Document:

Exhibit 10.1

 

SECURITIES PURCHASE AGREEMENT

 

THIS
SECURITIES PURCHASE AGREEMENT
(this “Agreement”), dated as of May 30, 2006, by and among ISONICS CORPORATION, a California
corporation (the “Company”), and the Buyers listed on Schedule I
attached hereto (individually, a “Buyer” or collectively “Buyers”).

 

WITNESSETH

 

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

 

WHEREAS,
the parties desire that, upon the terms and subject to the conditions contained
herein, the Company shall issue and sell to the Buyer(s), as provided herein,
and the Buyer(s) shall purchase up to Sixteen Million Dollars ($16,000,000) of
secured convertible debentures (the “Convertible Debentures”), which
shall be convertible into shares of the Company’s common stock, no par value
(the “Common Stock”) (as converted, the “Conversion Shares”) of
which;

 

a.                                             Ten Million Dollars ($10,000,000)]
shall be funded on the first (1st) 
Trading  Day following the date
hereof (the “First Closing”) provided however that an amount necessary
to pay the holders of those certain 2005 eight percent (8%) convertible
debentures (the “2005 8% Convertible Debentures”) as described in the
Disclosure Schedule attached hereto shall be deposited in escrow with David
Gonzalez, Esq. and paid by him on the same Trading Day to the holders of the
2005 8% Convertible Debentures and the balance will be paid to the Company;

 

b.                                            Three Million 
Dollars ($3,000,000) shall
be funded two (2) Trading  Days prior to
the date the registration statement (the “Registration Statement”) is
filed, pursuant to the Investor Registration Rights Agreement dated the date
hereof, with the United States Securities and Exchange Commission (the “SEC”)
(the “Second Closing”); and

 

c.                                             Three
Million Dollars ($3,000,000) shall be funded two (2) Trading Day prior to the
date the Registration Statement is declared effective by the SEC (the “Third
Closing”) (each individually referred to as a “Closing” collectively
referred to as the “Closings”), for a total purchase price of Sixteen
Million Dollars ($16,000,000), (the “Purchase Price”) in the respective
amounts set forth opposite each Buyer(s) name on Schedule I (the “Subscription
Amount”); and

 

WHEREAS,
contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement
(the “Investor Registration Rights Agreement”) pursuant to which the
Company has agreed to provide certain

 

 

registration rights under the Securities Act and the rules and
regulations promulgated there under, and applicable state securities laws; and

 

WHEREAS,
contemporaneously with the execution and delivery of this Agreement, the
Company and the Buyers are executing and delivering a Security Agreement; Isonics
Vancouver, Inc., Isonics Homeland Security and Defense Corporation, and

Protection Plus Security Corporation, all of which are wholly owned
subsidiaries of the Company, and the Buyers are 
executing and delivering a Security Agreement (all such security
agreements shall be referred to as the “Security Agreement”) pursuant to
which the Company and its wholly owned subsidiaries agreed to provide the
Buyers a security interest in Pledged Collateral (as this term is defined in
the each Security Agreement) to secure the Company’s obligations under this
Agreement, the Transaction Documents, or any other obligations of the Company
to the Buyer; and

 

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

 

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

 

1.             PURCHASE AND SALE OF CONVERTIBLE
DEBENTURES.

 

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

 

(b)           Closing Date.

 

(i)            The First Closing of the purchase
and sale of the Convertible Debentures shall take place at 10:00 a.m. Eastern
Standard Time on the first (1st) 
Trading  Day following the date
hereof, subject to notification of satisfaction of the conditions to the First
Closing set forth herein and in Sections 6 and 7 below (or such later date as
is mutually agreed to by the Company and the Buyer(s)) (the “First Closing
Date”);

 

(ii)           The Second Closing of the purchase
and sale of the Convertible Debentures shall take place at 10:00 a.m. Eastern
Standard Time two (2) Trading  Days prior
to the date the Registration Statement is filed with the SEC, subject to
notification of satisfaction of the conditions to the Second Closing set forth
herein and in Sections 6 and 7 below (or such later date as is mutually agreed
to by the Company and the Buyer(s)) (the “Second Closing Date”);

 

(iii)          The Third Closing of the purchase and
sale of the Convertible Debentures shall take place at 10:00 a.m. Eastern
Standard Time two (2) Trading Day prior to the date the Registration Statement
is declared effective by the SEC, subject to notification of satisfaction of
the conditions to the Third Closing set forth herein and in 

 

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Sections 6 and 7 below (or such later date as
is mutually agreed to by the Company and the Buyer(s)) (the “Third Closing
Date”) (collectively referred to a the “Closing Dates”). The Closing
shall occur on the respective Closing Dates at the offices of Yorkville Advisors,
LLC, 3700 Hudson Street, Suite 3700, Jersey City, New Jersey 07302 (or such
other place as is mutually agreed to by the Company and the Buyer(s)).

 

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

 

2.             BUYER’S REPRESENTATIONS AND
WARRANTIES.

 

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

 

(a)           Investment Purpose. Each Buyer
is acquiring the Convertible Debentures and, upon conversion of Convertible
Debentures, the Buyer will acquire the Conversion Shares then issuable, for its
own account for investment only and not with a view towards, or for resale in
connection with, the public sale or distribution thereof, except pursuant to
sales registered or exempted under the Securities Act; provided, however, that
by making the representations herein, such Buyer reserves the right to dispose
of the Conversion Shares at any time in accordance with or pursuant to an
effective registration statement covering such Conversion Shares or an
available exemption under the Securities Act.

 

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

 

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

 

(d)           Information. Each Buyer and
its advisors (and his or, its counsel), if any, have been furnished with all
materials relating to the business, finances and operations of the Company and
information he deemed material to making an informed investment decision
regarding his purchase of the Convertible Debentures and the Conversion Shares,
which have been requested by such Buyer. Each Buyer and its advisors, if any,
have been afforded the opportunity to ask questions of the Company and its
management. Neither such inquiries nor any other due diligence investigations
conducted by such Buyer or its advisors, if any, or its representatives shall
modify, amend or affect such Buyer’s right to rely on the Company’s
representations and warranties contained in Section 3 below. Each Buyer
understands that its

 

3

 

investment in the Convertible Debentures and
the Conversion Shares involves a high degree of risk. Each Buyer is in a
position regarding the Company, which, based upon employment, family
relationship or economic bargaining power, enabled and enables such Buyer to
obtain information from the Company in order to evaluate the merits and risks
of this investment. Each Buyer has sought such accounting, legal and tax
advice, as it has considered necessary to make an informed investment decision
with respect to its acquisition of the Convertible Debentures and the
Conversion Shares.

 

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

 

(f)            Transfer or Resale. Each
Buyer understands that except as provided in the Investor Registration Rights
Agreement: (i) the Convertible Debentures have not been and are not being registered
under the Securities Act or any state securities laws, and may not be offered
for sale, sold, assigned or transferred unless (A) subsequently registered
thereunder, or (B) such Buyer shall have delivered to the Company an opinion of
counsel, in a generally acceptable form, to the effect that such securities to
be sold, assigned or transferred may be sold, assigned or transferred pursuant
to an exemption from such registration requirements; (ii) any sale of such
securities made in reliance on Rule 144 under the Securities Act (or a
successor rule thereto) (“Rule 144”) may be made only in
accordance with the terms of Rule 144 and further, if Rule 144 is not
applicable, any resale of such securities under circumstances in which the
seller (or the person through whom the sale is made) may be deemed to be
an underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
person is under any obligation to register such securities under the Securities
Act or any state securities laws or to comply with the terms and conditions of
any exemption thereunder. The Company reserves the right to place stop transfer
instructions against the shares and certificates for the Conversion Shares.

