Document:

Exhibit 10.2

 

EXECUTION COPY

 

 

 

PLEDGE AND SECURITY AGREEMENT

 

made by

 

POWER-ONE, INC.

 

and

 

EACH OTHER PLEDGOR HEREUNDER

 

in favor of

 

THE BANK OF NEW YORK TRUST COMPANY, N.A., as Collateral Agent

 

 

Dated as of June 17, 2008

 

 

 

 

TABLE OF CONTENTS

 

	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  SECTION 1.

  	
  Certain Definitions

  	
  1

  
	
   

  	
   

  	
   

  
	
  SECTION 2.

  	
  Pledge of Security

  	
  7

  
	
   

  	
   

  	
   

  
	
  SECTION 3.

  	
  Security for
  Obligations

  	
  8

  
	
   

  	
   

  	
   

  
	
  SECTION 4.

  	
  Delivery of Pledged
  Equity

  	
  9

  
	
   

  	
   

  	
   

  
	
  SECTION 5.

  	
  Representations and
  Warranties

  	
  9

  
	
   

  	
   

  	
   

  
	
  SECTION 6.

  	
  Covenants

  	
  11

  
	
   

  	
   

  	
   

  
	
  SECTION 7.

  	
  Further Assurances

  	
  14

  
	
   

  	
   

  	
   

  
	
  SECTION 8.

  	
  Voting Rights;
  Dividends; Etc.

  	
  15

  
	
   

  	
   

  	
   

  
	
  SECTION 9.

  	
  Collateral Agent
  Appointed Attorney-in-Fact

  	
  16

  
	
   

  	
   

  	
   

  
	
  SECTION 10.

  	
  Collateral Agent
  May Perform; No Assumption

  	
  17

  
	
   

  	
   

  	
   

  
	
  SECTION 11.

  	
  Standard of Care

  	
  18

  
	
   

  	
   

  	
   

  
	
  SECTION 12.

  	
  Insurance Matters

  	
  21

  
	
   

  	
   

  	
   

  
	
  SECTION 13.

  	
  Remedies

  	
  21

  
	
   

  	
   

  	
   

  
	
  SECTION 14.

  	
  Application of
  Proceeds

  	
  23

  
	
   

  	
   

  	
   

  
	
  SECTION 15.

  	
  Indemnity and
  Expenses

  	
  23

  
	
   

  	
   

  	
   

  
	
  SECTION 16.

  	
  Set-Off

  	
  23

  
	
   

  	
   

  	
   

  
	
  SECTION 17.

  	
  Continuing Security
  Interest; Assigns

  	
  24

  
	
   

  	
   

  	
   

  
	
  SECTION 18.

  	
  Additional Pledgors

  	
  24

  
	
   

  	
   

  	
   

  
	
  SECTION 19.

  	
  Amendments; Etc.

  	
  24

  
	
   

  	
   

  	
   

  
	
  SECTION 20.

  	
  Notices

  	
  24

  
	
   

  	
   

  	
   

  
	
  SECTION 21.

  	
  Failure or
  Indulgence Not Waiver; Remedies Cumulative

  	
  25

  
	
   

  	
   

  	
   

  
	
  SECTION 22.

  	
  Severability

  	
  25

  
	
   

  	
   

  	
   

  
	
  SECTION 23.

  	
  Headings

  	
  25

  

 

i

 

	
  SECTION 24.

  	
  Governing Law;
  Terms

  	
  25

  
	
   

  	
   

  	
   

  
	
  SECTION 25.

  	
  Consent to
  Jurisdiction and Service of Process

  	
  25

  
	
   

  	
   

  	
   

  
	
  SECTION 26.

  	
  Waiver of Jury
  Trial

  	
  26

  
	
   

  	
   

  	
   

  
	
  SECTION 27.

  	
  Acknowledgments

  	
  26

  
	
   

  	
   

  	
   

  
	
  SECTION 28.

  	
  Counterparts

  	
  26

  
	
   

  	
   

  	
   

  
	
  SECTION 29.

  	
  Suretyship Waivers
  by Pledgors, etc.

  	
  26

  

 

ii

 

SECURITY AGREEMENT

 

This PLEDGE AND SECURITY
AGREEMENT (this “Agreement”)
is dated as of June 17, 2008 and entered into by and among POWER-ONE, INC., a Delaware corporation (“Company”), each of THE UNDERSIGNED DIRECT AND INDIRECT SUBSIDIARIES of
Company (each of such undersigned Subsidiaries being a “Subsidiary Pledgor” and collectively “Subsidiary Pledgors,”) and each Additional
Pledgor that may become a party hereto after the date hereof in accordance with
Section 18 hereof (each of Company, Subsidiary Pledgors and each
Additional Pledgor being a “Pledgor”
and collectively “Pledgors”), in
favor of THE BANK OF NEW YORK TRUST COMPANY, N.A.,
a national banking association (in such capacity, together with its successors
and assigns, herein called “Collateral Agent”).

 

PRELIMINARY STATEMENTS

 

A.            Company and Collateral Agent are
parties to an Indenture dated the date hereof (said indenture, as it may
hereafter be amended, supplemented, amended and restated or otherwise modified
from time to time, being the “Indenture”,
the terms defined therein and not otherwise defined herein being used herein as
therein defined; the Indenture, together with this Agreement and the other
Security Documents, being collectively the “Indenture
Documents”).  The Indenture Documents evidence and govern the
issuance of debt securities (the “Securities”) by
the Company in the original principal amount of up to Eighty Million Dollars
($80,000,000).

