ECONOMIC
      DEVELOPMENT AGREEMENT

    


    This
      Agreement is made this 14th day
      of
      December, 2005, by and between IsoRay Inc., a Minnesota corporation (hereinafter
      referred to as “Developer”)
      and the
      Pocatello Development Authority, an urban renewal agency formed under the laws
      of the State of Idaho (hereinafter referred to as “PDA”).

    


    1.
      Recitals

    


    1.1
       Developer
      represents that it intends to construct within the city limits of the City
      of
      Pocatello a manufacturing facility where Cesium 131 is inserted in titanium
      capsules to be used in brachytherapy for certain cancer patients. Developer
      will
      use the reactor facility located in Arco, Idaho to produce the Cesium 131,
      but
      the decision to do so is contingent upon test results which show that the
      irradiation process will provide the product needed by the Developer in both
      quantity and quality. Developer further represents that, contingent upon the
      result of the testing, it has obtained preliminary approval to use the reactor
      facility in such a manner and for such a purpose. Developer is seeking funding
      for approximately half of the costs of testing, including construction of the
      device required for insertion of the testing sample.

    


    1.2 
      Developer
      represents that the facility will eventually employ up to 200 people, that
      the
      majority of these positions will be professional or semi-professional, that
      significant insurance benefits are provided to all employees, and that the
      lowest salary is approximately double the current minimum wage, all of which
      assertions are provided to indicate that the jobs will be of significant
      positive impact to the local economy, and thus meet the economic development
      mission of the PDA.

    


    1.3 
      PDA is a public body created as an urban renewal agency pursuant to Idaho Code
      §50-2006,
      part of the Idaho Urban Renewal Law of 1965. As an urban renewal agency
      established by the City Council of the City of Pocatello, PDA is charged with
      aiding and assisting economic development in the Pocatello area, including
      assisting developments that will retain and increase available jobs in the
      community; and is further charged with encouraging such development by private
      enterprise; all as more specifically provided in Idaho Code §§50-2002
      and 50-2003, being part of the Idaho Urban Renewal Law, Idaho Code §50-2902,
      being part of the Local Economic Development Act.

    


    1.4 
      Based upon the assertions and assurances of the Developer, PDA has determined
      that the construction of a manufacturing facility for the devices used to
      implant the Cesium 131 represents the type of development to which it may apply
      urban renewal funds under the applicable statutes; and that the same will
      promote economic development of the area, creation of jobs and an increased
      tax
      base consistent with urban renewal laws. For that reason, PDA has committed
      to
      provide $200,000.00 to Developer for the testing project as described above,
      subject to the possibility of repayment requirements as set out
      below.

    


    1.5 
      By
      this Agreement, PDA and Developer wish to memorialize their mutual undertakings
      and commitments with respect to the project described herein and therefore,
      agree as follows:


    
      
         

      

      
         

        
          

        

      

      
         

      

    

    


    2.
      Funding
      and Uses of funds

    


    2.1 
      To
      further the proposed development, the increased economic opportunities, and
      increased tax base expected therefrom, PDA agrees to provide to Developer the
      sum of Two Hundred Thousand Dollars ($200,000.00) no later than December 15,
      2005, to use towards the costs of the testing procedures and construction as
      described in Paragraph 1.1.

    


    2.2 
      Developer
      agrees that it shall immediately thereafter take all necessary steps to initiate
      and pay all costs for the construction of the device and all testing procedures
      to be used in determining the ability of the irradiation process to meet the
      Developer’s
      product
      needs. Developer agrees to diligently pursue completion of construction and
      prompt testing thereafter. 

    


    3.
      Results of testing; repayment required.

    


    3.1
       Developer
      agrees that, in consideration for the availability of such economic development
      funds to work diligently to construct its manufacturing facility within the
      city
      limits of Pocatello so that operation will begin no later than January 1, 2008.
      Developer further agrees to repay, with 5% interest from the date of
      disbursement, the $200,000.00 amount should Developer fail to build and operate
      such a facility, except under the conditions set out in Paragraph 3.3
      below.

    


    3.2 
      Developer
      agrees to make repayment no later than 30 days after receipt of demand from
      the
      PDA for such repayment in the event it does not construct and operate the
      proposed manufacturing facility.

    


    3.3
      PDA
      agrees that no such repayment will be required if approval for the use of the
      reactor facility specified above is withdrawn by said facility and proof of
      denial of use is provided to the PDA.

    


    4.
      Effect of Agreement

    


    4.1 
      It
      is understood by the parties to this Agreement that the intent of the parties
      is
      that the payment assist Developer in its need for capital in connection with
      the
      development project which would include the construction of an approximately
      25,000 square-foot manufacturing facility within the city limits of the City
      of
      Pocatello, and that the parties shall take all action necessary to carry out
      that intent.

    


    4.2 
      The parties acknowledge that the effect of the payment by PDA set out hereunder
      will inure to the benefit of Developer, while having the corresponding benefit
      to the public purposes of PDA described above.

    


    5.
      Miscellaneous

    


    5.1 
      This Agreement shall be governed by and construed under the laws of the State
      of
      Idaho; venue shall be the Sixth Judicial District for the County of
      Bannock.

    


    5.2 
      In
      any
      litigation arising out of this Agreement, the prevailing party shall be entitled
      to recover reasonable attorney fees from the non-prevailing party. Determination
      of the prevailing party in any such litigation shall be made on the basis of
      the
      factors enumerated in Rule 54(d)(1)(B), Idaho Rules of Civil Procedure, as
      the
      same now exists or may subsequently be amended.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    	5.2  	
            The
              effective date of this Agreement shall be December 14,
              2005.

          


    


    5.3 
      This Agreement shall be binding upon and inure to the benefit of the respective
      parties and their legal successors. Developer may not assign this Agreement
      without the express written consent of the PDA.

    


    5.4 
      Each party represents to the other that is has full legal authority to enter
      into and execute this Agreement and that the persons signing on behalf of each
      party have full legal authority to execute this Agreement.

    


    5.5 
      Notices
      to the Developer shall be sent to Roger E. Girard, CEO and Chairman, IsoRay,
      Inc., 350 Hills St. Suite 106, Richland, WA 99354-5411. Notices to the PDA
      shall
      be sent to the Pocatello development Authority, c/o Ray Burstedt, Executive
      Director, 1651 Alvin Ricken Dr., Pocatello, ID 83201, telephone (208)
      233-3500.

    


    5.6 
      This document constitutes the entire agreement of the parties with respect
      to
      the grant by PDA to Developer and supersedes any prior agreements of the
      parties.

    


    IN
      WITNESS WHEREOF, the parties have executed this Agreement the day and year
      first
      above written.

     

     

     

    
      	
              POCATELLO DEVELOPMENT AUTHORITY

              An Idaho Urban Renewal Agency

            	 	 	
              ISORAY,
                INC., a corporation of 

              Minnesota, Developer

            
	 	 	 	 
	
               

            	 	 	 
	/s/ Harry
              Neuhardt    	 	 	/s/ Roger
              E. Girard
	
              
Harry
              Neuhardt, Chairman    	 	 	
              
Roger
              E. Girard, CEO &
              Chairman