 

(g)           Legends. Each Buyer
understands that the certificates or other instruments representing the
Convertible Debentures and or the Conversion Shares shall bear a restrictive
legend in substantially the following form (and a stop transfer order may be
placed against transfer of such stock certificates):

 

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

 

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SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE
STATE SECURITIES LAWS.

 

The legend set
forth above shall be removed and the Company within three (3) Trading Days
shall issue a certificate without such legend to the holder of the Conversion
Shares upon which it is stamped, if, unless otherwise required by state
securities laws, (i) in connection with a sale transaction, provided the
Conversion Shares are registered under the Securities Act and the holder (any
broker-dealer engaged in the sale of the Conversion Shares) represents to the Company
that the Conversion Shares have been or will be sold in accordance with the
Plan of Distribution as set forth in the registration statement, or (ii) in
connection with a sale transaction, after such holder provides the Company with
an opinion of counsel, which opinion shall be in form, substance and scope
customary for opinions of counsel in comparable transactions, to the effect
that a public sale, assignment or transfer of the Conversion Shares may be made
without registration under the Securities Act.

 

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

 

(i)            Receipt of Documents. Each
Buyer and his or its counsel has received and read in their entirety:  (i) this Agreement and each representation,
warranty and covenant set forth herein and the Transaction Documents (as
defined herein); (ii) all due diligence and other information necessary to
verify the accuracy and completeness of such representations, warranties and
covenants; (iii) the Company’s Form 10-KSB for the fiscal year ended April 30,
2005; (iv) the Company’s Form 10-QSB for the fiscal quarter ended July 31,
2005, October 31, 2005, and January 31, 2006; (v) all Forms 8-K filed
subsequent to the fling of the Company’s Form 10-KSB for the fiscal year ended
April 30, 2005; and (vi) answers to all questions each Buyer submitted to the
Company regarding an investment in the Company; and each Buyer has relied on
the information contained therein and has not been furnished any other
documents, literature, memorandum or prospectus.

 

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

 

(k)           Good Funds. All purchase
payments transferred or that may be transferred to the Company pursuant to this
Agreement originated directly from a bank or brokerage account in the name of
the Investor located within the United States of America or another Compliant
Jurisdiction as defined in by the Financial Action Task Force on Money
Laundering (found at http://www.oecd.org/fatf/).

 

5

 

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

 

3.     REPRESENTATIONS AND
WARRANTIES OF THE COMPANY.

 

The Company
represents and warrants as of the date hereof to each of the Buyers that,
except as set forth in the SEC Documents (as defined herein) or in the
Disclosure Schedule attached hereto (the “Disclosure Schedule”):

 

(a)           Organization and Qualification.
The Company and its subsidiaries are corporations duly organized and validly
existing in good standing under the laws of the jurisdiction in which they are
incorporated, and have the requisite corporate power to own their properties
and to carry on their business as now being conducted. Each of the Company and
its subsidiaries is duly qualified as a foreign corporation to do business and
is in good standing in every jurisdiction in which the nature of the business
conducted by it makes such qualification necessary, except to the extent that
the failure to be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries taken as a whole.

 

(b)           Authorization, Enforcement,
Compliance with Other Instruments. (i) The Company has the requisite
corporate power and authority to enter into and perform this Agreement, the
Security Agreement, the Investor Registration Rights Agreement, the Irrevocable
Transfer Agent Agreement, and any related agreements (collectively the “Transaction
Documents”) and to issue the Convertible Debentures and the Conversion
Shares in accordance with the terms hereof and thereof, (ii) the execution and
delivery of the Transaction Documents by the Company and the consummation by it
of the transactions contemplated hereby and thereby, including, without
limitation, the issuance of the Convertible Debentures the Conversion
Shares  and the reservation for issuance
and the issuance of the Conversion Shares issuable upon conversion or exercise
thereof, have been duly authorized by the Company’s Board of Directors and no
further consent or authorization is required by the Company, its Board of
Directors or its stockholders except as may be necessary to comply with the
requirements of the Nasdaq Capital Market, (iii) the Transaction Documents have
been duly executed and delivered by the Company, (iv) the Transaction Documents
constitute the valid and binding obligations of the Company enforceable against
the Company in accordance with their terms, except as such enforceability may
be limited by general principles of equity or applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating
to, or affecting generally, the enforcement of creditors’ rights and remedies. The
authorized officer of the Company executing the Transaction Documents knows of
no reason why the Company cannot file the registration statement as required
under the Investor Registration Rights Agreement or perform any of the Company’s
other obligations under such documents.

 

6

 

(c)           Capitalization.

 

(i)            The authorized capital stock of the
Company consists of 75,000,000 shares of Common Stock and 10,000,000 shares of
Preferred Stock, no par value  (“Preferred
Stock”) of which 43,700,779 shares of Common Stock and zero shares of
Preferred Stock are issued and outstanding. Upon the acceptance of certain
filings with the California Secretary of State, the authorized preferred stock
will be reduced to 7,650,000 shares. All of such outstanding shares have been
validly issued and are fully paid and nonassessable.

 

(ii)           No shares of Common Stock are subject
to preemptive rights or any other similar rights.

 

(iii)          As of the date of this Agreement, (A)
there are no outstanding options, warrants, scrip, rights to subscribe to,
calls or commitments of any character whatsoever relating to, or securities or
rights convertible into, any shares of capital stock of the Company or any of
its subsidiaries, or contracts, commitments, understandings or arrangements by
which the Company or any of its subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its subsidiaries or
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company or any of its subsidiaries, (B) there
are no outstanding debt securities and (C) there are no agreements or arrangements
under which the Company or any of its subsidiaries is obligated to register the
sale of any of their securities under the Securities Act (except pursuant to
the Registration Rights Agreement) and (D) there are no outstanding
registration statements and there are no outstanding comment letters from the
SEC or any other regulatory agency, in each case except as set forth in the
Disclosure Schedule.

 

(iv)          There are no securities or instruments
containing anti-dilution or similar provisions that will be triggered by the
issuance of the Convertible Debentures as described in this Agreement except in
connection with the 2005 8% Convertible Debentures and Warrants issued to the
purchasers of the 2005 8% Convertible Debentures and the anti-dilution provisions
of other options and warrants outstanding or issuable in accordance with the
Company’s authorized stock option plans.

 

(v)           The Company has furnished to the
Buyer true and correct copies of the Company’s Articles of Incorporation, as
amended and as in effect on the date hereof (the “Articles of Incorporation”)
(including certain amendments to be filed with the California Secretary of
State), and the Company’s By-laws, as in effect on the date hereof (the “By-laws”).
The Company’s reports filed under the Securities Exchange Act of 1934 provide
information regarding the terms of all securities convertible into or
exercisable for Common Stock and the material rights of the holders thereof in
respect thereto other than stock options issued to employees and consultants.

 

(d)           Issuance of Securities. The
Convertible Debentures are duly authorized and, upon issuance in accordance
with the terms hereof, shall be duly issued, fully paid and nonassessable, are
free from all taxes, liens and charges with respect to the issue thereof
subject, however, to the requirement that the Company increase its authorized
capitalization to provide for the Conversion Shares as set forth in Section
4(o) hereof. The Conversion Shares issuable upon conversion of the Convertible
Debentures have been duly authorized and reserved

 

7

 

for issuance. Upon conversion or exercise in
accordance with the Convertible Debentures and subject to the requirements of
Section 4(o) hereof, the Conversion Shares will be duly issued, fully paid and
nonassessable.

 

(e)           No Conflicts.

