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Exhibit 10.8    
    

ABBOTT LABORATORIES

1996 INCENTIVE STOCK PROGRAM

(as amended and restated through the

4th Amendment February 18, 2005)  

        1.     PURPOSE.
The purpose of the Abbott Laboratories 1996 Incentive Stock Program (the "Program") is to attract and retain outstanding directors, officers and other employees
of Abbott Laboratories (the "Company") and its subsidiaries, and to furnish incentives to such persons by providing opportunities to acquire common shares of the Company, or monetary payments based on
the value of such shares or the financial performance of the Company, or both, on advantageous terms as herein provided and to further align such persons' interests with those of the Company's other
shareholders through compensation that is based on the value of the Company's common shares. 

        2.     ADMINISTRATION.
The Program will be administered by a committee (the "Committee") of at least two persons which shall be either the Compensation Committee of the Board of
Directors of the Company (the "Board of Directors") or such other committee comprised entirely of persons who are both: (i) "disinterested persons" as defined in Rule 16b-3
of the Securities and Exchange Commission; and (ii) "outside directors" as defined under Section 162(m) of the Internal Revenue Code of 1986, as amended, or any successor provision; as
the Board of Directors may from time to time designate. The Committee shall interpret the Program, prescribe, amend and rescind rules and regulations relating thereto and make all other determinations
necessary or advisable for the administration of the Program. A majority of the members of the Committee shall constitute a quorum and all determinations of the Committee shall be made by a majority
of its members. Any determination of the Committee under the Program may be made without notice of meeting of the Committee by a writing signed by all of the Committee members. The Committee may, from
time to time, delegate any or all of its duties, powers and authority to any officer or officers of the Company, except to the extent such delegation would be inconsistent with
Rule 16b-3 of the Securities and Exchange Commission or other applicable law, rule or regulation. The Chief Executive Officer of the Company may, on behalf of the Committee, grant
stock options, restricted stock awards, and restricted stock units under the Program, other than to persons subject to Section 16 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All such grants by the Chief Executive Officer must be reported to, and ratified by, the Committee within twelve months of the grant date but, if ratified, shall be effective as of
the grant date. 

        3.     PARTICIPANTS.
Participants in the Program will consist of such officers and other employees of the Company and its subsidiaries as the Committee in its sole discretion
may designate from time to time to receive Benefits hereunder. The Committee's designation of a participant in any year shall not require the Committee to designate such person to receive a Benefit in
any other year. The Committee shall consider such factors as it deems pertinent in selecting participants and in determining the type and amount of their respective Benefits, including without
limitation (i) the financial condition of the Company; (ii) anticipated profits for the current or future years; (iii) contributions of participants to the profitability and
development of the Company; (iv) prior awards to participants; and (v) other compensation provided to participants. Non-Employee Directors shall also be participants in the
Program solely for purposes of receiving Restricted Stock Awards and Restricted Stock Units under paragraph 13 and Non-qualified Stock Options under paragraph 14. The term
"Non-Employee Director" shall mean a member of the Board of Directors who is not a full-time employee of the Company or any of its subsidiaries. 

        4.     TYPES
OF BENEFITS. Benefits under the Program may be granted in any one of a combination of (a) Incentive Stock Options; (b) Non-qualified Stock
Options; (c) Stock Appreciation 

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Rights;
(d) Limited Stock Appreciation Rights; (e) Restricted Stock Awards; (f) Restricted Stock Units; (g) Performance Awards; and (h) Foreign Qualified Benefits,
all as described below. 

        5.     SHARES
RESERVED UNDER THE PROGRAM. There is hereby reserved for issuance under the Program: (i) an aggregate of Five Million (5,000,000) common shares; plus
(ii) an authorization for each calendar year (the "Annual Authorization") for the years 1996 through 1999, of seven-tenths of one percent (0.7%) of the total common shares of the Company issued
and outstanding as of the first day of such calendar year and for the years from and including 2000, one and a half percent (1.5%) of the total common shares of the Company issued and outstanding as
of the first day of such calendar year; which may be newly issued or treasury shares. The shares hereby reserved are in addition to the shares previously reserved under the Company's 1981 Incentive
Stock Program, 1986 Incentive Stock Program and 1991 Incentive Stock Program (the "Prior Programs"). Any common shares reserved for issuance under the Prior Programs in excess of the number of shares
as to which options or other Benefits have been awarded on the date of shareholder approval of this Program, plus any such shares as to which options or other Benefits granted under the Prior Programs
may lapse, expire, terminate or be canceled after such date, shall also be reserved and available for issuance in connection with Benefits under this Program. Any common shares reserved under the
Program for any calendar year under an Annual Authorization as to which options or other Benefits have not been awarded as of the end of such calendar year shall be available for issuance in
connection with Benefits granted in subsequent years. 

        If
there is a lapse, expiration, termination or cancellation of any Benefit granted hereunder without the issuance of shares or payment of cash thereunder, or if shares are issued under
any Benefit and thereafter are reacquired by the Company pursuant to rights reserved upon the issuance thereof, or shares are reacquired pursuant to the payment of the purchase price of shares under
stock options by delivery of other common shares of the Company, the shares subject to or reserved for such Benefit, or so reacquired, may again be used for new options, rights or awards of any sort
authorized under this Program; provided, however, that in no event may the number of common shares issued under this Program, and not reacquired by the Company pursuant to rights reserved upon the
issuance thereof or pursuant to the payment of the purchase price of shares under stock options by delivery of other common shares of the Company, exceed the total number of shares reserved for
issuance hereunder. 

        6.     INCENTIVE
STOCK OPTIONS. Incentive Stock Options will consist of options to purchase common shares at purchase prices not less than One Hundred percent (100%) of the Fair
Market Value of such common shares on the date of grant. An Incentive Stock Option will not be exercisable after the expiration of ten (10) years from the date such option is granted. In the
event of termination of employment for any reason other than retirement, disability or death, the right of the optionee to exercise an Incentive Stock Option shall terminate upon the earlier of the
end of the original term of the option or three (3) months after the optionee's last day of work for the Company and its subsidiaries. In the event of termination of employment due to
retirement or disability, or if the optionee should die while employed, the right of the optionee or his or her successor in interest to exercise an Incentive Stock Option shall terminate upon the end
of the original term of the option. If the optionee should die within three (3) months after termination of employment for any reason other than retirement or disability, the right of his or
her successor in interest to exercise an Incentive Stock Option shall terminate upon the earlier of the end of the original term of the option or three (3) months after the date of such death.
To the extent the aggregate fair market value (determined as of the time the Option is granted) of the common shares with respect to which any Incentive Stock Option is exercisable for the first time
by any individual during any calendar year (under all option plans of the Company and its subsidiary corporations) exceeds $100,000, the excess shall be treated as a Non-qualified Stock
Option. An Incentive Stock Option shall be exercisable as determined by the Committee, but in no event earlier than six (6) months from its grant date. 

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        7.     NON-QUALIFIED
STOCK OPTIONS. Non-qualified Stock Options will consist of options to purchase common shares at purchase prices not less than One
Hundred percent (100%) of the Fair Market Value of such common shares on the date of grant. A Non-qualified Stock Option will not be exercisable after the expiration of ten
(10) years from the date such option is granted. In the event of termination of employment for any reason other than retirement, disability or death, the right of the optionee to exercise a
Non-qualified Stock Option shall terminate upon the earlier of the end of the original term of the option or three (3) months after the optionee's last day of work for the Company
and its subsidiaries. In the event of termination of employment due to retirement or disability, or if the optionee should die while employed, the right of the optionee or his or her successor in
interest to exercise a Non-qualified Stock Option shall terminate upon the end of the original term of the option. If the optionee should die within three (3) months after
termination of employment for any reason other than retirement or disability, the right of his or her successor in interest to exercise a Non-qualified Stock Option shall terminate upon
the earlier of the end of the original term of the option or three (3) months after the date of such death. A Non-qualified Stock Option shall be exercisable as determined by the
Committee, but in no event earlier than six (6) months from its grant date. 

        8.     STOCK
APPRECIATION RIGHTS. The Committee may, in its discretion, grant a Stock Appreciation Right to the holder of any stock option granted hereunder or under the Prior
Programs. Such Stock Appreciation Rights shall be subject to such terms and conditions consistent with the Program as the Committee shall impose from time to time, including the following: 

	(a)
	A
Stock Appreciation Right may be granted with respect to a stock option at the time of its grant or at any time thereafter up to six (6) months prior to its expiration.

	(b)
	Stock
Appreciation Rights will permit the holder to surrender any related stock option or portion thereof which is then exercisable and to elect to receive in exchange therefor cash
in an amount equal to:

	(i)
	The
excess of the Fair Market Value on the date of such election of one common share over the option price multiplied by

	(ii)
	The
number of shares covered by such option or portion thereof which is so surrendered.

	(c)
	A
Stock Appreciation Right granted to a participant who is subject to Section 16 of the Exchange Act may be exercised only after six (6) months from its grant date
(unless such exercise would not affect the exemption under Rule 16b-3 of the Securities and Exchange Commission).

	(d)
	A
Stock Appreciation Right may be granted to a participant regardless of whether such participant has been granted a Limited Stock Appreciation Right with respect to the same stock
option. However, a Stock Appreciation Right may not be exercised during any period that a Limited Stock Appreciation Right with respect to the same stock option may be exercised.

	(e)
	In
the event of the exercise of a Stock Appreciation Right, the number of shares reserved for issuance hereunder shall be reduced by the number of shares covered by the stock option
or portion thereof surrendered. 

        9.     LIMITED
STOCK APPRECIATION RIGHTS. The Committee may, in its discretion, grant a Limited Stock Appreciation Right to the holder of any stock option granted hereunder or
under the 

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Prior
Programs. Such Limited Stock Appreciation Rights shall be subject to such terms and conditions consistent with the Program as the Committee shall impose from time to time, including the
following: 

	(a)
	A
Limited Stock Appreciation Right may be granted with respect to a stock option at the time of its grant or at any time thereafter up to six (6) months prior to its
expiration.

	(b)
	A
Limited Stock Appreciation Right will permit the holder to surrender any related stock option or portion thereof which is then exercisable and to receive in exchange therefor cash
in an amount equal to:

	(i)
	The
excess of the Fair Market Value on the date of such election of one common share over the option price multiplied by

	(ii)
	The
number of shares covered by such option or portion thereof which is so surrendered.

	(c)
	A
Limited Stock Appreciation Right granted to a participant who is subject to Section 16 of the Exchange Act may be exercised only after six (6) months from its grant
date (unless such exercise would not affect the exemption under Rule 16b-3 of the Securities and Exchange Commission) and only during the sixty (60) day period commencing on
the later of:

	(i)
	the
day following the date of a Change in Control; or (ii) the first date on which such exercise would be exempt under Rule 16b-3 of the
Securities and Exchange Commission.

	(d)
	A
Limited Stock Appreciation Right may be granted to a participant regardless of whether such participant has been granted a Stock Appreciation Right with respect to the same stock
option.

	(e)
	In
the event of the exercise of a Limited Stock Appreciation Right, the number of shares reserved for issuance hereunder shall be reduced by the number of shares covered by the stock
option or portion thereof surrendered. 

        10.   RESTRICTED
STOCK AWARDS AND RESTRICTED STOCK UNITS 

	(a)
	RESTRICTED
STOCK AWARDS. Restricted Stock Awards will consist of common shares transferred to participants without other payment therefor as additional compensation for their services
to the Company or any of its subsidiaries. Restricted Stock Awards granted under this paragraph 10 shall be satisfied from the Company's available treasury shares. Restricted Stock Awards shall
be subject to such terms and conditions as the Committee determines appropriate, including, without limitation, restrictions on the sale or other disposition of such shares and rights of the Company
to reacquire such shares upon termination of the participant's employment within specified periods. Subject to such other restrictions as are imposed by the Committee, the common shares covered by a
Restricted Stock Award granted to a participant who is subject to Section 16 of the Exchange Act may be sold or otherwise disposed of only after six (6) months from the grant date of the
award (unless such sale would not affect the exemption under Rule 16b-3 of the Securities and Exchange Commission).

	(b)
	RESTRICTED
STOCK UNITS. Restricted Stock Units will consist of an unfunded promise to deliver shares of stock at some future date to participants without other payment therefor as
additional compensation for their services to the Company or any of its subsidiaries. Stock delivered under this paragraph 10 (b) shall be satisfied from the Company's available treasury
shares. Restricted Stock Units granted under this paragraph 10(b) shall be subject to such terms and conditions as the Committee 

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determines
appropriate, including, without limitation, restrictions on the sale or other disposition of such stock units, the rights of the Company to provide for the forfeiture of such stock units
upon termination of the participant's employment within specified periods and the right to receive dividend equivalent payments. 

	(c)
	No
more than ten percent (10%) of the total number of shares available for grant in any calendar year may be granted as Restricted Stock Units or Restricted Stock Awards (in the
aggregate) under paragraphs 10 and 13 in that year. 

