~~sheet ~~amendment expense, insurance and directors’ compensation~~obligations. InAs ~~January~~of April ~~2007~~30, ~~we elected~~2008, ~~to discontinue~~ the ~~operation~~off-balance ofsheet ~~our~~arrangements ~~life sciences business~~ and ~~put~~transactions ~~the assets~~into ~~and business up for sale (~~which ~~was sold in June 2007). As a result,~~ we ~~reclassified~~have ~~the~~entered ~~operations~~include ofoperating ~~our~~lease ~~life sciences business as~~agreements ~~discontinued~~and ~~operations.~~a ~~Prior~~performance ~~year~~bond ~~information has been reclassified to conform with the current year presentation.~~

Our homeland security products segment has generated significant operating losses in an effort to develop and commercialize our IMS technology into products that can be used to detect various types of explosives and/or chemical agents and innovative infrared imaging technology. While revenues were minimal for the years ended April 30, 2007, 2006 and 2005, we are hopeful that we will be able to begin to generate more substantial revenue in this segment during our year ending April 30, 2008.37

40Table of Contents

~~Our~~required by ~~security~~a ~~services~~customer ~~segment consists~~ of ~~PPSC,~~our ~~which was~~security ~~acquired~~services ~~in May 2005. For the years ended April 30, 2007 and 2006, this~~ segment ~~delivered revenue of $14,682,000 and $12,814,000, respectively~~. ~~The~~We ~~operating~~do ~~loss~~not ~~for~~believe ~~the~~that ~~year~~these ~~ended~~arrangements ~~April 30,~~are ~~2007,~~reasonably islikely ~~due primarily~~ to anmaterially ~~increase~~affect inliquidity ~~selling,~~or ~~general~~availability ~~and administrative expenses as compared to the comparable period in the prior year. This increase is due to increased marketing spending, a write-off~~ of ~~a single customer’s accounts receivable balance in the amount of approximately $90~~,~~000,~~ ~~the~~or ~~inclusion~~requirements ~~of a $86~~for,~~000~~ ~~non-cash charge related to stock-based compensation expense (due to our~~capital adoption of SFAS 123(R) during the year ended April 30, 2007) and $90,000 in increased rent due to a relocation and incremental investment in personnel to support future revenue growth in both the governmental and commercial marketsresources. ~~Although we continue to pursue selected domestic government contracts, we have taken steps to reduce our spending on sales and marketing in this area.~~

~~During~~ ~~the fourth quarter of the year ended April 30,~~ ~~2007~~ ITEM ~~and the first quarter of the year ending April 30, 2008, we implemented significant cost cutting initiatives that are expected to positively impact the results of PPSC’s operations~~7A. QUANTITATIVE ~~Additionally~~AND weQUALITATIVE ~~initiated plans~~DISCLOSURES toABOUT ~~improve~~MARKET operating margins at PPSC by focusing on customers that are willing to pay for premium security services, where PPSC is able to differentiate itself from its peers. As a result, we have and will continue to exit lower-margin business areas in lieu of premium accounts that prefer higher quality of service. While we believe that these cost cutting initiatives and refocused sales and marketing efforts will enable PPSC to report positive operating income for the year ending April 30, 2008, we can offer no assurance that this will actually occur.RISK

~~Our semiconductor~~ Not products and services segment showed continued operational and financial improvement (due mainly to the realignment of our business to significantly reduce our reliance on low margin small diameter products and focus mainly on higher margin 300-millimeter products and services, wafer thinning and custom wafer products) for the year ended April 30, 2007, recording our third consecutive quarterly operating income for the three months ended April 30, 2007Applicable. ~~Additionally, the operating income (loss) has generally improved each sequential quarter during the years ended April 30, 2007 and 2006, as reflected in the following table:~~

Three months ended	Semiconductor products and services operating income(loss)
July 31, 2005		$	(2,054,000	)(1)
October 31, 2005		$	(1,420,000	)
January 31, 2006		$	(900,000	)
April 30, 2006		$	(777,000	)
July 31, 2006		$	(199,000	)
October 31, 2006		$	151,000
January 31, 2007		$	88,000
April 30, 2007		$	286,000

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

~~(1) Includes~~ Included anfollowing ~~impairment charge~~the onsignature ~~assets~~page ~~held for sale of approximately $400,000~~hereof.

~~While~~ ~~we reported~~ ~~significant~~ ITEM revenue and operating income growth in our semiconductor operations for the year ended April 30, 2007, many of our top semiconductor customers have experienced weakened business results in recent quarters9. CHANGES InIN ~~addition, some~~AND ~~customers~~DISAGREEMENTS ~~have~~WITH ~~reported~~ACCOUNTANTS ~~inventory~~ON ~~buildup~~ACCOUNTING inAND ~~reclaim~~FINANCIAL and/or test products. As a result of these two factors, we have recently seen a slowdown in orders of reclaim and test materials, which has had a negative impact on our operations. The slowdown will have a significant impact on our results of operations and cash flows for our quarter ending July 31, 2007, which we expect to reflect a significant reduction in revenue (as compared to the previous sequential quarter) and the reporting of an operating loss for that segment. In order to minimize the effect of the slowdown, we have implemented many cost cutting procedures and will continue to do so. It is unclear as to when the market will rebound but we believe that this is a relatively short-term phenomenon and are hopeful that we DISCLOSURE

41 Not applicable.

~~will begin~~ ~~to see a recovery during our quarter ending October 31, 2007. We~~ ~~continue~~ ITEM ~~to monitor the situation closely and while we believe that we will see improving financial results in this operating segment~~ 9A(~~over the long-term~~T),. CONTROLS ~~we cannot~~AND ~~offer any assurance that we will be able to regain or sustain operating profitability in future periods~~PROCEDURES.

~~Other~~ ~~income (expense),~~Disclosure ~~net~~Controls and Procedures

~~Other income~~ As required by Rule 13a-15 under the Securities Exchange Act of 1934 (~~expense~~the "1934 Act"), ~~net~~as ~~for~~of ~~fiscal~~April 30, ~~years 2007~~2008, we ~~2006~~carried out an evaluation of the effectiveness of the design and ~~2005~~operation onof ~~both~~our adisclosure ~~dollar~~controls and procedures. This evaluation was carried out under the supervision and with the ~~amount~~participation of our Chief Executive Offier (our principal executive officer) and asour aChief ~~percentage~~Financial Officer (our principal financial officer), who concluded, that because of ~~revenues~~the ismaterial ~~reflected~~weakness in our ~~the~~internal ~~following~~control ~~table:~~over financial reporting ("ICFR") described below, our disclosure controls and procedures were not effective as of April 30, 2008.

	Year Ended April 30,
	2007			2006			2005
Dollar amount	$	2,651,000		$	(15,718,000	)	$	(1,068,000	)
Percent of revenues	9.6		%	(84.6		)%	(39.7		)%

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

~~For~~ ~~the~~Internal ~~year~~Control ~~ended~~Over April 30, 2007, other income (expense), net consists primarily of gains on derivative instruments of $5,905,000 related to the change in the fair value and reclassification of certain derivative liabilities (see Note 9 in our consolidated financial statements located at Item 8. “Financial Statements and Supplementary Data” for additional discussion) and the extinguishment of debt of $227,000 partially offset by interest expense of $3,320,000 and the amortization of debt issuance costs of $232,000. Included in interest expense for fiscal year 2007 are non-cash charges of $3,129,000 related primarily to the amortization of the discount and the accrual of interest on the 13% Debentures.Reporting

~~For~~ Our ~~the~~management ~~year~~is ~~ended~~also ~~April 30,~~responsible ~~2006,~~for ~~other~~establishing ~~income (expense),~~ICFR ~~net~~as ~~includes~~defined ~~debt~~in ~~conversion~~Rules 13a-15(f) ~~expense, interest expense~~ and ~~amortization~~ ~~of debt issuance costs related to our 8% Debentures issued in February 2005.~~15(d)-15(f) ~~Included~~under in the ~~amount~~1934 ~~for~~Act. ~~the~~Our ~~year~~ICFR ~~ended April 30, 2006,~~ are ~~non-cash interest~~intended ~~charges~~to ofbe ~~$5,662,000~~designed ~~related~~ to ~~various~~provide ~~transactions~~reasonable ~~associated~~assurance ~~with the~~regarding ~~8% Debentures, a non-cash charge of $7,227,000 related to~~ the ~~March 2006 conversion~~reliability of ~~our~~financial 8%reporting ~~Debentures~~ and athe ~~non-cash~~preparation ~~charge for amortization~~ of ~~debt issuance~~financial ~~costs~~statements ~~of $1,260,000. Additionally, included in other expense~~ for ~~year~~external ~~ended~~purposes ~~April 30, 2006, is the nominal interest expense on the 8% Debentures, of which $949,000 was paid~~ in ~~common~~accordance ~~stock~~with ~~and~~U.S. ~~$759,000~~generally ~~was~~accepted ~~paid~~accounting ~~in cash~~principles. ~~Lastly,~~Our ~~interest~~ICFR ~~income~~are inexpected ~~the~~to ~~amount~~include ofthose ~~$285,000~~policies ~~was~~and ~~earned~~procedures that ~~partially~~ ~~offset~~management ~~the~~believes ~~cash~~are ~~and~~necessary that: ~~non-cash interest expense.~~

(i): pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Isonics;
(ii): provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Isonics are being made only in accordance with authorizations of management and our directors; and
(iii): provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Isonics' assets that could have a material effect on the financial statements.

For the year ended April 30, 2005, other income (expense), net includes interest income and expense and the amortization of debt issuance costs. Included for the year ended April 30, 2005 is $993,000 of interest expense associated primarily with our 8% Debentures and $166,000 related to the amortization of debt issuance costs associated with our 8% Debentures partially offset by $91,000 in interest and other income.38

WeTable ~~expect that our other expenses will be volatile based on the future timing~~ of repayment , if ever, of the remaining 13% Debentures (see the Liquidity and Capital Resources discussion below) and the fluctuations in fair value of and classification of the instruments underlying our derivative liabilities.Contents

~~Income~~ Management recognizes ~~Taxes~~that there are inherent limitations in the effectiveness of any system of internal control, and accordingly, even effective internal control can provide only reasonable assurance with respect of financial statement preparation and may not prevent or detect misstatements. In addition, effective internal control at a point in time may become ineffective in future periods because of changes in conditions or due to deterioration in the degree of compliance with our established policies and procedures.

~~We currently operate at a~~ As ~~loss~~of ~~and~~April 30, ~~expect~~2008, tomanagement ~~operate~~assessed ~~at a loss until~~ the ~~products~~effectiveness ~~currently~~of ~~under development~~our ~~begin~~internal tocontrol ~~generate~~over ~~sufficient~~financial ~~revenue.~~reporting ~~The~~(ICFR) ~~losses~~based ~~incurred~~on in the ~~current~~ ~~year~~criteria ~~are~~for ~~not~~effective ~~expected~~ICFR toestablished ~~generate~~in Internal anControl—Integrated ~~income~~Framework ~~tax~~issued ~~benefit~~by ~~because of~~ the ~~uncertainty~~ ofCommittee ~~the realization~~ of ~~the~~Sponsoring ~~deferred~~Organizations tax asset. As a result, we have provided a valuation allowance against our net deferred tax asset because, based on available evidence including our continued operating losses, it is more likely than not, that all of the ~~deferred~~Treadway ~~tax~~Commission ~~assets will not be realized. Additionally, due to certain “change in ownership” rules~~ (~~as defined by the IRS~~COSO), ~~utilization~~and ofSEC ~~our~~guidance ~~federal~~on ~~net~~conducting ~~operating~~such ~~losses~~assessments ~~may~~by besmaller reporting ~~subject~~companies ~~to certain~~and ~~annual~~non-accelerated ~~limitations~~filers.

42 Based on that assessment, management concluded that, during the period covered by this report, such internal controls and procedures were not effective as of April 30, 2008 and that material weaknesses in ICFR existed as more fully described below.

~~Minority~~ As defined ~~Interest~~by Auditing Standard No. 5, "An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements and Related Independence inRule ~~Operations~~and Conforming Amendments," established by the Public Company Accounting Oversight Board ("PCAOB"), a material weakness is a deficiency or combination of ~~Consolidated~~deficiencies ~~Subsidiary~~that results more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. In connection with the assessment described above, management identified the following control deficiencies that represent material weaknesses as of April 30, 2008:

(1): Lack of an independent audit committee. Although we have had an independent audit committee in the past, since December 2007 we have not had an independent audit committee. We have never named an audit committee financial expert. It is our intension to establish an audit committee of the board and obtain a financial expert on our audit committee when we have sufficient capital resources and working capital to attract qualified independent directors and to maintain such a committee.
(2): Inadequate staffing and supervision within our bookkeeping operations. The relatively small number of employees who are responsible for bookkeeping functions prevents us from segregating duties within our internal control system. The inadequate segregation of duties is a weakness because it could lead to the untimely identification and resolution of accounting and disclosure matters or could lead to a failure to perform timely and effective reviews. During the latter portion of the fiscal year ended April 30, 2008, we had only three persons, two of which were executive officers, that performed nearly all aspects of our financial reporting process, including, but not limited to, access to the underlying accounting records and systems, the ability to post and record journal entries and responsibility for the preparation of the financial statements. This provides for a lack of review over the financial reporting process that may result in a failure to detect errors in spreadsheets, calculations, or assumptions used to compile the financial statements and related disclosures as filed with the SEC.
(3): Insufficient number of independent directors. At the present time, our Board of Directors does not consist of a majority of independent directors, a factor that is counter to corporate governance practices as set forth by the rules of various stock exchanges.
(4): Inadequate physical security of certain information technology assets and data. Due to space limitations, certain network equipment is stored in common areas, which are accessible by unauthorized personnel. In addition, offsite backup of data in two of our locations is sporadic. These factors may result in the loss of financial data, which could adversely affect the

~~Minority interest in operations of consolidated subsidiary for the years ended April 30, 2007, 2006 and 2005 is reflected in the following table:~~39

	Year Ended April 30,
	2007			2006				2005
Dollar amount	$	(44,000	)		$	—			$	—
Percent of revenues	(.2		)%		—		%		—		%

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~~The amount of minority~~reliability ~~interest in operations~~ of ~~consolidated~~information ~~subsidiary~~used ~~recorded~~to ~~for~~compile the ~~year~~financial ~~ended~~statements ~~April 30, 2007, relates to our purchase of a 90% interest in SenseIt in October 2006~~ and ~~the~~related ~~subsequent~~disclosures ~~operation~~as offiled ~~the~~with ~~business. The amount is expected to fluctuate in future periods dependent upon~~ the ~~development and, potentially, financing activities of SenseIt in future reporting periods~~SEC.