 

B.            As a condition to the purchase of
the Securities pursuant to the Purchase Agreement, the Company and each other
Pledgor party hereto is required to grant the security interests and undertake
the obligations  contemplated by this Agreement.

 

C.            Each Pledgor is the legal and
beneficial owner of certain shares of stock, partnership interests, interests
in joint ventures, limited liability company interests and other equity
interests (“Equity Interests”) in
one or more Persons and/or certain other assets and property described herein.

 

NOW, THEREFORE, in
consideration of the agreements set forth herein and for other good and
valuable consideration, each Pledgor hereby agrees with Collateral Agent (and
acknowledges that such Pledgor’s agreement to fulfill its obligations hereunder
is a material and essential part of the consideration and inducement of
Collateral Agent and the purchases of the Securities) as follows:

 

SECTION 1.              Certain Definitions.

 

(a)           The following terms used in this
Agreement shall have the following meanings:

 

“Account Collateral” means each Pledgor’s right, title and
interest, whether now existing or hereafter acquired or arising, in, to and
under, each Deposit Account and Securities Account (including any successor
accounts to any such accounts) and all amounts, investments 

 

 

and any other property (including, but not
limited to, checks, securities, financial assets, investment property, security
entitlements and instruments) at any time deposited in or credited to any such
account and all security entitlements with respect thereto, including all
income or gain earned thereon and any proceeds thereof.

 

“Account Control Agreement”
means, in respect of a Deposit Account, a Deposit Account Control Agreement,
and in respect of a Securities Account, a Securities Account Control Agreement.

 

“Bankruptcy Code” means
Title 11 of the United States Code, as now or hereafter in effect.

 

“Cash Equivalents” means any of the following, to the extent
owned by a Pledgor free and clear of all Liens other than Liens created under
the Indenture Documents and having a maturity of not greater than 360 days from
the date of acquisition thereof: (a) readily marketable direct obligations
of the Government of the United States or any agency or instrumentality thereof
or obligations unconditionally guaranteed by the full faith and credit of the
Government of the United States, (b) insured certificates of deposit of or
time deposits with any commercial bank that is a member of the Federal Reserve
System, issues (or the parent of which issues) commercial paper rated as
described in clause (c) below, is organized under the laws of the United
States or any State thereof and has combined capital and surplus of at least
$1,000,000,000, (c) commercial paper in an aggregate amount of no more than
$20,000,000 per issuer outstanding at any time, issued by any corporation
organized under the laws of any State of the United States and rated at least “Prime-1”
(or the then equivalent grade) by Moody’s or “A-1” (or the then
equivalent grade) by S&P or (d) Investments, classified in accordance
with GAAP as current assets of any Pledgor, in money market funds that are
registered under the Investment Company Act of 1940, as amended, that are
administered by financial institutions that have the highest rating obtainable
from either Moody’s or S&P and the portfolios of which are limited solely
to Investments of the character, quality and maturity described in clauses (a),
(b) and (c) of this definition including, without limitation, any
such fund for which any Secured Party or an Affiliate of a Secured Party serves
as an investment advisor, administrator, shareholder servicing agent, custodian
or sub-custodian, notwithstanding that (A) such Secured Party or Affiliate
of a Secured Party charges and collects fees and expenses from such funds for
services rendered (provided that such charges, fees and expenses are on terms
consistent with terms negotiated at arm’s length) and (B) such Secured
Party charges and collects fees and expenses for services rendered, pursuant to
this Agreement.

 

“Contractual Obligation”,
as applied to any Person, means any provision of any security issued by that
Person or of any material indenture, mortgage, deed of trust, contract,
undertaking, agreement or other instrument to which that Person is a party or
by which it or any of its properties is bound or to which it or any of its
properties is subject.

 

“Copyrights” means
all items under copyright in various published and unpublished works of
authorship including, without limitation, computer programs, computer data
bases, other computer software layouts, trade dress, drawings, designs,
writings, and formulas.

 

2

 

“Copyright Registrations” means
all copyright registrations issued to any Pledgor and applications for
copyright registration that have been or may hereafter be issued or applied for
thereon in the United States and any state thereof and in foreign countries.

 

“Copyright Rights”
means all common law and other rights in and to the Copyrights in the United
States and any state thereof and in foreign countries including all copyright
licenses (but with respect to such copyright licenses, only to the extent
permitted by such licensing arrangements), the right (but not the obligation)
to renew and extend Copyright Registrations and any such rights and to register
works protectable by copyright and the right (but not the obligation) to sue in
the name of any Pledgor or in the name of Collateral Agent for past, present
and future infringements of the Copyrights and any such rights.

 

“Counterpart” means
a counterpart to this Agreement entered into by the Company or a subsidiary of
Company pursuant to Section 18 hereof.

 

“Deposit Account Control Agreement” means, in respect of a Deposit Account, a
Deposit Account Control Agreement, in a form reasonably acceptable to
Collateral Agent, by and among the applicable Pledgor, Collateral Agent and a
depositary institution, granting Collateral Agent Control over such Deposit
Account.

 

“Designated Italian Merger” means a merger or consolidation of
Power-One Italy Holdings S.p.A. with and into Power-One Italy S.p.A., provided
that upon the effectiveness of such merger or consolidation, Company shall
pledge all of the outstanding Equity Interests of the surviving or resulting
Person (subject to the proviso to Section 2(a)), securing the payment of
the Secured Obligations, and within five Business Days after such merger or
consolidation, such pledge shall constitute a perfected (to the extent such
concept or an analogous concept is applicable under the relevant laws) security
interest in such Equity Interests prior to all other Liens.