        11.   PERFORMANCE
AWARDS. Performance Awards in the form of Performance Units or Performance Shares may be granted to any participant in the Program. Performance Units shall
consist of monetary awards which may be earned in whole or in part if the Company achieves certain goals established by the Committee over a designated period of time. Performance Shares shall consist
of common shares or awards denominated in common shares which may be earned in whole or in part if the Company achieves certain goals established by the Committee over a designated period of time. The
goals established by the Committee shall be based on any one, or combination of, earnings per share, return on equity, return on assets, total shareholder return, net operating income, cash flow,
increase in revenue, economic value added, increase in share price or cash flow return on investment. Partial achievement of the goal(s) may result in a payment or vesting corresponding to the degree
of achievement. Payment of an award earned may be in cash or in common shares or in a combination of both, and may be made when earned, or may be vested and deferred, as the Committee in its sole
discretion determines. The maximum amount which may be granted under all Performance Awards for any one year for any one participant shall be Five Million Dollars ($5,000,000). This limit shall be
applied to Performance Shares by multiplying the number of Performance Shares granted by the fair market value of one common share on the date of the award. During the term of the Program, no more
than 5 million shares of Abbott common stock may be granted in the form of Performance Units and no more than 5 million shares of Abbott common stock may be granted in the form of
Performance Shares. This paragraph 11 is intended to comply with the performance-based compensation requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended, and
shall be interpreted in accordance with the rules and regulations thereunder. 

        12.   FOREIGN
QUALIFIED BENEFITS. Benefits under the Program may be granted to such employees of the Company and its subsidiaries who are residing in foreign jurisdictions as
the Committee in its sole discretion may determine from time to time. The Committee may adopt such supplements to the Program as may be necessary to comply with the applicable laws of such foreign
jurisdictions and to afford participants favorable treatment under such laws; provided, however, that no Benefit shall be granted under any such supplement with terms or conditions which are
inconsistent with the provisions as set forth under the Program. 

        13.   RESTRICTED
STOCK UNIT AWARDS FOR NON-EMPLOYEE DIRECTORS. 

	(a)
	Each
year, on the date of the annual shareholders meeting, each person who is elected a Non-Employee Director at the annual shareholders meeting shall be awarded both:
(i) Restricted Stock Units covering a number of common shares with a Fair Market Value on the date of the award closest to, but not in excess of, an amount equal to six times the monthly fee in
effect under Section 3.1 of the Abbott Laboratories Non-Employee Director's Fee Plan on the date of the award and (ii) Restricted Stock Units covering a number of common
shares with a Fair Market Value on the date of the award closest to, but not in excess of, Fifty Thousand Dollars ($50,000).

	(b)
	VESTING
AND PAYMENT. The Restricted Stock Units granted under this paragraph 13 shall be fully vested on the date of the award. The Non-Employee Director receiving
the Restricted Stock Units shall be entitled to receive one common share for each common 

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share
subject to the award upon the earliest of the following events (the "Termination Event"): 

	(i)
	The
date the director terminates or retires from the Board;

	(ii)
	The
date the director dies; or

	(iii)
	The
date of occurrence of a Change in Control (as defined in paragraph 21(c)).

	(c)
	DIVIDENDS.
The Non-Employee Director receiving the Restricted Stock Units shall be entitled to receive cash payments equal to the dividends and distributions paid on
shares of stock (other than dividends or distributions of securities of the Company which may be issued with respect to its shares by virtue of any stock split, combination, stock dividend or
recapitalization) to the same extent as if each Restricted Stock Unit was a share of stock, and those shares were not subject to the restrictions imposed by this Program, provided that the record date
with respect to such dividend or distribution occurs within the period commencing with the date of the award and ending upon the date of the Termination Event (the "Restricted Period").

	(d)
	RESTRICTIONS.
All Restricted Stock Units granted under this paragraph 13 shall be subject to the following restrictions during the Restricted Period:

	(i)
	The
Restricted Stock Units may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of.

	(ii)
	Any
additional common shares of the Company or other securities or property issued with respect to shares covered by awards granted under this paragraph 13 as a
result of any stock split, combination, stock dividend or recapitalization, shall be subject to the restrictions and other provisions of this paragraph 13.

	(iii)
	A
director shall not be entitled to receive any shares prior to completion of all actions deemed appropriate by the Company to comply with federal or state securities
laws and stock exchange requirements.

	(e)
	Except
in the event of conflict, all provisions of the Program shall apply to this paragraph 13. In the event of any conflict between the provisions of the Program and this
paragraph 13, this paragraph 13 shall control. Restricted Stock Units granted under this paragraph 13 shall be satisfied from the Company's available treasury shares. 

        14.   NON-QUALIFIED
STOCK OPTIONS FOR NON-EMPLOYEE DIRECTORS. 

	(a)
	Each
Non-Employee Director may elect to receive any or all of his or her fees earned during the second half of 1996 and each subsequent calendar year under
Section 3 of the Abbott Laboratories Non-Employee Directors' Fee Plan (the "Directors' Fee Plan") in the form of Non-qualified Stock Options under this
Section 14. Each such election shall be irrevocable, and must be made in writing and filed with the Secretary of the Company by December 31, 1995 (for fees earned in the second half of
1996) and (for fees earned in subsequent calendar years) by June 30 of the calendar year preceding the calendar year in which such fees are earned (or such later date as may be permissible
under Rule 16b-3 of the Securities and Exchange Commission, but in no event later than December 31 of such preceding calendar year).

	(b)
	A
Non-Employee Director may file a new election each calendar year applicable to fees earned in the immediately succeeding calendar year. If no new election or
revocation of a prior election is received by June 30 of any calendar year (or such later date as may be permissible under paragraph (a)), the election, if any, in effect for such
calendar year shall continue in effect for the immediately succeeding calendar year. Any election made 

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under
this Section 14 shall take precedence over any election made by the director for the same period, under the Directors' Fee Plan, to the extent necessary to resolve any conflict between
such elections. If a director does not elect to receive his or her fees in the form of Non-qualified Stock Options, the fees due such director shall be paid or deferred as provided in the
Directors' Fee Plan and any applicable election thereunder by the director. 

	(c)
	The
number of common shares covered by each Non-qualified Stock Option granted in any year under this Section 14 shall be determined based on an independent
appraisal for such year of the intrinsic value of options granted hereunder and the amount of fees covered by the director's election for such year. The number of common shares covered by options
granted in 1996 (as determined under this procedure) shall be the number of whole shares equal to (i) the product of three (3) times the amount of fees which the director has elected
under paragraph (a) to receive in the form of Non-qualified Stock Options, divided by (ii) One Hundred percent (100%) of the Fair Market Value of one common share on the
grant date. Any fraction of a share shall be disregarded, and the remaining amount of the fees corresponding to such option shall be paid as provided in the Directors' Fee Plan and any applicable
election thereunder by the director.

	(d)
	Effective
on October 10, 1997, each Non-qualified Stock Option due a director under this Section 14 prior to the 1998 annual shareholders meeting shall be
granted on October 10, 1997 at a purchase price equal to One Hundred percent (100%) of the Fair Market Value of the common shares covered by such option on the grant date. Effective with the
1998 Annual Shareholders Meeting, each Non-qualified Stock Option due a director under this Section 14 shall be granted annually, on the date of the annual shareholders meeting, at
a purchase price equal to One Hundred percent (100%) of the Fair Market Value of the common shares covered by such option on the grant date. Each such option shall be immediately exercisable and
nonforfeitable, and shall not be exercisable after the expiration of ten (10) years from the date it is granted. Each such option shall contain provisions allowing payment of the purchase price
and, to the extent permitted, any taxes due on exercise, by delivery of other common shares of the Company (or, in the case of the payment of taxes, by withholding of shares).

	(e)
	All
Non-qualified Stock Options granted under this Section 14 prior to October 10, 1997, shall be immediately exercisable and nonforfeitable, and shall not
be exercisable after the expiration of ten (10) years from the date granted. 

        15.   NONTRANSFERABILITY.
Except as provided by the Committee, each stock option and stock appreciation right granted under this Program shall not be transferable other than
by will or the laws of descent and distribution, and shall be exercisable, during the participant's lifetime, only by the participant or the participant's guardian or legal representative. 

        16.   OTHER
PROVISIONS. The award of any Benefit under the Program may also be subject to other provisions (whether or not applicable to the Benefit awarded to any other
participant) as the Committee determines appropriate, including, without limitation, provisions for the purchase of common shares under stock options in installments, provisions for the payment of the
purchase price of shares under stock options by delivery of other common shares of the Company having a then market value equal to the purchase price of such shares, restrictions on resale or other
disposition, such provisions as may be appropriate to comply with federal or state securities laws and stock exchange requirements and understandings or conditions as to the participant's employment
in addition to those specifically provided for under the Program. 

        In
the case of a participant who is subject to Section 16(a) and 16(b) of the Exchange Act, the Committee may, at any time, add such conditions and limitations to any Benefit
granted to such 

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participant,
or any feature of any such Benefit, as the Committee, in its sole discretion, deems necessary or desirable to comply with Section 16(a) or 16(b) and the rules and regulations
thereunder or to obtain any exemption therefrom. A participant may pay the purchase price of shares under stock options by delivery of a properly executed exercise notice together with a copy of
irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds to pay the purchase price. To facilitate the foregoing, the Company may enter into
agreements for coordinated procedures with one or more brokerage firms. 

        The
Committee may, in its discretion and subject to such rules as it may adopt, permit or require a participant to pay all or a portion of the federal, state and local taxes, including
FICA and medicare withholding tax, arising in connection with the following transactions: (a) the exercise of a Non-qualified Stock Option; (b) the lapse of restrictions on common
shares received as a Restricted Stock Award; or (c) the receipt or exercise of any other Benefit; by (i) having the Company withhold common shares, (ii) tendering back common
shares received in connection with such Benefit or (iii) delivering other previously acquired common shares of the Company having a fair market value approximately equal to the amount to be
withheld. 

        The
Committee may grant stock options under the Program (and, for stock options granted prior to shareholder approval of this Program, under the Company's 1991 Incentive Stock Program)
that provide for the grant of replacement stock options if all or any portion of the purchase price or taxes incurred in connection with the exercise, are paid by delivery (or, in the case of payment
of taxes, by withholding of shares) of other common shares of the Company. The replacement stock option shall cover the number of common shares surrendered to pay the purchase price, plus the number
of shares
surrendered or withheld to satisfy the participant's tax liability, shall have an exercise price equal to One Hundred percent (100%) of the Fair Market Value of such common shares on the date such
replacement stock option is granted, shall first be exercisable six months from the date of grant of the replacement stock option and shall have an expiration date equal to the expiration date of the
original stock option. 

        17.   TERM
OF PROGRAM AND AMENDMENT, MODIFICATION, CANCELLATION OR ACCELERATION OF BENEFITS. The Program shall continue in effect until terminated by the Board of Directors,
except that no Incentive Stock Option shall be granted after October 13, 2005 and that no other Benefits shall be granted after April 27, 2010. The terms and conditions applicable to any
Benefits may at any time be amended, modified or canceled by mutual agreement between the Committee and the participant or such other persons as may then have an interest therein, so long as any
amendment or modification does not increase the number of common shares issuable under this Program; and provided further, that the Committee may, at any time and in its sole discretion, declare any
or all stock options and stock appreciation rights then outstanding under the Program or the Prior Programs to be exercisable and any or all the then outstanding Restricted Stock Awards or Restricted
Stock Units to be vested, whether or not such options, rights or awards are then otherwise exercisable or vested. Notwithstanding the foregoing, except as provided in paragraph 22, the
Committee shall neither lower the purchase price of any option granted under the Program nor grant any option under the Program in replacement of a cancelled option which had previously been granted
at a higher purchase price, without shareholder approval. 

        18.   AMENDMENT
TO PRIOR PROGRAMS. No options or other Benefits shall be granted under the Prior Programs on or after the date of shareholder approval of this Program. 

        19.   INDIVIDUAL
LIMIT ON OPTIONS AND STOCK APPRECIATION RIGHTS; AGGREGATE LIMIT ON INCENTIVE STOCK OPTIONS. The maximum number of shares with respect to which Incentive Stock
Options, Non-qualified Stock Options, Stock Appreciation Rights and Limited Stock Appreciation Rights may be granted to any one participant, in aggregate in any one calendar year, shall be
Two Million (2,000,000) shares. Incentive Stock Options with respect to no more 

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than
the lesser of (i) One Hundred and Fifty Million (150,000,000) shares (plus any shares acquired by the Company pursuant to payment of the purchase price of shares under incentive stock
options by delivery of other common shares of the Company), or (ii) the total number of shares reserved under paragraph 5 may be issued under the Plan. 

        20.   TAXES.
The Company shall be entitled to withhold the amount of any tax attributable to any amount payable or shares deliverable under the Program after giving the person
entitled to receive such amount or shares notice as far in advance as practicable, and the Company may defer making payment or delivery if any such tax may be pending unless and until indemnified to
its satisfaction. 

        21.   DEFINITIONS.

	(a)
	FAIR
MARKET VALUE. Except as provided below, the Fair Market Value of the Company's common shares shall be determined by such methods or procedures as shall be established by the
Committee; provided that, in the case of any Limited Stock Appreciation Right (other than a right related to an Incentive Stock Option), the Fair Market Value shall be the higher of:

	(i)
	The
highest daily closing price of the Company's common shares during the sixty (60) day period following the Change in Control; or

	(ii)
	The
highest gross price paid or to be paid for the Company's common shares in any of the transactions described in paragraphs 21(c)(i) and 21(c)(ii).

	(b)
	SUBSIDIARY.
The term "subsidiary" for all purposes other than the Incentive Stock Option provisions in paragraph 6, shall mean any corporation, partnership, joint venture or
business trust, fifty percent (50%) or more of the control of which is owned, directly or indirectly, by the Company. For Incentive Stock Option purposes the term "subsidiary" shall be defined as
provided in Internal Revenue Code Section 424(f).

