Document:

Exhibit 10.6

Date of Original
Issuance:  April 10, 2007

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

	
  No. CCP-2007 -1

  	
   

  	
  $2,000,000

  

 

ISONICS CORPORATION

Secured Convertible Debenture

Due: May 30, 2009

This Secured Convertible
Debenture (the “Debenture”) is issued by ISONICS
CORPORATION,  a
California corporation (the “Obligor”), to CORNELL
CAPITAL PARTNERS, LP (the “Holder”), pursuant to that certain
Securities Purchase Agreement (the “Securities Purchase Agreement”)
dated April 10, 2007.

FOR
VALUE RECEIVED, the Obligor hereby promises to pay to the
Holder or its successors and assigns the principal sum of  Two Million Dollars ($2,000,000)
together with accrued but unpaid interest on or before May 31, 2009 (the “Maturity
Date”) in accordance with the following terms:

Interest.  Interest shall accrue on the outstanding
principal balance hereof at an annual rate equal to thirteen  percent (13%).  Interest shall be calculated on the basis of
a 360-day year and the actual number of days elapsed, to the extent permitted
by applicable law.  Interest hereunder
will be paid to the Holder or its assignee 
(as defined in Section 5)
in whose name this Debenture is registered on the records of the Obligor
regarding registration and transfers of Debentures (the “Debenture Register”).

Interest  Payments.  The Obligor at its option shall make payment
of all outstanding and accrued interest at the Maturity Date (“Scheduled
Payment”) in shares of the Obligor’s Common Stock or cash; provided,
however, payment of the interest amount in shares of the Obligor’s Common Stock
can only be made if the Obligor’s shareholders have approved the transaction as
contemplated in Section 4(l) of the Securities Purchase Agreement.  If such Schedule Payment is made in Common
Stock, such number of shares of the Company’s Common Stock due as

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payment shall be calculated based on the amount of
interest due divided by eighty eight percent (88%) of the average VWAP of the
Company’s Common Stock for the five (5) Trading Days immediately preceding the
date the Maturity Date.

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

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

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

Security Agreements.  The Debenture
is secured by (i) a security interest in all of the assets of the Company
pursuant to the Security Agreement dated May 30, 2006 (the “Security
Agreement”) and the UCC-1 No.: 06-7072646008 filed with California
Secretary of State, (ii) a interest in all of the assets of Isonics
Vancouver, Inc., a subsidiary of the Company,
pursuant to the Security Agreement dated May 30, 2006 (a “Subsidiary
Security Agreement”) and the UCC-1 No.: 2006-156-5634-4 filed with the
Washington State Department of Licensing, (iii) a interest in all of the assets
of Isonics Homeland Security and Defense Corporation, a subsidiary of
the Company, pursuant to the Security Agreement
dated May 30, 2006 (a “Subsidiary Security Agreement”) and the UCC-1
No.: 6187870 1 filed with the Delaware Department of State U.C.C. Filing
Section, (iv) a interest in all of the assets of Protection Plus
Security Corporation, a subsidiary of the Company, pursuant to the Security Agreement dated May 30, 2006 (a “Subsidiary
Security Agreement”) and the UCC-1 No.: 200606020464949 filed the State of
New York Department of State Uniform Commercial Code Division and (v) the
Pledge and Escrow  Agreement dated the
dated hereof by and between the Obligor and the Holder (a “Pledge and Escrow
Agreement”) (the “Security Agreement” together with the Subsidiary
Security Agreements and the Pledge and Escrow Agreement are collectively
the referred to as the “Security Documents”).

Consent  of Holder to Sell Capital Stock or Grant
Security Interests.  So long as any of the principal amount on this
Debenture remains unpaid and unconverted and except for Excluded Securities,
the Obligor shall not, without the prior consent of the Holder, (i) issue
or sell any shares of Common Stock without consideration or for consideration
per share less than the VWAP of the Common Stock on the Trading Day immediately
prior to its issuance, (ii) issue or sell any warrant, option, right,
contract, call, or other security or instrument granting the holder

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thereof the right to acquire
Common Stock without consideration or for consideration per share less than the
Closing Bid Price  of the Common Stock on
the date of issuance , (iii) issue or sell any shares of preferred stock
without consideration or for consideration per share less than the VWAP of the
Common Stock on the Trading Day immediately prior to its issuance  (iv) enter into any security instrument
granting the holder a security interest in any of the assets of the Obligor,
other than security interests in connection with capital lease financing, in
cases where the security interest is in the nature of a purchase money security
interest, or for funds used for acquisitions by the Obligor or any subsidiary
of a business that has positive earnings before 
interest, taxes, depreciation, and amortization expenses or to refinance
of the purchase money security interest in such event the Holder shall take a
second security position, provided however in the event that a security
interest is not given in connection with acquisitions by the Obligor or any
subsidiary of a business that has positive earnings before  interest, taxes, depreciation, and
amortization expenses  it is understood
that the Holder shall be given a first security interest or (v) file any registration statements
on Form S-8 (except related to the 2007 Restructuring and Directors Stock
Option Plans).

This
Debenture is subject to the following additional provisions:

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

Section 2.              Events of Default.

(a)           An “Event of Default”,
wherever used herein, means any one of the following events (whatever the
reason and whether it shall be voluntary or involuntary or effected by
operation of law or pursuant to any judgment, decree or order of any court, or
any order, rule or regulation of any administrative or governmental body).  An Event of Default shall only be deemed to
exist after any applicable cure or grace period has expired:

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

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

(iii)          The
Obligor or any subsidiary of the Obligor shall commence, or there shall be
commenced against the Obligor or any subsidiary of the Obligor under any
applicable bankruptcy or insolvency laws as now or hereafter in effect or any
successor thereto, or the Obligor or any subsidiary of the Obligor commences
any other proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the

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

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

(v)           The
Common Stock shall cease to be quoted for trading or listing for trading on either
the OTC Bulletin Board (“OTCBB”), Nasdaq Global  Market, New York Stock Exchange, American
Stock Exchange or the Nasdaq National Market (each, a “Subsequent Market”)
and shall not again be quoted or listed for trading thereon within five (5)
Trading Days of such delisting;

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

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

(viii)        The
Obligor or the Obligor’s transfer agent, as the case maybe, shall fail for any
reason to deliver Common Stock certificates to a Holder, as contemplated under
the Irrevocable Transfer Agent Instructions dated April
      , 2007, prior to the third (3rd) or sixth (6th) 
Trading Day, as the case my be under the Irrevocable Transfer Agent
Instructions, after a Conversion Date or the Obligor shall provide notice to
the Holder, including by way of public announcement, at any time, of its
intention not to comply with requests for conversions of this Debenture in
accordance with the terms hereof and;

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

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

(xii)          The
number of shares of Common Stock at the time authorized, unissued and
unreserved for all purposes, or held as treasury stock, is insufficient to pay
principal hereunder in shares of Common Stock;

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

Section 3.              Conversion.