 

(1)           The execution, delivery and
performance of the Transaction Documents by the Company and the consummation by
the Company of the transactions contemplated hereby will not (i) result in a
violation of the Articles of Incorporation, any certificate of designations of
any outstanding series of preferred stock of the Company or the By-laws or (ii)
conflict with or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which the Company or any of its subsidiaries is a
party, or result in a violation of any law, rule, regulation, order, judgment
or decree (including federal and state securities laws and regulations and the
rules and regulations of the Nadsaq Capital Market on which the Common Stock is
quoted) applicable to the Company or any of its subsidiaries or by which any
property or asset of the Company or any of its subsidiaries is bound or
affected except to the extent any holder of the Company’s 2005 8% Convertible
Debentures or Warrants issued in connection therewith have failed to consent to
or waive the prohibitions against Variable Rate Transactions (as that term is
defined in the Securities Purchase Agreement pursuant to which the 2005 8%
Convertible Debentures were purchased).

 

(2)           Neither the Company nor its
subsidiaries is in violation of any term of or in default under its Articles of
Incorporation or By-laws or their organizational charter or by-laws,
respectively, or any material contract, agreement, mortgage, indebtedness,
indenture, instrument, judgment, decree or order or any statute, rule or
regulation applicable to the Company or its subsidiaries except: a failure to
pay sums required under an agreement dated September 1, 2005, between the
Company and Lucent Technologies, Inc. (the “Lucent Agreement”) and (ii)
to the extent that the Company is required to amend its articles of
incorporation to reflect its current capitalization (a process that is ongoing
with the California Secretary of State) and intends to increase its authorized
capitalization as contemplated in Section 4(o).

 

(3)           The business of the Company and its
subsidiaries is not being conducted, and shall not be conducted in violation of
any material law, ordinance, or regulation of any governmental entity.

 

(4)           Except as specifically contemplated
by this Agreement (including, without limitation, the requirements of the
Nasdaq Capital Market) and as required under the Securities Act and any
applicable state securities laws, the Company is not required to obtain any
consent, authorization or order of, or make any filing or registration with,
any court or governmental agency in order for it to execute, deliver or perform
any of its obligations under or contemplated by this Agreement or the
Registration Rights Agreement in accordance with the terms hereof or thereof. All
consents, authorizations, orders, filings and registrations which the Company
is required to obtain pursuant to the preceding sentence have been obtained or
effected on or prior to the date hereof. Except as contemplated by this
Agreement, the Company and its

 

8

 

subsidiaries are unaware of any facts or
circumstance, which might give rise to any of the foregoing.

 

(f)            SEC Documents: Financial
Statements. Since April 1, 2005, the Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it
with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”) (all of the foregoing filed prior to the date hereof or amended after
the date hereof and all exhibits included therein and financial statements and
schedules thereto and documents incorporated by reference therein, being
hereinafter referred to as the “SEC Documents”). The Company has
delivered to the Buyers or their representatives, or made available through the
SEC’s website at http://www.sec.gov., true and complete copies of the SEC
Documents. As of their respective dates, the financial statements of the
Company disclosed in the SEC Documents (the “Financial Statements”)
complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such Financial
Statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may exclude footnotes or may be condensed or
summary statements) and, fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). No other
information provided by or on behalf of the Company to the Buyer which is not
included in the SEC Documents, including, without limitation, information
referred to in this Agreement, contains any untrue statement of a material fact
or omits to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.

 

(g)           10(b)-5. The SEC Documents do
not include any untrue statements of material fact, nor do they omit to state
any material fact required to be stated therein necessary to make the
statements made, in light of the circumstances under which they were made, not
misleading.

 

(h)           Absence of Litigation. There
is no action, suit, proceeding, inquiry or investigation before or by any
court, public board, government agency, self-regulatory organization or body
known to be pending against or affecting the Company, the Common Stock or any
of the Company’s subsidiaries, wherein an unfavorable decision, ruling or
finding would (i) have a material adverse effect on the transactions
contemplated hereby (ii) adversely affect the validity or enforceability of, or
the authority or ability of the Company to perform its obligations under, this
Agreement or any of the documents contemplated herein, or (iii) have a material
adverse effect on the business, operations, properties, financial condition or
results of  operations of the Company and
its subsidiaries taken as a whole.

 

(i)            Acknowledgment Regarding Buyer’s
Purchase of the Convertible Debentures. The Company acknowledges and agrees
that the Buyer(s) is acting solely in the capacity of an arm’s length purchaser
with respect to this Agreement and the transactions contemplated hereby. The
Company further acknowledges that the Buyer(s) is not acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with respect
to this

 

9

 

Agreement and the transactions contemplated
hereby and any advice given by the Buyer(s) or any of their respective
representatives or agents in connection with this Agreement and the
transactions contemplated hereby is merely incidental to such Buyer’s purchase
of the Convertible Debentures or the Conversion Shares. The Company further
represents to the Buyer that the Company’s decision to enter into this
Agreement has been based solely on the independent evaluation by the Company
and its representatives.

 

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

 

(k)           No Integrated Offering. Neither
the Company, nor any of its affiliates, nor any person acting on its or their
behalf has, directly or indirectly, made any offers or sales of any security or
solicited any offers to buy any security, under circumstances that would
require registration of the Convertible Debentures or the Conversion Shares
under the Securities Act or cause this offering of the Convertible Debentures
or the Conversion Shares to be integrated with prior offerings by the Company
for purposes of the Securities Act where such integration would result in an
exemption not being available for the transactions contemplated herein.

 

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

 

(m)          Intellectual Property Rights. The
Company and its subsidiaries own or possess adequate rights or licenses to use
all trademarks, trade names, service marks, service mark registrations, service
names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and rights necessary to conduct
their respective businesses as now conducted except to the extent the Company
risks losing certain rights to intellectual property as a result of its
non-payment of an obligation arising under the Lucent Agreement. The Company
and its subsidiaries do not have any knowledge of any infringement by the
Company or its subsidiaries of trademark, trade name rights, patents, patent
rights, copyrights, inventions, licenses, service names, service marks, service
mark registrations, trade secret or other similar rights of others, and, to the
knowledge of the Company there is no claim, action or proceeding being made or
brought against, or to the Company’s knowledge, being threatened against, the
Company or its subsidiaries regarding trademark, trade name, patents, patent
rights, invention, copyright, license, service names, service marks, service
mark registrations, trade secret or other infringement; and the Company and its
subsidiaries are unaware of any facts or circumstances which might give rise to
any of the foregoing.

 

(n)           Environmental Laws. The
Company and its subsidiaries are (i) in compliance with any and all applicable
foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants (“Environmental Laws”),
(ii) have received all

 

10

 

permits, licenses or other approvals required
of them under applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and conditions of any
such permit, license or approval.

 

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

 

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

 

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

 

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

 

(s)           No Material Adverse Breaches, etc.
Neither the Company nor any of its subsidiaries is subject to any charter,
corporate or other legal restriction, or any judgment, decree, order, rule or
regulation which in the judgment of the Company’s officers has or is expected
in the future to have a material adverse effect on the business, properties,
operations, financial condition, results of operations or prospects of the
Company or its subsidiaries. Neither the Company nor any of its subsidiaries is
in breach of any contract or agreement which breach, in the judgment of the
Company’s officers, has or is expected to have a material adverse effect on the
business, properties, operations, financial condition, results of operations or
prospects of the Company or its subsidiaries.

 

(t)            Tax Status. The Company and
each of its subsidiaries has made and filed all federal and state income and
all other tax returns, reports and declarations required by any jurisdiction to
which it is subject and (unless and only to the extent that the Company and

 

11

 

each of its subsidiaries has set aside on its
books provisions reasonably adequate for the payment of all unpaid and
unreported taxes) has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and has set aside on its books provision reasonably adequate for the payment of
all taxes for periods subsequent to the periods to which such returns, reports
or declarations apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.