	(c)
	CHANGE
IN CONTROL. A "Change in Control" shall be deemed to have occurred on the earliest of the following dates:

	(i)
	the
date any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such
Person any securities acquired directly from the Company or its Affiliates) representing 20% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who
becomes such a Beneficial Owner in connection with a transaction described in clause (a) of paragraph (iii) below; or

	(ii)
	the
date the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof,
constitute the Board of Directors and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not
limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board of Directors or nomination for election by the Company's
shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose
appointment, election or nomination for election was previously so approved or recommended; or

	(iii)
	the
date on which there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or other
entity, other than (a) a merger or consolidation (I) immediately following which the individuals who comprise the Board of Directors immediately prior thereto constitute at least a
majority of the Board of Directors of the Company, the entity 

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surviving
such merger or consolidation or, if the Company or the entity surviving such merger or consolidation is then a subsidiary, the ultimate parent thereof and (II) which results in the
voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of
the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of
the Company, at least 50% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or
(b) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of
securities of the Company (not including in the securities Beneficially Owned by such Person any securities acquired directly from the Company or its Affiliates) representing 20% or more of the
combined voting power of the Company's then outstanding securities; or 

	(iv)
	the
date the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or
disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at
least 50% of the combined voting power of the voting securities of which are owned by shareholders of the Company, in combination with the ownership of any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any subsidiary of the Company, in substantially the same proportions as their ownership of the Company immediately prior to such sale. 

Notwithstanding
the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following
which the record holders of the common stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity
which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions. 

For
purposes of this Program: "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act; "Beneficial Owner" shall have the
meaning set forth in Rule 13d-3 under the Exchange Act; and "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections
13(d) and 14(d) thereof, except that such term shall not include (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee
benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned,
directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. 

	(d)
	DISABILITY.
The term "disability" for all purposes of the Program shall mean the participant's disability as defined in subsection 4.1(a) of the Abbott Laboratories Extended
Disability Plan for twelve (12) consecutive months. 

        22.   ADJUSTMENT
PROVISIONS. 

	(a)
	If
the Company shall at any time change the number of issued common shares without new consideration to the Company (such as by stock dividends or stock splits), the total 

10

 

number
of shares reserved for issuance under this Program, the individual and aggregate limits described in paragraphs 11 and 19 on the number of shares that may be granted or issued (as the case may
be), the number of shares covered by each outstanding Benefit and the purchase price of such shares shall be adjusted so that the aggregate consideration payable to the Company and the value of each
such Benefit shall not be changed. Subject to paragraph 22(c), the Committee shall also have the right to provide for the continuation of Benefits or for other equitable adjustments after
changes in the Company or in the common shares resulting from reorganization, sale, merger, consolidation, spin-off or similar occurrence. 

	(b)
	Subject
to paragraph 22(c), without affecting the number of shares otherwise reserved or available hereunder, the Committee may authorize the issuance or assumption of Benefits
in connection with any merger, consolidation, acquisition of property or stock, or reorganization upon such terms and conditions as it may deem appropriate.

	(c)
	Notwithstanding
any other provision of this Program or the Prior Programs including the terms of any Benefit granted hereunder, if the outstanding common shares of the Company shall
be combined, or be changed into, or exchanged for, another kind of stock of the Company, into securities of another corporation, or into property (including cash) whether through recapitalization,
reorganization, sale, merger, consolidation, spin-off, business combination or a similar transaction (a "Transaction"), the Company shall cause its successor, acquiror (or ultimate parent
of any successor or acquiror), as applicable, to assume each stock option, Stock Appreciation Right and Limited Stock Appreciation Right outstanding immediately prior to the Transaction (or to cause
new options or rights to be substituted therefor). Pursuant to such assumed or substituted option or rights, participants shall thereafter be entitled to receive, upon due exercise of any portion of
the option or right, (a) in the event of a Transaction in which the outstanding common shares of the Company are combined, or changed into, or exchanged for, solely another kind of stock of the
Company or securities of another corporation (disregarding, for this purpose, cash paid in lieu of fractional shares), the securities which that person would have been entitled to receive for common
shares acquired through exercise of the same portion of such option or right immediately prior to the effective date of such Transaction, and (b) in the event of a Transaction in which the
outstanding common shares of the Company are changed into, or exchanged for, property (including cash) other than solely stock of the Company or securities of another corporation (disregarding, for
this purpose, cash paid in lieu of fractional shares), securities the fair market value of which immediately following the effective date of such Transaction (as determined by the Committee) equals
the fair market value (as determined by the Committee) of the property which that person would have been entitled to receive for common shares acquired through exercise of the same portion of such
option or right immediately prior to the effective date of such Transaction. In each case such assumed or substituted option or right shall continue to be subject to the same terms and conditions
(including, without limitation, with respect to any right to receive "replacement options" upon option exercise) to which it was subject immediately prior to the Transaction. 

Notwithstanding
the immediately preceding paragraph, upon a Transaction in which the outstanding common shares of the Company are changed into, or exchanged for, property (including cash) other than
solely stock of the Company or securities of another corporation (disregarding, for this purpose, cash paid in lieu of fractional shares) and which constitutes a Change in Control, each participant
may elect to receive, immediately following such Transaction in exchange for cancellation of any stock option (other than an Incentive Stock Option granted prior to June 20, 2003), Stock
Appreciation Right or 

11

 

Limited
Appreciation Right held by such participant immediately prior to the Transaction, a cash payment, with respect to each common share subject to such option or right, equal to the difference
between the value of consideration (as determined by the Committee) received by the shareholders for a common share of the Company in the Transaction, less any applicable purchase price. 

	(d)
	Notwithstanding
any other provision of this Program or the Prior Programs including the terms of any Benefit granted hereunder, upon the occurrence of a Change in Control:

	(i)
	All
stock options then outstanding under this Program or the Prior Programs shall become fully exercisable as of the date of the Change in Control, whether or not then
otherwise exercisable;

	(ii)
	All
Stock Appreciation Rights and Limited Stock Appreciation Rights then outstanding shall become fully exercisable as of the date of the Change in Control, whether or
not then otherwise exercisable;

	(iii)
	All
terms and conditions of all Restricted Stock Awards then outstanding shall be deemed satisfied as of the date of the Change in Control;

	(iv)
	All
terms and conditions of all Restricted Stock Units then outstanding shall be deemed satisfied and all restrictions on those Restricted Stock Units will lapse as of
the date of the Change in Control; and

	(v)
	All
Performance Awards then outstanding shall be deemed to have been fully earned and to be immediately payable, in cash, as of the date of the Change in Control. 

        23.   AMENDMENT
AND TERMINATION OF PROGRAM. The Board of Directors may amend the Program from time to time or terminate the Program at any time, but no such action shall
reduce the then existing amount of any participant's Benefit or adversely change the terms and conditions thereof without the participant's consent. Notwithstanding the foregoing, except as provided
in paragraph 22, the Company shall neither lower the purchase price of any option granted under the Program nor grant any option under the Program in replacement of a cancelled option which had
previously been granted at a higher purchase price, without shareholder approval. To the extent required for compliance with Rule 16b-3 of the Securities and Exchange Commission,
paragraph 13 of the Program may not be amended more frequently than once every six months other than to comport with changes in the Internal Revenue Code of 1986, as amended, or the rules
thereunder, and no amendment of the Program shall result in any Committee member losing his or her status as a "disinterested person" as defined in Rule 16b-3 of the Securities and
Exchange Commission with respect to any employee benefit plan of the Company or result in the Program or awards thereunder losing their exempt status under said Rule 16b-3. 

        24.   EFFECTIVE
DATE. The Program was originally adopted by the Board of Directors on October 13, 1995. 

12

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Exhibit 10.1  

 
 

SECURITIES PURCHASE AGREEMENT    
    

        This Securities Purchase Agreement (this "Agreement") is dated as of February 24, 2005 among Isonics
Corporation, a California corporation (the "Company"), and each purchaser identified on the signature pages hereto (each, including its successors and
assigns, a "Purchaser" and collectively the "Purchasers"). 

        WHEREAS,
subject to the terms and conditions set forth in this Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act") and Rule 506 promulgated thereunder, the Company desires to issue and sell to each Purchaser, and each Purchaser, severally and
not jointly, desires to purchase from the Company, securities of the Company as more fully described in this Agreement. 

        NOW,
THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby
acknowledged, the Company and each Purchaser agree as follows: 

ARTICLE I.

DEFINITIONS  

        1.1    Definitions.    In addition to the terms defined elsewhere in this Agreement: (a) capitalized terms that
are not otherwise defined herein have the meanings given to such terms in the Debentures (as defined herein), and (b) the following terms have the meanings indicated in this Section 1.1: 

        "Action" shall have the meaning ascribed to such term in Section 3.1(j). 

        "Affiliate" means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under
common control with a Person, as such terms are used in and construed under Rule 144 under the Securities Act. With respect to a Purchaser, any investment fund or managed account that is
managed on a discretionary basis by the same investment manager as such Purchaser will be deemed to be an Affiliate of such Purchaser. 

        "Closing" means the closing of the purchase and sale of the Securities pursuant to Section 2.1. 

        "Closing Date" means the Trading Day when all of the Transaction Documents have been executed and delivered by the applicable parties
thereto, and all conditions precedent to (i) the Purchasers' obligations to pay the Subscription Amount and (ii) the Company's obligations to deliver the Securities have been satisfied
or waived. 

        "Closing Price" means on any particular date (a) the last reported closing bid price per share of Common Stock on such date on the
Trading Market (as reported by Bloomberg L.P. at 4:15 PM (New York time), or (b) if there is no such price on such date, then the closing bid price on the Trading Market on the date nearest
preceding such date (as reported by Bloomberg L.P. at 4:15 PM (New York time) for the closing bid price for regular session trading on such day), or (c) if the Common Stock is not then listed
or quoted on a Trading Market and if prices for the Common Stock are then quoted on the OTC Bulletin Board, the closing bid price of the Common Stock for such date (or the nearest preceding date) on
the OTC Bulletin Board (as reported by Bloomberg L.P. at 4:15 PM (New York time), (d) if the Common Stock is not then listed or quoted on the Trading Market and if prices for the Common Stock
are then reported in the "pink sheets" published by the Pink Sheets LLC (formerly the National Quotation Bureau Incorporated (or a similar organization or agency succeeding to its functions of
reporting prices), the most recent bid price per share of the Common Stock so reported, or (e) if the shares of Common Stock are not then publicly traded the fair market value of a share of
Common Stock as determined by a qualified independent appraiser selected in good faith by the Purchasers of a majority in interest of the Shares then outstanding. 

 

        "Commission" means the Securities and Exchange Commission. 

        "Common Stock" means the common stock of the Company, no par value, and any securities into which such common stock shall hereinafter have
been reclassified into. 

        "Common Stock Equivalents" means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire at
any time Common Stock, including without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exchangeable for, or otherwise
entitles the holder thereof to receive, Common Stock. 

        "Company Counsel" means Burns, Figa & Will, P.C., Denver, Colorado and, for the purposes of California law, Lord, Bissell &
Brook, LLP, Los Angeles, California. 

        "Conversion Price" shall have the meaning ascribed to such term in the Debentures. 

        "Debentures" means, the 8% Convertible Debentures issued by the Company to the Purchasers hereunder, in the form of  Exhibit A. 

        "Disclosure Schedules" shall have the meaning ascribed to such term in Section 3.1. 

        "Effective Date" means the date that the initial Registration Statement filed by the Company pursuant to the Registration Rights Agreement
is first declared effective by the Commission. 

        "Escrow Agent" shall have the meaning set forth in the Escrow Agreement. 

        "Escrow Agreement" shall mean the Escrow Agreement in substantially the form of  Exhibit E hereto executed and delivered contemporaneously with this Agreement.

        "Evaluation Date" shall have the meaning ascribed to such term in Section 3.1(r). 

        "Exchange Act" means the Securities Exchange Act of 1934, as amended. 

        "Exempt Issuance" means the issuance of (a) shares of Common Stock or options to employees, officers or directors of the Company
pursuant to any stock or option plan duly adopted by a majority of the non-employee members of the Board of Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose, (b) shares of Common Stock or options to non-employee directors of the Company
pursuant to the Company's Directors Stock Option Plan, (c) shares of Common Stock or options or warrants to non-employee consultants to the Company as compensation for services
rendered, in an aggregate amount not to exceed 1,000,000 shares or equivalents for any twelve-month period, (d) securities upon (i) the exercise of or conversion of any securities issued
hereunder, (ii) the exercise or conversion of any convertible securities, options or warrants issued and outstanding on the date of this Agreement, or (iii) the application of any
anti-dilution provisions contained in the provisions establishing any securities issued hereunder or that are outstanding on the date of this Agreement or that are issuable pursuant to the
plans described in clauses (a) or (b) hereof, provided that the material terms of such issuances in clauses (i)-(iii) are determined on the date hereof and are not amended after
the date of this Agreement to increase the number of such securities or to decrease the exercise or conversion price of any such securities, and (e) securities issued pursuant to acquisitions
or strategic transactions, provided any such issuance shall only be to a Person which is, itself or through its subsidiaries, an operating company in which the Company anticipates receiving benefits
in addition to the investment of funds, but shall not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose primary
business is investing in securities. 

        "FW" means Feldman Weinstein LLP with offices at 420 Lexington Avenue, Suite 2620, New York, New York 10170-0002. 

2

 

        "GAAP" shall have the meaning ascribed to such term in Section 3.1(h). 

        "Intellectual Property Rights" shall have the meaning ascribed to such term in Section 3.1(o). 

        "Legend Removal Date" shall have the meaning ascribed to such term in Section 4.1(c). 

        "Liens" means a lien, charge, security interest, encumbrance, right of first refusal, preemptive right or other restriction. 

        "Material Adverse Effect" shall have the meaning assigned to such term in Section 3.1(b). 