(a)           Conversion at Option of Holder.

(i)            (a)
Provided the Obligor has sufficient authorized shares, in which case the
Obligor shall be obligated to increase its authorized shares pursuant to
Section 4 (e) of the Securities Purchase Agreement, and provided that the Obligor
has obtained shareholder approval as contemplated in Section 4(q) of the
Securities Purchase Agreement, this Debenture shall be convertible into shares
of Common Stock at the option of the Holder, in whole or in part at any time
and from time to time, after the Original Issue Date (as defined in Section 5) (subject to the limitations on conversion set
forth in Section 3(b) hereof). In
the event that the Underlying Shares Registration Statement is not declared
effective within one (1) year from the date hereof the Holder shall be entitled
to sell shares of the Obligor’s  Common
Stock issuable hereunder pursuant to Rule 144 as applicable. The number of
shares of Common Stock issuable upon a conversion hereunder equals the quotient
obtained by dividing (x) the outstanding amount of this Debenture to be
converted by (y) the Conversion Price (as defined in Section 3(c)(i)).  The
Obligor shall deliver Common Stock certificates to the Holder prior to the
Fifth (5th)
Trading Day after a Conversion Date.

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

(b)           Certain Conversion Restrictions.

(i)            A
Holder may not convert this Debenture or receive shares of Common Stock as
payment of interest hereunder to the extent such conversion or receipt of such
interest payment would result in the Holder, together with any affiliate
thereof, beneficially owning (as determined in accordance with Section 13(d) of
the Exchange Act and the rules promulgated thereunder) in excess of 4.99% of
the then issued and outstanding shares of Common Stock, including shares
issuable upon conversion of, and payment of interest on, this Debenture held by
such Holder after application of this Section. 
Since the Holder will not be obligated to report to the Obligor the
number of shares of Common Stock it may hold at the time of a conversion
hereunder, unless the conversion at issue would result in the issuance of
shares of Common Stock in excess of 4.99% of the then outstanding shares of
Common Stock without regard to any other shares which may be beneficially owned
by the Holder or an affiliate thereof, the Holder shall have the authority and
obligation to determine whether the restriction contained in this Section will
limit any particular conversion hereunder and to the extent that the Holder
determines that the limitation contained in this Section applies, the
determination of which portion of the principal amount of this Debenture is
convertible shall be the responsibility and obligation of the Holder.  If the Holder has delivered a Conversion
Notice for a principal amount of this Debenture that, without regard to any
other shares that the Holder or its affiliates may beneficially own, would
result in the issuance in excess of the permitted amount hereunder, the Obligor
shall notify the Holder of this fact and shall honor the conversion for the
maximum principal amount permitted to be converted on such Conversion Date in
accordance with the periods described in Section
3(a)(i) and, at the option of the Holder, either retain any
principal amount tendered for conversion in excess of the permitted amount
hereunder for future conversions or return such excess principal amount to the
Holder. The provisions of this Section may be waived by a Holder (but only as
to itself and not to any other Holder) upon not less than 65 days prior notice
to the Obligor. Other Holders shall be unaffected by any such waiver.

(iii) Conversion
Limitation.  The Holder shall not be
entitled to convert any amount of outstanding principal and/or interest
hereunder without the written consent of the Company until after February 28,
2008 provided however the Holder shall not be subject to such limitation if
either the average VWAPs of the Company’s Common Stock for five (5) consecutive
trading days is Three Dollars ($3.00) or greater or an Event of Default has
occurred.

(c)           Conversion Price and Adjustments
to Conversion Price.

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(i)            The conversion
price in effect on any Conversion Date shall be, at the sole option of the
Holder, equal to either (a) Five Dollars 
($5.00) (the “Fixed Conversion Price”) or (b) eighty percent (80%) of
the average of the two (2) lowest daily VWAPs of the Common Stock during the
five (5) Trading Days immediately preceding the Conversion Date as quoted by
Bloomberg, LP (the “Market
Conversion Price”).  The Fixed
Conversion Price and the Market Conversion Price are collectively referred to
as the “Conversion Price.” 
The Conversion Price may be adjusted pursuant to the other terms of this
Debenture.  Notwithstanding the
restrictions set forth in Sections 2(b)(ii) and 2(b)(iii), the Holder shall
have the absolute right to convert any or all of this Debenture at the Fixed
Conversion Price free of such restriction provided such conversion is in
compliance with the shareholder approval requirements of the Nasdaq Capital
Market.

If after the date hereof, upon the first conversion by the Buyer of any
Convertible Debenture issued by the Company, including this Debenture or any
other Convertible Debenture of the Company held by the Buyer, the Fixed
Conversion Price then in effect shall be reduced to an amount equal the average
VWAP for the five (5) Trading Days prior to such conversion provided that such
adjusted Fixed Conversion Price will be less than the existing Fixed Conversion
Price at the time of conversion.

Notwithstanding
anything to the contrary herein, the maximum number of shares of the Company’s
Common Stock that may be issued upon conversion of the principal amount of this
Debenture is 10,000,000 (the “Conversion Shares”).

