Document:

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

 3EXHIBIT
10.3

REGISTRATION RIGHTS AGREEMENT

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

WHEREAS:

A.            In
connection with the Securities Purchase Agreement by and among the parties
hereto of even date herewith (the “Securities
Purchase Agreement”), the Company has agreed, upon the terms and subject to
the conditions of the Securities Purchase Agreement, to issue and sell to the
Buyers (i) secured convertible debentures (the “Convertible Debentures”)
which shall be convertible into shares of the Company’s common stock, no par
value per share (the “Common Stock,” as converted, the “Conversion
Shares”) in accordance with the terms of the Convertible Debentures, and
(ii) warrants (the “Warrants”), which will be exercisable to purchase
shares of Common Stock (as exercised, collectively, the “Warrant Shares”).  Capitalized terms not defined herein shall
have the meaning ascribed to them in the Securities Purchase Agreement.

B.            To
induce the Buyers to execute and deliver the Securities Purchase Agreement, the
Company has agreed to provide certain registration rights under the Securities
Act of 1933, as amended, and the rules and regulations thereunder, or any
similar successor statute (collectively, the “Securities Act”), and
applicable state securities laws.

NOW, THEREFORE, in
consideration of the premises and the mutual covenants contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company and the Buyers hereby agree as follows:

1.             DEFINITIONS.

As used in this Agreement, the following terms shall
have the following meanings:

(a)           “Effectiveness
Deadline” means, with respect to the initial Registration Statement
required to be filed hereunder, the 120th calendar day following the receipt of
a written demand from the Buyers requesting the filing of such Registration
Statement and, with respect to any Subsequent Registration Statements which may
be required pursuant to Section 3(c), the 60th calendar day following the date
on which the Company first knows, or reasonably should have known, that it is
obligated to file such Subsequent Registration Statement; provided, however, in
the event the Company is notified by the U.S. Securities and Exchange
Commission (“SEC”) that one of the above Registration Statements will
not be reviewed or is no longer subject to further review and comments, the
Effectiveness Date as to such Registration Statement shall be the fifth Trading
Day following the date on which the Company is so notified if such date
precedes the dates required above.

(b)           “Filing Deadline”
means, with respect to the initial Registration Statement required hereunder,
the 30th calendar day following the receipt of a written demand from the Buyers
requesting the filing of such Registration Statement and, with respect to any
Subsequent Registration Statements which may be required pursuant to Section
3(c), the 30th day following the date on which the Company first knows, or
reasonably should have known that it is obligated to file such Subsequent
Registration Statement.

(c)           “Initial Required
Registration Amount” means shares of the Company’s Common Stock, in an
amount equal to nineteen and ninety-nine one hundredths percent (19.99%) if
such initial Registration Statement is filed prior to obtaining shareholder
approval, on or before November 30, 2007 to issue shares of the Company’s
Common Stock in excess of nineteen and ninety-nine one hundredths percent
(19.99%) or if such initial Registration Statement is filed after obtaining
shareholder approval on or before November 30, 2007 than in an amount equal to
thirty three percent (33%) of the outstanding shares of the Company’s Common
Stock excluding “insiders” as of the date the initial Registration Statement or
any Subsequent Registration Statement, issued or to be issued upon conversion
of the Convertible Debentures or exercise of the series Warrants, with amount
includes shares issued or issuable by the Company which will be aggregated by
the Securities and Exchange Commission under Rule 415(a) in calculating the
maximum number of shares that can be registered.

(d)           “Person”
means a corporation, a limited liability company, an association, a
partnership, an organization, a business, an individual, a governmental or
political subdivision thereof or a governmental agency.

(e)           “Prospectus”
means the prospectus included in a Registration Statement (including, without
limitation, a prospectus that includes any information previously omitted from
a prospectus filed as part of an effective registration statement in reliance
upon Rule 430A promulgated under the Securities Act), as amended or
supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of the Registrable Securities covered by a Registration
Statement, and all other amendments and supplements to the Prospectus,
including post-effective amendments, and all material incorporated by
reference or deemed to be incorporated by reference in such Prospectus.

(f)            “Registrable
Securities” means all of (i) the Conversion Shares issuable upon conversion
of the Convertible Debentures, (ii) the Warrant Shares issued or issuable upon
exercise of the Warrants, (iii) any additional shares issuable in connection
with any anti-dilution provisions in the Warrants or the Convertible Debentures
(without giving effect to any limitations on exercise set forth in the Warrants
or Convertible Debentures) and (iv) any shares of Common Stock issued or
issuable with respect to the Conversion Shares, the Convertible Debentures, the
Warrant Shares, or the Warrants as a result of any stock split, dividend or
other distribution, recapitalization or similar event or otherwise, without
regard to any limitations on the conversion of the Convertible Debentures or
exercise of the Warrants.

(g)           “Registration
Statement” means the registration statements required to be filed hereunder
and any additional registration statements contemplated by Section 3(c),
including (in each case) the Prospectus, amendments and supplements to such
registration statement or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and 

 2
 

all material
incorporated by reference or deemed to be incorporated by reference in such
registration statement.

(h)           “Rule 415”
means Rule 415 promulgated by the SEC pursuant to the Securities Act, as such
Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the SEC  having
substantially the same purpose and effect as such Rule.