        "Material Permits" shall have the meaning ascribed to such term in Section 3.1(m). 

        "Maximum Rate" shall have the meaning ascribed to such term in Section 5.17. 

        "Participation Maximum" shall have the meaning ascribed to such term in Section 4.13. 

        "Person" means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited
liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind. 

        "Pre-Notice" shall have the meaning ascribed to such term in Section 4.13. 

        "Proceeding" means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened. 

        "Purchaser Party" shall have the meaning ascribed to such term in Section 4.11. 

        "Registration Rights Agreement" means the Registration Rights Agreement, dated the date hereof, among the Company and the Purchasers, in
the form of Exhibit B attached hereto. 

        "Registration Statement" means a registration statement meeting the requirements set forth in the Registration Rights Agreement and
covering the resale of the Registrable Securities (as defined in the Registration Rights Agreement) by each Purchaser as provided for in the Registration Rights Agreement. 

        "Required Approvals" shall have the meaning ascribed to such term in Section 3.1(e). 

        "Required Minimum" means, as of any date, the maximum aggregate number of shares of Common Stock then issued or potentially issuable in
the future pursuant to the Transaction Documents, including any Underlying Shares issuable upon exercise or conversion in full of all Warrants and Debentures (including Underlying Shares issuable as
payment of interest), ignoring any conversion or exercise limits set forth therein, and assuming that the Conversion Price is at all times on and after the date of determination 75% of the then
Conversion Price on the Trading Day immediately prior to the date of determination. 

        "Rule 144" means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from
time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. 

        "SEC Reports" shall have the meaning ascribed to such term in Section 3.1(h). 

        "Securities" means the Debentures, the Warrants, the Warrant Shares and the Underlying Shares. 

        "Securities Act" means the Securities Act of 1933, as amended. 

        "Shareholder Approval" means such approval as may be required by the applicable rules and regulations of the Trading Market (or any
successor entity) from the shareholders of the Company with respect to the transactions contemplated by the Transaction Documents, including the 

3

 

issuance
of all of the Underlying Shares and shares of Common Stock issuable upon exercise of the Warrants in excess of 19.99% of the issued and outstanding Common Stock on the Closing Date. 

        "Short Sales" shall include all "short sales" as defined in Rule 3b-3 of the Exchange Act. 

        "Subscription Amount" means, as to each Purchaser, the aggregate amount to be paid for Debentures and Warrants purchased hereunder as
specified below such Purchaser's name on the signature page of this Agreement and next to the heading "Subscription Amount", in United States Dollars and in immediately available funds. 

        "Subsequent Financing" shall have the meaning ascribed to such term in Section 4.13. 

        "Subsequent Financing Notice" shall have the meaning ascribed to such term in Section 4.13. 

        "Subsidiary" means any subsidiary of the Company as set forth on Schedule 3.1(a). 

        "Trading Day" means a day on which the Common Stock is traded on a Trading Market 

        "Trading Market" means the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in
question: the Nasdaq SmallCap Market, the American Stock Exchange, the New York Stock Exchange or the Nasdaq National Market. 

        "Transaction Documents" means this Agreement, the Debentures, the Warrants, the Escrow Agreement, the Registration Rights Agreement and
any other documents or agreements executed in connection with the transactions contemplated hereunder. 

        "Underlying Shares" means the shares of Common Stock issuable upon conversion of the Debentures and upon exercise of the Warrants and
issued and issuable in lieu of the cash payment of interest on the Debentures. 

        "Warrants" means collectively the Common Stock purchase warrants, in the form of  Exhibit C delivered to the Purchasers at the Closing in accordance with
Section 2.2(a) hereof, which Warrants shall be exercisable
immediately and have a term of exercise equal to three years. 

        "Warrant Shares" means the shares of Common Stock issuable upon exercise of the Warrants. 

ARTICLE II.

PURCHASE AND SALE  

        2.1    Closing.    On the Closing Date, upon the terms and subject to the conditions set forth herein, concurrent with
the execution and delivery of this Agreement by the parties hereto, the Company agrees to sell, and each Purchaser agrees to purchase in the aggregate, severally and not jointly, up to $22,000,000
principal amount of the Debentures. Each Purchaser shall deliver pursuant to Section 2.2(b) via wire transfer or a certified check immediately available funds equal to their Subscription Amount
and the Company shall deliver their respective Debenture and Warrants as determined pursuant to Section 2.2(a) and the other items set forth in Section 2.2 issuable at the Closing. Upon
satisfaction of the conditions set forth in Section 2.2, the Closing shall occur at the offices of the Escrow Agent, or such other location as the parties shall mutually agree. 

        2.2    Deliveries.    

	a)
	On
the Closing Date, the Company shall deliver or cause to be delivered to the Escrow Agent with respect to each Purchaser the following:

	(i)
	this
Agreement duly executed by the Company;

	(ii)
	a
Debenture with a principal amount equal to such Purchaser's Subscription Amount, registered in the name of such Purchaser; 

4

 

	(iii)
	a
Warrant registered in the name of such Purchaser to purchase up to a number of shares of Common Stock equal to 35% of such Purchaser's Subscription Amount divided by
the Conversion Price, with an exercise price equal to $6.25, subject to adjustment therein;

	(iv)
	the
written voting agreement, in the form of Exhibit F attached hereto, of all of the officers, directors and
shareholders holding more than 10% of the issued and outstanding shares of Common Stock on the date hereof to vote all Common Stock owned by each of such officers, directors and shareholders as of the
record date for the annual meeting of shareholders of the Company in favor of Shareholder Approval amounting to, in the aggregate, at least 50% of the issued and outstanding Common Stock;

	(v)
	the
Registration Rights Agreement duly executed by the Company;

	(vi)
	the
Escrow Agreement duly executed by the Company; and

	(vii)
	a
legal opinion of Company Counsel, in the form of Exhibit D attached hereto.

	b)
	On
the Closing Date, each Purchaser shall deliver or cause to be delivered to the Escrow Agent the following:

	(i)
	this
Agreement duly executed by such Purchaser;

	(ii)
	such
Purchaser's Subscription Amount by wire transfer to the account of the Escrow Agent;

	(iii)
	the
Escrow Agreement duly executed by such Purchaser; and

	(iv)
	the
Registration Rights Agreement duly executed by such Purchaser. 

        2.3    Closing Conditions.    

	a)
	The
obligations of the Company hereunder in connection with the Closing are subject to the following conditions being met:

	(i)
	the
accuracy in all material respects when made and on the Closing Date of the representations and warranties of the Purchasers contained herein;

	(ii)
	all
obligations, covenants and agreements of the Purchasers required to be performed at or prior to the Closing Date shall have been performed;

	(iii)
	written
approval of the transactions contemplated hereunder by the Trading Market; and

	(iv)
	the
delivery by the Purchasers of the items set forth in Section 2.2(b) of this Agreement.

	b)
	The
respective obligations of the Purchasers hereunder in connection with the Closing are subject to the following conditions being met:

	(i)
	the
accuracy in all material respects on the Closing Date of the representations and warranties of the Company contained herein;

	(ii)
	all
obligations, covenants and agreements of the Company required to be performed at or prior to the Closing Date shall have been performed;

	(iii)
	the
delivery by the Company of the items set forth in Section 2.2(a) of this Agreement;

	(iv)
	there
shall have been no Material Adverse Effect with respect to the Company since the date hereof;

	(v)
	the
Company shall have obtained the consent of Asset Managers International, Ltd. to include the Registrable Securities (as defined in the Registration Rights
Agreement) on the next registration statement to be filed on behalf of Asset Managers International, Ltd.; 

5

 

	(vi)
	written
approval of the transactions contemplated hereunder by the Trading Market; and

	(vii)
	From
the date hereof to the Closing Date, trading in the Common Stock shall not have been suspended by the Commission (except for any suspension of trading of limited
duration agreed to by the Company, which suspension shall be terminated prior to the Closing), and, at any time prior to the Closing Date, trading in securities generally as reported by Bloomberg
Financial Markets shall not have been suspended or limited, or minimum prices shall not have been established on securities whose trades are reported by such service, or on any Trading Market, nor
shall a banking moratorium have been declared either by the United States or New York State authorities nor shall there have occurred any material outbreak or escalation of hostilities or other
national or international calamity of such magnitude in its effect on, or any material adverse change in, any financial market which, in each case, in the reasonable judgment of each Purchaser, makes
it impracticable or inadvisable to purchase the Debentures at the Closing. 

ARTICLE III.

REPRESENTATIONS AND WARRANTIES  

        3.1    Representations and Warranties of the Company.    Except as set forth under the corresponding section of the
disclosure schedules delivered to the Purchasers concurrently herewith (the "Disclosure Schedules") which Disclosure Schedules shall be deemed a part
hereof, the Company hereby makes the representations and warranties set forth below to each Purchaser. 

        (a)    Subsidiaries.    All of the direct and indirect subsidiaries of the Company are set forth on  Schedule 3.1(a). The
Company owns, directly or indirectly, the capital stock or other equity interests of each Subsidiary free and clear of any
Liens, and all the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights to
subscribe for or purchase securities. 

        (b)    Organization and Qualification.    Each of the Company and the Subsidiaries is an entity duly incorporated or
otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite power and authority to own and
use its properties and assets and to carry on its business as currently conducted. Neither the Company nor any Subsidiary is in violation or default of any of the provisions of its respective
certificate or articles of incorporation, bylaws or other organizational or charter documents. Each of the Company and the Subsidiaries is duly qualified to conduct business and is in good standing as
a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so
qualified or in good standing, as the case may be, could not have or reasonably be expected to result in (i) a material adverse effect on the legality, validity or enforceability of any
Transaction Documents, (ii) a material adverse effect on the results of operations, assets, business, prospects or financial condition of the Company and the Subsidiaries, taken as a whole, or
(iii) a material adverse effect on the Company's ability to perform in any material respect on a timely basis its obligations under any Transaction Documents (any of (i), (ii) or (iii),
a "Material Adverse Effect") and no Proceeding has been instituted in
any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification.    When used in this Agreement or in the
Transaction Documents, the term "Material Adverse Effect" does not include any effect that may result from the matters disclosed on  Schedule 3.1(b). 

        (c)    Authorization; Enforcement.    The Company has the requisite corporate power and authority to enter into and to
consummate the transactions contemplated by each of the 

6

 

Transaction
Documents and otherwise to carry out its obligations thereunder. The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company in connection therewith other than in
connection with the Required Approvals. Each Transaction Documents has been (or upon delivery will have been) duly executed by the Company and, when delivered in accordance with the terms hereof, will
constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies. 

        (d)    No Conflicts.    The execution, delivery and performance of the Transaction Documents by the Company and the
consummation by the Company of the other transactions contemplated thereby do not and will not: (i) conflict with or violate any provision of the Company's or any Subsidiary's certificate or
articles of incorporation, bylaws or other organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would
become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary, or give to others any rights of termination, amendment, acceleration
or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or other
understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii) subject to the Required
Approvals, conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or
a Subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected; except in the case of each
of clauses (ii) and (iii), such as could not have or reasonably be expected to result in a Material Adverse Effect. 

        (e)    Filings, Consents and Approvals.    The Company is not required to obtain any consent, waiver, authorization or
order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, other than (i) filings required pursuant to Section 4.6, (ii) the filing with the Commission of the
Registration Statement, (iii) the notice and/or application(s) to each applicable Trading Market for the issuance and sale of the Debentures and Warrants and the listing of the Underlying
Shares for trading thereon in the time and manner
required thereby, (iv) the filing of Form D with the Commission and such filings as are required to be made under applicable state securities laws and (vi) Shareholder Approval
(collectively, the "Required Approvals"). 

        (f)    Issuance of the Securities.    The Securities are duly authorized and, when issued and paid for in accordance
with the applicable Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company other than restrictions on transfer
provided for in the Transaction Documents and applicable securities laws. The Underlying Shares, when issued in accordance with the terms of the Transaction Documents, will be validly issued, fully
paid and nonassessable, free and clear of all Liens imposed by the Company. The number of shares of Common Stock the Company has reserved from its duly authorized capital stock for issuance of the
Underlying Shares is set forth on Schedule 3.1(f), which shares shall be fairly apportioned among the Purchasers pro-rata based on
their initial purchases of Debentures hereunder. Each Purchaser shall have the sole and absolute discretion in determining, within such allocation, whether to receive Conversion Shares or Warrant
Shares. 

7

 

        (g)    Capitalization.    The capitalization of the Company is as described in the Disclosure Schedules. No Person has
any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as a result of the
purchase and sale of the Securities, there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings or arrangements by
which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock or Common Stock Equivalents. The issuance and sale of the Securities will not obligate the Company
to issue shares of Common Stock or other securities to any Person (other than the Purchasers) and will not result in a right of any holder of Company securities to adjust the exercise, conversion,
exchange or reset price under such securities. All of the outstanding shares of capital stock of the Company are validly issued, fully paid and nonassessable, have been issued in compliance with all
federal and state securities laws, and none of such outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. No further approval
or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale of the Securities. There are no stockholders agreements, voting agreements or
other similar agreements with respect to the Company's capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company's stockholders. 

        (h)    SEC Reports; Financial Statements.    The Company has filed all reports required to be filed by it under the
Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or such shorter period as the Company was required by law
to file such material) (the foregoing materials, including the exhibits thereto, being collectively referred to herein as the "SEC Reports") on a timely
basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension. As of their respective dates, the SEC Reports complied
in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and none of the SEC Reports, when filed, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The
financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect
thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during
the periods involved ("GAAP"), except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited
financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company and its consolidated subsidiaries as of and for
the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments. 

