**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-K/A**

**(Amendment No. 1)**

**(MarkOne)**

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

**For the fiscal year ended April 30, 2007**

**o**                                  TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934.

**For the transition periodfrom              to              **

**Commission file number: 001-12531**

**ISONICSCORPORATION**

(Nameof 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)                         |

 

Registrant’stelephone number, including area code:**(303) 279-7900**

Securitiesregistered pursuant to Section 12(b) of the Exchange Act: **None**

Securitiesregistered pursuant to Section 12(g) of the Exchange Act:

**CommonStock, no par value**(Title of Class)

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

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

Checkwhether the issuer (1) filed all reports required to be filed bySection 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 filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x  No o

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-K contained in this form, and no disclosure will be contained, tothe best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. x

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer (as defined in Exchange ActRule 12b-2).

Largeaccelerated filer o         Acceleratedfiler o         Non-acceleratedfiler x

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act): Yes o  No x

Theaggregate market value of the common stock held by non-affiliates of theRegistrant as of October 31, 2006 was approximately $28,775,000 based uponthe closing sale price of the Registrant’s Common Stock on such date, asreported on the Nasdaq Capital Market. Shares of Common Stock held by eachexecutive officer and director and each person owning more than 10% of theoutstanding Common Stock of the Registrant have been excluded in that suchpersons may be deemed to be affiliates of the Registrant. This determination ofaffiliate status is not necessarily a conclusive determination for otherpurposes.

The number of shares outstanding of the Registrant’sCommon Stock, no par value, as of July 20, 2007, was 12,658,150 shares.

 

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**EXPLANATORY NOTE**

We are filing this Amendment No. 1 onForm 10-K/A (the “Amendment”) to our Annual Report on Form 10-Kfor the fiscal year ended April 30, 2007, as filed with the Securities andExchange Commission on July 30, 2007. Because we will not file ourdefinitive proxy statement by August 28, 2007, the 120th day after the end of our last fiscal year,parts of the definitive proxy statement will not be incorporated by referenceinto Items 10, 11, 12, 13 and 14 of Part III of our Annual Report on Form 10-K.The purpose of this Amendment is to provide the information required byPart III of Form 10-K. The remainder of the informationcontained in our Annual Report for the year ended April 30, 2007, onForm 10-K is not amended hereby and remains as set forth in theoriginal filing.

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**PART III**

**ITEM 10.**         DIRECTORS,EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

**Identification ofDirectors and Executive Officers**

The following table sets forth the names and ages ofall the Directors and Executive Officers of Isonics, and the positions held byeach such person as of April 30, 2007. Each of the directors holds officeuntil the next annual meeting of shareholders and until his successor iselected and qualified or until his earlier death, resignation, or removal. Eachofficer serves at the discretion of the Board.

Exceptfor Mr. Toffales, as described below, no arrangement exists between any ofour executive officers or directors pursuant to which any one of those personswas elected to such office or position. 

| Name                            | ** ** | ** ** | ** ** | **Age**                                                                    | ** ** | **Position** |
|---------------------------------|------------|------------|------------|----------------------------------------------------------------------------|------------|--------------|
| John Sakys                      |       | 38         |       | Chief Executive Officer,  Chief Operating Officer and President            |
| Christopher Toffales            |       | 55         |       | Chairman of the Board                                                      |
| Kenneth J. Deane                |       | 37         |       | Chief Financial Officer,  Vice President and Secretary                     |
| Greg Meadows                    |       | 44         |       | Vice President of  Business Operations and Corporate Controller            |
| Joanna Lohkamp                  |       | 42         |       | Chief Operating Officer  and General Manager of the Semiconductor Division |
| Richard H. Hagman(1)(2)         |       | 60         |       | Director                                                                   |
| Richard Parker*(1)(2)           |       | 63         |       | Director                                                                   |
| Russell W. Weiss**(1)(2)        |       | 60         |       | Director                                                                   |
| C. Stewart Verdery, Jr.(2) |       | 40         |       | Director                                                                   |

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*                    Mr. Parkerhas requested to not be nominated to stand for re-election to our Board andtherefore will cease serving as a director, and as a member of all committeesof the Board of Directors, at the conclusion of our next annual meeting ofshareholders.

**             Mr. Weiss hasnotified us that he is contemplating requesting to not be nominated to standfor re-election to our Board. If he does request to not be nominated tostand for re-election to our Board, he will cease serving as a director, and asa member of all committees of the Board of Directors, at the conclusion of ournext annual meeting of shareholders.

(1)          Currently a member ofthe Audit Committee.

(2)          Currently a member ofthe Compensation Committee, Nominating Committee and Management DevelopmentCommittee.

***John Sakys***joined us in May 2001 as Controller. He was promoted to Vice President,Chief Financial Officer effective September 3, 2001, and effective February 14,2007 Mr. Sakys was promoted to President, interim Chief Executive Officer,and Chief Operating Officer. From September 2000 to April 2001 Mr. Sakyswas controller of AuraServ Communications. From July 1998 to September 2000Mr. Sakys was Director of Financial Reporting for Media One, Inc.From December 1994 to July 1998 Mr. Sakys was an audit managerat Ernst and Young LLP. Mr. Sakys received his Bachelors degree inBusiness Economics with an emphasis in accounting from the University ofCalifornia at Santa Barbara and is a Certified Public Accountant.

***ChristopherToffales*********joined usin February 2007 as Chairman of the Board of Directors. Mr. Toffaleshas been President and Director of CTC Aero, LLC, a defense advisory consultingfirm, since 2003. Since August 2004 Mr. Toffales has served as adirector of Irvine Sensors Corporation (“Irvine Sensors”) of Costa Mesa,California. Irvine Sensors (Nasdaq: IRSN) has a class of securities registeredunder section 12 of the Exchange Act of 1934, and is involved in the design,development, manufacture and sale of 

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miniaturized visionsystems and electronic products for defense, security and commercialapplications. From January 2004 to February 2007 he served as adirector and Vice Chairman of Communications of Power Industries, Inc. aprovider of military and commercial electronic products and its parent CPIInternational, Inc. (Nasdaq: CPII). From 1999 to 2003, Mr. Toffaleswas a Senior Vice President of DRS Technologies, Inc., a supplier ofmilitary electronics systems (including infrared imaging systems), and alsoserved as President of DRS Technologies Systems Company, a subsidiary of DRSTechnologies. From 1998 to 1999, Mr. Toffales was Vice President forBusiness Development of Lockheed Martin Fairchild Systems, an aerospace anddefense firm. Prior to these positions, Mr. Toffales held various officerlevel positions at Lockheed Martin Corporation and Loral Fairchild Systems,both of which are aerospace and defense firms. Mr. Toffales holds a B.S.in Electrical Engineering from City College of New York.

In February 2007, we entered into an employmentagreement with Mr. Toffales to serve as the Chairman of our Board ofDirectors.  Pursuant to his employmentagreement we agreed to pay Mr. Toffales $10,000 per month, and granted him options to purchase 2,250,000 sharesof Isonics common stock (exercisable at $1.76 per share for a five year period)from the 2007 Restructuring Equity Plan, which options are subject toshareholder approval.

***Kenneth J. Deane*********joined us in April 2005 as ourDirector of Financial Reporting. Effective February 14, 2007 Mr. Deanewas promoted to Chief Financial Officer, Vice President and CorporateSecretary. From March 1999 to March 2005 Mr. Deane was employedby Sun Microsystems, Inc., holding the position of senior finance managerimmediately prior to departing the company. From September 1993 to January 1999Mr. Deane was employed by Deloitte & Touche LLP, holding theposition of audit manager immediately prior to departing the entity. Mr. Deanereceived his Bachelor of Science and Masters degrees in accounting fromthe University of Florida and is a Certified Public Accountant.

***Greg Meadows***joined us in March 2004 as our Corporate Controller. Effective February 14,2007 Mr. Meadows was promoted to Vice President of Business Operations,and still serves as our Corporate Controller. Prior to working for Isonics, Mr. Meadowsserved as treasurer of Sage Telecommunications for two years. Prior to workingwith Sage Telecommunications, Mr. Meadows served as the controller of the constructiondivision of Western Integrated Networks for two years. Mr. Meadows holds abachelor of science degree from Colorado State University and is a CertifiedPublic Accountant.

***Joanna Lohkamp***joined Isonics as Acting Chief Operating Officer and General Manager of thesemiconductor division in June 2005 as an independent contractor. Ms. Lohkamphas been President and Founder of Sound Business Solutions, Inc., amanagement consulting company, since 2004. From 1991 until 2003, Ms. Lohkampworked at Intel Corporation in a variety of leadership positions includingfinance, human resources, marketing operations, strategic capacity planning,and mergers & acquisitions. Ms. Lohkamp received a Bachelorsdegree in International Relations from Stanford University and a Masters ofBusiness Administration from the Haas School of Business at University ofCalifornia, Berkeley. Ms. Lohkamp’s contract as COO with our semiconductordivision expires in September 2007.

***Russell W. Weiss***has served as a director since January 2004. Mr. Weiss had 37 yearsof experience in the Semiconductor Industry before he retired from KLA-Tencorin January 2007. He is currently President of Ascot Consulting Group. Hislast position with KLA-Tencor was Vice President and General Manager of theworldwide Sales Operations. From April 2002 through February 2003, Mr. Weisswas President and Representative Director of KLA-Tencor Japan Ltd. From1996 through April 2002, Mr. Weiss held various positions withKLA-Tencor. From 1991-1996 Mr. Weiss held various positions withSchlumberger with the most recent being Vice President and General Manager ofSchlumberger ATE test equipment division. Mr. Weiss received his BSEE fromMissouri University and his MBA from Babson College.

***Richard H. Hagman,Ph.D.,*** hasserved as a director and a member of our Audit Committee since July 2005. From2001 to the present, and from 1994 through 1998, Dr. Hagman has been theowner of R.H. Hagman & Company, a company that providesmanagement consulting, CEO and senior 

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management coaching,investment banking (M&A), turnarounds, negotiations and mediation, andcapital sourcing services to businesses in a wide variety of industries. Dr. Hagmanhas more than 20 years of corporate management and top-tier executiveexperience in several Fortune 500 companies. He was Chairman and CEO of WENRCorp., and served as Vice President and Corporate Officer of Cyprus AmaxMinerals Co. Dr. Hagman also held senior investment and government affairspositions for such companies as Amoco Corp. He has also served asAdministrative Director of Graduate Studies and Lecturer at the University ofChicago; Assistant Dean for Undergraduate Curriculum at NorthwesternUniversity, and as Rapporteur for the Fellows’ Meetings at the Adlai StevensonInstitute of International Affairs. Dr. Hagman has received masters anddoctorate degrees from The University of Chicago, and completed hispost-doctoral studies at The University of Chicago working specifically in management theory,organizational theory and labor relations.

***Richard L. Parker***has served as a director since August 1998. Mr. Parker previously wasVice-President of Distribution Sales for Cypress Semiconductor and he held thatposition from December 1997 until his retirement, which was effective December 31,2002. Previously, Mr. Parker was Director of Sales for Cypress from April 1984to December 1997. Prior to joining Cypress, he held various sales andmarketing management positions at Fairchild Semiconductor from 1973 to 1984. Hereceived a Bachelors degree in Education from the University of North Dakota.

***C. Stewart Verdery, Jr.***has served as a director since August 2005. Mr. Verdery is a partnerand founder of the consulting firm of Monument Policy Group, LLC, followingover 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 forStrategic and International Studies. Nominated by President Bush and confirmedby the U.S. Senate in 2003 as Assistant Secretary for Homeland Security, he ledDHS efforts to implement policies related to: immigration, visas, and travelfacilitation; cargo security and international trade; transportation security;and counter-narcotics and other law enforcement priorities. Mr. Verderyfrequently represented DHS in hearings before numerous Congressionalcommittees, 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 asGeneral Counsel to U.S. Senate Assistant Majority Leader Don Nickles from 1998until 2002, handled lead staff duties for the Senate Republican High Tech TaskForce, and served as counsel to the Senate Judiciary Committee and the SenateCommittee on Rules and Administration. In addition to his governmentservice, Verdery was the Senior Legislative Counsel for the government affairsand public policy office representing Vivendi Universal and was also anassociate at the Washington office of the law firm Baker & Hostetler,concentrating on antitrust and litigation. He is a graduate from WilliamsCollege and the University of Virginia School of Law.