2.             REGISTRATION.

(a)           On or prior to each
Filing Deadline, the Company shall prepare and file with the SEC a Registration
Statement on Form S-3 (if the Company is then eligible, on Form S-3) or other
appropriate form covering the resale of all of the Registrable Securities.  The Registration Statement prepared pursuant
hereto shall register for resale at least the number of shares of Common Stock
equal to the Required Registration Amount as of date the Registration Statement
is initially filed with the SEC.  The
Registration Statement shall contain the “Selling Stockholders” and “Plan
of Distribution” sections in substantially the form attached hereto as Exhibit
A and contain all the required disclosures set forth on Exhibit B.  The Company shall use its best efforts to
have the Registration Statement declared effective by the SEC as soon as practicable,
but in no event later than the Effectiveness Deadline.  No later than the second (2nd) trading day following the
date of effectiveness, the Company shall file with the SEC in accordance with
Rule 424 under the 1933 Act the final Prospectus to be used in connection with
sales pursuant to such Registration Statement. 
The Company shall use its best efforts to cause the Registration
Statement to remain effective until all of the Registrable Securities have been
sold or may be sold without volume restrictions pursuant to Rule 144(k), as
determined by the counsel to the Company pursuant to a written opinion letter
to such effect, addressed and acceptable to the Company’s transfer agent and
the affected Holders (“Registration Period”).  Prior to the filing of the Registration
Statement with the SEC, the Company shall furnish a draft of the Registration
Statement to the Buyers for their review and comment.  The Buyers shall furnish comments on the
Registration Statement to the Company within twenty-four (24) hours of the
receipt thereof from the Company.

(b)           Failure to File
or Obtain Effectiveness of the Registration Statement.     If: (i) a Registration Statement is not
filed on or prior to its Filing Date (if the Company files a Registration
Statement without affording the Holders the opportunity to review and comment
on the same as required by Section 2(a), the Company shall not be deemed to
have satisfied this clause (i)), or (ii) the Company fails to file with the SEC
a request for acceleration in accordance with Rule 461 promulgated under the
Securities Act, within five Trading Days of the date that the Company is
notified (orally or in writing, whichever is earlier) by the SEC that a
Registration Statement will not be “reviewed,” or not subject to further
review, or (iii) a Registration Statement filed or required to be filed
hereunder is not declared effective by the SEC by its Effectiveness Deadline,
or (iv) after the effectiveness, a Registration Statement ceases for any reason
to remain continuously effective as to all Registrable Securities for which it
is required to be effective, or the Holders are otherwise not permitted to
utilize the Prospectus therein to resell such Registrable Securities for more
than 30 consecutive calendar days or more than an aggregate of 40 calendar days
during any 12-month period (which need not be consecutive calendar days) (any
such failure or breach being referred to as an “Event”), then in
addition to any other rights the holders of the Convertible Debentures may have
hereunder or under 

 3
 

applicable
law, on each such Event date and on each monthly anniversary of each such Event
date (if the applicable Event shall not have been cured by such date) until the
applicable Event is cured, the Company shall pay to each holder of Convertible
Debentures, at the Company’s option, either an amount in cash or shares of the
Company’s Common Stock, as partial liquidated damages (“Liquidated Damages”)
and not as a penalty, equal to 1.0% of the aggregate purchase price paid by
such holder pursuant to the Securities Purchase Agreement for any Convertible
Debentures then held by such holder.  The
parties agree that (1) the Company shall not be liable for Liquidated Damages
under this Agreement with respect to any Warrants or Warrant Shares and (2) the
maximum aggregate Liquidated Damages payable to a holder of Convertible
Debentures under this Agreement shall be twelve percent (12%) of the aggregate
Purchase Price paid by such holder pursuant to the Securities Purchase
Agreement.  The partial Liquidated
Damages pursuant to the terms hereof shall apply on a daily pro-rata basis for
any portion of a month prior to the cure of an Event.

(c)           Liquidated
Damages.  The Company and the Buyer
hereto acknowledge and agree that the sums payable under subsection 2(b) above
shall constitute liquidated damages and not penalties and are in addition to
all other rights of the Buyer, including the right to call a default.  The parties further acknowledge that (i) the amount
of loss or damages likely to be incurred is incapable or is difficult to
precisely estimate, (ii) the amounts specified in such subsections bear a
reasonable relationship to, and are not plainly or grossly disproportionate to,
the probable loss likely to be incurred in connection with any failure by the
Company to obtain or maintain the effectiveness of a Registration Statement,
(iii) one of the reasons for the Company and the Buyer reaching an agreement as
to such amounts was the uncertainty and cost of litigation regarding the
question of actual damages, and (iv) the Company and the Buyer are
sophisticated business parties and have been represented by sophisticated and
able legal counsel and negotiated this Agreement at arm’s length.

3.             RELATED
OBLIGATIONS.

(a)           The Company shall,
not less than three (3) Trading Days prior to the filing of each Registration
Statement and not less than one (1) Trading Day prior to the filing of any
related amendments and supplements to all Registration Statements (except for
annual reports on Form 10-K or Form 10-KSB), furnish to each Buyer copies of
all such documents proposed to be filed, which documents (other than those
incorporated or deemed to be incorporated by reference) will be subject to the
reasonable and prompt review of such Buyers, The Company shall not file a
Registration Statement or any such Prospectus or any amendments or supplements
thereto to which the Buyers shall reasonably object in good faith; provided that, the Company is notified of such objection in
writing no later than two (2) Trading Days after the Buyers have been so
furnished copies of a Registration Statement.

(b)           The Company shall
(i) prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to a Registration Statement and the
Prospectus used in connection with such Registration Statement, which
prospectus is to be filed pursuant to Rule 424 promulgated under the Securities
Act, as may be necessary to keep such Registration Statement effective at all
times during the Registration Period, and prepare and file with the SEC such
additional Registration Statements in order to register for resale under the
Securities Act all of the Registrable Securities; (ii) cause the related
Prospectus to be amended or 

 4
 

supplemented
by any required Prospectus supplement (subject to the terms of this Agreement),
and as so supplemented or amended to be filed pursuant to Rule 424; (iii)
respond as promptly as reasonably possible to any comments received from the
SEC with respect to a Registration Statement or any amendment thereto and as
promptly as reasonably possible provide the Buyers true and complete copies of
all correspondence from and to the SEC relating to a Registration Statement
(provided that the Company may excise any information contained therein which
would constitute material non-public information as to any Buyer which has not
executed a confidentiality agreement with the Company); and (iv) comply with
the provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by such Registration Statement
until such time as all of such Registrable Securities shall have been disposed
of in accordance with the intended methods of disposition by the seller or
sellers thereof as set forth in such Registration Statement.  In the case of amendments and supplements to
a Registration Statement which are required to be filed pursuant to this
Agreement (including pursuant to this Section 3(b)) by reason of the Company’s
filing a report on Form 10-K, Form 10-Q or Form 8-K or any analogous report
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
the Company shall incorporate such report by reference into the Registration
Statement, if applicable, or shall file such amendments or supplements with the
SEC on the same day on which the Exchange Act report is filed which created the
requirement for the Company to amend or supplement the Registration Statement.