 

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

 

(v)           Fees and Rights of First Refusal.
The Company is not obligated to offer the securities offered hereunder on a
right of first refusal basis or otherwise to any third parties including, but
not limited to, current or former shareholders of the Company, underwriters,
brokers, agents or other third parties except in connection with the 2005 8%
Convertible Debentures and the Warrants issued to the purchasers of the 2005 8%
Convertible Debentures.

 

(w)          Shareholder Approval.        The Company has obtained and provided to
the Buyer’s irrevocable voting proxies from James E. Alexander, Boris
Rubizhevsky, Lindsay A. Gardner, and John Sakys 
in favor of the purposes described in Sections 4(l) and 4(m) hereof .

 

(x)            2005 8% Convertible Debentures.     The amounts due under the 2005 8%
Convertible Debentures is as outlined in the Disclosure Schedule attached
hereto. 

 

4.             COVENANTS.

 

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

 

(b)           Form D. The Company agrees to
file a Form D with respect to the Converrtible Debentures  as required under Regulation D and to provide
a copy thereof to each Buyer promptly after such filing. The Company shall, on
or before the Closing Date, take such action as the Company shall reasonably
determine is necessary to qualify the Convertible

 

12

 

Debentures , or obtain an exemption for the
Convertible Debentures  for sale to the
Buyers at the Closing pursuant to this Agreement under applicable securities or
“Blue Sky” laws of the states of the United States, and shall provide evidence
of any such action so taken to the Buyers on or prior to the Closing Date.

 

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

 

(d)           Use of Proceeds. The Company
will use the proceeds from the sale of the Convertible Debentures for general
corporate and working capital purposes as well payment as outlined on the
Disclosure Schedule attached hereto on the existing 8% Convertible Debentures .

 

(e)           Reservation of Shares. No
later than December 31, 2006, the Company shall take all action reasonably
necessary to at all times have authorized, and reserved for the purpose of
issuance, such number of shares of Common Stock as shall be necessary to effect
the issuance of the Conversion Shares. If at any time after December 31, 2006,
the Company does not have available such shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all of the Conversion
Shares, the Company shall call and hold a special meeting of the shareholders
within thirty (30) days of such occurrence, for the sole purpose of increasing
the number of shares authorized. The Company’s management shall recommend to
the shareholders to vote in favor of increasing the number of shares of Common
Stock authorized. Management shall also vote all of its shares in favor of
increasing the number of authorized shares of Common Stock. The Buyer
acknowledges that there is currently inadequate authorized capital to reserve
the full amount of shares required by this Agreement.

 

(f)            Listings or Quotation. The
Company shall promptly secure the listing or quotation of the Conversion Shares
upon each national securities exchange, automated quotation system or the
Over-The-Counter Bulletin Board (“OTCBB”) or other market, if any, upon
which shares of Common Stock are then listed or quoted (subject to official
notice of issuance) and shall use its best efforts to maintain, so long as any
other shares of Common Stock shall be so listed, such listing of all Conversion
Shares from time to time issuable under the terms of this Agreement. The
Company shall maintain the Common Stock’s authorization for quotation on the
Nasdaq Capital   Market.

 

(g)           Fees and Expenses.

 

(i)            Each of the Company and the Buyer(s)
shall pay all costs and expenses incurred by such party in connection with the
negotiation, investigation, preparation, execution and delivery of the
Transaction Documents. The Company shall pay

 

13

 

Yorkville Advisors LLC a fee of Eight Hundred
Eighty Thousand Dollars ($880,000) of which Five Hundred Fifty Thousand Dollars
($550,000) shall be paid directly from the proceeds of the First Closing, One
Hundred Sixty Five Thousand Dollars ($165,000) shall be paid directly from the
proceeds of the Second Closing and One Hundred Sixty Five Thousand Dollars
($165,000) shall be paid directly from the proceeds of the Third Closing.

 

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

 

(iii)          The Company has prior to the date
hereof paid  Yorkville Advisors, LLC a
non-refundable due diligence fee of Five Thousand Dollars ($5,000).

 

(iv)          Upon the execution of this Agreement
the Company shall pay to the Buyer(s) a fee of Eight Hundred Twenty Five
Thousand Dollars ($825,000) which shall be payable by the issuance to the
Buyer(s) of six hundred sixty thousand (660,000) restricted shares of the
Company’s Common Stock at a per share valuation of One Dollar and Twenty Five
Cents ($1.25) (the “Buyer’s Shares”).

 

(v)           Upon the execution of this Agreement
the Company shall issue to the Buyer warrants to purchase an aggregate of eight
million (8,000,000) shares of the Company’s Common Stock for a period of
three (3) years (the “Warrants”), of which a warrant to purchase  two million (2,000,000) shares of the Company’s
Common Stock shall have an exercise price of $1.25 per share, three million
(3,000,000) shares of the Company’s Common Stock shall have an exercise price
of $1.75 per share and a warrant to purchase 
three million (3,000,000) shares of the Company’s Common Stock shall
have an exercise price of $2.00 per share (the “Warrant”). The shares of
Common Stock issuable under the Warrants shall collectively be referred to as
the “Warrant Shares”.

 

(vi)          The Warrant Shares and the Buyer’s
Shares shall have “piggy-back” and a single demand registration rights
(although the demand registrations right shall not be deemed satisfied unless
the applicable registration statement becomes effective).

 

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

 

(i)            Transactions With Affiliates.
So long as any Convertible Debentures are outstanding, the Company shall not,
and shall cause each of its subsidiaries not to, enter into, amend,

14

 

modify or supplement, or permit any
subsidiary to enter into, amend, modify or supplement any agreement,
transaction, commitment, or arrangement with any of its or any subsidiary’s
officers, directors, person who were officers or directors at any time during
the previous two (2) years, stockholders who beneficially own five percent (5%)
or more of the Common Stock, or Affiliates (as defined below) or with any
individual related by blood, marriage, or adoption to any such individual or
with any entity in which any such entity or individual owns a five percent (5%)
or more beneficial interest (each a “Related Party”), except for (a)
customary employment arrangements and benefit programs on reasonable terms, (b)
any investment in an Affiliate of the Company, 
(c) any agreement, transaction, commitment, or arrangement on an arms-length
basis on terms no less favorable than terms which would have been obtainable
from a person other than such Related Party, (d) any agreement, transaction,
commitment, or arrangement which is approved by a majority of the disinterested
directors of the Company; for purposes hereof, any director who is also an
officer of the Company or any subsidiary of the Company shall not be a
disinterested director with respect to any such agreement, transaction,
commitment, or arrangement. “Affiliate” for purposes hereof means, with
respect to any person or entity, another person or entity that, directly or
indirectly, (i) has a ten percent (10%) or more equity interest in that person
or entity, (ii) has ten percent (10%) or more common ownership with that person
or entity, (iii) controls that person or entity, or (iv) shares common
control with that person or entity. “Control” or “controls” for
purposes hereof means that a person or entity has the power, direct or
indirect, to conduct or govern the policies of another person or entity.

 

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

 

(k)           No Short Sales or Hedging
Transactions. Neither the Buyer(s) nor any of its affiliates have an open
short position in the Common Stock of the Company, and the Buyer(s) agrees that
it shall not, and that it will cause its affiliates not to, engage in any short
sales of or hedging transactions with respect to the Common Stock as long as
any Convertible Debentures shall remain outstanding.