~~Loss~~ Our management ~~From~~determined that these deficiencies constituted material weaknesses. Due to a lack of financial and personnel resources, we are not able to, and do not intend to, ~~Discontinued~~immediately ~~Operations~~take any action to remediate these material weaknesses. We will not be able to do so until, ~~net~~if ever, we acquire sufficient financing and staff to do so. We will implement further controls as circumstances, cash flow, and working capital permit. Notwithstanding the assessment that our ICFR was not effective and that there were material weaknesses as identified in this report, we believe that our consolidated financial statements contained in our Annual Report on form 10-K for the fiscal year ended April 30, 2008, fairly present our financial position, results of ~~Income~~operations ~~Taxes~~and cash flows for the years covered thereby in all material respects.

~~Loss~~ This ~~from~~Annual ~~discontinued~~Report ~~operations,~~does ~~net~~not include an attestation report of ~~income~~our ~~taxes~~independent ~~for~~registered ~~the~~public ~~years~~accounting ~~ended~~firm ~~April 30,~~regarding internal control over financial reporting. Management's report ~~2007,~~was ~~2006~~not subject ~~and~~to ~~2005~~attestation isby ~~reflected~~our inindependent registered public accounting firm pursuant to temporary rules of the ~~following~~SEC ~~table:~~that permit us to provide only management's report in this Annual Report.

	Year Ended April 30,
	2007			2006			2005
Dollar amount	$	(224,000	)	$	(960,000	)	$	(2,153,000	)
Percent of revenues	(.8		)%	(5.2		)%	(80.0		)%

There were no changes in our internal control over financial reporting during the quarter ended April 30, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In ~~January 2007, we~~ ~~decided~~ ITEM ~~to discontinue operations of our life sciences business and to put the assets and business up for sale (which was sold in June 2007)~~9B. OTHER We decided to sell this business as it no longer fit our long-term strategy and because of deteriorating business conditions in the historical revenue producing products in the segment. Accounting rules required us to treat the operations of the life sciences business as discontinued operations whereby the net financial impact of the operations of the business is combined into a single line item and prior periods are reclassified for this presentation. Revenue for the life sciences business, reported in discontinued operations, was $1,803,000, $5,136,000 and $7,413,000 for the years ended April 30, 2007, 2006 and 2005, respectively.INFORMATION

~~Net~~ Not ~~Loss~~applicable.

~~Net loss for the years ended April 30, 2007, 2006 and 2005 is reflected in the following table:~~40

	Year Ended April 30,
	2007			2006			2005
Dollar amount	$	(13,165,000	)	$	(32,341,000	)	$	(15,177,000	)
Percent of revenues	(47.5		)%	(174.1		)%	(563.8		)%

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We ~~anticipate that~~ ~~consolidated~~ ~~losses will continue until (if ever): (i) revenues from our~~ ~~current~~ PART operations substantially increase or (ii) we generate substantial revenues from products introduced as a result of our research and development projects. Further, the revenue increases must increase faster than any increases in operating and research and development expenses. Additionally, we expect that our consolidated net loss will continue during at least the short term as we continue to work through the downturn in the semiconductor market and as we continue our marketing and research efforts to expand sales and develop new products in the homeland security business, including the commercialization of the IMS technology and, eventually, the infrared imaging technology based on the Lucent Agreement and the operations of our 90% owned subsidiary, SenseIt. However, we can offer no assurance that the development and commercialization of these technologies will occur.III

43 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

~~Liquidity~~ Identification of Directors and ~~Capital~~ ~~Resources~~Executive Officers

~~Included in~~ The ~~the~~ following table ~~are~~sets ~~consolidated~~forth ~~balance~~the ~~sheet~~names and ~~cash~~ages ~~flow~~of ~~items~~all ~~for~~ of our directors and executive officers, and the ~~years~~positions ~~ended~~held by each such person as of April 30, ~~2007,~~2008. ~~2006~~Each of the directors holds office until the next annual meeting of shareholders and ~~2005:~~until his successor is elected and qualified or until his earlier death, resignation, or removal. Each officer serves at the discretion of the Board of Directors.

	Year Ended
	April 30, 2007				Change			April 30, 2006			Change			April 30, 2005
	(in thousands)
Cash and cash equivalents		$	1,556		$	(30	)	$	1,586		$	(19,012	)	$	20,598
Working capital (deficit)		3,310			9,755			(6,445		)	(24,648		)	18,203
Current convertible debentures, net of discount		—			(10,432		)	10,432			7,407			3,025
Convertible debentures, net of discount and current portion		8,634			8,634			—			(15,040		)	15,040
Total convertible debentures, net of discount		$	8,634		$	(1,798	)	$	10,432		$	(7,633	)	$	18,065
Total convertible debentures, face value outstanding		$	18,000		$	8,025		$	9,975		$	(12,795	)	$	22,770
Net cash used in operating activities		$	(9,817	)	$	5,583		$	(15,400	)	$	(5,680	)	$	(9,720	)
Net cash used in investing activities		(1,135		)	3,303			(4,438		)	(875		)	(3,563		)
Net cash provided by (used in) financing activities		10,922			10,096			826			(29,842		)	30,668
Net (decrease) increase in cash and cash equivalents		$	(30	)	$	18,982		$	(19,012	)	$	(36,397	)	$	17,385

Except for Mr. Toffales, as described below, there is no arrangement or understanding between any of our officers or directors and Isonics Corporation pursuant to which any such person was selected as a director or an officer. However, as described below we have entered into employment agreements with Messrs. Toffales, Sakys and Meadows.

Working Capital

Name		Position

Christopher Toffales	51	Chief Executive Officer and Chairman of the Board
John Sakys(1)	39	President and Chief Operating Officer
Gregory A. Meadows	45	Vice President and Chief Financial Officer
Richard H. Hagman(1, 3)	61	Director
C. Stewart Verdery, Jr.(2)	41	Director
George O'Leary	45	Director

(1): Currently a member of the Audit Committee.
(2): Mr. Verdery resigned as of July 15, 2008.
(3): Currently a member of the Management Development Committee.

~~Our~~ Christopher ~~working~~Toffales ~~capital~~joined us in February 2007 as Chairman of the Board of Directors. Effective in January 2008 Mr. Toffales was $3appointed to serve as our Chief Executive Officer. Mr. Toffales has been President and Director of CTC Aero,~~310~~ LLC,~~000~~ ata ~~April 30~~defense advisory consulting firm, since 2003. From 2004 to 2007, Mr. Toffales served as ~~compared~~a toDirector aof ~~working~~Irvine ~~capital~~Sensors ~~deficit~~Corporation ("Irvine Sensors") of $ Costa Mesa, California. Irvine Sensors (6Nasdaq: IRSN) is involved in the design,~~445~~ development,~~000)~~ atmanufacture and ~~April 30~~sale of miniaturized vision systems and electronic products for defense, ~~2006~~security and commercial applications. ~~This~~From $9January 2004 to February 2007 he served as a Director and Vice Chairman of Communications of Power Industries,~~755~~ Inc. a provider of military and commercial electronic products and its parent CPI International,~~000~~ Inc. ~~increase~~(Nasdaq: inCPII). ~~working~~From 1999 to 2003, ~~capital~~Mr. Toffales ~~for~~was ~~the~~a ~~year~~Senior ~~ended~~Vice ~~April~~President of DRS Technologies, 30Inc., ~~2007~~a supplier of military electronics systems (including infrared imaging systems), isand ~~due~~also toserved as President of DRS Technologies Systems Company, a ~~combination~~subsidiary of DRS Technologies. From 1998 to 1999, Mr. Toffales was Vice President for Business Development of Lockheed Martin Fairchild Systems, an aerospace ~~factors~~and defense firm. Prior to these positions, Mr. Toffales held various officer level positions at Lockheed Martin Corporation and Loral Fairchild Systems, both of which ~~the~~are ~~significant~~aerospace ~~factors~~and ~~are~~defense firms. ~~set~~Mr. Toffales ~~out~~holds ~~below:~~a B.S. in Electrical Engineering from City College of New York.

~~Factors~~ In February 2007, we entered into an employment agreement with Mr. Toffales pursuant to which he agreed to serve as the Chairman of our Board of Directors. In February 2008 that ~~increased~~employment ~~working~~agreement ~~capital~~was terminated and Mr. Toffales entered into a new employment agreement pursuant to which he now serves as our Chief Executive Officer and Chairman of the Board.

~~· $16,930,000 due to the issuance of the 13% Debentures, which are classified as long-term liabilities;~~41

~~· $5,648,000 due~~Table ~~to a decrease in the current portion~~ of ~~the 8% Debentures related to principal payments made in shares of our common stock (see discussion of 8% Debenture repayment below);~~Contents

~~· cash~~ John ofSakys ~~$112~~joined us in May 2001 as Controller. He was promoted to Vice President,~~000~~ ~~received~~Chief Financial Officer effective September 3, in2001. ~~excess~~In February 2007 Mr. Sakys ceased serving as our Chief Financial Officer as he was appointed to serve as our Chief Executive Officer, an office he held until January 10, 2008. Currently, Mr. Sakys serves as our President, Chief Operating Officer and as a Director. From September 2000 to April 2001 Mr. Sakys was Controller of ~~carrying~~AuraServ ~~amount~~Communications. ~~upon~~From ~~the~~July 1998 ~~sale~~to September 2000 Mr. Sakys was Director of ~~assets~~Financial ~~held~~Reporting for ~~sale~~Media One, Inc. From December 1994 to July 1998 Mr. Sakys was an audit manager at ~~April~~Ernst and Young ~~30,~~LLP. Mr. Sakys received his Bachelors degree in Business Economics with an emphasis in accounting from the University of California at Santa Barbara and is a Certified Public ~~2007~~Accountant.

~~Factors~~ Gregory ~~which~~A. Meadows joined us in March 2004 as our Corporate Controller. Effective February 14, 2007 Mr. Meadows was promoted ~~decreased~~to Vice President of Business Operations. Then on January 11, 2008 Mr. Meadows was appointed to serve as our Vice President and Chief Financial Officer. Prior to working ~~capital~~for Isonics, Mr. Meadows served as Treasurer of Sage Telecommunications for two years. Prior to working with Sage Telecommunications, Mr. Meadows served as the Controller of the construction division of Western Integrated Networks for two years. Mr. Meadows holds a bachelor of science degree from Colorado State University and is a Certified Public Accountant.

~~· $9~~ Richard H. Hagman,~~893~~ Ph.D.,~~000~~ has served as a Director and a Member of our Audit Committee since July 2005. From 2001 to the present, and from 1994 through 1998, Dr. Hagman has been the owner of ~~cash~~R.H. ~~consumed~~Hagman & ~~directly~~Company, ina ~~operating~~company ~~activities~~that ~~(calculated~~provides asmanagement $9consulting,~~817~~ CEO and senior management coaching,~~000~~ investment banking (M&A), turnarounds, negotiations and mediation, and capital sourcing services to businesses in a wide variety of industries. Dr. Hagman has more than 20 years of corporate management and ~~cash~~top-tier ~~used~~executive experience in ~~operating~~several ~~activities,~~Fortune ~~increased~~500 bycompanies. ~~$76~~He was Chairman and CEO of WENR Corp.,~~000~~ and served as Vice President and Corporate Officer of Cyprus Amax Minerals Co. Dr. Hagman also held senior investment and government affairs positions for such companies as Amoco Corp. He has also served as Administrative Director of Graduate Studies and Lecturer at the University ~~cash~~of ~~impact~~Chicago; Assistant Dean for Undergraduate Curriculum at Northwestern University, and as Rapporteur for the Fellows' Meetings at the Adlai Stevenson Institute of ~~changes~~International Affairs. Dr. Hagman has received masters and doctorate degrees from The University of Chicago, and completed his post-doctoral studies at The University of Chicago working specifically in management ~~other~~theory, ~~current~~organizational ~~assets~~theory orand ~~liabilities~~labor ~~included~~relations. ~~therein);~~

~~· $1~~ C. Stewart Verdery,~~707~~ Jr. served as a Director since August 2005 until his resignation in July 2008. Mr. Verdery is a partner and founder of the consulting firm of Monument Policy Group,~~000~~ LLC, following over a decade of high-level positions in the Executive Branch, the Congress, and the private sector. He also serves as an Adjunct Fellow at the Center for Strategic and International Studies. Nominated by President Bush and confirmed by the U.S. Senate in 2003 as Assistant Secretary for Homeland Security, he led DHS efforts to implement policies related to: ~~purchases~~immigration, ofvisas, ~~fixed~~and ~~assets~~travel facilitation; cargo security and international trade; transportation security; and counter-narcotics and other law enforcement priorities. Mr. Verdery frequently represented DHS in hearings before numerous Congressional committees, worked extensively with foreign governments on security matters, and made numerous speeches regarding homeland security, travel facilitation, and international trade issues. Prior to his service at DHS, he served as General Counsel to U.S. Senate Assistant Majority Leader Don Nickles from 1998 until 2002, handled lead staff duties for the Senate Republican High Tech Task Force, and served as counsel to the Senate Judiciary Committee and the Senate Committee on Rules and Administration. In addition to his government service, Verdery was the Senior Legislative Counsel for the government affairs and public policy office representing Vivendi Universal and was also an associate at the Washington office of the law firm Baker & Hostetler, concentrating on antitrust and litigation. He is a graduate from Williams College and the University of Virginia School of Law.