(c)           To the extent that
the Buyer holds any Registrable Securities that are prohibited from being
included on a the initial Registration Statement or any other Registration
Statement (the “Non-Registered Shares”) either under Rule 415, as
interpreted by the SEC, or because the Company’s shareholders had not approved
the issuance of in excess of 19.99% of the outstanding shares of the Company’s
Common Stock as contemplated in Section 4(q) of the Securities Purchase
Agreement, then the Company shall become obligated to file an additional
Registration Statement (each, a “Subsequent Registration Statement”) on
the first day after such Subsequent Registration Statement may be filed without
objection by the SEC under Rule 415 covering the resale by the Buyers of the
maximum number of such Non-Registered Shares allowed under Rule 415 as
interpreted by the SEC.

(d)           The Company shall
file with the SEC pursuant to Rule 424(b) a copy of the definitive prospectus
for each Registration Statement not later than the second (2nd) business day after the
effectiveness of such Registration Statement. 
The Company shall provide the Buyers such other documents as such Buyers
may reasonably request from time to time in order to facilitate the disposition
of the Registrable Securities owned by such Investor.

(e)           The Company shall
use its best efforts to (i) register and qualify the Registrable Securities
covered by a Registration Statement under such other securities or “blue sky”
laws of such jurisdictions in the United States as any Buyer reasonably
requests, (ii) prepare and file in those jurisdictions, such amendments
(including post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof during
the Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during
the Registration Period, and (iv) take all other actions reasonably necessary
or advisable to qualify 

 5
 

the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (w) make any change to its articles of incorporation or by-laws, (x)
qualify to do business in any jurisdiction where it would not otherwise be
required to qualify but for this Section 3(d), (y) subject itself to general
taxation in any such jurisdiction, or (z) file a general consent to service of
process in any such jurisdiction.  The
Company shall promptly notify each Buyer who holds Registrable Securities of
the receipt by the Company of any notification with respect to the suspension
of the registration or qualification of any of the Registrable Securities for
sale under the securities or “blue sky” laws of any jurisdiction in the United
States or its receipt of actual notice of the initiation or threat of any
proceeding for such purpose.

(f)            As promptly as
practicable after becoming aware of such event or development, the Company
shall notify each Buyer in writing of the happening of any event as a result of
which the Prospectus included in a Registration Statement, as then in effect,
includes an untrue statement of a material fact or omission to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading
(provided that in no event shall such notice contain any material, nonpublic
information), and promptly prepare a supplement or amendment to such
Registration Statement to correct such untrue statement or omission, and
deliver ten (10) copies of such supplement or amendment to each Buyer.  The Company shall also promptly notify each
Buyer in writing (i) when a Prospectus or any Prospectus supplement or
post-effective amendment has been filed, and when a Registration Statement or
any post-effective amendment has become effective (notification of such
effectiveness shall be delivered to each Buyer by facsimile on the same day of
such effectiveness), (ii) of any request by the SEC for amendments or
supplements to a Registration Statement or related prospectus or related
information, and (iii) of the Company’s reasonable determination that a
post-effective amendment to a Registration Statement would be appropriate.

(g)           The Company shall
use its best efforts to prevent the issuance of any stop order or other
suspension of effectiveness of a Registration Statement, or the suspension of
the qualification of any of the Registrable Securities for sale in any
jurisdiction within the United States of America and, if such an order or
suspension is issued, to obtain the withdrawal of such order or suspension at
the earliest possible moment and to notify each Buyer who holds Registrable
Securities being sold of the issuance of such order and the resolution thereof
or its receipt of actual notice of the initiation or threat of any proceeding
for such purpose.

(h)           If, after the
execution of this Agreement, a Buyer believes, after consultation with its
legal counsel, that it could reasonably be deemed to be an underwriter of
Registrable Securities, at the request of any Buyer, the Company shall furnish
to such Buyer, on the date of the effectiveness of the Registration Statement
and thereafter from time to time on such dates as a Buyer may reasonably
request (i) a letter, dated such date, from the Company’s independent certified
public accountants in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public
offering, and (ii) an opinion, dated as of such date, of counsel representing
the Company for purposes of such Registration Statement, in form, scope and
substance as is customarily given in an underwritten public offering, addressed
to the Buyers.

 6
 

(i)            If, after the
execution of this Agreement, a Buyer believes, after consultation with its
legal counsel, that it could reasonably be deemed to be an underwriter of
Registrable Securities, at the request of any Buyer, the Company shall make
available for inspection by (i) any Buyer and (ii) one (1) firm of
accountants or other agents retained by the Buyers (collectively, the “Inspectors”)
all pertinent financial and other records, and pertinent corporate documents
and properties of the Company (collectively, the “Records”), as shall be
reasonably deemed necessary by each Inspector, and cause the Company’s
officers, directors and employees to supply all information which any Inspector
may reasonably request; provided, however, that each Inspector shall agree, and
each Buyer hereby agrees, to hold in strict confidence and shall not make any
disclosure (except to a Buyer) or use 
any Record or other information which the Company determines in good
faith to be confidential, and of which determination the Inspectors are so
notified, unless (a) the disclosure of such Records is necessary to avoid or
correct a misstatement or omission in any Registration Statement or is
otherwise required under the Securities Act, (b) the release of such Records is
ordered pursuant to a final, non-appealable subpoena or order from a court or
government body of competent jurisdiction, or (c) the information in such
Records has been made generally available to the public other than by
disclosure in violation of this or any other agreement of which the Inspector
and the Buyer has knowledge.  Each Buyer agrees
that it shall, upon learning that disclosure of such Records is sought in or by
a court or governmental body of competent jurisdiction or through other means,
give prompt notice to the Company and allow the Company, at its expense, to
undertake appropriate action to prevent disclosure of, or to obtain a
protective order for, the Records deemed confidential.

