Exhibit 10.2


SECURITIES
PURCHASE AGREEMENT


THIS  SECURITIES PURCHASE AGREEMENT (this “Agreement”),
dated as of April 10, 2007, by and among ISONICS
CORPORATION, a California corporation (the “Company”), and
the Buyers listed on Schedule I attached hereto (individually, a “Buyer”
or collectively “Buyers”).


WITNESSETH


WHEREAS, the
Company and the Buyer(s) are executing and delivering this Agreement in
reliance upon an exemption from securities registration pursuant to Section
4(2) and/or Rule 506 of Regulation D (“Regulation D”) as
promulgated by the U.S. Securities and Exchange Commission (the “SEC”)
under the Securities Act of 1933, as amended (the “Securities Act”);


WHEREAS, the
parties desire that, upon the terms and subject to the conditions contained
herein, the Company shall issue and sell to the Buyer(s), as provided herein,
and the Buyer(s) shall purchase Two Million 
Dollars ($2,000,000) of a single secured convertible debentures in the
form attached hereto as “Exhibit A” (the “Convertible Debentures”),
which shall be convertible into shares of the Company’s common stock, no par
value (the “Common Stock”) (as converted, the “Conversion Shares”),
which shall be funded within two (2) business day following the date hereof
(the “Closing”) for a total purchase price of Two Million  Dollars ($2,000,000), (the “Purchase Price”)
in the respective amounts set forth opposite each Buyer(s) name on Schedule I
(the “Subscription Amount”);


WHEREAS,
contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement
(the “Registration Rights Agreement”) pursuant to which the Company has
agreed to provide certain registration rights under the Securities Act and the
rules and regulations promulgated there under, and applicable state securities
laws;


WHEREAS, the Company has agreed
to secure the Company’s obligations under this Agreement, the Transaction
Documents, or any other obligations of the Company to the Buyer pursuant to the
security agreement of dated May 30, 2006 (the “Security Agreement”) and
UCC-1 No.: 06-7072646008 filed with California Secretary of State;


WHEREAS, Isonics Vancouver,
Inc., a subsidiary of the Company, has agreed to secure the Company’s
obligations under this Agreement, the Transaction Documents, or any other
obligations of the Company to the Buyer pursuant to the security agreement of
dated May 30, 2006 (a “Subsidiary Security Agreement”) and UCC-1 No.:
2006-156-5634-4 filed with the Washington State Department of Licensing;


WHEREAS, Isonics Homeland
Security and Defense Corporation, has agreed to secure the Company’s
obligations under this Agreement, the Transaction Documents, or any other
obligations of the Company to the Buyer pursuant to the security agreement of
dated May 30, 2006 (a “Subsidiary Security Agreement”) and UCC-1 No.:
6187870 1 filed with the Delaware Department of State U.C.C. Filing Section;













WHEREAS, Protection Plus
Security Corporation, a subsidiary of the Company, has agreed to secure the
Company’s obligations under this Agreement, the Transaction Documents, or any
other obligations of the Company to the Buyer pursuant to the security
agreement of dated May 30, 2006 (a “Subsidiary Security Agreement”) and
UCC-1 No.: 200606020464949 filed the State of New York Department of State
Uniform Commercial Code Division;


WHEREAS, contemporaneously with
the execution and delivery of this Agreement, the parties hereto are executing
and delivering a Pledge and Escrow Agreement (the “Pledge and Escrow
Agreement”) pursuant to which the Company has agreed to provide the Buyer a
security interest in the Pledged Shares (as this term is defined in the Pledge
and Escrow Agreement) to secure the Company’s obligations under this Agreement,
the Transaction Documents, or any other obligations of the Company to the
Buyer;  (the Pledge and Escrow  Agreement 
together with the Security Agreement collectively the “Security
Documents”);


WHEREAS,
contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering Irrevocable Transfer Agent
Instructions (the “Irrevocable Transfer Agent Instructions”); and


WHEREAS, the Convertible
Debentures, the Conversion Shares, the Warrants, and the Warrants Shares
collectively are referred to herein as the “Securities”).


NOW, THEREFORE, in
consideration of the mutual covenants and other agreements contained in this
Agreement the Company and the Buyer(s) hereby agree as follows:


1.     PURCHASE AND SALE OF CONVERTIBLE DEBENTURES.


(a)           Purchase
of Convertible Debentures.  Subject
to the satisfaction (or waiver) of the terms and conditions of this Agreement,
each Buyer agrees, severally and not jointly, to purchase at the Closing and
the Company agrees to sell and issue to each Buyer, severally and not jointly,
at the Closing, Convertible Debentures in amounts corresponding with the
Subscription Amount set forth opposite each Buyer’s name on Schedule I hereto.


(b)           Closing
Dates.  The Closing of the purchase
and sale of the Convertible Debentures shall take place at 10:00 a.m. Eastern
Standard Time on the second  (2nd)  business day following the date hereof,
subject to notification of satisfaction of the conditions to the Closing set
forth herein and in Sections 6 and 7 below (or such later date as is mutually
agreed to by the Company and the Buyer(s)) (the “Closing Date”).  The Closing shall occur on the respective
Closing Dates at the offices of Yorkville Advisors, LLC, 3700 Hudson Street,
Suite 3700, Jersey City, New Jersey 07302 (or such other place as is mutually
agreed to by the Company and the Buyer(s)).


(c)           Form
of Payment.  Subject to the
satisfaction of the terms and conditions of this Agreement, on each Closing
Date, (i) the Buyers shall deliver to the Company such aggregate proceeds for
the Convertible Debentures to be issued and sold to such Buyer at such Closing,
minus the fees to be paid directly from the proceeds of such Closing as set
forth herein, and (ii) the Company shall deliver to each Buyer,
Convertible Debentures which such Buyer is purchasing at such Closing in
amounts indicated opposite such Buyer’s name on Schedule I, duly executed on
behalf of the Company.



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2.     BUYER’S
REPRESENTATIONS AND WARRANTIES.


Each Buyer represents and warrants, severally and not
jointly, that:


(a)           Investment
Purpose.  Each Buyer is acquiring the
Securities for its own account for investment only and not with a view towards,
or for resale in connection with, the public sale or distribution thereof,
except pursuant to sales registered or exempted under the Securities Act;
provided, however, that by making the representations herein, such Buyer
reserves the right to dispose of the Securities at any time in accordance with
or pursuant to an effective registration statement covering such Securities or
an available exemption under the Securities Act.  Such Buyer does not presently have any
agreement or understanding, directly or indirectly, with any Person to
distribute any of the Securities.


(b)           Accredited
Investor Status.  Each Buyer is an “Accredited
Investor” as that term is defined in Rule 501(a)(3) of Regulation D.


(c)           Reliance
on Exemptions.  Each Buyer
understands that the Securities are being offered and sold to it in reliance on
specific exemptions from the registration requirements of United States federal
and state securities laws and that the Company is relying in part upon the
truth and accuracy of, and such Buyer’s compliance with, the representations,
warranties, agreements, acknowledgments and understandings of such Buyer set
forth herein in order to determine the availability of such exemptions and the
eligibility of such Buyer to acquire the Securities.