        (i)    Material Changes.    Since the date of the latest audited financial statements included within the SEC Reports,
except as specifically disclosed in the SEC Reports, (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse
Effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business
consistent with past practice and (B) liabilities not required to be reflected in the Company's financial statements pursuant to GAAP or required to be disclosed in filings made with the
Commission, (iii) the Company has not altered its method of accounting, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its
stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock and (v) the Company has not issued any equity securities to any officer,
director or Affiliate, except pursuant to existing Company stock option plans. The Company does not have pending before the Commission any request for confidential treatment of information. 

8

  

        (j)    Litigation.    There is no action, suit, inquiry, notice of violation, proceeding or investigation pending or,
to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any of their respective properties before or by any court, arbitrator, governmental or administrative
agency or regulatory authority (federal, state, county, local or foreign) (collectively, an "Action") which (i) adversely affects or challenges
the legality, validity or enforceability of any of the Transaction Documents or the Securities or (ii) could, if there were an unfavorable decision, have or reasonably be expected to result in
a Material Adverse Effect. Neither the Company nor any Subsidiary, nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under
federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the
Commission involving the Company or any current or former director or officer of the Company. The Commission has not issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the Exchange Act or the Securities Act. 

        (k)    Labor Relations.    No material labor dispute exists or, to the knowledge of the Company, is imminent with
respect to any of the employees of the Company which could reasonably be expected to result in a Material Adverse Effect. 

        (l)    Compliance.    Neither the Company nor any Subsidiary (i) is in default under or in violation of (and no
event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary
received notice of a claim that it is in default under or that it is in violation of, any material indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by
which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any order of any court, arbitrator or governmental body, or
(iii) is or has been in violation of any statute, rule or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws applicable to its
business except in each case as could not have a Material Adverse Effect. The Company has not taken any action in violation of applicable law designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Securities. 

        (m)    Regulatory Permits.    The Company and the Subsidiaries possess all certificates, authorizations and permits
issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess
such permits could not have or reasonably be expected to result in a Material Adverse Effect ("Material Permits"), and neither the Company nor any
Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit. 

        (n)    Title to Assets.    The Company and the Subsidiaries have good and marketable title in fee simple to all real
property owned by them that is material to the business of the Company and the Subsidiaries and good and marketable title in all personal property owned by them that is material to the business of the
Company and the Subsidiaries, in each case free and clear of all Liens, except for Liens as do not materially affect the value of such property and do not materially interfere with the use made and
proposed to be made of such property by the Company and the Subsidiaries and Liens for the payment of federal, state or other taxes, the payment of which is neither delinquent nor subject to
penalties. Any real property and facilities held under lease by the Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases of which the Company and the
Subsidiaries are in compliance. 

9

 

        (o)    Patents and Trademarks.    The Company and the Subsidiaries have, or have rights to use, all patents, patent
applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and other similar rights necessary or material for use in connection with their respective businesses
as described in the SEC Reports and which the failure to so have could have a Material Adverse Effect (collectively, the "Intellectual Property
Rights"). Neither the Company nor any Subsidiary has received a written notice that the Intellectual Property Rights used by the Company or any Subsidiary violates or infringes
upon the rights of any Person. To the knowledge of the Company, all such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual
Property Rights of others. 

        (p)    Insurance.    The Company and the Subsidiaries are insured by insurers of recognized financial responsibility
against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and the Subsidiaries are engaged, including, but not limited to, directors and
officers insurance coverage at least equal to the aggregate Subscription Amount. To the best of Company's knowledge, such insurance contracts and policies are accurate and complete. Neither the
Company nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its business without a significant increase in cost. 

        (q)    Transactions With Affiliates and Employees.    Except as set forth in the SEC Reports, none of the officers or
directors of the Company and, to the knowledge of the Company, none of the employees of the Company is presently a party to any transaction with the Company or any Subsidiary (other than for services
as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or
from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a
substantial interest or is an officer, director, trustee or partner, in each case in excess of $60,000 other than (i) for payment of salary or consulting fees for services rendered,
(ii) reimbursement for expenses incurred on behalf of the Company and (iii) for other employee benefits, including stock option agreements under any stock option plan of the Company. 

        (r)    Sarbanes-Oxley; Internal Accounting Controls.    The Company is in material compliance with all provisions of
the Sarbanes-Oxley Act of 2002 which are applicable to it as of the Closing Date. The Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization,
and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company has
established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure controls and
procedures to ensure that material information relating to the Company, including its Subsidiaries, is made known to the certifying officers by others within those entities, particularly during the
period in which the Company's most recently filed periodic report under the Exchange Act, as the case may be, is being prepared. The Company's certifying officers have evaluated the effectiveness of
the Company's controls and procedures as of the date prior to the filing date of the most recently filed periodic report under the Exchange Act (such date, the "Evaluation
Date"). The Company presented in its most recently filed periodic report under the Exchange Act the conclusions of the certifying officers about the effectiveness of the
disclosure controls and 

10

 

procedures
based on their evaluations as of the Evaluation Date. Since the Evaluation Date, there have been no significant changes in the Company's internal controls (as such term is defined in Item
307(b) of Regulation S-K under the Exchange Act) or, to the Company's knowledge, in other factors that could significantly affect the Company's internal controls. 

        (s)    Certain Fees.    No brokerage or finder's fees or commissions are or will be payable by the Company to any
broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by this Agreement. The Purchasers shall have no
obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the
transactions contemplated by this Agreement. 

        (t)    Private Placement.    Assuming the accuracy of the Purchasers representations and warranties set forth in
Section 3.2, no registration under the Securities Act is required for the offer and sale of the Securities by the Company to the Purchasers as contemplated hereby. The issuance and sale of the
Securities hereunder does not contravene the rules and regulations of the Trading Market. 

        (u)    Investment Company.    The Company is not, and is not an Affiliate of, and immediately after receipt of payment
for the Securities, will not be or be an Affiliate of, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. The Company shall conduct its business in a manner
so that it will not become subject to the Investment Company Act. 

        (v)    Registration Rights.    No Person has any right to cause the Company to effect the registration under the
Securities Act of any securities of the Company which are subject to registration statements that are effective. 

        (w)    Listing and Maintenance Requirements.    The Company's Common Stock is registered pursuant to
Section 12(g) of the Exchange Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating the registration of the Common Stock
under the Exchange Act nor has the Company received any notification that the Commission is contemplating terminating such registration. The Company has not, in the 12 months preceding the date
hereof, received notice from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance
requirements of such Trading Market. The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance
requirements. 

        (x)    Application of Takeover Protections.    The Company and its Board of Directors have taken all necessary action,
if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar
anti-takeover provision under the Company's Certificate of Incorporation (or similar charter documents) or the laws of its state of incorporation that is or could become applicable to the
Purchasers as a result of the Purchasers and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including without limitation as a result of the
Company's issuance of the Securities and the Purchasers' ownership of the Securities. 

        (y)    Disclosure.    The Company confirms that neither it nor any other Person acting on its behalf has provided any
of the Purchasers or their agents or counsel with any information that constitutes or might constitute material, nonpublic information. The Company understands and confirms that the Purchasers will
rely on the foregoing representations and covenants in effecting transactions in securities of the Company. All disclosure provided to the Purchasers regarding the Company, its business and the
transactions contemplated hereby, including the Disclosure 

11

 

Schedules
to this Agreement, furnished by or on behalf of the Company with respect to the representations and warranties made herein are true and correct with respect to such representations and
warranties and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under
which they were made, not misleading. The Company acknowledges and agrees that no Purchaser makes or has made any representations or warranties with respect to the transactions contemplated hereby
other than those specifically set forth in Section 3.2 hereof. 

        (z)    No Integrated Offering.    Assuming the accuracy of the Purchasers' representations and warranties set forth in
Section 3.2, neither the Company, nor any of its affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any
offers to buy
any security, under circumstances that would cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of the Securities Act or any applicable shareholder
approval provisions, including, without limitation, under the rules and regulations of any exchange or automated quotation system on which any of the securities of the Company are listed or
designated. 

        (aa)    Solvency.    Based on the financial condition of the Company as of the Closing Date after giving effect to the
receipt by the Company of the proceeds from the sale of the Securities hereunder, 

	(i)
	the
Company's fair saleable value of its assets exceeds the amount that will be required to be paid on or in respect of the Company's existing debts and other
liabilities (including known contingent liabilities) as they mature;

	(ii)
	the
Company's assets do not constitute unreasonably small capital to carry on its business for the current fiscal year as now conducted and as proposed to be conducted
including its capital needs taking into account the particular capital requirements of the business conducted by the Company, and projected capital requirements and capital availability thereof; and

	(iii)
	the
current cash flow of the Company, together with its cash on hand and the proceeds the Company would receive, were it to liquidate all of its assets, after taking
into account all anticipated uses of the cash, would be sufficient to pay all amounts on or in respect of its debt when such amounts are required to be paid. 

        The
Company does not intend to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its
debt). The Company has no knowledge of any facts or circumstances which lead it to believe that it will file for reorganization or liquidation under the bankruptcy or reorganization laws of any
jurisdiction within one year from the Closing Date. The SEC Reports set forth as of the dates thereof all outstanding secured and unsecured Indebtedness of the Company or any Subsidiary, or for which
the Company or any Subsidiary has commitments. For the purposes of this Agreement, "Indebtedness" shall mean (a) any liabilities for borrowed
money or amounts owed in excess of $50,000 (other than trade accounts payable incurred in the ordinary course of business), (b) all guaranties, endorsements and other contingent obligations in
respect of Indebtedness of others, whether or not the same are or should be reflected in the Company's balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of business; and (c) the present value of any lease payments in excess of $50,000 due under leases required to be
capitalized in accordance with GAAP. Neither the Company nor any Subsidiary is in default with respect to any Indebtedness. 

        (bb)    Form S-3 Eligibility.    The Company is eligible to register the resale of the Underlying
Shares for resale by the Purchaser on Form S-3 promulgated under the Securities Act. 

12

 

        (cc)    Tax Status.    Except for matters that would not, individually or in the aggregate, have or reasonably be
expected to result in a Material Adverse Effect, the Company and each Subsidiary has filed all necessary federal, state and foreign income and franchise tax returns and has paid or accrued all taxes
shown as due thereon, and the Company has no knowledge of a tax deficiency which has been asserted or threatened against the Company or any Subsidiary. 

        (dd)    No General Solicitation.    Neither the Company nor any person acting on behalf of the Company has offered or
sold any of the Securities by any form of general solicitation or general advertising. The Company has offered the Securities for sale only to the Purchasers and certain other "accredited investors"
within the meaning of Rule 501 under the Securities Act. 

        (ee)    Foreign Corrupt Practices.    Neither the Company, nor to the knowledge of the Company, any agent or other
person acting on behalf of the Company, has (i) directly or indirectly, used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic
political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds,
(iii) failed to disclose fully any contribution made by the Company (or made by any person acting on its behalf of which the Company is aware) which is in violation of law, or
(iv) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended 

        (ff)    Accountants.    The Company's accountants are set forth on  Schedule 3.1(ff) of the Disclosure Schedule. To the
Company's knowledge, such accountants, who the Company expects will express their opinion
with respect to the financial statements to be included in the Company's Annual Report on Form 10-KSB for the year ending April 30, 2005 are a registered public accounting
firm as required by the Securities Act. 

        (gg)    Seniority.    As of the Closing Date, no indebtedness or other equity of the Company is senior to the
Debentures in right of payment, whether with respect to interest or upon liquidation or dissolution, or otherwise, other than indebtedness secured by purchase money security interests (which is senior
only as to underlying assets covered thereby) and capital lease obligations (which is senior only as to the property covered thereby). 

        (hh)    No Disagreements with Accountants and Lawyers.    There are no disagreements of any kind presently existing,
or reasonably anticipated by the Company to arise, between the accountants and lawyers
formerly or presently employed by the Company and the Company is current with respect to any fees owed to its accountants and lawyers. 

        (ii)    Acknowledgment Regarding Purchasers' Purchase of Securities.    The Company acknowledges and agrees that each
of the Purchasers is acting solely in the capacity of an arm's length purchaser with respect to the Transaction Documents and the transactions contemplated hereby. The Company further acknowledges
that no Purchaser is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any advice given
by any Purchaser or any of their respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is merely incidental to the Purchasers' purchase of the
Securities. The Company further represents to each Purchaser that the Company's decision to enter into this Agreement has been based solely on the independent evaluation of the transactions
contemplated hereby by the Company and its representatives. 

13

   
        3.2    Representations and Warranties of the Purchasers.    Each Purchaser hereby, for itself and for no other
Purchaser, represents and warrants as of the date hereof and as of the Closing Date to the Company as follows: 

        (a)    Organization; Authority.    Such Purchaser is an entity duly organized, validly existing and in good standing
under the laws of the jurisdiction of its organization with full right, corporate or partnership power and authority to enter into and to consummate the transactions contemplated by the Transaction
Documents and otherwise to carry out its obligations thereunder. The execution, delivery and performance by such Purchaser of the transactions contemplated by this Agreement have been duly authorized
by all necessary corporate or similar action on the part of such Purchaser. Each Transaction Documents to which it is a party has been duly executed by such Purchaser, and when delivered by such
Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with its terms, except (i) as
limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally,
(ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution
provisions may be limited by applicable law. 