 

“Domestic Subsidiary” means
any direct or indirect Subsidiary of Company that is incorporated or organized
under the laws of the United States of America, any state thereof or in the
District of Columbia.

 

“Equity Interests” means, with respect to any Person, shares
of capital stock of (or other ownership or profit interests in) such Person,
warrants, options or other rights for the purchase or other acquisition from
such Person of shares of capital stock of (or other ownership or profit
interests in) such Person, securities convertible into or exchangeable for
shares of capital stock of (or other ownership or profit interests in) such
Person or warrants, rights or options for the purchase or other acquisition
from such Person of such shares (or such other interests), and other ownership
or profit interests in such Person (including, without limitation, partnership,
member or trust interests therein), whether voting or nonvoting.

 

“Foreign Subsidiary”
means any direct or indirect Subsidiary of Company that is not a Domestic
Subsidiary.

 

“Grant” means a
Grant of Trademark Security Interest, substantially in the form of Exhibit I
annexed hereto, and a Grant of Patent Security Interest, substantially in the
form of 

 

3

 

Exhibit II annexed hereto, and a Grant of
Copyright Security Interest, substantially in the form of Exhibit III
annexed hereto.

 

“Intellectual Property Collateral”
means, with respect to any Pledgor all right, title and interest (including
rights acquired pursuant to a license or otherwise but only to the extent
permitted by agreements governing such license or other use) in and to all

 

(i)            Copyrights, Copyright Registrations
and Copyright Rights, including, without limitation, each of the Copyrights,
rights, titles and interests in and to the Copyrights, all derivative works and
other works protectable by copyright, which are presently, or in the future may
be, owned, created (as a work for hire for the benefit of such Pledgor),
authored (as a work for hire for the benefit of such Pledgor), or acquired by
such Pledgor, in whole or in part, and all Copyright Rights with respect
thereto and all Copyright Registrations therefor, heretofore or hereafter
granted or applied for, and all renewals and extensions thereof, throughout the
world;

 

(ii)           Patents;

 

(iii)          Trademarks, Trademark Registrations,
the Trademark Rights and goodwill of such Pledgor’s business symbolized by the
Trademarks and associated therewith;

 

(iv)          all trade secrets, trade secret
rights, know-how, customer lists, processes of production, ideas, confidential
business information, techniques, processes, formulas, and all other
proprietary information;

 

(v)           all proceeds thereof (such as, by way
of example and not by limitation, license royalties and proceeds of
infringement suits).

 

“Investment” means, with respect to any Person, (a) any
purchase or other acquisition by such Person of (i) any Equity Interest
issued by, (ii) a beneficial interest in any Equity Interest issued by, or
(iii) any other equity ownership interest in, any other Person, (b) any
purchase by such Person of all or substantially all of the assets of a business
conducted by another Person or all or substantially all of the assets
constituting the business of a division, branch or other unit operation of any
other Person, (c) any loan, advance (other than deposits with financial
institutions available for withdrawal on demand, prepaid expenses, accounts
receivable and similar items made or incurred in the ordinary course of
business as presently conducted), or capital contribution by such Person to any
other Person, including all Indebtedness of any other Person to such Person
arising from a sale of property by such Person other than in the ordinary
course of its business, (d) any guarantee obligation incurred by such
Person in respect of any obligation of another and (e) any purchase, or
entry into, of any derivative instrument or other contract by such Person
providing for the economic or risk equivalent of all or any part of any
investment in another Person of the type referred to in clause (a),  (b),
(c) or (d) above.

 

“IP Filing Office” means either the United States Patent and
Trademark Office (USPTO or PTO) or the United States Copyright Office, as
applicable.

 

“IP Supplement”
means an IP Supplement, substantially in the form of Exhibit IV
annexed hereto.

 

4

 

“Lien” means any
lien, mortgage, pledge, assignment, security interest, charge or encumbrance of
any kind (including any conditional sale or other title retention agreement,
any lease in the nature thereof, and any agreement to give any security
interest) and any option, trust or other preferential arrangement having the
practical effect of any of the foregoing.

 

“Patents” means all
patents and patent applications and rights and interests in patents and patent
applications under any domestic or foreign law that are presently, or in the
future may be, owned or held by a Pledgor and all patents and patent
applications and rights, title and interests in patents and patent applications
under any domestic or foreign law that are presently, or in the future may be,
owned by such Pledgor in whole or in part, all rights (but not obligations)
corresponding thereto to sue for past, present and future infringements and all
re-issues, divisions, continuations, renewals, extensions and
continuations-in-part thereof.

 

“Permitted Dispositions”
means (A) dispositions in the ordinary course of business of inventory, (B) dispositions
of obsolete or worn out property (including obsolete or valueless intellectual
property), whether now owned or hereafter acquired, in the ordinary course of
business, and dispositions of property (including intellectual property) that
are reasonably determined by the Board of Directors of the disposing Pledgor
(or, in the case of any disposition or series of related dispositions in an
amount not in excess of $100,000, reasonably determined by the disposing
Pledgor) in good faith to be of no practical use to the business of Company and
its Subsidiaries, which dispositions do not, in the aggregate, materially
adversely affect the value of the Pledged Collateral taken as a whole, in an
aggregate amount not in excess of $2,000,000 over the term of this Agreement, (C) dispositions
of cash or Cash Equivalents not otherwise prohibited herein,  (D) dispositions to any Pledgor not
otherwise prohibited by the Indenture Documents, (E) dispositions of
property to the extent such transaction constitutes a Permitted Investment, and
(F) dispositions of equipment to the extent that such equipment is
exchanged for credit against the purchase price of similar replacement
equipment.