**SignificantEmployees and Family Relationships.**

**Thereare no significant employees who are not also directors or executive officers. Therewere, and are, no family relationships among the officers, directors or anyperson chosen by Isonics to become a director or officer.**

**Involvement inCertain Legal Proceedings**

Based on information submitted by the directors andexecutive officers, none of the directors or executive officers is involved in,or has been involved in, legal proceedings during the past five years that arematerial to an evaluation of the ability or integrity of any director orexecutive officer.

None of our directors,executive officers, affiliates or beneficial owners of more than 5% of anyclass of voting securities is adverse to us or has a material interest adverseto us.

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**Section 16(a) BeneficialOwnership Reporting Compliance**

Section 16(a) of the Securities Exchange Actof 1934 (the “1934 Act”) requires our directors, executive officers and personswho own more than ten percent of a registered class of our equity securities,to file with the SEC initial reports of ownership and reports of changes inownership of common stock and other equity securities of Isonics. Officers,directors and greater than ten percent shareholders are required by SECregulation to furnish us with copies of all Section 16(a) forms theyfile.

To our knowledge, basedupon a review of the copies of such reports furnished to us and based uponwritten representations that no other reports were required, all Section 16(a) filingrequirements applicable to our officers, directors and greater than ten percentbeneficial owners were complied with during the fiscal year ended April 30,2007, and subsequently. YA Global Investments, L.P. (f/k/a Cornell CapitalPartners, LP), the holder of our 13% Debentures issued in May, June and November 2006and April 2007, has taken the position that, because provisions within the13% Debentures prevent them from converting their debentures into shares ofsuch stock at any time when the results of the conversion would result inownership of more than 4.99% of the outstanding Isonics common stock, they arenot subject to the reporting requirements of Section 16(a). *See “Security Ownership of Certain Beneficial Holders and Management”below.*

**Code of Ethics**

On January 27, 2004,our Board of Directors adopted a code of ethics that applies to all of ourofficers and employees, including our principal executive officer, principalfinancial officer, principal accounting officer and controller. Our Code ofEthics establishes standards and guidelines to assist our directors, officers,and employees in complying with both Isonics’ corporate policies and with thelaw and is posted at our website: www.isonics.com. Upon request Isonics willprovide any person, free of charge, a copy of our Code of Ethics. Such arequest can be made by contacting our corporate office at:  Isonics Corporation, attention CorporateSecretary, 5906 McIntyre Street, Golden, CO 80403, or by calling our corporateoffice at (303) 279 7900.

**Procedures by whichsecurity holders may recommend nominees to the Board of Directors.**

We have not changed our nominating procedures duringthe past fiscal year or subsequently. We have a standing Nominating Committee (“NominatingCommittee”) to direct and oversee the process by which individuals may benominated to our Board of Directors. The following persons currently serve onour Nominating Committee:****Russell W.Weiss, Richard Parker, Richard H. Hagman and C. Stewart Verdery Jr., allof whom are independent directors as required by Nasdaq Marketplace Rule 4350(c)(4).Our Nominating Committee’s charter was adopted by the Board of Directors on January 27,2004, and is available on our web site at www.isonics.com. Each member of theNominating Committee must qualify as “independent” as defined under NasdaqMarketplace Rule 4200(a)(15) and be free of any relationship that, in theopinion of the Board, would interfere with his or her exercise of independentjudgment.

The functions performed by the Nominating Committeeinclude identifying potential directors and making recommendations as to thesize, functions and composition of the Board and its committees. In makingnominations, our Nominating Committee is required to submit candidates who havethe highest personal and professional integrity, who have demonstratedexceptional ability and judgment and who shall be most effective, inconjunction with the other nominees to the Board, in collectively serving thelong-term interests of the shareholders.

The Nominating Committee will consider nomineesproposed by our shareholders. To recommend a prospective nominee for theNominating Committee’s consideration, you may submit the candidate’s name bydelivering notice in writing to Isonics’ Nominating Committee atisonics@nuvox.net or c/o Chair, 

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Nominating Committee, viafirst class U.S. mail, at Isonics Corporation, 5906 McIntyre Street, Golden,CO 80403.

A shareholder nomination submitted to the NominationCommittee must include at least the following information (and can include suchother information the person submitting the recommendation desires to include),and must be submitted to Isonics by the date mentioned in the most recent proxystatement under the heading “*Proposal From Shareholders*”as such date may be amended in cases where the annual meeting has been changedas contemplated in SEC Rule 14a-8(e), Question 5:

(i)                   Thename, address, telephone number, fax number and e-mail address of the personsubmitting the recommendation;

(ii)               Thenumber of shares and description of Isonics voting securities held by theperson submitting the nomination and whether such person is holding the sharesthrough a brokerage account (and if so, the name of the broker-dealer) ordirectly;

(iii)           Thename, address, telephone number, fax number and e-mail address of the personbeing recommended to the nominating committee to stand for election at the nextannual meeting (the “proposed nominee”) together with information regardingsuch person’s education (including degrees obtained and dates), businessexperience during the past ten years, professional affiliations during the pastten years, and other relevant information.

(iv)             Informationregarding any family relationships of the proposed nominee as required byItem 401(d) of SEC Regulation S-K.

(v)                 Informationwhether the proposed nominee or the person submitting the recommendation has(within the ten years prior to the recommendation) been involved in legalproceedings of the type described in Item 401(f) of SEC Regulation S-K(and if so, provide the information regarding those legal proceedings requiredby Item 401(f) of Regulation S-K).

(vi)             Informationregarding the share ownership of the proposed nominee required by Item 403 ofRegulation S-K.

(vii)         Informationregarding certain relationships and related party transactions of the proposednominee as required by Item 404 of Regulation S-K.

(viii)     Thesigned consent of the proposed nominee in which he or she

a.                  consentsto being nominated as a director of Isonics if selected by the nominatingcommittee;

b.                 stateshis or her willingness to serve as a director if elected for compensation notgreater than that described in the most recent proxy statement;

c.                  stateswhether the proposed nominee is “independent” as defined by Nasdaq Marketplace Rule 4200(a)(15);and

d.                 atteststo the accuracy of the information submitted pursuant to paragraphs (i), (ii),(iii), (iv), (v), (vi), and (vii), above.

Although the information may be submitted by fax,e-mail, mail or courier, the nominating committee must receive the proposednominee’s signed consent, in original form, within ten days of making thenomination.

When the information required above has been received,the nominating committee will evaluate the proposed nominee based on thecriteria described below, with the principal criteria being the needs of Isonicsand the qualifications of such proposed nominee to fulfill those needs.

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The process forevaluating a director nominee is the same whether a nominee is recommended by ashareholder or by an existing officer or director. The Nominating Committeewill:

1.                Establishcriteria for selection of potential directors, taking into consideration thefollowing attributes which are desirable for a member of our Board ofDirectors: leadership; independence; interpersonal skills; financial acumen;business experiences; industry knowledge; and diversity of viewpoints. We willperiodically assess the criteria to ensure it is consistent with best practicesand the goals of Isonics.

2.                Identifyindividuals who satisfy the criteria for selection to the Board and, afterconsultation with the Chairman of the Board, make recommendations to the Boardon new candidates for Board membership.

3.                Receiveand evaluate nominations for Board membership which are recommended by existingdirectors, corporate officers, or shareholders in accordance with policies setby the Nominating Committee and applicable laws.

The Nominating Committee held no formal in-person meetings during the year ended April 30,2007. However, on August 1,2006 by unanimous written consent the Nominating Committee nominated all sevendirectors then serving on our Board of Directors to stand for re-election. On July 19, 2007 by unanimouswritten consent the Nominating Committee nominated five of the six directorsthen serving on our Board of Directors to stand for re-election at a meetingscheduled to be held on November 8, 2007, although we are consideringpostponing that meeting. Mr. Parker requested to not stand for re-electionto the Board of Directors at our next annual shareholder meeting and thereforewas not nominated. Subsequently Mr. Weiss advised us that he was consideringnot standing for election at the next shareholders’ meeting. Both Mr. Parkerand Mr. Weiss indicated that they intend to serve out their term.

Isonics has not engagedthe services of or paid a fee to any third party or parties to identify orevaluate or assist in identifying or evaluating potential nominees. NeitherIsonics nor our Nominating Committee has received a recommended nominee fromany shareholder that beneficially own more than 5% of Isonics common stock orgroup of shareholders that beneficially own more than 5% of our common stock.

**Identification ofAudit Committee**

We have aseparately-designated standing audit committee established in accordance with Section 3(a)(58)(A) ofthe Exchange Act**.**The following persons currentlyserve on our Audit Committee:  Richard H.Hagman, Richard Parker and Russell W. Weiss, all of whom are considered “independent”as that term is defined in Rule 4200(a)(15) of the Nasdaq listingstandards.

**Audit CommitteeFinancial Expert**

We have not named an “audit committee financial expert”serving on our Audit Committee. Our Audit Committee consists of threedirectors, all of whom are financially literate, have experience with publiccompanies, and are knowledgeable about our business and financial position. Dueto the nature of our operations, our Board of Directors does not believe thatit needs to name an audit committee financial expert at this time.

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**ITEM 11.**         EXECUTIVECOMPENSATION

**CompensationDiscussion and Analysis**

***Overview***

The following CompensationDiscussion and Analysis describes the material elements of compensation for theexecutive officers identified in the Summary Compensation Table containedelsewhere in this****Annual Report.

***Oversight of Executive Compensation Program***

As more fully described below, the CompensationCommittee of the Board of Directors (the “Compensation Committee”) reviews andrecommends to the full Board of Directors the total direct compensationprograms for our executive officers, including the named executive officers.Our senior executive officers, Christopher Toffales and John Sakys, review thebase salary, annual bonus and long-term compensation levels for the other officersand corporate employees. The entire Board of Directors remains responsible forsignificant changes to or adoption of new employee benefit plans. Consistentwith the listing requirements of the Nasdaq Capital Market, the CompensationCommittee is composed entirely of independent members of our Board ofDirectors.

The Compensation Committeehas in the past retained compensation consultants to assist in its analysis ofexecutive compensation, but has not retained any consultants during fiscal year2007. When most recently reviewed by Mercer Human Resource Consulting inSeptember 2005, Mercer identified a peer group of public companies of asimilar size to, and in similar industries as, Isonics at that time. TheCompensation Committee believes that the situation at Isonics has changedsignificantly since that time, and this peer group may no longer be relevant bywhich to judge compensation paid by Isonics.

***Compensation Program Philosophy and Objectives***

Our businessstrategy is to enhance shareholder value through growth in our assets,revenues, and resulting cash flows from operations. During early calendar 2007,we changed our emphasis from research and development activities on a varietyof products to a more focused business plan. This more focused business plan isdirected at:

·       Maintainingand improving the performance that has been achieved by our semiconductordivision (Isonics Vancouver, Inc.) during the past two years (which, sinceApril 2007, has been adversely impacted by an industry-wide businessslowdown);

·       Maintainingand improving the performance of Protection Plus Security Corporation whichprovides security guard services to approximately 30 customers, locatedprimarily in the northeastern United States;

·       Focusingour homeland security operation on our Ion Mobility Spectroscopy detectionproduct, seeking the necessary certifications, and determining whether anindustry partner would be interested in joint venturing this product with us(which we are not currently actively pursuing);

·       Continuingto pursue our infra-red project with Lucent Technologies, Inc., throughour 90%-owned SenseIt subsidiary (which we have been unable to accomplish,having failed to make a payment due July 16, 2007);

·       Thesale of the assets that constituted our life sciences business segment(accomplished in June 2007); and

·       Minimizinggeneral and administrative expenses and other non-critical expenses (which weare continuing to review).

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Starting in February 2007 we took a number ofsteps to reduce costs associated with senior management to extend our cashresources to the maximum extent possible. During this period, we entered intoseparation agreements with our former president and our former senior vicepresident, both of whom had been employed by Isonics since before its initialpublic offering. In considering management changes, the Board of Directors,with the participation of the Compensation Committee, considered a number offactors and ultimately appointed a new president (who is also serving asinterim chief executive officer) and a new chief financial officer.