(d)           Information.  Each Buyer and its advisors (and his or, its
counsel), if any, have been furnished with all materials relating to the
business, finances and operations of the Company and information he deemed
material to making an informed investment decision regarding his purchase of
the Securities, which have been requested by such Buyer.  Each Buyer and its advisors, if any, have
been afforded the opportunity to ask questions of the Company and its
management.  Neither such inquiries nor
any other due diligence investigations conducted by such Buyer or its advisors,
if any, or its representatives shall modify, amend or affect such Buyer’s right
to rely on the Company’s representations and warranties contained in Section 3
below.  Each Buyer understands that its
investment in the Securities involves a high degree of risk.  Each Buyer is in a position regarding the
Company, which, based upon employment, family relationship or economic
bargaining power, enabled and enables such Buyer to obtain information from the
Company in order to evaluate the merits and risks of this investment.  Each Buyer has sought such accounting, legal
and tax advice, as it has considered necessary to make an informed investment
decision with respect to its acquisition of the Securities.


(e)           No
Governmental Review.  Each Buyer
understands that no United States federal or state agency or any other
government or governmental agency has passed on or made any recommendation or
endorsement of the Securities, or the fairness or suitability of the investment
in the Securities, nor have such authorities passed upon or endorsed the merits
of the offering of the Securities.


(f)            Transfer
or Resale.  Each Buyer understands
that except as provided in the Registration Rights Agreement: (i) the
Securities have not been and are not being



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registered under the Securities Act or any state securities laws, and
may not be offered for sale, sold, assigned or transferred unless (A)
subsequently registered thereunder, (B) such Buyer shall have delivered to the
Company an opinion of counsel, in a generally acceptable form, to the effect
that such Securities to be sold, assigned or transferred may be sold, assigned
or transferred pursuant to an exemption from such registration requirements, or
(C) such Buyer provides the Company with reasonable assurances (in the form of
seller and broker representation letters) that such Securities can be sold,
assigned or transferred pursuant to Rule 144, Rule 144(k), or Rule 144A
promulgated under the Securities Act, as amended (or a successor rule thereto)
(collectively, “Rule 144”), in each case following the applicable
holding period set forth therein; (ii) any sale of the Securities made in
reliance on Rule 144 may be made only in accordance with the terms of Rule 144
and further, if Rule 144 is not applicable, any resale of the Securities under
circumstances in which the seller (or the person through whom the sale is
made) may be deemed to be an underwriter (as that term is defined in the
Securities Act) may require compliance with some other exemption under the
Securities Act or the rules and regulations of the SEC thereunder; and (iii)
neither the Company nor any other person is under any obligation to register
the Securities under the Securities Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder.


(g)           Legends.  Each Buyer agrees to the imprinting, so long
as is required by this Section 2(g), of a restrictive legend in substantially
the following form:


THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS.  THE SECURITIES HAVE BEEN ACQUIRED
SOLELY FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TOWARD RESALE AND MAY NOT BE
OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A
GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
APPLICABLE STATE SECURITIES LAWS.


Certificates evidencing the Conversion Shares or
Warrant Shares shall not contain any legend (including the legend set forth
above), (i) while a registration statement (including the Registration
Statement) covering the resale of such security is effective under the
Securities Act, (ii) following any sale of such Conversion Shares or Warrant
Shares pursuant to Rule 144, (iii) if such Conversion Shares or Warrant Shares
are eligible for sale under Rule 144(k), or (iv) if such legend is not required
under applicable requirements of the Securities Act (including judicial interpretations
and pronouncements issued by the staff of the SEC).  The Company shall cause its counsel to issue
a legal opinion to the Company’s transfer agent promptly after the effective
date (the “Effective Date”) of a Registration Statement if required by
the Company’s transfer agent to effect the removal of the legend
hereunder.  If all or any portion of the
Convertible Debentures or Warrants are exercised by a Buyer that is not an
Affiliate of the Company (a



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“Non-Affiliated Buyer”) at a time when there is
an effective registration statement to cover the resale of the Conversion
Shares or the Warrant Shares, such Conversion Shares or Warrant Shares shall be
issued free of all legends.  The Company
agrees that following the Effective Date or at such time as such legend is no
longer required under this Section 2(g), it will, no later than three (3)
Trading Days following the delivery by a Non-Affiliated Buyer to the Company or
the Company’s transfer agent of a certificate representing Conversion Shares or
Warrant Shares, as the case may be, issued with a restrictive legend (such
third Trading Day, the “Legend Removal Date”), deliver or cause to be
delivered to such Non-Affiliated Buyer a certificate representing such shares
that is free from all restrictive and other legends.  The Company may not make any notation on its
records or give instructions to any transfer agent of the Company that enlarge
the restrictions on transfer set forth in this Section.  Each Buyer acknowledges that the Company’s
agreement hereunder to remove all legends from Conversion Shares or Warrant
Shares is not an affirmative statement or representation that such Conversion
Shares or Warrant Shares are freely tradable. 
Each Buyer, severally and not jointly with the other Buyers, agrees that
the removal of the restrictive legend from certificates representing Securities
as set forth in this Section 3(g) is predicated upon the Company’s reliance
that the buyer will sell any Securities pursuant to either the registration
requirements of the Securities Act, including any applicable prospectus
delivery requirements, or an exemption therefrom, and that if Securities are
sold pursuant to a Registration Statement, they will be sold in compliance with
the plan of distribution set forth therein.


(h)           Authorization,
Enforcement.  This Agreement has been
duly and validly authorized, executed and delivered on behalf of such Buyer and
is a valid and binding agreement of such Buyer enforceable in accordance with
its terms, except as such enforceability may be limited by general principles
of equity or applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies.


(i)            Receipt
of Documents.  Each Buyer and his or
its counsel has received and read in their entirety:  (i) this Agreement and each representation,
warranty and covenant set forth herein and the Transaction Documents (as
defined herein); (ii) all due diligence and other information necessary to
verify the accuracy and completeness of such representations, warranties and
covenants; (iii) the Company’s Form 10-K for the fiscal year ended April 30,
2006; (iv) the Company’s Form 10-Q for the fiscal quarter ended January  31, 2007; all Forms 8-K filed since the
Company’s Form 10-K for the fiscal year ended April 30, 2006 and (v) answers to
all questions each Buyer submitted to the Company regarding an investment in
the Company; and each Buyer has relied on the information contained therein and
has not been furnished any other documents, literature, memorandum or
prospectus.


(j)            Due
Formation of Corporate and Other Buyers. 
If the Buyer(s) is a corporation, trust, partnership or other entity
that is not an individual person, it has been formed and validly exists and has
not been organized for the specific purpose of purchasing the Securities and is
not prohibited from doing so.


(k)           Good
Funds.         All purchase payments
transferred or that may be transferred to the Company pursuant to this
Agreement originated directly from a bank or brokerage account in the name of
the Buyer located within the United States of America or



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another Compliant Jurisdiction as defined in by the Financial Action
Task Force on Money Laundering (found at http://www.oecd.org/fatf/).


(l)            No
Legal Advice From the Company.  Each
Buyer acknowledges, that it had the opportunity to review this Agreement and
the transactions contemplated by this Agreement with his or its own legal
counsel and investment and tax advisors. 
Each Buyer is relying solely on such counsel and advisors and not on any
statements or representations of the Company or any of its representatives or
agents for legal, tax or investment advice with respect to this investment, the
transactions contemplated by this Agreement or the securities laws of any
jurisdiction.


3.     REPRESENTATIONS AND WARRANTIES OF THE COMPANY.


Except as set forth under the corresponding section of
the Disclosure Schedules which Disclosure Schedules shall be deemed a part hereof
and to qualify any representation or warranty otherwise made herein to the
extent of such disclosure, the Company hereby makes the representations and
warranties set forth below to each Buyer:


(a)           Subsidiaries.  All of the direct and indirect subsidiaries
of the Company are set forth on Schedule 3(a).  The Company owns, directly or indirectly, all
of the capital stock or other equity interests of each subsidiary free and
clear of any liens, and all the issued and outstanding shares of capital stock
of each subsidiary are validly issued and are fully paid, non-assessable and
free of preemptive and similar rights to subscribe for or purchase securities.