 

(l)            Shareholder Approval. The
Company shall obtain shareholder approval no later than October 31, 2006
(without the vote of any shares acquired in this transaction and related
transactions) for the issuance of a maximum 57,924,215 shares as Conversion
Shares (being 64,000,000 maximum shares to be issued less 6,075,785 Conversion
Shares,
which will registered in the Initial Registration Statement, as defined in the
Investor’s Registration Rights Agreement,
within the 19.99% requirement),
(ii) shares issuable in payment of interest on the Debentures; (iii) shares
issuable as liquidated damages pursuant to the Investor Registration Rights
Agreement; and (iv) the Warrant Shares (the “Total Transaction Shares”). 
For the purposes of the shareholder approval requirement, the term “Total
Transaction Shares” does not include 6,075,785 Conversion Shares, the Buyers
Shares, and the shares of the Company’s Common Stock issuable upon exercise of
the 2,000,000 warrants with an exercise price of $1.25.

 

15

 

(m)  Increase of Authorized Shares.  The Company shall increase its authorized
Shares of Common Stock to at least one hundred seventy five million
(175,000,000) shares of Common Stock by a vote of its shareholders no later
than October 31, 2006 and the filing of preliminary and definitive Schedule 14A
to be followed by the appropriate filings with the California Secretary of
State  and which shall be effective as
soon thereafter as possible, but no later than December 31, 2006.

 

(n) Amendment
of Registration Statement. Within thirty (30) calendar days of obtaining
Shareholder Approval outlined in Section (n) above and increasing its
authorized Shares of Common Stock as outlined in Section (m) above the Company
but in no event later than November 30, 2006 
file an amended Registration Statement to increase the number of shares
registered to the Total Transaction Shares. The Company shall use its best
efforts to have such amended registration statement declared effective within
forty five (45)  calendar days of its
filing but in no event later than January 15, 2007.

 

5.             TRANSFER AGENT INSTRUCTIONS.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

16

 

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

 

(ii)           The Common Stock shall be authorized
for quotation on the Nasdaq Capital Markets, trading in the Common Stock shall
not have been suspended for any reason, the Company shall have made all filings
necessary for the Conversion Shares with the Nasdaq Capital Markets, subject to
the understanding that, until the Company obtains shareholder approval as
contemplated in Section 4(m), the Company has insufficient authorized shares.

 

(iii)          The representations and warranties of
the Company shall be true and correct in all material respects (except to the
extent that any of such representations and warranties is already qualified as
to materiality in Section 3 above, in which case, such representations and
warranties shall be true and correct without further qualification) as of the
date when made and as of the First Closing Date as though made at that time
(except for representations and warranties that speak as of a specific date)
and the Company shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Company at or
prior to the First Closing Date. If requested by the Buyer, the Buyer shall
have received a certificate, executed by the President of the Company, dated as
of the First Closing Date, to the foregoing effect and as to such other matters
as may be reasonably requested by the Buyer including, without limitation an
update as of the First Closing Date regarding the representation contained in
Section 3(c) above.

 

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

 

(v)           The Buyer(s) shall have received an
opinion of counsel from Burns, Figa & Will, P.C. in the form of Schedule
7(a)(v).

 

(vi)          The Company shall have provided to the
Buyer(s) a certificate of good standing from the secretary of state from the
state in which the company is incorporated.

 

(vii)         The Company shall have authorized the
Buyer, as provided for in Schedule 7(a)(vii) to file a form UCC-1 or such other
forms as may be required to perfect the Buyer’s interest in the Pledged
Property as detailed in the Security Agreement dated the date hereof and
provided proof of such filing to the Buyer(s).

 

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

 

(ix)           The Company shall have reserved out
of its authorized and unissued Common Stock, solely for the purpose of
effecting the conversion of the Convertible Debentures, shares of Common Stock
to effect the conversion of all of the

 

17

 

Conversion Shares then outstanding to the
extent that the Company has authorized shares 
remaining available for reservation in which case the Obligor shall be
obligated to increase its authorized shares pursuant to Section 4 (e) herein.

 

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

 

(xi)          The Company
has obtained and provided to the Buyers 
irrevocable voting proxies from James E. Alexander, Boris Rubizhevsky,
Lindsay A. Gardner, and John Sakys voting in favor of registering and being
able to issue the Total Transaction Shares as contemplated under this
transaction.

 

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

 

(i)            The Common Stock shall be authorized
for quotation on the Nasdaq Capital Market, trading in the Common Stock shall
not have been suspended for any reason, and all the Conversion Shares issuable
upon the conversion of the Convertible Debentures shall be approved by the
Nasdaq Capital Markets, subject to the understanding that, until the Company
obtains shareholder approval as contemplated in Section 4(m), the Company has
insufficient authorized shares.

 

(ii)           The representations and warranties of
the Company shall be true and correct in all material respects (except to the
extent that any of such representations and warranties is already qualified as
to materiality in Section 3 above, in which case, such representations and
warranties shall be true and correct without further qualification) as of the
date when made and as of the Second Closing Date as though made at that time
(except for representations and warranties that speak as of a specific date)
and the Company shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Company at or
prior to the Second Closing Date. If requested by the Buyer, the Buyer shall
have received a certificate, executed by two officers of the Company, dated as
of the Second Closing Date, to the foregoing effect and as to such other
matters as may be reasonably requested by the Buyer including, without
limitation an update as of the Second Closing Date regarding the representation
contained in Section 3(c) above.

 

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

 

(iv)          The Company shall have certified that
all conditions to the Second Closing have been satisfied and that the Company
will file the Registration Statement with the SEC in compliance with the rules
and regulations promulgated by the SEC for filing thereof two (2) Trading Days
after the Second Closing. If requested by the Buyer, the Buyer

 

18

 

shall have received a certificate, executed
by the two officers of the Company, dated as of the Second Closing Date, to the
foregoing effect.

 

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

 

(i)            The Common Stock shall be authorized
for quotation on the Nasdaq Capital Markets, trading in the Common Stock shall
not have been suspended for any reason, and all the Conversion Shares issuable
upon the conversion of the Convertible Debentures shall be approved by the
Nasdaq Capital Markets, subject to the understanding that, until the Company
obtains shareholder approval as contemplated in Section 4(m), the Company has
insufficient authorized shares.

 

(ii)           The representations and warranties of
the Company shall be true and correct in all material respects (except to the
extent that any of such representations and warranties is already qualified as
to materiality in Section 3 above, in which case, such representations and
warranties shall be true and correct without further qualification) as of the
date when made and as of the Third Closing Date as though made at that time
(except for representations and warranties that speak as of a specific date)
and the Company shall have performed, satisfied and complied in all material
respects with the covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Company at or
prior to the Third Closing Date. If requested by the Buyer, the Buyer shall
have received a certificate, executed by two officers of the Company, dated as
of the Third Closing Date, to the foregoing effect and as to such other matters
as may be reasonably requested by the Buyer including, without limitation an
update as of the Third Closing Date regarding the representation contained in
Section 3(c) above.

 

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

 

(iv)          The Company shall have certified that
all conditions to the Third Closing have been satisfied and that the Company
Registration Statement shall be declared effective by the SEC, in compliance
with the rules and regulations promulgated by the SEC, within two(2) Trading
Days after the Third Closing. If requested by the Buyer, the Buyer shall have
received a certificate, executed by the two officers of the Company, dated as
of the Third  Closing Date, to the
foregoing effect.