Following theseinitial changes, the Compensation Committee redefined our compensation program,and believes that our compensation program is now designed to help ussuccessfully implement our business strategy. Our compensation program has fourobjectives:

·       Toattract, retain and motivate qualified executives whose performance is key tothe successful execution of our strategy and the achievement of our corporategoals;

·       Tocreate a performance-oriented environment that rewards achievement of ourshort- and long-term strategic goals;

·       Toprovide an executive compensation structure that is internally equitable basedupon the level of responsibility of our executives; and

·       Toalign the interests of our executive officers with those of our shareholders.

In making compensationdecisions, the Compensation Committee considers various factors such as eachexecutive’s motivation level, leadership ability, overall knowledge andexperience in his particular segment of our business, the competitivecompensation environment for such individual, that person’s unique skills andhis or her expected future contribution to the success of our company. We feelthat if these qualities are rewarded, the executives will be motivated toachieve our corporate goals and implement our strategies.

***Elements of Compensation***

The CompensationCommittee believes that the compensation environment for qualifiedprofessionals in the industries in which Isonics operates is highly competitive,particularly as a result of Isonics’ current financial condition and thelikelihood that other companies will be able to offer more concrete benefitsand higher salaries to its senior officers. It also believes that similarcompensation pressure has resulted from increased financial reporting andcorporate governance regulatory issues implemented within recent years. Inorder to compete in this environment, our executive officers’ compensation hasfour components:

·       basesalary;

·       annualdiscretionary cash bonuses;

·       stockoption and performance share awards granted periodically under our incentiveplans; and

·       other benefits that, inmost cases, are available to all salaried employees.

***How Elements of Our Compensation Program are Relatedto Each Other***

We view the various components of compensation asrelated but distinct and emphasize “pay for performance” with a significantportion of total compensation reflecting a risk aspect tied to long- andshort-term financial and strategic goals. Our compensation philosophy is tofoster entrepreneurship at all levels of the organization by making long-termequity-based incentives, in particular stock option grants, a significantcomponent of executive compensation. We determine the appropriate level foreach compensation component based in part, but not exclusively, on our view ofinternal equity and consistency, 

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and other considerationswe deem relevant, such as rewarding extraordinary performance. Our CompensationCommittee has not adopted any formal or informal policies or guidelines forallocating compensation between long-term and currently paid out compensation,between cash and non-cash compensation, or among different forms of non-cashcompensation. We have not adopted any internal pay-equity proposal, but it isthe Compensation Committee’s goal to be fair and reasonable to all employeeswithin the limitations of Isonics’ financial capabilities and equityrequirements.

***Base Salary.******  ***Base salary, paid in cash, isthe first element of compensation to our officers. In determining base salariesfor the key executive officers of Isonics, we will, when cash considerationspermit, set base salaries at a level we believe enables us to hire and retainindividuals in a competitive environment and to reward individual performanceand contribution to our overall business goals, while recognizing that oursenior executive officers have additional incentives to encourage Isonics’growth and success and to reflect competitive practices, individual performanceand the officer’s contribution to our overall business goals. Individualperformance and contribution to the overall business goals of Isonics aresubjective measures and will also be evaluated by the Compensation Committee.

The Compensation Committee believes that base salariesfor our CEO and CFO are appropriate for executives serving as CEO and CFO ofpublic companies of a size and complexity similar to Isonics, given Isonics’lack of working capital and sufficient positive cash flow.

The Compensation Committee believes that base salaryshould be relatively stable over time, providing the executive a dependable,minimum level of compensation which is approximately equivalent to compensationthat may be paid by competitors for persons of similar abilities. It is the CompensationCommittee’s goal to reconsider salaries and benefits for its named executiveofficers and on a company-wide basis when Isonics’ working capital and cashflow permit.

As noted, during our fiscal 2007, we restructured oursenior management significantly. We terminated our relationships with officerswith annual salaries of $275,000 (Mr. Alexander), $249,000(Mr. Rubishevsky), $176,667 (Dr. Walitzki), $165,200(Ms. Gardner), and $151,200 (Dr. Burden). We filled certain of thosepositions (while other positions remain unfilled) by promoting from within withsalary increases to Messrs. Deane ($25,000 increase) and Meadows ($20,000increase), and hiring Christopher Toffales to serve in the part-time role asChairman of the Board at the rate of $10,000 per month. In addition, weconverted certain persons who were formally employees into consultants at acost savings to Isonics.

As discussed below, the base salary and other benefitspaid to our Chairman, Christopher Toffales (who also serves as president of our90%-owned SenseIt Corp subsidiary) were negotiated with Mr. Toffales andcontained in employment agreements he has entered into with Isonics andSenseIt. Our negotiations with Mr. Toffales at the time he became employedby SenseIt were conducted at a time when Mr. Toffales was not an affiliateof Isonics. Our negotiations with Mr. Toffales to become Chairman ofIsonics occurred when his only relationship with Isonics was through SenseIt.

The consulting fees and stock warrants paid to SoundBusiness Solutions, Inc. principal Joanna Lohkamp, chief operating officerof our wholly owned subsidiary conducting our semiconductor operations inVancouver, Washington, have been negotiated between Isonics andMs. Lohkamp. The improved performance results at our semiconductorsubsidiary have, in the Compensation Committee’s opinion, justified thecompensation paid to her notwithstanding the current industry slowdown that hasadversely impacted our semiconductor operations.

***AnnualDiscretionary Cash Bonuses.*****  **Annualdiscretionary cash bonuses are the second prong of our compensation plan. TheCompensation Committee believes that it is appropriate that executive officersand other employees have the potential to receive a significant portion oftheir annual cash compensation as a cash bonus to encourage performance toachieve key short-term (annual) corporate objectives and to 

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be competitive from atotal remuneration standpoint. The payment of any bonus is subject to cash flowconsiderations, and even when a bonus is declared, the Compensation Committeemay choose to pay the bonus in equity rather than in cash where cash flowconsiderations require.

We paid cash bonuses during fiscal years 2007, 2006and 2005 as disclosed in the “Summary Compensation Table” included subsequentlywithin this Item 11. Additionally, subsequent to April 30, 2007, we paiddiscretionary cash bonuses to Messrs. Sakys ($80,000), Deane ($25,000) andMeadows ($22,500) related to performance during fiscal year 2007. We arecontractually obligated to pay certain bonuses to our Chairman, ChristopherToffales, as a result of his meeting certain goals set forth in his employmentagreement. The bonus obligation and the goals were negotiated withMr. Toffales as a condition of his employment at Isonics.

We have no set formula for determining or awardingdiscretionary cash bonuses to our other executives or employees (other thanMr. Toffales, as discussed above). In determining whether to award bonusesand the amount of any bonuses, we have taken and will continue to take intoconsideration discretionary factors such as the individual’s current andexpected future performance, level of responsibilities, retentionconsiderations, and the total compensation package, as well as Isonics’ overallperformance as reflected by improvements in shareholder equity, revenues,EBITDA, cash flow and other operational factors.

The Compensation Committee may also consider howunexpected events may have impacted the Company’s performance with respect todetermining the appropriateness of a bonus. For example, a large acquisitionmay substantially change our budget and forecast prepared prior to thebeginning of a year, thereby affecting the original guidelines established forpayment of bonuses. Also, our Compensation Committee encourages our executivesto pursue long-term goals, even if these long-term goals may result in areduction in our near-term performance. Accordingly, the Compensation Committeewill determine whether and in what amount a discretionary bonus is appropriate foreach of the named executive officers after taking into account all factors thatthe Committee, in its discretion, determines to be appropriate.

Where the Compensation Committee determines thatbonuses are properly payable, but cash considerations do not permit the paymentof a bonus in cash, the Compensation Committee will consider payment of thebonus amount in restricted stock or options. The Compensation Committee mayalso defer all or any part of any bonus to future years and to pay bonuses evenif no bonus would be payable under the bonus plan.

***Long-TermEquity-Based Incentives.****  *Equity-basedincentives form a third element of our compensation program. Long-termequity-based incentive compensation is an element of our compensation policybecause we believe it aligns management and executives’ interests with theinterests of Isonics’ shareholders. Our equity incentives also reward theattainment of long-term corporate objectives by our executives. We generallygrant equity awards that are subject to vesting over several years in order toencourage management and executive retention. We also believe that grants ofequity-based compensation are necessary to enable us to be competitive from atotal remuneration standpoint. At the present time, Isonics has two equityincentive plans for its management and employees: its 2005 Stock Option Plan(which has been approved by Isonics’ shareholders) and its 2007 RestructuringEquity Plan (which is being submitted to Isonics’ shareholders for approval atthe next annual shareholders’ meeting). There remain stock options outstandingunder prior plans, but no further rights or options may be granted under anyprior plan.

The Compensation Committee acts as the manager of ourlong-term equity-based incentive plans and perform functions that includeselecting award recipients, determining the timing of grants and assigning thenumber of shares subject to each award, fixing the time and manner in whichawards are exercisable, setting exercise prices and vesting and expirationdates, and from time to time adopting rules and regulations for carryingout the purposes of our plans. For compensation decisions regarding the grantof 

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equity compensation toexecutive officers and other employees, our Compensation Committee typicallyconsiders recommendations from our chief executive officer as well as thecompetitive environment associated with longer-term compensation. All awardsare priced at the fair market value on the grant date in accordance with SFAS123(R).

In addition, all equity awards to our employees,including executive officers, and to our directors have been granted andreflected in our consolidated financial statements, based upon the applicableaccounting guidance, at fair market value on the grant date in accordance withSFAS 123(R). Information about unvested performance shares and outstandingoptions held by our named executive officers and directors is contained in the“Outstanding Equity Awards at Fiscal Year End—2007” and “Director Compensation”tables.

Typically, awards vest over multiple years but theCompensation Committee maintains the discretionary authority to vest the equitygrant immediately if the individual situation merits. In the event of a changeof control, or upon the death, disability, retirement or termination of agrantee’s employment without good reason, all outstanding equity-based awardswill immediately vest.

We have no set formula for granting awards to ourexecutives or employees. In determining whether to grant awards and the amountof any awards, we take into consideration discretionary factors such as theindividual’s current and expected future performance, level ofresponsibilities, retention considerations, and the total compensation package.

During February 2007, the Compensation Committeeapproved the award of an aggregate of 1,000,000 options to purchase commonstock to Isonics’ president, chief financial officer, corporate controller, anda former vice president in connection with their assuming new duties andresponsibilities as a result of the change of management. These options vestedimmediately and have an exercise price of $1.94 per share but are subject toshareholder approval of the 2007 Restructuring Equity Plan, which approval hasnot been sought. Consequently, all options issued under the 2007 RestructuringEquity Plan are currently not exercisable.

In addition, Isonics issued options to purchase2,250,000 shares to Chris Toffales as part of his compensation package tobecome our Chairman and take personal control over the continuingrestructuring. The stock options granted to Mr. Toffales will vestimmediately upon shareholder approval of the 2007 Restructuring Equity Plan (asto 500,000 shares), on April 30, 2008 (as to 750,000 shares) and inmonthly increments thereafter (83,333 per month) through April 30, 2009).Mr. Toffales’ options are exercisable through the date equal to five yearsafter approval of the 2007 Restructuring Equity Plan at an exercise price of$1.76 per share.

Since the end of our fiscal year we have grantedoptions to purchase 150,000 shares to Michael Caridi from our 2007Restructuring Equity Plan as part of his compensation package for serving asthe senior vice president of our wholly owned subsidiary Protection PlusSecurity Corporation (“PPSC”). The stock options granted to Mr. Caridi aresubject to the following vesting schedule: 50,000 shares vested immediatelyupon the execution Mr. Caridi’s employment agreement; 25,000 shares veston December 22, 2007; 25,000 shares vest on March 22, 2008; 25,000shares vest upon PPSC achieving certain financial milestones in the fiscal year2008; and an additional 25,000 shares vest upon PPSC achieving certainfinancial milestones in the fiscal year 2009. Mr. Caridi’s options areexercisable through June 21, 2012, though subject to shareholder approvalof the 2007 Restructuring Equity Plan,****and areexercisable at $1.47 per share.

On June 19, 2007, we granted options to purchase200,000 shares to Sound Business Solutions, Inc., a corporation controlledby the chief operating officer of Isonics Vancouver, Inc, Joanna Lohkamp. Thisoption was granted pursuant to our 2005 Stock Option Plan. The stock optionsgranted to Sound Business Solutions Inc. are subject to the following vestingschedule: 66,667 shares vested immediatelyupon grant; 

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66,667shares vest on September 7, 2007; and 66,666 shares vest onJanuary 31, 2008. The stock options granted to Sound Business SolutionsInc. are exercisable through June 18, 2011 at $1.45 per share. Options topurchase 50,000 shares are currently exercisable while options to purchase150,000 shares are subject to our shareholders approving an increase to thecumulative shares issuable under the 2005 Stock Option Plan.