        (b)    Own Account.    Such Purchaser understands that the Securities are "restricted securities" and have not been
registered under the Securities Act or any applicable state securities law and is acquiring the Securities as principal for its own account and not with a view to or for distributing or reselling such
Securities or any part thereof, has no present intention of distributing any of such Securities and has no arrangement or understanding with any other persons regarding the distribution of such
Securities (this representation and warranty not limiting such Purchaser's right to sell the Securities pursuant to the Registration Statement or otherwise in compliance with applicable federal and
state securities laws). Such Purchaser is acquiring the Securities hereunder in the ordinary course of its business. Such Purchaser does not have any agreement or understanding, directly or
indirectly, with any Person to distribute any of the Securities. 

        (c)    Purchaser Status.    At the time such Purchaser was offered the Securities, it was, and at the date hereof it
is, and on each date on which it exercises any Warrants or converts any Debentures it will be either: (i) an "accredited investor" as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or
(a)(8) under the Securities Act or (ii) a "qualified institutional buyer" as defined in Rule 144A(a) under the Securities Act. Such Purchaser is not required to be registered as a
broker-dealer under Section 15 of the Exchange Act. 

        (d)    Experience of Such Purchaser.    Such Purchaser, either alone or together with its representatives, has such
knowledge, sophistication and experience in business and financial matters so as to be capable of
evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment. Such Purchaser is able to bear the economic risk of an
investment in the Securities and, at the present time, is able to afford a complete loss of such investment. 

        (e)    General Solicitation.    Such Purchaser is not purchasing the Securities as a result of any advertisement,
article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other
general solicitation or general advertisement. 

        (f)    Short Sales.    Other than the transaction contemplated hereunder, such Purchaser has not directly or
indirectly, nor has any Person acting on behalf of or pursuant to any understanding with such Purchaser, executed any disposition, including Short Sales (but not including the location and/or
reservation of shares of Common Stock), in the securities of the Company (including, without limitations, any Short Sales involving the Company's securities) since the later of
(i) 9 P.M. 

14

 

(New
York Time) on December 27, 2004 and (ii) time that such Purchaser first received a term sheet from the Company or any other Person setting forth the material terms of the
transactions contemplated hereunder ("Discussion Time"). Notwithstanding the foregoing, in the case of a Purchaser that is a multi-managed investment
vehicle whereby separate portfolio managers manage separate portions of such Purchaser's assets and the portfolio managers have no direct knowledge of the investment decisions made by the portfolio
managers managing other portions of such Purchaser's assets, the representation set forth above shall only apply with respect to the portion of assets managed by the portfolio manager that made the
investment decision to purchase the Securities covered by this Agreement. 

        (g)    No Advice From the Company.    In executing this Agreement and in completing the transactions contemplated
herein and by the other Transaction Documents, each Purchaser is relying on its own investigation (including the information set forth herein and in the Disclosure Schedules hereto), and on advice
from its own legal, financial, investment, and accounting advisors, and is not relying on any advice received from the Company. 

        (h)    Completion of Due Diligence.    Each Purchaser has reviewed this Agreement, the Disclosure Schedules, the SEC
Reports, and the Transaction Documents to the full extent desired by such Purchaser, and has requested and received and reviewed such other information regarding the Company or its Subsidiaries
(including, without limitation, its or their business, financial condition, operations, management, and assets) that such Purchaser has requested. 

        The
Company acknowledges and agrees that each Purchaser does not make or has not made any representations or warranties with respect to the transactions contemplated hereby other than
those specifically set forth in this Section 3.2. 

ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES  

        4.1    Transfer Restrictions.    

        (a)   The
Securities may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of Securities other than pursuant to an
effective registration statement or Rule 144, to the Company or to an affiliate of a Purchaser or in connection with a pledge as contemplated in Section 4.1(b), the Company may require
the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably
satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Securities under the Securities Act. As a condition of transfer, any such transferee
shall agree in writing to be bound by the terms of this Agreement and shall have the rights of a Purchaser under this Agreement and the Registration Rights Agreement. 

        (b)   The
Purchasers agree to the imprinting, so long as is required by this Section 4.1(b), of a legend on any of the Securities in substantially the following form: 

[NEITHER]
THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [EXERCISABLE]
[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 

15

 

THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH
SECURITIES. 

The
Company acknowledges and agrees that a Purchaser may from time to time pledge pursuant to a bona fide margin agreement with a registered broker-dealer or grant a security interest in some or all
of the Securities to a financial institution that is an "accredited investor" as defined in Rule 501(a) under the Securities Act and who agrees to be bound by the provisions of this Agreement
and the Registration Rights Agreement and, if required under the terms of such arrangement, such Purchaser may transfer pledged or secured Securities to the pledgees or secured parties. Such a pledge
or transfer would not be subject to approval of the Company and no legal opinion of legal counsel of the pledgee, secured party or pledgor shall be required in connection therewith. Further, no notice
shall be required of such pledge. At the appropriate Purchaser's expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably
request in connection with a pledge or transfer of the Securities, including, if the Securities are subject to registration pursuant to the Registration Rights Agreement, the preparation and filing of
any required prospectus supplement under Rule 424(b)(3) under the Securities Act or other applicable provision of the Securities Act to appropriately amend the list of Selling Stockholders
thereunder. 

        (c)   Certificates
evidencing the Underlying Shares shall not contain any legend (including the legend set forth in Section 4.1(b) hereof): (i) while a
registration statement (including the Registration Statement) covering the resale of such security is effective under the Securities Act, or (ii) following any sale of such Underlying Shares
pursuant to Rule 144, or (iii) if such Underlying Shares are eligible for sale under Rule 144(k), or (iv) if such legend is not required under applicable requirements of
the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). The Company shall cause its counsel to issue a legal opinion to the Company's transfer
agent promptly after the Effective Date if required by the Company's transfer agent to effect the removal of the legend hereunder. If all or any portion of a Debenture or Warrant is converted or
exercised (as applicable) at a time when there is an effective registration statement to cover the resale of the Underlying Shares, or if such Underlying Shares may be sold under Rule 144(k) or
if such legend is not otherwise required under applicable requirements of the Securities Act (including judicial interpretations thereof) then such Underlying Shares shall be issued free of all
legends. The Company agrees that following the Effective Date or at such time as such legend is no longer required under this Section 4.1(c), it will, no later than three Trading Days following
the delivery by a Purchaser to the Company or the Company's transfer agent of a certificate representing Underlying Shares, as applicable, issued with a restrictive legend (such third Trading Day, the
"Legend Removal Date"), deliver or cause to be delivered to such Purchaser a certificate representing such shares that is free from all restrictive and
other legends. The Company may not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on transfer set forth in this Section. If no
legend is required on the certificates for Conversion Shares pursuant to this Section 4.1(c), such certificates shall be transmitted by the transfer agent of the Company to the Purchaser by
crediting the account of the Purchaser's prime broker with the Depository Trust Company System through the Deposit Withdrawal Agent Commission system if the Company is a participant in such system, or
another established clearing corporation performing similar functions, provided the Purchaser requests such transmission and provided that the Purchaser 

16

 

making
such request provides the transfer agent with the prime broker account information necessary to effect such transfer. 

        (d)   In
addition to such Purchaser's other available remedies, the Company shall pay to a Purchaser, in cash, as partial liquidated damages and not as a penalty, for each
$1,000 of Underlying Shares (based on the Closing Price of the Common Stock on the date such Securities are submitted to the Company's transfer agent) delivered for removal of the restrictive legend
and subject to this Section 4.1(d), $10 per Trading Day (increasing to $20 per Trading Day 5 Trading Days after such damages have begun to accrue) for each Trading Day after the Legend Removal
Date until such certificate is delivered without a legend. Nothing herein shall limit such Purchaser's right to pursue actual damages for the Company's failure to deliver certificates representing any
Securities as required by the Transaction Documents, and such Purchaser 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. 

        (e)   Each
Purchaser, severally and not jointly with the other Purchasers, agrees that the removal of the restrictive legend from certificates representing Securities as set
forth in this Section 4.1 is predicated upon the Company's reliance that the Purchaser will sell any Securities pursuant to either the registration requirements of the Securities Act, including
any applicable prospectus delivery requirements, or an exemption therefrom. 

        (f)    Until
the date that each Purchaser holds less than 20% of the Debentures initially purchased hereunder by such Purchaser, the Company shall not undertake a reverse or
forward stock split or reclassification of the Common Stock without the prior written consent of the Purchasers holding a majority in principal amount outstanding of the Debentures. 

        4.2    Acknowledgment of Dilution.    The Company acknowledges that the issuance of the Securities may result in
dilution of the outstanding shares of Common Stock, which dilution may be substantial under certain market conditions. The Company further acknowledges that its obligations under the Transaction
Documents, including without limitation its obligation to issue the Underlying Shares pursuant to the Transaction Documents, are unconditional and absolute and not subject to any right of set off,
counterclaim, delay or reduction, regardless of the effect of any such dilution or any claim the Company may have against any Purchaser and regardless of the dilutive effect that such issuance may
have on the ownership of the other stockholders of the Company. The Company further understands and acknowledges that (a) one or more Purchasers may engage in hedging activities at various
times during the period that the Securities are outstanding, including, without limitation, during the periods that the value of the Underlying Shares deliverable with respect to Securities is being
determined and (b) such hedging activities (if any) could reduce the value of the existing stockholders' equity interests in the Company at and after the time that the hedging activities are
being conducted. 

        4.3    Furnishing of Information.    As long as any Purchaser owns Securities, the Company covenants to timely file
(or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act. As long as any
Purchaser owns Securities, if the Company is not required to file reports pursuant to the Exchange Act, it will prepare and furnish to the Purchasers and make publicly available in accordance with
Rule 144(c) such information as is required for the Purchasers to sell the Securities under Rule 144. The Company further covenants that it will take such further action as any holder of
Securities may reasonably request, all to the extent required from time to time to enable such Person to sell such
Securities without registration under the Securities Act within the limitation of the exemptions provided by Rule 144. 

        4.4    Integration.    The Company shall not sell, offer for sale or solicit offers to buy or otherwise negotiate in
respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under 

17

 

the
Securities Act of the sale of the Securities to the Purchasers or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market. 

        4.5    Conversion and Exercise Procedures.    Section 4.1 of this Agreement, the form of Notice of Exercise
included in the Warrants and the form of Notice of Conversion included in the Debentures set forth the totality of the procedures required of the Purchasers in order to exercise the Warrants or
convert the Debentures. No additional legal opinion or other information or instructions shall be required of the Purchasers to exercise their Warrants or convert their Debentures. The Company shall
honor exercises of the Warrants and conversions of the Debentures and shall deliver Underlying Shares in accordance with the terms, conditions and time periods set forth in the Transaction Documents. 

        4.6    Securities Laws Disclosure; Publicity.    The Company shall, by 8:30 a.m. Eastern time on the Trading
Day following the date hereof, issue a Current Report on Form 8-K, reasonably acceptable to each Purchaser disclosing the material terms of the transactions contemplated hereby, and
shall attach the Transaction Documents thereto. The Company and each Purchaser shall consult with each other in issuing any other press releases with respect to the transactions contemplated hereby,
and neither the Company nor any Purchaser shall issue any such press release or otherwise make any such public statement without the prior consent of the Company, with respect to any press release of
any Purchaser, or without the prior consent of each Purchaser, with respect to any press release of the Company, which consent shall not unreasonably be withheld, except if such disclosure is required
by law, in which case the disclosing party shall promptly provide the other party with prior notice of such public statement or communication. Notwithstanding the foregoing, the Company shall not
publicly disclose the name of any Purchaser, or include the name of any Purchaser in any filing with the Commission or any regulatory agency or Trading Market, without the prior written consent of
such Purchaser, except (i) as required by federal securities law in connection with the registration statement contemplated by the Registration Rights Agreement and (ii) to the extent
such disclosure is required by law or Trading Market regulations, in which case the Company shall provide the Purchasers with prior notice of such disclosure permitted under subclause (i) or
(ii). 

        4.7    Shareholder Rights Plan.    No claim will be made or enforced by the Company or, to the knowledge of the
Company, any other Person that any Purchaser is an "Acquiring Person" under any shareholder rights plan or similar plan or arrangement in effect or hereafter adopted by the Company, or that any
Purchaser could be deemed to trigger the provisions of any such plan or arrangement, by virtue of receiving Securities under the Transaction Documents or under any other agreement between the
Company and the Purchasers. The Company shall conduct its business in a manner so that it will not become subject to the Investment Company Act. 

        4.8    Non-Public Information.    The Company covenants and agrees that neither it nor any other Person
acting on its behalf will provide any Purchaser or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto
such Purchaser shall have executed a written agreement regarding the confidentiality and use of such information. The Company understands and confirms that each Purchaser shall be relying on the
foregoing representations in effecting transactions in securities of the Company. 

        4.9    Use of Proceeds.    Except as set forth on Schedule 4.9
attached hereto, the Company shall use the net proceeds from the sale of the Securities hereunder for working capital purposes and not for the satisfaction of any portion of the Company's debt (other
than payment of trade payables in the ordinary course of the Company's business and prior practices), to redeem any Common Stock or Common Stock Equivalents or to settle any outstanding litigation. 