(b)           Organization
and Qualification.  The Company and
its subsidiaries are corporations duly organized and validly existing in good
standing under the laws of the jurisdiction in which they are incorporated, and
have the requisite corporate power to own their properties and to carry on
their business as now being conducted. 
Each of the Company and its subsidiaries is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction in
which the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not have or reasonably be expected to result in (i) a
material adverse effect on the legality, validity or enforceability of any
Transaction Document, (ii) a material adverse effect on the results of
operations, assets, business or condition (financial or otherwise) of the
Company and the subsidiaries, taken as a whole, or (iii) a material adverse
effect on the Company’s ability to perform in any material respect on a timely
basis its obligations under any Transaction Document (any of (i), (ii) or
(iii), a “Material Adverse Effect”) and no proceeding has been
instituted in any such jurisdiction revoking, limiting or curtailing or seeking
to revoke, limit or curtail such power and authority or qualification.


(c)           Authorization,
Enforcement, Compliance with Other Instruments.  (i) The Company has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement, the Convertible Debentures, the Warrants, , the Registration
Rights Agreement, the Irrevocable Transfer Agent Instructions, and each of the
other agreements



 6
 









entered into by the parties hereto in connection with the transactions
contemplated by this Agreement (collectively the “Transaction Documents”)
and to issue the Securities in accordance with the terms hereof and thereof,
(ii) the execution and delivery of the Transaction Documents by the Company and
the consummation by it of the transactions contemplated hereby and thereby,
including, without limitation, the issuance of the Securities, the reservation
for issuance and the issuance of the Conversion Shares, and the reservation for
issuance and the issuance of the Warrant Shares, have been duly authorized by
the Company’s Board of Directors and no further consent or authorization is required
by the Company, its Board of Directors or its stockholders, (iii) the
Transaction Documents have been duly executed and delivered by the Company,
(iv) the Transaction Documents constitute the valid and binding obligations of
the Company enforceable against the Company in accordance with their terms,
except as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of creditors’
rights and remedies.  The authorized
officer of the Company executing the Transaction Documents knows of no reason
why the Company cannot file the Registration Statement as required under the
Registration Rights Agreement or perform any of the Company’s other obligations
under the Transaction Documents.


(d)           Capitalization.  The authorized capital stock of the Company
consists of 175,000,000 shares of Common Stock and 7,650,000 shares of
Preferred Stock, no par value  (“Preferred
Stock”) of which 12,189,405 shares of Common Stock and zero shares of
Preferred Stock are issued and outstanding as of March 31, 2007, which amount
does not include 250,000 shares issuable to James E. Alexander and 200,000
shares issuable to Boris Rubizhevsky as a result of settlement agreements they
entered into with the Company.  All of
the outstanding shares of capital stock of the Company are validly issued,
fully paid and nonassessable, have been issued in compliance with all federal
and state securities laws, and none of such outstanding shares was issued in
violation of any preemptive rights or similar rights to subscribe for or
purchase securities.  Except as disclosed
in Schedule 3(d): (i) none of the Company’s capital stock is subject to preemptive
rights or any other similar rights or any liens or encumbrances suffered or
permitted by the Company; (ii) there are no outstanding options, warrants,
scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, or exercisable or
exchangeable for, any capital stock of the Company or any of its subsidiaries,
or contracts, commitments, understandings or arrangements by which the Company
or any of its subsidiaries is or may become bound to issue additional capital
stock of the Company or any of its subsidiaries or options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, or exercisable or
exchangeable for, any capital stock of the Company or any of its subsidiaries;
(iii) there are no outstanding debt securities, notes, credit agreements,
credit facilities or other agreements, documents or instruments evidencing
indebtedness of the Company or any of its subsidiaries or by which the Company
or any of its subsidiaries is or may become bound; (iv) there are no financing
statements securing obligations in any material amounts, either singly or in
the aggregate, filed in connection with the Company or any of its subsidiaries;
(v) there are no outstanding securities or instruments of the Company or any of
its subsidiaries which contain any redemption or similar provisions, and there
are no contracts, commitments, understandings or arrangements by which the
Company or any of its subsidiaries is or may become bound to redeem a security
of the Company or any of its subsidiaries; (vi) there are no securities or
instruments containing anti-dilution or similar provisions that will be



 7
 









triggered by the issuance of the Securities; (vii) the Company does not
have any stock appreciation rights or “phantom stock” plans or agreements or
any similar plan or agreement; and (viii) the Company and its subsidiaries have
no liabilities or obligations required to be disclosed in the SEC Documents but
not so disclosed in the SEC Documents, other than those incurred in the
ordinary course of the Company’s or its subsidiaries’ respective businesses and
which, individually or in the aggregate, do not or would not have a Material
Adverse Effect.  The Company has
furnished to the Buyers true, correct and complete copies of the Company’s
Certificate of Incorporation, as amended and as in effect on the date hereof
(the “Certificate
of Incorporation”), and the Company’s Bylaws, as amended and as in
effect on the date hereof (the “Bylaws”),
and the terms of all securities convertible into, or exercisable or
exchangeable for, shares of Common Stock and the material rights of the holders
thereof in respect thereto.  No further approval
or authorization of any stockholder, the Board of Directors of the Company or
others is required for the issuance and sale of the Securities except to the
extent the approval of the Company’s shareholders are required by the rules and
regulations of the Nasdaq Capital Market. 
There are no stockholders agreements, voting agreements or other similar
agreements with respect to the Company’s capital stock to which the Company is
a party or, to the knowledge of the Company, between or among any of the Company’s
stockholders.


(e)           Issuance
of Securities.  The issuance of the
Convertible Debentures and the Warrants is duly authorized and free from all
taxes, liens and charges with respect to the issue thereof.  Upon conversion in accordance with the terms
of the Convertible Debentures or exercise in accordance with the Warrants, as
the case may be, the Conversion Shares and Warrant Shares, respectively, when
issued will be validly issued, fully paid and nonassessable, free from all
taxes, liens and charges with respect to the issue thereof.  The Company has reserved from its duly
authorized capital stock the appropriate number of shares of Common Stock as
set forth in this Agreement.


(f)            No
Conflicts.   The execution, delivery
and performance of the Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the issuance of the Convertible Debentures and
the Warrants, and reservation for issuance and issuance of the Conversion
Shares and the Warrant Shares) will not (i) result in a violation of any
certificate of incorporation, certificate of formation, any certificate of
designations or other constituent documents of the Company or any of its
subsidiaries, any capital stock of the Company or any of its subsidiaries or
bylaws of the Company or any of its subsidiaries or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) in any respect under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which the Company or any of its subsidiaries is a
party except the warrants issued to certain investors in February 2005 to the extent
that any action that may be taken by the Buyer(s) hereunder may result in
dilution adjustment to such warrants in accordance with the terms thereof, or
(iii) result in a violation of any law, rule, regulation, order, judgment or
decree (including foreign, federal and state securities laws and regulations
and the rules and regulations of the Nasdaq Capital Market subject to the
shareholder approval requirements of such rules) applicable to the Company or
any of its subsidiaries or by which any property or asset of the Company or any
of its subsidiaries is bound or affected; except in the case of each of clauses
(ii) and (iii), such as could not, individually or in the aggregate, have or
reasonably be expected to result in a Material Adverse



 8
 









Effect.  The business of the
Company and its subsidiaries is not being conducted, and shall not be conducted
in violation of any material law, ordinance, or regulation of any governmental
entity.  Except as specifically contemplated
by this Agreement and as required under the Securities Act and any applicable
state securities laws, the Company is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court
or governmental agency in order for it to execute, deliver or perform any of
its obligations under or contemplated by this Agreement or the Registration
Rights Agreement in accordance with the terms hereof or thereof.  All consents, authorizations, orders, filings
and registrations which the Company is required to obtain pursuant to the
preceding sentence have been obtained or effected on or prior to the date
hereof.  The Company and its subsidiaries
are unaware of any facts or circumstance, which might give rise to any of the
foregoing.


