1023966--7/30/2007--ISONICS

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{stock, price, share}

{interest, director, officer}

{customer, product, revenue}

{provision, law, control}

{product, market, service}

{personnel, key, retain}

{capital, credit, financial}

{cost, operation, labor}

{control, financial, internal}

{tax, income, asset}

{loss, insurance, financial}

{property, intellectual, protect}

{system, service, information}

{financial, litigation, operation}

{condition, economic, financial}

We have historically had working capital shortages, even following significant financing transactions and we received an opinion from our auditors indicating a substantial doubt regarding our ability to continue as a going concern. Our ability to obtain further financing when necessary is limited. We may be delisted from the Nasdaq Capital Market and delisting may adversely impact our ability to raise capital. We have three business segments and, for the year ended April 30, 2007, two of our three segments operated at a loss. Unless we are able to develop and sell our products profitably, we may be unable to remain competitive, furthering the likelihood that our losses and negative cash flow will continue. We have issued securities during the years ended April 30, 2007, 2006 and 2005, and subsequently which has resulted (and will in the future when warrant exercises or conversions occur) in dilution to our existing shareholders. This was accomplished to provide necessary working capital or obtain assets and services. We will likely issue more securities to raise additional capital or to obtain other services or assets, any of which may result in substantial additional dilution. Two former holders of a portion of the then outstanding 8% Debentures have asserted that a default existed. Accounting charges resulting from our issuance of the 13% Debentures may lead to significant non-cash charges which would adversely impact future interest expense, net income and earnings per share and may also lead to future volatility in our financial statement components. Historically we depended upon few customers for a significant portion of our revenues and our business could have been materially and adversely affected if we lost any one of those customers. We realized increased expenses, reduced revenues and longer than anticipated delays in integrating past business acquisitions into our operations, and we may face similar difficulties with future acquisitions as well. If demand for any of our products grows suddenly, we may lack the resources to meet demand or we may be required to increase our capital spending significantly. Because we are dependent upon our key personnel for our future success, if we fail to retain or attract key personnel, our business will be adversely affected. The reorganization of our Company and the changes in our senior management may result in a disruption of operations or have adverse impacts on our business. We may not be able to protect our intellectual property, which would reduce our competitive advantage. We face technological change and intense competition both domestically and internationally which may adversely affect our ability to sell our products profitably. Our semiconductor products and services segment is dependent on the performance of several key pieces of equipment. If any of these items were not to perform to their ability or were taken out of service for any significant amount of time, our ability to produce product would be severely compromised. We could be subject to environmental regulation by federal, state and local agencies, including laws that impose liability without fault, which could produce working capital shortages and lessen shareholders equity. We are controlled by our Board of Directors; individual purchasers of our shares will have little ability to elect directors or control our management. We risk exposing ourselves to an above-policy limit product liability claim, which could adversely affect our working capital, shareholders equity and profitability. Our common stock is vulnerable to pricing and purchasing actions that are beyond our control and, therefore, persons acquiring or holding our shares or warrants may be unable to resell their shares at a profit as a result of this volatility. SEC penny stock regulations may limit the ability to trade our securities. Future sales of our common stock may cause our stock price to decline. We have never paid any cash dividends on our common stock and we do not anticipate paying cash dividends on our common stock in the foreseeable future. Outstanding debentures, options and warrants may make it difficult for us to obtain additional capital on reasonable terms. If we fail to effect and maintain registration of the common stock issued or issuable pursuant to conversion of our convertible debentures, or certain of our outstanding common stock warrants, we may be obligated to pay the investors of those securities liquidated damages. As a public company, we are subject to a significant amount of regulation. In the past we have received requests for information from the Securities and Exchange Commission and from Nasdaq. Any such inquiry or investigation that may result may adversely affect the market for our stock or our Company. We failed to provide necessary funding to SenseIt to make the most recent development payment to Lucent and, as a result, Lucent could terminate the agreement and our investment in SenseIt would be impaired. Even if we are able to make the development payment we have missed or future development payments when due, there is no guarantee that the development activity will yield technologically relevant or commercially viable products. Provisions in our charter documents could prevent or delay a change in control, which could delay or prevent a takeover. Provisions in our bylaws provide for indemnification of officers and directors to the full extent permitted by California law, which could require us to direct funds away from our business and products. We will need to make substantial financial and man-power investments in order to assess our internal controls over financial reporting and our internal controls over financial reporting may be found to be deficient.

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1023966--7/30/2007--ISONICS_CORP