 

8.             INDEMNIFICATION.

 

(a)           In consideration of the Buyer’s
execution and delivery of this Agreement and acquiring the Convertible
Debentures and the Conversion Shares hereunder, and in addition to all of the
Company’s other obligations under this Agreement, the Company shall defend,
protect, indemnify and hold harmless the Buyer(s) and each other holder of the
Convertible Debentures and the Conversion Shares, and all of their officers,
directors, employees and agents (including, without limitation, those
retained in connection with the transactions

 

19

 

contemplated by this Agreement)
(collectively, the “Buyer Indemnitees”) from and against any and all
actions, causes of action, suits, claims, losses, costs, penalties, fees,
liabilities and damages, and expenses in connection therewith (irrespective of
whether any such Buyer Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys’ fees
and disbursements (the “Indemnified Liabilities”), incurred by the Buyer
Indemnitees or any of them as a result of, or arising out of, or relating to
(a) any misrepresentation or breach of any representation or warranty made by
the Company in this Agreement, the Convertible Debentures or the Investor
Registration Rights Agreement or any other certificate, instrument or document
contemplated hereby or thereby, (b) any breach of any covenant, agreement or
obligation of the Company contained in this Agreement, or the Investor
Registration Rights Agreement or any other certificate, instrument or document
contemplated hereby or thereby, or (c) any cause of action, suit or claim brought
or made against such Indemnitee and arising out of or resulting from the
execution, delivery, performance or enforcement of this Agreement or any other
instrument, document or agreement executed pursuant hereto by any of the
parties hereto, any transaction financed or to be financed in whole or in part,
directly or indirectly, with the proceeds of the issuance of the Convertible
Debentures or the status of the Buyer or holder of the Convertible
Debentures  the Conversion Shares,  as a Buyer of Convertible Debentures in the
Company. To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution
to the payment and satisfaction of each of the Indemnified Liabilities, which
is permissible under applicable law.

 

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

 

9.             GOVERNING LAW: MISCELLANEOUS.

 

(a)           Governing Law. This Agreement
shall be governed by and interpreted in accordance with the laws of the State
of New Jersey without regard to the principles of conflict of laws. The parties
further agree that any action between them shall be

 

20

 

heard in the United States District Court for
the District of New Jersey sitting in Newark, New Jersey for the adjudication
of any civil action asserted pursuant to this Paragraph.

 

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

 

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

 

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

 

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

 

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

 

21

 

	
  If to the Company, to:

  	
   

  	
  Isonics Corporation

  
	
   

  	
   

  	
  5906 McIntyre Street

  
	
   

  	
   

  	
  Golden, CO 80403

  
	
   

  	
   

  	
  Attention:

  	
  James E. Alexander

  
	
   

  	
   

  	
  Telephone:

  	
  (303) 279-7900

  
	
   

  	
   

  	
  Facsimile:

  	
  (303) 279-7300

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  Burns, Figa & Will, P.C.

  
	
   

  	
   

  	
  6400 South Fiddler’s Green Circle – Suite 1000

  
	
   

  	
   

  	
  Greenwood Village, CO 80111

  
	
   

  	
   

  	
  Attention:

  	
  Herrick K. Lidstone, Jr., Esq.

  
	
   

  	
   

  	
  Telephone:

  	
  (303) 796-2626

  
	
   

  	
   

  	
  Facsimile:

  	
  (303) 796-2777

  

 

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

 

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

 

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

 

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

 

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

 

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

 

22

 

consummation of the transactions contemplated
hereby. Without limitation of the foregoing, the Buyer(s) will timely file any
reports required under Sections 13(d) or 16(a) of the Securities Exchange Act
of 1934.

 

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

 

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

 

[REMAINDER PAGE INTENTIONALLY LEFT BLANK]

 

23

 

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.

 

 

	
   

  	
  COMPANY:

  
	
   

  	
  ISONICS CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   James E. Alexander

  
	
   

  	
  Title:

  	
  President and Chief Executive Officer

  
					

 

24

 

SCHEDULE I

 

SCHEDULE OF
BUYERS 

 

	
  Name

  	
   

  	
  Signature

  	
   

  	
  Address/Facsimile

  Number of Buyer

  	
   

  	
  Amount
  of

  Subscription

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cornell
  Capital Partners, LP.

  	
   

  	
  By:

  	
  Yorkville
  Advisors, LLC

  	
   

  	
  101
  Hudson Street – Suite 3700

  	
   

  	
  $

  	
  16,000,000

  
	
   

  	
   

  	
  Its:

  	
  General
  Partner

  	
   

  	
  Jersey
  City, NJ 07303

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Facsimile:       (201)
  985-8266

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Mark
  Angelo

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Its:

  	
  Portfolio
  Manager

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  With
  a copy to:

  	
   

  	
  David
  Gonzalez, Esq.

  	
   

  	
  101
  Hudson Street – Suite 3700

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Jersey
  City, NJ 07302

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Facsimile:       (201)
  985-8266

  	
   

  	
   

  
										

 

 

DISCLOSURE SCHEDULE

 

2Exhibit 10.2

 

INVESTOR
REGISTRATION RIGHTS AGREEMENT

 

THIS
REGISTRATION RIGHTS AGREEMENT (this “Agreement”),
dated as of May 30, 2006, by and among ISONICS
CORPORATION, a California corporation (the “Company”),
and the undersigned investors listed on Schedule I attached
hereto (each, an “Investor” and collectively, the “Investors”).

 

WHEREAS:

 

A.                                   In
connection with the Securities Purchase Agreement by and among the parties
hereto of even date herewith (the “Securities
Purchase Agreement”), the Company has agreed, upon the terms and subject to
the conditions of the Securities Purchase Agreement, to issue and sell to the
Investors secured convertible debentures (the “Convertible Debentures”)
which shall be convertible into that number of shares of the Company’s common
stock, no par value per share (the “Common Stock”), pursuant to the
terms of the Securities Purchase 
Agreement for an aggregate purchase price of up to Sixteen Million
Dollars ($16,000,000). Capitalized terms not defined herein shall have the
meaning ascribed to them in the Securities Purchase Agreement.

 

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

 

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

 

1.                                       DEFINITIONS.

 

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

 

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

 

(b)                                 “Register,”
“registered,” and “registration” refer to a registration effected
by preparing and filing one or more Registration Statements (as defined below)
in compliance with the Securities Act and pursuant to Rule 415 under the
Securities Act or any successor rule providing for offering securities on
a continuous or delayed basis (“Rule 415”), and the declaration or
ordering of effectiveness of such Registration Statement(s) by the United
States Securities and Exchange Commission (the “SEC”).

 

(c)                                  “Registrable
Securities” means the shares of Common Stock issuable to the Investors upon
conversion of the Convertible Debentures pursuant to the Securities Purchase
Agreement the Buyer’s Shares, as this term is defined in the Securities
Purchase Agreement, and the Warrant Shares, as this term is defined in the
Securities Purchase Agreement.

 

 

(d)                                 “Registration
Statement” means a registration statement, including but not limited to the
Initial Registration Statement, the Amended Registration Statement or New
Registration Statement, and any subsequent Registration Statement under the
Securities Act which covers the Registrable Securities.

 

2.                                       REGISTRATION.

 

(a)                                  (i) Subject
to the terms and conditions of this Agreement, the Company shall prepare and
file, no later than August 7, 2006 (the “Scheduled Filing Deadline”),
with the SEC a registration statement on Form S-1 or SB-2 (or, if the
Company is then eligible, on Form S-3) under the Securities Act (the “Initial
Registration Statement”) for the resale by the Investors of the Registrable
Securities, which includes a total of 8,735,785 shares of the Company’s Common
Stock (this number is equivalent to 19.99% of the outstanding shares of the
Company’s Common Stock),  including
6,075,785shares of the Company’s Common Stock to be issued upon conversion of
the Convertible Debentures, 660,000 Buyer’s Shares and 2,000,000 Warrant Shares
to be issued under the Warrants with the $1.25 exercise price. The Company
shall cause the Registration Statement to remain effective until the earlier of
i) all of the Registrable Securities have been sold or such Registrable
Securities being eligible for sale under Rule 144(k). Prior to the filing
of the Registration Statement with the SEC, the Company shall furnish a copy of
the Initial Registration Statement to the Investors for their review and
comment. Prior to the filing of the Registration Statement the Investors shall
furnish to the Company a completed and executed Selling Shareholder Notice and
Questionnaire in the form attached hereto. The Investors shall furnish
comments on the Initial Registration Statement to the Company within
twenty-four (24) hours of the receipt thereof from the Company.