(g)           SEC
Documents; Financial Statements.  The
Company has filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), for the two years preceding the
date hereof (or such shorter period as the Company was required by law or
regulation to file such material) (all of the foregoing filed prior to the date
hereof or amended after the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents incorporated by
reference therein, being hereinafter referred to as the “SEC Documents”)
on timely basis or has received a valid extension of such time of filing and
has filed any such SEC Document prior to the expiration of any such
extension.  The Company has delivered to
the Buyers or their representatives, or made available through the SEC’s
website at http://www.sec.gov., true and complete copies of the SEC
Documents.  As of their respective dates,
the SEC Documents complied in all material respects with the requirements of
the Exchange Act and the rules and regulations of the SEC promulgated
thereunder applicable to the SEC Documents, and none of the SEC Documents, at
the time they were filed with the SEC, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.  As of their respective dates, the financial
statements of the Company included in the SEC Documents complied as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto.  Such financial statements have been prepared
in accordance with generally accepted accounting principles, consistently
applied, during the periods involved (except (i) as may be otherwise indicated
in such financial statements or the notes thereto, or (ii) in the case of
unaudited interim statements, to the extent they may exclude footnotes or may
be condensed or summary statements) and fairly present in all material respects
the financial position of the Company as of the dates thereof and the results
of its operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments).  No other information provided by or on behalf
of the Company to the Buyers which is not included in the SEC Documents,
including, without limitation, information referred to in Section 2(i) of this
Agreement, contains any untrue statement of a material fact or omits to state
any material fact necessary in order to make the statements therein, in the
light of the circumstance under which they are or were made and not misleading.


(h)           10
b 5.  The SEC Documents do not
include any untrue statements of material fact, nor do they omit to state any
material fact required to be stated therein necessary



 9
 









to make the statements made, in light of the circumstances under which
they were made, not misleading.


(i)            Absence
of Litigation.  There is no action,
suit, proceeding, inquiry or investigation before or by any court, public
board, government agency, self-regulatory organization or body pending against or
affecting the Company, the Common Stock or any of the Company’s subsidiaries,
wherein an unfavorable decision, ruling or finding would (i) have a Material
Adverse Effect.


(j)            Acknowledgment
Regarding Buyer’s Purchase of the Convertible Debentures.  The Company acknowledges and agrees that each
Buyer is acting solely in the capacity of an arm’s length purchaser with
respect to this Agreement and the transactions contemplated hereby.  The Company further acknowledges that each
Buyer is not acting as a financial advisor or fiduciary of the Company (or in
any similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any advice given by each Buyer or any of their
respective representatives or agents in connection with this Agreement and the
transactions contemplated hereby is merely incidental to such Buyer’s purchase
of the Securities.  The Company further
represents to each Buyer that the Company’s decision to enter into this
Agreement has been based solely on the independent evaluation by the Company
and its representatives.


(k)           No
General Solicitation.  Neither the
Company, nor any of its affiliates, nor any person acting on its or their
behalf, has engaged in any form of general solicitation or general advertising
(within the meaning of Regulation D under the Securities Act) in connection
with the offer or sale of the Securities.


(l)            No
Integrated Offering.  Neither the
Company, nor any of its affiliates, nor any person acting on its or their
behalf has, directly or indirectly, made any offers or sales of any security or
solicited any offers to buy any security, under circumstances that would
require registration of the Securities under the Securities Act or cause this
offering of the Securities to be integrated with prior offerings by the Company
for purposes of the Securities Act.


(m)          Employee
Relations.  Neither the Company nor
any of its subsidiaries is involved in any labor dispute or, to the knowledge
of the Company or any of its subsidiaries, is any such dispute threatened.  None of the Company’s or its subsidiaries’
employees is a member of a union and the Company and its subsidiaries believe
that their relations with their employees are good.


(n)           Intellectual
Property Rights.  The Company and its
subsidiaries own or possess adequate rights or licenses to use all trademarks,
trade names, service marks, service mark registrations, service names, patents,
patent rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted.  The Company
and its subsidiaries do not have any knowledge of any infringement by the
Company or its subsidiaries of trademark, trade name rights, patents, patent
rights, copyrights, inventions, licenses, service names, service marks, service
mark registrations, trade secret or other similar rights of others, and, to the
knowledge of



 10
 









the Company there is no claim, action or proceeding being made or
brought against, or to the Company’s knowledge, being threatened against, the
Company or its subsidiaries regarding trademark, trade name, patents, patent
rights, invention, copyright, license, service names, service marks, service
mark registrations, trade secret or other infringement; and the Company and its
subsidiaries are unaware of any facts or circumstances which might give rise to
any of the foregoing.


(o)           Environmental
Laws.  The Company and its
subsidiaries are (i) in compliance with any and all applicable foreign,
federal, state and local laws and regulations relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants (“Environmental Laws”), (ii) have
received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii)
are in compliance with all terms and conditions of any such permit, license or
approval.


(p)           Title.  All real property and facilities held under
lease by the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries.


(q)           Insurance.  The Company and each of its subsidiaries is
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
subsidiaries are engaged.  Neither the
Company nor any such subsidiary has been refused any insurance coverage sought
or applied for and neither the Company nor any such subsidiary has any reason
to believe that it will not be able to renew its existing insurance coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business at a cost that would not
materially and adversely affect the condition, financial or otherwise, or the
earnings, business or operations of the Company and its subsidiaries, taken as
a whole.


(r)            Regulatory
Permits.  The Company and its
subsidiaries possess all material certificates, authorizations and permits
issued by the appropriate federal, state or foreign regulatory authorities
necessary to conduct their respective businesses, and neither the Company nor
any such subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or permit.


(s)           Internal
Accounting Controls.  The Company and
each of its subsidiaries maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed
in accordance with management’s general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability, and (iii) the recorded amounts for assets are
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.


(t)            No
Material Adverse Breaches, etc. 
Neither the Company nor any of its subsidiaries is subject to any charter,
corporate or other legal restriction, or any judgment,



 11
 









decree, order, rule or regulation which in the judgment of the Company’s
officers has or is expected in the future to have a Material Adverse Effect on
the business, properties, operations, financial condition, results of
operations or prospects of the Company or its subsidiaries.  Neither the Company nor any of its
subsidiaries is in breach of any contract or agreement which breach, in the
judgment of the Company’s officers, has or is expected to have a Material
Adverse Effect on the business, properties, operations, financial condition,
results of operations or prospects of the Company or its subsidiaries except
the pending delisting of the Company’s common stock from the Nasdaq Stock
Market if the Company is unable to show the staff of Nasdaq Listings
Enforcement that the Company can meet the Nasdaq shareholders’ equity
requirement and other requirements for continued listing.