(j)            The Company shall
hold in confidence and not make any disclosure of information concerning a
Buyer provided to the Company unless (i) disclosure of such information is
necessary to comply with federal or state securities laws, (ii) the disclosure
of such information is necessary to avoid or correct a misstatement or omission
in any Registration Statement, (iii) the release of such information is ordered
pursuant to a subpoena or other final, non-appealable order from a court or
governmental body of competent jurisdiction, or (iv) such information has been
made generally available to the public other than by disclosure in violation of
this Agreement or any other agreement. 
The Company agrees that it shall, upon learning that disclosure of such
information concerning a Buyer is sought in or by a court or governmental body
of competent jurisdiction or through other means, give prompt written notice to
such Buyer and allow such Buyer, at the Buyer’s expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.

(k)           The Company shall
use its best efforts either to cause all the Registrable Securities covered by
a Registration Statement (i) to be listed on each securities exchange on which
securities of the same class or series issued by the Company are then listed,
if any, if the listing of such Registrable Securities is then permitted under the
rules of such exchange or (ii) the inclusion for quotation on the National
Association of Securities Dealers, Inc. OTC Bulletin Board for such Registrable
Securities.  The Company shall pay all
fees and expenses in connection with satisfying its obligation under this
Section 3(j).

(l)            The Company shall
cooperate with each Buyer who holds Registrable Securities being offered and,
to the extent applicable, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legend) representing the Registrable
Securities 

 7
 

to be offered
pursuant to a Registration Statement and enable such certificates to be in such
denominations or amounts, as the case may be, as the Buyers may reasonably
request and registered in such names as the Buyers may request.

(m)          The Company shall use
its best efforts to cause the Registrable Securities covered by the applicable
Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to consummate the
disposition of such Registrable Securities.

(n)           The Company shall
otherwise use its best efforts to comply with all applicable rules and
regulations of the SEC in connection with any registration hereunder.

(o)           Within two (2)
business days after a Registration Statement which covers Registrable
Securities is declared effective by the SEC, the Company shall deliver, and
shall cause legal counsel for the Company to deliver, to the transfer agent for
such Registrable Securities (with copies to the Buyer whose Registrable
Securities are included in such Registration Statement) confirmation that such
Registration Statement has been declared effective by the SEC in the form
attached hereto as Exhibit C.

(p)           The Company shall
take all other reasonable actions necessary to expedite and facilitate
disposition by each Buyer of Registrable Securities pursuant to a Registration
Statement.

4.             OBLIGATIONS OF
THE BUYERS.

(a)           Each Buyer agrees
that, upon receipt of any notice from the Company of the happening of any event
of the kind described in Section 3(f) or the first sentence of Section 3(e),
such Buyer will immediately discontinue disposition of Registrable Securities
pursuant to any Registration Statement covering such Registrable Securities
until such Buyer’s receipt of the copies of the supplemented or amended
prospectus contemplated by Section 3(f) or the first sentence of Section 3(e)
or receipt of notice that no supplement or amendment is required.  Notwithstanding anything to the contrary, the
Company shall cause its transfer agent to deliver unlegended certificates for
shares of Common Stock to a transferee of a Buyer in accordance with the terms
of the Securities Purchase Agreement in connection with any sale of Registrable
Securities with respect to which a Buyer has entered into a contract for sale
prior to the Buyer’s receipt of a notice from the Company of the happening of
any event of the kind described in Section 3(f) or the first sentence of 3(e)
and for which the Buyer has not yet settled.

(b)           Each buyer covenants
and agrees that it will comply with the prospectus delivery requirements of the
Securities Act as applicable to it or an exemption therefrom in connection with
the sale of Registerable Securities pursuant to the Registration Statement.

5.             EXPENSES OF
REGISTRATION.

All expenses incurred in connection with
registrations, filings or qualifications pursuant to Sections 2 and 3,
including, without limitation, all registration, listing and qualifications
fees, printers, legal and accounting fees shall be paid by the Company.

 8
 

6.             INDEMNIFICATION.

With respect to Registrable Securities which are
included in a Registration Statement under this Agreement:

(a)           To the fullest
extent permitted by law, the Company will, and hereby does, indemnify, hold
harmless and defend each Buyer, the directors, officers, partners, employees,
agents, representatives of, and each Person, if any, who controls any Buyer
within the meaning of the Securities Act or the Exchange Act (each, an “Indemnified
Person”), against any losses, claims, damages, liabilities, judgments,
fines, penalties, charges, costs, reasonable attorneys’ fees, amounts paid in
settlement or expenses, joint or several (collectively, “Claims”)
incurred in investigating, preparing or defending any action, claim, suit,
inquiry, proceeding, investigation or appeal taken from the foregoing by or
before any court or governmental, administrative or other regulatory agency,
body or the SEC, whether pending or threatened, whether or not an indemnified
party is or may be a party thereto (“Indemnified Damages”), to which any
of them may become subject insofar as such Claims (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or are based
upon: (i) any untrue statement or alleged untrue statement of a material fact
in a Registration Statement or any post-effective amendment thereto or in any
filing made in connection with the qualification of the offering under the
securities or other “blue sky” laws of any jurisdiction in which Registrable
Securities are offered (“Blue Sky Filing”), or the omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; (ii) any untrue
statement or alleged untrue statement of a material fact contained in any final
prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading; or (iii) any violation or alleged violation by the
Company of the Securities Act, the Exchange Act, any other law, including,
without limitation, any state securities law, or any rule or regulation there
under relating to the offer or sale of the Registrable Securities pursuant to a
Registration Statement (the matters in the foregoing clauses (i) through (iii)
being, collectively, “Violations”). 
The Company shall reimburse the Buyers and each such controlling person
promptly as such expenses are incurred and are due and payable, for any legal
fees or disbursements or other reasonable expenses incurred by them in connection
with investigating or defending any such Claim. 
Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(a): (x) shall not apply
to a Claim by an Indemnified Person arising out of or based upon a Violation
which occurs in reliance upon and in conformity with information furnished in
writing to the Company by such Indemnified Person expressly for use in
connection with the preparation of the Registration Statement or any such
amendment thereof or supplement thereto; (y) shall not be available to the
extent such Claim is based on a failure of the Buyer to deliver or to cause to
be delivered the prospectus made available by the Company, if such prospectus
was timely made available by the Company pursuant to Section 3(c); and
(z) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the Company, which
consent shall not be unreasonably withheld. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of the
Indemnified Person and shall survive the transfer of the Registrable Securities
by the Buyers pursuant to Section 9 hereof.

