Document:

Exhibit 10.5

 

Dated:  May 30, 2006

 

NEITHER
THIS DEBENTURE NOR THE SECURITIES INTO WHICH THIS DEBENTURE IS CONVERTIBLE HAVE
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS.

 

	
  No. CCP-1

  	
   

  	
  $10,000,000]

  

 

ISONICS CORPORATION

 

Secured Convertible Debenture

 

Due May 30, 2009

 

This Secured Convertible
Debenture (the “Debenture”) is issued by ISONICS
CORPORATION, a
California corporation (the “Obligor”), to CORNELL
CAPITAL PARTNERS, LP (the “Holder”), pursuant to that certain
Securities Purchase Agreement (the “Securities Purchase Agreement”) of
even date herewith.

 

FOR
VALUE RECEIVED, the Obligor hereby promises to pay to the
Holder or its successors and assigns the principal sum of Ten Million
Dollars ($10,000,000) together with accrued but unpaid interest on
or before May 30, 2009 (the “Maturity Date”) in accordance with the
following terms:

 

Interest.
Interest shall accrue on the outstanding principal balance hereof at an annual
rate equal to six percent (6%). Interest shall be calculated on the basis of a
360-day year and the actual number of days elapsed, to the extent permitted by
applicable law. Interest hereunder will be paid to the Holder or its
assignee  (as defined in Section 5) in whose name this
Debenture is registered on the records of the Obligor regarding registration
and transfers of Debentures (the “Debenture Register”).

 

Interest  Payments. The Obligor
at its option shall make payment of all outstanding and accrued interest at the
Maturity Date (“Scheduled Payment”) in shares of the Company’s Common
Stock or cash. If such Schedule Payment is made in Common Stock, such
number of shares of the Company’s Common Stock due as payment shall be
calculated based on the amount of interest due divided by eighty eight percent
(88%) of the average VWAP of the Company’s Common Stock for the five (5) Trading
Days immediately preceding the date the Maturity Date.

 

1

 

Notwithstanding
the foregoing, this Debenture shall become due and immediately payable,
including all accrued but unpaid interest, upon an Event of Default (as defined
in Section 2 hereof).

 

Right of Redemption. The Obligor at its option
shall have the right, with ten (10) Trading Days advance written notice
(the “Redemption Notice”),
to redeem a portion or all amounts outstanding under this Debenture prior to
the Maturity Date provided that the Closing Bid Price of the of the Obligor’s
Common Stock, as reported by Bloomberg, LP, is less than Two Dollars and Fifty
Cents ($2.50) at the time of the Redemption Notice. The Obligor shall pay an
amount equal to the principal amount being redeemed plus a redemption premium (“Redemption
Premium”) equal to twenty percent (20%) of the principal amount being
redeemed, and accrued interest, (collectively referred to as the “Redemption Amount”). The Obligor
shall deliver to the Holder the Redemption Amount on the tenth (10th)
Trading Day after the Redemption Notice.

 

Notwithstanding the foregoing in the event that the Obligor has elected
to redeem a portion of the outstanding principal amount and accrued
interest under this Debenture the Holder shall be permitted to convert all or
any portion of this Debenture during such ten (10) business  day advance written notice period.

 

Security
Agreements. This Debenture is secured by Security
Agreements of even date herewith between the Obligor and the Holder as well as Isonics Vancouver, Inc., Isonics Homeland Security and
Defense Corporation, and

Protection Plus Security Corporation , all of which are wholly owned
subsidiaries of the Obligor, and the Holders (all such security agreements
shall be referred to as the “Security Agreement”).

 

Consent  of Holder to Sell Capital Stock or Grant
Security Interests. So long as any of the principal amount
on this Debenture remains unpaid and unconverted and except for Excluded
Securities, the Obligor shall not, without the prior consent of the Holder, (i) issue
or sell any shares of Common Stock without consideration or for consideration
per share less than the VWAP of the Common Stock on the Trading Day immediately
prior to its issuance, (ii) issue or sell any warrant, option, right,
contract, call, or other security or instrument granting the holder thereof the
right to acquire Common Stock without consideration or for consideration per
share less than the Closing Bid Price  of
the Common Stock on the date of issuance , (iii) issue or sell any shares
of preferred stock without consideration or for consideration per share less
than the VWAP of the Common Stock on the Trading Day immediately prior to its
issuance  (iv) enter into any
security instrument granting the holder a security interest in any of the
assets of the Obligor, other than security interests in connection with capital
lease financing, in cases where the security interest is in the nature of a
purchase money security interest, or for funds used for acquisitions by the
Obligor or any subsidiary of a business that has positive earnings before  interest, taxes, depreciation, and
amortization expenses or to refinance of the purchase money security interest
in such event the Holder shall take a second security position, provided
however in the event that a security interest is not given in connection with
acquisitions by the Obligor or any subsidiary of a business that has positive
earnings before  interest, taxes, depreciation,
and amortization expenses  it is
understood that the Holder shall be given a first security interest or (v) file
any registration statements on Form S-8.

 

2

 

Rights of First Refusal.
For a period of one (1) year from the date hereof, so long as any portion
of this Debenture is outstanding (including principal or accrued interest), if
the Obligor intends to raise additional capital by the issuance or sale of
capital stock of the Obligor, including without limitation shares of any class of
Common Stock, any class of preferred stock, options, warrants or any other
securities convertible or exercisable into shares of Common Stock (whether the
offering is conducted by the Obligor, underwriter, placement agent or any third
party) the Obligor shall be obligated to offer to the Holder a percentage of
such issuance or sale of capital stock, by providing in writing the principal
amount of capital it intends to raise and outline of the material terms of such
capital raise, prior to the offering such issuance or sale of capital stock
 to any third parties including, but not limited to, current or former
officers or directors, current or former shareholders and/or investors of the
obligor, underwriters, brokers, agents or other third parties. For the purposes
of this paragraph, the percentage shall be calculated by multiplying fifty
percent (50%) by a fraction, the numerator of which is the principal amount of
this Debenture, and the denominator of which is $16,000,000.

 

After one (1) year
from the date hereof, so long as any portion of this Debenture is outstanding
(including principal or accrued interest), if the Obligor intends to raise
additional capital by the issuance or sale of capital stock of the Obligor,
including without limitation shares of any class of Common Stock, any class of
preferred stock, options, warrants or any other securities convertible or
exercisable into shares of Common Stock (whether the offering is conducted by
the Obligor, underwriter, placement agent or any third party) the Obligor shall
be obligated to offer to the Holder a percentage of such issuance or sale of
capital stock, by providing in writing the principal amount of capital it
intends to raise and outline of the material terms of such capital raise, prior
to the offering such issuance or sale of capital stock  to any third
parties including, but not limited to, current or former officers or directors,
current or former shareholders and/or investors of the obligor, underwriters,
brokers, agents or other third parties. For the purposes of this paragraph, the
percentage shall be calculated by multiplying twenty five percent (25%) by a
fraction, the numerator of which is the principal amount of this Debenture, and
the denominator of which is $16,000,000.

 

The Holder shall have
five (5) Trading Days from receipt of such notice of the sale or issuance
of capital stock to accept or reject all or a portion of such capital raising
offer. If the Holder does not accept and complete its participation in the
financing to the full extent to which the Holder is entitled under this
section, the right of first refusal shall terminate upon the completion of the
financing.

 

This Debenture is subject
to the following additional provisions:

 

Section 1.                                          This
Debenture is exchangeable for an equal aggregate principal amount of Debentures
of different authorized denominations, as requested by the Holder surrendering
the same. No service charge will be made for such registration of transfer or
exchange.

 

Section 2.                                          Events
of Default.

 

(a)                                  An
“Event of Default”, wherever used herein, means any one of the following
events (whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of
any court, or any order, rule or

 

3

 

regulation of any
administrative or governmental body). An Event of Default shall only be deemed
to exist after any applicable cure or grace period has expired:

 

(i)                                     Any
default in the payment of the principal of, interest on or other charges in
respect of this Debenture, free of any claim of subordination, as and when the
same shall become due and payable (whether on the Scheduled Payment due date, a
Conversion Date or the Maturity Date or by acceleration or otherwise);

 

(ii)                                  The
Obligor shall fail to observe or perform any other covenant, agreement or
warranty contained in, or otherwise commit any breach or default of any
provision of this Debenture (except as may be covered by Section 2(a)(i) hereof) or any
Transaction Document (as defined in Section 5)
which is not cured with in the time prescribed after notice from the Holder and
an opportunity of not less than ten (10) Trading Days to cure such breach;

 

(iii)                               The
Obligor or any subsidiary of the Obligor shall commence, or there shall be
commenced against the Obligor or any subsidiary of the Obligor under any
applicable bankruptcy or insolvency laws as now or hereafter in effect or any
successor thereto, or the Obligor or any subsidiary of the Obligor commences
any other proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Obligor or any
subsidiary of the Obligor or there is commenced against the Obligor or any
subsidiary of the Obligor any such bankruptcy, insolvency or other proceeding
which remains undismissed for a period of 61 days; or the Obligor or any
subsidiary of the Obligor is adjudicated insolvent or bankrupt; or any order of
relief or other order approving any such case or proceeding is entered; or the
Obligor or any subsidiary of the Obligor suffers any appointment of any
custodian, private or court appointed receiver or the like for it or any
substantial part of its property which continues uncontested, undischarged
or unstayed for a period of sixty one (61) days; or the Obligor or any
subsidiary of the Obligor makes a general assignment for the benefit of
creditors; or the Obligor or any subsidiary of the Obligor shall fail to pay,
or shall state that it is unable to pay, or shall be unable to pay, its debts
generally as they become due; or the Obligor or any subsidiary of the Obligor
shall call a meeting of its creditors with a view to arranging a composition,
adjustment or restructuring of its debts; or the Obligor or any subsidiary of
the Obligor shall by any act or failure to act expressly indicate its consent
to, approval of or acquiescence in any of the foregoing; or any corporate or
other action is taken by the Obligor or any subsidiary of the Obligor for the
purpose of effecting any of the foregoing;

 

(iv)                              The
Obligor or any subsidiary of the Obligor shall default in any of its obligations
under any other debenture or any mortgage, credit agreement or other facility,
indenture agreement, factoring agreement or other instrument under which there may be
issued, or by which there may be secured or evidenced any indebtedness for
borrowed money or money due under any long term leasing or factoring
arrangement of the Obligor or any subsidiary of the Obligor in an amount
exceeding $500,000, whether such indebtedness now exists or shall hereafter be
created and such default shall result in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise become
due and payable;

 

(v)                                 The
Common Stock shall cease to be quoted for trading or listing for trading on
either the OTC Bulletin Board (“OTCBB”), Nasdaq Capital Market, New York
Stock

 

4

 

Exchange, American
Stock Exchange or the Nasdaq National Market (each, a “Subsequent Market”)
and shall not again be quoted or listed for trading thereon within five (5) Trading
Days of such delisting;

 

(vi)                              The
Obligor or any subsidiary of the Obligor shall be a party to any Change of
Control Transaction (as defined in Section 5)
without the consent of holders of at least a majority in principal amount of
the 6% Convertible Debentures then outstanding;

 

(vii)                           The
Obligor shall fail to comply with its obligations in the Underlying Shares
Registration Statement (as defined in Section 5)
in any material respect, after any notice and grace period or opportunity to
cure as provided by such Underlying Shares Registration Statement;

 

(viii)                        The
Obligor or the Obligor’s transfer agent, as the case maybe, shall fail for any
reason to deliver Common Stock certificates to a Holder, as contemplated under
the Irrevocable Transfer Agent Instructions dated the date hereof, prior to the
third (3rd) or sixth (6th)  Trading Day, as the case my be under the
Irrevocable Transfer Agent Instructions, after a Conversion Date or the Obligor
shall provide notice to the Holder, including by way of public announcement, at
any time, of its intention not to comply with requests for conversions of this
Debenture in accordance with the terms hereof and;

 

(x)                                   The
Obligor shall fail for any reason to deliver the payment in cash pursuant to a
Buy-In (as defined herein) within three (3) days after notice is claimed
delivered hereunder;

 

(xi)                                The
Obligor shall fail for any reason to deliver the payment in cash pursuant to Section 3
(c)(i) within three (3) days after notice is claimed delivered
hereunder.