(u)           Tax
Status.  The Company and each of its
subsidiaries has made and filed all federal and state income and all other tax
returns, reports and declarations required by any jurisdiction to which it is
subject and (unless and only to the extent that the Company and each of its
subsidiaries has set aside on its books provisions reasonably adequate for the
payment of all unpaid and unreported taxes) has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those being
contested in good faith and has set aside on its books provision reasonably
adequate for the payment of all taxes for periods subsequent to the periods to
which such returns, reports or declarations apply.  There are no unpaid taxes in any material amount
claimed to be due by the taxing authority of any jurisdiction, and the officers
of the Company know of no basis for any such claim.


(v)           Certain
Transactions.  Except for arm’s
length transactions pursuant to which the Company makes payments in the ordinary
course of business upon terms no less favorable than the Company could obtain
from third parties and other than entry into certain employment or consulting
agreements, the severance of certain employment relationships, and the grant of
stock options disclosed in the SEC Documents, none of the officers, directors,
or employees of the Company is presently a party to any transaction with the
Company (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Company, any corporation,
partnership, trust or other entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.


(w)          Fees
and Rights of First Refusal.  The
Company is not obligated to offer the securities offered hereunder on a right
of first refusal basis or otherwise to any third parties including, but not
limited to, current or former shareholders of the Company, underwriters,
brokers, agents or other third parties.


(x)            Investment
Company. The Company is not, and is not an affiliate of, and immediately
after receipt of payment for the Securities, will not be or be an affiliate of,
an “investment company” within the meaning of the Investment Company Act of
1940, as amended.  The Company shall
conduct its business in a manner so that it will not become subject to the
Investment Company Act.


 



 12















(y)           Registration
Rights.  Other than each of the
Buyers, the holders of certain warrants issued by the Company in February 2005,
and certain investors in a private placement being conducted by Clayton Dunning
Co., Inc., no Person has any right to cause the Company to effect the
registration under the Securities Act of any securities of the Company.  There are no outstanding registration
statements not yet declared effective and there are no outstanding comment
letters from the SEC or any other regulatory agency except the Nasdaq Listings
Enforcement staff notification to the Company regarding the Company’s
non-compliance with Nasdaq’s shareholders’ equity requirement.


(z)            Private
Placement. Assuming the accuracy of the Buyers’ representations and
warranties set forth in Section 2, no registration under the Securities Act is
required for the offer and sale of the Securities by the Company to the Buyers
as contemplated hereby. The issuance and sale of the Securities hereunder does
not contravene the rules and regulations of the Primary Market.


(aa)         Listing
and Maintenance Requirements.  The
Company’s Common Stock is registered pursuant to Section 12(b) or 12(g) of the
Exchange Act, and the Company has taken no action designed to terminate, or
which to its knowledge is likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act nor has the Company
received any notification that the SEC is contemplating terminating such
registration.  Except for notifications
received from Nasdaq on July 10, 2006, January 10, 2007 and March 21, 2007 and
other correspondence related thereto, the Company has not, in the twelve (12)
months preceding the date hereof, received notice from any Primary Market on
which the Common Stock is or has been listed or quoted to the effect that the
Company is not in compliance with the listing or maintenance requirements of
such Primary Market.


(bb)         Manipulation
of Price.  The Company has not, and to its knowledge no one acting on
its behalf has, (i) taken, directly or indirectly, any action designed to cause
or to result in the stabilization or manipulation of the price of any security
of the Company to facilitate the sale or resale of any of the Securities, (ii)
sold, bid for, purchased, or, paid any compensation for soliciting purchases
of, any of the Securities, or (iii) paid or agreed to pay to any Person any
compensation for soliciting another to purchase any other securities of the
Company, other than, in the case of clauses (ii) and (iii), compensation paid
to the Company’s placement agent in connection with the placement of the
Securities.


(cc)         Dilutive
Effect.  The Company understands and
acknowledges that the number of Conversion Shares issuable upon conversion of
the Convertible Debentures and the Warrant Shares issuable upon exercise of the
Warrants will increase in certain circumstances.  The Company further acknowledges that its
obligation to issue Conversion Shares upon conversion of the Convertible
Debentures in accordance with this Agreement and the Convertible Debentures and
its obligation to issue the Warrant Shares upon exercise of the Warrants in
accordance with this Agreement and the Warrants, in each case, is absolute and
unconditional regardless of the dilutive effect that such issuance may have on
the ownership interests of other stockholders of the Company.



 13
 









4.     COVENANTS.


(a)           Best
Efforts.  Each party shall use its
best efforts to timely satisfy each of the conditions to be satisfied by it as
provided in Sections 6 and 7 of this Agreement.


(b)           Form
D.  The Company agrees to file a Form
D with respect to the Securities as required under Regulation D and to provide
a copy thereof to each Buyer promptly after such filing.  The Company shall, on or before the Closing
Date, take such action as the Company shall reasonably determine is necessary
to qualify the Securities, or obtain an exemption for the Securities for sale
to the Buyers at the Closing pursuant to this Agreement under applicable
securities or “Blue Sky” laws of the states of the United States, and shall
provide evidence of any such action so taken to the Buyers on or prior to the
Closing Date.


(c)           Reporting
Status.  Until the earlier of (i) the
date as of which the Buyer(s) may sell all of the Securities without
restriction pursuant to Rule 144(k) promulgated under the Securities Act (or
successor thereto), or (ii) the date on which (A) the Buyers shall have sold
all the Securities and (B) none of the Convertible Debentures or Warrants are
outstanding (the “Registration Period”), the Company shall file in a
timely manner all reports required to be filed with the SEC pursuant to the
Exchange Act and the regulations of the SEC  
thereunder, and the Company shall not terminate its status as an issuer
required to file reports under the Exchange Act even if the Exchange Act or the
rules and regulations thereunder would otherwise permit such termination.


(d)           Use
of Proceeds.  The Company will use
the proceeds from the sale of the Convertible Debentures for general corporate
and working capital purposes.


(e)           Reservation
of Shares.  On the date hereof, the
Company shall reserve for issuance to the Buyers 10,000,000 shares for issuance
upon conversions of the Convertible Dentures and 250,000 shares for issuance
upon exercise of the Warrants (collectively, the “Share Reserve”).  The Company represents that it has sufficient
authorized and unissued shares of Common Stock available to create the Share
Reserve after considering all other commitments that may require the issuance
of Common Stock.  The Company shall take
all action reasonably necessary to at all times have authorized, and reserved
for the purpose of issuance, such number of shares of Common Stock as shall be
necessary to effect the full conversion of the Convertible Debentures and the full
exercise of the Warrants.  If at any time
the Share Reserve is insufficient to effect the full conversion of the
Convertible Debentures or the full exercise of the Warrants, the Company shall
increase the Share Reserve accordingly. 
If the Company does not have sufficient authorized and unissued shares
of Common Stock available to increase the Share Reserve, the Company shall call
and hold a special meeting of the shareholders within thirty (30) days of such
occurrence, for the sole purpose of increasing the number of shares
authorized.  The Company’s management
shall recommend to the shareholders to vote in favor of increasing the number
of shares of Common Stock authorized. 
Management shall also vote all of its shares in favor of increasing the
number of authorized shares of Common Stock.


(f)            Listings
or Quotation.  The Company’s Common
Stock shall be listed or quoted for trading on any of (a) the Nasdaq Capital
Market, (b) New York Stock



 14
 









Exchange, (c) the Nasdaq Global Market, (d) the American Stock Exchange,
or (e) the Nasdaq OTC Bulletin Board (“OTCBB”) (each, a “Primary
Market”).  The Company shall promptly
secure the listing of all of the Registrable Securities (as defined in the
Registration Rights Agreement) upon each national securities exchange and
automated quotation system, if any, upon which the Common Stock is then listed
(subject to official notice of issuance) and shall maintain such listing of all
Registrable Securities from time to time issuable under the terms of the
Transaction Documents.