 9
 

(b)           In connection with a
Registration Statement, each Buyer agrees to severally and not jointly
indemnify, hold harmless and defend, to the same extent and in the same manner
as is set forth in Section 6(a), the Company, each of its directors, each of
its officers, employees, representatives, or agents and each Person, if any,
who controls the Company within the meaning of the Securities Act or the
Exchange Act (each an “Indemnified Party”), against any Claim or
Indemnified Damages to which any of them may become subject, under the
Securities Act, the Exchange Act or otherwise, insofar as such Claim or
Indemnified Damages arise out of or is based upon any Violation, in each case
to the extent, and only to the extent, that such Violation occurs in reliance
upon and in conformity with written information furnished to the Company by
such Buyer expressly for use in connection with such Registration Statement;
and, subject to Section 6(d), such Buyer will reimburse any legal or other
expenses reasonably incurred by them in connection with investigating or defending
any such Claim; provided, however, that the indemnity agreement contained in
this Section 6(b) and the agreement with respect to contribution contained in
Section 7 shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of such Buyer, which
consent shall not be unreasonably withheld; provided, further, however, that
the Buyer shall be liable under this Section 6(b) for only that amount of a
Claim or Indemnified Damages as does not exceed the net proceeds to such Buyer
as a result of the sale of Registrable Securities pursuant to such Registration
Statement.  Such indemnity shall remain
in full force and effect regardless of any investigation made by or on behalf
of such Indemnified Party and shall survive the transfer of the Registrable
Securities by the Buyers pursuant to Section 9. 
Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(b) with respect to any
prospectus shall not inure to the benefit of any Indemnified Party if the
untrue statement or omission of material fact contained in the prospectus was
corrected and such new prospectus was delivered to each Buyer prior to such
Buyer’s use of the prospectus to which the Claim relates.

(c)           Promptly after
receipt by an Indemnified Person or Indemnified Party under this Section 6 of
notice of the commencement of any action or proceeding (including any
governmental action or proceeding) involving a Claim, such Indemnified Person
or Indemnified Party shall, if a Claim in respect thereof is to be made against
any indemnifying party under this Section 6, deliver to the indemnifying party
a written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; provided, however, that an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the fees and expenses of
not more than one (1) counsel for such Indemnified Person or Indemnified Party
to be paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate
due to actual or potential differing 
interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding.  The Indemnified Party or Indemnified Person
shall cooperate fully with the indemnifying party in connection with any
negotiation or defense of any such action or claim by the indemnifying party
and shall furnish to the indemnifying party all information reasonably
available to the Indemnified Party or Indemnified Person which relates to such
action or claim.  The indemnifying party
shall keep the Indemnified Party or 

 10
 

Indemnified
Person fully apprised at all times as to the status of the defense or any
settlement negotiations with respect thereto. 
No indemnifying party shall be liable for any settlement of any action,
claim or proceeding effected without its prior written consent; provided,
however, that the indemnifying party shall not unreasonably withhold, delay or
condition its consent.  No indemnifying
party shall, without the prior written consent of the Indemnified Party or
Indemnified Person, consent to entry of any judgment or enter into any
settlement or other compromise which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party or
Indemnified Person of a release from all liability in respect to such claim or
litigation.  Following indemnification as
provided for hereunder, the indemnifying party shall be subrogated to all
rights of the Indemnified Party or Indemnified Person with respect to all third
parties, firms or corporations relating to the matter for which indemnification
has been made.  The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of
any liability to the Indemnified Person or Indemnified Party under this Section
6, except to the extent that the indemnifying party is prejudiced in its
ability to defend such action.

(d)           The indemnification
required by this Section 6 shall be made by periodic payments of the amount
thereof during the course of the investigation or defense, as and when bills
are received or Indemnified Damages are incurred.

(e)           The indemnity
agreements contained herein shall be in addition to (i) any cause of
action or similar right of the Indemnified Party or Indemnified Person against
the indemnifying party or others, and (ii) any liabilities the indemnifying
party may be subject to pursuant to the law.

7.             CONTRIBUTION.

To the extent any indemnification by an indemnifying
party is prohibited or limited by law, the indemnifying party agrees to make
the maximum contribution with respect to any amounts for which it would
otherwise be liable under Section 6 to the fullest extent permitted by law;
provided, however, that:  (i) no seller
of Registrable Securities guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to contribution
from any seller of Registrable Securities who was not guilty of fraudulent
misrepresentation; and (ii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds received by
such seller from the sale of such Registrable Securities.