***Other EmployeeBenefits.******  ***Isonics’executive officers (except Ms. Lohkamp who is an independent contractor)are eligible to participate in all of our employee benefit plans, such asmedical, dental, group life and long-term disability insurance, in each case onthe same basis as other employees. Isonicsprovides vacation and other paid holidays to all employees, includingthe named officers, which are comparable to those provided at other employers**.**

Isonics’ executive officers (except Ms. Lohkampwho is an independent contractor) are also eligible to participate in our401(k) plan on the same basis as other employees. Isonics’ Board ofDirectors, at its sole discretion, may authorize Isonics to match (in part orin whole) the contributions of each employee to the 401(k) plan during agiven year. During our 2007 fiscal year, Isonics did match a portion of theemployees’ 401(k) contributions, up to 4% of employees’ salaries(including our named executive officers).

Isonics’ articles of incorporation and bylaws entitleour officers and directors to advancement or reimbursement of their legalexpenses, to the fullest extent permitted by law, if they are involved inlitigation as a result of performing services for Isonics or other enterpriseat its request. The right to indemnification is conditioned on meeting aspecified standard of care, generally requiring the officer to have acted ingood faith and in a manner he reasonably believed to be in or not opposed tothe best interests of Isonics.

***Employment Contracts, Change-In-Control Arrangementsand Certain Other Matters.******  ***Allof our executive officers, except Mr. Toffales and Ms. Lohkamp, areserving without an employment agreement and are, therefore, at-will employees.On February 12, 2007, the Board of Directors adopted change-in-controlprovisions applicable to Messrs. Sakys, Deane, and Meadows. Under theseprovisions, upon termination of employment without cause, upon a change ofcontrol, or if the corporate offices move out of the Denver, Coloradometropolitan area, the officer shall be paid a severance equal to six monthssalary over a twelve month period. The term “change of control” is defined tomean the occurrence of any of the following events:

(i)            A majority of thepersons who were members of the Board of Directors before any cash tenderoffer, merger or other business combination, sale of assets, sale or transferof Isonics stock or other equity securities, or contested election orcombination of the foregoing, shall cease to constitute a majority of thedirectors after the completion of such event; or

(ii)        The closing of (A) amerger, consolidation or reorganization of Isonics with or into anothercorporation in which the holders of Isonics’ common stock immediately beforesuch merger, consolidation or reorganization do not, immediately following suchmerger, consolidation or reorganization, hold as a group on a fully dilutedbasis both the ability to elect at least a majority of the directors of thesurviving corporation (or its parent), and at least a majority in value of thesurviving corporation’s (or its parent’s) outstanding equity securities, or(B) a sale or other disposition of all or substantially all of the assetsof Isonics, unless Isonics owns 50% or more of the outstanding votingsecurities or other equity interests of the transferee at the time of thetransfer.

Isonics has enteredinto an employment agreement with its Chairman, Christopher Toffales. Thisagreement, dated February 16, 2007 and expiring on April 30, 2009,confirms Mr. Toffales’ appointment as a director and as Chairman of theBoard of Directors of Isonics. The agreement contemplates thatMr. Toffales will devote approximately half of his time to Isonics’business. Isonics agreed to pay him $10,000 per month for this work, and hasissued to him options to purchase 2,250,000 shares of Isonics 

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commonstock as described above. Mr. Toffales will receive a bonus of up to$250,000 during the year ending April 30, 2008, if he achieves certainmilestones:

(A)  Mr. Toffales,with the assistance of other members of management and employees of Isonics,will assess Isonics’ ion-mobility spectroscopy (“IMS”) technology and productsand provide a recommendation to the Board of Directors for the continuation ofthat division, discontinuance of that division, or other recommendation.Mr. Toffales did so at the March 28, 2007 Board meeting. Thismilestone also required that, since Mr. Toffales concluded that theCompany should continue to pursue the IMS technology and products, then he,with the assistance of other members of management and employees of the Company,present to the Board of Directors a more complete plan for presentation to theBoard of Directors by April 15, 2007.

The  Board ofDirectors concluded that Mr. Toffales completed this milestone and, as aresult, Isonics paid $62,500 of the bonus (25%) to Mr. Toffales subsequentto April 30, 2007.

(B)   Mr. Toffales,with the assistance of other members of management and employees of Isonics,will create a three-year strategic plan for Isonics for presentation to theBoard of Directors not later than October 2007. This is expected to be areasonably detailed plan, including appropriate forecasts and otherinformation. When completed, Mr. Toffales will have earned 25% of thebonus, which portion of the bonus shall be paid to Mr. Toffales no laterthan fifteen calendar days following the date on which such portion of thebonus is earned.

(C)   Mr. Toffaleswill identify and negotiate a significant strategic acquisition for Isonics byApril 30, 2008, and (by that date) obtain a letter of intent or otherdocumentation indicating the other party’s desire and intention to completesuch transaction with a reasonable likelihood that the acquisition can and willbe completed in accordance with legal requirements before November 1,2008. When such letter of intent is obtained, Mr. Toffales will haveearned 50% of the bonus, which portion of the bonus shall be paid toMr. Toffales no later than fifteen calendar days following the date onwhich such portion of the bonus is earned.

The compensation committee also agreed to negotiate,on or before March 31, 2008, a reasonable, appropriate, market-based bonusprogram for Mr. Toffales’ continuing employment for the Company’s fiscalyear ending April 30, 2009, which will be based on EBITDA and otherreasonable performance criteria.

The Board ofDirectors may terminate Mr. Toffales’ employment by Isonics “for cause” bydelivering to him, not less than ten days prior to the date on which thetermination is to be effective, a written notice of termination for causespecifying the act, acts or failure to act that constitute the cause. For thepurposes of this agreement, the term “for cause” shall mean:

(i)            any act of fraud orembezzlement materially adversely affecting the financial, market, reputationor other interests of Isonics;

(ii)        in the event of aconviction of Mr. Toffales of, or a plea of nolo contendere to, (A) any violent felony or misdemeanorresulting in a jail sentence, (B) any felony involving moral turpitude or(C) a criminal violation of federal or state securities laws;

(iii)    any material failure toperform his duties as set forth in his Employment Agreement which results inmaterial harm to the Company, after reasonable notice and the opportunity tocure; or

(iv)      his death.

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If Isonics terminates Mr. Toffales “without cause,”one-half of the unvested options will immediately vest. If Isonics terminatesMr. Toffales without cause or fails to renew his employment agreement when itexpires on April 30, 2009, the vested options remain exercisable for their fullterm. In that case, Mr. Toffales would also be entitled to a severancepayment equal to $120,000 plus the greater of either: (a) the $250,000bonus for fiscal year 2008; or (b) the amount of his to-be-negotiated 2009bonus pro-rated for the number of days in fiscal year 2009 that he was employedby Isonics. This agreement provides that Isonics must indemnify Mr. Toffales tothe maximum, extent provided by California law, in addition to any otherliability that Isonics may have to Mr. Toffales.

Mr. Toffales is also employed as president andChairman of the Board by Isonics’ 90%-owned subsidiary, SenseIt Corp. pursuantto an agreement dated October 26, 2006. TheSenseIt employment agreement has an initial term of two years through October26, 2008. It provides for automatic two year extensions unless SenseIt or Mr.Toffales chooses not to renew. The SenseIt employment agreement requires thatMr. Toffales provide five days per calendar month to SenseIt activities for abase salary of $21,000 per calendar month. Additional days will be billed at$4,000 per day. The SenseIt employment agreement also requires thatSenseIt maintain, at its expense and at no cost to Mr. Toffales (but subject toExecutive being insurable), a (i) lifeinsurance policy on his life providing for a minimum death benefit of$5,000,000 and (ii) long-term disability insurance policy for the benefit ofMr. Toffales and providing for a minimum net benefit of $10,000 per month aftertaxes. These insurance policies are subject to the limitation that SenseIt willnot have to pay premiums in excess of $15,000 per year. After SenseIt receives$5,000,000 of additional financing from sources other than Isonics, SenseItwill be obligated to pay Mr. Toffales a car allowance of $1,200 per month(plus premiums for auto insurance).

As with the employment agreement with Isonics, SenseItmay terminate the SenseIt employment agreement for cause. “Cause” is definedsimilarly in this SenseIt employment agreement to the employment agreement withIsonics. SenseIt terminates the SenseIt employment agreement with Mr. Toffalesafter SenseIt has made a commercial sale of a Lucent product, as described inthe Lucent Agreement, or has acquired a business having revenues of $10 millionor more in any one year, termination without cause will result in SenseIt’sobligation to pay Mr. Toffales a two-year severance based on the respectiveannualized salary over the previous five years. The SenseIt employmentagreement contains an indemnification provision for Mr. Toffales’ benefitsimilar to that provided in his employment agreement with Isonics.

Additionally, we have entered into a consultingagreement with Sound Business Solutions, Inc. principal Joanna Lohkamp, thechief operating officer of the subsidiary corporation conducting oursemi-conductor operations in Vancouver, Washington. Ms. Lohkamp is anindependent contractor and her current consulting agreement will terminateduring September 2007. Ms. Lohkamp is paid at a base hourly rate of $200 perhour. Additionally, we agreed to grant Ms. Lohkamp or her designee options topurchase 200,000 shares of our common stock pursuant to our 2005 Stock OptionPlan. Ms. Lohkamp’s consulting agreement provides that we may terminate theagreement “for cause” and it also contains non-compete, non-solicitation andconfidentiality provisions applicable during the term of the agreement andthereafter. 

***Insider Trading andStock Ownership Policy.*****  **A stockownership policy is a policy that requires our senior management to own aminimum interest in Isonics common stock. Currently we do not have astock ownership policy that applies to our employees or to our executiveofficers. 

We do have an Insider Trading Policy for which allemployees and members of our Board of Directors are prevented from buying orselling Company stock during an announced “trading blackout” period. Generallya blackout period is placed in effect by senior management when materialnon-public information about Isonics exists and may have an influence on themarketplace. Our officers have adopted program selling plans under SEC Rule10b5-1 which permit them to sell shares even while in possession of 

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inside information if theydo so under a non-discretionary plan put into place at a time when they did nothave material non-public information. 

During our 2007 fiscal year, none of our executiveofficers sold shares of our common stock pursuant to Rule 10b5-1 plans. 

***CertainRelationships and Related Party Transactions.***   Our Audit Committee charterprovides that Isonics shall not enter into a related party transaction unlesssuch transaction is approved by the Audit Committee after a review of thetransaction by the Audit Committee for potential conflicts of interest. A transactionwill be considered a “related party transaction” if the transaction would berequired to be disclosed under Item 404 of Regulation S-K. The AuditCommittee has the authority to hire legal, accounting, financial or otheradvisors as it may deem necessary or desirable and/or to delegateresponsibilities to executive officers of Isonics in connection withdischarging their duties. As of July 31, 2007, we are not aware of any relatedparty transactions with our executive officers that may cause a conflict ofinterest with Isonics. At the time that Isonics hired Mr. Toffales as Chairmanas described above, he was serving as president and Chairman of SenseIt Corp.and, therefore, could be considered to be an affiliate of Isonics. Hisemployment package was approved by the members of the Audit Committee voting asmembers of the Board of Directors. Further, as described below in February 2007we entered into settlement agreements and mutual general releases with ourformer Chief Executive Officer and our former Senior Vice President pursuant towhich both resigned from their positions, terminated their employment contractwith Isonics and accepted compensation packages for continuing employment asnon-officer, non-director consulting employees. Both of these settlementagreements were approved by the members of the Audit Committee voting asmembers of the Board of Directors

***Accounting and TaxConsiderations.******  ***We have structured our compensation program tocomply with Internal Revenue Code Sections 162(m) and 409A. UnderSection 162(m) of the Internal Revenue Code, a limitation was placed ontax deductions of any publicly-held corporation for individual compensation tocertain executives of such corporation exceeding $1,000,000 in any taxableyear, unless the compensation is performance-based. 