(g)           Fees
and Expenses.


(i)            Each
of the Company and the Buyer(s) shall pay all costs and expenses incurred by
such party in connection with the negotiation, investigation, preparation,
execution and delivery of the Transaction Documents.  The Company shall pay Yorkville Advisors LLC
a fee equal to eight percent (8%) of the Purchase Price which shall be paid pro
rata directly from the gross proceeds of the Closing.


(ii)           The
Company shall pay a structuring fee to Yorkville Advisors LLC of Fifteen
Thousand Dollars ($15,000), which shall be paid directly from the proceeds of
the Closing.


(iii)          Upon
the execution of this Agreement the Company shall issue to the Buyer(s) a
warrant to purchase two hundred fifty thousand (250,000) shares of the Company’s
Common Stock at an exercise price of Five Dollars ($5.00) (the “Warrant”).  The shares of Common Stock issuable under the
Warrants shall collectively be referred to as the “Warrant Shares”.


(iv)          Registration
Rights.  The Warrant Shares will have
“piggy-back” registration rights.


(h)           Corporate
Existence.  So long as any of the
Convertible Debentures remain outstanding, the Company shall not directly or
indirectly consummate any merger, reorganization, restructuring, reverse stock
split consolidation, sale of all or substantially all of the Company’s assets
or any similar transaction or related transactions (each such transaction, an “Organizational
Change”) unless, prior to the consummation an Organizational Change, the
Company obtains the written consent of each Buyer.  In any such case, the Company will make
appropriate provision with respect to such holders’ rights and interests to
insure that the provisions of this Section 4(h) will thereafter be applicable
to the Convertible Debentures.


(i)            Transactions
With Affiliates.  So long as any
Convertible Debentures are outstanding, the Company shall not, and shall cause
each of its subsidiaries not to, enter into, amend, modify or supplement, or
permit any subsidiary to enter into, amend, modify or supplement any agreement,
transaction, commitment, or arrangement with any of its or any subsidiary’s
officers, directors, person who were officers or directors at any time during
the previous two (2) years, stockholders who beneficially own five percent (5%)
or more of the Common Stock, or Affiliates (as defined below) or with any
individual related by blood, marriage, or adoption to any such individual or
with any entity in which any such entity or individual owns a five percent (5%)
or more beneficial interest (each a “Related Party”), except



 15
 









for (a) customary employment arrangements and benefit programs on
reasonable terms, (b) any investment in an Affiliate of the Company,  (c) any agreement, transaction, commitment,
or arrangement on an arms-length basis on terms no less favorable than terms
which would have been obtainable from a person other than such Related Party,
(d) any agreement, transaction, commitment, or arrangement which is approved by
a majority of the disinterested directors of the Company; for purposes hereof,
any director who is also an officer of the Company or any subsidiary of the
Company shall not be a disinterested director with respect to any such
agreement, transaction, commitment, or arrangement.  “Affiliate” for purposes hereof means,
with respect to any person or entity, another person or entity that, directly
or indirectly, (i) has a ten percent (10%) or more equity interest in that
person or entity, (ii) has ten percent (10%) or more common ownership with that
person or entity, (iii) controls that person or entity, or (iv) shares
common control with that person or entity. 
“Control” or “controls” for purposes hereof means that a
person or entity has the power, direct or indirect, to conduct or govern the
policies of another person or entity.


(j)            Transfer
Agent.  The Company covenants and
agrees that, in the event that the Company’s agency relationship with the
transfer agent should be terminated for any reason prior to a date which is two
(2) years after the Closing Date, the Company shall immediately appoint a new
transfer agent and shall require that the new transfer agent execute and agree
to be bound by the terms of the Irrevocable Transfer Agent Instructions (as
defined herein).


(k)           Neither
the Buyer(s) nor any of its affiliates have an open short position in the
Common Stock of the Company, and the Buyer(s) agrees that it shall not, and
that it will cause its affiliates not to, engage in any short sales of or
hedging transactions with respect to the Common Stock as long as any
Convertible Debentures shall remain outstanding.


(l)            Additional
Registration Statements.  Other than
existing registration requirements pursuant to the Registration Rights
Agreement dated May 30, 2006 by and between the Company and the Buyer(s) or
such registration requirements in connection with the Clayton Dunning & Co.
which the Company anticipates will be issued in April 2007 or soon thereafter
and are referenced in the Waiver Agreement between the Parties dated February
19, 2007 (the “Clayton Dunning Transaction”), until the effective date
of the initial Registration Statement, the Company will not file a registration
statement under the Securities Act relating to securities that are not the
Securities except to the extent that the Company has existing contractual requirements
to do so as disclosed on the Disclosure Schedule attached hereto, and except
for a Form S-8 to register the Company’s existing employee benefit plans.


(m)          Review
of Public Disclosures.  All SEC
filings (including, without limitation, all filings required under the Exchange
Act, which include Forms 10-Q,  10-K and
8-K, etc) and other public disclosures made by the Company, including, without
limitation, all press releases, investor relations materials, and scripts of
analysts meetings and calls, shall be reviewed and approved for release by the
Company’s attorneys.


(n)           Disclosure
of Transaction.  Within four Business
Day following the date of this Agreement, the Company shall file a Current
Report on Form 8-K describing the terms of the transactions contemplated by the
Transaction Documents in the form required by the



 16
 









Exchange Act and attaching the material Transaction Documents
(including, without limitation, this Agreement, the form of the Convertible
Debenture, the form of Warrant and the form of the Registration Rights
Agreement) as exhibits to such filing.


(o)           Shareholder
Approval. The Company shall obtain shareholder approval no later than
November 30, 2007 (without the vote of any shares acquired in this transaction
and related transactions) for the issuance of in excess of 19.99% of the
outstanding shares of the Company’s Common Stock upon (i) conversion of the
Convertible Debentures, issuance of shares of the Company’s Common Stock, (ii)
shares issuable in payment of interest on the Debentures; (iii) shares issuable
as liquidated damages pursuant to the Investor Registration Rights Agreement;
and (iv) issuance of the Warrant Shares (the “Total Transaction Shares”).   Until the Company obtains such shareholder
approval, the maximum number of shares that the Company can issue upon exercise
of the Warrant, conversion of principal and interest on the Debenture, and in
payment of liquidated damages will not exceed 2,526,617 shares (being 19.99% of
the shares currently outstanding).


5.     TRANSFER
AGENT INSTRUCTIONS.


(a)           The
Company shall issue the Irrevocable Transfer Agent Instructions in the form
attached hereto.


6.     CONDITIONS
TO THE COMPANY’S OBLIGATION TO SELL.


The obligation of the Company hereunder to issue and
sell the Convertible Debentures to the Buyer(s) at the Closings is subject to
the satisfaction, at or before the Closing Dates, of each of the following
conditions, provided that these conditions are for the Company’s sole benefit
and may be waived by the Company at any time in its sole discretion:


(a)           Each
Buyer shall have executed the Transaction Documents and delivered them to the
Company.


(b)           The
Buyer(s) shall have delivered to the Company the Purchase Price for the
Convertible Debentures and Warrants in the respective amounts as set forth next
to each Buyer as set forth on Schedule I attached hereto, minus any fees to be
paid directly from the proceeds the Closings as set forth herein, by wire
transfer of immediately available U.S. funds pursuant to the wire instructions
provided by the Company.