8.             REPORTS UNDER
THE EXCHANGE ACT.

With a view to making available to the Buyers the
benefits of Rule 144 promulgated under the Securities Act or any similar rule
or regulation of the SEC that may at any time permit the Buyers to sell
securities of the Company to the public without registration (“Rule 144”)
the Company agrees to:

(a)           make and keep public
information available, as those terms are understood and defined in Rule 144;

 11
 

(b)           file with the SEC in
a timely manner all reports and other documents required of the Company under
the Securities Act and the Exchange Act so long as the Company remains subject
to such requirements (it being understood that nothing herein shall limit the
Company’s obligations under Section 4(c) of the Securities Purchase Agreement)
and the filing of such reports and other documents as are  required by the applicable provisions of Rule
144; and

(c)           furnish to each
Buyer so long as such Buyer owns Registrable Securities, promptly upon request,
(i) a written statement by the Company that it has complied with the reporting
requirements of Rule 144, the Securities Act and the Exchange Act, (ii) a copy
of the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and (iii) such other information
as may be reasonably requested to permit the Buyers to sell such securities
pursuant to Rule 144 without registration.

9.             AMENDMENT
OF REGISTRATION RIGHTS.

Provisions of this Agreement may be amended and the
observance thereof may be waived (either generally or in a particular instance
and either retroactively or prospectively), only with the written consent of
the Company and Buyers who then hold at least two-thirds (2/3) of the
Registrable Securities.  Any amendment or
waiver effected in accordance with this Section 9 shall be binding upon
each Buyer and the Company.  No such
amendment shall be effective to the extent that it applies to fewer than all of
the holders of the Registrable Securities. 
No consideration shall be offered or paid to any Person to amend or
consent to a waiver or modification of any provision of any of this Agreement
unless the same consideration also is offered to all of the parties to this
Agreement.

10.           MISCELLANEOUS.

(a)           A Person is deemed
to be a holder of Registrable Securities whenever such Person owns or is deemed
to own of record such Registrable Securities or owns the right to receive the
Registrable Securities.  If the Company
receives conflicting instructions, notices or elections from two (2) or more
Persons with respect to the same Registrable Securities, the Company shall act
upon the basis of instructions, notice or election received from the registered
owner of such Registrable Securities.

(b)           No Piggyback on
Registrations.  Except as set forth
on Schedule 10(b) attached hereto, contemplated with respect to the
private placement offering being completed by Clayton Dunning & Co., Inc.,
neither the Company nor any of its security holders (other than the Buyers in
such capacity pursuant hereto) may include securities of the Company in the
initial Registration Statement other than the Registrable Securities.  The Company shall not file any other
registration statements until the initial Registration Statement required
hereunder is declared effective by the SEC, provided that this Section 10(b)
shall not prohibit the Company from filing amendments to registration
statements already filed.

(c)           Piggy-Back
Registrations.  If at any time during
the Registration Period there is not an effective Registration Statement
covering all of the Registrable Securities and the Company shall determine to
prepare and file with the SEC a registration statement relating to an 

 12
 

offering for
its own account or the account of others under the Securities Act of any of its
equity securities, other than on Form S-4 or Form S-8 (each as promulgated
under the Securities Act) or their then equivalents relating to equity
securities to be issued solely in connection with any acquisition of any entity
or business or equity securities issuable in connection with the stock option
or other employee benefit plans, then the Company shall send to each Buyer a
written notice of such determination and, if within fifteen (15) days after the
date of such notice, any such Buyer shall so request in writing, the Company
shall include in such registration statement all or any part of such
Registrable Securities such Buyer requests to be registered; provided, however,
that, the Company shall not be required to register any Registrable Securities
pursuant to this Section 10(c) that are eligible for resale pursuant to Rule
144(k) promulgated under the Securities Act or that are the subject of a then
effective Registration Statement.

(d)           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 receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one (1) business 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, President

  	
   

  
	
   

  	
   

  	
  Telephone:

  	
  (303) 279-7900

  	
   

  
	
   

  	
   

  	
  Facsimile:

  	
  (303) 279-7300

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  With 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 an Buyer, to its
address and facsimile number on the Schedule of Buyers attached hereto, with
copies to such Buyer’s representatives as set forth on the Schedule of Buyers
or to such other address and/or facsimile number and/or to the attention of
such other person as the recipient party has specified by written notice given
to each other party five (5) days prior to the effectiveness of such
change.  Written confirmation of receipt
(A) given by the recipient of such notice, consent, waiver or other communication,
(B) mechanically or electronically generated by the sender’s facsimile machine
containing the time, date, recipient facsimile number and an image of the first
page of such transmission or (C) provided by a courier or overnight courier
service shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in
accordance with clause (i), (ii) or (iii) above, respectively.

 13
 

(e)           Failure of any party
to exercise any right or remedy under this Agreement or otherwise, or delay by
a party in exercising such right or remedy, shall not operate as a waiver
thereof.

(f)            The laws of the
State of New Jersey shall govern all issues concerning the relative rights of
the Company and the Buyers as its stockholders. 
All other questions concerning the construction, validity, enforcement
and interpretation of this Agreement shall be governed by the internal laws of
the State of New Jersey, without giving effect to any choice of law or conflict
of law provision or rule (whether of the State of New Jersey or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of New Jersey.  Each
party hereby irrevocably submits to the non-exclusive jurisdiction of the
Superior Courts of the State of New Jersey, sitting in Hudson County, New
Jersey and federal courts for the District of New Jersey sitting Newark, New
Jersey, for the adjudication of any dispute hereunder or in connection herewith
or with any transaction contemplated hereby or discussed herein, and hereby
irrevocably waives, and agrees not to assert in any suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of any such
court, that such suit, action or proceeding is brought in an inconvenient forum
or that the venue of such suit, action or proceeding is improper.  Each party hereby irrevocably waives personal
service of process and consents to process being served in any such suit,
action or proceeding by mailing a copy thereof to such party at the address for
such notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by
law.  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.  EACH PARTY HEREBY
IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY
TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH
OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

(g)           This Agreement shall
inure to the benefit of and be binding upon the permitted successors and
assigns of each of the parties hereto.

(h)           The headings in this
Agreement are for convenience of reference only and shall not limit or
otherwise affect the meaning hereof.

(i)            This Agreement may
be executed in identical counterparts, each of which shall be deemed an
original but all of which shall constitute one and the same agreement.  This Agreement, once executed by a party, may
be delivered to the other party hereto by facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.

(j)            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 

 14
 

intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

(k)           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.