~~· approximately $325~~ George O'Leary has served as a Director since March,~~000~~ ~~representing~~2008. ~~the~~Mr. O'Leary ~~current~~is ~~portion~~on the Board of ~~capital~~Directors ~~lease~~of ~~entered~~NeoGenomics ~~into~~(OTCBB: ~~during~~NGNM), ~~the~~NeoMedia ~~year~~(OTCCBB: ~~ended April 30~~NEOM), ~~2007;~~SmarTire (OTCBB:

~~· $100,000 related to an investment into a business (subsequently written off in its entirety);~~42

44Table of Contents

~~· Net~~SMTR), ~~impact~~NS8 of(OTCBB: $1NSEO),~~021,000~~ ~~related~~and toFutureMedia ~~warrants~~(FMDAY). ~~reclassified~~Mr. O'Leary ~~from~~is ~~equity~~currently tothe ~~derivative~~President of SKS Consulting of South Florida Corp. ("SKS") and he and his team are working with these companies ~~liabilities;~~and others under consulting agreements providing turn-around expertise, as well as helping the implementation and execution of these companies' strategic plans.

~~· approximately~~ Mr. O'Leary ~~$100,000~~started SKS in ~~reclassification~~2000 with the mission to help companies focus on execution of ~~notes~~their ~~payable~~core business while shedding their non-core business assets. From 1996 to 2000, Mr. O'Leary was the Chief Executive Officer and President of Communication Resources Incorporated (CRI), where annual revenues grew from ~~long~~$5 million ~~term~~to $40 million during his tenure. Prior to ~~current~~CRI, Mr. O'Leary was Vice President of Operations of Cablevision Industries, where he ran $125 million of business until it was sold to Time Warner. Mr. O'Leary started his professional career as a Senior Accountant with Peat Marwick and Mitchell. Mr. O'Leary holds a B.B.A. degree in Accounting with honors from Siena College.

~~Our~~ ~~working~~Significant ~~capital decreased~~Employees byand ~~$24,648,000~~Family during the year ended April 30, 2006, from a working capital surplus of $18,203,000 at April 30, 2005, to a working capital deficit of $(6,445,000) at April 30, 2006. The decrease in working capital for the year ended April 30, 2006, is due to a combination of factors, or which the significant factors are set out below:Relationships

~~Factors~~ There ~~which~~are no significant employees who are not also directors or executive officers. There were, and are, no family relationships among ~~increased~~the ~~working~~officers, ~~capital~~directors or any person chosen by Isonics Corporation to become a director or officer.

~~· $560,000 related~~ toInvolvement ~~assets~~in ~~held~~Certain ~~for~~Legal ~~sale that were reclassified to current assets from property and equipment;~~Proceedings

~~· $1~~ Based on information submitted by the directors and executive officers,~~761~~ none of the directors or executive officers is involved in,~~000~~ ~~related~~or has been involved in, legal proceedings during the past five years that are material to ~~proceeds~~ ~~from~~an ~~issuance~~evaluation of ~~common~~the ~~stock~~ability or integrity of any director or executive officer.

~~Factors which~~ None ~~decreased~~of ~~working~~our ~~capital~~directors, executive officers, affiliates or beneficial owners of more than 5% of any class of voting securities is adverse to us or has a material interest adverse to us.

~~· $7,407,000 due~~ ~~to an increase in the current portion of the convertible debentures~~ Section 16(~~which are~~a) ~~payable~~Beneficial atOwnership ~~our~~Reporting ~~option in cash or common stock, assuming all contractual requirements for payment in common stock are met—see discussion of convertible debenture repayment below);~~Compliance

~~· $14,200,000~~ Section 16(a) of ~~cash~~the ~~consumed~~Securities ~~directly~~Exchange inAct ~~operating~~of ~~activities~~1934 (~~calculated~~the as"1934 ~~$15~~Act") requires our directors,~~400,000~~ ofexecutive officers and persons who ~~cash~~own ~~used~~more inthan ~~operating~~ten ~~activities,~~percent ~~netted~~of ~~down~~a byregistered ~~$1,200,000~~class of our equity securities, to file with the ~~cash~~SEC ~~impact~~ initial reports of ownership and reports of changes in ownership of common stock and other ~~current~~equity securities ~~assets~~of orIsonics. ~~liabilities~~Officers, ~~included~~directors ~~therein~~and greater than ten percent shareholders are required by SEC regulation to furnish us with copies of all Section 16(a); forms they file.

~~· $2~~ To our knowledge,~~500~~ based upon a review of the copies of such reports furnished to us and based upon written representations that no other reports were required,~~000~~ all Section 16(a) offiling ~~cash~~requirements ~~paid~~applicable to our officers, directors and greater than ten percent beneficial owners were complied with during the fiscal year ended April 30, 2008, except as ~~part~~follows: upon his appointment to our Board of Directors Mr. O'Leary did not timely file a Form 3. YA Global , the ~~acquisition~~holder of ~~PPSC;~~our 13% Debentures and the Term Notes, has taken the position that, because provisions within the 13% Debentures and Term Notes prevent it from converting their debentures into shares of such stock at any time when the results of the conversion would result in ownership of more than 4.99% of our outstanding common stock, YA Global is not subject to the reporting requirements of Section 16(a). See "Security Ownership of Certain Beneficial Holders and Management" below.

~~· $336,000 of~~ ~~cash~~Code ~~paid~~of ~~to purchase additional equity in IUT;~~Ethics

~~· approximately~~ On January 27, 2004, our Board of Directors adopted a code of ethics that applies to all of our officers and employees, ~~$785~~including our principal executive officer,~~000~~ inprincipal ~~reclassification~~financial officer and principal accounting officer. Our Code of ~~notes~~Ethics ~~payable~~establishes ~~from~~standards ~~long~~and ~~term~~guidelines to ~~current;~~assist our directors,

~~· $1,634,000 expended on purchases of fixed assets.~~43

AsTable ~~a result~~ of our fund raising activities during the year ended April 30, 2007, other anticipated cash flows and certain cost-saving measures we have instituted, we believe we have sufficient working capital to finance our anticipated operations and projected negative cash flow into our quarter ending January 31, 2008.Contents

~~We have satisfied our~~officers, ~~working~~and ~~capital~~employees ~~requirements~~in ~~primarily~~complying ~~through~~with ~~financing~~both ~~activities~~Isonics' incorporate ~~the past,~~policies ~~including~~and ~~the~~with ~~issuance of~~ the 8%law ~~Debentures~~and inis ~~February 2005~~posted ~~and~~at ~~the 13%~~our ~~Debentures~~website: inwww.isonics.com. ~~May,~~Upon ~~June and~~request ~~November 2006~~Isonics ~~and~~will ~~April 2007. During~~provide ~~our~~any ~~year~~person, ~~ended~~free ~~April 30,~~of ~~2007~~charge, a wecopy ~~cured~~of ~~several~~our ~~listing deficiencies~~Code ~~with~~of ~~Nasdaq~~Ethics. We ~~may~~Such ~~receive additional~~a ~~deficiency~~request ~~notifications,~~can ~~which,~~be ifmade ~~not~~by ~~cured~~contacting ~~timely,~~our ~~may~~corporate ~~result~~office ~~in our~~at: ~~delisting~~Isonics ~~from~~Corporation, ~~the~~attention ~~Nasdaq~~Corporate ~~Capital~~Secretary, ~~Market.~~5906 ~~Any~~McIntyre ~~such~~Street, ~~delisting~~Golden, ifCO ~~it should occur~~80403, ~~will~~or ~~make~~by calling ~~future~~our ~~financing~~corporate ~~activities~~office ~~significantly~~at ~~more difficult~~(303) 279-7900.

8% ~~Convertible Debentures~~Procedures by which security holders may recommend nominees to the Board of Directors

We ~~repaid~~have ~~our~~not ~~outstanding~~changed 8%our ~~Debentures~~nominating inprocedures ~~full~~ during the past fiscal year ~~ended~~or ~~April~~subsequently. As a result of Mr. ~~30,~~Verdery's resignation ~~2007~~in byJuly ~~issuing~~2008, 1however,~~502,526~~ ~~shares~~we ofdid terminate our ~~common stock~~nominating ~~(amounting~~committee. toAs $4a result,~~970,000~~ inthe ~~nominal~~Board ~~principal~~of Directors now performs the functions of the nominating committee and ~~$112,250~~will indirect ~~interest)~~ and ~~$5,005,000~~oversee inthe process ~~cash~~by which individuals may be nominated to our Board of Directors.

~~Two~~ The functions ~~former~~performed ~~holders~~by the Board of Directors in the 8% ~~Debentures~~place ~~have~~of atthe ~~various~~nominating ~~times~~committee ~~asserted~~include ~~that~~identifying ~~the~~potential ~~issuance~~directors ofand making recommendations as to the ~~6% Debentures~~size, functions ~~constituted~~and acomposition ~~default~~of ~~(due~~the toBoard aand ~~potential~~its ~~variable~~committees. ~~conversion~~In ~~provision contained~~making ~~within~~nominations, ~~the~~our 6%Board ~~Debentures)~~of ~~under the~~Directors 8%will ~~Debentures.~~consider Wecandidates who have ~~contested~~the ~~that~~highest ~~allegation~~personal onand ~~several~~professional ~~bases~~integrity, ~~and~~who ~~will~~have demonstrated ~~defend~~exceptional ~~against~~ability ~~any~~and ~~further~~judgment ~~allegation~~and ofwho ~~default~~shall asbe ~~necessary. Remedies~~most ~~for~~effective, anin ~~event~~conjunction ofwith ~~default~~the ~~include~~other ~~the option~~nominees to ~~accelerate~~the ~~payment~~Board of ~~the~~Directors, ~~full~~in ~~principal~~collectively ~~amount~~serving of the ~~debentures, together~~long-term ~~with~~interests ~~interest~~of ~~and~~the shareholders. ~~other~~

45 The Board of Directors will consider nominees proposed by our shareholders. To recommend a prospective nominee for the Board of Directors's consideration, you may submit the candidate's name by delivering notice in writing to the Board of Directors at isonics@nuvox.net or via first class U.S. mail, at Isonics Corporation, 5906 McIntyre Street, Golden, CO 80403.

~~amounts~~ A shareholder ~~due,~~nomination submitted to the ~~date~~Board of ~~acceleration.~~Directors ~~The~~must ~~principal amount~~include ofat least the ~~debentures~~following ~~shall~~information be(and ~~equal~~can toinclude ~~130%~~such ofother information the ~~then-principal~~person ~~amount~~submitting ofthe recommendation desires to include), and must be submitted to us by the ~~debentures~~date ~~plus~~mentioned ~~all~~in ~~interest~~the ~~and~~most ~~other~~recent ~~amounts~~proxy ~~due~~statement orunder athe ~~conversion~~heading "Proposal From ~~calculation,~~Shareholders" ~~whichever~~as issuch ~~higher.~~date Ifmay ~~they~~be ~~prove~~amended ain ~~default,~~cases wewhere ~~could~~the ~~be liable~~annual ~~for~~meeting anhas ~~amount~~been ofchanged ~~approximately~~as ~~$1,200,000,~~contemplated ~~including~~in ~~accrued~~SEC ~~interest.~~Rule 14a-8(e), Question 5:

(i): The name, address, telephone number, fax number and e-mail address of the person submitting the recommendation;
(ii): The number of shares and description of our voting securities held by the person submitting the nomination and whether such person is holding the shares through a brokerage account (and if so, the name of the broker-dealer) or directly;
(iii): The name, address, telephone number, fax number and e-mail address of the person being recommended to the nominating committee to stand for election at the next annual meeting (the "proposed nominee") together with information regarding such person's education (including degrees obtained and dates), business experience during the past ten years, professional affiliations during the past ten years, and other relevant information.
(iv): Information regarding any family relationships of the proposed nominee as required by Item 401(d) of SEC Regulation S-K.
(v): Information whether the proposed nominee or the person submitting the recommendation has (within the ten years prior to the recommendation) been involved in legal proceedings of the type described in Item 401(f) of SEC Regulation S-K (and if so, provide the information regarding those legal proceedings required by Item 401(f) of Regulation S-K).
(vi): Information regarding the share ownership of the proposed nominee required by Item 403 of Regulation S-K.

~~2006 Convertible Debentures~~44

OnTable ~~May 31, 2006, we completed a private placement by which we issued to an accredited investor the 2006 Debentures in the aggregate principal amount~~ of $16,000,000 (including debentures of $3,000,000 each purchased in June and November 2006) and warrants to purchase a total of 2,000,000 shares of our common stock at exercise prices of $5.00 per share (500,000 warrants), $7.00 per share (750,000 warrants) and $8.00 per share (750,000 warrants) for a period of three years. The 2006 Debentures mature on May 31, 2009. In April 2007, the interest rate was adjusted from 6% to 13% (though the rate decreases periodically down to 7.75% immediately prior to maturity). The accredited investor and an unaffiliated third party provided us services in connection with completing the transaction (which were valued at $825,000) and as a result, we issued 165,000 shares of restricted common stock as compensation. The accredited investor may convert the 2006 Debenture into shares of our common stock at any time at a conversion price of $5.00 per share. The holder may convert the 2006 Debentures into common stock at the lesser of $5.00 or 80% of the average of the two lowest daily volume weighted average prices of our stock during the five trading days immediately preceding the conversion date (the “Market Conversion Price”), subject to certain conversion limitations including, due to an amendment to the 2006 Debentures which was effected in April 2007. Because of the amendment, the holder cannot convert the 2006 Debentures without our written consent until after February 28, 2008, provided however that this limitation will not apply if either the average volume weighted average price (“VWAP”) of the our common stock for five consecutive trading days is $3.00 or greater or an Event of Default has occurred (see Note 9 to the accompanying consolidated financial statements located at Item 8. “Financial Statements and Supplementary Data”). If the holder converts using the Market Conversion Price, the holder is limited to converting no more than $400,000 of the principal or accrued interest on the 6% Debentures into shares of our common stock in any seven calendar day period.Contents

(vii)

Information regarding certain relationships and related party transactions of the proposed nominee as required by Item 404 of Regulation S-K.

(viii)

The signed consent of the proposed nominee in which he or she

a.: consents to being nominated as a director of Isonics Corporation if selected by the nominating committee;
b.: states his or her willingness to serve as a director if elected for compensation not greater than that described in the most recent proxy statement;
c.: states whether the proposed nominee is "independent" as defined by Nasdaq Marketplace Rule 4200(a)(15); and
d.: attests to the accuracy of the information submitted pursuant to paragraphs (i), (ii), (iii), (iv), (v), (vi), and (vii), above.