If an executive is entitled to nonqualified deferredcompensation benefits that are subject to Section 409A, and such benefitsdo not comply with Section 409A, then the benefits are taxable in thefirst year they are not subject to a substantial risk of forfeiture. In suchcase, the service provider is subject to regular federal income tax, interestand an additional federal income tax of 20% of the benefit includible inincome. 

Isonics has no employees with non-performance basedcompensation paid in excess of the Internal Revenue Code §162(m) tax deductionlimit. However, we reserve the right to use our judgment to authorizecompensation payments that do not comply with the exemptions inSection 162(m) when we believe that such payments are appropriate and inthe best interest of the stockholders, after taking into consideration changingbusiness conditions or the executive’s individual performance and/or changes inspecific job duties and responsibilities. 

In considering severance and other payments toemployees, the Compensation Committee also considers the potentialapplicability of §280G of the Internal Revenue Code. This section applies topayments made to a “disqualified individual” (an employee or consultant who isan officer, shareholder, or highly compensated individual) as a result of achange of control of the employer. If certain compensatory payments are paid toa disqualified individual as a result of a change of control exceed three timesthe individual’s “base amount” (generally an average of the individual’s W-2compensation for the five years preceding the year in which the change incontrol occurs) (referred to as “parachute payments”), then all amounts paid inexcess of one times the base amount (the “excess parachute payment”) arenondeductible to the employer. Section 4999 of the Code imposes a 20% excisetax on the recipient of any “excess parachute payment.”

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All equity awards to our employees, includingexecutive officers, and to our directors have been granted and reflected in ourconsolidated financial statements, based upon the applicable accountingguidance, at fair market value on the grant date in accordance with SFASNo. 123R. On October 22, 2004, the American Jobs Creation Act of 2004was signed into law, changing the tax rules applicable to nonqualified deferredcompensation arrangements. While the final regulations have not become effectiveyet, Isonics believes it is operating in good faith compliance with thestatutory provisions which were effective January 1, 2005. 

***Compensation Committee Interlocks and InsiderParticipation.***   The following persons servedon our Compensation Committee during the fiscal year completed April 30,2007:  Messrs. Hagman, Parker, Weiss andVerdery. None of the members of our compensation committee was an employee ofIsonics during the fiscal year, nor has any member of Compensation Committeeformerly served an officer of Isonics, and none of the committee membersentered into a transaction with Isonics in which they had a direct or indirectinterest that is required to be disclosed pursuant to Item 404 of RegulationS-K.

**REPORT OF THECOMPENSATION COMMITTEE**

*The followingCompensation Committee Report does not constitute soliciting material andshould not be deemed filed or incorporated by reference into any other Companyfiling under the Securities Act of 1933 or the Securities Exchange Act of 1934,except to the extent the Company specifically incorporates this Report.*

The Compensation Committee of the Board of Directorshas reviewed and discussed the Compensation Discussion and Analysis required byItem 402(b) of SEC Regulation S-K with management. The CompensationCommittee recommended to the Board of Directors that the CompensationDiscussion and Analysis be included in the registrant’s annual report on Form10-K. 

Respectfully submitted by the Compensation Committee of the Board ofDirectors:

Richard L. Parker, ChairmanRussell W. WeissRichard H. HagmanC. Stewart Verdery, Jr.

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**SummaryCompensation Table**

The following table setsforth information regarding compensation awarded, paid to, or earned by thechief executive officer and the other principal officers of Isonics for thethree years ended April 30, 2007. No other executive officer earned salary andbonus compensation exceeding $100,000 during any of those years. This includesall compensation paid to each by Isonics and any subsidiary. 

**SUMMARYCOMPENSATION TABLE**

| Name and  Principal  Position | ** ** | ** ** | ** ** | **Year** | ** ** | **Salary  ($)** | ** ** | **Bonus  ($)** | ** ** | **Stock  Awards(7)  ($)** | ** ** | **Option  Awards  ($)** | ** ** | **Non-Equity  Incentive  Plan  Compensation  ($)** | ** ** | **Non-Qualified  Deferred   Plan   Compensation  ($)** | ** ** | **All   Other  Compensation  ($)** | ** ** | **Total  ($)** | ** ** |
|------------------------------------|------------|------------|------------|----------|------------|-----------------|------------|----------------|------------|---------------------------|------------|-------------------------|------------|----------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------|------------|----------------|------------|
| Christopher Toffales,              |       |       | 2007       |     |       | $               | 254,692    |           | $          | 0                         |       |                    | $          | 667,000                                            |       |                                                             | $          | 0                                       |       |           | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 0 |   |   | $ | 921,692 |   |
| Chairman of                        |       |       | 2006       |     |       | $               | 0          |           | $          | 0                         |       |                    | $          | 0                                                  |       |                                                             | $          | 0                                       |       |           | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 0 |   |   | $ | 0 |   |
| the Board*(1)                      |       |       | 2005       |     |       | $               | 0          |           | $          | 0                         |       |                    | $          | 0                                                  |       |                                                             | $          | 0                                       |       |           | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 0 |   |   | $ | 0 |   |
| John Sakys,                        |       |       | 2007       |     |       | $               | 200,000    |           | $          | 0                         |       |                    | $          | 0                                                  |       |                                                             | $          | 63,359                                  |       |           | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 0 |   |   | $ | 263,359 |   |
| CEO, COO and                       |       |       | 2006       |     |       | $               | 181,250    |           | $          | 18,983                    |       |                    | $          | 0                                                  |       |                                                             | $          | 74,500                                  |       |           | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 0 |   |   | $ | 274,733 |   |
| President*(2)                      |       |       | 2005       |     |       | $               | 142,917    |           | $          | 20,000                    |       |                    | $          | 0                                                  |       |                                                             | $          | 265,500                                 |       |           | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 15,920 |   |   | $ | 444,337 |   |
| Kenneth J. Deane,                  |       |       | 2007       |     |       | $               | 126,042    |           | $          | 10,000                    |       |                    | $          | 0                                                  |       |                                                             | $          | 16,896                                  |       |           | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 0 |   |   | $ | 152,938 |   |
| Vice President                     |       |       | 2006       |     |       | $               | 115,833    |           | $          | 0                         |       |                    | $          | 0                                                  |       |                                                             | $          | 26,750                                  |       |           | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 0 |   |   | $ | 142,583 |   |
| and CFO*(3)                        |       |       | 2005       |     |       | $               | 8,330      |           | $          | 0                         |       |                    | $          | 0                                                  |       |                                                             | $          | 93,500                                  |       |           | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 0 |   |   | $ | 101,830 |   |
| Greg Meadows,                      |       |       | 2007       |     |       | $               | 128,438    |           | $          | 13,000                    |       |                    | $          | 0                                                  |       |                                                             | $          | 16,896                                  |       |           | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 0 |   |   | $ | 158,334 |   |
| Vice President and                 |       |       | 2006       |     |       | $               | 118,333    |           | $          | 0                         |       |                    | $          | 0                                                  |       |                                                             | $          | 53,500                                  |       |           | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 0 |   |   | $ | 171,833 |   |
| Corporate Controller*(4)           |       |       | 2005       |     |       | $               | 102,188    |           | $          | 10,000                    |       |                    | $          | 0                                                  |       |                                                             | $          | 0                                       |       |           | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 0 |   |   | $ | 112,188 |   |
| Joanna Lohkamp,                    |       |       | 2007       |     |       | $               | 498,025    |           | $          | 200,000                   |       |                    | $          | 0                                                  |       |                                                             | $          | 0                                       |       |           | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 20,000 |   |   | $ | 718,025 |   |
| COO Semiconductor                  |       |       | 2006       |     |       | $               | 445,950    |           | $          | 0                         |       |                    | $          | 0                                                  |       |                                                             | $          | 0                                       |       |           | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 75,000 |   |   | $ | 520,950 |   |
| Division*(5)                       |       |       | 2005       |     |       | $               | 0          |           | $          | 0                         |       |                    | $          | 0                                                  |       |                                                             | $          | 0                                       |       |           | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 0 |   |   | $ | 0 |   |
| James Alexander,                   |       |       | 2007       |     |       | $               | 275,000    |           | $          | 0                         |       |                    | $          | 485,000                                            |       |                                                             | $          | 63,359                                  |       |           | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 24,327 |   |   | $ | 847,686 |   |
| Former President                   |       |       | 2006       |     |       | $               | 257,750    |           | $          | 26,367                    |       |                    | $          | 0                                                  |       |                                                             | $          | 149,000                                 |       |           | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 15,701 |   |   | $ | 448,818 |   |
| and CEO(6)                         |       |       | 2005       |     |       | $               | 250,000    |           | $          | 50,000                    |       |                    | $          | 0                                                  |       |                                                             | $          | 406,000                                 |       |           | $          | 0 |   |   |   | $ | 0 |   |   |   | $ | 19,730 |   |   | $ | 725,730 |   |

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*                      Executive officer

(1)              On February 16, 2007, we entered into an employmentagreement with Mr. Toffales pursuant to which he began serving as the Chairmanof our Board of Directors and becoming actively involved in the restructuringand operations of Isonics. The material terms of his employment agreement aredescribed above. Mr. Toffales was then, and remains, an employee of asubsidiary, SenseIt Corp, as well as the holder of a 10% interest in SenseIt,for which a charge in the amount of $667,000 was recorded in our consolidatedfinancial statements for the year ended April 30, 2007. The disclosure includeshis salary as an employee of SenseIt and consulting fees paid to him prior tothe formation of SenseIt in October 2006. As part of his compensation packagewith Isonics, Mr. Toffales was granted options to purchase 2,250,000 shares ofour common stock. The stock options granted to Mr. Toffales will vestimmediately upon shareholder approval of the 2007 Restructuring Equity Plan (asto 500,000 shares), on April 30, 2008 (as to 750,000 shares) and in monthlyincrements thereafter (83,333 per month) through April 30, 2009). Mr. Toffales’options are exercisable through for a term that extends five years after shareholderapproval of our 2007 Restructuring Equity Plan at an exercise price of $1.76per share. The options are currently not exercisable because the 2007Restructuring Equity Plan has not been approved by shareholders and, as such,the financial impact of the options have not been included in the SummaryCompensation Table. 

(2)              Mr. Sakys served as our Chief Financial Officer untilFebruary of 2007 at which time he was appointed as our interim Chief ExecutiveOfficer, Chief Operating Officer and President. This disclosure includes Mr.Sakys’ compensation in all capacities. In February 2007 Mr. Sakys was alsoappointed to serve on our Board of Directors. On February 14, 2007, Mr. Sakyswas granted options to purchase 400,000 shares of our common stock from our2007 Restructuring Equity Plan, with such options vesting immediately butsubject to shareholder approval of the 2007 Restructuring Equity Plan. Becausethe 2007 Restructuring Equity Plan has not been approved by shareholders, thefinancial impact of the options have not been included in the SummaryCompensation Table. On February 15, 2007, Mr. Sakys agreed to forfeit optionsto purchase 51,953 shares of common stock pursuant to the 1996 Executives’Equity Incentive Plan (as adjusted for the reverse stock split) and options topurchase 31,250 shares of common stock pursuant to the 2005 Stock Option Plan(as adjusted for the reverse stock split).

(3)              Mr. Deane was appointed as our Chief Financial Officerand Vice President in February 2007. This disclosure includes Mr. Deane’scompensation in all capacities. On February 14, 2007, Mr. Deane was grantedoptions to purchase 200,000 shares of our common stock from our 2007Restructuring Equity Plan, with such options vesting immediately, but subjectto shareholder approval of the 2007 Restructuring Equity Plan. Because the 2007Restructuring Equity Plan has not been approved by shareholders, the financialimpact of the options have not been included in the Summary Compensation Table.On February 15, 2007, Mr. Deane agreed to forfeit options to 

19

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purchase 12,500 shares ofcommon stock granted pursuant to the 1996 Executives’ Equity Incentive Plan (asadjusted for the reverse stock split) and options to purchase 11,500 shares ofcommon stock granted pursuant to the 2005 Stock Option Plan (as adjusted forthe reverse stock split). 