 

“Permitted Investments”
means (i)  Investments by Company that are not through or in any
Subsidiary or other Person and that are (x) reasonably determined by
Company to be strategic in nature and to have a valid business purpose or (y) in
the ordinary course of business, (ii) Investments in cash and Cash
Equivalents, (iii) Investments in any Pledgor (including, for the
avoidance of doubt, any newly formed Domestic or Foreign Subsidiary (first tier
or otherwise) that has become a Domestic or Foreign Subsidiary Pledgor
hereunder), (iv) Investments in any Subsidiary of a Pledgor that are in
existence as of the Issue Date, (v) Investments in the ordinary course of
business in any newly formed wholly-owned Foreign Subsidiary of a newly formed
first tier Domestic or Foreign Subsidiary that has become a Domestic or Foreign
Subsidiary Pledgor hereunder where Company has in good faith reasonably
determined that the creation of the newly formed wholly-owned Foreign
Subsidiary and the Investment each have a valid business purpose and do not
materially impair the value of the Pledged Collateral taken as a whole, (vi) Investments
(including debt obligations and Equity Interests) received in connection with
the bankruptcy or reorganization of suppliers and customers or in settlement of
delinquent obligations of, or other disputes with, customers and suppliers
arising in the ordinary course of business or upon the foreclosure with respect
to any secured Investment or other transfer of title with respect to any
secured Investment, and (vii) Investments by a Pledgor in equipment, fixed
assets, real property or improvements, or replacements or substitutions
therefor or additions thereto (excluding normal replacements and maintenance
which are properly charged to current 

 

5

 

operations as operating expenses in accordance with GAAP), that have
been or should be, in accordance with GAAP, reflected as additions to property,
plant or equipment on a Consolidated balance sheet of such Pledgor or have a
useful life of more than one year, (viii) lease, utility and other similar
deposits in the ordinary course of business, (ix) hedging or other
derivative obligations otherwise permitted to be incurred under the Indebtedness
covenants under the Indenture and incurred in the ordinary course of business
for a valid business purpose, (x) receivables owing to Company or any
Subsidiary if created or acquired in the ordinary course of business and
payable or dischargeable in accordance with customary trade terms; provided,
however, that such trade terms may include such concessionary trade terms as
Company or any such Subsidiary deems commercially reasonable under the
circumstances, (xi) Investments that are advances paid to third-party contract
manufacturers in the ordinary course of business to purchase specialized
equipment required to produce specialized products for Company or its
Subsidiaries, (xii) Investments made by Company or a Subsidiary for
consideration consisting only of common Equity Interests of Company, (xiii)
stock, obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Company or any Subsidiary or in
satisfaction of judgments, (xiv) any other Investment where Company has in good
faith reasonably determined that the Investment has a valid business purpose
and does not materially impair the value of the Pledged Collateral taken as a
whole if, upon the consummation of the Investment, the resulting Investment has
been pledged for the benefit of the Secured Parties on a basis consistent with
this Agreement and (xv) any other Investments not specified above that do not
in the aggregate, since the Issue Date, exceed $1,000,000 (for purposes of
calculating which, the amount of any Investment shall be the amount actually
invested, without adjustment for subsequent increases or decreases in the value
of such Investment).

 

“Permitted Securities”
means (i) any security issued under any Company or Subsidiary employee,
officer and/or director stock or option plan reflected in the financial
statements contained in Company’s March 30, 2008 Form 10-Q, or under
any Company or Subsidiary employee, officer and/or director stock or option
plan adopted in the ordinary course of business after the date hereof, in each
case whether directly or upon exercise of any option or other security issued
thereunder and (ii) warrants for shares of Company’s common stock or
securities issued in connection with the exercise thereof.

 

“Pledged Collateral”
has the meaning provided therefor in Section 2.

 

“Secured Parties” means, collectively, the Trustee,
Collateral Agent and each Holder.

 

“Securities Account Control Agreement” means, in respect of a Securities Account, a
Securities Account Control Agreement, in a form reasonably acceptable to
Collateral Agent, by and among the applicable Pledgor, Collateral Agent and a
Securities Intermediary, granting Collateral Agent Control over such Securities
Account.

 

“Trademarks” means
all trademarks, service marks, designs, logos, indicia, tradenames, trade
dress, corporate names, company names, business names, fictitious business
names, trade styles and/or other source and/or business identifiers and
applications pertaining thereto, owned by a Pledgor, or hereafter adopted and
used, in its business.

 

6

 

“Trademark Registrations”
means all registrations that have been or may hereafter be issued or applied
for thereon in the United States and any state thereof and in foreign countries
(including, without limitation, the registrations and applications set forth on
Schedule VII annexed hereto).

 

“Trademark Rights” means
all common law and other rights (but in no event any of the obligations) in and
to the Trademarks in the United States and any state thereof and in foreign
countries.

 

“UCC” means the
Uniform Commercial Code, as it exists on that date of the Agreement or as it
may hereafter be amended in the State of New York.

 

(b)           The following terms are used herein
as defined in the UCC: Accounts, Certificated Security, Chattel Paper,
Commercial Tort Claims, Control, Deposit Account, Documents, Equipment, Farm
Products, Goods, Instruments, Inventory, Letter of Credit Rights, Securities
Account, Securities Intermediary and Supporting Obligations.