~~Interest~~ Although the isinformation ~~payable~~may onbe ~~May 31~~submitted by fax, ~~2009~~e-mail, inmail ~~cash~~ or ~~shares~~ ~~of our common stock~~courier, ~~at our option. If we choose to pay accrued interest in shares of our common stock,~~ the ~~number~~Board of ~~shares~~Directors tomust bereceive ~~issued will be calculated as~~ the ~~amount~~proposed ofnominee's ~~interest~~signed ~~due~~consent, ~~divided~~in byoriginal ~~88%~~form, ~~of the volume weighted~~within ~~average~~ten ~~price~~days of ~~our~~making ~~common stock for~~ the ~~five trading days preceding the Maturity Date~~nomination.

~~In February 2007, we entered into a waiver~~ When ~~Agreement with~~ the ~~holder~~information ~~that,~~required ~~among~~above ~~other~~has ~~terms~~been received, ~~waived~~the ~~certain~~Board ~~compliance deficiencies~~of ~~and~~Directors ~~amended~~will ~~certain~~evaluate ~~clauses of~~ the ~~2006~~proposed ~~Debenture~~nominee ~~transaction documents.~~based Inon ~~return for~~ the ~~waivers~~criteria ~~granted~~described ~~and other amendments to the transaction documents~~below, wewith ~~agreed to provide a one-time ratchet to~~ the ~~$7.00 warrant~~principal ~~and~~criteria ~~the $8.00 warrant, each exercisable for 750,000 shares. The~~being ~~one-time ratchet will occur upon~~ the ~~first~~needs ~~conversion by a holder~~ of aIsonics ~~2006 Debenture~~ and the ~~exercise~~qualifications ~~price~~ of ~~the~~such ~~aforementioned~~proposed ~~warrants~~nominee ~~will be automatically adjusted~~ to ~~the~~fulfill ~~average~~those ~~of the two lowest daily VWAP’s of our common stock during the five trading days prior to such conversion (to the extent that the new exercise price is lower than the then existing exercise price)~~needs.

~~Additionally, other~~ The ~~events,~~process ~~as defined in the 2006 Debenture agreement, may also allow the 2006 Debenture holders to declare us in default. Remedies~~ for anevaluating ~~event~~a ofdirector ~~default, include~~nominee ~~the~~is ~~option to accelerate payment of~~ the ~~full~~same ~~principal~~whether ~~amount~~a ofnominee ~~the Debentures,~~is ~~together~~recommended ~~with~~by ~~interest~~a ~~and~~shareholder ~~other~~or ~~amounts~~by ~~due,~~an toexisting ~~the~~officer ~~date of acceleration and Cornell will have the right to request such payment in cash~~ or in ~~shares of our common stock~~director. WeThe ~~are~~Board ~~not obligated to pay liquidated damages for more than a total~~ of ~~365~~Directors, ~~calendar~~acting ~~days.~~in ~~We may elect to pay any liquidated~~the ~~damages~~place ~~in cash or shares~~ of ~~our~~the ~~common~~Nominating ~~stock if registered. Failure to comply with our registration obligations may~~Committee, ~~subsequent~~will: ~~to any grace periods and opportunities to cure, be deemed an event of default.~~

1.: Establish criteria for selection of potential directors, taking into consideration the following attributes which are desirable for a member of our Board of Directors: leadership; independence; interpersonal skills; financial acumen; business experiences; industry knowledge; and diversity of viewpoints. We will periodically assess the criteria to ensure it is consistent with best practices and the goals of Isonics Corporation.
2.: Identify individuals who satisfy the criteria for selection to the Board of Directors and, after consultation with the Chairman of the Board of Directors, make recommendations to the Board of Directors on new candidates for Board of Directors membership.
3.: Receive and evaluate nominations for Board of Directors membership which are recommended by existing directors, corporate officers, or shareholders in accordance with policies set by the Board of Directors, acting in the place of the Nominating Committee and applicable laws.

46 Isonics Corporation has not engaged the services of or paid a fee to any third party or parties to identify or evaluate or assist in identifying or evaluating potential nominees. Neither Isonics Corporation nor the Board of Directors has received a recommended nominee from any shareholder that beneficially own more than 5% of our common stock or group of shareholders that beneficially own more than 5% of our common stock.

~~April 2007 Convertible~~ ~~Debenture~~Identification of Audit Committee

In We ~~April 2007,~~have ~~we completed~~ a ~~private~~separately-designated ~~placement by~~standing ~~which~~audit we issued, to the same accredited investor who holds the 2006 Debentures, the April 2007 Debenture in the principal amount of $2,000,000 and warrants to purchase 250,000 shares of our common stock at exercise prices of $5committee.00 ~~per share for a period of three years.~~ The ~~April 2007~~following ~~Debenture~~persons ~~matures~~currently serve on ~~May 30, 2009 and bears interest at 13% per annum. The accredited investor, to which we paid fees of $175,000 upon closing, may convert the April 2007 Debenture into shares of~~ our ~~common~~Audit ~~stock~~Committee: atRichard ~~any time at a conversion price of $5~~H.~~00 per share. The~~ ~~holder~~Hagman may convert the April 2007 Debenture into common stock at the lesser of $5.00 or 80% of the average of the two lowest daily volume weighted average prices of our stock during the five trading days immediately preceding the conversion date (the “Market Conversion Price”), subject to certain conversion limitations, including without our written consent until after February 28, 2008, provided however that this limitation will not apply if either the average VWAPs of the our common stock for five consecutive trading days is $3.00 or greater or an Event of Default has occurred (see Note 9 to the accompanying consolidated financial statements located at Item 8. “Financial Statements and ~~Supplementary Data”). Both~~John ~~the~~Sakys ~~April 2007 Debenture~~currently ~~and~~serve ~~the~~on related warrants bear a one-time ratchet to the conversion or exercise price, respectively. The one-time ratchet will occur upon the first conversion by a holder of a 2006 Debenture or April 2007 Debenture and the conversion or exercise price, respectively, will be automatically adjusted to the average of the two lowest daily VWAP’s of our ~~common~~Audit ~~stock during the five trading days prior to such conversion (to the extent that the new exercise price is lower than the then existing exercise price)~~Committee.

Interest is payable on May 31, 2009, in cash or shares of our common stock, at our option. If we choose to pay accrued interest in shares of our common stock, the number of shares to be issued will be calculated as the amount of interest due divided by 88% of the volume weighted average price of our common stock for the five trading days preceding the Maturity Date.45

~~The~~Table ~~April 2007 Debenture includes certain conditions, which would constitute an event~~ of ~~default~~ under the agreement. Remedies for an event of default include the option to accelerate payment of the full principal amount of the debentures, together with interest and other amounts due, to the date of acceleration. The principal amount of the debentures shall be equal to 130% of the then-principal amount of the debentures plus all interest and other amounts due or a conversion calculation, whichever is higher.Contents

~~Cash~~ ~~Flows~~Audit Committee Financial Expert

As We ofhave ~~April 30,~~not ~~2007,~~named wean ~~had~~"audit ~~$1,556,000~~committee offinancial ~~cash and~~expert" ~~cash~~serving ~~equivalents,~~on aour ~~decrease~~Audit ofCommittee. ~~$30,000~~Our asAudit ~~compared~~Committee toconsists ~~$1,586,000~~of attwo ~~April 30~~Directors, ~~2006.~~both ~~The balance~~ of ~~cash~~whom ~~and~~are ~~cash~~financially ~~equivalents at April 30~~literate, ~~2006,~~have ~~was $19,012,000~~experience ~~decreased~~with ~~from~~public ~~the balance of $20~~companies,~~598,000~~ atand ~~April 30,~~are ~~2005.~~knowledgeable ~~Our principal~~about ~~source~~our ofbusiness ~~funding~~and ~~for~~financial ~~the~~position. ~~year~~Due ~~ended~~to ~~April 30, 2007 was from~~ the ~~issuance~~ nature of ~~the~~our ~~13% Debentures for which we received cumulative net proceeds of $16~~operations,~~930,000.~~ ~~Our~~our ~~principal~~Board ~~source~~ of ~~funding for the year ended April 30,~~ ~~2006~~Directors ~~was~~does ~~from~~not ~~cash~~believe ~~and~~that ~~cash~~it ~~equivalents~~needs ~~on hand at the start of the period related~~ to ~~the~~name ~~issuance~~an ofaudit 8%committee ~~Debentures~~financial ~~completed~~expert inat ~~February 2005 whereby~~this ~~we received net proceeds of $21,340,000~~time.

~~Cash~~ ~~used~~Management inDevelopment operating activities of $(9,817,000), $(15,400,000) and $(9,720,000) for the years ended April 30, 2007, 2006 and 2005, respectively, was primarily the result of net losses of $(13,165,000) (which included noncash expenses and gains in the net amount of approximately a $3,251,000 expense), $(32,341,000) (which included noncash expenses and gains in the aggregate amount of approximately a $18,125,000 expense) and $(15,177,000) (which included noncash expenses of approximately a $3,481,000), respectively.Committee

~~Investing~~ Isonics ~~activities~~formed ~~used cash of $(1,135,000), $(4,438,000) and $(3,563,000) for~~ the ~~years~~Management ~~ended~~Development ~~April 30,~~Committee ~~2007,~~to ~~2006~~provide ~~and 2005,~~a ~~respectively.~~mechanism ~~Cash~~by ~~used~~which inmembers ~~investing~~of ~~activities~~the ~~for~~Board ~~the~~of ~~year~~Directors ~~ended~~can ~~April 30,~~provide ~~2007,~~direct ~~consisted~~assistance ofto ~~$1,707,000~~management ~~expended~~ on ~~additions~~specific ~~of property and equipment and $100~~projects,~~000~~ ~~expended~~as onrequested aby ~~minority investment in a business (which was subsequently written off in its entirety)~~management. ~~Cash used in~~

47 ITEM 11. EXECUTIVE COMPENSATION

~~investing~~ ~~activities~~Summary ~~for the~~Compensation year ended April 30, 2006 resulted primarily from the purchase of PPSC in May 2005 (which purchase price included a net cash outflow of $2,468,000) as well as purchases of property and equipment of $1,634,000. Cash used in investing activities for the year ended April 30, 2005 resulted primarily from the purchase of property and equipment of $3,514,000.Table

~~Financing~~ The ~~activities provided~~following ~~cash~~table ofsets ~~$10,922,000,~~forth ~~$826,000~~information ~~and~~regarding ~~$30,668,000~~compensation ~~for~~paid to the ~~years~~Chief ~~ended~~Executive ~~April 30, 2007,~~Officer ~~2006~~ and ~~2005, respectively. Cash provided by financing activities for~~ the ~~year~~other ~~ended~~principal ~~April 30, 2007 resulted primarily from the issuance of the~~officers ~~13% Debentures, which yielded cumulative net proceeds~~ of ~~$16,930,000~~Isonics ~~offset primarily~~Corporation ~~by principal payments on borrowings of $5,889,000. Cash provided by financing activities~~ for the ~~year~~two years ended April 30, ~~2006,~~2008. ~~resulted~~No ~~primarily from~~other ~~the~~executive ~~exercise~~officer ofserving ~~common~~as ~~stock options and warrants in the amount~~ of ~~$1,723,000~~ offset primarily by debt repayments of $790,000 and dividend payments on our outstanding Series E Convertible Preferred Stock in the amount of $101,000. Cash provided by financing activities for the year ended April 30, ~~2005,~~ ~~resulted~~2008 ~~primarily~~earned ~~from~~salary ~~the~~and ~~issuance~~bonus ofcompensation ~~the~~exceeding ~~8% Debentures for net proceeds of~~ $21100,~~340,~~000, ~~the exercise of common stock options and warrants in~~during ~~the~~either ~~amount~~ of ~~$6,819,000~~those ~~and~~years. ~~the~~This ~~issuance~~includes ofall ~~Series E~~compensation ~~Convertible Preferred~~paid ~~Stock~~to ~~for~~each ~~net proceeds of $3,069 offset~~ by ~~repayments~~Isonics ofCorporation ~~borrowings~~ and ~~payment~~any ~~of dividends on the Series E Convertible Preferred Stock~~subsidiary.

~~Additional~~ ~~Liquidity~~ ~~Considerations~~ SUMMARY COMPENSATION TABLE

As a result of the issuance of the 2006 Debentures, anti-dilution provisions associated with the 398,475 common stock warrants issued in the 8% Debenture transaction were triggered whereby we issued an additional 1,593,900 common stock warrants to these holders and reduced the exercise price on all related warrants to $5.00. As a result, as of April 30, 2007, we have 1,992,377 common stock warrants exercisable at $5.00 related to the 8% Debenture transaction. In May 2006, 1,139,250 of these common stock warrants were modified to reduce their anti-dilution provisions to a price-protection provision only. If we were to enter into a financing agreement in the future with an effective price less then $5.00 (or of the holder of our 2006 Debentures and our April 2007 Debentures was to convert a portion of the outstanding debenture at a conversion rate less than $5.00), the remaining 853,125 common stock warrants that have a full anti-dilution provision, would ratchet into a greater number of common stock warrants at a lower exercise price. There were no other changes in the terms or conditions of the warrants.

Name and Principal Position			Salary ($)		Bonus ($)		Stock Awards ($)		Option Awards(1) ($)			Non-Equity Incentive Plan Compensation ($)		Non-Qualified Deferred Plan Compensation ($)		All Other Compensation ($)		Total ($)

Christopher Toffales,		2008	$	325,917	$	65,000	$	—	$	94,721	(2)	$	—	$	—	$	—	$	485,638
	CEO and Chairman of the Board	2007	$	254,692	$	—	$	—	$	—		$	—	$	—	$	—	$	254,692

John Sakys,		2008	$	216,333	$	80,000	$	—	$	71,040	(2)	$	—	$	—	$	—	$	367,373
	COO and President and Chief Operating Officer	2007	$	200,000	$	0	$	0	$	0		$	0	$	0	$	0	$	200,000

Gregory A. Meadows,		2008	$	163,000	$	25,000	$	—	$	47,360	(2)	$	—	$	—	$	—	$	235,360
	CFO, Vice President and Chief Financial Officer	2007	$	128,438	$	13,000	$	0	$	0		$	0	$	0	$	0	$	141,438

(1): This column does not include options that were granted to the executive officers in 2007, but which were terminated when, in January 2008, the Board of Directors determined not to submit the options to our shareholders for approval.
(2): This column includes options granted in April 2008 to the named executive officers (Mr. Toffales—4,000,000 shares; Mr. Sakys—3,000,000 shares; and Mr. Meadows—2,000,000 shares), immediately vesting, exercisable at $0.03 per share for ten years, which options were not subject to shareholder approval. We calculated these amounts in accordance with the provisions of SFAS 123(R) for the year ended April 30, 2008. Compensation expense related to stock options is calculated using the Black-Scholes option-pricing model.