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

 (ii)          If the Obligor, at any time while this
Debenture is outstanding, shall (a) pay a stock dividend or otherwise make
a distribution or distributions on shares of its Common Stock or any other
equity or equity equivalent securities payable in shares of Common Stock, (b)
subdivide outstanding shares of Common Stock into a larger number of shares,
(c) combine (including by way of reverse stock split) outstanding shares of
Common Stock into a smaller number of shares, or (d) issue by reclassification
of shares of the Common Stock any shares of capital stock of the Obligor, then,
at the sole option of the Holder, the Fixed Conversion Price shall be adjusted
to mirror the issue price or applicable reset price, exchange price, conversion
price and other pricing terms (including any reset provisions thereof) of such
issuances herein. Such adjustment shall be made whenever such issuances
hereunder are made. The Obligor shall notify the Holder in writing, no later
than one (1) business day following any issuance hereunder, indicating therein
the applicable issuance price, or applicable reset price, exchange price,
conversion price and other pricing terms.

. Any adjustment made pursuant to this Section shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.

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(iii)          If
the Obligor, at any time while this Debenture is outstanding, shall issue
rights, options or warrants to all holders of Common Stock (and not to the
Holder) entitling them to subscribe for or purchase shares of Common Stock at a
price per share less than the Fixed Conversion Price (not including the
issuance of Excluded Securities), then, at the sole option of the Holder, the
Fixed Conversion Price shall be adjusted to mirror the conversion, exercise,
exchange or purchase price for such issuance (including any reset provisions
thereof) at issue. Such adjustment shall be made whenever such issuances
hereunder are made. The Obligor shall notify the Holder in writing, no later
than one (1) business day following such issuance subject to this Section,
indicating therein the applicable issuance price, applicable issuance exercise
price, applicable issuance conversion price or of applicable reset price,
exchange price, and other pricing terms.

 Such adjustment
shall be made whenever such rights or warrants are issued, and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such rights, options or warrants. However,
upon the expiration of any such right, option or warrant to purchase shares of
the Common Stock the issuance of which resulted in an adjustment in the Fixed
Conversion Price pursuant to this Section, if any such right, option or warrant
shall expire and shall not have been exercised, the Fixed Conversion Price
shall immediately upon such expiration be recomputed and effective immediately
upon such expiration be increased to the price which it would have been (but
reflecting any other adjustments in the Fixed Conversion Price made pursuant to
the provisions of this Section after the issuance of such rights or warrants)
had the adjustment of the Fixed Conversion Price made upon the issuance of such
rights, options or warrants been made on the basis of offering for subscription
or purchase only that number of shares of the Common Stock actually purchased upon
the exercise of such rights, options or warrants actually exercised.

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

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

(vi)          In
case of any reclassification of the Common Stock or any compulsory share
exchange pursuant to which the Common Stock is converted into other securities,
cash or property, the Holder shall have the right thereafter to, at its
option,  (A) convert the then outstanding
principal amount, together with all accrued but unpaid interest and any other
amounts then owing hereunder in respect of this Debenture into the shares of
stock and other securities, cash and property receivable upon or deemed to be
held by holders of the Common Stock following such reclassification or share
exchange, and the Holder of this Debenture shall be entitled upon such event to
receive such amount of securities, cash or property as the shares of the Common
Stock of the Obligor into which the then outstanding principal amount, together
with all accrued but unpaid interest and any other amounts then owing hereunder
in respect of this Debenture could have been converted immediately prior to
such reclassification or share exchange would have been entitled, or (B) require
the Obligor to prepay the outstanding principal amount of this Debenture, plus
all interest and other amounts due and payable thereon. The entire prepayment
price shall be paid in cash.  This
provision shall similarly apply to successive reclassifications or share
exchanges.

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

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

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

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

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

 10
 

Holder the right to receive the securities, cash and
property set forth in this Section upon any conversion or redemption following
such event. This provision shall similarly apply to successive such events.

(d)           Other Provisions.

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

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

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

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

 11
 

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

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

 

	
  If to the Obligor, to:

  	
   

  	
  Isonics Corporation

  
	
   

  	
   

  	
  5906 McIntyre Street

  
	
   

  	
   

  	
  Golden, CO 80403

  
	
   

  	
   

  	
  Attention:   John Sakys, President

  
	
   

  	
   

  	
  Telephone: (303) 279-7900

  
	
   

  	
   

  	
  Facsimile:  (303) 279-7300

  
	
   

  	
   

  	
   

  
	
  With a copy (which does not Burns, Figa & Will,
  P.C.

  
	
  constitute notice) to:

  	
   

  	
   

  
	
   

  	
   

  	
  6400 South Fiddler’s Green Circle — Suite 1000

  
	
   

  	
   

  	
  Greenwood Village, CO 80111

  
	
   

  	
   

  	
  Attention:   Herrick K. Lidstone,
  Jr., Esq.

  
	
   

  	
   

  	
  Telephone: (303) 796-2626

  
	
   

  	
   

  	
  Facsimile:  (303) 796-2777

  
	
   

  	
   

  	
   

  
	
  If to the Holder:

  	
   

  	
  Cornell Capital Partners, LP

  
	
   

  	
   

  	
  101 Hudson Street, Suite 3700

  

 

 12
 

 

	
  

  	
   

  	
  Jersey City, NJ 07303

  
	
   

  	
   

  	
  Attention:   Mark Angelo

  
	
   

  	
   

  	
  Telephone: (201) 985-8300

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  David Gonzalez, Esq.

  
	
   

  	
   

  	
  101 Hudson Street — Suite 3700

  
	
   

  	
   

  	
  Jersey City, NJ 07302

  
	
   

  	
   

  	
  Telephone: (201) 985-8300

  
	
   

  	
   

  	
  Facsimile:  (201) 985-8266

  

 

or at such other address and/or facsimile number
and/or to the attention of such other person as the recipient party has
specified by written notice given to each other party three (3) Trading Days
prior to the effectiveness of such change. 
Written confirmation of receipt (i) given by the recipient of such
notice, consent, waiver or other communication, (ii) mechanically or
electronically generated by the sender’s facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (iii) provided by a nationally recognized overnight delivery
service, shall be rebuttable evidence of personal service, receipt by facsimile
or receipt from a nationally recognized overnight delivery service in
accordance with clause (i), (ii) or (iii) above, respectively.