 

SECTION 2.              Pledge of
Security.  Each Pledgor
hereby appoints Collateral Agent to act as collateral agent hereunder and
pledges and assigns to Collateral Agent, for the ratable benefit of the Secured
Parties, and hereby grants to Collateral Agent, for the ratable benefit of the
Secured Parties, a security interest in, all of such Pledgor’s right, title and
interest in and to the following (the “Pledged
Collateral”):

 

(a)

 

(i)           all of the Equity Interests now or
hereafter owned by such Pledgor in each Domestic Subsidiary that is or
subsequently becomes a first tier Subsidiary of Company;

 

(ii)          all of the Equity Interests now or
hereafter owned by such Pledgor in each Foreign Subsidiary of Company listed on
Schedule I;

 

in each case, whether such Equity Interests are classified as
investment property or general intangibles under the UCC, and shall include all
securities convertible into, and rights, warrants, options and other rights to
purchase or otherwise acquire, any Equity Interest, and shall include those
owned on the date hereof and described in Schedule I for such Pledgor,
the certificates or other instruments representing any of the foregoing and any
interest of such Pledgor, and all such interests hereafter acquired by
Pledgors (or any of them) and in the entries on the books of any Securities
Intermediary pertaining thereto (the “Pledged
Equity”), and all distributions, dividends, and other property
received, receivable or otherwise distributed in respect of or in exchange
therefore;

 

provided, that, if the issuer of any
such Pledged Equity is a controlled foreign corporation (as such term is
defined in Section 957(a) of the Internal Revenue Code of 1986, as
amended), the Pledged Equity shall not include any Equity Interests of such
issuer to the extent that creation of a security interest by Pledgor in such
Equity Interests could reasonably be expected to result in material adverse tax
consequences to Company, it being acknowledged and agreed that the creation of
a security interest in Equity Interests possessing up to 66% of the voting
power of all 

 

7

 

classes of Equity Interests of such issuer entitled to vote will not
result in such adverse tax consequences;

 

(b)           the assets and property described in Schedule
II for such Pledgor, whether now owned or hereafter acquired by such
Pledgor and howsoever its interest therein may arise or appear (whether by
ownership, security interest, claim or otherwise) (the “Pledged Assets”);

 

(c)           all books, records, ledger cards,
files, correspondence, computer programs, tapes, disks and related data
processing software that at any time evidence or contain information relating
to any of the Pledged Collateral or are otherwise necessary or helpful in the
collection thereof or realization thereupon; and

 

(d)           to the extent not covered by clauses (a) and
(b) above, all proceeds of any or all of the foregoing Pledged
Collateral.  For purposes of this Agreement, the term “proceeds” means all “proceeds” as such term
is defined in Section 9-102(a)(64) of the UCC and, in any event, shall
include, without limitation, all dividends or other income from such Pledged
Collateral, collections thereon or distributions or payments with respect
thereto, whatever is receivable or received when Pledged Collateral or proceeds
are sold, exchanged, collected or otherwise disposed of, whether such
disposition is voluntary or involuntary, and includes, without
limitation, proceeds of any indemnity or guaranty payable to Pledgors or
Collateral Agent from time to time with respect to any of the Pledged
Collateral.

 

SECTION 3.              Security for Obligations.  This Agreement secures, and the Pledged
Collateral is collateral security for, the prompt payment or performance in full
when due, whether at stated maturity, by required redemption, conversion,
repurchase, acceleration, demand or otherwise (including the payment of amounts
that would become due but for the operation of the automatic stay under Section 362(a) of
the Bankruptcy Code, 11 U.S.C. §362(a)), of all obligations and liabilities of
every nature of Company now or hereafter existing under or arising out of or in
connection with this Agreement or any of the Indenture Documents, together with
all extensions or renewals thereof, whether for principal, interest (including
without limitation interest that, but for the filing of a petition in
bankruptcy with respect to any Pledgor, would accrue on such obligations,
whether or not a claim is allowed against such Pledgor for such interest in the
related bankruptcy proceeding), fees, expenses, indemnities or otherwise,
whether voluntary or involuntary, direct or indirect, absolute or contingent,
liquidated or unliquidated, whether or not jointly owed with others, and whether
or not from time to time decreased or extinguished and later increased, created
or incurred, and all or any portion of such obligations or liabilities that are
paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Collateral
Agent as a preference, fraudulent transfer or otherwise; all other loans and
future advances made by Collateral Agent to any Pledgor and all other debts,
obligations and liabilities of each Pledgor or every kind and character now or
hereafter existing in favor of Collateral Agent, whether direct or indirect,
primary or secondary, joint or several, fixed or contingent, secured or
unsecured, and whether originally payable to Collateral Agent or to a third
party and subsequently acquired by Collateral Agent, it being contemplated that
any Pledgor may hereafter become indebted to Collateral Agent for such further
debts, obligations and liabilities; and all obligations of every nature of
Pledgors now or hereafter existing under this Agreement (all such obligations
of Pledgors being the “Secured Obligations”).

 

8

 

SECTION 4.              Delivery of Pledged Equity.  In the case of Pledged Equity consisting of
Certificated Securities or Instruments, all such Certificated Securities or
Instruments representing or evidencing such Pledged Equity shall be delivered
to and held by or on behalf of Collateral Agent in a segregated account
pursuant hereto and shall be in suitable form for transfer by delivery or, as
applicable, shall be accompanied by the applicable Pledgor’s endorsement, where
necessary, or duly executed instruments of transfer or assignment in blank, all
in form and substance satisfactory to Collateral Agent.  Upon the
occurrence and during the continuation of an Event of Default, Collateral Agent
shall have the right, without notice to Pledgors, to transfer to or to register
in the name of Collateral Agent or any of its nominees any or all of the
Pledged Equity.