(4)              OnFebruary 14, 2007, Mr. Meadows was granted options to purchase 200,000 sharesof our common stock from our 2007 Restructuring Equity Plan, with such optionsvesting immediately but subject to shareholder approval of the 2007Restructuring Equity Plan. Because the 2007 Restructuring Equity Plan has notbeen approved by shareholders, the financial impact of the options have notbeen included in the Summary Compensation Table. On February 15, 2007, Mr.Meadows agreed to forfeit options to purchase 12,500 shares of common stockgranted pursuant to the 1996 Executives’ Equity Incentive Plan (as adjusted forthe reverse stock split) and options to purchase 17,500 shares of common stockgranted pursuant to the 2005 Stock Option Plan (as adjusted for the reversestock split). 

(5)              On September 9, 2005, we granted Ms. Lohkamp a warrantto purchase 12,500 shares of our common stock (as adjusted for the reversestock split), exercisable at $11.36 (as adjusted for the reverse stock split).On August 1, 2006, we granted Ms. Lohkamp a warrant to purchase 12,500 sharesof our common stock (as adjusted for the reverse stock split), exercisable at$2.68 (as adjusted for the reverse stock split). Ms. Lohkamp is an independentcontractor and as such does not receive benefits generally provided to otherIsonics’ employees, including (but not limited to) medical coverage, dentalcoverage, participation in our 401(k) plan, vacation pay and holiday pay.

(6)              Mr. Alexander served as our President and ChiefExecutive Officer until February of 2007 when he resigned from those positions.At that time Mr. Alexander surrendered previously-issued options to acquire83,750 (as adjusted for the reverse stock split) shares of common stock(including 53,750 as adjusted for the reverse stock split) shares from Isonics’2005 Stock Option Plan) having exercise prices in excess of $4.60 (as adjustedfor the reverse stock split) per share. Pursuant to a Settlement Agreement andMutual Release, we issued Mr. Alexander 250,000 shares of our common stock fromthe Isonics’ 2005 Stock Option Plan (valued at $485,000 based on the closingprice of our stock of $1.94 on the date of grant). 

(7)              We calculated these amounts in accordancewith the provisions of SFAS 123(R) for 2007 and SFAS 123 for 2006 and 2005.Compensation expense related to stock options is calculated using theBlack-Scholes option-pricing model

***Elements of “All Other Compensation”***

As noted in the Summary Compensation Table above someof our executive officers and directors received compensation that has listedin our column labeled “All Other Compensation.” This compensation in this column consists of compensation receivedpursuant to Company matching contributions in our 401(k) profit sharing plan,life insurance premiums we paid on behalf of our executive officers andcompensation for serving on our Board of Directors. 

In October 1996, we adopted an employee benefit planunder Internal Revenue Code Section 401(k). The 401(k) plan is a profit sharingplan under which both employees and Isonics are entitled to contribute aportion of compensation and earnings, respectively, to investment funds tosupplement employee retirement benefits. 

We have adopted medical, dental, and life insuranceplans for our employees and their dependents partly at our cost. In some cases,we also provide discretionary disability and other insurance plans for thebenefit of our employees.

The following is adescription of the benefits received by each of the persons listed in theSummary Compensation Table who received compensation included as “All OtherCompensation.”

·       JohnSakys:   automobile allowance and payout of unused but accrued PersonalTime Off (paid at the employee’s then-current salary at time of payment)

·       JoannaLohkamp:   common stock warrants as described in footnote (5) to theSummary Compensation Table

·       JamesAlexander:   automobile allowance, payments on key man life insurance andpayout of unused but accrued Personal Time Off (paid at the employee’sthen-current salary at time of payment)

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**GRANTSOF PLAN-BASED AWARDS**

| ** ** | ** ** | ** ** | ** ** | **Estimated Future Payouts  Under Non-Equity  Incentive Plan Awards** | ** ** | **Estimated Future  Payouts Under Equity  Incentive Plan Awards** | ** ** | **All Other  Stock  Awards:  Number of  Shares of** | ** ** | **All other  Option  Awards:  Number of  Securities** | ** ** | **Exercise  or Base  Price of** | ** ** | **Grant  Date Fair  Value of** | ** ** |
|------------|------------|------------|------------|------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| **Name**   | ** ** | ** ** | ** ** | **Grant  Date**                                                                                | ** ** | **Thresh-  hold  ($)**                                                                     | ** ** | **Target  ($)**                                                    | ** ** | **Maxi-  mum  ($)**                                             | ** ** | **Thresh-  hold  (#)**                    | ** ** | **Target  (#)**                          | ** ** | **Maxi-  Mum  (#)** | ** ** | **Stock or  Units  (#)** | ** ** | **Underlying  Options  (#)** | ** ** | **Option  Awards  ($/Sh)** | ** ** | **Stock and  Option  Awards** | ** ** |
| **(a)**    | ** ** | **(b)**    | ** ** | **(c)**                                                                                        | ** ** | **(d)**                                                                                    | ** ** | **(e)**                                                            | ** ** | **(f)**                                                         | ** ** | **(g)**                                   | ** ** | **(h)**                                  | ** ** | **(i)** | ** ** | **(j)** | ** ** | **(k)** | ** ** | **(l)** | ** ** |
|            |            |            |            |                                                                                                |            |                                                                                            |            |                                                                    |            |                                                                 |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |  |  |

| Christopher Toffales* |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|-----------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| James Alexander       |   |   | 5/5/06 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 18,750 |   |   |   | $      | 4.60   |   |   |   | $      | 63,359 |   |   |
| John Sakys**          |   |   | 5/5/06 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 18,750 |   |   |   | $      | 4.60   |   |   |   | $      | 63,359 |   |   |
| Kenneth J. Deane**    |   |   | 5/5/06 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 5,000  |   |   |   | $      | 4.60   |   |   |   | $      | 16,896 |   |   |
| Greg Meadows**        |   |   | 5/5/06 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 5,000  |   |   |   | $      | 4.60   |   |   |   | $      | 16,896 |   |   |

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*                      As part of hiscompensation package on February 16, 2007 our Board of Directors grantedoptions to purchase 2,250,000 shares of our common stock to Mr. Toffalespursuant to our 2007 Restructuring Equity Plan, which plan is subject toshareholder approval. The material terms of this option grant are described inthe notes to the Summary Compensation Table above. Because the 2007Restructuring Equity Plan has not been approved by shareholders, the sharesunderlying the option are not included in the Grants of Plan-Based Awardstable.

**                 As describedabove, as part of the restructuring of our management on February 14, 2007our Board of Directors granted options to Messrs. Sakys, Deane and Meadowspursuant to our 2007 Restructuring Equity Plan, which is subject to shareholderapproval. The material terms of each of each option grant is outlined in thenotes to the Summary Compensation Table above. Because the 2007 RestructuringEquity Plan has not been approved by shareholders, the shares underlying the respectiveoptions are not included in the Grants of Plan-Based Awards table.

**OUTSTANDINGEQUITY AWARDS AT FISCAL YEAR-END 2007**

| ** ** | ** ** | ** ** | ** ** | **Option Awards**                                                                  | ** ** | **Stock Awards**                                                                        | ** ** |
|------------|------------|------------|------------|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| **Name**   | ** ** | ** ** | ** ** | **Number of  Securities  Underlying  Unexercised  Options  (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options  (#)  Un-  exercisable** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options  (#)** | ** ** | **Option  Exercise  Price  ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number  Of  Shares  or Units  of  Stock  That  Have  Not  Vested  (#)** | ** ** | **Market  Value  Of  Shares  Or  Units of  Stock  That  Have Not  Vested  ($)** | ** ** | **Equity  Incentive  Plan  Awards:  Number  Of  Unearned  Shares,  Units or  Other  Rights  That  Have not  Vested  (#)** | ** ** | **Equity  Incentive  Plan  Awards:  Market  Or Payout  Value of  Unearned  Shares,  Units or  Other  Rights  That  Have Not  Vested  ($)** | ** ** |
| **(a)**    | ** ** | ** ** | **(b)**    | ** **                                                                         | ** ** | ** **                                                                              | **(c)**    | ** ** | ** ** | ** ** | **(d)** | ** ** | ** ** | ** ** | **(e)** | ** ** | ** ** | ** ** | **(f)** | ** ** | ** ** | ** ** | **(g)** | ** ** | ** ** | ** ** | **(h)** | ** ** | ** ** | ** ** | **(i)** | ** ** | ** ** | ** ** | **(j)** | ** ** | ** ** |
|            |            |            |            |                                                                                    |            |                                                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| John Sakys*             |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |
|-------------------------|--------|--------|--------|------------|--------|--------|--------|------------|--------|--------|--------|------------|--------|--------|--------|------------|--------|--------|--------|------------|--------|--------|--------|------------|--------|--------|--------|------------|--------|--------|--------|------------|--------|--------|--------|------------|--------|
| Kenneth J. Deane*       |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |
| Greg Meadows*           |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |
| Christopher  Toffales** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |   | — | ** ** |   |

 

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*                      On February 14, 2007Messrs. Sakys, Deane and Meadows were granted options pursuant to our 2007Restructuring Equity Plan. The material terms of these option grants aredescribed in the notes to the Summary Compensation Table above. Because the2007 Restructuring Equity Plan has not been approved by shareholders, theshares underlying the respective options are not included in the OutstandingEquity Awards at Fiscal Year-End 2007 table.

**                 On February 16, 2007 we entered intoan employment agreement with Mr. Toffales pursuant to which he serves asthe Chairman of our Board of Directors. The material terms of this option grantis described in the notes to the Summary Compensation Table above. Because the2007 Restructuring Equity Plan has not been approved by shareholders, theshares underlying the respective options are not included in the OutstandingEquity Awards at Fiscal Year-End 2007 table.

**Option Exercisesand Stock Vested**

None of our executiveofficers exercised any stock options, SARs or similar instruments during thefiscal year ended April 30, 2007, or subsequently. None of our currentexecutive officers serving were granted restricted common stock that wassubject to a vesting schedule during our fiscal year ended April 30, 2007,or subsequently.

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**Pension Benefits**

Isonics has no definedbenefit plans, supplemental executive retirement plans or actuarial plans.

**NonqualifiedDefined Contribution and Other Deferred Compensation Plans**

Isonics does not have anynonqualified defined contribution or deferred compensation plans.

**Potential PaymentsUpon Termination or Change-in-Control**

*Messrs. Sakys,Deane and Meadows*

Asdescribed above, on February 12, 2007, the Board of Directorsadopted change-in-control provisions applicable to Messrs. Sakys, Deaneand Meadows. Under these provisions, upon the termination of employment withoutcause, upon a change of control, or if our corporate offices move out of theDenver Colorado metropolitan area, each officer shall be paid a severance equalto six months of their current salary payable over twelve months, as follows:

·       Mr. Sakyswould be entitled to twenty-four semi-monthly payments of $4,167;

·       Mr. Deanewould be entitled to twenty-four semi-monthly payments of $3,125; and

·       Mr. Meadowswould be entitled to twenty-four semi-monthly payments of $3,125.

Messrs. Sakys, Deaneand Meadows would****be entitled to participate inIsonics health and dental coverage during the term of their severance payments.There are no material conditions or obligations applicable to the receipt ofthese severance payments or benefits.

*ChristopherToffales*

As described above, on February 16, 2007, weentered into an employment agreement with Christopher Toffales pursuant towhich he currently serves as the Chairman of our Board of Directors. If weterminate Mr. Toffales “without cause,” one-half of the unvested optionswill immediately vest. The agreement also provides that the options shall fullyvest and remain exercisable for their full term upon: (a) change incontrol of the Company, (b) merger of the Company as a result of which theshareholders of the Company immediately preceding such merger shall ownless than a majority of the voting securities of the surviving corporationin the merger, (c) any sale of all or substantially all of the assets ofthe Company (for purposes of this clause (c), the sale of Protection PlusSecurity Corporation and Isonics Vancouver, Inc., or such entities’assets, shall not constitute the sale of all or substantially all of the assetsof the Company), or (d) any dissolution, liquidation or winding up of theCompany. Also, within three months of a termination without cause we would be obligatedto pay Mr. Toffales a severance payment equal to one year of his basesalary plus the greater of either: (a) a $250,000 bonus for fiscal year2008; or (b) the amount of his to-be-negotiated 2009 bonus pro-rated forthe number of days in fiscal year 2009 that he was employed by Isonics.

If Mr. Toffales wouldhave been terminated on the last day of our fiscal year without cause we wouldhave been obligated to pay him a severance payment equal to $120,000 plus$250,000 representing his bonus for fiscal year 2008. Moreover, 1,125,000 ofhis options would have become immediately vested and exercisable at $1.76 pershare.