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

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

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

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

 13
 

or (d) the execution by the Obligor of an agreement to
which the Obligor is a party or by which it is bound, providing for any of the
events set forth above in (a), (b) or (c).

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

“Commission”
means the Securities and Exchange Commission.

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

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

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

“Excluded Securities” means:

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

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

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

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

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

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

g)            the securities issued to, or upon
the conversion or exercise of, the warrants and convertible debentures issued
through Clayton Dunning &  Co., Inc.
(the “2007A Securities”),

 14
 

which the Company anticipates will be issued in April
2007 or soon thereafter, and are referenced in the Waiver Agreement between the
parties dated February 19, 2007.

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

“Other Securities” means (i) those convertible debentures,
options and warrants of the Company issued prior to, and outstanding on, the
Issuance Date of this Warrant, (ii) except for as provided in Section 8(a)
herein or as otherwise agreed by the Holder and the Company, the shares of
Common Stock issuable on exercise of such convertible debentures, options and
warrants, provided such convertible debentures, options and warrants are not amended
after the Issuance Date of this Warrant and, and (iii) the 660,000 shares of
restricted common stock issued or to be issued pursuant to the Securities
Purchase Agreement dated May 30, 2006, and (iv) any other shares of Common
Stock issued or issuable pursuant to this Warrant,  the Convertible Debenture, and the
registration rights agreement entered into between the Company and the initial
holder of this Warrant.

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

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

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

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

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

“Underlying
Shares Registration Statement” means a registration statement meeting the
requirements set forth in the Investor’s Registration Rights Agreement, dated
April      , 2007 by and between the Obligor and the
Holder, covering among other things the resale of the Underlying Shares and
naming the Holder as a “selling stockholder” thereunder.

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

Section 6.              Except as expressly provided
herein, no provision of this Debenture shall alter or impair the obligations of
the Obligor, which are absolute and unconditional, to pay the principal of,
interest and other charges (if any) on, this Debenture at the time, place, and
rate, and

 15
 

in the coin or currency, herein prescribed.  This Debenture is a direct obligation of the
Obligor. This Debenture ranks pari passu with all other 6% Debentures now or
hereafter issued to the Holder under the terms set forth herein. As long as
this Debenture is outstanding, the Obligor shall not and shall cause their
subsidiaries not to, without the consent of the Holder of at least a majority
of the principal amount of the 6% Convertible Debentures then outstanding
(whether or not the Holder consents), (i) amend its certificate of
incorporation, bylaws or other charter documents so as to adversely affect any
rights of the Holder; (ii) repay, repurchase or offer to repay, repurchase or
otherwise acquire shares of its Common Stock or other equity securities other
than as to the Underlying Shares to the extent permitted or required under the
Transaction Documents; or (iii) enter into any agreement with respect to any of
the foregoing.

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

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

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

Section 10.            This Debenture shall be governed by
and construed in accordance with the laws of the State of New Jersey, without
giving effect to conflicts of laws thereof. 
Each of the parties consents to the jurisdiction of the
U.S. District Court for the District of New Jersey  sitting in Newark, New Jersey in connection
with any dispute arising under this Debenture and hereby waives, to the maximum
extent permitted by law, any objection, including any objection based on forum
non  conveniens to the bringing of any such proceeding in such
jurisdictions.

Section 11.            If the Obligor fails to strictly
comply with the terms of this Debenture, then the Obligor shall reimburse the
Holder promptly for all fees, costs and expenses, including, without
limitation, attorneys’ fees and expenses incurred by the Holder in any action
in connection with this Debenture, including, without limitation, those
incurred: (i) during any

 16
 

workout, attempted workout, and/or in connection with
the rendering of legal advice as to the Holder’s rights, remedies and
obligations, (ii) collecting any sums which become due to the Holder, (iii)
defending or prosecuting any proceeding or any counterclaim to any proceeding
or appeal; or (iv) the protection, preservation or enforcement of any rights or
remedies of the Holder.

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

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

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

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

[REMAINDER OF PAGE INTENTIONLLY
LEFT BLANK]

 17
 

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

	
  

  	
  ISONICS CORPORATION

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:   John Sakys

  
	
   

  	
  Title:     President and
  Interim Chief Executive Officer

  

 

 18

 

EXHIBIT “A”

NOTICE OF
CONVERSION

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

 

TO:

 

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

	
  Conversion Date:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Applicable Conversion Price:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Signature:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Amount to be converted:

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Amount of Debenture unconverted:

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Conversion Price per share:

  	
  $

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Number of shares of Common Stock to be issued:

  	
   

  	
   

  
	
   

  	
   

  	
   

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

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Issue to:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Authorized Signature:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Phone Number:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Broker DTC Participant Code:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Account Number:

  	
   

  	
   

  

 

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

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

	
  By:

  	
   

  	
   

  	
  Date:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  
	
  Address:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Social Security NumberExhibit
10.7

WARRANT

THE SECURITIES
REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN
OPINION OF COUNSEL IN A FORM REASONABLY SATISFACTORY TO THE ISSUER THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS
OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THIS WARRANT
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT.

ISONICS CORPORATION

Warrant To Purchase Common Stock

	
  Warrant No.: CCP2007-1-1

  	
   

  	
  Number of
  Shares:

  	
   

  	
  250,000

  
	
   

  	
   

  	
  Warrant Exercise
  Price:

  	
   

  	
  $5.00

  
	
   

  	
   

  	
  Expiration Date:

  	
   

  	
  April10, 2010

  

 