        4.10    Reimbursement.    If any Purchaser becomes involved in any capacity in any Proceeding by or against any Person
who is a stockholder of the Company (except as a result of sales, pledges, margin sales and similar transactions by such Purchaser to or with any current stockholder or as a result of the Purchaser's
breach of any of its representations, warranties or covenants contained in this Agreement 

18

 

or
the Transaction Documents), solely as a result of such Purchaser's acquisition of the Securities under this Agreement, the Company will reimburse such Purchaser for its reasonable legal and other
expenses (including the cost of any investigation preparation and travel in connection therewith) incurred in connection therewith, as such expenses are incurred. The reimbursement obligations of the
Company under this paragraph shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any Affiliates of the Purchasers who are
actually named in such action, proceeding or investigation, and partners, directors, agents, employees and controlling persons (if any), as the case may be, of the Purchasers and any such Affiliate,
and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Purchasers and any such Affiliate and any such Person. The Company
also agrees that neither the Purchasers nor any such Affiliates, partners, directors, agents, employees or controlling persons shall have any liability to the Company or any Person asserting claims on
behalf of or in right of the Company solely as a result of acquiring the Securities under this Agreement. 

        4.11    Indemnification of Purchasers.    Subject to the provisions of this Section 4.11, the Company will
indemnify and hold the Purchasers and their directors, officers, shareholders, partners, employees and agents (each, a "Purchaser Party") harmless from
any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys' fees and
costs of investigation that any such Purchaser Party may suffer
or incur as a result of or relating to (a) any breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction
Documents or (b) any action instituted against a Purchaser Party, or any of them or their respective Affiliates, by any stockholder of the Company who is not an Affiliate of such Purchaser
Party, with respect to any of the transactions contemplated by the Transaction Documents (unless such action is based upon a breach of such Purchaser's representation, warranties or covenants under
the Transaction Documents or any agreements or understandings such Purchaser Party may have with any such stockholder or any violations by the Purchaser of state or federal securities laws or any
conduct by such Purchaser which constitutes fraud, gross negligence, willful misconduct or malfeasance). If any action shall be brought against any Purchaser Party in respect of which indemnity may be
sought pursuant to this Agreement, such Purchaser Party shall promptly notify the Company in writing, and the Company shall have the right to assume the defense thereof with counsel of its own
choosing. Any Purchaser Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Purchaser Party except to the extent that (i) the employment thereof has been specifically authorized by the Company in writing, (ii) the Company has failed after a
reasonable period of time to assume such defense and to employ counsel or (iii) in such action there is, in the reasonable opinion of such separate counsel, a material conflict on any material
issue between the position of the Company and the position of such Purchaser Party. The Company will not be liable to any Purchaser Party under this Agreement (i) for any settlement by a
Purchaser Party effected without the Company's prior written consent, which shall not be unreasonably withheld or delayed; or (ii) to the extent, but only to the extent that a loss, claim,
damage or liability is attributable to any Purchaser Party's breach of any of the representations, warranties, covenants or agreements made by the Purchasers in this Agreement or in the other
Transaction Documents. 

        4.12    Reservation and Listing of Securities.    

        (a)   After
the Authorized Capital Shareholder Approval Date (as defined below), the Company shall maintain a reserve from its duly authorized shares of Common Stock for
issuance pursuant to the Transaction Documents in such amount as may be required to fulfill its obligations in full under the Transaction Documents. 

        (b)   If,
on any date after Isonics' next annual meeting of shareholders, the number of authorized but unissued (and otherwise unreserved) shares of Common Stock is less than
the Required Minimum on such date, then the Board of Directors of the Company shall use 

19

 

commercially
reasonable efforts to amend the Company's certificate or articles of incorporation to increase the number of authorized but unissued shares of Common Stock to at least the Required
Minimum at such time, as soon as possible and in any event not later than the 75th day after such date. 

        (c)   The
Company shall, if applicable: (i) in the time and manner required by the Trading Market, prepare and file with the Trading Market an additional shares listing
application covering a number of
shares of Common Stock at least equal to the Required Minimum on the date of such application and prepare and file with the Trading Market a listing application for the Debentures and Warrants,
(ii) take all steps necessary to cause such shares of Common Stock, Debentures and Warrants to be approved for listing on the Trading Market as soon as possible thereafter, (iii) provide
to the Purchasers evidence of such listing, and (iv) maintain the listing of the Debentures, the Warrants and Common Stock on any date at least equal to the Required Minimum on such date on
such Trading Market or another Trading Market. 

        (d)   The
Company shall hold a special meeting of shareholders (which may also be at the annual meeting of shareholders) on or before November 30, 2005 for the purpose
of obtaining Shareholder Approval with the recommendation of the Company's Board of Directors that such proposal be approved, and the Company shall solicit proxies from its shareholders in connection
therewith in the same manner as all other management proposals in such proxy statement and all management-appointed proxyholders shall vote their proxies in favor of such proposals. If the Company
fails to obtain Shareholder Approval at such meeting, the Company shall be obligated to hold at least one meeting of shareholders semi-annually thereafter for the purpose of obtaining
Shareholder Approval, as set forth above until the Debentures are no longer outstanding. 

        (e)   On
or before April 30, 2005, the Company shall have increased its authorized capital stock (such date, the "Authorized Capital Shareholder
Approval Date") to at least the amount as is required to fulfill its obligations of the Company in full under the Transaction Documents. 

        4.13    Participation in Future Financing.    

        (a)   From
the date hereof until the one year anniversary of the Effective Date, upon any financing by the Company or any of its Subsidiaries of Common Stock or Common Stock
Equivalents (a "Subsequent Financing"), each Purchaser shall have the right to participate in up to 100% of the Subsequent Financing (the
"Participation Maximum"). 

        (b)   At
least 5 Trading Days prior to the closing of the Subsequent Financing, the Company shall deliver to each Purchaser a written notice of its intention to effect a
Subsequent Financing ("Pre-Notice"), which Pre-Notice shall ask such Purchaser if it wants to review the details of such
financing (such additional notice, a "Subsequent Financing Notice"). Upon the request of a Purchaser, and only upon a request by such Purchaser, for a
Subsequent Financing Notice, the Company shall promptly, but no later than 1 Trading Day after such request, deliver a Subsequent Financing Notice to such Purchaser. The Subsequent Financing Notice
shall describe in reasonable detail the proposed terms of such Subsequent Financing, the amount of proceeds intended to be raised thereunder, the Person with whom such Subsequent Financing is proposed
to be effected, and attached to which shall be a term sheet or similar document relating thereto. 

        (c)   Any
Purchaser desiring to participate in such Subsequent Financing must provide written notice to the Company by not later than 5:30 p.m. (New York City time) on
the 5th Trading Day after all of the Purchasers have received the Pre-Notice that the Purchaser is committed to participate in the Subsequent Financing, the amount of the
Purchaser's commitment, and that the Purchaser has such funds ready, willing, and available for investment on the terms set forth in the Subsequent Financing Notice. 

20

 

        (d)   If
by 5:30 p.m. (New York City time) on the 5th Trading Day after all of the Purchasers have received the Pre-Notice, notifications by
the Purchasers of their commitment to participate in the Subsequent Financing (or to cause their designees to participate) is, in the aggregate, less than the total amount of the Subsequent Financing,
then the Company may effect the remaining portion of such Subsequent Financing on the terms and to the Persons set forth in the Subsequent Financing Notice. 

        (e)   If
the Company receives no notice from a Purchaser as of such 5th Trading Day, such Purchaser shall be deemed to have notified the Company that it does not
elect to participate. 

        (f)    The
Company must provide the Purchasers with a second Subsequent Financing Notice, and the Purchasers will again have the right of participation set forth above in this
Section 4.13, if the Subsequent Financing subject to the initial Subsequent Financing Notice is not consummated for any reason on the terms set forth in such Subsequent Financing Notice within
60 Trading Days after the date of the initial Subsequent Financing Notice. In the event the Company receives responses to Subsequent Financing Notices from Purchasers seeking to purchase more than the
aggregate amount of the Subsequent Financing, each such Purchaser shall have the right to purchase their Pro Rata Portion (as defined below) of the Participation Maximum. "Pro
Rata Portion" is the ratio of (x) the Subscription Amount of Securities purchased by a participating Purchaser and (y) the sum of the aggregate Subscription
Amount of all participating Purchasers. 

        (g)   Notwithstanding
the foregoing, this Section 4.13 shall not apply in respect of an Exempt Issuance. 

        4.14    Subsequent Equity Sales.    

        (a)   From
the date hereof until 90 days after the Effective Date, neither the Company nor any Subsidiary shall issue shares of Common Stock or Common Stock
Equivalents; provided, however, the 90 day period set forth in this Section 4.14 shall be extended for the number of Trading Days during such period in which (y) trading in the
Common Stock is suspended by any Trading Market, or (z) following the Effective Date, the Registration Statement is not effective or the prospectus included in the Registration Statement may
not be used by the Purchasers for the resale of the Underlying Shares. 

        (b)   From
the date hereof until such time as no Purchaser holds any of the Debentures, the Company shall be prohibited from effecting or entering into an agreement to effect
any Subsequent Financing involving a "Variable Rate Transaction" (as defined below). The term "Variable Rate
Transaction" shall mean a transaction in which the Company issues or sells (i) any debt or equity securities that are convertible into, exchangeable or exercisable for,
or include the right to receive additional shares of Common Stock either (A) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices
of or quotations for the shares of Common Stock at any time after the initial issuance of such debt or equity securities, or (B) with a conversion, exercise or exchange price that is subject to
being reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to the business of
the Company or the market for the Common Stock or (ii) enters into any agreement, including, but not limited to, an equity line of credit, whereby the Company may sell securities at a future
determined price. 

        (c)   Unless
Shareholder Approval has been obtained and deemed effective, the Company shall not make any issuance whatsoever of Common Stock or Common Stock Equivalents which
would cause any adjustment of the Conversion Price to the extent the holders of Debentures would not be permitted, pursuant to Section 4(c)(i) of the Debentures, to convert their
respective outstanding Debentures and exercise their respective Warrants in full, ignoring for such purposes the 

21

 

conversion
or exercise limitations in Section 4(c)(ii) of the Debentures. Any Purchaser shall be entitled to obtain injunctive relief against the Company to preclude any such issuance,
which remedy shall be in addition to any right to collect damages. 

        (d)   Notwithstanding
the foregoing, this Section 4.14 shall not apply in respect of an Exempt Issuance, except that no Variable Rate Transaction shall be an Exempt
Issuance. 

        4.15    Equal Treatment of Purchasers.    No consideration shall be offered or paid to any person to amend or consent
to a waiver or modification of any provision of any of the Transaction Documents unless the same consideration is also offered to all of the parties to the Transaction Documents. Further, the Company
shall not make any payment of principal or interest on the Debentures in amounts which are disproportionate to the respective principal amounts outstanding on the Debentures at any applicable time.
For clarification purposes, this provision constitutes a separate right granted to each Purchaser by the Company and negotiated separately by each Purchaser, and is intended to treat for the Company
the Debenture holders as a class and shall not in any way be construed as the Purchasers acting in concert or as a group with respect to the purchase, disposition or voting of Securities or otherwise. 

        4.16    Short Sales.    Each Purchaser covenants that neither it nor any affiliates acting on its behalf or pursuant
to any understanding with it will execute any Short Sales during the period from the Discussion Time until prior to the time that the transactions contemplated by this Agreement are first
publicly announced as described in Section 4.6. Notwithstanding the foregoing, no Purchaser makes any representation, warranty or covenant hereby that it will not engage in Short Sales in the
securities of the Company after the time that the transactions contemplated by this Agreement are first publicly announced as described in Section 4.6. Notwithstanding the foregoing, in the
case of a Purchaser that is a multi-managed investment vehicle whereby separate portfolio managers manage separate portions of such Purchaser's assets and the portfolio managers have no direct
knowledge of the investment decisions made by the portfolio managers managing other portions of such Purchaser's assets, the covenant set forth above shall only apply with respect to the portion of
assets managed by the portfolio manager that made the investment decision to purchase the Securities covered by this Agreement. 

ARTICLE V.

MISCELLANEOUS  

        5.1    Termination.    This Agreement may be terminated by any Purchaser, by written notice to the other parties, if
the Closing has not been consummated on or before February 28, 2005; provided that no such termination will affect the right of any party to sue for any breach by the other party (or parties). 

        5.2    Fees and Expenses.    Except as expressly set forth in the Transaction Documents to the contrary, each party
shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution,
delivery and performance of this Agreement. The Company shall pay all transfer agent fees, stamp taxes and other taxes and duties levied in connection with the delivery of any Securities. 

        5.3    Entire Agreement.    The Transaction Documents, together with the exhibits and schedules thereto, contain the
entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules. 

        5.4    Notices.    Any and all notices or other communications or deliveries required or permitted to be provided
hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile at the
facsimile number set forth on the signature pages attached hereto prior to 5:30 p.m. (New York City time) on a 

22

 

Trading
Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages
attached hereto on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (c) the second Trading Day following the date of mailing, if sent by
U.S. nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall
be as set forth on the signature pages attached hereto. 

        5.5    Amendments; Waivers.    No provision of this Agreement may be waived or amended except in a written instrument
signed, in the case of an amendment, by the Company and each Purchaser or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with
respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision,
condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right. 

        5.6    Headings    The headings herein are for convenience only, do not constitute a part of this Agreement and shall
not be deemed to limit or affect any of the provisions hereof. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules
of strict construction will be applied against any party. 

        5.7    Successors and Assigns.    This Agreement shall be binding upon and inure to the benefit of the parties and
their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of each Purchaser. Any Purchaser may assign
any or all of its rights under this Agreement to any Person to whom such Purchaser assigns or transfers any Securities, provided such transferee agrees in writing to be bound, with respect to the
transferred Securities, by the provisions hereof that apply to the "Purchasers". 

        5.8    No Third-Party Beneficiaries.    This Agreement is intended for the benefit of the parties hereto and their
respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except as otherwise set forth in Section 4.11. 