 

 (b)                              During the time that any
portion of this Debenture is outstanding, if any Event of Default has occurred,
the full principal amount of this Debenture, together with interest and other
amounts owing in respect thereof, to the date of acceleration shall become at
the Holder’s election, immediately due and payable in cash, provided however, the Holder may request
(but shall have no obligation to request) payment of such amounts in Common
Stock of the Obligor. In addition to any other remedies, the Holder shall have
the right (but not the obligation) to convert this Debenture at any time after
(x) an Event of Default or (y) the Maturity Date at the Conversion Price then
in-effect. The Holder need not provide and the Obligor hereby waives any
presentment, demand, protest or other notice of any kind, and the Holder may immediately
and without expiration of any grace period enforce any and all of its rights
and remedies hereunder and all other remedies available to it under applicable
law. Such declaration may be rescinded and annulled by Holder at any time
prior to payment hereunder. No such rescission or annulment shall affect any
subsequent Event of Default or impair any right consequent thereon. Upon an
Event of Default, notwithstanding any other provision of this Debenture or any
Transaction Document, the Holder shall have no obligation to comply with or
adhere to any limitations, if any, on the conversion of this Debenture or the
sale of the Underlying Shares except those restrictions imposed by federal or
applicable state securities laws.

 

5

 

Section 3.                                          Conversion.

 

(a)                                  Conversion
at Option of Holder.

 

(i)                                     (a) Provided
the Obligor has sufficient authorized shares, in which case the Obligor shall
be obligated to increase its authorized shares pursuant to Section 4 (e) of
the Securities Purchase Agreement, this Debenture shall be convertible into
shares of Common Stock at the option of the Holder, in whole or in part at
any time and from time to time, after the Original Issue Date (as defined in Section 5) (subject to the limitations on conversion
set forth in Section 3(b) hereof)
provided however the Holder shall not be entitled to sell such shares, until
the later  to occur of i) the date the
Underlying Shares Registration Statement is declared effective or ii) (subject
to compliance with federal and applicable state securities laws) one hundred
twenty (120) calendar days from the date hereof (collectively referred to as
the “Waiting Period”), unless waived by the Obligor. Notwithstanding the
foregoing in the event that the Underlying Shares Registration Statement is not
declared effective within one (1) year from the date hereof the Holder
shall be entitled to sell shares of the Obligor’s  Common Stock issuable hereunder pursuant to Rule 144
as applicable. The number of shares of Common Stock issuable upon a conversion
hereunder equals the quotient obtained by dividing (x) the outstanding amount
of this Debenture to be converted by (y) the Conversion Price (as defined in Section 3(c)(i)). The Obligor shall
deliver Common Stock certificates to the Holder prior to the Fifth (5th)
Trading Day after a Conversion Date.

 

(b)                           Provided that there is an effective Underlying Shares Registration
Statement the Obligor at its option shall have the right at any time and from
time to time, if the VWAP of the Obligor’s Common Stock as quoted by Bloomberg,
LP is equal to or greater than Two Dollars and Fifty Cents ($2.50) (the “Forced
Conversion Price”) for twenty (20) consecutive Trading Days (the “Forced
Conversion Pricing Period”), to force the Holder to convert the outstanding
Principal amount of this Debenture plus outstanding and accrued interest,
subject to the limitations in Section 3(b)(i) herein, at the Fixed
Conversion Price, in whole or in part. In such event the Obligor shall provide
to the Holder written notice at the end of business, but not later than 5:30 pm
EST, on the last Trading Day of the Forced Conversion Pricing Period (the “Forced
Conversion Notice”). The Holder shall than on the next Trading Day from
receipt of the Forced Conversion Notice, convert this Debenture, subject to the
limitations in Section 3(b)(i) herein, in whole or in part, at the
Fixed Conversion Price (“Forced Conversion Period”). Provided however in
the event that the VWAP of the Obligor’s Common Stock, as quoted by Bloomberg,
LP, during the Forced Conversion Period is lower than the Forced Conversion
Price the Obligor shall not have the right to force the Holder to exercise this
Debenture, in whole or in part.

 

 (ii)                               Notwithstanding anything
to the contrary contained herein, if after December 31, 2006, on any
Conversion Date:  (1) the number of
shares of Common Stock at the time authorized, unissued and unreserved for all
purposes, or held as treasury stock, is insufficient to pay principal and
interest hereunder in shares of Common Stock; (2) the Common Stock is not
listed or quoted for trading on the OTCBB or on a Subsequent Market; (3) the
Obligor has failed to timely satisfy its conversion; or (4) the issuance
of such shares of Common Stock would result in a violation of Section 3(b), then, at the option of
the Holder, the Obligor, in lieu of delivering shares of Common Stock pursuant
to Section 3(a)(i), shall
deliver, within five (5)  Trading Days of each applicable Conversion Date,
an amount in cash equal to the product of the outstanding principal amount to
be converted plus any interest due therein divided by the

 

6

 

Conversion Price,
chosen by the Holder, and multiplied by the VWAP of the Common Stock on
the   date of the conversion notice until
the date that such cash payment is made.

 

Further, if the Obligor
shall not have delivered any cash due in respect of conversion of this
Debenture or as payment of interest thereon by the fifth (5th)
Trading Day after the Conversion Date, the Holder may, by notice to the
Obligor, require the Obligor to issue shares of Common Stock pursuant to Section 3(c), except that for such
purpose the Conversion Price applicable thereto shall be the lesser of the
Conversion Price on the Conversion Date and the Conversion Price on the date of
such Holder demand. Any such shares will be subject to the provisions of this
Section.

 

(iii)                               The
Holder shall effect conversions by delivering to the Obligor a completed notice
in the form attached hereto as Exhibit A (a “Conversion Notice”).
The date on which a Conversion Notice is delivered is the “Conversion Date.”
Unless the Holder is converting the entire principal amount outstanding under
this Debenture, the Holder is not required to physically surrender this
Debenture to the Obligor in order to effect conversions. Conversions hereunder
shall have the effect of lowering the outstanding principal amount of this
Debenture plus all accrued and unpaid interest thereon in an amount equal to
the applicable conversion. The Holder and the Obligor shall maintain records
showing the principal amount converted and the date of such conversions. In the
event of any dispute or discrepancy, the records of the Holder shall be
controlling and determinative in the absence of error.

 

(b)                                 Certain
Conversion Restrictions.

 

(i)                                     A
Holder may not convert this Debenture or receive shares of Common Stock as
payment of interest hereunder to the extent such conversion or receipt of such
interest payment would result in the Holder, together with any affiliate
thereof, beneficially owning (as determined in accordance with Section 13(d) of
the Exchange Act and the rules promulgated thereunder) in excess of 4.99%
of the then issued and outstanding shares of Common Stock, including shares
issuable upon conversion of, and payment of interest on, this Debenture held by
such Holder after application of this Section. Since the Holder will not be
obligated to report to the Obligor the number of shares of Common Stock it may hold
at the time of a conversion hereunder, unless the conversion at issue would
result in the issuance of shares of Common Stock in excess of 4.99% of the then
outstanding shares of Common Stock without regard to any other shares which may be
beneficially owned by the Holder or an affiliate thereof, the Holder shall have
the authority and obligation to determine whether the restriction contained in
this Section will limit any particular conversion hereunder and to the
extent that the Holder determines that the limitation contained in this Section applies,
the determination of which portion of the principal amount of this Debenture is
convertible shall be the responsibility and obligation of the Holder. If the
Holder has delivered a Conversion Notice for a principal amount of this
Debenture that, without regard to any other shares that the Holder or its
affiliates may beneficially own, would result in the issuance in excess of
the permitted amount hereunder, the Obligor shall notify the Holder of this
fact and shall honor the conversion for the maximum principal amount permitted
to be converted on such Conversion Date in accordance with the periods
described in Section 3(a)(i) and,
at the option of the Holder, either retain any principal amount tendered for
conversion in excess of the permitted amount hereunder for future conversions
or return such excess principal amount to the Holder. The provisions of this
Section

 

7

 

may be waived
by a Holder (but only as to itself and not to any other Holder) upon not less
than 65 days prior notice to the Obligor. Other Holders shall be unaffected by
any such waiver.

 

(ii) Commencing
at the end of the Waiting Period and for one hundred twenty (120)  calendar days thereafter and subject to
further limitations in Section 3(a)(i), the Holder shall not convert any
portion of the aggregate outstanding principal amount and accrued interest due
under all Debentures issued under the Securities Purchase Agreement,  into shares of the Obligor’s Common Stock in
excess of Two Hundred Thousand Dollars ($200,000) at the Market Conversion
Price in any seven (7) calendar  day
period. Notwithstanding the forgoing, this conversion restriction shall not
apply upon the occurrence of an Event of Default or if waived in writing by the
Obligor. Thereafter, the Holder shall not convert any portion of the aggregate
outstanding principal amount and accrued interest due under all Debentures
issued under the Securities Purchase Agreement, into shares of the Company’s
Common Stock in excess of Four Hundred Thousand Dollars ($400,000) at the
Market Conversion Price in any seven (7) calendar day period.

 

Notwithstanding
the forgoing, the conversion restrictions in this Section 3(b)(ii) shall
not apply upon the occurrence of an Event of Default (after notice and any
applicable cure period),  if waived in
writing by the Company or if such shares being sold have been converted at the
Fixed Conversion Price (to the extent such sales are permitted under federal
and applicable state securities laws).

 

(iii)                           The number of shares of
Common Stock issuable upon conversion of the Debenture  shall not be greater than 6,075,785 shares
(which when included with the 660,000 Buyer’s Shares (as defined in the
Securities Purchase Agreement) and the 2,000,000 Warrant Shares exercisable at
$1.25 is less than 20% of the total number of outstanding shares of Common  Stock as of the date of this Debenture),
until the Obligor’s shareholders approve (without the vote of any shares
acquired in this transaction and related transactions) the issuance of the
Total Transaction Shares as outlined in Section 4(l) of the Securities
Purchase Agreement.

 

(c)                                  Conversion
Price and Adjustments to Conversion Price.

 

(i)                                     The
conversion price in effect on any Conversion Date shall be, at the sole option
of the Holder, equal to either (a) One Dollar and Twenty Five Cents
($1.25) (the “Fixed Conversion Price”)
or (b) eighty percent (80%) of the average of the two (2) lowest
daily VWAPs of the Common Stock during the five (5) Trading Days
immediately preceding the Conversion Date as quoted by Bloomberg, LP (the “Market Conversion Price”). The
Fixed Conversion Price and the Market Conversion Price are collectively
referred to as the “Conversion Price.” 
The Conversion Price may be adjusted pursuant to the other terms of
this Debenture. Notwithstanding the restrictions set forth in Sections 2(b)(ii) and
2(b)(iii), the Holder shall have the absolute right to convert any or all of
this Debenture at the Fixed Conversion Price free of such restriction provided
such conversion is in compliance with the shareholder approval requirements of
the Nasdaq Capital Market.

 

8

 

Notwithstanding anything
to the contrary herein, the maximum number of shares of the Company’s Common
Stock that may be issued upon conversion of the principal amount of this
Debenture is 64,000,000 (the “Conversion Shares”).

 

In the event that all of
the Conversions Shares are issued and there remains outstanding principal
amount and accrued interest hereunder all amounts of outstanding principal and
accrued interest shall be immediately due and payable in cash.

 

 (ii)                               If the Obligor, at any
time while this Debenture is outstanding, shall (a) pay a stock dividend
or otherwise make a distribution or distributions on shares of its Common Stock
or any other equity or equity equivalent securities payable in shares of Common
Stock, (b) subdivide outstanding shares of Common Stock into a larger
number of shares, (c) combine (including by way of reverse stock split)
outstanding shares of Common Stock into a smaller number of shares, or (d) issue
by reclassification of shares of the Common Stock any shares of capital stock
of the Obligor, then the Fixed Conversion Price shall be multiplied by a
fraction of which the numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any) outstanding before such event and of which
the denominator shall be the number of shares of Common Stock outstanding after
such event. Any adjustment made pursuant to this Section shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.