Date of
Issuance: April 10, 2007

Isonics
Corporation, a California corporation (the “Company”),
hereby certifies that, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Cornell
Capital Partners, L.P. (the “Holder”), the registered holder
hereof or its permitted assigns, is entitled, subject to the terms set forth
below, to purchase from the Company upon surrender of this Warrant, at any time
or times on or after the date hereof, but not after 11:59 P.M. Eastern
Time on the Expiration Date (as defined herein) two hundred fifty thousand  (250,000) fully paid and nonassessable shares
of Common Stock (as defined herein) of the Company (the “Warrant Shares”)
at the exercise price per share provided in Section 1(b) below or as
subsequently adjusted; provided, however, that in no event shall the holder be
entitled to exercise this Warrant for a number of Warrant Shares in excess of
that number of Warrant Shares which, upon giving effect to such exercise, would
cause the aggregate number of shares of Common Stock beneficially owned by the
holder and its affiliates to exceed 4.99% of the outstanding shares of the
Common Stock following such exercise, except within sixty (60) days of the
Expiration Date (however, such restriction may be waived by Holder (but only as
to itself and not to any other holder) upon not less than 65 days prior notice
to the Company).  For purposes of the
foregoing proviso, the aggregate number of shares of Common Stock beneficially
owned by the holder and its affiliates shall include the number of shares of Common
Stock issuable upon exercise of this Warrant with respect to which the
determination of such proviso is being made, but shall exclude shares of Common
Stock which would be issuable upon (i) exercise of the remaining,
unexercised Warrants beneficially owned by the holder and its affiliates and
(ii) exercise or conversion of the unexercised or unconverted portion of
any other securities of the Company beneficially owned by the holder and its 

 1
 

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

Section 1.

(a)   This Warrant is issued pursuant to the
Securities Purchase Agreement (“Securities Purchase Agreement”) dated
the date hereof between the Company and the Buyers listed on Schedule I thereto
or issued in exchange or substitution thereafter or replacement thereof.  Each Capitalized term used, and not otherwise
defined herein, shall have the meaning ascribed thereto in the Securities
Purchase Agreement.

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

(i)          “Approved Stock Plan” means a
stock option plan that has been approved by the Board of Directors of the
Company, pursuant to which the Company’s securities may be issued only to any
employee, officer or director for services provided to the Company.

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

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

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

(v)         “Event of Default” means an
event of default under the Securities Purchase Agreement or the Convertible
Debentures issued in connection therewith.

 2
 

(vi)        “Excluded Securities” means,

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

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

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

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

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

(f) except as
provided for in Section 8(a) herein, any issuance of securities to holders of
the Other Securities provided such transactions are in accordance with the
terms of such instrument (including any anti-dilution protection contained in
such instrument) or are on terms determined by the Board of Directors of the
Company to be no less favorable to the Company than the existing terms, and

               (g)           the securities issued to, or upon the
conversion or exercise of, the warrants and convertible debentures issued
through Clayton Dunning &  Co., Inc.
(the “2007A Securities”), which Isonics anticipates will be issued in April
2007 or soon thereafter, and are referenced in the Waiver Agreement between the
parties dated February 19, 2007.

(vii)       “Expiration Date” means April 10,
2010.

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

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

(x)         “Other Securities” means
(i) those convertible debentures, options and warrants of the Company
issued prior to, and outstanding on, the Issuance Date of this Warrant, (ii)
except for as provided in Section 8(a) herein or as otherwise agreed by the
Holder and the Company, the shares of Common Stock issuable on exercise of such
convertible debentures, options and warrants, provided such convertible
debentures, options and warrants are not amended after the Issuance Date of
this Warrant and, and (iii) the 660,000 shares of restricted common stock issued
or to be issued pursuant to the Securities Purchase Agreement dated May 

 3
 

30, 2006, and (iv) any other
shares of Common Stock issued or issuable pursuant to this Warrant,  the Convertible Debenture, and the
registration rights agreement entered into between the Company and the initial
holder of this Warrant.

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

(xii)       “Principal Market” means on any of
(a) the American Stock Exchange, (b) New York Stock Exchange, (c) the Nasdaq
Global  Market, (d) the Nasdaq Capital
Market, or (e) the Nasdaq OTC Bulletin Board (“OTCBB”)

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

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

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

(xvi)      “Warrant Exercise Price” shall be
$5.00 or as subsequently adjusted as provided in Section 8 hereof.

(c)   Other Definitional Provisions.

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

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

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

Section 2.               Exercise of Warrant.

(a)   Subject to the terms and conditions hereof,
this Warrant may be exercised by the holder hereof then registered on the books
of the Company, pro rata as hereinafter provided, at any time on any Business
Day on or after the opening of business on such Business Day, commencing with
the first day after the date hereof, and prior to 11:59 P.M. Eastern Time
on the Expiration Date (i) by delivery of a written notice, in the form of the
subscription notice attached 

 4
 

as Exhibit A hereto (the
“Exercise Notice”), of such holder’s election to exercise this Warrant,
which notice shall specify the number of Warrant Shares to be
purchased, payment to the Company of an amount equal to the Warrant
Exercise Price(s) applicable to the Warrant Shares being purchased, multiplied
by the number of Warrant Shares (at the applicable Warrant Exercise Price)
as to which this Warrant is being exercised (plus any applicable issue or
transfer taxes) (the “Aggregate Exercise Price”) in cash or wire
transfer of immediately available funds and the surrender of this Warrant (or
an indemnification undertaking with respect to this Warrant in the case of its
loss, theft or destruction) to a common carrier for overnight delivery to the
Company as soon as practicable following such date (“Cash Basis”) or
(ii) if after October 9, 2007, at the time of exercise, the Warrant Shares are
not subject to an effective registration statement or if an Event of Default
has occurred, by delivering an Exercise Notice and in lieu of making payment of
the Aggregate Exercise Price in cash or wire transfer, elect instead to receive
upon such exercise the “Net Number” of shares of Common Stock determined
according to the following formula (the “Cashless Exercise”):

	
  Net Number =

  	
  (A x B) — (A x
  C)

  	
   

  
	
   

  	
  B

  	
   

  

 

For purposes of the
foregoing formula:

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

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

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

In the event
of any exercise of the rights represented by this Warrant in compliance with
this Section 2, the Company shall on or before the fifth (5th) Business
Day following the date of receipt of the Exercise Notice, the Aggregate
Exercise Price and this Warrant (or an indemnification undertaking with respect
to this Warrant in the case of its loss, theft or destruction) and the receipt
of the representations of the holder specified in Section 6 hereof, if
requested by the Company (the “Exercise Delivery Documents”), and if the
Common Stock is DTC eligible, credit such aggregate number of shares of Common
Stock to which the holder shall be entitled to the holder’s or its designee’s
balance account with The Depository Trust Company; provided, however, if the
holder who submitted the Exercise Notice requested physical delivery of any or
all of the Warrant Shares, or, if the Common Stock is not DTC eligible  then the Company shall, on or before the
fifth (5th)
Business Day following receipt of the Exercise Delivery Documents, issue and
surrender to a common carrier for overnight delivery to the address specified
in the Exercise Notice, a certificate, registered in the name of the holder,
for the number of shares of Common Stock to which the holder shall be entitled
pursuant to such request.  Upon delivery
of the Exercise Notice and Aggregate Exercise Price referred to in
clause (i) or (ii) above the holder of this Warrant shall be deemed for
all corporate purposes to have become the holder of record of the Warrant
Shares with respect to which this Warrant has been exercised.  In the case of a dispute as to the
determination of the Warrant Exercise Price, the VWAP or the arithmetic
calculation of the Warrant Shares, the Company 

 5
 

shall promptly issue to the holder the number
of Warrant Shares that is not disputed and shall submit the disputed
determinations or arithmetic calculations to the holder via facsimile within
one (1) Business Day of receipt of the holder’s Exercise Notice.

(b)   If the holder and the Company are unable to
agree upon the determination of the Warrant Exercise Price or arithmetic
calculation of the Warrant Shares within one (1) day of such disputed
determination or arithmetic calculation being submitted to the holder, then the
Company shall immediately submit via facsimile (i) the disputed determination
of the Warrant Exercise Price or the VWAPto an independent, reputable
investment banking firm or (ii) the disputed arithmetic calculation of the
Warrant Shares to its independent, outside accountant.  The Company shall cause the investment
banking firm or the accountant, as the case may be, to perform the determinations
or calculations and notify the Company and the holder of the results no later
than forty-eight (48) hours from the time it receives the disputed
determinations or calculations.  Such
investment banking firm’s or accountant’s determination or calculation, as the
case may be, shall be deemed conclusive absent manifest error.

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

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

(e)   If the Company or its Transfer Agent shall
fail for any reason or for no reason to issue to the holder within
ten (10) days of receipt of the Exercise Delivery Documents, a certificate
for the number of Warrant Shares to which the holder is entitled or to credit
the holder’s balance account with The Depository Trust Company for such number
of Warrant Shares to which the holder is entitled upon the holder’s exercise of
this Warrant, the Company shall, in addition to any other remedies under this
Warrant or otherwise available to such holder, pay as additional damages in
cash to such holder on each day the issuance of such certificate for Warrant
Shares is not timely effected an amount equal to 0.025% of the product of (A)
the sum of the number of Warrant Shares not issued to the holder on a timely
basis and to which the holder is entitled, and (B) the VWAPof the Common Stock
for the trading day immediately preceding the last possible date which the
Company could have issued such Common Stock to the holder without violating
this Section 2.

(f)    If within ten (10) days after the Company’s
receipt of the Exercise Delivery Documents, the Company fails to deliver a new
Warrant to the holder for the number of Warrant Shares to which such holder is
entitled pursuant to Section 2 hereof, then, in addition to any other available
remedies under this Warrant, or otherwise available to such holder, the Company
shall pay as additional damages in cash to such holder on each day after such
tenth (10th)
day that such delivery of such new Warrant is not timely effected in an amount
equal to 0.25% of the product of (A) the number of Warrant Shares
represented by the portion of this Warrant which is 

 6
 

not being exercised and
(B) the VWAPof the Common Stock for the trading day immediately preceding
the last possible date which the Company could have issued such Warrant to the
holder without violating this Section 2.

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

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

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

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

(d)   If at any time after the date hereof the
Company shall file a registration statement, the Company shall include the
Warrant Shares issuable to the holder, pursuant to the terms of this Warrant
and shall maintain, so long as any other shares of Common Stock shall be so
listed, such listing of all Warrant Shares from time to time issuable upon the
exercise of this Warrant; and the Company shall so list on each national
securities exchange or automated quotation system, as the case may be, and
shall maintain such listing of, any other shares of capital stock of the
Company issuable upon the exercise of this Warrant if and so long as any shares
of the same class shall be listed on such national securities exchange or
automated quotation system.

(e)   The Company will not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed by it hereunder, but will at all times
in good faith assist in the carrying out of all the provisions of this Warrant
and in the taking of all such action as may reasonably be requested by the
holder of this Warrant in order to protect the exercise privilege of the holder
of this Warrant against dilution or other impairment, consistent with the tenor
and purpose of this Warrant.  The Company
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above the Warrant Exercise Price then in effect,
and (ii) will take all such actions as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock upon the exercise of this Warrant.

 7
 

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

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

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

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

 8
 

Section 7.               Ownership and Transfer.

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

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

(a)   Adjustment of Warrant Exercise Price and
Number of Shares upon Issuance of Common Stock.  If and whenever on or after the Issuance Date
of this Warrant, the Company issues or sells, or is deemed to have issued or
sold, any shares of Common Stock (other than Excluded Securities) for a
consideration per share less than a price (the “Applicable Price”) equal
to the Warrant Exercise Price in effect immediately prior to such issuance or
sale, then immediately after such issue or sale the Warrant Exercise Price then
in effect shall be reduced to an amount equal to the issuance price, exercise
price, exchange price or purchase price for such issuance (including any reset
provisions thereof) at issue. Such adjustment shall be made whenever such
issuances hereunder are made. The Company shall notify the Holder in writing,
no later than one (1) business day following such issuance subject to this
Section, indicating therein the applicable issuance price, applicable issuance
exercise price, applicable issuance conversion price or of applicable reset
price, exchange price, and other pricing terms.

Furthermore if
after the date hereof, upon the first conversion by the Holder of any
Convertible Debenture issued by the Company, including the Debenture issued
pursuant to the Securities Purchase Agreement or any other Convertible
Debenture of the Company held by the Holder, the Warrant Exercise Price then in
effect shall be reduced to an amount equal the average VWAP for the five (5)
Trading Days prior to such conversion provided that such adjusted Warrant
Exercise Price will be less than the existing Warrant Exercise Price at the
time of conversion.

