Document:

Exhibit
10.1

Surrender
and Reissuance Agreement

For
good and valuable consideration, in hand paid and the receipt and sufficiency
of which is hereby acknowledged, Cornell Capital Partners, LP (“Cornell”) and
Isonics Corporation (“Isonics”) hereby agree as of this 13th day of June 2006 as follows:

1.                                       Cornell
hereby surrenders to Isonics for cancellation Debenture No. CCP-1 in
the original principal amount of $10,000,000; Isonics hereby tenders to Cornell
in exchange therefor Debenture No. CCP-3 in the original principal
amount of $10,000,000.

2.                                       Cornell
hereby surrenders to Isonics for cancellation Debenture No. CCP-2 in
the original principal amount of $3,000,000; Isonics hereby tenders to Cornell
in exchange therefor Debenture No. CCP-4 in the original principal
amount of $3,000,000.

3.                                       Cornell
hereby surrenders to Isonics for cancellation Warrant No. CCP-001
for the purchase of 2,000,000 shares of Isonics common stock at a purchase
price of $1.25 per share; Isonics hereby tenders to Cornell in exchange therefor
Warrant No. CCP-002 for the purchase of 2,000,000 shares of Isonics
common stock at a purchase price of $1.25 per share.

4.                                       Cornell
hereby surrenders to Isonics for cancellation Warrant No. CCP-001
for the purchase of 3,000,000 shares of Isonics common stock at a purchase
price of $1.75 per share; Isonics hereby tenders to Cornell in exchange
therefor Warrant No. CCP-003 for the purchase of 3,000,000 shares of
Isonics common stock at a purchase price of $1.75 per share.

5.                                       Cornell
hereby surrenders to Isonics for cancellation Warrant No. CCP-001
for the purchase of 3,000,000 shares of Isonics common stock at a purchase
price of $2.00 per share; Isonics hereby tenders to Cornell in exchange
therefor Warrant No. CCP-004 for the purchase of 3,000,000 shares of
Isonics common stock at a purchase price of $2.00 per share.

IN WITNESS WHEREOF, the Buyers and the Company have caused
this Securities Purchase Agreement to be duly executed as of the date first
written above.

 

	
  CORNELL

  	
   

  	
  COMPANY:

  
	
  CORNELL
  CAPITAL, L.P.

  	
   

  	
  ISONICS CORPORATION

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  
	
  Mark Angelo,
  Portfolio Manager

  	
   

  	
  Name:

  	
  James E. Alexander

  
	
   

  	
   

  	
   

  	
  Title:

  	
  President and Chief Executive OfficerExhibit 10.2

Date of Original Issuance:  May 30,
2006

       Date of
Amendment and Restatement:   June 13,
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-3                                                                                                                                                                       $10,000,000

ISONICS CORPORATION

Secured Convertible Debenture

Due May  31, 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. This Amended and Restated
Secured Convertible Debenture cancels and replaces Debenture No. CCP-1
in the original principal amountn of $10,000,000 issued by Isonics Corporation,
a California corporation, which Debenture is superseded in its entirety hereby.

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 31, 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”).

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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.

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 

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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.

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:

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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 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, 

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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 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 

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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.

Section 3.              Conversion.

(a)           Conversion at Option of Holder.
The Holder may not convert this Debenture or receive shares of Common Stock in
the payment of interest on this Debenture, in a total number that exceeds
6,075,785 shares of the Obligor’s common stock unless and until after the
shareholders of the Obligor approve the transaction as required by Section 4(l) of
the Securities Purchase Agreement.

(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 

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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 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 

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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 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.

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(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.

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 

 9
 

 

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.

(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.

 

 10

 

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 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 

 11
 

 

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 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 

 12
 

 

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 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 

 13
 

 

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 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 

 14
 

 

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:

“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.

 15
 

 

“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,

(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.

 16
 

 

“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.

“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.

 17
 

 

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 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 

 18
 

 

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 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 Number

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00105-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00105-of-00352.parquet"}]]