~~As of April~~ Messrs. ~~30,~~Toffales ~~2007,~~and weSakys ~~had~~served ~~commitments outstanding~~on ~~for~~our ~~capital~~Board ~~expenditures~~ of ~~approximately~~Directors ~~$2,450,000,~~during ~~although subsequent~~both toof ~~year-end~~our weyears ~~cancelled~~ended $1April 30,~~700,000~~ of2008 ~~this~~and ~~commitment~~2007 ~~related~~but todid not ~~one~~receive ~~piece~~any ofseparate ~~semiconductor~~compensation ~~equipment.~~for ~~Further,~~serving inon ~~May 2008 we entered into a capital lease in~~ the ~~amount~~Board of ~~approximately $630,000 underlying a capital commitment existing at April 30, 2007~~Directors.

Our other future commitments have increased due to the Lucent Agreement, under which we endeavor to develop a next-generation imaging and night vision surveillance technology and the related investment in SenseIt, in which we acquired a 90% interest in exchange for assigning to SenseIt all of our interest under the Lucent Agreement. We did not make the $1,000,000 payment that was due to Lucent on or before July 16, 2007 as neither entity currently has sufficient working capital to make such payment. As a result of not making this payment (or other payments when due), Lucent may, after certain steps of notification and periods to cure have been exhausted, cancel the Lucent Agreement and all licenses granted to us thereunder or cease working on the project and then assess us a “start-up” fee if funding was to resume.46

OnTable ~~July 26,~~of 2007, we received official notification from Lucent that we failed to make the $1,000,000 payment to Lucent by July 16, 2007 and that in the event such non-payment continues for more than ten days, Lucent may at is discretion, suspend work on the development project. We are currently seeking additional financing to allow us to fund SenseIt so that SenseIt can make its contractual development payments to Lucent. We cannot offer any assurance that we will be able to raise the funds necessary to Contents

48 GRANTS OF PLAN-BASED AWARDS

~~make~~ We ~~all~~granted ofno ~~the~~non-equity ~~required payments~~incentive toplan ~~Lucent,~~awards orduring ~~that~~our ~~the~~year ~~technology~~ended ~~will~~April 30, be2008, ~~developed~~and towe aanticipate ~~point~~no ~~where~~future wepayouts ~~want~~under toequity ~~continue~~incentive toplan ~~make~~awards. ~~such~~We ~~payments~~also ~~when~~granted ~~due.~~no ~~Additionally~~stock awards during our year ended April 30, ~~SenseIt~~2008. ~~may need~~The tofollowing ~~seek~~table ~~outside~~sets ~~financing~~forth toinformation ~~make~~about ~~payments~~the tooptions ~~Lucent~~granted ~~and~~during our year ended April 30, if2008. soIn ~~elected~~each case the options vested immediately, ~~such~~ ~~outside~~are ~~financing~~exercisable ~~would~~for ~~dilute~~ten ~~our~~years ~~ownership~~from ~~interest~~the date of grant (unless the option holder's relationship with Isonics Corporation is terminated, in ~~SenseIt~~which case the option expires three months after such termination).

The assumptions underlying the above statements include, among other things, that there will be no material adverse developments in the business or market in general (see Item 1. “Business” in this Form 10-K for discussion of current market conditions impacting our operations). There can be no assurances however that those assumed events will occur. If our plans are not achieved, there may be further negative effects on the results of operations and cash flows, which could have a material adverse effect on our financial position.

Name			Exercise Price		Grant Date Fair Value of Option Awards

Christopher Toffales	4/18/2008	4,000,000	$	0.03	$	94,721
John Sakys	4/18/2008	3,000,000	$	0.03	$	71,040
Gregory A. Meadows	4/18/2008	2,000,000	$	0.03	$	47,360

~~Contractual~~ ~~Cash Obligations~~OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 2008

The following summarizes our contractual cash obligations and commercial commitments at April 30, 2007, and the effect such obligations are expected to have on liquidity and cash flows in future periods. Included in the table below (in thousands) are purchase obligations under which we have legal obligations for payments in specific years.

	Stock Awards

Name	Number of Securities Underlying Unexercised Options (#) Exercisable		Number of Securities Underlying Unexercised Options (#) Un- exercisable		Option Exercise Price ($)		Option Expiration Date		Number Of Shares or Units of Stock That Have Not Vested (#)		Market Value Of Shares Or Units of Stock That Have Not Vested ($)
(a)	(b)		(c)		(e)		(f)		(g)		(h)
Christopher Toffales		4,000,000		0	$	0.03		04/17/2018		0	$	0
John Sakys		3,000,000		0	$	0.03		04/17/2018		0	$	0
Gregory A. Meadows		2,000,000		0	$	0.03		04/17/2018		0	$	0

	Payments Due by Period(a)
	Total		Less than 1 Year			2-3 Years		4-5 Years			After 5 Years
Long-term debt(b)	$	18,186		$	151	$	18,025		$	10		$	—
Capital lease obligations	1,303			487		816			—			—
Operating lease obligations(c)	1,598			368		545			392			293
Purchase obligations(d)	2,450			2,450		—			—			—
Other long-term obligations(e)	1,345			1,345		—			—			—
Total contractual obligations	$	24,882		$	4,801	$	19,386		$	402		$	293

Option Exercises and Stock Vested

~~(a) Payments~~ None ~~are~~of ~~included in~~our ~~the~~executive ~~period~~officers byexercised ~~which~~any ~~they~~stock ~~are~~options, ~~contractually~~SARs ~~required~~or tosimilar beinstruments ~~made.~~during ~~Actual~~the fiscal year ended April 30, ~~payments~~2008, ~~may~~or besubsequently. ~~made~~None ~~prior~~of our current executive officers serving were granted restricted common stock that was subject to ~~the~~a ~~contractually~~vesting ~~required~~schedule ~~date~~during our fiscal year ended April 30, 2008, or subsequently.

~~(b) Amount~~ ~~consists primarily~~Pension of the principal outstanding on the 13% Debentures, a note to a commercial bank with a remaining principal amount of $134,000 and related interest at 6.9% and a note with a remaining principal amount of $39,000 and related interest at 9.7% (this note was repaid in full in May 2007). Amount does not include interest payments on the 13% Debentures as amounts are payable in common stock (at a discount to the then current market price) or cash at our election, assuming the existence of an effective registration statement. If such amounts were paid in cash, the commitment on the interest repayment would be included in the heading “2-3 years.”Benefits

~~(c) Represents~~ We ~~our commitments~~have ~~associated~~no ~~with~~defined ~~operating~~benefit ~~leases~~plans, ~~and~~supplemental ~~includes~~executive ~~contracts~~retirement ~~that~~plans ~~expire in~~or ~~various~~actuarial ~~fiscal years through 2014~~plans. ~~Payments due reflect minimum lease payments.~~

~~(d) Purchase~~ ~~obligations include~~Nonqualified ~~payments~~Defined ~~for~~Contribution ~~capital~~and ~~equipment,~~Other ~~although~~Deferred aCompensation ~~capital equipment commitment in the amount of approximately $1,700,000 related to a single piece of semiconductor equipment was canceled subsequent to April 30, 2007.~~Plans

~~(e) Amount consists~~ We ofdo ~~the~~not ~~guaranteed~~have ~~portion~~any ofnonqualified ~~two~~defined ~~employment~~contribution ~~agreements~~or ifdeferred ~~such employees~~compensation ~~are terminated without cause as well as the next development payment due to Lucent by SenseIt~~plans.

49 Compensation Discussion and Analysis

~~Off-Balance~~ ~~Sheet Arrangements~~Overview

~~From~~ The ~~time-to-time,~~following ~~we enter~~Compensation ~~into~~Discussion ~~off-balance sheet arrangements~~ and ~~transactions~~Analysis ~~that~~describes ~~can~~the ~~give~~material ~~rise to~~elements ~~off-balance sheet obligations. As~~ of ~~April 30,~~compensation ~~2007,~~for the ~~off-balance sheet~~executive ~~arrangements and transactions into which we have entered include~~officers ~~operating~~identified ~~lease~~in ~~agreements.~~the ~~Subsequent~~Summary toCompensation ~~April 30,~~Table ~~2007,~~contained weelsewhere ~~entered~~in ~~into a~~this ~~performance~~Annual ~~bond required by a customer of our security services segment~~Report. ~~We do not believe that these arrangements are reasonably likely to materially affect liquidity or availability of, or requirements for, capital resources.~~

~~ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~47

WeTable ~~are exposed to market risk related to changes in interest rates, equity security market values, foreign currency rates and the market price~~ of ~~our common stock.~~ Contents

~~Interest~~ ~~Rates~~Oversight of Executive Compensation Program

~~Our~~ As ~~investment~~more ~~portfolio consists~~fully ofdescribed ~~cash~~below, ~~and~~prior ~~cash~~to ~~equivalents~~July ~~(in~~2008 the ~~amount~~Compensation Committee of ~~$1,556,000~~the atBoard ~~April 30, 2007),~~of ~~all~~Directors of(the ~~which~~"Compensation isCommittee") reviewed ~~exposed~~and recommended to ~~interest~~the ~~rate~~full ~~fluctuations.~~Board ~~The~~of ~~primary objective~~Directors ofthe total direct compensation programs for our ~~investments~~executive isofficers, toincluding ~~earn~~the anamed ~~market~~executive ~~rate~~officers. ofAs ~~return~~a ~~while~~result of Mr. Verdery's ~~preserving~~resignation ~~principal~~in ~~and~~July ~~maximizing~~2008, ~~liquidity~~we terminated the Compensation Committee. The ~~interest~~Board ~~earned~~of onDirectors ~~these investments~~now ~~(with~~performs athe ~~blended~~functions ~~yield~~ of ~~0.5%~~the atCompensation ~~April 30~~Committee. Additionally, ~~2007)~~the ~~may~~entire ~~vary~~Board of Directors is ~~based~~responsible onfor ~~fluctuations~~significant inchanges ~~the~~to, ~~prevailing~~or ~~interest~~adoption ~~rate~~of, new employee benefit plans.

~~Equity~~ ~~Securities~~Compensation Program Philosophy and Objectives

We Our dobusiness ~~not~~strategy ~~hold~~is ~~any investments~~to inenhance ~~marketable~~shareholder ~~equity~~value ~~securities.~~through ~~However,~~growth wein ~~hold~~our ~~interests~~assets, ~~in various~~revenues, ~~wholly-~~ and ~~partially-owned~~resulting ~~subsidiaries~~cash asflows ~~described~~from ~~in Item 1~~operations. ~~“Business”~~ ~~above.~~Because ~~These securities are non-marketable. Our investment in these subsidiaries may be impacted by the underlying economic conditions~~ of ~~the entity,~~our ~~including~~working ~~the ability to raise additional~~ capital ~~and the likelihood of our being able to realize our investments through liquidity events such as initial public offerings~~shortages, ~~mergers~~operational ~~or private sales. This investment involves a great deal of market risk~~difficulties, and ~~there~~negative ~~can~~cash beflow noover ~~assurances~~the ~~that~~past aseveral ~~specific company will grow or become successful. Consequently~~years, weour ~~could~~primary ~~lose~~focus ~~all~~has orbeen ~~part of~~to ~~our~~reduce ~~investment. Additionally~~expenses, ~~because~~increase ~~IUT is located in Germany~~efficiency, ~~our investment in the entity (~~and ~~our share of their earnings or losses) may be~~to ~~impacted~~develop bya ~~changes~~plan into ~~foreign~~become ~~currency~~cash-flow ~~rates~~positive. ~~The carrying amount of this investment was $382,000 as of April 30, 2007.~~

~~Derivative~~ During ~~Instruments~~early calendar 2007, we changed our emphasis from research and development activities on a variety of products to a more focused business plan. We also took a number of steps to reduce costs associated with senior management to extend our cash resources to the maximum extent possible. Our compensation program currently has four objectives:

•: To retain and motivate qualified executives whose performance is key to the successful execution of our strategy and the achievement of our corporate goals. Should we need to attract executives in the future, that, too, will be an objective of our compensation program although we are not currently attempting to attract executives.
•: To create a performance-oriented environment that rewards achievement of our short- and long-term strategic goals.
•: To provide an executive compensation structure that is internally equitable based upon the level of responsibility of our executives.
•: To align the interests of our executive officers with those of our shareholders.