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

(i)          Issuance of Options.  If after the date hereof, the Company in any
manner grants any Options and the lowest price per share for which one share of
Common Stock is issuable upon the exercise of any such Option or upon
conversion or exchange of any convertible securities issuable upon exercise of
any such Option is less than the Applicable Price, then such share of Common
Stock shall be deemed to be outstanding and to have been issued and 

 9
 

sold by the Company at the time
of the granting or sale of such Option for such price per share.  For purposes of this Section 8(b)(i), the
lowest price per share for which one share of Common Stock is issuable upon
exercise of such Options or upon conversion or exchange of such Convertible
Securities shall be equal to the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to any one share of
Common Stock upon the granting or sale of the Option, upon exercise of the
Option or upon conversion or exchange of any convertible security issuable upon
exercise of such Option.  No further
adjustment of the Warrant Exercise Price shall be made upon the actual issuance
of such Common Stock or of such convertible securities upon the exercise of
such Options or upon the actual issuance of such Common Stock upon conversion
or exchange of such convertible securities.

(ii)         Issuance of Convertible Securities.  If the Company in any manner issues or sells
any convertible securities and the lowest price per share for which one share
of Common Stock is issuable upon the conversion or exchange thereof is less
than the Applicable Price, then such share of Common Stock shall be deemed to
be outstanding and to have been issued and sold by the Company at the time of
the issuance or sale of such convertible securities for such price per
share.  For the purposes of this
Section 8(b)(ii), the lowest price per share for which one share of Common
Stock is issuable upon such conversion or exchange shall be equal to the sum of
the lowest amounts of consideration (if any) received or receivable by the
Company with respect to one share of Common Stock upon the issuance or sale of
the convertible security and upon conversion or exchange of such convertible
security.  No further adjustment of the
Warrant Exercise Price shall be made upon the actual issuance of such Common
Stock upon conversion or exchange of such convertible securities, and if any
such issue or sale of such convertible securities is made upon exercise of any
Options for which adjustment of the Warrant Exercise Price had been or are to
be made pursuant to other provisions of this Section 8(b), no further
adjustment of the Warrant Exercise Price shall be made by reason of such issue
or sale.

(iii)        Change in Option Price or Rate of
Conversion.  If the purchase price
provided for in any Options, the additional consideration, if any, payable upon
the issue, conversion or exchange of any convertible securities, or the rate at
which any convertible securities are convertible into or exchangeable for
Common Stock changes at any time, the Warrant Exercise Price in effect at the
time of such change shall be adjusted to the Warrant Exercise Price which would
have been in effect at such time had such Options or convertible securities
provided for such changed purchase price, additional consideration or changed
conversion rate, as the case may be, at the time initially granted, issued or
sold and the number of Warrant Shares issuable upon exercise of this Warrant
shall be correspondingly readjusted.  For
purposes of this Section 8(b)(iii), if the terms of any Option or convertible
security that was outstanding as of the Issuance Date of this Warrant are
changed in the manner described in the immediately preceding sentence, then
such Option or convertible security and the Common Stock deemed issuable upon
exercise, conversion or exchange thereof shall be deemed to have been issued as
of the date of such change.  No
adjustment pursuant to this Section 8(b) shall be made if such adjustment
would result in an increase of the Warrant Exercise Price then in effect.

(iv)        Calculation of Consideration Received.  If any Common Stock, Options or convertible
securities are issued or sold or deemed to have been issued or sold for cash,
the consideration received therefore will be deemed to be the net amount received
by the Company therefore.  If any Common
Stock, Options or convertible securities are issued or sold 

 10
 

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

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

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

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

(c)   Adjustment of Warrant Exercise Price upon
Subdivision or Combination of Common Stock. 
If the Company at any time after the date of issuance of this Warrant
subdivides (by any stock split, stock dividend, recapitalization or otherwise)
one or more classes of its outstanding shares of Common Stock into a greater
number of shares, any Warrant Exercise 

 11
 

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

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

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

(ii)         either (A) the number of Warrant Shares
obtainable upon exercise of this Warrant shall be increased to a number of
shares equal to the number of shares of Common Stock obtainable immediately
prior to the close of business on the record date fixed for the determination
of holders of Common Stock entitled to receive the Distribution multiplied by
the reciprocal of the fraction set forth in the immediately preceding clause
(i), or (B) in the event that the Distribution is of common stock of a company
whose common stock is traded on a national securities exchange or a national
automated quotation system, then the holder of this Warrant shall receive an
additional warrant to purchase Common Stock, the terms of which shall be
identical to those of this Warrant, except that such warrant shall be
exercisable into the amount of the assets that would have been payable to the
holder of this Warrant pursuant to the Distribution had the holder exercised
this Warrant immediately prior to such record date and with an exercise price
equal to the amount by which the exercise price of this Warrant was decreased
with respect to the Distribution pursuant to the terms of the immediately
preceding clause (i).

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

 12
 

(f)    Notices.

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

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

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

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

(a)   In addition to any adjustments pursuant to
Section 8 above, if at any time the Company grants, issues or sells any
Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the “Purchase Rights”), then the holder of this Warrant
will be entitled to acquire, upon the terms applicable to such Purchase Rights,
the aggregate Purchase Rights which such holder could have acquired if such
holder had held the number of shares of Common Stock acquirable upon complete
exercise of this Warrant immediately before the date on which a record is taken
for the grant, issuance or sale of such Purchase Rights, or, if no such record
is taken, the date as of which the record holders of Common Stock are to be
determined for the grant, issue or sale of such Purchase Rights.