(l)            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.

[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]

 15
 

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

	
  

  	
  COMPANY:

  	
   

  
	
   

  	
  ISONICS CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
  John Sakys

  
	
   

  	
  Title:

  	
  President and Interim Chief Executive Officer

  
					

 

 16
 

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

	
  

  	
  BUYER:

  	
   

  	 

	
   

  	
  CORNELL CAPITAL PARTNERS, L.P.

  
	
   

  	
   

  	
   

  	 

	
   

  	
  By:

  	
  Yorkville Advisors, LLC

  	 

	
   

  	
  Its:

  	
  Investment Manager

  	 

	
   

  	
   

  	
   

  	 

	
   

  	
   

  	
   

  	 

	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
  Mark Angelo

  	 

	
   

  	
  Title:

  	
  Portfolio Manager

  	 

						

 

 

 17

SCHEDULE I

SCHEDULE OF BUYERS

 

	
  Buyer

  	
   

  	
  Address/Facsimile 

  Number of Buyer

  	
   

  	
  Address/Facsimile 

  Number of Buyer’s Representative

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cornell Capital Partners, L.P.

  	
   

  	
  101 Hudson Street — Suite 3700

  	
   

  	
  101 Hudson Street — Suite 3700

  
	
   

  	
   

  	
  Jersey City, NJ 07303

  	
   

  	
  Jersey City, NJ 07303

  
	
   

  	
   

  	
  Facsimile:(201) 985-8266

  	
   

  	
  Facsimile:(201) 985-8266

  
	
   

  	
   

  	
   

  	
   

  	
  Attention: David Gonzalez, Esq.

  

 

EXHIBIT
A

SELLING STOCKHOLDERS

AND PLAN OF DISTRIBUTION

Selling Stockholders

The
shares of Common Stock being offered by the selling stockholders are issuable
upon conversion of the convertible debentures and upon exercise of the
warrants.  For additional information
regarding the issuance of those convertible notes and warrants, see “Private
Placement of Convertible Debentures and Warrants” above.  We are registering the shares of Common Stock
in order to permit the selling stockholders to offer the shares for resale from
time to time.  Except as otherwise notes
and except for the ownership of the convertible Debentures and the warrants
issued pursuant to the Securities Purchase Agreement, the selling stockholders
have not had any material relationship with us within the past three years.

The
table below lists the selling stockholders and other information regarding the
beneficial ownership of the shares of Common Stock by each of the selling
stockholders.  The second column lists
the number of shares of Common Stock beneficially owned by each selling
stockholder, based on its ownership of the convertible debentures and warrants,
as of                  ,
200      , assuming conversion of all convertible
debentures and exercise of the warrants held by the selling stockholders on
that date, without regard to any limitations on conversions or exercise.

The
third column lists the shares of Common Stock being offered by this prospectus
by the selling stockholders.

In
accordance with the terms of a registration rights agreement with the selling
stockholders, this prospectus generally covers the resale of at least (i)
nineteen and ninety-nine one hundredths percent (19.99%) if such initial
Registration Statement is filed prior to obtaining shareholder approval, on or
before November 30, 2007 to issue shares of the Company’s Common Stock in
excess of nineteen and ninety-nine one hundredths percent (19.99%) or if such
initial Registration Statement is filed after obtaining shareholder approval on
or before November 30, 2007 than in an amount equal to thirty three percent
(33%) of the outstanding shares of the Company’s Common Stock excluding “insiders”
as of the date the initial Registration Statement or any Subsequent
Registration Statement, issued or to be issued upon conversion of the
Convertible Debentures (“Conversion Shares”) and (ii) 100% of the number
of warrant shares issued and issuable pursuant to the warrants as of the
trading day immediately preceding the date the registration statement is
initially filed with the SEC.  Because the conversion price of
the convertible debentures and the exercise price of the warrants may be
adjusted, the number of shares that will actually be issued may be more or less
than the number of shares being offered by this prospectus.  The fourth column assumes the sale of all of
the shares offered by the selling stockholders pursuant to this prospectus.

Under
the terms of the convertible debentures and the warrants, a selling stockholder
may not convert the convertible debentures or exercise the warrants to the
extent such conversion or 

exercise would
cause such selling stockholder, together with its affiliates, to beneficially
own a number of shares of Common Stock which would exceed 4.99% of our then
outstanding shares of Common Stock following such conversion or exercise,
excluding for purposes of such determination shares of Common Stock issuable
upon conversion of the convertible debentures which have not been converted and
upon exercise of the warrants which have not been exercised.  The number of shares in the second column
does not reflect this limitation.  The
selling stockholders may sell all, some or none of their shares in this
offering.  See “Plan of Distribution.”

 

	
  

  	
   

  	
   

  	
   

  	
  Maximum
  Number of Shares

  	
   

  	
   

  
	
   

  	
   

  	
  Number
  of Shares Owned

  	
   

  	
  to be
  Sold Pursuant to this

  	
   

  	
  Number
  of Shares Owned

  
	
  Name of Selling Stockholder

  	
   

  	
  Prior to
  Offering

  	
   

  	
  Prospectus

  	
   

  	
  After
  Offering

  
	
  Cornell Capital Partners, L.P. (1)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

(1)             Cornell
Capital Partners, L.P. is a Cayman Island exempt limited partnership.  Cornell is managed by Yorkville Advisors,
LLC.  Investment decisions for Yorkville
Advisors are made by Mark Angelo, its portfolio manager.