(c)           The
representations and warranties of the Buyer(s) shall be true and correct in all
material respects as of the date when made and as of the Closing Dates as
though made at that time (except for representations and warranties that speak
as of a specific date), and the Buyer(s) shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Buyer(s) at or prior to the Closing Dates.



 17
 









7.     CONDITIONS
TO THE BUYER’S OBLIGATION TO PURCHASE.


(a)           The
obligation of the Buyer(s) hereunder to purchase the Convertible Debentures at
the Closing is subject to the satisfaction, at or before the First Closing
Date, of each of the following conditions:


(i)            The
Company shall have executed the Transaction Documents and delivered the same to
the Buyers.


(ii)           The
Common Stock shall be authorized for quotation or trading on one of the
designated Primary Markets, trading in the Common Stock shall not have been
suspended for any reason, and all the Conversion Shares issuable upon the
conversion of the Convertible Debentures shall be approved for listing or
trading on the Primary Market.


(iii)          The
representations and warranties of the Company shall be true and correct in all
material respects (except to the extent that any of such representations and
warranties is already qualified as to materiality in Section 3 above, in which
case, such representations and warranties shall be true and correct without
further qualification) as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the Closing Date


(iv)          The
Company shall have executed and delivered to the Buyer(s) the Convertible
Debentures and Warrants in the respective amounts set forth opposite each Buyer’s
name on Schedule I attached hereto.


(v)           The
Buyers shall have received an opinion of counsel from counsel to the Company in
a form satisfactory to the Buyers.


(vi)          The
Company shall have provided to the Buyers a true copy of a certificate of good
standing evidencing the formation and good standing of the Company from the
secretary of state (or comparable office) from the jurisdiction in which the
Company is incorporated, as of a date within 10 days of the Closing Date.


(vii)         The
Company shall have delivered to the Buyers a certificate, executed by the
Secretary of the Company and dated as of the Closing Date, as to (i) the
resolutions consistent with Section 3(c) as adopted by the Company’s Board of
Directors in a form reasonably acceptable to such Buyer, (ii) the Certificate
of Incorporation and (iii) the Bylaws, each as in effect at the Closing.


(viii)        The
Company shall have cooperated with the Buyer(s) as the Buyer(s) may request to
file an amendment to the existing UCC-1s filed in connection with the Security
Documents, and shall have filed a UCC-1 or such other forms as may be required
to perfect the Buyer’s interest in the Pledged Property as detailed in the
Security Documents and provided proof of such filing to the Buyer(s).



 18
 









(ix)           The
Company shall have delivered the Pledged Shares as well as executed and
medallion guaranteed stock powers as required pursuant to the Pledge and Escrow
Agreement.


(x)            The
Company shall have obtained the approval of the SenseIt Corp. and the
stockholders of SenseIt Corp in order to enter into the Pledge and Escrow
Agreement.


(xi)           The
Company shall have provided to the Buyer an acknowledgement, to the
satisfaction of the Buyer, from the Company’s independent certified public
accountants as to its ability to provide all consents required in order to file
a registration statement in connection with this transaction.


(xii)          The
Company shall have created the Share Reserve.


(xiii)         The
Irrevocable Transfer Agent Instructions, in form and substance satisfactory to
the Buyer, shall have been delivered to and acknowledged in writing by the
Company’s transfer agent.


8.     INDEMNIFICATION.


(a)           In
consideration of the Buyer’s execution and delivery of this Agreement and
acquiring the Convertible Debentures and the Conversion Shares hereunder, and
in addition to all of the Company’s other obligations under this Agreement, the
Company shall defend, protect, indemnify and hold harmless the Buyer(s) and
each other holder of the Convertible Debentures and the Conversion Shares, and
all of their officers, directors, employees and agents (including, without
limitation, those retained in connection with the transactions contemplated by
this Agreement) (collectively, the “Buyer Indemnitees”) from and against
any and all actions, causes of action, suits, claims, losses, costs, penalties,
fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Buyer Indemnitee is a party to the action for
which indemnification hereunder is sought), and including reasonable attorneys’
fees and disbursements (the “Indemnified Liabilities”), incurred by the
Buyer Indemnitees or any of them as a result of, or arising out of, or relating
to (a) any misrepresentation or breach of any representation or warranty made
by the Company in this Agreement, the Convertible Debentures or the other
Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby, (b) any breach of any covenant, agreement or
obligation of the Company contained in this Agreement, or the other Transaction
Documents or any other certificate, instrument or document contemplated hereby
or thereby, or (c) any cause of action, suit or claim brought or made against
such Buyer Indemnitee and arising out of or resulting from the execution,
delivery, performance or enforcement of this Agreement or any other instrument,
document or agreement executed pursuant hereto by any of the parties hereto,
any transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Convertible Debentures or
the status of the Buyer or holder of the Convertible Debentures  the Conversion Shares,  as a Buyer of Convertible Debentures in the
Company.  To the extent that the
foregoing undertaking by the Company may be unenforceable for any reason, the
Company shall make the maximum



 19
 









contribution to the payment and satisfaction of each of the Indemnified
Liabilities, which is permissible under applicable law.


(b)           In
consideration of the Company’s execution and delivery of this Agreement, and in
addition to all of the Buyer’s other obligations under this Agreement, the
Buyer shall defend, protect, indemnify and hold harmless the Company and all of
its officers, directors, employees and agents (including, without limitation,
those retained in connection with the transactions contemplated by this
Agreement) (collectively, the “Company Indemnitees”) from and against
any and all Indemnified Liabilities incurred by the Indemnitees or any of them
as a result of, or arising out of, or relating to (a) any misrepresentation or
breach of any representation or warranty made by the Buyer(s) in this
Agreement, instrument or document contemplated hereby or thereby executed by
the Buyer, (b) any breach of any covenant, agreement or obligation of the
Buyer(s) contained in this Agreement, 
the Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby executed by the Buyer, or (c) any cause of
action, suit or claim brought or made against such Company Indemnitee based on
material misrepresentations or due to a material breach and arising out of or
resulting from the execution, delivery, performance or enforcement of this
Agreement, the Transaction Documents or any other instrument, document or
agreement executed pursuant hereto by any of the parties hereto.  To the extent that the foregoing undertaking
by each Buyer may be unenforceable for any reason, each Buyer shall make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities, which is permissible under applicable law.


9.     GOVERNING LAW: MISCELLANEOUS.


(a)           Governing
Law.  This Agreement shall be
governed by and interpreted in accordance with the laws of the State of New
Jersey without regard to the principles of conflict of laws.  The parties further agree that any action
between them shall be heard in Hudson County, New Jersey, and expressly consent
to the jurisdiction and venue of the Superior Court of New Jersey, sitting in
Hudson County and the United States District Court for the District of New
Jersey sitting in Newark, New Jersey for the adjudication of any civil action
asserted pursuant to this Paragraph.


(b)           Counterparts.  This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party.  In the event any signature page is delivered
by facsimile transmission, the party using such means of delivery shall cause
four (4) additional original executed signature pages to be physically
delivered to the other party within five (5) days of the execution and delivery
hereof.


(c)           Headings.  The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.


(d)           Severability.  If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.



 20
 









(e)           Entire
Agreement, Amendments.  This
Agreement supersedes all other prior oral or written agreements between the
Buyer(s), the Company, their affiliates and persons acting on their behalf with
respect to the matters discussed herein, and this Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor any Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters.  No provision of this Agreement may be waived
or amended other than by an instrument in writing signed by the party to be
charged with enforcement.