 

(iii)                               If
the Obligor, at any time while this Debenture is outstanding, shall issue
rights, options or warrants to all holders of Common Stock (and not to the
Holder) entitling them to subscribe for or purchase shares of Common Stock at a
price per share less than the Fixed Conversion Price (not including the
issuance of Excluded Securities), then the Fixed Conversion Price shall be
multiplied by a fraction, of which the denominator shall be the number of
shares of the Common Stock (excluding treasury shares, if any) outstanding on
the date of issuance of such rights or warrants (plus the number of additional
shares of Common Stock offered for subscription or purchase), and of which the
numerator shall be the number of shares of the Common Stock (excluding treasury
shares, if any) outstanding on the date of issuance of such rights or warrants,
plus the number of shares which the aggregate offering price of the total
number of shares so offered would purchase at the Fixed Conversion Price. Such
adjustment shall be made whenever such rights or warrants are issued, and shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such rights, options or warrants. However,
upon the expiration of any such right, option or warrant to purchase shares of
the Common Stock the issuance of which resulted in an adjustment in the Fixed Conversion
Price pursuant to this Section, if any such right, option or warrant shall
expire and shall not have been exercised, the Fixed Conversion Price shall
immediately upon such expiration be recomputed and effective immediately upon
such expiration be increased to the price which it would have been (but
reflecting any other adjustments in the Fixed Conversion Price made pursuant to
the provisions of this Section after the issuance of such rights or
warrants) had the adjustment of the Fixed Conversion Price made upon the
issuance of such rights, options or warrants been made on the basis of offering
for subscription or purchase only that number of shares of the Common Stock
actually purchased upon the exercise of such rights, options or warrants actually
exercised.

 

9

 

(iv)                              If
the Obligor or any subsidiary thereof, as applicable, at any time while this
Debenture is outstanding, shall issue shares of Common Stock or rights,
warrants, options or other securities or debt that are convertible into or
exchangeable for shares of Common Stock (“Common Stock Equivalents”)
entitling any Person to acquire shares of Common Stock, at a price per share
less than the Fixed Conversion Price (if the holder of the Common Stock or
Common Stock Equivalent so issued shall at any time, whether by operation of
purchase price adjustments, reset provisions, floating conversion, exercise or
exchange prices or otherwise, or due to warrants, options or rights per share
which is issued in connection with such issuance, be entitled to receive shares
of Common Stock at a price per share which is less than the Fixed Conversion
Price (in all cases, other than Excluded Securities), such issuance shall be
deemed to have occurred for less than the Fixed Conversion Price), then, at the
sole option of the Holder, the Fixed Conversion Price shall be adjusted to
mirror the conversion, exchange or purchase price for such Common Stock or
Common Stock Equivalents (including any reset provisions thereof) at issue.
Such adjustment shall be made whenever such Common Stock or Common Stock
Equivalents are issued. The Obligor shall notify the Holder in writing, no
later than one (1) business day following the issuance of any Common Stock
or Common Stock Equivalent subject to this Section, indicating therein the
applicable issuance price, or of applicable reset price, exchange price,
conversion price and other pricing terms. No adjustment under this Section shall
be made as a result of issuances and exercises of options to purchase shares of
Common Stock issued for compensatory purposes pursuant to any of the Obligor’s
stock option or stock purchase plans.

 

(v)                                 If
the Obligor, at any time while this Debenture is outstanding, shall distribute
to all holders of Common Stock (and not to the Holder) evidences of its
indebtedness or assets or rights or warrants to subscribe for or purchase any
security, then in each such case the Fixed Conversion Price at which this
Debenture shall thereafter be convertible shall be determined by multiplying
the Fixed Conversion Price in effect immediately prior to the record date fixed
for determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the Closing Bid Price determined as
of the record date mentioned above, and of which the numerator shall be such
Closing Bid Price on such record date less the then fair market value at such
record date of the portion of such assets or evidence of indebtedness so
distributed applicable to one outstanding share of the Common Stock as
determined by the Board of Directors in good faith. In either case the
adjustments shall be described in a statement provided to the Holder of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.

 

(vi)                              In
case of any reclassification of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is converted into other securities,
cash or property, the Holder shall have the right thereafter to, at its
option,  (A) convert the then
outstanding principal amount, together with all accrued but unpaid interest and
any other amounts then owing hereunder in respect of this Debenture into the
shares of stock and other securities, cash and property receivable upon or
deemed to be held by holders of the Common Stock following such
reclassification or share exchange, and the Holder of this Debenture shall be
entitled upon such event to receive such amount of securities, cash or property
as the shares of the Common Stock of the Obligor into which the then
outstanding principal amount, together

 

10

 

with all accrued
but unpaid interest and any other amounts then owing hereunder in respect of
this Debenture could have been converted immediately prior to such
reclassification or share exchange would have been entitled, or (B) require
the Obligor to prepay the outstanding principal amount of this Debenture, plus
all interest and other amounts due and payable thereon. The entire prepayment
price shall be paid in cash. This provision shall similarly apply to successive
reclassifications or share exchanges.

 

(vii)                           The
Obligor shall at all times after December 31, 2006 reserve and keep
available out of its authorized Common Stock the full number of shares of
Common Stock issuable upon conversion of all outstanding amounts under this
Debenture; and within three (3) Trading Days following the receipt by the
Obligor of a Holder’s notice that such minimum number of Underlying Shares is
not so reserved, the Obligor shall promptly reserve a sufficient number of
shares of Common Stock to comply with such requirement.

 

(viii)                        All
calculations under this Section 3
shall be rounded up to the nearest $0.001 or whole share.

 

(ix)                                Whenever
the Conversion Price is adjusted pursuant to Section 3
hereof, the Obligor shall promptly mail or send by electronic means (including
without limitation e-mail) to the Holder a notice setting forth the Conversion
Price after such adjustment and setting forth a brief statement of the facts
requiring such adjustment.

 

(x)                                   If
(A) the Obligor shall declare a dividend (or any other distribution) on
the Common Stock; (B) the Obligor shall declare a special nonrecurring
cash dividend on or a redemption of the Common Stock; (C) the Obligor
shall authorize the granting to all holders of the Common Stock rights or
warrants to subscribe for or purchase any shares of capital stock of any class or
of any rights; (D) the approval of any stockholders of the Obligor shall
be required in connection with any reclassification of the Common Stock, any
consolidation or merger to which the Obligor is a party, any sale or transfer
of all or substantially all of the assets of the Obligor, of any compulsory
share exchange whereby the Common Stock is converted into other securities,
cash or property; or (E) the Obligor shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the affairs of the
Obligor; then, in each case, the Obligor shall cause to be filed at each office
or agency maintained for the purpose of conversion of this Debenture, and shall
cause to be mailed to the Holder at its last address as it shall appear upon
the stock books of the Obligor, at least twenty (20) calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be
taken, the date as of which the holders of the Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of the Common Stock
of record shall be entitled to exchange their shares of the Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer or share exchange, provided, that the
failure to mail such notice or any defect therein or in the mailing thereof
shall not affect the validity of the corporate action required to be specified
in such notice. The Holder is entitled to convert this Debenture during the
20-day

 

11

 

calendar period
commencing the date of such notice to the effective date of the event
triggering such notice.

 

(xi)                                In
case of any  merger or consolidation of
the Obligor or any subsidiary of the Obligor with or into another Person, a
Holder shall have the right to (A) exercise any rights under Section 2(b), (B) convert the
aggregate amount of this Debenture then outstanding into the shares of stock
and other securities, cash and property receivable upon or deemed to be held by
holders of Common Stock following such merger, consolidation or sale, and such
Holder shall be entitled upon such event or series of related events to
receive such amount of securities, cash and property as the shares of Common
Stock into which such aggregate principal amount of this Debenture could have
been converted immediately prior to such merger, consolidation or sales would
have been entitled, or (C) in the case of a merger or consolidation,
require the surviving entity to issue to the Holder a convertible Debenture
with a principal amount equal to the aggregate principal amount of this
Debenture then held by such Holder, plus all accrued and unpaid interest and
other amounts owing thereon, which such newly issued convertible Debenture
shall have terms identical (including with respect to conversion) to the terms
of this Debenture, and shall be entitled to all of the rights and privileges of
the Holder of this Debenture set forth herein and the agreements pursuant to
which this Debentures were issued. In the case of clause (C), the conversion
price applicable for the newly issued shares of convertible preferred stock or
convertible Debentures shall be based upon the amount of securities, cash and
property that each share of Common Stock would receive in such transaction and
the Conversion Price in effect immediately prior to the effectiveness or
closing date for such transaction. The terms of any such merger, sale or
consolidation shall include such terms so as to continue to give the Holder the
right to receive the securities, cash and property set forth in this Section upon
any conversion or redemption following such event. This provision shall
similarly apply to successive such events.

 

(d)                                 Other
Provisions.

 

(i)                                     The
Obligor covenants that it will at all times after December 31, 2006
reserve and keep available out of its authorized and unissued shares of Common
Stock solely for the purpose of issuance upon conversion of this Debenture and
payment of interest on this Debenture, each as herein provided, free from
preemptive rights or any other actual contingent purchase rights of persons
other than the Holder, not less than such number of shares of the Common Stock
as shall (subject to any additional requirements of the Obligor as to reservation
of such shares set forth in this Debenture) be issuable (taking into account
the adjustments and restrictions of Sections
2(b) and 3(c)) upon the conversion of the outstanding principal
amount of this Debenture and payment of interest hereunder. The Obligor
covenants that all shares of Common Stock that shall be so issuable shall, upon
issue, be duly and validly authorized, issued and fully paid, nonassessable
and, if the Underlying Shares Registration Statement has been declared
effective under the Securities Act, registered for public sale in accordance
with such Underlying Shares Registration Statement.

 

(ii)                                  Upon
a conversion hereunder the Obligor shall not be required to issue stock
certificates representing fractions of shares of the Common Stock, but may if
otherwise permitted, make a cash payment in respect of any final fraction of a
share based on the Closing Bid Price at such time. If the Obligor elects not,
or is unable, to make such a cash payment, the

 

12

 

Holder shall be
entitled to receive, in lieu of the final fraction of a share, one whole share
of Common Stock.

 

(iii)                               The
issuance of certificates for shares of the Common Stock on conversion of this
Debenture shall be made without charge to the Holder thereof for any
documentary stamp or similar taxes that may be payable in respect of the
issue or delivery of such certificate, provided that the Obligor shall not be
required to pay any tax that may be payable in respect of any transfer
involved in the issuance and delivery of any such certificate upon conversion
in a name other than that of the Holder of such Debenture so converted and the
Obligor shall not be required to issue or deliver such certificates unless or
until the person or persons requesting the issuance thereof shall have paid to
the Obligor the amount of such tax or shall have established to the
satisfaction of the Obligor that such tax has been paid.

 

(iv)                              Nothing
herein shall limit a Holder’s right to pursue actual damages or declare an
Event of Default pursuant to Section 2
herein for the Obligor ‘s failure to deliver certificates representing shares
of Common Stock upon conversion within the period specified herein and such
Holder shall have the right to pursue all remedies available to it at law or in
equity including, without limitation, a decree of specific performance and/or
injunctive relief, in each case without the need to post a bond or provide
other security. The exercise of any such rights shall not prohibit the Holder
from seeking to enforce damages pursuant to any other Section hereof or
under applicable law.