 

SECTION 5.              Representations and Warranties.  Each Pledgor represents and warrants as
follows:

 

(a)           Organization and Powers. 
Such Pledgor is duly organized, validly existing and in good standing (solely
in the case of an entity incorporated or organized under the laws of the United
States of America or any state thereof or in any other jurisdiction in which an
entity may be in good standing) and has all requisite power and authority to
own and operate its properties, to carry on its business as now conducted and
proposed to be conducted and to enter into this Agreement and carry out the
transactions contemplated hereby.

 

(b)           Good Standing.  Such
Pledgor is qualified to do business and in good standing (solely in the case of
an entity incorporated or organized under the laws of the United States of America
or any state thereof or in any other jurisdiction in which an entity may be in
good standing) wherever necessary to carry on its present business and
operations, except in jurisdictions in which the failure to be so qualified or
in good standing has not had and will not have a material adverse effect on the
business, operations, properties, assets or condition (financial or otherwise)
of such Pledgor and its subsidiaries, taken as a whole.

 

(c)           Binding Obligation.  This
Agreement is the legally valid and binding obligation of such Pledgor,
enforceable against it in accordance with its terms, except as enforcement may
be limited by bankruptcy, insolvency, reorganization, moratorium or similar
laws or equitable principles relating to or limiting creditors’ rights
generally.

 

(d)           Due Authorization, etc. of Pledged
Collateral.  All of the Pledged Equity described in Schedule I
for such Pledgor has been duly authorized and validly issued and is fully paid
and non-assessable and represents  all of
the Pledged Equity owned by such Pledgor.

 

(e)           Description of Pledged Collateral. 
The Pledged Equity constitutes all of the issued and outstanding Equity
Interests in each issuer thereof (subject to the proviso to Section 2(a)),
and there are no outstanding warrants, options or other rights to purchase, or
other agreements outstanding with respect to, or property that is now or
hereafter convertible into, or that requires the issuance or sale of, any
securities, or rights or interest in any securities, of any of the issuers of
any of the Pledged Equity or any of the properties or assets of any of such
issuers.

 

9

 

(f)            Ownership of Pledged Collateral. 
Such Pledgor is the legal, record and beneficial owner of the Pledged
Collateral and its interests in the Pledged Collateral are free and clear of
any Lien except for the security interest created by this Agreement.

 

(g)           Governmental Authorizations. 
No authorization, approval or other action by, and no notice to or filing with,
any governmental authority or regulatory body is required for either (i) the
pledge by such Pledgor of the Pledged Collateral pursuant to this Agreement and
the grant by such Pledgor of the security interest granted hereby, (ii) the
execution, delivery or performance of this Agreement by such Pledgor, or (iii) the
exercise by Collateral Agent of the voting or other rights, or the remedies in
respect of the Pledged Collateral, provided for in this Agreement (except as
may be required in connection with a disposition of Pledged Collateral by laws
affecting the offering and sale of securities generally).

 

(h)           Perfection.  Upon (i) the
filing of UCC financing statements naming such Pledgor as “debtor,” naming
Collateral Agent as “secured party” and describing the Pledged Collateral in
the filing offices set forth on Schedule III, (ii) in the case
of Pledged Collateral consisting of certificated securities or evidenced by
instruments, in addition to filing such financing statements, delivery of the
certificates representing such certificated securities and delivery of such
instruments to Collateral Agent, in each case duly endorsed or accompanied by
duly executed instruments of assignment or transfer in blank (and in the case
of Pledged Collateral issued by a foreign issuer, any actions required under
foreign law to perfect (to the extent such concept or an analogous concept is
applicable under the relevant laws) a security interest in such Pledged
Collateral), (iii) in the case of the Intellectual Property Collateral, in
addition to the filing of such UCC financing statements, the recordation of a
Grant with the applicable IP Filing Office, and (iv) in the case of
Pledged Collateral consisting of Account Collateral with respect to a Deposit
Account or Securities Account, the effectiveness of an Account Control
Agreement in respect of such Deposit Account or Securities Account, the
security interests in the Pledged Collateral, granted to Collateral Agent, will
constitute perfected (to the extent such concept or an analogous concept is
applicable under the relevant laws) security interests in the Pledged
Collateral prior to all other Liens (except for Permitted Liens of the types
described in clauses (i), (ii), (iii), (iv), (vi), (vii), (viii) (solely
with respect to the extension, renewal or refinancing of Indebtedness secured
by Liens of the type described in clause (vi) thereof), (ix) and
(xii) of the definition of Permitted Liens), securing the payment of the
Secured Obligations.

 

(i)            Office Locations; Type and
Jurisdiction of Organization.  Such Pledgor’s name as it appears in
official filings in its jurisdiction of organization, type of organization
(i.e. corporation, limited liability company, etc.), jurisdiction of
organization, principal place of business, chief executive office, office where
such Pledgor keeps its records regarding the Pledged Collateral, and
organization number provided by the applicable government authority of the
jurisdiction of organization are set forth on Schedule IV annexed hereto
or the applicable Counterpart.

 

(j)            Names.  No Pledgor (or
predecessor by merger or otherwise of such Pledgor) has, within the five-year
period preceding the date hereof, or, in the case of an Additional Pledgor, the
date of the applicable Counterpart, had a different name from the name 

 

10

 

of such Pledgor listed on
the signature pages hereof, except the names set forth on Schedule IV
annexed hereto or the applicable Counterpart.