(f)            Notices.  Any notices, consents, waivers, or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered (i) upon
receipt, when delivered personally; (ii) upon confirmation of receipt, when
sent by facsimile; (iii) three (3) days after being sent by U.S. certified
mail, return receipt requested, or (iv) one (1) day after deposit with a
nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. 
The addresses and facsimile numbers for such communications shall be:


	
  If to the Company, to:

  	
  Isonics Corporation

  
	
   

  	
  5906 McIntyre Street

  
	
   

  	
  Golden, CO 80403

  
	
   

  	
  Attention:

  	
  John Sakys

  
	
   

  	
  Telephone:

  	
  (303) 279-7900

  
	
   

  	
  Facsimile:

  	
  (303) 279-7300

  
	
   

  	
   

  
	
  With a copy to:

  	
  Burns, Figa & Will, P.C.

  
	
   

  	
  6400 South Fiddler’s Green Circle — Suite 1000

  
	
   

  	
  Greenwood Village, CO 80111

  
	
   

  	
  Attention:

  	
  Herrick K. Lidstone, Jr., Esq.

  
	
   

  	
  Telephone:

  	
  (303) 796-2626

  
	
   

  	
  Facsimile:

  	
  (303) 796-2777

  



 


If to the Buyer(s), to its address and facsimile
number on Schedule I, with copies to the Buyer’s counsel as set forth on
Schedule I.  Each party shall provide
five (5) days’ prior written notice to the other party of any change in address
or facsimile number.


(g)           Successors
and Assigns.  This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns.  Neither the
Company nor any Buyer shall assign this Agreement or any rights or obligations
hereunder without the prior written consent of the other party hereto.


(h)           No
Third Party Beneficiaries.  This
Agreement is intended for the benefit of the parties hereto and their
respective permitted successors and assigns, and is not for the benefit of, nor
may any provision hereof be enforced by, any other person.


(i)            Survival.  Unless this Agreement is terminated under
Section 9(l), the representations and warranties of the Company and the
Buyer(s) contained in Sections 2 and



 21
 









3, the agreements and covenants set forth in Sections 4, 5 and 9, and
the indemnification provisions set forth in Section 8, shall survive the
Closing for a period of two (2) years following the date on which the
Convertible Debentures are converted or repaid in full.  The Buyer(s) shall be responsible only for
its own representations, warranties, agreements and covenants hereunder.


(j)            Publicity.  The Company and the Buyer(s) shall have the
right to approve, before issuance any press release or any other public
statement with respect to the transactions contemplated hereby made by any
party; provided, however, that the Company shall be entitled, without the prior
approval of the Buyer(s), to issue any press release or other public disclosure
with respect to such transactions required under applicable securities or other
laws or regulations (the Company shall use its best efforts to consult the
Buyer(s) in connection with any such press release or other public disclosure
prior to its release and Buyer(s) shall be provided with a copy thereof upon
release thereof).


(k)           Further
Assurances.  Each party shall do and
perform, or cause to be done and performed, all such further acts and things,
and shall execute and deliver all such other agreements, certificates,
instruments and documents, as the other party may reasonably request in order
to carry out the intent and accomplish the purposes of this Agreement and the
consummation of the transactions contemplated hereby.


(l)            Termination.  In the event that the Closing shall not have
occurred with respect to the Buyers on or before five (5) business days from
the date hereof due to the Company’s or the Buyer’s failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the non-breaching party’s
failure to waive such unsatisfied condition(s)), the non-breaching party shall
have the option to terminate this Agreement with respect to such breaching
party at the close of business on such date without liability of any party to
any other party; provided, however, that if this Agreement is terminated by the
Company pursuant to this Section 9(l), the Company shall remain obligated to
reimburse the Buyer(s) for the fees and expenses of Yorkville Advisors LLC
described in Section 4(g) above.


(m)          Brokerage.  The Company represents that no broker, agent,
finder or other party has been retained by it in connection with the
transactions contemplated hereby and that no other fee or commission has been
agreed by the Company to be paid for or on account of the transactions
contemplated hereby.


(n)           No
Strict Construction.  The language
used in this Agreement will be deemed to be the language chosen by the parties
to express their mutual intent, and no rules of strict construction will be
applied against any party.


[REMAINDER
PAGE INTENTIONALLY LEFT BLANK]



 22
 









IN WITNESS WHEREOF, each Buyer and the Company have caused
their respective signature page to this Securities Purchase Agreement to be
duly executed as of the date first written above.


	
  

  	
  COMPANY:

  
	
   

  	
  ISONICS CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
  John Sakys

  
	
   

  	
  Title:

  	
  President and Interim Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
  ISONICS VANCOUVER, INC. *

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
  John Sakys

  
	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  
	
   

  	
  ISONICS HOMELAND SECURITY AND DEFENSE
  CORPORATION *

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Title:

  	
  President

  
	
   

  	
  Name:

  	
  John Sakys

  
	
   

  	
   

  
	
   

  	
  PROTECTION PLUS SECURITY CORPORATION *

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
  John Sakys

  
	
   

  	
  Title:

  	
  President

  
					







* Solely with
regard to the 5th Whereas Clause, 6th Whereas Clause, and 7th Whereas Clause, respectively, herein wherein
Isonics Vancouver, Inc., Isonics Homeland Security and Defense Corporation,
Protection Plus Security Corporation are providing the Buyer a security
interest in its assets pursuant to the terms of the Subsidiary Security
Agreements (as defined herein) and UCC-1s filed in connection therewith.



 23














IN
WITNESS WHEREOF,
each Buyer and the Company have caused their respective signature page to this
Securities Purchase Agreement to be duly executed as of the date first written
above.


	
  

  	
  BUYERS:

  
	
   

  	
  CORNELL CAPITAL PARTNERS, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Yorkville Advisors, LLC

  
	
   

  	
  Its:

  	
  Investment Manager

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
  Mark Angelo

  
	
   

  	
  Its:

  	
  Portfolio Manager

  



 















SCHEDULE I


SCHEDULE OF BUYERS


SCHEDULE I


SCHEDULE OF BUYERS


	
  (1)

  	
   

  	
  (2)

  	
   

  	
  (3)

  	
   

  	
  (4)

  	
   

  	
  (8)

  
	
  Buyer

  	
   

  	
  Subscription Amount

  	
   

  	
  Legal Representative’s Address and
  Facsimile Number

  
	
   

  	
   

  	
   

  	
   

  	
  Closing

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cornell Capital Partners, L.P.

  	
   

  	
   

  	
   

  	
  $2,000,000

  	
   

  	
   

  	
   

  	
  David Gonzalez, Esq.

  
	
  

  101 Hudson Street, Suite 3700

  Jersey City, NJ 07303

  Attention: Mark Angelo

  Telephone: (201) 985-8300

  Facsimile: (201) 985-8266

  Residence: Cayman Islands

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  101 Hudson Street, Suite 3700

  Jersey City, New Jersey 07302

  Telephone: (201) 985-8300

  Facsimile: (201) 985-8266

  



 
















DISCLOSURE
SCHEDULE


Schedule 3(a) —
direct and indirect subsidiaries


1.             Isonics Vancouver, Inc.


2.             Isonics Homeland Securities and
Defense Corporation


3.             Protection Plus Security
Corporation


4.             SenseIt Corp.


Schedule 3(d) —
Warrants and Options


3,653,500
Stock Options


4,254,500
Common Stock Warrants (which shall be increased to include such Common Stock
Warrants to be issued to Clayton Dunning in connection with the Clayton Dunning
transaction)


Schedule 4(n) —
Registration Rights  













EXHIBIT A


FORM OF CONVERTIBLE DEBENTURE



 2
 









EXHIBIT B


FORM OF WARRANT



 3