 

(v)                                 In
addition to any other rights available to the Holder, if the Obligor fails to
deliver to the Holder such certificate or certificates pursuant to Section 3(a)(i) by the fifth (5th)
Trading Day after the Conversion Date, and if after such fifth (5th)
Trading Day the Holder purchases (in an open market transaction or otherwise)
Common Stock to deliver in satisfaction of a sale by such Holder of the
Underlying Shares which the Holder anticipated receiving upon such conversion
(a “Buy-In”), then the Obligor shall (A) pay in cash to the Holder
(in addition to any remedies available to or elected by the Holder) the amount
by which (x) the Holder’s total purchase price (including brokerage
commissions, if any) for the Common Stock so purchased exceeds (y) the product
of (1) the aggregate number of shares of Common Stock that such Holder
anticipated receiving from the conversion at issue multiplied by (2) the
market price of the Common Stock at the time of the sale giving rise to such
purchase obligation and (B) at the option of the Holder, either reissue a
Debenture in the principal amount equal to the principal amount of the
attempted conversion or deliver to the Holder the number of shares of Common
Stock that would have been issued had the Obligor timely complied with its
delivery requirements under Section 3(a)(i).
For example, if the Holder purchases Common Stock having a total purchase price
of $11,000 to cover a Buy-In with respect to an attempted conversion of
Debentures with respect to which the market price of the Underlying Shares on
the date of conversion was a total of $10,000 under clause (A) of the
immediately preceding sentence, the Obligor shall be required to pay the Holder
$1,000. The Holder shall provide the Obligor written notice indicating the
amounts payable to the Holder in respect of the Buy-In.

 

Section 4.                                          Notices.    Any notices, consents, waivers
or other communications required or permitted to be given under the terms
hereof 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

 

13

 

kept on file by the sending party); or (iii) one (1) Trading
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 Obligor, to:

  	
   

  	
  Isonics Corporation

  
	
   

  	
   

  	
  5906 McIntyre Street

  
	
   

  	
   

  	
  Golden, CO 80403

  
	
   

  	
   

  	
  Attention:

  	
  James E. Alexander, President

  
	
   

  	
   

  	
  Telephone:

  	
  (303) 279-7900

  
	
   

  	
   

  	
  Facsimile:

  	
  (303) 279-7300

  
	
   

  	
   

  	
   

  
	
  With a copy (which does not constitute notice) 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 Holder:

  	
   

  	
  Cornell Capital Partners, LP

  
	
   

  	
   

  	
  101 Hudson Street, Suite 3700

  
	
   

  	
   

  	
  Jersey City, NJ 07303

  
	
   

  	
   

  	
  Attention:

  	
  Mark Angelo

  
	
   

  	
   

  	
  Telephone:

  	
  (201) 985-8300

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  David Gonzalez, Esq.

  
	
   

  	
   

  	
  101 Hudson Street – Suite 3700

  
	
   

  	
   

  	
  Jersey City, NJ 07302

  
	
   

  	
   

  	
  Telephone:

  	
  (201) 985-8300

  
	
   

  	
   

  	
  Facsimile:

  	
  (201) 985-8266

  

 

or at 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
three (3) Trading Days prior to the effectiveness of such change. Written
confirmation of receipt (i) given by the recipient of such notice,
consent, waiver or other communication, (ii) 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 (iii) provided by a nationally recognized overnight
delivery 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.

 

Section 5.                                          Definitions.
For the purposes hereof, the following terms shall have the following meanings:

 

14

 

“Approved Stock Plan”
means any employee benefit plan which has been approved or is in the future
approved by the Board of Directors of the Company, pursuant to which the
Company’s securities may be issued to any employee, consultant, officer or
director for services provided to the Company.

 

“Business Day”
means any day except Saturday, Sunday and any day which shall be a federal
legal holiday in the United States or a day on which banking institutions are
authorized or required by law or other government action to close.

 

“Change of Control
Transaction” means the occurrence of (a) an acquisition after the date
hereof by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated
under the Exchange Act) of effective control (whether through legal or
beneficial ownership of capital stock of the Obligor, by contract or otherwise)
of in excess of fifty percent (50%) of the voting securities of the Obligor
(except that the acquisition of voting securities by the Holder shall not
constitute a Change of Control Transaction for purposes hereof), (b) a
replacement at one time or over time of more than one-half of the members of
the board of directors of the Obligor which is not approved by a majority of
those individuals who are members of the board of directors on the date hereof
(or by those individuals who are serving as members of the board of directors
on any date whose nomination to the board of directors was approved by a majority
of the members of the board of directors who are members on the date hereof), (c) the
merger, consolidation or sale of fifty percent (50%) or more of the
consolidated assets of the Obligor or any subsidiary of the Obligor in one or a
series of related transactions with or into another entity, or (d) the
execution by the Obligor of an agreement to which the Obligor is a party or by
which it is bound, providing for any of the events set forth above in (a), (b) or
(c).

 

“Closing Bid Price”
means the price per share in the last reported trade of the Common Stock on the
Nasdaq Capital Market or on the exchange 
which the Common Stock is then listed as quoted by Bloomberg, LP.

 

“Commission” means
the Securities and Exchange Commission.

 

“Common Stock”
means the common stock, no par value, of the Obligor and stock of any other class into
which such shares may hereafter be changed or reclassified.

 

“Conversion Date” shall mean the
date upon which the Holder gives the Obligor notice of their intention to
effectuate a conversion of this Debenture into shares of the Obligor’s Common
Stock as outlined herein.

 

 “Exchange Act” means the Securities
Exchange Act of 1934, as amended.

 

“Excluded Securities”
means:

 

 (a) any issuance by the Company of
securities in connection with a strategic partnership or a joint venture (the
primary purpose of which is not to raise equity capital),

 

(b) any issuance by
the Company of securities as consideration for a merger or consolidation or the
acquisition of a business, product, license, or other assets of another person
or entity,

 

15

 

(c) options to
purchase shares of Common Stock, provided (I) such options are issued after the
date of this Debenture to employees of the Company within thirty (30) days of
such employee’s starting his employment with the Company, and (II) the exercise
price of such options is not less than the Closing Price of the Common Stock on
the date of issuance of such option,

 

(d) securities
issued pursuant to an Approved Stock Plan,

 

(e) up to 1,000,000
without registration rights and not pursuant to Form S-8 (in the event
that such issuance has registration rights the Obligor shall obtain the prior
written approval of the Holder) shares that may be issued from time to
time at a price no less than the VWAP ending within three (3) Business
Days prior to the completion of the transaction (the primary purpose of which
is not to raise equity capital), and

 

(f) any issuance of
securities to holders of the Other Securities provided such transactions are in
accordance with the terms of such instrument (including any anti-dilution
protection contained in such instrument) or are on terms determined by the
Board of Directors of the Company to be no less favorable to the Company than
the existing terms.

 

“Original Issue Date”
shall mean the date of the first issuance of this Debenture regardless of the
number of transfers and regardless of the number of instruments, which may be
issued to evidence such Debenture.

 

“Person” means a corporation,
an association, a partnership, organization, a business, an individual, a
government or political subdivision thereof or a governmental agency.

 

 “Securities Act” means the Securities
Act of 1933, as amended, and the rules and regulations promulgated
thereunder.

 

“Trading Day”
means a day on which the shares of Common Stock are quoted on the OTC or quoted
or traded on such Subsequent Market on which the shares of Common Stock are
then quoted or listed; provided, that in the event that the shares of Common
Stock are not listed or quoted, then Trading Day shall mean a Business Day.

 

“Transaction Documents”
means the Securities Purchase Agreement or any other agreement delivered in
connection with the Securities Purchase Agreement, including, without
limitation, the Security Agreement, the Irrevocable Transfer Agent
Instructions, and the Registration Rights Agreement.

 

“Underlying Shares”
means the shares of Common Stock issuable upon conversion of this Debenture or
as payment of interest in accordance with the terms hereof.

 

“Underlying Shares
Registration Statement” means a registration statement meeting the
requirements set forth in the Investor’s Registration Rights Agreement, dated
the date hereof by and between the Obligor and the Holder, covering among other
things the resale of the Underlying Shares and naming the Holder as a “selling
stockholder” thereunder.

 

16

 

“VWAP” means the
price per share in the volume weighted average price of the Common Stock on the
Nasdaq Capital Market or other Subsequent Market   which the Common Stock is then listed as
quoted by Bloomberg, LP.

 

Section 6.                                          Except
as expressly provided herein, no provision of this Debenture shall alter or
impair the obligations of the Obligor, which are absolute and unconditional, to
pay the principal of, interest and other charges (if any) on, this Debenture at
the time, place, and rate, and in the coin or currency, herein prescribed. This
Debenture is a direct obligation of the Obligor. This Debenture ranks pari
passu with all other 6% Debentures now or hereafter issued to the Holder under
the terms set forth herein. As long as this Debenture is outstanding, the
Obligor shall not and shall cause their subsidiaries not to, without the consent
of the Holder of at least a majority of the principal amount of the 6%
Convertible Debentures then outstanding (whether or not the Holder consents), (i) amend
its certificate of incorporation, bylaws or other charter documents so as to
adversely affect any rights of the Holder; (ii) repay, repurchase or offer
to repay, repurchase or otherwise acquire shares of its Common Stock or other
equity securities other than as to the Underlying Shares to the extent
permitted or required under the Transaction Documents; or (iii) enter into
any agreement with respect to any of the foregoing.

 

Section 7.                                          This
Debenture shall not entitle the Holder to any of the rights of a stockholder of
the Obligor, including without limitation, the right to vote, to receive dividends
and other distributions, or to receive any notice of, or to attend, meetings of
stockholders or any other proceedings of the Obligor, unless and to the extent
converted into shares of Common Stock in accordance with the terms hereof.

 

Section 8.                                          If
this Debenture is mutilated, lost, stolen or destroyed, the Obligor shall
execute and deliver, in exchange and substitution for and upon cancellation of
the mutilated Debenture, or in lieu of or in substitution for a lost, stolen or
destroyed Debenture, a new Debenture for the principal amount of this Debenture
so mutilated, lost, stolen or destroyed but only upon receipt of evidence of
such loss, theft or destruction of such Debenture, and of the ownership hereof,
and indemnity, if requested, all reasonably satisfactory to the Obligor.

 

Section 9.                                          Except
as described in the Disclosure Schedule, no indebtedness of the Obligor is
senior to this Debenture in right of payment, whether with respect to interest,
damages or upon liquidation or dissolution or otherwise. Without the Holder’s
consent, the Obligor will not and will not permit any of their subsidiaries to,
directly or indirectly, enter into, create, incur, assume or suffer to exist
any indebtedness of any kind, on or with respect to any of its property or
assets now owned or hereafter acquired or any interest therein or any income or
profits there from that is senior in any respect to the obligations of the
Obligor under this Debenture except for capital lease financing, in cases where
the security interest is in the nature of a purchase money security interest,
or for funds used for acquisitions by the Obligor or any subsidiary of a
business that has positive earnings before 
interest, taxes, depreciation, and amortization expenses or to refinance
of the purchase money security interest initially taken.

 

Section 10.                                   This
Debenture shall be governed by and construed in accordance with the laws of the
State of New Jersey, without giving effect to conflicts of laws thereof. Each
of the parties consents to the jurisdiction of the U.S. District Court for
the District of New Jersey  sitting in
Newark, New Jersey in connection with any dispute arising under this Debenture
and

 

17

 

hereby waives, to
the maximum extent permitted by law, any objection, including any objection
based on forum  non  conveniens to the bringing of any such
proceeding in such jurisdictions.

 

Section 11.                                   If
the Obligor fails to strictly comply with the terms of this Debenture, then the
Obligor shall reimburse the Holder promptly for all fees, costs and expenses,
including, without limitation, attorneys’ fees and expenses incurred by the
Holder in any action in connection with this Debenture, including, without
limitation, those incurred: (i) during any workout, attempted workout,
and/or in connection with the rendering of legal advice as to the Holder’s
rights, remedies and obligations, (ii) collecting any sums which become
due to the Holder, (iii) defending or prosecuting any proceeding or any
counterclaim to any proceeding or appeal; or (iv) the protection,
preservation or enforcement of any rights or remedies of the Holder.

 

Section 12.                                   Any
waiver by the Holder of a breach of any provision of this Debenture shall not
operate as or be construed to be a waiver of any other breach of such provision
or of any breach of any other provision of this Debenture. The failure of the
Holder to insist upon strict adherence to any term of this Debenture on one or
more occasions shall not be considered a waiver or deprive that party of the
right thereafter to insist upon strict adherence to that term or any other term
of this Debenture. Any waiver must be in writing.