 

(k)           Margin Regulations.  The pledge
of the Pledged Collateral pursuant to this Agreement does not violate
Regulation T, U or X of the Board of Governors of the Federal Reserve System.

 

(l)            Account Collateral.  The value of cash and other property in all
Deposit Accounts and Securities Accounts constituting Pledged Collateral, that
are not subject to effective Account Control Agreements, does not, in the
aggregate, exceed $1,000,000.

 

(m)          Other Information.  All
information heretofore, herein or hereafter supplied to Collateral Agent by or
on behalf of such Pledgor with respect to the Pledged Collateral is accurate
and complete in all material respects.

 

(n)           Account Debtors.  None of
the account debtors or other persons obligated on any of the portions of the
Pledged Assets consisting of accounts receivable is a governmental authority
covered by the Federal Assignment of Claims Act or like federal, state or local
statute or rule in respect of such Pledged Collateral.

 

The
representations and warranties as to the information set forth in Schedules
referred to herein are made, as to each Pledgor as of the date hereof (or, in
the case of the representation and warranty set forth in clause (l) above,
shall be made on and as of June 30, 2008) and, as to each Additional
Pledgor, as of the date of the applicable Counterpart, that, in the case of a
Pledge Amendment, such representations and warranties are made as of the date
of such Pledge Amendment.

 

Company shall cause its
legal counsel to deliver a legal opinion regarding certain of the representations
and warranties set forth in this Section 5 and such other matters as may
be reasonably requested by Collateral Agent.

 

SECTION 6.              Covenants.  Each
Pledgor shall:

 

(a)           not, except as expressly permitted by
the Indenture Documents and without prejudice to clause (y) below, (i) sell,
assign (by operation of law or otherwise) or otherwise dispose of, or grant any
option with respect to, any of the Pledged Collateral, except for Permitted
Dispositions, (ii) create or suffer to exist any Lien (other than, for the
avoidance of doubt, Permitted Liens) upon or with respect to any of the Pledged
Collateral, except for the security interest under this Agreement or any other
Indenture Document, or (iii) permit any issuer of Pledged Equity to merge
or consolidate with another Person (except (x) with a Pledgor in a merger
or consolidation in which the surviving or resulting Person is a Pledgor and (y) the
Designated Italian Merger) unless upon the effectiveness of such merger or
consolidation, the surviving or resulting Person (if other than a Pledgor)
becomes a Pledgor hereunder and all of the outstanding Equity Interests of the
surviving or resulting Person (subject to the proviso to Section 2(a))
become pledged hereunder and no cash, securities or other property is
distributed in respect of the outstanding shares of any other constituent
Person;

 

11

 

(b)           do or cause to be done, and cause
each issuer of Pledged Equity to do or cause to be done, all things necessary
to preserve and keep in full force and effect its respective corporate
existence in accordance with its organizational documents (as the same may be
amended from time to time);

 

(c)           (i) cause each issuer of Pledged
Equity not to issue Equity Interests (except Permitted Securities) in addition
to or in substitution for the Pledged Equity issued by such issuer, except to
Company or any other Pledgor, (ii) subject to the proviso to Section 2(a),
pledge hereunder, immediately upon its acquisition (directly or indirectly)
thereof, any and all additional Equity Interests of each issuer of Pledged
Equity, and (iii) subject to the proviso to Section 2(a), pledge
hereunder, immediately upon its acquisition (directly or indirectly) thereof,
any and all Equity Interests of any Person that, after the date of this
Agreement, becomes, as a result of any occurrence, a direct Domestic Subsidiary
or a first tier Foreign Subsidiary of Company;

 

(d)           at its expense (i) perform and
comply in all material respects with all terms and provisions of any agreement
related to the Pledged Collateral required to be performed or complied with by
it, (ii) maintain its agreements in all such agreements in full force and
effect, and (iii) enforce its rights under all such agreements in accordance
with their terms;

 

(e)           give Collateral Agent at least
30 days’ prior written notice of any (i) change in such Pledgor’s
name, identity or corporate structure and (ii) reincorporation,
reorganization or other action that results in a change of the jurisdiction or
organization of such Pledgor;

 

(f)            promptly deliver to Collateral Agent
all written notices received by it with respect to the Pledged Collateral;

 

(g)           pay promptly when due all taxes,
assessments and governmental charges or levies imposed upon, and all claims
against, the Pledged Collateral, except to the extent the validity thereof is
being contested in good faith and with respect to which reserves in conformity
with GAAP have been provided on the books of the applicable Pledgor; provided
that such Pledgor shall in any event pay such taxes, assessments, charges,
levies or claims not later than five days prior to the date of any proposed
sale under any judgement, writ or warrant of attachment entered or filed
against such Pledgor or any of the Pledged Collateral as a result of the
failure to make such payment;

 

(h)           keep adequate records concerning the
Pledged Collateral and permit Collateral Agent or its representatives or
designees from time to time upon reasonable notice within normal business hours
to examine and make copies of and abstracts from such records;

 

(i)            at its expense, defend Collateral
Agent’s right, title and security interest in and to the Pledged Collateral
against the claims of any person;

 

(j)            at its expense, at any time and from
time to time, promptly execute and deliver all further instruments, financing
statements, continuation statements and documents and take all further action
that may be necessary or desirable or that Collateral Agent may reasonably
request in order to (i) perfect and protect the security interests created
or purported to be created 

 

12

 

hereby, (ii) enable
Collateral Agent to exercise and enforce its rights and remedies hereunder in
respect of the Pledged Collateral or (iii) otherwise effect the purposes
of this Agreement;

 