~~We do not purchase~~ In ~~derivative~~making ~~instruments~~compensation ondecisions, the ~~open~~Compensation ~~market.~~Committee ~~However~~considered, inand ~~accordance~~the ~~with~~Board ~~current US~~of ~~GAAP,~~Directors wewill ~~have~~consider ~~classified~~various ~~certain~~factors ~~warrants~~such ~~and the embedded conversion feature in our 6% Debentures~~ as ~~derivative~~each ~~instruments~~executive's (amotivation $1level,~~021,000 current~~ ~~liability at April 30~~leadership ability, ~~2007).~~overall ~~Classification~~knowledge asand ~~derivative liabilities~~experience ~~was~~in ~~required~~his ~~because,~~particular ~~for~~segment ~~each~~of ~~instrument~~our business, ~~there~~the iscompetitive ~~(or~~compensation ~~was~~environment atfor ~~the time~~such ofindividual, ~~initial~~that ~~classification)~~person's aunique ~~possibility~~skills ~~that~~and ~~the~~his ~~instrument~~or ~~could~~her beexpected ~~required~~future contribution to bethe ~~settled~~success onof aour ~~net cash basis~~company. We ~~are~~feel ~~required~~that toif ~~mark~~ these ~~instruments~~ toqualities ~~market~~are asrewarded, of the ~~end~~executives ofwill ~~each~~be ~~reporting~~motivated ~~period and~~ to ~~recognize the~~achieve ~~change~~our incorporate ~~fair~~goals ~~value~~and inimplement our ~~condensed~~strategies. ~~consolidated statements~~ Because of ~~operations. Our stock price has been historically volatile and~~ the ~~fair~~volatility ~~values~~ of ~~these instruments~~the ~~are~~market ~~sensitive~~for ~~to changes in~~ our ~~underlying~~common stock, ~~price.~~working Ascapital ~~such~~shortages, ~~the~~ ~~carrying~~and ~~amount~~various ofrestrictions ~~these~~imposed ~~instruments~~by ~~may~~our beprincipal ~~volatile~~creditor ~~from~~YA ~~period~~Global toas ~~period. For~~described ~~the year ended April 30, 2007, we recorded a gain on derivative instruments~~ in ~~the~~more ~~aggregate~~detail ~~amount of $5~~below,~~905,000,~~ ~~such amount representing~~ the ~~change~~ inBoard ~~fair value between the date~~ of ~~the respective initial recording as~~ ~~derivatives~~Directors ~~and~~is ~~the~~not ~~date~~confident ofthat the ~~reclassification~~current ~~back~~compensation ~~to equity or April 30~~package, ~~2007,~~ asother ~~applicable.~~than ~~See~~base ~~Note~~salary, 9is adequate to ~~the~~achieve ~~consolidated financial statements located in Item 8. “Financial Statements and Supplementary Data” for a more detailed discussion of~~ the ~~derivative~~stated ~~instruments~~goals.

50 Elements of Compensation

~~ITEM~~ The 8Board of Directors believes that the compensation environment for qualified professionals in the industries in which we operate is highly competitive, particularly as a result of our current financial condition and the likelihood that other companies will be able to offer more concrete benefits and higher salaries to its senior officers. ~~FINANCIAL~~It ~~STATEMENTS~~also ~~AND~~believes ~~SUPPLEMENTARY~~that ~~DATA~~similar compensation pressure has resulted from increased financial reporting and corporate governance regulatory issues implemented within

~~Included following the signature page hereof.~~48

~~ITEM~~Table 9.of ~~CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE~~Contents

~~Not applicable~~recent years. In order to compete in this environment, our executive officers' compensation has four components:

•: base salary;
•: discretionary cash bonuses, although currently our ability to pay cash bonuses to our officers has been contractually limited by our agreement with YA Global;
•: stock option and performance share awards granted periodically under our incentive plans, although the value to our officers of option and share awards has been limited by the performance and volatility of our shares in the market and the contractual prohibition from including our shares issued pursuant to an incentive plan on a registration statement; and
•: other benefits that, in most cases, are available to all salaried employees.

~~ITEM~~ ~~9A.~~How ~~CONTROLS~~Elements ~~AND~~of ~~PROCEDURES.~~Our Compensation Program are Related to Each Other

~~Our~~ We ~~management,~~view ~~with~~ the ~~participation~~various components of ~~our principal~~compensation ~~executive~~as ~~officer~~related but distinct and ~~our~~emphasize ~~principal~~"pay ~~financial~~for ~~officer~~performance" ~~have~~with ~~evaluated the~~a ~~effectiveness~~significant portion of ~~our~~total ~~disclosure~~compensation ~~controls~~reflecting a risk aspect tied to long- and ~~procedures~~short-term asfinancial ~~required~~and bystrategic goals. Our compensation philosophy is to foster entrepreneurship at all ~~Exchange~~levels ~~Act~~of ~~Rule 13a~~the organization by making long-~~15(b) as~~term ofequity-based ~~April 30~~incentives, ~~2007~~in ~~(the~~particular ~~end~~stock option grants, a significant component of executive compensation. We determine the appropriate ~~period~~level ~~covered~~for byeach ~~this~~compensation ~~report).~~component ~~Based~~based onin ~~that~~part, ~~evaluation~~but not exclusively, on our ~~principal~~view of internal equity and consistency, and other considerations we deem relevant, such as rewarding extraordinary ~~executive~~performance. ~~officer~~Our Board of Directors has not adopted any formal or informal policies or guidelines for allocating compensation between long-term and ~~our~~currently ~~principal~~paid ~~financial~~out ~~officer~~compensation, between cash and non-cash compensation, or among different forms of non-cash compensation. We have ~~concluded~~not ~~that~~adopted ~~these~~any internal pay-equity proposal, but it is the Board of ~~disclosure~~Director's ~~controls~~goal to be fair and ~~procedures~~reasonable ~~are~~to ~~effective~~all asemployees within the limitations of ~~such~~our ~~date~~financial capabilities and working capital requirements.

~~Disclosure~~ Base ~~controls~~Salary. Base ~~and~~salary, ~~procedures~~paid ~~are~~in ~~controls~~cash, ~~and other~~is ~~procedures~~the ~~that~~first ~~are~~element ~~designed~~of compensation to ~~ensure~~our ~~that~~officers. ~~information~~In ~~required~~determining tobase ~~be disclosed~~salaries infor our ~~reports~~key ~~filed~~executive orofficers, ~~submitted~~we ~~under~~will, when ~~the~~cash ~~Securities~~considerations ~~Exchange~~permit, ~~Act is~~set ~~recorded,~~base ~~processed,~~salaries ~~summarized~~at ~~and~~a ~~reported~~level ~~within~~we ~~the~~believe ~~time~~enables ~~periods specified~~us to hire and retain individuals in ~~the~~a ~~Securities~~competitive environment and ~~Exchange~~to ~~Commission’s~~reward ~~rules~~ individual performance and ~~forms.~~contribution ~~Disclosure~~to ~~controls~~our ~~and~~overall ~~procedures~~business ~~include~~goals, ~~without~~while ~~limitation,~~recognizing ~~controls~~that ~~and~~our ~~procedures designed~~senior toexecutive ~~ensure~~officers ~~that~~have ~~information~~additional ~~required~~incentives to beencourage ~~disclosed~~our ingrowth ~~our~~and ~~reports filed~~success ~~under~~and ~~the~~to ~~Exchange~~reflect ~~Act~~competitive ispractices, ~~accumulated~~individual performance and ~~communicated~~the officer's contribution to our ~~management, including~~overall ~~our~~business ~~principal~~goals. ~~executive~~Individual ~~officer~~performance and ~~our~~contribution ~~principal~~to ~~financial~~the ~~officer, as~~overall ~~appropriate,~~business togoals ~~allow~~of ~~timely~~Isonics ~~decisions~~are ~~regarding~~subjective ~~required~~measures ~~disclosure~~and will also be evaluated by the Board of Directors.

~~There~~ The Board ~~were~~of noDirectors ~~changes~~believes inthat base salaries for our executive officers are appropriate for persons serving as executive officers of public companies of a size and complexity similar to Isonics Corporation, given our ~~internal~~lack ~~control~~of ~~over~~working ~~financial~~capital ~~reporting~~and ~~during~~sufficient positive cash flow. As the ~~quarter~~role ~~ended~~of ~~April 30~~the executive officers changed following the resignation of our then Chief Financial Officer in January 2008, the Compensation Committee approved a salary increase for each of the executive officers. Previously (in February 2007) the Compensation Committee approved the same salary level for Mr. Sakys and a lesser salary for Mr. Meadows because of their anticipated increased responsibilities following the management reorganization that occurred in February 2007. At the request of YA Global, at that ~~have~~time ~~materially~~both ~~affected,~~Mr. Sakys orand ~~are~~Mr. Meadows ~~reasonably~~(and ~~likely~~the toother ~~materially~~executive ~~affect, our~~officers ~~internal~~at ~~control~~the ~~over~~time) ~~financial~~agreed ~~reporting~~to defer any such salary increase.

~~ITEM~~ The Board 9Bof Directors believes that base salary should be relatively stable over time, providing the executive a dependable, minimum level of compensation, which is approximately equivalent to compensation that may be paid by competitors for persons of similar abilities. ~~OTHER~~It ~~INFORMATION~~is the Board of Director's goal to reconsider salaries and benefits for its named executive officers and on a company-wide basis when our working capital and cash flow permit.

~~Not applicable~~49

~~PART III~~ Table of Contents

~~ITEM~~ Discretionary 10Cash Bonuses. Discretionary ~~DIRECTORS~~cash bonuses are the second prong of our compensation plan. The Board of Directors believes that it is appropriate that executive officers and other employees have the potential to receive a significant portion of their annual cash compensation as a cash bonus to encourage performance to achieve key short-term (annual) corporate objectives and to be competitive from a total remuneration standpoint. The payment of any bonus is subject to cash flow considerations, ~~EXECUTIVE~~and ~~OFFICERS~~even ~~AND~~when ~~CORPORATE~~a ~~GOVERNANCE~~bonus is declared, the Board of Directors may choose to pay the bonus in equity rather than in cash where cash flow considerations require.

~~Incorporated by reference~~ We ~~from~~have ~~the~~no ~~definitive~~set ~~proxy~~formula ~~statement~~for determining or anawarding ~~amendment~~discretionary cash bonuses to ~~this~~our ~~Form 10-K~~other executives or employees. In determining whether to award bonuses and the amount of any bonuses, bewe ~~filed~~have notaken ~~later~~and ~~than~~will ~~August 28~~continue to take into consideration discretionary factors such as the individual's current and expected future performance, ~~2007~~level of responsibilities, retention considerations, and the total compensation package, as ~~permitted~~well as our overall performance as reflected by ~~General~~improvements ~~Instruction~~in shareholder equity, revenues, earnings before interest, taxes, depreciation and amortization G(3"EBIDTA") to, ~~Form 10-K~~cash flow and other operational factors.

~~ITEM~~ Where the 11Board of Directors determines that bonuses are properly payable, but cash considerations do not permit the payment of a bonus in cash, the Board of Directors will consider payment of the bonus amount in restricted stock or options, however we have not paid any bonuses through the issuance of stock or the grant of options. ~~EXECUTIVE~~The ~~COMPENSATION~~Board of Directors may also defer all or any part of any bonus to future years and to pay bonuses even if no bonus would be payable under the bonus plan.

~~Incorporated~~ During our byyear ~~reference~~ended April 2008 we entered into executive employment agreements with Messrs. Toffales, Sakys, and Meadows. Each of these employment agreements provided for the ~~from~~payment of a discretionary bonus to each executive in recognition for the ~~definitive~~substantial ~~proxy~~risk ~~statement~~that oreach anexecutive ~~amendment~~is taking by remaining with Isonics Corporation, the significant operational improvements accomplished since February 2007 and each executive's willingness to ~~this~~enter ~~Form~~into their employment agreement. The employment agreements provided for a bonus of $70,000 to Mr. ~~10-K~~Toffales, $60,000 to beMr. Sakys, ~~filed~~and no$50,000 ~~later~~for ~~than~~Mr. Meadows ~~August~~which amounts were paid in June 2008. Additionally, during our year ending April 2830, ~~2007~~2008 aswe ~~permitted~~paid bydiscretionary ~~General~~cash ~~Instruction~~bonuses to GMessrs. Sakys (3$80,000), our former Chief Financial Officer Kenneth Deane ($25,000) and Gregory Meadows ($25,000) as compensation for their job performance during our year ended April 30, 2007. The Compensation Committee and the Board of Directors believed that these bonuses were appropriate to ~~Form~~reward the officers for the amount and quality of work they had performed for Isonics Corporation in difficult circumstances during our years ended April ~~10-K~~30, 2007 and 2008 and the operational improvements accomplished since February 2007.

~~ITEM~~ The Board 12of Director's ability to pay future bonuses to our executive officers is limited by our agreements with YA Global. ~~SECURITY~~As ~~OWNERSHIP~~reflected OFin ~~CERTAIN~~Section 5(u) ~~BENEFICIAL~~of ~~OWNERS~~the ~~AND~~Securities Purchase ~~MANAGEMENT~~Agreement ~~AND~~for ~~RELATED~~our ~~STOCKHOLDER~~June 13, ~~MATTERS~~2008, financing with YA Global, we "will not distribute officer bonuses, allocated pro rata to a given quarter, unless (i) in such quarter the Company achieves a minimum of 110% of the targeted EBITDA reflected on the Annual Operating Plan or (ii) YA Global's consent." Thus our ability to pay bonuses to our executive officers in the future is severely limited.

~~Incorporated~~ Long-Term byEquity-Based ~~reference~~Incentives. Equity-based incentives form a third element of our compensation program. Long-term equity-based ~~from~~incentive compensation is an element of our compensation policy because we believe it aligns management and executives' interests with the ~~definitive~~interests ~~proxy~~of ~~statement~~Isonics' orshareholders. anOur ~~amendment~~equity toincentives also ~~this~~reward ~~Form 10~~the attainment of long-Kterm corporate objectives by our executives. We also believe that grants of equity-based compensation are necessary to enable us to be ~~filed~~competitive nofrom ~~later~~a total ~~than~~remuneration ~~August 28~~standpoint. At the present time, ~~2007~~we ashave ~~permitted~~one byequity ~~General~~incentive ~~Instruction~~plans for our management and employees, the 2008 Isonics Equity Plan. There remain stock options outstanding under ~~G(3) to~~prior ~~Form 10-K~~plans, but no further rights or options may be granted under any prior plan.

~~ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS~~50

~~Incorporated~~Table byof ~~reference from the definitive proxy statement or an amendment to this Form 10-K to be filed no later than August 28, 2007 as permitted by General Instruction G(3) to Form 10-K.~~Contents

51 Since there is no Compensation Committee, the Board of Directors acts as the manager of our long-term equity-based incentive plans and perform functions that include selecting award recipients, determining the timing of grants and assigning the number of shares subject to each award, fixing the time and manner in which awards are exercisable, setting exercise prices and vesting and expiration dates, and from time to time adopting rules and regulations for carrying out the purposes of our plans. For compensation decisions regarding the grant of equity compensation to executive officers and other employees, our Board of Directors typically considers recommendations from our Chief Executive oOfficer as well as the competitive environment associated with longer-term compensation. All awards are priced at the fair market value on the grant date in accordance with SFAS 123(R). The Board of Directors recognizes that in light of the declining price of our common stock, our cash flow, working capital and operational difficulties, the volatile market for our common stock, the fact that the shares are not registered on a Form S-8 registration statement (and such registration is prohibited by our agreements with YA Global), and other factors, our equity-based compensation does not have significant value to our executives, even on a long-term basis.