 

Section 13.                                   If
any provision of this Debenture is invalid, illegal or unenforceable, the
balance of this Debenture shall remain in effect, and if any provision is
inapplicable to any person or circumstance, it shall nevertheless remain
applicable to all other persons and circumstances. If it shall be found that
any interest or other amount deemed interest due hereunder shall violate
applicable laws governing usury, the applicable rate of interest due hereunder
shall automatically be lowered to equal the maximum permitted rate of interest.
The Obligor covenants (to the extent that it may lawfully do so) that it
shall not at any time insist upon, plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay, extension or usury law or other law
which would prohibit or forgive the Obligor from paying all or any portion of
the principal of or interest on this Debenture as contemplated herein, wherever
enacted, now or at any time hereafter in force, or which may affect the
covenants or the performance of this indenture, and the Obligor (to the extent
it may lawfully do so) hereby expressly waives all benefits or advantage
of any such law, and covenants that it will not, by resort to any such law,
hinder, delay or impeded the execution of any power herein granted to the
Holder, but will suffer and permit the execution of every such as though no
such law has been enacted.

 

Section 14.                                   Whenever
any payment or other obligation hereunder shall be due on a day other than a
Business Day, such payment shall be made on the next succeeding Business Day.

 

Section 15.                                   THE
PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT ANY OF
THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON
OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY
TRANSACTION DOCUMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS PROVISION

 

18

 

IS A MATERIAL
INDUCEMENT FOR THE PARTIES’ ACCEPTANCE OF THIS AGREEMENT.

 

[REMAINDER
OF PAGE INTENTIONLLY LEFT BLANK]

 

19

 

IN
WITNESS WHEREOF, the Obligor has caused this Secured
Convertible Debenture to be duly executed by a duly authorized officer as of
the date set forth above.

 

	
   

  	
   

  	
  ISONICS CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   James E. Alexander

  
	
   

  	
   

  	
  Title:

  	
  President and Chief Executive Officer

  
						

 

20

 

EXHIBIT “A”

 

NOTICE OF
CONVERSION

 

(To be executed by the Holder in order to convert the Debenture)

 

	
  TO:

  	
   

  

 

The
undersigned hereby irrevocably elects to convert $                                                                   of
the principal amount of the above Debenture into Shares of Common Stock of
Isonics Corporation, according to the conditions stated therein, as of the
Conversion Date written below.

 

	
  Conversion
  Date:

  	
   

  	
   

  
	
  Applicable
  Conversion Price:

  	
   

  	
   

  
	
  Signature:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  Address:

  	
   

  	
   

  
	
  Amount to
  be converted:

  	
   

  	
  $

  	
   

  
	
  Amount of
  Debenture unconverted:

  	
   

  	
  $

  	
   

  
	
  Conversion
  Price per share:

  	
   

  	
  $

  	
   

  
	
  Number of
  shares of Common Stock to be issued:

  	
   

  	
   

  
	
  Please
  issue the shares of Common Stock in the following name and to the following
  address:

  	
   

  	
   

  
	
  Issue to:

  	
   

  	
   

  
	
  Authorized
  Signature:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
  Phone
  Number:

  	
   

  	
   

  
	
  Broker DTC Participant Code:

  	
   

  	
   

  
	
  Account
  Number:

  	
   

  	
   

  

 

If this name is different from the name of the Holder, the Holder will
have to show compliance for such transfer with federal and applicable state
securities laws or in accordance with the plan of distribution in the
Underlying Shares Registration Statement.

 

 

By submitting this Notice of Conversion, the undersigned holder
represents and warrants to the Obligor that it is an accredited investor as
that term is defined in SEC Rule 501(a), it is a sophisticated investor as
required by SEC Rule 506, that it has completed such investigation into
the Obligor and the securities being acquired pursuant to this Notice of
Conversion as the undersigned (in consultation with its advisors) has
determined appropriate, and that it is submitting this Notice of Conversion of
its own volition and free will.

 

	
  By:

  	
   

  	
   

  	
   

  	
  Date:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Social Security NumberExhibit 10.6

 

WARRANT

 

THE SECURITIES
REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE
BEEN ACQUIRED FOR INVESTMENT 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 FORM REASONABLY
SATISFACTORY TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER
SAID ACT.

 

ISONICS CORPORATION

 

Warrant To Purchase Common Stock

 

	
  Warrant No.:
  CCP-001

  	
   

  	
  Number of Shares: 2,000,000

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Warrant Exercise Price: $1.25

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Expiration
  Date: May 30, 2009

  

 

Date of Issuance: May 30, 2006

 

Isonics
Corporation, a California corporation (the “Company”), hereby certifies
that, for good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Cornell Capital
Partners, LP (the “Holder”), the registered holder hereof or
its permitted assigns, is entitled, subject to the terms set forth below, to
purchase from the Company upon surrender of this Warrant, at any time or times
on or after the date hereof, but not after 11:59 P.M. Eastern Time on the
Expiration Date (as defined herein) Two Million (2,000,000) fully paid and
nonassessable shares of Common Stock (as defined herein) of the Company (the “Warrant
Shares”) at the exercise price per share provided in Section 1(b) below
or as subsequently adjusted; provided, however, that in no event shall the
holder be entitled to exercise this Warrant for a number of Warrant Shares in
excess of that number of Warrant Shares which, upon giving effect to such
exercise, would cause the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates to exceed 4.99% of the
outstanding shares of the Common Stock following such exercise, except within
sixty (60) days of the Expiration Date (however, such restriction may be
waived by Holder (but only as to itself and not to any other holder) upon not
less than 65 days prior notice to the Company). For purposes of the foregoing
proviso, the aggregate number of shares of Common Stock beneficially owned by
the holder and its affiliates shall include the number of shares of Common
Stock issuable upon exercise of this Warrant with respect to which the
determination of such proviso is being made, but shall exclude shares of Common
Stock which would be issuable upon (i) exercise of the remaining,
unexercised Warrants beneficially owned by the holder and its affiliates and

 

1

 

(ii) exercise
or conversion of the unexercised or unconverted portion of any other securities
of the Company beneficially owned by the holder and its affiliates (including,
without limitation, any convertible notes or preferred stock) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein. Except as set forth in the preceding sentence, for purposes of this
paragraph, beneficial ownership shall be calculated in accordance with Section 13(d) of
the Securities Exchange Act of 1934, as amended. For purposes of this Warrant,
in determining the number of outstanding shares of Common Stock a holder may rely
on the number of outstanding shares of Common Stock as reflected in (1) the
Company’s most recent Form 10-QSB or Form 10-KSB, as the case may be,
(2) a more recent public announcement by the Company or (3) any other
notice by the Company or its transfer agent setting forth the number of shares
of Common Stock outstanding. Upon the written request of any holder, the
Company shall promptly, but in no event later than one (1) Business Day
following the receipt of such notice, confirm in writing to any such holder the
number of shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to
the exercise of Warrants (as defined below) by such holder and its affiliates
since the date as of which such number of outstanding shares of Common Stock
was reported.

 

Section 1.

 

(a)                                  This
Warrant is one (1) of three (3) common stock purchase warrants (the “Warrant”)
issued pursuant to the Securities Purchase Agreement (“Securities Purchase
Agreement”) dated the date hereof between the Company and the Buyers listed
on Schedule I thereto. The other warrant issued pursuant to the Securities
Purchase Agreement is referred to herein as the “Companion Warrants” and
areto be interpreted together with this Warrant. Convertible debentures were
issued to the holder of this Warrant at the same time as and after this Warrant
and the Companion Warrants as described in the Securities Purchase Agreement
and are referred to herein as the Convertible Debentures.

 

(b)                                 Definitions.
The following words and terms as used in this Warrant shall have the following
meanings:

 

(i)                                     “Approved
Stock Plan” means any employee benefit plan which has been approved or is
in the future approved by the Board of Directors of the Company, pursuant to
which the Company’s securities may be issued to any employee, consultant,
officer or director for services provided to the Company.

 

(ii)                                  “Business
Day” means any day other than Saturday, Sunday or other day on which
commercial banks in the City of New York are authorized or required by law to
remain closed.

 

(iii)                               “Closing
Bid Price” means the closing bid price of Common Stock as quoted on the
Principal Market (as reported by Bloomberg Financial Markets (“Bloomberg”)
through its “Volume at Price” function).

 

2

 

(iv)                              “Common
Stock” means (i) the Company’s common stock, no par value per share,
and (ii) any capital stock into which such Common Stock shall have been
changed or any capital stock resulting from a reclassification of such Common
Stock.

 

(v)                                 “Event
of Default” means an event of default under the Securities Purchase
Agreement, the Convertible Debentures issued in connection therewith or the
Investor’s Registration Rights Agreement dated the date hereof.

 

(vi)                              “Excluded
Securities” means, any of the following:

 

(a) any
issuance by the Company of securities in connection with a strategic
partnership or a joint venture (the primary purpose of which is not to raise
equity capital),

 

 (b) any issuance by the Company of
securities as consideration for a merger or consolidation or the acquisition of
a business, product, license, or other assets of another person or entity,

 

(c) options
to purchase shares of Common Stock, provided (I) such options are issued after
the date of this Warrant to employees of the Company within thirty (30) days of
such employee’s starting his employment with the Company, and (II) the exercise
price of such options is not less than the Closing Price, as quoted by
Bloomberg, LP of the Common Stock on the date of issuance of such option.

 

(d) securities issued pursuant to an
Approved Stock Plan;

 

(e) up to
1,000,000 without registration rights and not pursuant to Form S-8 (in the
event that such issuance has registration rights the Obligor shall obtain the
prior written approval of the Holder) shares that may be issued from time
to time at a price no less than the VWAP ending within three (3) Business
Days prior to the completion of the transaction (the primary purpose of which
is not to raise equity capital), and

 

(f) any
issuance of securities to holders of the Other Securities provided such
transactions are in accordance with the terms of such instrument (including any
anti-dilution protection contained in such instrument) or are on terms
determined by the Board of Directors of the Company to be no less favorable to
the Company than the existing terms.

 

(vii)                           “Expiration
Date” means the date three (3) years from the Issuance Date of this
Warrant or, if such date falls on a Saturday, Sunday or other day on which
banks are required or authorized to be closed in the City of New York or the
State of New York or on which trading does not take place on the Principal
Exchange or automated quotation system on which the Common Stock is traded (a “Holiday”),
the next date that is not a Holiday.

 

(viii)                        “Issuance
Date” means the date hereof.

 

(ix)                                “Options”
means any rights, warrants or options to subscribe for or purchase Common Stock
or Convertible Securities.

 

3

 

(x)                                   “Other
Securities” means (i) those convertible debentures, options and
warrants of the Company issued prior to, and outstanding on, the Issuance Date
of this Warrant, (ii) the shares of Common Stock issuable on exercise of
such convertible debentures, options and warrants, provided such convertible
debentures, options and warrants are not amended after the Issuance Date of
this Warrant and (iii) the shares of Common Stock issuable upon exercise
of this Warrant the Convertible Debenture and the Companion Warrants that were
issued pursuant to the Securities Purchase Agreement, and (iv) the 660,000
shares of restricted common stock issued or to be issued pursuant to the
Securities Purchase Agreement, and (v) any other shares of Common Stock
issued or issuable pursuant to this Warrant, the Companion Warrants, the
Convertible Debenture, and the registration rights agreement entered into
between the Company and the initial holder of this Warrant.

 

(xi)                                “Person”
means an individual, a limited liability company, a partnership, a joint
venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.

 

(xii)                             “Principal
Market” means the New York Stock Exchange, the American Stock Exchange, the
Nasdaq National Market, the Nasdaq Capital Market, whichever is at the time the
principal trading exchange or market for such security, or the over-the-counter
market on the electronic bulletin board for such security as reported by
Bloomberg or, if no bid or sale information is reported for such security by
Bloomberg, then the average of the bid prices of each of the market makers for
such security as reported in the “pink sheets” by the National Quotation Bureau, Inc.

 

(xiii)                          “Securities
Act” means the Securities Act of 1933, as amended.