 

 

Plan of Distribution

Each Selling Stockholder
(the “Selling Stockholders”) of the common stock and any of their
pledgees, assignees and successors-in-interest may, from time to time, sell any
or all of their shares of common stock on the                
or any other stock exchange, market or trading facility on which the shares are
traded or in private transactions.  These
sales may be at fixed or negotiated prices. 
A Selling Stockholder may use any one or more of the following methods
when selling shares:

·                  ordinary brokerage transactions and
transactions in which the broker-dealer solicits purchasers;

·                  block trades in which the broker-dealer
will attempt to sell the shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction;

·                  purchases by a broker-dealer as
principal and resale by the broker-dealer for its account;

·                  an exchange distribution in
accordance with the rules of the applicable exchange;

·                  privately negotiated transactions;

·                  broker-dealers may agree with
the Selling Stockholders to sell a specified number of such shares at a
stipulated price per share;

·                  through the writing or settlement of
options or other hedging transactions, whether through an options exchange or
otherwise;

·                  a combination of any such methods of
sale; or

·                  any other method permitted pursuant
to applicable law.

The Selling Stockholders
may also sell shares under Rule 144 under the Securities Act of 1933, as
amended (the “Securities Act”), if available, rather than under this
prospectus.

Broker-dealers
engaged by the Selling Stockholders may arrange for other brokers-dealers
to participate in sales.  Broker-dealers
may receive commissions or discounts from the Selling Stockholders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the
purchaser) in amounts to be negotiated, but, except as set forth in a
supplement to this Prospectus, in the case of an agency transaction not in
excess of a customary brokerage commission in compliance with NASDR Rule 2440; and
in the case of a principal transaction a markup or markdown in compliance with
NASDR IM-2440.

In connection with the
sale of the common stock or interests therein, the Selling Stockholders may
enter into hedging transactions with broker-dealers or other financial
institutions, which may in turn engage in short sales of the Common Stock in
the course of hedging the positions they assume.  The Selling Stockholders may also enter into
option or other 

 4
 

transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).

The Selling Stockholders
and any broker-dealers or agents that are involved in selling the shares may be
deemed to be “underwriters” within the meaning of the Securities Act in
connection with such sales.  In such
event, any commissions received by such broker-dealers or agents and any profit
on the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.  Each Selling Stockholder has informed the
Company that it does not have any written or oral agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock. In no
event shall any broker-dealer receive fees, commissions and markups which, in
the aggregate, would exceed eight percent (8%).

The Company is required
to pay certain fees and expenses incurred by the Company incident to the
registration of the shares.  The Company
has agreed to indemnify the Selling Stockholders against certain losses,
claims, damages and liabilities, including liabilities under the Securities
Act.

Because Selling
Stockholders may be deemed to be “underwriters” within the meaning of the
Securities Act, they will be subject to the prospectus delivery requirements of
the Securities Act including Rule 172 thereunder.  In addition, any securities covered by this
prospectus which qualify for sale pursuant to Rule 144 under the Securities Act
may be sold under Rule 144 rather than under this prospectus.  There is no underwriter or coordinating
broker acting in connection with the proposed sale of the resale shares by the
Selling Stockholders.

We agreed to use our best
efforts to keep this prospectus effective until the earlier of (i) the date on
which the shares may be resold by the Selling Stockholders without registration
and without regard to any volume limitations by reason of Rule 144(k) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to this prospectus or Rule 144 under the Securities Act
or any other rule of similar effect.  The
resale shares will be sold only through registered or licensed brokers or
dealers if required under applicable state securities laws. In addition, in
certain states, the resale shares may not be sold unless they have been
registered or qualified for sale in the applicable state or an exemption from
the registration or qualification requirement is available and is complied
with.

Under applicable rules
and regulations under the Exchange Act, any person engaged in the distribution
of the resale shares may not simultaneously engage in market making activities
with respect to the common stock for the applicable restricted period, as
defined in Regulation M, prior to the commencement of the distribution.  In addition, the Selling Stockholders will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including Regulation M, which may limit the timing of
purchases and sales of shares of the common stock by the Selling Stockholders
or any other person.  We will make copies
of this prospectus available to the Selling Stockholders and have informed them
of the need to deliver a 

 5
 

copy of this
prospectus to each purchaser at or prior to the time of the sale (including by
compliance with Rule 172 under the Securities Act).

 6
 

EXHIBIT
B

OTHER DISCLOSURES 

See
attachment provided separately.

 7
 

EXHIBIT
C

FORM OF NOTICE OF
EFFECTIVENESS

OF REGISTRATION STATEMENT

Attention:

Re:                               ISONICS CORPORATION

Ladies and
Gentlemen:

We are counsel to Isonics Corporation, a California
corporation (the “Company”), and have represented the Company in
connection with that certain Securities Purchase Agreement (the “Securities
Purchase Agreement”) entered into by and among the Company and the Buyers
named therein (collectively, the “Buyers”) pursuant to which the Company
issued to the Buyers shares of its Common Stock, no par value per share (the “Common
Stock”).  Pursuant to the Purchase
Agreement, the Company also has entered into a Registration Rights Agreement
with the Buyers (the “Registration Rights Agreement”) pursuant to which
the Company agreed, among other things, to register the Registrable Securities
(as defined in the Registration Rights Agreement) under the Securities Act of
1933, as amended (the “Securities Act”). 
In connection with the Company’s obligations under the Registration
Rights Agreement, on                          
            , the
Company filed a Registration Statement on Form                     
(File No. 333-                         )
(the “Registration Statement”) with the Securities and Exchange
Commission (the “SEC”) relating to the Registrable Securities which
names each of the Buyers as a selling stockholder there under.

In connection with the foregoing, we advise you that a
member of the SEC’s staff has advised us by telephone that the SEC has entered
an order declaring the Registration Statement effective under the Securities
Act at [ENTER TIME OF EFFECTIVENESS]
on [ENTER DATE OF EFFECTIVENESS]
and we have no knowledge, after telephonic inquiry of a member of the SEC’s
staff, that any stop order suspending its effectiveness has been issued or that
any proceedings for that purpose are pending before, or threatened by, the SEC
and the Registrable Securities are available for resale under the Securities
Act pursuant to the Registration Statement.

	
  

  	
  Very truly yours,

  
	
   

  	
  [Law Firm]

  
	
   

  	
  By:

  	
   

  
	
  cc:

  	
  [LIST NAMES OF BUYERS]

  	
   

  
				

 

 8

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