~~ITEM~~ In addition, 14all equity awards to our employees, including executive officers, and to our directors have been granted and reflected in our consolidated financial statements, based upon the applicable accounting guidance, at fair market value on the grant date in accordance with SFAS 123(R). ~~PRINCIPAL~~Information ~~ACCOUNTANTS~~about ~~FEES~~unvested ~~AND~~performance ~~SERVICES~~shares and outstanding options held by our named executive officers and directors is contained in the "Outstanding Equity Awards at Fiscal Year End—2008" and "Director Compensation" tables, although such value for financial accounting purposes may not reflect or represent the value of such awards to the individual.

~~Incorporated~~ Awards may byvest ~~reference from~~over multiple years but the ~~definitive~~Board ~~proxy~~of ~~statement~~Directors ormaintains anthe ~~amendment~~discretionary authority to ~~this~~vest ~~Form 10-K~~the toequity grant immediately if the individual situation merits. In the event beof ~~filed~~a nochange ~~later~~of ~~than~~control, ~~August 28~~or upon the death, ~~2007~~disability, asretirement ~~permitted~~or bytermination ~~General~~of ~~Instruction G(3) to~~a ~~Form 10~~grantee's employment without good reason, all outstanding equity-Kbased awards will immediately vest.

~~PART IV~~ We have no set formula for granting awards to our executives or employees. In determining whether to grant awards and the amount of any awards, we take into consideration discretionary factors such as the individual's current and expected future performance, level of responsibilities, retention considerations, and the total compensation package.

~~ITEM~~ In the 15year ended April 30, 2007 we adopted the 2007 Restructuring Equity Plan (the "2007 Plan"). ~~EXHIBITS~~All ~~AND~~options ~~FINANCIAL~~granted ~~STATEMENT~~under ~~SCHEDULES~~that plan were subject to shareholder approval. In January 2008 our Board of Directors determined not to seek shareholder approval and therefore to terminate the 2007 Plan. Consequently, the stock options granted under the 2007 Plan were terminated.

~~The~~ On February 6, ~~following~~2008 our Board of Directors adopted the 2008 Isonics Equity Plan (the "2008 Plan") and reserved 25,000,000 shares of common stock for issuance under the 2008 Plan ~~documents~~upon ~~are~~the ~~files~~exercise asof ~~part~~options and grant of ~~this~~stock ~~report:~~bonuses. The 2008 Plan was adopted to compensate new, continuing, and existing employees, officers, consultants, and advisors of Isonics Corporation and its controlled, affiliated and subsidiary entities.

~~1. Financial~~ In ~~Statements:~~April ~~See~~2008 ~~Index~~the Compensation Committee approved option grants to ~~Consolidated~~certain ~~Financial~~company ~~Statements~~employees, ~~under~~including ~~Item~~each 8of our executive officers and directors based on the duties and responsibilities of ~~this report~~each option recipient. As a result of the termination of the 2007 Plan and the expiration of other options, the options granted to each executive under the 2008 Plan represent the only options held by each executive. These options were granted to the executive officers to further align their interests with those of our shareholders as at the time of their grant none of our executive officers held options to purchase our common stock

~~2. Financial~~ ~~Statements~~Other ~~Schedules~~Employee ~~have~~Benefits. Our ~~been~~executive ~~omitted~~officers ~~since~~are ~~they~~eligible ~~are~~to ~~either~~participate ~~not~~in ~~required~~all of our employee benefit plans, ~~not~~such as medical, dental, group life and ~~applicable~~long-term ordisability ~~the~~insurance, ~~information~~in iseach ~~otherwise~~case ~~included.~~on the

~~3. Exhibits:~~51

Exhibit Number				Title
3.01				Restated Articles of Incorporation.(1)
3.02				Registrant’s Amended and Restated Bylaws.(2)
10.01				Registrant’s 1996 Stock Option Plan.(3)
10.02				Registrant’s 1998 Directors’ Stock Option Plan.(4)
10.03				Registrant’s 1996 Executives Equity Incentive Plan.(3)
10.04				Registrant’s 1996 Equity Incentive Plan.(3)
10.05				Registrant’s 2005 Stock Option Plan(4)
10.06				Registrant’s 2007 Restructuring Equity Plan.(5)
10.07				Option Agreement between the Registrant and Yale University.(3)
10.08				Letter from Yale University to Registrant dated February 10, 1996.(3)
10.09				Form of Indemnity Agreement between Registrant and its directors.(6)
10.10				Agreement dated June 7, 2004 between Isonics Corporation, Isonics Vancouver, Inc., and Encompass Materials Group Limited.(7)
10.11				Assignment of Intellectual Property Rights agreement between Isonics and IUT dated April 27, 2006.(6)
10.12				Research and Development Agreement between Isonics and IUT dated April 27, 2006.(6)
10.13				Cancellation Agreement and Assignment between Isonics and IUT dated April 27, 2006.(6)
10.14				Letter from Yale University to Registrant dated January 28, 1997.(3)
10.15				Securities Purchase Agreement dated May 30, 2006, between Isonics and Cornell Capital Partners, L.P.(8)
10.16				Investor Registration Rights Agreement dated May 30, 2006, between Isonics and Cornell Capital Partners, L.P.(8)
10.17				Irrevocable Transfer Agent Instructions dated May 30, 2006.(8)
10.18				Voting Agreement dated May 30, 2006.(8)
10.19				Surrender and Reissuance Agreement, dated June 13, 2006.(9)
10.20				Amended and Restated 6% Secured Convertible Debenture no. CCP-3: $10,000,000 principal.(9)
10.21				Amended and Restated 6% Secured Convertible Debenture no. CCP-4: $3,000,000 principal.(9)
10.22				Amended and Restated Warrant no. CCP-002 ($1.25 exercise price).(9)
10.23				Amended and Restated Warrant no. CCP-003 ($1.75 exercise price).(9)
10.24				Amended and Restated Warrant no. CCP-004 ($2.00 exercise price).(9)

Table of Contents

52same basis as other employees. Isonics provides vacation and other paid holidays to all employees, including the named officers, which are comparable to those provided at other employers.

10.25		Security Agreement dated May 30, 2006, between Isonics as grantor and Cornell Capital Partners, L.P as secured party.(8)
10.26		Security Agreement dated May 30, 2006, between Isonics Homeland Security and Defense Corporation; as grantor and Cornell Capital Partners, L.P as secured party.(8)
10.27		Security Agreement dated May 30, 2006, between Isonics Vancouver, Inc. as grantor and Cornell Capital Partners, L.P as secured party.(8)
10.28		Security Agreement dated May 30, 2006, between Protection Plus Security Corporation as grantor and Cornell Capital Partners, L.P. as secured party.(8)
10.29		Class A. Common Stock Purchase Agreement, dated as of October 26, 2006.(10)
10.30		Employment Agreement between SenseIt Corp. and Christopher Toffales, dated as of October 27, 2006.(10)
10.31		Stockholders’ Agreement between Isonics, SenseIt Corp, and Mr. Toffales, dated as of October 27, 2006.(10)
10.32		6% Secured Convertible Debenture no. CCP-5; $3,000,000 principal.(11)
10.33		Waiver Agreement with Cornell Capital Partners, L.P.(5)
10.34		Settlement Agreement and Mutual Releases between Isonics and Mr. Alexander.(5)
10.35		Settlement Agreement and Mutual Releases between Isonics and Mr. Rubizhevsky.(5)
10.36		Employment Agreement between Isonics and Christopher Toffales dated as of February 16, 2007.(5)
10.37		Document Amendment Agreement between Isonics and Cornell Capital Partners, L.P.(12)
10.38		Securities Purchase Agreement with Cornell Capital Partners, L.P, dated as of April 10, 2007.(12)
10.39		Registration Rights Agreement with Cornell Capital Partners, L.P, dated as of April 10, 2007.(12)
10.40		Pledge and Escrow Agreement, dated as of April 10, 2007.(12)
10.41		Irrevocable Transfer Agent Instructions.(12)
10.42		13% Secured Convertible Debenture no. CCP-2007-1: $2,000,000 principal.(12)
10.43		Warrant no. CCP-2007-1-1 ($5.00 exercise price).(12)
10.44*		Registrant’s 2007 Non-Employee Directors Stock Option Plan
10.45*		Registrant’s Amended and Restated 2005 Stock Option Plan
10.46		Registration Rights Agreement between Isonics and Encompass Materials Group Limited.(7)
10.47		Registration Rights Agreement between Isonics with Asset Managers, Ltd.(14)
14.0		Code of Ethics(13)
21.1*		List of subsidiaries
23.10*		Consent of independent registered public accounting firm
31.1*		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
31.2*		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
32*		Certification pursuant to 18 U.S.C. §1350

Our executive officers are also eligible to participate in our 401(k) plan on the same basis as other employees. Our Board of Directors, at its sole discretion, may authorize us to match (in part or in whole) the contributions of each employee to the 401(k) plan during a given year. During our year ended April 30, 2008, we did match a portion of the employees' 401(k) contributions, up to 4% of employees' salaries (including our named executive officers).

* Our articles ~~Filed~~of ~~herewith.~~incorporation ~~All~~and bylaws entitle our officers and directors to advancement or reimbursement of their legal expenses, to the fullest extent permitted by law, if they are involved in litigation as a result of performing services for Isonics or other ~~documents~~enterprise ~~have~~at ~~been~~its request. The right to indemnification is conditioned on meeting a specified standard of care, generally ~~previously~~requiring ~~filed~~the officer to have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of Isonics.

~~(1)~~ ~~Filed~~Employment ~~with~~Contracts, ~~Isonics’ Current Report on Form 8~~Change-~~K (File No. 001~~In-~~12531), dated~~Control ~~June 13,~~Arrangements ~~2007~~ and ~~filed~~Certain onOther ~~June 25, 2007, and incorporated herein by reference.~~Matters

~~(2)~~ ~~Filed~~Accrued ~~with Isonics’ Current Report on Form 8-K (File No. 001-12531), dated March 27, 2006, and filed on March 31, 2006, and incorporated herein by reference~~Salaries

~~(3)~~ On ~~Incorporated herein~~February 12, by2007, ~~reference~~the toCompensation ~~exhibit~~Committee ~~filed~~recommended ~~with~~and ~~Isonics’~~approved, ~~Registration~~and ~~Statement~~ on ~~Form SB-2~~the same day the Board of Directors awarded, ~~(“Registration~~salary ~~Statement”)~~increases ~~(Commission~~to ~~file~~certain Noof our officers, including John Sakys and Gregory Meadows. However, because of working capital shortages Messrs. ~~333-13289)~~Sakys inand ~~which~~Meadows ~~this~~and the other officers each agreed ~~exhibit~~to ~~bears~~suspend the ~~same~~salary ~~number~~increases. ~~except~~The ~~exhibit~~suspended 3portion of each Messrs.~~01,~~ Sakys' ~~which~~and ~~was~~Meadows' ~~numbered~~salaries ~~3.03~~accrued in from the date that ~~registration~~the ~~statement~~salary increases were awarded through December 31, 2007.

53 Employment Agreements with our executive officers

~~(4)~~ Effective ~~Filed~~February 6, ~~with~~2008, ~~Isonics’~~we ~~Registration~~entered ~~Statement~~into onemployment ~~Form~~agreements with: 1) ~~S-8~~Christopher ~~(file~~Toffales, our Chief Executive ~~no.~~Officer; ~~333-128592~~2) John ~~filed~~Sakys, onour ~~September~~President, and Chief Operating Officer (the "Sakys Agreement"); and 3) 26Gregory Meadows, ~~2005~~our Vice President and Chief Financial Officer (the "Meadows Agreement").

~~(5)~~ Previously on ~~Filed~~February 16, 2007 we entered into an employment agreement with Mr. Toffales pursuant to which he joined Isonics’ ~~Current~~Corporation ~~Report~~as our Chairman of the Board of Directors, this agreement was terminated on ~~Form~~February ~~8-K~~6, ~~(file~~2008 nowhen Mr. Toffales entered into the new employment agreement. For purposes of the following discussion the employment ~~000-12531)~~agreements ~~dated~~entered into on February 136, ~~2007,~~2008 ~~filed~~are ~~February 20~~sometimes collectively referred to herein as the "Employment Agreements," ~~2007~~and Christopher Toffales, John Sakys and Gregory Meadows are sometimes ~~incorporated~~collectively referred to herein byas ~~reference~~the "Executive."

~~(6) Incorporated~~ Each byof ~~reference~~the ~~from~~Employment ~~Isonics’~~Agreements ~~annual~~has ~~report~~an oninitial ~~Form 10-KSB~~term of one year and thereafter will be renewed automatically for ~~the~~successive one year ~~ended~~terms unless either party provides sixty days ~~April~~notice prior to the expiration of the current term that the Employment Agreement is being terminated. The Employment Agreements provide that Mr. 30Toffales will receive an annual base salary of $250,000, ~~2006~~Mr. Sakys will receive an annual base salary of $240,000, and Mr. Meadows will receive an annual base salary of $180,000.

~~(7)~~ Under the ~~Filed~~Employment ~~with~~Agreements, ~~Isonics’~~each ~~Current~~of ~~Report~~Mr. Toffales, onMr. Sakys ~~Form~~and Mr. 8Meadows are eligible for a discretionary cash bonus and are entitled to participate in all of our equity-Kbased ~~(file~~compensation noplans. ~~000~~ Discretionary cash bonuses and equity-~~12531)~~based ~~dated~~compensation ~~June 11,~~will ~~2004~~be based on the achievement of performance goals, and ~~incorporated~~if ~~herein~~none byare ~~reference~~formally established, paid or granted in the discretion of the Board of Directors.