 

(xiv)                         “VWAP”
means the volume weighted average price per share of the Company’s Common Stock
on the Nasdaq Capital Market or other Subsequent Market, as quoted by
Bloomberg, LP.

 

(xv)                            “Warrant”
means this Warrant and all Warrants issued in exchange, transfer or replacement
thereof.

 

(xvi)                         “Warrant
Exercise Price” shall be $1.25 or as subsequently adjusted as provided in Section 8
hereof.

 

(xvii)                      “Warrant
Shares” means the shares of Common Stock issuable at any time upon exercise
of this Warrant.

 

(c)                                  Other
Definitional Provisions.

 

(i)                                     Except
as otherwise specified herein, all references herein (A) to the Company
shall be deemed to include the Company’s successors and (B) to any
applicable law defined or referred to herein shall be deemed references to such
applicable law as the same may have been or may be amended or
supplemented from time to time.

 

4

 

(ii)                                  When
used in this Warrant, the words “herein”, “hereof”, and “hereunder” and words of similar import, shall refer
to this Warrant as a whole and not to any provision of this Warrant, and the
words “Section”, “Schedule”, and “Exhibit” shall refer to
Sections of, and Schedules and Exhibits to, this Warrant unless otherwise
specified.

 

(iii)                               Whenever
the context so requires, the neuter gender includes the masculine or feminine,
and the singular number includes the plural, and vice versa.

 

Section 2.                                            Exercise
of Warrant.

 

(a)                                  Subject
to the terms and conditions hereof, this Warrant may be exercised by the
holder hereof then registered on the books of the Company, pro rata as
hereinafter provided, at any time on any Business Day on or after the opening
of business on such Business Day, commencing with the first day after the date
hereof, and prior to 11:59 P.M. Eastern Time on the Expiration Date (i) by
delivery of a written notice, in the form of the subscription notice
attached as Exhibit A hereto (the “Exercise Notice”), of
such holder’s election to exercise this Warrant, which notice shall specify the
number of Warrant Shares to be purchased, payment to the Company of an
amount equal to the Warrant Exercise Price(s) applicable to the Warrant Shares
being purchased, multiplied by the number of Warrant Shares (at the
applicable Warrant Exercise Price) as to which this Warrant is being
exercised (plus any applicable issue or transfer taxes) (the “Aggregate
Exercise Price”) in cash or wire transfer of immediately available funds
and the surrender of this Warrant (or an indemnification undertaking with
respect to this Warrant in the case of its loss, theft or destruction) to a
common carrier for overnight delivery to the Company as soon as practicable
following such date (“Cash Basis”) or (ii) if after January 15,
2007, at the time of exercise, the Warrant Shares are not subject to an
effective registration statement or if an Event of Default has occurred, by
delivering an Exercise Notice and in lieu of making payment of the Aggregate
Exercise Price in cash or wire transfer, elect instead to receive upon such
exercise the “Net Number” of shares of Common Stock determined according to the
following formula (the “Cashless Exercise”):

 

	
   

  	
  Net Number = (A x B) – (A x C)

  
	
   

  	
                                       B

  

 

For purposes
of the foregoing formula:

 

A = the total number of Warrant Shares with
respect to which this Warrant is then being exercised.

 

B = the VWAP of the Common Stock on the date
of exercise of the Warrant.

 

C = the Warrant Exercise Price then in effect
for the applicable Warrant Shares at the time of such exercise.

 

In the event
of any exercise of the rights represented by this Warrant in compliance with
this Section 2, the Company shall on or before the fifth (5th)
Business Day following the date of receipt of the Exercise Notice, the
Aggregate Exercise Price and this Warrant (or an indemnification undertaking
with respect to this Warrant in the case of its loss, theft or

 

5

 

destruction)
and the receipt of the representations of the holder specified in Section 6
hereof, if requested by the Company (the “Exercise Delivery Documents”),
and if the Common Stock is DTC eligible, credit such aggregate number of shares
of Common Stock to which the holder shall be entitled to the holder’s or its
designee’s balance account with The Depository Trust Company; provided,
however, if the holder who submitted the Exercise Notice requested physical
delivery of any or all of the Warrant Shares, or, if the Common Stock is not
DTC eligible  then the Company shall, on
or before the fifth (5th) Business Day following receipt of the
Exercise Delivery Documents, issue and surrender to a common carrier for
overnight delivery to the address specified in the Exercise Notice, a
certificate, registered in the name of the holder, for the number of shares of
Common Stock to which the holder shall be entitled pursuant to such request. Upon
delivery of the Exercise Notice and Aggregate Exercise Price referred to in
clause (i) or (ii) above the holder of this Warrant shall be
deemed for all corporate purposes to have become the holder of record of the
Warrant Shares with respect to which this Warrant has been exercised. In the
case of a dispute as to the determination of the Warrant Exercise Price, the
VWAP or the arithmetic calculation of the Warrant Shares, the Company shall
promptly issue to the holder the number of Warrant Shares that is not disputed
and shall submit the disputed determinations or arithmetic calculations to the
holder via facsimile within one (1) Business Day of receipt of the holder’s
Exercise Notice.

 

(b)                                 If
the holder and the Company are unable to agree upon the determination of the
Warrant Exercise Price or arithmetic calculation of the Warrant Shares within
one (1) day of such disputed determination or arithmetic calculation being
submitted to the holder, then the Company shall immediately submit via
facsimile or other form of electronic communication (including without
limitation e-mail) (i) the disputed determination of the Warrant Exercise
Price or the VWAP to an independent, reputable investment banking firm or (ii) the
disputed arithmetic calculation of the Warrant Shares to its independent,
outside accountant. The Company shall cause the investment banking firm or the
accountant, as the case may be, to perform the determinations or
calculations and notify the Company and the holder of the results no later than
forty-eight (48) hours from the time it receives the disputed determinations or
calculations. Such investment banking firm’s or accountant’s determination or
calculation, as the case may be, shall be deemed conclusive absent
manifest error.

 

(c)                                  Unless
the rights represented by this Warrant shall have expired or shall have been
fully exercised, the Company shall, as soon as practicable and in no event
later than five (5) Business Days after any exercise and at its own
expense, issue a new Warrant identical in all respects to this Warrant exercised
except it shall represent rights to purchase the number of Warrant Shares
purchasable immediately prior to such exercise under this Warrant exercised,
less the number of Warrant Shares with respect to which such Warrant is
exercised.

 

(d)                                 No
fractional Warrant Shares are to be issued upon any pro rata exercise of this
Warrant, but rather the number of Warrant Shares issued upon such exercise of
this Warrant shall be rounded up or down to the nearest whole number.

 

(e)                                  If
the Company or its Transfer Agent shall fail for any reason or for no reason to
issue to the holder within ten (10) days of receipt of the Exercise
Delivery Documents, a certificate for the number of Warrant Shares to which the
holder is entitled or to credit the holder’s balance account with The
Depository Trust Company for such number of Warrant

 

6

 

Shares to
which the holder is entitled upon the holder’s exercise of this Warrant, the
Company shall, in addition to any other remedies under this Warrant or
otherwise available to such holder, pay as additional damages in cash to such
holder on each day the issuance of such certificate for Warrant Shares is not
timely effected an amount equal to 0.025% of the product of (A) the sum of
the number of Warrant Shares not issued to the holder on a timely basis and to
which the holder is entitled, and (B) the VWAP of the Common Stock for the
trading day immediately preceding the last possible date which the Company
could have issued such Common Stock to the holder without violating this Section 2.

 

(f)                                    If
within ten (10) days after the Company’s receipt of the Exercise Delivery
Documents, the Company fails to deliver a new Warrant to the holder for the
number of Warrant Shares to which such holder is entitled pursuant to Section 2
hereof, then, in addition to any other available remedies under this Warrant,
or otherwise available to such holder, the Company shall pay as additional
damages in cash to such holder on each day after such tenth (10th)
day that such delivery of such new Warrant is not timely effected in an amount
equal to 0.25% of the product of (A) the number of Warrant Shares
represented by the portion of this Warrant which is not being exercised and (B) the
VWAP of the Common Stock for the trading day immediately preceding the last
possible date which the Company could have issued such Warrant to the holder
without violating this Section 2.

 

Section 3.                                            Covenants
as to Common Stock. The Company hereby covenants and agrees as follows:

 

(a)                                  This
Warrant is, and any Warrants issued in substitution for or replacement of this
Warrant will upon issuance be, duly authorized and validly issued.

 

(b)                                 Subject
to the availability of sufficient authorized shares, all Warrant Shares which may be
issued upon the exercise of the rights represented by this Warrant will, upon
issuance, be validly issued, fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issue thereof.

 

(c)                                  During
the period within which the rights represented by this Warrant may be
exercised, and subject to the availability of sufficient authorized shares the
Company will at all times have authorized and reserved at least one hundred
percent (100%) of the number of shares of Common Stock needed to provide for
the exercise of the rights then represented by this Warrant and the par value
of said shares will at all times be less than or equal to the applicable
Warrant Exercise Price. If at any time after December 31, 2006 the Company
does not have a sufficient number of shares of Common Stock authorized and
available, then the Company shall call and hold a special meeting of its
stockholders within sixty (60) days of that time for the sole purpose of
increasing the number of authorized shares of Common Stock.

 

(d)                                 The
Company will not, by amendment of its Articles of Incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities, or any other voluntary action, avoid or seek to avoid
the observance or performance of any of the terms to be observed or performed
by it hereunder, but will at all times in good faith assist in the carrying out
of all the provisions of this Warrant and in the taking of all such action as may reasonably
be requested by the holder of this Warrant in order to protect the exercise

 

7

 

privilege of
the holder of this Warrant against dilution or other impairment, consistent
with the tenor and purpose of this Warrant. The Company will not increase the
par value of any shares of Common Stock receivable upon the exercise of this
Warrant above the Warrant Exercise Price then in effect, and (ii) will
take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares
of Common Stock upon the exercise of this Warrant assuming that there is an
exemption available from the registration requirements of the Securities Act of
1933 and applicable state law for such exercise.

 

(e)                                  This
Warrant will be binding upon any entity succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company’s
assets.

 

Section 4.                                            Taxes.
The Company shall pay any and all taxes, except any applicable withholding,
which may be payable with respect to the issuance and delivery of Warrant
Shares upon exercise of this Warrant.

 

Section 5.                                            Warrant
Holder Not Deemed a Stockholder. Except as otherwise specifically provided
herein, no holder, as such, of this Warrant shall be entitled to vote or
receive dividends or be deemed the holder of shares of capital stock of the
Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to
any corporate action (whether any reorganization, issue of stock,
reclassification of stock, consolidation, merger, conveyance or otherwise),
receive notice of meetings, receive dividends or subscription rights, or
otherwise, prior to the issuance to the holder of this Warrant of the Warrant
Shares which he or she is then entitled to receive upon the due exercise of
this Warrant. In addition, nothing contained in this Warrant shall be construed
as imposing any liabilities on such holder to purchase any securities (upon
exercise of this Warrant or otherwise) or as a stockholder of the Company,
whether such liabilities are asserted by the Company or by creditors of the Company.
Notwithstanding this Section 5, the Company will provide the holder of
this Warrant with copies of the same notices and other information given to the
stockholders of the Company generally, contemporaneously with the giving
thereof to the stockholders.

 

Section 6.                                            Representations
of Holder. The holder of this Warrant, by the acceptance hereof, represents
that it is acquiring this Warrant and the Warrant Shares for its own account
for investment only and not with a view towards, or for resale in connection
with, the public sale or distribution of this Warrant or the Warrant Shares,
except pursuant to sales registered or exempted under the Securities Act;
provided, however, that by making the representations herein, the holder does
not agree to hold this Warrant or any of the Warrant Shares for any minimum or
other specific term and reserves the right to dispose of this Warrant and the
Warrant Shares at any time in accordance with or pursuant to a registration
statement or an exemption under the Securities Act. The holder of this Warrant
further represents, by acceptance hereof, that, as of this date, such holder is
an “accredited investor” as such term is defined in Rule 501(a)(1) of
Regulation D promulgated by the Securities and Exchange Commission under the
Securities Act (an “Accredited Investor”). Upon exercise of this
Warrant  the holder shall, if requested
by the Company, confirm in writing, in a form satisfactory to the Company,
that the Warrant Shares so purchased are being acquired solely for the holder’s
own account and not as a nominee for any other party, for investment, and not
with a view toward distribution or resale

 

8

 

and that such
holder is an Accredited Investor. If such holder cannot make such
representations because they would be factually incorrect, it shall be a
condition to such holder’s exercise of this Warrant that the Company receive
such other representations as the Company considers reasonably necessary to
assure the Company that the issuance of its securities upon exercise of this
Warrant shall not violate any United States or state securities laws.