        5.9    Governing Law.    All questions concerning the construction, validity, enforcement and interpretation of the
Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each
party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought
against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New
York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), 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 improper or inconvenient venue for such proceeding. 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 via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for 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. The parties hereby waive all rights to a trial by jury. If either party shall commence an action or proceeding to enforce any provisions of the Transaction Documents, then the prevailing party
in such action or proceeding shall 

23

 

be
reimbursed by the other party for its attorneys' fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding. 

        5.10    Survival.    The representations and warranties contained herein shall survive the Closing and the delivery,
exercise and/or conversion of the Securities, as applicable for the applicable statue of limitations. 

        5.11    Execution.    This Agreement may be executed in two or more counterparts, all of which when taken together
shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need
not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose
behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof. 

        5.12    Severability.    If any provision of this Agreement is held to be invalid or unenforceable in any respect, the
validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and
enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. 

        5.13    Rescission and Withdrawal Right.    Notwithstanding anything to the contrary contained in (and without
limiting any similar provisions of) the Transaction Documents, whenever any Purchaser exercises a right, election, demand or option under a Transaction Documents and the Company does not timely
perform its related obligations within the periods therein provided, then such Purchaser may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, any
relevant notice, demand or election in whole or in part without prejudice to its future actions and rights; provided,  however, in the case of a rescission
of a conversion of a Debenture or exercise of a Warrant, the Purchaser shall be required to return any shares of
Common Stock subject to any such rescinded conversion or exercise notice. 

        5.14    Replacement of Securities.    If any certificate or instrument evidencing any Securities is mutilated, lost,
stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefor, a new certificate or
instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity, if requested. The applicants for a new
certificate or instrument under such circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement Securities. 

        5.15    Remedies.    In addition to being entitled to exercise all rights provided herein or granted by law, including
recovery of damages, each of the Purchasers and the Company will be entitled to specific performance under the Transaction Documents. The parties agree that monetary damages may not be adequate
compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation
the defense that a remedy at law would be adequate. 

        5.16    Payment Set Aside.    To the extent that the Company makes a payment or payments to any Purchaser pursuant to
any Transaction Documents or a Purchaser enforces or exercises its rights thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any
other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation
or part thereof originally intended to be satisfied shall be revived and 

24

 

continued
in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. 

        5.17    Usury.    To the extent it may lawfully do so, the Company hereby agrees not to insist upon or plead or in any
manner whatsoever claim, and will resist any and all efforts to be compelled to take the benefit or advantage of, usury laws wherever enacted, now or at any time hereafter in force, in connection with
any claim, action or proceeding that may be brought by any Purchaser in order to
enforce any right or remedy under any Transaction Documents. Notwithstanding any provision to the contrary contained in any Transaction Documents, it is expressly agreed and provided that the total
liability of the Company under the Transaction Documents for payments in the nature of interest shall not exceed the maximum lawful rate authorized under applicable law (the
"Maximum Rate"), and, without limiting the foregoing, in no event shall any rate of interest or default interest, or both of them, when aggregated with
any other sums in the nature of interest that the Company may be obligated to pay under the Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum contract rate of interest
allowed by law and applicable to the Transaction Documents is increased or decreased by statute or any official governmental action subsequent to the date hereof, the new maximum contract rate of
interest allowed by law will be the Maximum Rate applicable to the Transaction Documents from the effective date forward, unless such application is precluded by applicable law. If under any
circumstances whatsoever, interest in excess of the Maximum Rate is paid by the Company to any Purchaser with respect to indebtedness evidenced by the Transaction Documents, such excess shall be
applied by such Purchaser to the unpaid principal balance of any such indebtedness or be refunded to the Company, the manner of handling such excess to be at such Purchaser's election. 

        5.18    Independent Nature of Purchasers' Obligations and Rights.    The obligations of each Purchaser under any
Transaction Documents are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Documents. Nothing contained herein or in any Transaction Documents, and no action taken by any Purchaser pursuant thereto, shall be deemed to constitute the Purchasers
as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Documents. Each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation the rights
arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose.
Each Purchaser has been represented by its own separate legal counsel in their review and negotiation of the Transaction Documents. For reasons of administrative convenience only, Purchasers and their
respective counsel have chosen to communicate with the Company through FW. FW does not represent all of the Purchasers but only DKR. The Company has elected to provide all Purchasers with the same
terms and Transaction Documents for the convenience of the Company and not because it was required or requested to do so by the Purchasers. 

        5.19    Liquidated Damages.    The Company's obligations to pay any partial liquidated damages or other amounts owing
under the Transaction Documents is a continuing obligation of the Company and shall not terminate until all unpaid partial liquidated damages and other amounts have been paid notwithstanding the fact
that the instrument or security pursuant to which such partial liquidated damages or other amounts are due and payable shall have been canceled. 

        5.20    Construction.    The parties agree that each of them and/or their respective counsel has reviewed and had an
opportunity to revise the Transaction Documents and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of the Transaction Documents or any amendments hereto. 

(Signature Pages Follow)

25

 

        IN
WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. 

	 ISONICS CORPORATION	 	Address for Notice:
	

By:	
 	

 	
 	

 
	 	 	
 Name:

Title:	 	 
	

With a copy to (which shall not constitute notice):

[REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR PURCHASER FOLLOWS] 

26

   [PURCHASER SIGNATURE PAGES TO ISON SECURITIES PURCHASE AGREEMENT] 

        IN
WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. 

	Name of Purchaser:	 
	 	

	Signature of Authorized Signatory of Purchaser:	 
	 	

	Name of Authorized Signatory:	 
	 	

	Title of Authorized Signatory:	 
	 	

	Email Address of Purchaser:	 
	 	

	

Address for Notice of Purchaser:
	

    
	

    
	Address for Delivery of Securities for Purchaser (if not same as above):
	

    
	

    

Subscription
Amount:

Warrant Shares:

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER] 

[SIGNATURE
PAGES CONTINUE] 

27

 
Disclosure Schedules 

Schedule 3.1(a)  

        Isonics currently conducts some of its operations through three wholly owned-subsidiaries and one partially owned subsidiary. The following chart provides some
information about those subsidiaries: 

	Name and Headquarters
 
	 	Place of

Formation
	 	Ownership

Percentage
	 	Business

	Chemotrade GmbH

Dusseldorf, Germany	 	Germany	 	100%	 	Chemotrade GmbH ("Chemotrade") is a value-added re-seller of stable and radioactive isotopes. It supplies radioactive isotopes for pharmaceutical and industrial research as well as for industrial and medical imaging,
calibration sources and for brachytherapy applications. Additionally, Chemotrade supplies various stable isotope labeled compounds for pharmaceutical research and drug design, as well as oxygen-18 for use in producing a radioisotope used in positron
emission tomography. Chemotrade's market is primarily Europe, but sales are also made to North America and Asia.
	 	 	 	 	 	 	 

28

 

	

IUT Detection Technologies, Inc.	
 	

Colorado, USA	
 	

85%, owned not by

Isonics but by

IHSD	
 	

IUT Detection Technologies,Inc. ("IUTDT") owns and we anticipate will commercialize the detection technology that we acquired from IUT. This isotope-based trace detection technology will be used to detect explosives and chemical and biological
weapons.
	

Isonics Homeland

Security and Defense

Corporation	
 	

Delaware, USA	
 	

100%	
 	

IHSD is a newly-formed corporation that is coordinating our efforts in the homeland security market.
	

Isonics Vancouver, Inc.	
 	

Washington, USA	
 	

100% (subject to a

security interest to

Silver Silicon, Inc.)	
 	

IVI operates our silicon wafer and SOI wafer fabrication and reclamation plant in Vancouver, Washington

        The
foregoing does not include our minority ownership in two companies: 

	•
	Interpro
Zinc, LLC, a Colorado entity that engages in the research and development for the recovery and recycling of zinc metal from various sources. We have a 25% interest
in this entity. Interpro Zinc, LLC has suspended its operations due to a lack of funding and it is unclear as to if or when it will resume such operations.

	•
	IUT,
an entity based in Berlin, Germany, which performs research and development, and manufacturing of radioisotopes. We have a 6% interest in IUT through Chemotrade. 

Schedule 3.1(e)  

        Asset Managers International Ltd. has a right of first refusal for future financings. 

Schedule 3.1(f)  

        As of January 31, 2005, there are approximately 91,000 shares of Isonics common stock that are authorized for issuance but which have not been issued or
reserved for issuance. 

29

 

Schedule 3.1(g)  

        Capitalization, as of January 31, 2005 (not including the shares issuable as a result of the transactions contemplated by the Agreement): 

	Shares of Common Stock outstanding	 	27,586,800
	

6,666 shares of convertible Series A Preferred Stock outstanding, liquidation preference $1.50 per share	
 	

13,332
	

No shares of convertible Series B Preferred Stock outstanding	
 	

None
	

No shares of convertible Series C Preferred Stock outstanding	
 	

None
	

2,450 shares of convertible Series D Preferred Stock outstanding, liquidation preference $100 per share	
 	

172,727
	

33,000 shares of convertible Series E Preferred Stock outstanding, liquidation preference $100 per share	
 	

3,300,000
	

Class C Warrants that are issuable (exercisable at $2.50 per share; expiring December 31, 2005)	
 	

1,780,110
	

Options, that expire through October 6, 2014, with an average exercise price of $1.44	
 	

2,212,647
	

Warrants, that expire through November 2007, with an average exercise price of $1.62	
 	

3,810,610
	

Options which may be issued pursuant to 1996 Stock Option Plan (which plan has been terminated).	
 	

Zero
	

Options which may be issued pursuant to 1996 Executives' Equity Incentive Plan, which authorizes the grant of options to purchase 2,000,000 stock options (not including the options which have been issued and which have been exercised or remain
outstanding)	
 	

641,605
	

Options which may be issued pursuant to 1996 Equity Incentive Plan, which authorizes the grant of options to purchase 1,000,000 stock options (not including the options which have been issued and which have been exercised or remain
outstanding).	
 	

247,879

30

 

	Shares remaining to be purchased pursuant to 1998 Employee Stock Purchase Plan, which authorizes employees to purchase of up to 200,000 shares of Isonics common stock (not including the shares which have been
purchased through December 2004)	 	142,776
	

The 1998 Directors' Plan authorized each person serving as a member of the Board who is not an employee to receive options to purchase 20,000 shares of common stock when such person accepts his position as a Director and to receive an additional
option to purchase 10,000 shares when such person is re-elected as a Director provided such person is not an employee of Isonics. The exercise price for the options is the Fair Market Value (as defined in the Executives' Plan) on the date such person
becomes a director and the options are exercisable for five years from such date. The options granted under the Directors' Plan vest immediately upon the date of the grant. In the event a Director resigns or is not re-elected to the Board, his or her
failure to exercise the options in three months results in the options' termination prior to the expiration of their term.	
 	

Options to be

issued at the

scheduled 2004

annual meeting (to

be held in April

2005), to one or

more new

directors, and

thereafter
	

Options which may be issued to new members of the Advisory Board to Isonics Homeland Security and Defense Corporation	
 	

Unknown

        Asset
Managers International has a right of first refusal. The Company also has an obligation to pay dividends to Asset Managers International with respect to the Series E
Preferred Stock for a period of one year after issuance, and is obligated to pay liquidated damages because of a failure to meet a registration obligation. 

        Isonics
plans to adopt new stock option plans to replace the 1996 Executives' Equity Incentive Plan and the 1996 Equity Incentive Plan and propose such plans to its shareholders for
approval at its next annual meeting of shareholders, currently scheduled to be held in April 2005. 

Schedule 3.1(i)  

        Isonics has paid dividends to the holders of its Series E Preferred Stock and is contractually required to do so through October 2005.. 

Schedule 3.1(j)  

        Isonics has provided information to both Nasdaq and the Securities and Exchange Commission in connection with inquiries received from both. 

Schedule 3.1(l)  

        Isonics has registration obligations for shares held by Silver Silicon Ltd. and to Asset Managers International Ltd. which are in default. 

Schedule 3.1(n)  

        Silver Silicon Ltd. has security interests in the assets of Isonics Vancouver, Inc., and in the shares of Isonics Vancouver, Inc., common
stock. 

        In
addition to the foregoing, Isonics has several capital lease obligations aggregating approximately $125,000. 

        There
are liens for taxes which have not yet become due or payable. 

31

 

Schedule 3.1(s)  

        Upon completion of the transaction, Isonics will owe placement agent fees of 6.5%, of which 3.0% is payable in cash and 3.5% is payable in kind) to Harborview
Capital Management and J.H. Darbie as described in the Escrow Agreement. 

Schedule 3.1(v)  

        See schedule 6.1(b) to the Registration Rights Agreement for persons who have registration rights for shares of Isonics common stock which have not been
satisfied. 

Schedule 3.1(x)  

        The Board of Directors has the ability to issue preferred stock (which may be considered a takeover protection device in certain circumstances). 

        California
law requires that the shareholders be offered the right to cumulate votes in the election of directors—a right that may be considered a takeover protection device. 

Schedule 3.1(ff)  

        Isonics' independent accountants are Hein & Associates, LLP. Grant Thornton LLP audited Isonics' financial statements for the years ended April 30,
2003 and 2004, and the financial statements for EnCompass Materials Group, Ltd. (now known as Silver Silicon Ltd.) included in Isonics' Form 8-K reporting Isonics'
acquisition of the assets of EnCompass Materials Group. 

Schedule 3.1(gg)  

        See Schedule 3.1(n). 

Schedule 3.1(hh)  

        See the SEC Reports for a discussion of the dismissal of Grant Thornton LLP. 

Schedule 3.1(ii)  

        See the SEC Reports. 

32

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