**DirectorCompensation**

We reimburse directors for travel and related expensesassociated with Board of Directors’ meetings. Effective May 1, 2006, webegan compensating our non-employee directors $2,000 for attending Board of 

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Directors’ meetings inperson, $1,000 for attending Board of Directors’ meetings telephonically and wepay an additional $500 to the chair person for required preparation time.

During our fiscal year ended April 30, 2007 eachof independent directors was granted options pursuant to our 1998 Directors’Plan. The 1998 Director’s Plan authorizes each person serving as a member ofthe Board who is not an employee of ours to receive options to purchase 5,000shares of our common stock (as adjusted for our reverse stock split) when suchperson accepts his position as a Director and to receive an additional optionto purchase 5,000 shares of common stock when such person is re-elected as aDirector provided such person is not an employee of Isonics. The exercise pricefor the options is the Fair Market Value on the date such person becomes adirector and the options are exercisable for five years from such date. Theoptions granted under the 1998 Directors’ Plan vest immediately upon the dateof the grant. In the event a Director resigns or is not re-elected to theBoard, his or her failure to exercise the options in three months results inthe options’ termination prior to the expiration of their term. OnSeptember 9, 2005, the Board of Directors approved, and we entered intoindemnity agreements with each of our directors.

As discussed above during our 2007 fiscal yearMessrs. Alexander, Rubizhevsky, Sakys and Toffales and Ms. Gardneralso served on our Board of Directors. However, each of these persons alsoserved as executive officers of the Company and none received separatecompensation for serving as a director

The following tablereflects the compensation of our directors for our fiscal year endedApril 30, 2007:

**DIRECTORCOMPENSATION**

| **Name**           | ** ** | ** ** | ** ** | **Fees  Earned  Or Paid  In Cash  ($)** | ** ** | **Stock  Awards  ($)** | ** ** | **Option  Awards  ($)** | ** ** | **Non-  Equity  Incentive  Plan  Compensation  ($)** | ** ** | **Change in  Pension  Value and  Nonqualified  Deferred  Compensation  Earnings  ($)** | ** ** | **All Other  Compensation  ($)** | ** ** | **Total  ($)** | ** ** |
|--------------------|------------|------------|------------|---------------------------------------------------|------------|------------------------|------------|-------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|----------------|------------|
| **(a)**            | ** ** | **(b)**    | ** ** | **(c)**                                           | ** ** | **(d)**                | ** ** | **(e)**                 | ** ** | **(f)**                                              | ** ** | **(g)**                                                                                          | ** ** | **(h)**                               | ** ** |
| Richard Parker     |       | $          | 32,000     |                                              |       | $                      | 0          |                    |       | $                                                    | 9,360      | (1)                                                                                              |       | $                                     | 0          |           |       |   | $ | 0 |   |   |   | $ | 0 |   |   | $ | 41,360 |   |
| Russell W. Weiss   |       | $          | 29,500     |                                              |       | $                      | 0          |                    |       | $                                                    | 9,360      | (1)                                                                                              |       | $                                     | 0          |           |       |   | $ | 0 |   |   |   | $ | 0 |   |   | $ | 38,860 |   |
| Richard H. Hagman  |       | $          | 60,000     |                                              |       | $                      | 0          |                    |       | $                                                    | 9,360      | (1)                                                                                              |       | $                                     | 0          |           |       |   | $ | 0 |   |   |   | $ | 0 |   |   | $ | 69,360 |   |
| C. Stewart Verdery |       | $          | 12,000     |                                              |       | $                      | 0          |                    |       | $                                                    | 9,360      | (1)                                                                                              |       | $                                     | 0          |           |       |   | $ | 0 |   |   |   | $ | 0 |   |   | $ | 21,360 |   |

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(1)          On October 30,2006, upon being re-elected to our Board of Directors each ofMessrs. Parker, Weiss, Hagman and Verdery were each granted an option topurchase 5,000 shares of our common stock pursuant to our 1998 Directors’ Plan.

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**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS.

**Ownership ofCertain Beneficial Owners and Management.**

Thefollowing table sets forth information regarding the ownership of our commonstock as of August 24, 2007****by: (i) each director or nominee for director;(ii) each of the executive officers named in the Summary CompensationTable; (iii) all executive officers and directors of the Company as agroup; and (iv) all those known by us to be beneficial owners of more than5% of our common stock.

| ** **                                                                                                                                                                              | ** ** | **Beneficial Ownership** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| **Beneficial Owner**                                                                                                                                                               | ** ** | ** **                    | ** ** | **Number of  Shares** | ** ** | **Percent of  Total** | ** ** |
| John Sakys(1)                                                                                                                                                                           |       |                          | 1,143      |   |   |   | <1% |   |   |
| Kenneth J.  Deane(2)                                                                                                                                                                    |       |                          | 0          |   |   |   | <1% |   |   |
| Christopher  Toffales(3)                                                                                                                                                                |       |                          | 0          |   |   |   | <1% |   |   |
| Greg Meadows(4)                                                                                                                                                                         |       |                          | 431        |   |   |   | <1% |   |   |
| Joanna Lohkamp(5)                                                                                                                                                                       |       |                          | 75,000     |   |   |   | <1% |   |   |
| Richard  Parker*(6)                                                                                                                                                                     |       |                          | 25,000     |   |   |   | <1% |   |   |
| Russell W.  Weiss**(7)                                                                                                                                                                  |       |                          | 17,500     |   |   |   | <1% |   |   |
| Richard H.  Hagman(8)                                                                                                                                                                   |       |                          | 12,500     |   |   |   | <1% |   |   |
| C. Stewart  Verdery, Jr.(9)                                                                                                                                                        |       |                          | 12,500     |   |   |   | <1% |   |   |
| All executive officers  and directors as a group (9 persons). The address for all of the above  directors and executives officers is: 5906 McIntyre Street, Golden, CO  80403 |       |                          | 144,074    |   |   |   | 1.1 % |   |   |
|                                                                                                                                                                                         |            |                               |            |  |  |  |  |  |  |  |  |

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*                    Mr. Parkerhas requested to not be nominated to stand for re-election to our Board andtherefore will cease serving as a director, and as a member of all committeesof the Board of Directors, at the conclusion of our next annual meeting ofshareholders.

**             Mr. Weiss hasnotified us that he is contemplating requesting to not be nominated to standfor re-election to our Board. If he does request to not be nominated to standfor re-election to our Board, he will cease serving as a director, and as amember of all committees of the Board of Directors, at the conclusion of ournext annual meeting of shareholders.

(1)          Includes 1,143 shares ofcommon stock beneficially owned by Mr. Sakys. On February 14, 2007,Mr. Sakys was granted options to purchase 400,000 shares of our commonstock from our 2007 Restructuring Equity Plan, with such options vesting immediatelybut subject to shareholder approval of the 2007 Restructuring Equity Plan.Because the 2007 Restructuring Equity Plan has not been approved byshareholders, the shares underlying the option are not included in the table ofbeneficial ownership. Does not include an indeterminate number of shares ofcommon stock beneficially owned by James Alexander and subject to anirrevocable proxy agreement by which Mr. Alexander granted our Presidentthe right to vote his shares for certain matters to be submitted to ourshareholders at the next annual meeting of shareholders. Also does not includean indeterminate number of shares of common stock beneficially owned by BorisRubizhevsky and subject to an irrevocable proxy agreement by whichMr. Rubizhevsky granted our President the right to vote his shares forcertain matters to be submitted to our shareholders at the next annual meetingof shareholders. Both irrevocable proxy agreements referenced in this footnoteexpire no later than December 31, 2007.

(2)          On February 14,2007, Mr. Deane was granted options to purchase 200,000 shares of ourcommon stock from our 2007 Restructuring Equity Plan, with such options vestingimmediately but subject to shareholder approval of the 2007 RestructuringEquity Plan. Because the 2007 Restructuring Equity 

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Plan has not been approvedby shareholders, the shares underlying the option are not included in the tableof beneficial ownership.

(3)          On February 16,2007, Mr. Toffales was granted options to purchase 2,250,000 shares of ourcommon stock from our 2007 Restructuring Equity Plan, with such options vestingimmediately but subject to shareholder approval of the 2007 RestructuringEquity Plan. Because the 2007 Restructuring Equity Plan has not been approvedby shareholders, the shares underlying the option are not included in the tableof beneficial ownership.

(4)          Includes 431 shares ofcommon stock beneficially owned by Mr. Meadows. On February 14, 2007,Mr. Meadows was granted options to purchase 200,000 shares of our commonstock from our 2007 Restructuring Equity Plan, with such options vestingimmediately but subject to shareholder approval of the 2007 RestructuringEquity Plan. Because the 2007 Restructuring Equity Plan has not been approvedby shareholders, the shares underlying the option are not included in the tableof beneficial ownership.

(5)          Includes 12,500 sharesof common stock underlying a common stock purchase warrant exercisable at$11.36 and 12,500 shares of common stock underlying a common stock purchasewarrant exercisable at $2.68. Also includes 50,000 shares of common stockunderlying a stock option granted to Sound Business Solutions Inc. a companycontrolled by Ms. Lohkamp. Does not include options to purchase 150,000shares of common stock issued to Sound Business Solutions that vest at variousdates through January 31, 2008, and which are not exercisable untilshareholder approval is achieved for an increase to the cumulative sharesissuable under the 2005 Stock Option Plan.

(6)          Includes 25,000 sharesof common stock underlying stock options that are currently vested andexercisable.

(7)          Includes 12,500 sharesof common stock underlying stock options that are currently exercisable.

(8)          Includes 12,500 sharesof common stock underlying stock options that are currently exercisable.

(9)          Includes12,500 shares of common stock underlying stock options that are currentlyexercisable.

**No Change ofControl Arrangements.**

As a result of the financing transactions with Cornellcompleted in 2006 Cornell currently holds debentures and common stock purchasewarrant that may be converted into, or exercisable to purchase, shares of ourcommon stock. The transaction could result in the issuance of a number ofshares for less than market value in a number far greater than 20% of our commonstock outstanding at the time of the transaction. (The actual number of sharesthat Cornell would have a right to acquire depends on the timing of Cornell’sconversion of the 13% convertible debenture and the market price of our commonstock at that time, as well as the amount of interest accrued and any dilutionadjustments incurred.). In October 2006 our shareholders approved thistransaction thereby authorizing us to issue the full number of sharescontemplated by the 2006 transaction. In November 2006 we filed aregistration statement registering the resale of 2,183,947 of the shares (asadjusted for our reverse stock split) issued to Cornell or its affiliates, andshares underlying a portion of the debentures and warrants then held byCornell. We amended the terms of these debentures in April 2007 in amanner not financially material to Isonics.

Additionally, in April 2007 we issued Cornell one13% debenture and a warrant to purchase 250,000 shares of our common stock. Themaximum number of shares that may be issued pursuant to the 13% debenture is10,000,000. Currently, the terms of the April 2007 transaction withCornell limit the maximum number of shares we may issue pursuant to thetransaction to 2,526,617 shares of our common stock.

Cornell has contractual restrictions on its ability toacquire shares in excess of 5% of the number of shares outstanding, but it canwaive those restrictions upon not less than 65 days’ notice. Further, unless 

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our stock trades at $3.00or higher for five consecutive trading days or an event of default occurs,Cornell has agreed not to convert any portion of any of the debentures it holdswithout our written consent until February 28, 2008. Although Cornell hascontractual limitations on the amount of our common stock it may own, shouldCornell in the future acquire all or a portion of the shares it has the rightto acquire it would result in Cornell being our single largest shareholder.Because of this significant potential stock ownership, Cornell may be able toinfluence management’s direction, although it has not attempted to do so. WereCornell to acquire the shares, it may be able to effect a change in control ata shareholders’ meeting. As the majority shareholder, Cornell would clearlyhave the right and ability to effect a change in control of Isonics through itsmajority shareholder vote. Even if Cornell acquired fewer than an absolutemajority of shares then outstanding, Cornell would be the largest shareholderand would likely be able to effect a change in control of Isonics at ashareholders’ meeting.

Cornell has not advised us that it has any intentionto effect a change of control of Isonics, and has not filed a Schedule 13D orother filing under the Securities Exchange Act of 1934 which would be requiredin anticipation of a change of control Cornell has not filed a Schedule 13D(required upon beneficial ownership of greater than 5%) based on its opinionthat the contractual limitations imposed in the agreements preclude it frombeing able to acquire more than 5% beneficial ownership within any 60 dayperiod.