(b)   Any recapitalization, reorganization,
reclassification, consolidation, merger, sale of all or substantially all of
the Company’s assets to another Person or other transaction in each case which
is effected in such a way that holders of Common Stock are entitled to receive
(either directly or upon subsequent liquidation) stock, securities or assets
with respect to or in exchange for Common Stock is referred to herein as an “Organic
Change.”  Prior to the consummation
of any (i) sale of all or substantially all of the Company’s assets to an
acquiring Person or (ii) other Organic Change following which the Company is
not a surviving entity, the Company will secure from the Person purchasing such
assets or the successor resulting from such Organic Change (in each case, the “Acquiring
Entity”) a written agreement (in form and substance satisfactory to the
holders of Warrants representing at least two-thirds (iii) of the Warrant
Shares issuable upon exercise of the Warrants then outstanding) to deliver to
each holder of Warrants in exchange for such Warrants, a security of the
Acquiring Entity evidenced by a written instrument substantially similar in
form and substance to this Warrant and satisfactory to the holders of the
Warrants (including an adjusted warrant exercise price equal to 

 13
 

the value for the Common Stock
reflected by the terms of such consolidation, merger or sale, and exercisable
for a corresponding number of shares of Common Stock acquirable and receivable
upon exercise of the Warrants without regard to any limitations on exercise, if
the value so reflected is less than any Applicable Warrant Exercise Price
immediately prior to such consolidation, merger or sale).  Prior to the consummation of any other
Organic Change, the Company shall make appropriate provision (in form and
substance satisfactory to the holders of Warrants representing a majority  of the Warrant Shares issuable upon exercise of the
Warrants then outstanding) to insure that each of the holders of the Warrants
will thereafter have the right to acquire and receive in lieu of or in addition
to (as the case may be) the Warrant Shares immediately theretofore issuable and
receivable upon the exercise of such holder’s Warrants (without regard to
any limitations on exercise), such shares of stock, securities or assets that
would have been issued or payable in such Organic Change with respect to or in
exchange for the number of Warrant Shares which would have been issuable and
receivable upon the exercise of such holder’s Warrant as of the date of such
Organic Change (without taking into account any limitations or restrictions on
the exercisability of this Warrant).

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

Section 11.             Notice.  Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this
Warrant must be in writing and will be deemed to have been delivered:  (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of receipt is received by the sending party transmission is mechanically
or electronically generated and kept on file by the sending party); or
(iii) one Business Day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same.  The addresses and
facsimile numbers for such communications shall be:

	
  If to Holder:

  	
   

  	
  Cornell Capital Partners, L.P.

  
	
   

  	
   

  	
  101 Hudson Street — Suite 3700

  
	
   

  	
   

  	
  Jersey City, NJ 07302

  
	
   

  	
   

  	
  Attention:Mark A. Angelo

  
	
   

  	
   

  	
  Telephone: (201) 985-8300

  
	
   

  	
   

  	
  Facsimile:  (201) 985-8266

  
	
   

  	
   

  	
   

  
	
  With Copy to:

  	
   

  	
  David Gonzalez, Esq.

  
	
   

  	
   

  	
  101 Hudson Street — Suite 3700

  
	
   

  	
   

  	
  Jersey City, NJ 07302

  
	
   

  	
   

  	
  Telephone: (201) 985-8300

  
	
   

  	
   

  	
  Facsimile:  (201) 985-8266

  

 

 14
 

 

	
  If to the Company, to:

  	
   

  	
  Isonics Corporation

  
	
   

  	
   

  	
  5906 McIntyre Street

  
	
   

  	
   

  	
  Golden, CO 80403

  
	
   

  	
   

  	
  Attention:John Sakys

  
	
   

  	
   

  	
  Telephone: (303) 279-7900

  
	
   

  	
   

  	
  Facsimile:  (303) 279-7300

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  Burns, Figa & Will, P.C.

  
	
   

  	
   

  	
  6400 South Fiddler’s Green Circle — Suite 1000

  
	
   

  	
   

  	
  Greenwood Village, CO 80111

  
	
   

  	
   

  	
  Attention:Herrick K. Lidstone, Jr., Esq.

  
	
   

  	
   

  	
  Telephone: (303) 796-2626

  
	
   

  	
   

  	
  Facsimile:  (303) 796-2777

  

 

If to a holder of
this Warrant, to it at the address and facsimile number set forth on Exhibit C
hereto, with copies to such holder’s representatives as set forth on Exhibit C,
or at such other address and facsimile as shall be delivered to the Company
upon the issuance or transfer of this Warrant. 
Each party shall provide five days’ prior written notice to the other
party of any change in address or facsimile number.  Written confirmation of receipt
(A) given by the recipient of such notice, consent, facsimile, waiver or
other communication, (or (B) provided by a nationally recognized overnight
delivery service shall be rebuttable evidence of personal service, receipt by
facsimile or receipt from a nationally recognized overnight delivery service in
accordance with clause (i), (ii) or (iii) above, respectively.

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

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

Section 14.             Descriptive Headings; Governing
Law.  The descriptive headings of the
several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant.  The corporate laws of the State of New Jersey
shall govern all issues concerning the relative rights of the Company and its
stockholders.  All other questions
concerning the construction, validity, enforcement and interpretation of this
Agreement shall be governed by the internal laws of the State of New Jersey,
without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of New Jersey or any other jurisdictions) that would
cause the application of the laws of any jurisdictions other than the 

 15
 

State of New Jersey.  Each party hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in Hudson County
and the United States District Court for the District of New Jersey, for the
adjudication of any dispute hereunder or in connection herewith or therewith,
or with any transaction contemplated hereby or discussed herein, and hereby
irrevocably waives, and agrees not to assert in any suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of any such
court, that such suit, action or proceeding is brought in an inconvenient forum
or that the venue of such suit, action or proceeding is improper.  Each party hereby irrevocably waives personal
service of process and consents to process being served in any such suit, action
or proceeding by mailing a copy thereof to such party at the address for such
notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by law.

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

REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

 16
 

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

	
  

  	
  ISONICS CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
  John Sakys

  
	
   

  	
  Title:

  	
  President and Interim Chief Executive Officer

  
				

 

 17

EXHIBIT A TO WARRANT

EXERCISE NOTICE

TO
BE EXECUTED 

BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT

ISONICS
CORPORATION INC.

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

Specify Method of exercise by check mark:

1.          Cash Exercise

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

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

2.          Cashless Exercise

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

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

Date:               
      ,             

Name of Registered Holder

	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  

 

EXHIBIT B TO WARRANT

FORM OF WARRANT POWER

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

	
  Dated:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
   

  	
  Title:

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