 

Section 7.                                            Ownership
and Transfer.

 

(a)                                  The
Company shall maintain at its principal executive offices (or such other office
or agency of the Company as it may designate by notice to the holder
hereof), a register for this Warrant, in which the Company shall record the
name and address of the person in whose name this Warrant has been issued, as
well as the name and address of each transferee. The Company may treat the
person in whose name any Warrant is registered on the register as the owner and
holder thereof for all purposes, notwithstanding any notice to the contrary,
but in all events recognizing any transfers made in accordance with the terms
of this Warrant.

 

Section 8.                                            Adjustment
of Warrant Exercise Price and Number of Shares. The Warrant Exercise Price
and the number of shares of Common Stock issuable upon exercise of this Warrant
shall be adjusted from time to time as follows:

 

(a)                                  Adjustment
of Warrant Exercise Price and Number of Shares upon Issuance of Common Stock.
If and whenever on or after the Issuance Date of this Warrant, the Company
issues or sells, or is deemed to have issued or sold, any shares of Common
Stock (other than (i) Excluded Securities, (ii) shares of Common
Stock which are issued or deemed to have been issued by the Company in
connection with an Approved Stock Plan, or (iii) the Other Securities)
(the New Shares) for a consideration per share less than a price (the “Applicable
Price”) equal to the Warrant Exercise Price in effect immediately prior to
such issuance or sale, then immediately after such issue or sale the Warrant
Exercise Price then in effect shall be adjusted (the “Weighted Adjustment”)
to a price determined by multiplying such exercise price by a fraction,

 

the numerator of which shall be the number of
shares of Common Stock outstanding immediately before such issuance plus the
number of shares of common stock that the aggregate consideration received by
the Company for such issuance would purchase at the Warrant Exercise Price then
in effect; and

 

the denominator of which shall be the number
of shares of Common Stock outstanding immediately prior to such issuance plus
the number of New Shares.

 

For the
purposes of this Section 8(a), the term “Common Stock outstanding”
includes all shares of Common Stock then outstanding calculated in accordance
with generally accepted accounting principles consistently applied.

 

Upon each such
adjustment of the Warrant Exercise Price hereunder, the number of Warrant
Shares issuable upon exercise of this Warrant shall be adjusted to the number
of shares determined by multiplying the Warrant Exercise Price in effect
immediately prior to such adjustment by the number of Warrant Shares issuable
upon exercise of this Warrant immediately prior to such adjustment and dividing
the product thereof by the Warrant Exercise Price resulting from such
adjustment.

 

9

 

(b)                                 Effect
on Warrant Exercise Price of Certain Events. For purposes of determining
the adjusted Warrant Exercise Price under Section 8(a) above, the
following shall be applicable:

 

(i)                                     Issuance
of Options. If after the date hereof, the Company in any manner grants any Options
and the lowest price per share for which one share of Common Stock is issuable
upon the exercise of any such Option or upon conversion or exchange of any
convertible securities issuable upon exercise of any such Option is less than
the Applicable Price (not including Excluded Securities), then such share of
Common Stock shall be deemed to be outstanding and to have been issued and sold
by the Company at the time of the granting or sale of such Option for such
price per share and shall be subject to the Weighted Adjustment. For purposes
of this Section 8(b)(i), the lowest price per share for which one share of
Common Stock is issuable upon exercise of such Options or upon conversion or
exchange of such Convertible Securities shall be equal to the sum of the lowest
amounts of consideration (if any) received or receivable by the Company with
respect to any one share of Common Stock upon the granting or sale of the
Option, upon exercise of the Option or upon conversion or exchange of any
convertible security issuable upon exercise of such Option. No further
adjustment of the Warrant Exercise Price shall be made upon the actual issuance
of such Common Stock or of such convertible securities upon the exercise of
such Options or upon the actual issuance of such Common Stock upon conversion
or exchange of such convertible securities.

 

(ii)                                  Issuance
of Convertible Securities. If the Company in any manner issues or sells any
convertible securities and the lowest price per share for which one share of
Common Stock is issuable upon the conversion or exchange thereof is less than
the Applicable Price (not including Excluded Securities), then such share of
Common Stock shall be deemed to be outstanding and to have been issued and sold
by the Company at the time of the issuance or sale of such convertible
securities for such price per share and shall be subject to the Weighted
Adjustment. For the purposes of this Section 8(b)(ii), the lowest price
per share for which one share of Common Stock is issuable upon such conversion
or exchange shall be equal to the sum of the lowest amounts of consideration
(if any) received or receivable by the Company with respect to one share of
Common Stock upon the issuance or sale of the convertible security and upon
conversion or exchange of such convertible security. No further adjustment of
the Warrant Exercise Price shall be made upon the actual issuance of such
Common Stock upon conversion or exchange of such convertible securities, and if
any such issue or sale of such convertible securities is made upon exercise of
any Options for which adjustment of the Warrant Exercise Price had been or are
to be made pursuant to other provisions of this Section 8(b), no further
adjustment of the Warrant Exercise Price shall be made by reason of such issue
or sale.

 

(iii)                               Change
in Option Price or Rate of Conversion. If the purchase price provided for
in any Options, the additional consideration, if any, payable upon the issue,
conversion or exchange of any convertible securities, or the rate at which any
convertible securities are convertible into or exchangeable for Common Stock
changes at any time, the Warrant Exercise Price in effect at the time of such
change shall be adjusted and shall be subject to the Weighted Adjustment to the
Warrant Exercise Price which would have been in effect at such time had such
Options or convertible securities provided for such changed purchase price,
additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold and the number of Warrant Shares
issuable upon exercise of this Warrant

 

10

 

shall be
correspondingly readjusted. For purposes of this Section 8(b)(iii), if the
terms of any Option or convertible security that was outstanding as of the
Issuance Date of this Warrant are changed in the manner described in the
immediately preceding sentence, then such Option or convertible security and
the Common Stock deemed issuable upon exercise, conversion or exchange thereof
shall be deemed to have been issued as of the date of such change. No
adjustment pursuant to this Section 8(b) shall be made if such
adjustment would result in an increase of the Warrant Exercise Price then in
effect.

 

(c)                                  Effect
on Warrant Exercise Price of Certain Events. For purposes of determining
the adjusted Warrant Exercise Price under Sections 8(a) and 8(b), the
following shall be applicable:

 

(i)                                     Calculation
of Consideration Received. If any Common Stock, Options or convertible
securities are issued or sold or deemed to have been issued or sold for cash,
the consideration received therefore will be deemed to be the gross amount
received by the Company therefore. If any Common Stock, Options or convertible
securities are issued or sold for a consideration other than cash, the amount
of such consideration received by the Company will be the fair value of such
consideration, except where such consideration consists of marketable
securities, in which case the amount of consideration received by the Company
will be the market price of such securities on the date of receipt of such
securities. If any Common Stock, Options or convertible securities are issued
to the owners of the non-surviving entity in connection with any merger in
which the Company is the surviving entity, the amount of consideration
therefore will be deemed to be the fair value of such portion of the net assets
and business of the non-surviving entity as is attributable to such Common
Stock, Options or convertible securities, as the case may be. The fair
value of any consideration other than cash or securities will be determined
jointly by the Company and the holders of Warrants representing at least a
majority of the Warrant Shares issuable upon exercise of the Warrants and
Companion Warrants then outstanding. If such parties are unable to reach
agreement within ten (10) days after the occurrence of an event
requiring valuation (the “Valuation Event”), the fair value of such
consideration will be determined within five (5) Business Days after the
tenth (10th) day following the Valuation Event by an
independent, reputable appraiser jointly selected by the Company and the
holders of Warrants representing at least a majority  of the Warrant Shares issuable upon exercise
of the Warrants (including the Companion Warrants) then outstanding. The
determination of such appraiser shall be final and binding upon all parties and
the fees and expenses of such appraiser shall be borne equally by the Company
and the holders of Warrants.

 

(ii)                                  Integrated
Transactions. In case any Option is issued in connection with the issue or
sale of other securities of the Company, together comprising one integrated
transaction in which no specific consideration is allocated to such Options by
the parties thereto, the Options will be deemed to have been issued for a
consideration of $.01.

 

(iii)                               Treasury
Shares. The number of shares of Common Stock outstanding at any given time
does not include shares owned or held by or for the account of the Company, and
the disposition of any shares so owned or held will be considered an issue or
sale of Common Stock.

 

11

 

(iv)                              Record
Date. If the Company takes a record of the holders of Common Stock for the
purpose of entitling them (1) to receive a dividend or other distribution
payable in Common Stock, Options or in convertible securities or (2) to
subscribe for or purchase Common Stock, Options or convertible securities, then
such record date will be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or sold upon the declaration
of such dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may be.

 

(d)                                 Adjustment
of Warrant Exercise Price upon Subdivision or Combination of Common Stock. If
the Company at any time after the date of issuance of this Warrant subdivides
(by any stock split, stock dividend, recapitalization or otherwise) one or more
classes of its outstanding shares of Common Stock into a greater number of
shares, any Warrant Exercise Price in effect immediately prior to such
subdivision will be proportionately reduced and the number of shares of Common
Stock obtainable upon exercise of this Warrant will be proportionately
increased. If the Company at any time after the date of issuance of this
Warrant combines (by combination, reverse stock split or otherwise) one or more
classes of its outstanding shares of Common Stock into a smaller number of
shares, any Warrant Exercise Price in effect immediately prior to such
combination will be proportionately increased and the number of Warrant Shares
issuable upon exercise of this Warrant will be proportionately decreased. Any
adjustment under this Section 8(d) shall become effective at the
close of business on the date the subdivision or combination becomes effective.

 

(e)                                  Distribution
of Assets. If the Company shall declare or make any dividend or other
distribution of its assets (or rights to acquire its assets) to holders of
Common Stock, by way of return of capital or otherwise (including, without
limitation, any distribution of cash, stock or other securities, property or
options by way of a dividend, spin off, reclassification, corporate
rearrangement or other similar transaction) (a “Distribution”), at any
time after the issuance of this Warrant, then, in each such case:

 

(i)                                     any
Warrant Exercise Price in effect immediately prior to the close of business on
the record date fixed for the determination of holders of Common Stock entitled to receive the Distribution shall be reduced, effective as of the close of
business on such record date, to a price determined by multiplying such Warrant
Exercise Price by a fraction of which (A) the numerator shall be the Closing
Sale Price of the Common Stock on the trading day immediately preceding such
record date minus the value of the Distribution (as determined in good faith by
the Company’s Board of Directors) applicable to one share of Common Stock, and (B) the
denominator shall be the Closing Sale Price of the Common Stock on the trading
day immediately preceding such record date; and

 

(ii)                                  either
(A) the number of Warrant Shares obtainable upon exercise of this Warrant
shall be increased to a number of shares equal to the number of shares of
Common Stock obtainable immediately prior to the close of business on the
record date fixed for the determination of holders of Common Stock entitled to
receive the Distribution multiplied by the reciprocal of the fraction set forth
in the immediately preceding clause (i), or (B) in the event that the
Distribution is of common stock of a company whose common stock is traded on a
national securities exchange or a national automated quotation system, then the
holder of this Warrant shall receive an additional warrant to purchase Common
Stock, the terms of which shall

 

12

 

be identical
to those of this Warrant, except that such warrant shall be exercisable into
the amount of the assets that would have been payable to the holder of this
Warrant pursuant to the Distribution had the holder exercised this Warrant
immediately prior to such record date and with an exercise price equal to the
amount by which the exercise price of this Warrant was decreased with respect
to the Distribution pursuant to the terms of the immediately preceding clause
(i).