We know of no other plansor arrangement that will result in a change of control at Isonics. No executiveofficer or director of Isonics has pledged any shares to secure any financingissued to that officer or director.

**Equity CompensationPlan Information**

Thefollowing is provided with respect to compensation plans under which equitysecurities are authorized for issuance as of the year ended April 30,2007.

| **Plan Category**                                                        | ** ** | ** ** | ** ** | **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(1)(2)(3)** |       |       | 3,250,000  |                                                                                                                                                   |       |                                                                                                             | $          | 1.82                                                                                                                                                                                                             |       |   |   | 250,000 |   |   |
| **Total**                                                                     |       |       | 3,651,000  |                                                                                                                                                   |       |                                                                                                             | $          | 2.54                                                                                                                                                                                                             |       |   |   | 501,000 |   |   |

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(1)          The 2007 RestructuringEquity Plan was adopted and approved by our board of directors during the yearended April 30, 2007. The effectiveness of such plan is subject toshareholder approval.

(2)          Subsequent to year-end,our Board of Directors approved an increase in the authorized shares in the2005 Stock Option Plan from 875,000 to 2,875,000. The effectiveness of thisincrease is subject to stockholder approval.

(3)          Subsequent to year-end,our Board of Directors adopted and approved the establishment of the 2007Non-Employee Directors Stock Option Plan. The plan has 1,500,000 authorizedshares and the effectiveness of such plan is subject to shareholder approval.

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**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

***Transactions with Related Persons***

*ChristopherToffales*

On February 16, 2007 we enteredinto an employment contract with Christopher Toffales. At the time thatIsonics hired Mr. Toffales he was serving as president and chairman of SenseItCorp., our 90% owned subsidiary, and, therefore, could be considered to be anaffiliate of Isonics. However, his employment package was approved by themembers of the Audit Committee voting as members of the Board of Directors. 

Additionally, pursuant tothe Common Stock Purchase Agreement we entered into with SenseIt Corp., we havemade total cash investments of approximately $2,500,000 into SenseIt Corp.during our 2007 fiscal year (in addition to contributing the development andlicensing agreement with Lucent Technologies , Inc. and the $4,333,000 ofpayments made under the agreement at the time of contribution to SenseIt).Although Mr. Toffales will not directly economic benefit from our investmentsin SenseIt Corp., Mr. Toffales is a 10% shareholder of SenseIt Corp and hasentered into an employment agreement with SenseIt Corp. pursuant to which hereceives a base salary of $21,000 per month. 

*James Alexander*

On February 14,2007, Isonics entered into a Settlement Agreement and Mutual Release with James E.Alexander who, until then, was Isonics’ Chairman, president and chief executiveofficer, by which Mr. Alexander resigned from those positions, terminatedhis employment contract with Isonics, and accepted the following package forcontinuing employment as a non-officer, non-director, consulting employee:

·       Threepayments of his normal monthly salary ($22,916 per month, subject toappropriate withholding), with the first payment made on February 28, 2007, andthe remaining two payments made on or before the last day of the two monthsthereafter; and the twelve monthly payments of half salary ($11,458 per month,also subject to withholding); and 

·       250,000shares of common stock from Isonics’ 2005 Stock Option Plan or its economicequivalent (subject to appropriate tax arrangements).

Mr. Alexander has continued to serve as anon-executive employee during the period he is receiving the monthly payment,and has agreed to assist Isonics and its senior management in the transition tonew management. In his settlement agreement, Mr. Alexander agreed to grant aproxy by which the president of Isonics can vote all shares of Isonics commonstock beneficially owned by Mr. Alexander for approval of Isonics’ 2007Restructuring Equity Plan and for any amendment to the Isonics 2005 StockOption Plan being proposed at the next annual meeting of shareholders. Thisproxy expires on December 31, 2007. Because of cash flow considerations, weceased paying Mr. Alexander this salary effective August 31, 2007.

Mr. Alexander surrenderedhis previously-issued options to acquire 335,000 (83,750 as adjusted for thereverse stock split) shares of common stock (including 215,000 (53,750 asadjusted for the reverse stock split) shares from Isonics’ 2005 Stock OptionPlan) having exercise prices in excess of $4.60 per share.

*Boris Rubizhevsky*

On February 14,2007, Isonics entered into a Settlement Agreement and Mutual Release with BorisRubizhevsky who, until then, was Isonics’ senior vice president and vicechairman of the Board of Directors, by which Mr. Rubizhevsky resigned thosepositions, terminated his employment contract with 

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Isonics,and accepted the following package for continuing employment as a non-officer,non-director, consulting employee:

·       Threepayments of his normal monthly salary ($20,750 per month, subject towithholding), with the first payment made on February 28, 2007, and theremaining two payments made on or before the last day of the two months thereafter;and then twelve monthly payments of half salary ($10,375 per month, alsosubject to withholding); and 

·       200,000shares of common stock from Isonics’ 2005 Stock Option Plan or its economicequivalent (subject to appropriate tax arrangements).

Effective August 27, 2007 Mr. Rubizhevsky agreed todefer all but $500 of his semi-monthly salary to reduce requirements on ouroperating cash flows. We will recommence paying a salary to Mr. Rubizhevsky(and all accrued interest) upon achieving adequate financing. Mr. Rubizhevskyhas continued to serve as a non-executive employee during the period he isreceiving the monthly payment, and has agreed to assist Isonics and its seniormanagement in the transition to new management. In his settlement agreement,Mr. Rubizhevsky agreed to grant a proxy by which the president of Isonicscan vote all shares of Isonics common stock beneficially owned by Mr.Rubizhevsky for approval of the 2007 Restructuring Equity Plan and amendment tothe Isonics 2005 Stock Option Plan being proposed at the next annual meeting ofshareholders. This proxy expires on December 31, 2007.

Mr. Rubizhevskysurrendered his previously-issued options to acquire 533,750 (133,438 asadjusted for the reverse stock split) shares of common stock (including 215,000(53,750 as adjusted for the reverse stock split) shares from Isonics’ 2005Stock Option Plan) having exercise prices in excess of $4.60 per share.

*Lindsay Gardner*

Effective February 14, 2007, Lindsay Gardner assumedresponsibility for Isonics’ homeland security products division in addition toher prior responsibilities. In February 2007 Isonics issued her an option topurchase 200,000 shares of Isonics common stock (exercisable at $1.94 per sharefor a five year period) from the 2007 Plan. The Board also approved a six monthseverance payment to Ms. Gardner (payable to her over twelve months) should heremployment with Isonics be terminated by Isonics without cause, or heremployment with Isonics being terminated by Ms. Gardner upon a change of controlor if the corporate offices moved out of the Denver, Colorado metropolitanarea. In that case, her options are to remain exercisable for the entirefive-year term. Ms. Gardner surrendered her previously-issued options toacquire 193,014shares of common stock (including 70,000 (17,500 as adjusted forthe reverse stock split) shares from Isonics’ 2005 Stock Option Plan) havingexercise prices in excess of $4.00 per share. On February 18, 2007, Ms. Gardnerresigned as a director of Isonics. 

On April 6, 2007, Isonicsentered into a Settlement Agreement and Mutual Release with Ms. Gardner who,until then by which Mr. Gardner resigned as an officer and accepted the apackage for continuing employment as a non-officer, consulting employee thatincluded six months of her salary but payable over twelve months for totalpayments of $82,600. Effective August 27, 2007 Ms. Gardner agreed to defer allbut $500 of her semi-monthly salary to reduce requirements on our operatingcash flows. We will recommence paying a salary to Ms. Gardner (and all accruedinterest) upon achieving adequate financing.

*Messrs. Sakys,Deane and Meadows*

Effective February 14,2007, the Board of Directors promoted Messrs. Sakys, Deane, and Meadows, eachof whom currently serves an executive officer. At that time the Board approvedcertain option grants as described in the notes to the Summary CompensationTable above and approved severance packages for each Messrs. Sakys, Deane andMeadows which are described in Item 11 Executive Compensation under the heading“Potential Payments Upon Termination or Change-in-Control.”

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***Director Independence***

Our Board of Directorscurrently consists of Messrs. Sakys, Toffales, Hagman, Weiss, Parker andVerdery. Messrs. Hagman, Weiss, Parker and Verdery are “independent” as definedby Nasdaq Marketplace Rule 4200(a)(15). The Board considers all relevant factsand circumstances in its determination of independence of all members of theBoard (including any relationships set forth in this Form 10-K under the heading“Certain Related Person Transactions”). Each of our directors who serve on ourAudit, Nominating and Compensation Committees are independent as defined byNasdaq Marketplace Rule 4200(a)(15). 

**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES.

**(a)**           AuditFees.

Ourprincipal accountant, Hein & Associates LLP, billed us aggregate fees inthe amount of approximately $201,500 for the fiscal year ended April 30, 2007and $186,000 for the fiscal year ended April 30, 2006. These amounts werebilled for professional services that Hein & Associates provided for theaudit of our annual financial statements, review of the financial statementsincluded in our report on 10-Q and other services typically provided by anaccountant in connection with statutory and regulatory filings or engagementsfor those fiscal years.

**(b)**          Audit-RelatedFees.

Hein & Associates LLPbilled us aggregate fees in the amount of $24,720 and $36,000 for the fiscalyears ended April 30, 2007 and 2006 for assurance and related services thatwere reasonably related to the performance of the audit or review of ourfinancial statements. 

**(c)**           TaxFees

Hein & Associates LLPbilled us aggregate fees in the amount of $0 for the fiscal years ended April 30, 2007 and 2006 for tax compliance, tax advice, and tax planning.

**(d)**          AllOther Fees

Hein & Associates LLPbilled us aggregate fees in the amount of $1,690 and $53,000 for the fiscalyears ended April 30, 2007 and 2006 for other fees. The majority of the feespaid for the fiscal year ended April 30, 2006, related to due diligenceprocedures associated with our acquisition of Protection Plus SecurityCorporation

**(e)**           AuditCommittee’s Pre-Approval Practice

Section 10A(i) of the Securities Exchange Act of 1934prohibits our auditors from performing audit services for us as well as anyservices not considered to be “audit services” unless such services arepre-approved by the Audit Committee of the Board of Directors, or unless theservices meet certain *de minimis*standards. The Audit Committee’s charter (as amended May 18, 2006) providesthat the Audit Committee must:

Preapproveall audit services that the auditor may provide to us or any subsidiary(including, without limitation, providing comfort letters in connection withsecurities underwritings or statutory audits) as required by §10A(i)(1)(A) ofthe Securities Exchange Act of 1934 (as amended by the Sarbanes-Oxley Act of2002).

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Preapproveall non-audit services (other than certain *de minimis*services described in §10A(i)(1)(B) of the Securities Exchange Act of 1934 (asamended by the Sarbanes-Oxley Act of 2002)) that the auditors propose toprovide to us or any of its subsidiaries.

The Audit Committeeconsiders at each of its meetings whether to approve any audit services ornon-audit services. In some cases, management may present the request; in othercases, the auditors may present the request. At its annual meeting in October2006, our Audit Committee approved Hein & Associates performing our auditfor the 2007 fiscal year. In November 2004 the Audit Committee approved Hein& Associates performing the reaudit of our 2004 fiscal year and the auditof our 2005 fiscal year.

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULES.

(a)           ExhibitsPursuant to Item 601 of Regulation S-k: 
| Exhibit  Number | ** ** | ** **                                      | ** ** | **Title** |
|-----------------|------------|-------------------------------------------------|------------|-----------|
| 31.1*           |       | Certification pursuant  to Rule 13a-14(a)       |
| 31.2*           |       | Certification  pursuant to Rule 13a-14(a)       |
| 32*             |       | Certification pursuant  to 18 U.S.C. §1350 |

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*                    Filed herewith

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**SIGNATURES**

Inaccordance with Section 13 or 15(d) of the Exchange Act, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

| August 28, 2007 | **ISONICS CORPORATION,** |
|----------------------|--------------------------|
|                 | a California Corporation |
|                 | By:                      | /s/ KENNETH  J. DEANE |
|                 |                     | Kenneth J. Deane |
|                 | * *                 | *Vice President, Chief Financial Officer* |

 

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