 

(b)                                 Effectiveness
of the Initial Registration Statement. The Company shall use its best
efforts (i) to have the Initial Registration Statement declared effective
by the SEC no later than one hundred twenty (120) days from the date hereof
(the “Scheduled Effective Deadline”), (ii) to have the Amended
Registration Statement declared effective by the SEC no later than forty five
(45) days from the date filed (the “Amended Scheduled Effective Deadline”)
and (iii) to insure that the Initial Registration Statement, the Amended
Registration Statement and any subsequent Registration Statement remains in
effect until all of the Registrable Securities have been sold, subject to the
terms and conditions of this Agreement.

 

(c)                                  Failure
to File or Obtain Effectiveness of the Registration Statement. In the event
the Initial or Amended Registration Statement is not filed by the Scheduled
Filing Deadline or the Amended Filing Deadline or is not declared effective by
the SEC on or before the Scheduled Effective Date or the Amended Scheduled
Effective Deadline, or if after the Registration Statement has been declared
effective by the SEC, sales cannot be made pursuant to the Registration
Statement (whether because of a failure to keep the Registration Statement
effective, failure to disclose such information as is necessary for sales to be
made pursuant to the Registration Statement, failure to register sufficient shares
of Common Stock or otherwise) then as partial relief for the damages to any
holder of Registrable Securities by reason of any such delay in or reduction of
its ability to sell the underlying shares of Common Stock (which remedy shall
not be exclusive of any other remedies at law or in equity), the Company will
pay as liquidated damages (the “Liquidated Damages”) to the holder, at
the Company’s option, either a cash amount or shares of the Company’s Common
Stock within three (3) business days, after

 

2

 

demand
therefore, equal to one percent (1%) of the liquidated value of the Convertible
Debentures outstanding as Liquidated Damages for each thirty (30) day period
after the Scheduled Filing Deadline, Amended 
Scheduled Filing Deadline or the Scheduled Effective Date, Amended
Scheduled Effective Date as the case may be. The Liquidated Damages will
be pro rated for each day, and in no case will the Company be obligated to pay
Liquidated Damages for more than a total of 365 calendar days.

 

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

 

3.                                       RELATED
OBLIGATIONS.

 

(a)                                  The
Company shall no later than October 31, 2006 obtain shareholder approval
to issue in excess of 19.99% of the outstanding shares of the Company’s Common
Stock upon conversion of the Convertible Debentures, issuance of shares of the
Company’s Common Stock for payment for outstanding and accrued interest,
issuance of shares of the Company’s Common Stock for payment of Liquidated Damages,  exercise of the Warrant Shares, issuance of
the Buyer’s Shares (as defined in the Securities Purchase Agreement) and
increase its authorized shares of Common Stock to at least one hundred seventy
five million (175,000,000) shares of Common Stock.

 

(b)                                 Within
thirty (30) calendar days of obtaining shareholder approval to issue in excess
of 19.99% of the outstanding shares of the Company’s Common Stock, as outlined
above, and increasing its authorized shares of Common Stock to at least one
hundred seventy five million (175,000,000) shares of Common Stock but no in no
event later than November 30, 2006, the Company shall file an amended
Registration Statement or a new Registration Statement increasing the number of
Registrable Securities to an amount equal to three (3) times the number of
shares of the Company’s Common Stock to be issued upon conversion of the
Convertible Debentures then unconverted or unpaid (calculated based on dividing
the result of a twenty percent (20%) discount of the average of the two (2) daily
lowest VWAP’s for the five (5) consecutive Trading Days prior to the date
the Amended Registration Statement is filed into the principal amount of the
then unconverted Convertible Debenture multiplied by three (3)), (but no more
than 64,000,000 shares of Common Stock) and 6,000,000 Warrant Shares to be
issued under the Warrants with the exercise price of $1.75 and $2.00 (either
the Amended Registration Statement or the new Registration Statement shall be
referred to as the “Amended Registration Statement”). The Company shall
use its best efforts (i) to have the Amended Registration Statement
declared effective by the SEC no later than forty five (45) calendar from

 

3

 

the date filed
but in no event later than January 15, 2007 (the “Amended  Scheduled
Effective Deadline”) and (ii) to insure that the Amended Registration
Statement and any subsequent Registration Statement remains in effect until all
of the Registrable Securities have been sold, subject to the terms and
conditions of this Agreement.

 

(c)                                  In
the event that all of the Registrable Securities registered pursuant to the
Amended Registration Statement are issued to the Investor and there remains
principal amounts and accrued interest due and outstanding pursuant to the
Convertible Debentures the Company shall within thirty (30) calendar days of
such event file a subsequent Registration Statement registering the sum of the
number of Registrable Securities to be issued upon conversion of the principal
amounts due and outstanding pursuant to the Convertible Debentures registered
to date subtracted from 64,000,000 shares. The Company shall use its best
efforts to have such subsequent Registration Statement declared effective by
the SEC no later than forty five (45) calendar from the date filed.

 

(d)                                 The
Company shall keep the Registration Statement effective pursuant to Rule 415
at all times until the date on which the Investor shall have sold all the
Registrable Securities covered by such Registration Statement or such
Registrable Securities being eligible for sale under Rule 144(k) (the “Registration
Period”), which Registration Statement (including any amendments or
supplements thereto and prospectuses contained therein) shall not contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein, or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading.

 

(e)                                  The
Company shall prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to a Registration Statement and the
prospectus used in connection with such Registration Statement, which
prospectus is to be filed pursuant to Rule 424 promulgated under the Securities
Act, as may be necessary to keep such Registration Statement effective at
all times during the Registration Period, and, during such period, comply with
the provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Company covered by such Registration Statement
until such time as all of such Registrable Securities shall have been disposed
of in accordance with the intended methods of disposition by the seller or
sellers thereof as set forth in such Registration Statement. In the case of
amendments and supplements to a Registration Statement which are required to be
filed pursuant to this Agreement (including pursuant to this Section 3(b))
by reason of the Company’s filing a report on Form 10-KSB, Form 10-QSB
or Form 8-K or any analogous report under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), the Company shall incorporate
such report by reference into the Registration Statement, if applicable, or
shall file such amendments or supplements with the SEC on the same day on which
the Exchange Act report is filed which created the requirement for the Company
to amend or supplement the Registration Statement.

 

(f)                                    The
Company shall ensure that the Registration Statement and the final prospectus
included therein are available to the holders of Registrable Securities on the
EDGAR website maintained by the Securities and Exchange Commission. The Company
shall provide the Investors such other documents as such Investor may reasonably
request from time to time in order to facilitate the disposition of the
Registrable Securities owned by such Investor.

 

4

 

(g)                                 The
Company shall use its best efforts to (i) register and qualify the
Registrable Securities covered by a Registration Statement under such other
securities or “blue sky” laws of such jurisdictions in the United States as any
Investor reasonably requests, (ii) prepare and file in those
jurisdictions, such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary
to maintain the effectiveness thereof during the Registration Period, (iii) take
such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and (iv) take
all other actions reasonably necessary or advisable to qualify the Registrable
Securities for sale in such jurisdictions; provided, however, that the Company
shall not be required in connection therewith or as a condition thereto to (w)
make any change to its articles of incorporation or by-laws, (x) qualify to do
business in any jurisdiction where it would not otherwise be required to
qualify but for this Section 3(d), (y) subject itself to general taxation
in any such jurisdiction, or (z) file a general consent to service of process
in any such jurisdiction. The Company shall promptly notify each Investor who
holds Registrable Securities of the receipt by the Company of any notification
with respect to the suspension of the registration or qualification of any of
the Registrable Securities for sale under the securities or “blue sky” laws of
any jurisdiction in the United States or its receipt of actual notice of the
initiation or threat of any proceeding for such purpose.