 

(f)                                    Certain
Events. If any event occurs of the type contemplated by the provisions of
this Section 8 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company’s
Board of Directors will make an appropriate adjustment in the Warrant Exercise
Price and the number of shares of Common Stock obtainable upon exercise of this
Warrant so as to protect the rights of the holders of the Warrants; provided,
except as set forth in section 8(d),that no such adjustment pursuant to
this Section 8(f) will increase the Warrant Exercise Price or
decrease the number of shares of Common Stock obtainable as otherwise
determined pursuant to this Section 8.

 

(g)                                 Notices.

 

(i)                                     Immediately
upon any adjustment of the Warrant Exercise Price, the Company will give
written notice thereof to the holder of this Warrant, setting forth in
reasonable detail, and certifying, the calculation of such adjustment.

 

(ii)                                  The
Company will give written notice to the holder of this Warrant at least ten (10) days
prior to the date on which the Company closes its books or takes a record (A) with
respect to any dividend or distribution upon the Common Stock, (B) with
respect to any pro rata subscription offer to holders of Common Stock or (C) for
determining rights to vote with respect to any Organic Change (as defined
below), dissolution or liquidation, provided that such information shall be
made known to the public prior to or in conjunction with such notice being
provided to such holder.

 

(iii)                               The
Company will also give written notice to the holder of this Warrant at least
ten (10) days prior to the date on which any Organic Change, dissolution
or liquidation will take place, provided that such information shall be made
known to the public prior to or in conjunction with such notice being provided
to such holder.

 

Section 9.                                            Purchase
Rights; Reorganization, Reclassification, Consolidation, Merger or Sale.

 

(a)                                  In
addition to any adjustments pursuant to Section 8 above, if at any time
the Company grants, issues or sells any Options, Convertible Securities or
rights to purchase stock, warrants, securities or other property pro rata to
the record holders of any class of Common Stock (the “Purchase Rights”),
then the holder of this Warrant will be entitled to acquire, upon the terms
applicable to such Purchase Rights, the aggregate Purchase Rights which such
holder could have acquired if such holder had held the number of shares of
Common Stock acquirable upon complete exercise of this Warrant immediately
before the date on which a record is taken

 

13

 

for the grant,
issuance or sale of such Purchase Rights, or, if no such record is taken, the
date as of which the record holders of Common Stock are to be determined for
the grant, issue or sale of such Purchase Rights.

 

(b)                                 Any
recapitalization, reorganization, reclassification, consolidation, merger, sale
of all or substantially all of the Company’s assets to another Person or other
transaction in each case which is effected in such a way that holders of Common
Stock are entitled to receive (either directly or upon subsequent liquidation)
stock, securities or assets with respect to or in exchange for Common Stock is
referred to herein as an “Organic Change.”  Prior to the consummation of any (i) sale
of all or substantially all of the Company’s assets to an acquiring Person or (ii) other
Organic Change following which the Company is not a surviving entity, the
Company will secure from the Person purchasing such assets or the successor
resulting from such Organic Change (in each case, the “Acquiring Entity”)
a written agreement (in form and substance satisfactory to the holders of
Warrants representing at least a majority  of the Warrant Shares issuable
upon exercise of the Warrants then outstanding) to deliver to each holder of
Warrants in exchange for such Warrants, a security of the Acquiring Entity
evidenced by a written instrument substantially similar in form and
substance to this Warrant and satisfactory to the holders of the Warrants
(including an adjusted warrant exercise price equal to the value for the Common
Stock reflected by the terms of such consolidation, merger or sale, and
exercisable for a corresponding number of shares of Common Stock acquirable and
receivable upon exercise of the Warrants without regard to any limitations on
exercise, if the value so reflected is less than any Applicable Warrant
Exercise Price immediately prior to such consolidation, merger or sale). Prior
to the consummation of any other Organic Change, the Company shall make
appropriate provision (in form and substance satisfactory to the holders
of Warrants representing a majority of
the Warrant Shares issuable upon exercise of the Warrants then outstanding) to
insure that each of the holders of the Warrants will thereafter have the right
to acquire and receive in lieu of or in addition to (as the case may be)
the Warrant Shares immediately theretofore issuable and receivable upon the
exercise of such holder’s Warrants (without regard to any limitations on
exercise), such shares of stock, securities or assets that would have been
issued or payable in such Organic Change with respect to or in exchange for the
number of Warrant Shares which would have been issuable and receivable upon the
exercise of such holder’s Warrant as of the date of such Organic Change
(without taking into account any limitations or restrictions on the
exercisability of this Warrant).

 

Section 10.                                      Lost,
Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost, stolen,
mutilated or destroyed, the Company shall promptly, on receipt of an
indemnification undertaking (or, in the case of a mutilated Warrant, the
Warrant), issue a new Warrant of like denomination and tenor as this Warrant so
lost, stolen, mutilated or destroyed.

 

Section 11.                                      Notice.
Any notices, consents, waivers or other communications required or permitted to
be given under the terms of this Warrant 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 receipt is received by the sending party
transmission is mechanically or electronically generated and kept on file by
the sending party); or (iii) one 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:

 

14

 

	
  If to Holder:

  	
   

  	
  Cornell Capital Partners, LP

  
	
   

  	
   

  	
  101 Hudson Street – Suite 3700

  
	
   

  	
   

  	
  Jersey City, NJ 07302

  
	
   

  	
   

  	
  Attention:

  	
  Mark A. Angelo

  
	
   

  	
   

  	
  Telephone:

  	
  (201) 985-8300

  
	
   

  	
   

  	
  Facsimile:

  	
  (201) 985-8266

  
	
   

  	
   

  	
   

  
	
  With Copy to:

  	
   

  	
  David Gonzalez, Esq.

  
	
   

  	
   

  	
  101 Hudson Street – Suite 3700

  
	
   

  	
   

  	
  Jersey City,

  	
  NJ 07302

  
	
   

  	
   

  	
  Telephone:

  	
  (201) 985-8300

  
	
   

  	
   

  	
  Facsimile:

  	
  (201) 985-8266

  
	
   

  	
   

  	
   

  
	
  If to the Company, to:

  	
   

  	
  Isonics Corporation

  
	
   

  	
   

  	
  5906 McIntyre Street

  
	
   

  	
   

  	
  Golden, CO 80403

  
	
   

  	
   

  	
  Attention:

  	
  James E. Alexander, President

  
	
   

  	
   

  	
  Telephone:

  	
  (303) 279-7900

  
	
   

  	
   

  	
  Facsimile:

  	
  (303) 279-7300

  
	
   

  	
   

  	
   

  
	
  With a copy (which does not constitute
  notice) 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 a holder
of this Warrant, to it at the address and facsimile number set forth on Exhibit C
hereto, with copies to such holder’s representatives as set forth on Exhibit C,
or at such other address and facsimile as shall be delivered to the Company
upon the issuance or transfer of this Warrant. Each party shall provide five
days’ prior written notice to the other party of any change in address or
facsimile number. Written confirmation of receipt (A) given by the
recipient of such notice, consent, facsimile, waiver or other communication,
(or (B) provided by a nationally recognized overnight delivery 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.

 

Section 12.                                      Date.
The date of this Warrant is set forth on page 1 hereof. This Warrant,
in all events, shall be wholly void and of no effect after the close of
business on the Expiration Date, except that notwithstanding any other
provisions hereof, the provisions of Section 8(b) shall continue in
full force and effect after such date as to any Warrant Shares or other
securities issued upon the exercise of this Warrant.

 

15

 

Section 13.                                      Amendment
and Waiver. Except as otherwise provided herein, the provisions of the
Warrants may be amended and the Company may take any action herein
prohibited, or omit to perform any act herein required to be performed by
it, only if the Company has obtained the written consent of the holders of
Warrants representing at a majority  of
the Warrant Shares issuable upon exercise of the Warrants then outstanding;
provided that, except for Section 8(d), no such action may increase
the Warrant Exercise Price or decrease the number of shares or class of
stock obtainable upon exercise of any Warrant without the written consent of
the holder of such Warrant.

 

Section 14.                                      Descriptive
Headings; Governing Law. The descriptive headings of the several sections
and paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant. The corporate laws of the State of New
Jersey shall govern all issues concerning the relative rights of the Company
and 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 jurisdictions) that would cause the application of
the laws of any jurisdictions other than the State of New Jersey. Each party
hereby irrevocably submits to the exclusive jurisdiction of the United States
District Court for the District of New Jersey, sitting in Newark, New Jersey
for the adjudication of any dispute hereunder or in connection herewith or
therewith, 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.

 

Section 15.                                   Waiver
of Jury Trial. AS A MATERIAL INDUCEMENT
FOR EACH PARTY HERETO TO ENTER INTO THIS WARRANT, THE PARTIES HERETO HEREBY
WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATED IN ANY WAY TO
THIS WARRANT AND/OR ANY AND ALL OF THE OTHER DOCUMENTS ASSOCIATED WITH THIS
TRANSACTION.

 

REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK

 

16

 

IN
WITNESS WHEREOF, the Company has caused this Warrant
to be signed as of the date first set forth above.

 

	
   

  	
  ISONICS CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   James E. Alexander

  
	
   

  	
  Title:

  	
  President and Chief Executive Officer

  
					

 

17

 

EXHIBIT A
TO WARRANT

 

EXERCISE
NOTICE

 

TO BE EXECUTED 

BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT

 

ISONICS CORPORATION

 

The
undersigned holder hereby exercises the right to purchase                              
of the shares of Common Stock (“Warrant Shares”) of Isonics Corporation
(the “Company”), evidenced by the attached Warrant (the “Warrant”).
Capitalized terms used herein and not otherwise defined shall have the
respective meanings set forth in the Warrant.

 

Specify Method of exercise by check mark:

 

1.  o                         Cash
Exercise

 

(a) Payment
of Warrant Exercise Price. The holder shall pay the Aggregate Exercise
Price of $                             
to the Company in accordance with the terms of the Warrant.

 

(b) Delivery
of Warrant Shares. The Company shall deliver to the holder                         
Warrant Shares in accordance with the terms of the Warrant.

 

2.  o                         Cashless
Exercise

 

(a) Payment
of Warrant Exercise Price. In lieu of making payment of the Aggregate
Exercise Price, the holder elects to receive upon such exercise the Net Number
of shares of Common Stock determined in accordance with the terms of the Warrant.

 

(b) Delivery
of Warrant Shares. The Company shall deliver to the holder                      
Warrant Shares in accordance with the terms of the Warrant.

 

By submitting this Exercise Notice, the undersigned holder represents
and warrants to the Company that it is an accredited investor as that term is
defined in SEC Rule 501(a), it is a sophisticated investor as required by
SEC Rule 506, that it has completed such investigation into the Company
and the securities being acquired pursuant to this Exercise Notice as the
undersigned (in consultation with its advisors) has determined appropriate, and
that it is submitting this Exercise Notice of its own volition and free will.

 

 

	
  Date:

  	
   

  	
  ,

  	
   

  	
   

  

 

Name of Registered Holder

 

18

 

	
  By:

  	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
   

  
						

 

2

 

EXHIBIT B
TO WARRANT

 

FORM OF
WARRANT POWER

 

FOR
VALUE RECEIVED, the undersigned does hereby assign and
transfer to                              ,
Federal Identification No.              ,
a warrant to purchase                              
shares of the capital stock of Isonics Corporation represented by warrant
certificate no.        , standing in
the name of the undersigned on the books of said corporation. The undersigned
does hereby irrevocably constitute and appoint                              ,
attorney to transfer the warrants of said corporation, with full power of
substitution in the premises.

 

In submitting
this Warrant Power, the undersigned represents and warrants to Isonics
Corporation that it has not offered the Warrant through any means of general
advertising or public solicitation, and that it will provide Isonics
Corporation such other information and representations of the undersigned or of
the transferee necessary or appropriate to permit Isonics Corporation to
determine whether there is an exemption available for the transfer of this
Warrant.

 

	
  Dated:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  
								

 

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