~~(8) Filed with Isonics’ Current Report on Form 8-K (file no. 000-12531) dated May 31, 2006, filed June 6, 2006, and incorporated herein by reference.~~52

~~(9)~~Table ~~Filed with~~of ~~Isonics’ Current Report on Form 8-K (file no. 001-12531) dated June 21, 2006, filed on June 21, 2006, and incorporated herein by reference.~~Contents

Additionally, we agreed to pay (10and in June 2008 paid) ~~Filed~~each Executive a one-time discretionary bonus: with ~~Isonics’~~Mr. Toffales ~~Current~~being ~~Report~~entitled onto ~~Form~~a $70,000 bonus, Mr. ~~8-K~~Sakys ~~(file~~a no$60,000 bonus and Mr. Meadows a $50,000 bonus. As described above, these one-~~12531)~~time ~~dated~~bonuses ~~October 26~~were, ~~2006~~in part, in recognition of the amount and quality of work they had ~~filed~~performed ~~November~~for Isonics in difficult circumstances during the years ended April 130, ~~2006,~~2007 and ~~incorporated~~2008 ~~herein~~and bythe ~~reference~~operational improvements accomplished since February 2007.

We may terminate the Executives' employment with or without "cause" (11as defined in the Employment Agreements). ~~Filed~~If ~~with~~we ~~Isonics’~~terminate ~~Current~~employment ~~Report~~for on"cause," ~~Form 8-K~~the ~~(file~~Executive will have no rights to any unvested benefits or any other compensation or payments after the termination date. ~~000-12531)~~We ~~dated~~may ~~November 14,~~also ~~2006,~~terminate employment without "cause" by providing the Executive at least sixty days advance ~~filed~~notice. ~~November 17,~~The ~~2006,~~Employment Agreements provide that if we terminate the Executive without cause the Executive is entitled to a severance payment equal to twelve months of Executive's current annual salary and ~~incorporated~~payable ~~herein~~in bya ~~reference~~lump sum at termination.

The Employment ~~(12)~~Agreements ~~Filed~~also ~~with~~provide ~~Isonics’~~that ~~Current~~the ~~Report~~Executive onmay ~~Form 8-K~~terminate ~~(file~~the ~~no.~~Employment Agreement upon the occurrence of any of the following events by providing us at least three ~~000-12531)~~business ~~dated~~days ~~April~~notice: 1) 5,we ~~2007~~make a general assignment for the benefit of our creditors, ~~filed~~filing ~~April 11~~a voluntary bankruptcy petition, ~~2007~~filing a petition or an answer seeking reorganization, liquidation, dissolution or similar relief; 2) the sale of substantially all of our assets; 3) our decision to terminate our business and liquidate our assets; 4) the holder of ~~incorporated~~any ~~herein~~convertible debenture issued by ~~reference~~us prior to the date of the Employment Agreements declaring a default or accelerating any obligation under the terms of such debentures; or 5) our material breach of the Employment Agreement except to the extent such breach results directly or indirectly from our lack of funding to cure any material breach. If the Employment Agreements are terminated by the Executive for any of these reasons the Executive is due a severance payment equal to twelve months of his current annual salary payable in a lump sum payment within three months of the termination of the Employment Agreement. The Sakys Agreement and Meadows Agreement also provide that if the Company's corporate offices are moved from the Denver metropolitan area each Executive may terminate their respective Employment Agreement and each shall be entitled to a severance payment equal to twelve months of their current annual salary and payable in a lump sum payment within three months of the Executive's termination.

Upon a "change of control" (13which is defined in the Employment Agreements), ~~Incorporated~~each byExecutive ~~reference~~may ~~from~~terminate ~~Isonics’~~their ~~annual~~Employment ~~report~~Agreement onand ~~Form 10-KSB~~will be entitled to receive a severance payment ~~for~~equal ~~the~~to ~~year~~twelve ~~ended~~months ~~April 30~~of his current annual salary, ~~2004~~and payable in a lump sum within three months of the Executive's termination.

The Employment ~~(14)~~Agreements ~~Filed~~contain ~~with~~non-competition ~~Isonics’~~and ~~Current~~non-solicitation ~~Report~~provisions. onHowever, ~~Form 8-K~~each ~~(file~~Executive ~~no.~~may engage in certain business activities so long as ~~000-12531)~~such ~~dated~~activities ~~October 4~~do not interfere with the Executive's duties and responsibilities with Isonics Corporation, ~~2004~~and such activities are not with persons or entities that directly compete with us.

54 Mr. Toffales is also employed as President and Chairman of the Board by our 90%-owned subsidiary, SenseIt pursuant to an agreement dated October 26, 2006. The SenseIt employment agreement has an initial term of two years through October 26, 2008. However, SenseIt is no longer engaged in business activities and Mr. Toffales has not drawn his salary from SenseIt since October 2007.

~~SIGNATURES~~ Insider Trading and Stock Ownership Policy. A stock ownership policy is a policy that requires our senior management to own a minimum interest in our common stock. Currently we do not have a stock ownership policy that applies to our employees or to our executive officers.

In We ~~accordance~~do ~~with~~have ~~Section 13~~an orInsider ~~15(d) of~~Trading ~~the~~Policy ~~Exchange~~for ~~Act,~~which ~~the Registrant~~all ~~has~~employees ~~duly~~and ~~caused~~members ~~this~~of ~~report~~our toBoard beof ~~signed~~Directors onare ~~its~~prevented ~~behalf~~from bybuying ~~the undersigned,~~or ~~thereunto~~selling ~~duly~~our ~~authorized.~~stock during an announced "trading blackout"

July 30, 2007
		ISONICS CORPORATION,
		a California Corporation
	By:	/s/ JOHN SAKYS
		John Sakys
		Chief Executive Officer

~~Pursuant to~~Table ~~the requirement~~ of ~~the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:~~Contents

	Date		Name and Title		Signature
July 30, 2007		John Sakys		/s/ JOHN SAKYS
		Principal Executive Officer
		Chief Operating Officer
		Director
July 30, 2007		Christopher Toffales		/s/ CHRISTOPHER TOFFALES
		Chairman of the Board
July 30, 2007		Richard Parker		/s/ RICHARD PARKER
		Director
July 30, 2007		Russell W. Weiss		/s/ RUSSELL W. WEISS
		Director
July 30, 2007		Richard H. Hagman		/s/ RICHARD H. HAGMAN
		Director
July 30, 2007		C. Stewart Verdery, Jr.		/s/ C. STEWART VERDERY, JR.
		Director
July 30, 2007		Kenneth Deane		/s/ KENNETH DEANE
		Principal Financial Officer
July 30, 2007		Greg Meadows		/s/ GREG MEADOWS
		Corporate Controller

period. Generally a blackout period is placed in effect by senior management when material non-public information about Isonics exists and may have an influence on the marketplace. Our officers have in the past adopted program selling plans under SEC Rule 10b5-1 which permit them to sell shares even while in possession of inside information if they do so under a non-discretionary plan put into place at a time when they did not have material non-public information. No Rule 10b5-1 plan is currently in effect, and during our 2008 fiscal year, none of our executive officers sold shares of our common stock pursuant to Rule 10b5-1 plans.

55 Certain Relationships and Related Party Transactions. Our Audit Committee charter provides that we shall not enter into a related party transaction unless such transaction is approved by the Audit Committee after a review of the transaction by the Audit Committee for potential conflicts of interest. A transaction will be considered a "related party transaction" if the transaction would be required to be disclosed under Item 404 of Regulation S-K. The Audit Committee has the authority to hire legal, accounting, financial or other advisors as it may deem necessary or desirable and/or to delegate responsibilities to executive officers of Isonics in connection with discharging their duties. During our year ended April 30, 2008 and as of the date of this annual report, we are not aware of any related party transactions with our executive officers that may cause a conflict of interest with Isonics. At the time that Isonics hired Mr. Toffales as Chairman of the Board of Directors as described above, he was serving as President and Chairman of the Board of Directors of SenseIt and, therefore, could have been considered to be an affiliate of Isonics Corporation. His employment package was approved by the members of the Audit Committee voting as members of the Board of Directors.

~~ISONICS~~ Accounting ~~CORPORATION~~and Tax Considerations. We have structured our compensation program to comply with Internal Revenue Code Sections 162(m) and 409A. Under ~~AND~~Section 162(m) ~~SUBSIDIARIES~~of the Internal Revenue Code, a limitation was placed on tax deductions of any publicly-held corporation for individual compensation to certain executives of such corporation exceeding $1,000,000 in any taxable year, unless the compensation is performance-based.

~~Index~~ If an executive is entitled to ~~Financial~~nonqualified ~~Statements~~deferred compensation benefits that are subject to Section 409A, and such benefits do not comply with Section 409A, then the benefits are taxable in the first year they are not subject to a substantial risk of forfeiture. In such case, the service provider is subject to regular federal income tax, interest and an additional federal income tax of 20% of the benefit includible in income.

	Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Financial Statements
Consolidated Balance Sheets		F-3
Consolidated Statements of Operations		F-4
Consolidated Statements of Stockholders’ Equity		F-5
Consolidated Statements of Cash Flows		F-6
Notes to Consolidated Financial Statements		F-7

We have no employees with non-performance based compensation paid in excess of the Internal Revenue Code §162(m) tax deduction limit. However, we reserve the right to use our judgment to authorize compensation payments that do not comply with the exemptions in Section 162(m) when we believe that such payments are appropriate and in the best interest of the stockholders, after taking into consideration changing business conditions or the executive's individual performance and/or changes in specific job duties and responsibilities.

F In considering severance and other payments to employees, the Compensation Committee(and now the Board of Directors) also considers the potential applicability of §280G of the Internal Revenue Code. This section applies to payments made to a "disqualified individual" (an employee or consultant who is an officer, shareholder, or highly compensated individual) as a result of a change of control of the employer. If certain compensatory payments are paid to a disqualified individual as a result of a change of control exceed three times the individual's "base amount" (generally an average of the individual's W-12 compensation for the five years preceding the year in which the change in control occurs) (referred to as "parachute payments"), then all amounts paid in excess of one times the base amount (the "excess parachute payment") are nondeductible to the employer. Section 4999 of the Code imposes a 20% excise tax on the recipient of any "excess parachute payment."

~~REPORT OF~~ All ~~INDEPENDENT~~equity ~~REGISTERED~~awards ~~PUBLIC~~to ~~ACCOUNTING~~our ~~FIRM~~employees, including executive officers, and to our directors have been granted and reflected in our consolidated financial statements, based upon the applicable accounting

~~To the Board of Directors~~54

~~Isonics Corporation~~Table of Contents

~~Golden~~guidance, at ~~Colorado~~fair market value on the grant date in accordance with SFAS No. 123R. On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law, changing the tax rules applicable to nonqualified deferred compensation arrangements. While the final regulations have not become effective yet, Isonics believes it is operating in good faith compliance with the statutory provisions which were effective January 1, 2005.

We ~~have~~Compensation ~~audited~~Committee ~~the~~Interlocks ~~consolidated balance sheets of Isonics Corporation~~ and ~~subsidiaries~~Insider (the “Company”) as of April 30, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended April 30, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.Participation

~~We conducted our audits in accordance with the~~Not ~~standards of the Public Company Accounting Oversight Board (United States)~~applicable. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provided a reasonable basis for our opinion.

In ~~our~~Report ~~opinion,~~Of ~~the~~The ~~consolidated~~Compensation financial statements referred to above present fairly, in all material respects, the financial position of Isonics Corporation and subsidiaries as of April 30, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2007, in conformity with U.S. generally accepted accounting principles.Committee

~~The~~Not ~~accompanying financial statements have been prepared assuming that the Company will continue as a going concern~~applicable. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and will continue to require funding from investors for working capital. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

~~/s/~~ ~~HEIN~~Director ~~& ASSOCIATES LLP Denver, Colorado July 30, 2007~~Compensation

F We reimburse directors for travel and related expenses associated with Board of Directors' meetings. Effective May 1, 2006, we began compensating our non-employee directors $2,000 for attending Board of Directors' meetings in person, $1,000 for attending Board of Directors' meetings telephonically and we pay an additional $500 to the chair person for required preparation time. In addition, directors are entitled to receive fees as committee members of our management development committee as they are asked to assist management. The following table sets forth information regarding the cash compensation paid to our directors for board meetings and committee meetings attended during our year ended April 30, 2008:

Isonics Corporation and Subsidiaries CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)

Russell Weiss(1)		Richard Parker(1)		Richard Hagman		Stewart Verdery(2)		George O'Leary

$11,000		$12,500		$41,500		$14,000		$2,500

(1): Messrs. Weiss and Parker resigned in December 2007.
(2): Mr. Verdery resigned in July 2008.

	April 30,
	2007			2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,556		$	1,586
Accounts receivable (net of allowances of $146 and $51, respectively)	3,678			3,066
Inventories	1,259			630
Prepaid expenses and other current assets	1,388			1,046
Assets of discontinued operations	491			1,713
Assets held for sale	—			560
Total current assets	8,372			8,601
LONG-TERM ASSETS:
Property and equipment, net	5,666			4,562
Goodwill	3,631			3,631
Intangible assets, net	303			491
Equity in net assets of investee	382			386
Other assets	606			192
Total long-term assets	10,588			9,262
TOTAL ASSETS	$	18,960		$	17,863
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	973		$	2,169
Accrued liabilities	2,522			1,598
Derivative liabilities	1,021			—
Liabilities of discontinued operations	72			61
Current portion of obligations under capital lease	340			14
Current portion of notes payable	134			772
Current portion of convertible debentures, net of discount	—			10,432
Total current liabilities	5,062			15,046
Obligations under capital lease, net of current portion	710			34
Notes payable, net of current portion	—			140
Other long-term liabilities	888			—
Convertible debentures, net of discount and current portion	8,634			—
TOTAL LIABILITIES	15,294			15,220
Minority interest in consolidated subsidiary	111			—
Commitments and Contingencies (See Notes 9 and 10)
STOCKHOLDERS’ EQUITY:
Preferred Stock; shares authorized—7,650,000; no par value, no shares issued and outstanding	—			—
Common stock—no par value; 175,000,000 shares authorized; shares issued and outstanding: 2007—12,639,400; 2006—10,517,780	64,319			57,061
Additional paid in capital	20,705			13,910
Deferred compensation	—			(24		)
Accumulated deficit	(81,469		)	(68,304		)
Total stockholders’ equity	3,555			2,643
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	18,960		$	17,863

During our year ended April 30, 2008 each of our non-employee directors were granted options pursuant to the

Three months ended

July 31, 2007

(through July 20, 2007)

Common Stock (ISON)

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