 

(h)                                 As
promptly as practicable after becoming aware of such event or development, the
Company shall notify each Investor in writing of the happening of any event as
a result of which the prospectus included in a Registration Statement, as then
in effect, includes an untrue statement of a material fact or omission to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made, not
misleading (provided that in no event shall such notice contain any material,
nonpublic information), and promptly prepare a supplement or amendment to such
Registration Statement to correct such untrue statement or omission, and ensure
that such supplement or amendment is filed with the Securities and Exchange
Commission pursuant to Rule 424(b) to each Investor. The Company
shall also promptly notify each Investor in writing (i) when a prospectus
or any prospectus supplement or post-effective amendment has been filed, and
when a Registration Statement or any post-effective amendment has become
effective (notification of such effectiveness shall be delivered to each
Investor by facsimile on the same day of such effectiveness), (ii) of any
request by the SEC for amendments or supplements to a Registration Statement or
related prospectus or related information, and (iii) of the Company’s
reasonable determination that a post-effective amendment to a Registration
Statement would be appropriate.

 

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

 

5

 

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

 

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

 

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

 

(m)                               The
Company shall cooperate with the Investors who hold Registrable Securities
being offered and, to the extent applicable, to facilitate the timely
preparation and delivery of certificates (not bearing any restrictive legend)
representing the Registrable Securities to be offered pursuant to a
Registration Statement and enable such certificates to be in such

 

6

 

denominations
or amounts, as the case may be, as the Investors may reasonably
request and registered in such names as the Investors may request.

 

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

 

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

 

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

 

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

 

4.                                       OBLIGATIONS
OF THE INVESTORS.

 

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

 

5.                                       EXPENSES
OF REGISTRATION.

 

All expenses
incurred in connection with registrations, filings or qualifications pursuant
to Sections 2 and 3, including, without limitation, all registration, listing
and qualifications fees, printers, legal and accounting fees shall be paid by
the Company. The Company’s obligation to bear expenses described in this Section 5
does not include any expenses that any Investor may incur in connection
with any inspection contemplated in Section 3(i), any legal, accounting or
other advisors retained by the Investors (or any of them) to assist the
Investor in the registration process, or any sales commissions, fees, or any
other charge or expense incurred by the Investor.

 

7

 

6.                                       INDEMNIFICATION.

 

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

 

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

 

(b)                                 In
connection with a Registration Statement, each Investor agrees to severally and
not jointly indemnify, hold harmless and defend, to the same extent and in the

 

8

 

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

 

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

 

9

 

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

 

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

 

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

 

7.                                       CONTRIBUTION.

 

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

 

8.                                       REPORTS
UNDER THE EXCHANGE ACT.

 

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

 

10

 

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

 

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

 

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

 

9.                                       AMENDMENT
OF REGISTRATION RIGHTS.

 

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

 

10.                                 MISCELLANEOUS.

 

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

 

(b)                                 Any
notices, consents, waivers or other communications required or permitted to be
given under the terms of this Agreement must be in writing and will be deemed
to have been delivered:  (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by
facsimile (provided confirmation of transmission is mechanically or
electronically generated and kept on file by the sending party); or (iii) one
(1) business day after deposit with a nationally recognized overnight
delivery service, in each case properly addressed to the party to receive the
same. The addresses and facsimile numbers for such communications shall be:

 

11

 

	
  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 Copy to:

  	
   

  	
  Burns, Figa & Will, P.C.

  
	
   

  	
   

  	
  6400 South Fiddler’s Green Circle – Suite 1000

  
	
   

  	
   

  	
  Greenwood Village, CO 80111

  
	
   

  	
   

  	
  Attention:

  	
  Herrick K. Lidstone, Jr., Esq.

  
	
   

  	
   

  	
  Telephone:

  	
  (303) 796-2626

  
	
   

  	
   

  	
  Facsimile:

  	
  (303) 796-2777

  

 

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

 

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

 

(d)                                 The
laws of the State of New Jersey shall govern all issues concerning the relative
rights of the Company and the Investors as its stockholders. All other
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of New
Jersey, without giving effect to any choice of law or conflict of law provision
or rule (whether of the State of New Jersey or any other jurisdiction)
that would cause the application of the laws of any jurisdiction other than the
State of New Jersey. Each party hereby irrevocably submits to the non-exclusive
jurisdiction of the federal courts for the District of New Jersey sitting
Newark, New Jersey, for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding
is improper. Each party hereby irrevocably waives personal service of process
and consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it
under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any

 

12

 

manner
permitted by law. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of the remainder of this Agreement in
that jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY
RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION
OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS
AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

(e)                                  This
Agreement, the Irrevocable Transfer Agent Instructions, the Securities Purchase
Agreement and related documents including the Convertible Debenture and the
Security Agreements dated the date hereof (the “Security Agreements”)
constitute the entire agreement among the parties hereto with respect to the
subject matter hereof and thereof. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
and therein. This Agreement, the Irrevocable Transfer Agent Instructions, the
Securities Purchase Agreement and related documents including the Convertible
Debenture, and the Security Agreement supersede all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof and thereof.

 

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

 

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

 

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

 

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

 

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

 

(j)                                     This
Agreement is intended for the benefit of the parties hereto and their
respective permitted successors and assigns, and is not for the benefit of, nor
may any provision hereof be enforced by, any other Person.

 

[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]

 

13

 

IN
WITNESS WHEREOF, the parties have caused this Investor
Registration Rights Agreement to be duly executed as of day and year first
above written.

 

	
   

  	
   

  	
  COMPANY:

  
	
   

  	
   

  	
  ISONICS CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   James E. Alexander

  
	
   

  	
   

  	
  Title:

  	
  President and Chief Executive Officer

  
						

 

14

 

SCHEDULE I

 

SCHEDULE OF INVESTORS

 

	
  Name

  	
   

  	
  Signature

  	
   

  	
  Address/Facsimile

  Number of Investors

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cornell Capital Partners, LP

  	
   

  	
  By:

  	
  Yorkville Advisors, LLC

  	
   

  	
  101 Hudson Street – Suite 3700

  
	
   

  	
   

  	
  Its:

  	
  General Partner

  	
   

  	
  Jersey City, NJ 07303

  
	
   

  	
   

  	
   

  	
   

  	
  Facsimile:       (201) 985-8266

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Mark Angelo

  	
   

  	
   

  
	
   

  	
   

  	
  Its:

  	
  Portfolio Manager

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  David Gonzalez, Esq.

  	
   

  	
  101 Hudson Street – Suite 3700

  
	
   

  	
   

  	
   

  	
   

  	
  Jersey City, NJ 07302

  
	
   

  	
   

  	
   

  	
   

  	
  Facsimile:       (201) 985-8266

  
							

 

 

EXHIBIT A

 

FORM OF NOTICE OF EFFECTIVENESS

OF REGISTRATION STATEMENT

 

Attention:

 

Re:                               ISONICS CORPORATION

 

Ladies and Gentlemen:

 

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

 

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

 

	
   

  	
   

  	
  Very truly yours,

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  [Law Firm]

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  

 

cc:                                 [LIST NAMES OF INVESTORS]

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