(k)           not make or consent to any amendment
or other modification or waiver with respect to any agreement concerning the
Pledged Collateral as permitted by the Indenture Documents and this Agreement;
not take any action that could, or fail to take any action which failure could,
reasonably be expected to result in any one or more of the representations and
warranties set forth in Section 5 of this Agreement being incorrect or
inaccurate in any material respect when made;

 

(l)            in the case of Company, not have or
permit to exist any first-tier Domestic Subsidiary that is not a Pledgor
hereunder without the prior written consent of Collateral Agent (provided,
however, in the case of a Domestic Subsidiary that is directly or indirectly
acquired or formed by Company after the Issue Date, this covenant shall not be
breached for a period of five Business Days after such acquisition or formation
thereof, provided that within such period such acquired or formed Domestic
Subsidiary shall become an Additional Pledgor in accordance with Section 18,
and Schedule II shall be updated to reflect such Domestic Subsidiary as a
Pledgor);

 

(m)          not take any action which would, or
fail to take any action which failure would, in any manner impair the
enforceability of Collateral Agent’s security interest in any Pledged
Collateral;

 

(n)           keep the Pledged Collateral in good
order and repair and not use the same in violation of law or any policy of
insurance thereon;

 

(o)           permit Collateral Agent, or its
designee, to inspect the Pledged Collateral at any reasonable time, wherever
located;

 

(p)           not, from and after June 30,
2008, permit the value of all cash and other assets maintained in all Deposit
Accounts and Securities Accounts constituting Pledged Collateral, that are not
subject to effective Account Control Agreements, to exceed, in the aggregate,
$1,000,000;

 

(q)           not grant Control over any Deposit
Account or Securities Account constituting Pledged Collateral to any Person
other than Collateral Agent;

 

(r)            promptly notify Collateral Agent in
writing of, and update Schedule II so as to list with specificity, all
Commercial Tort Claims at any time held or acquired by such Pledgor (except for
such Commercial Tort Claims in amounts as do not, in the aggregate, exceed
$1,000,000), in each case including a summary description of such claim, and
grant to Collateral Agent in writing a security interest therein and in the
proceeds thereof, all upon the terms of this Agreement, with such writing to be
in form and substance reasonably satisfactory to Collateral Agent;

 

(s)           [Intentionally
omitted];

 

(t)            [Intentionally
omitted];

 

13

 

(u)           [Intentionally omitted];

 

(v)           conduct all transactions with any of
its Affiliates on terms that are fair and reasonable and no less favorable to
such Pledgor than it would obtain in a comparable arm’s length transaction with
a Person not an Affiliate;

 

(w)          [Intentionally omitted];

 

(x)           [Intentionally omitted];

 

(y)           in the case of Company, maintain
direct ownership of all of, and not transfer or dispose of any of, and not
permit to be issued to any Person other than Company any of, the Capital Stock
in the Pledged Subsidiaries; provided that, in the case of Shenzhen, PAI
shall maintain direct ownership of all of, and shall not transfer or dispose of
any of, and shall not permit to be issued to any Person other than PAI any of,
the Capital Stock in Shenzhen; and provided  further that, in the
case of PowerOne UK, Company shall maintain direct ownership of no less than
60.5% of, and shall not transfer or dispose of any of, and shall not permit to
be issued (if after such issuance Company shall have less than 60.5% of the
Capital Stock in PowerOne UK) to any Person other than Company any of, the
Capital Stock in PowerOne UK; and

 

(z)            not make or hold any Investments in
any other Person, except for Permitted Investments.

 

SECTION 7.              Further Assurances.

 

(a)           Each Pledgor agrees that from time to
time, at the expense of such Pledgor, such Pledgor will promptly execute and
deliver, and cause to be executed and delivered, at request of Collateral
Agent, agreements establishing that Collateral Agent has control over all
Pledged Collateral and all further instruments and documents, and take all
further action, that may be necessary or desirable, or that Collateral Agent
may request, in order to perfect and protect any security interest granted or
purported to be granted hereby or to enable Collateral Agent to exercise and enforce
its rights and remedies hereunder with respect to any Pledged Collateral. 
Without limiting the generality of the foregoing, each Pledgor will:  (i) execute
(if necessary) and file such financing or continuation statements, or
amendments thereto, and such other instruments or notices, as may be necessary
or desirable, or as Collateral Agent may request, in order to perfect and
preserve the security interests granted or purported to be granted hereby
(including, without limitation, pledge agreements under the local law of the
jurisdiction of any Person the Equity Interests in which constitute Pledged
Collateral, and all filings, notices, instruments and other documents relating
thereto) and (ii) at Collateral Agent’s request, appear in and defend any
action or proceeding that may affect such Pledgor’s title to or Collateral
Agent’s security interest in all or any part of the Pledged Collateral. 
Each Pledgor hereby authorizes Collateral Agent (provided Collateral
Agent shall have no obligation) to file one or more financing or continuation
statements, and amendments thereto, relative to all or any part of the Pledged
Collateral without the signature of such Pledgor; provided, however,
that each Pledgor shall have the primary obligation to file any financing or
continuation statement.

 

14

 

(b)           Each Pledgor further agrees that it
will, upon obtaining any additional Equity Interest (including any additional
Equity Interest hereafter owned in a Domestic Subsidiary that is a direct
subsidiary of Company or a Foreign Subsidiary that is a first tier subsidiary
of Company (in each case, formed or acquired after the date of this
Agreement)), promptly (and in any event within five Business Days) deliver to
Collateral Agent a Pledge Amendment, duly executed by such Pledgor, in
substantially the form of Schedule V annexed hereto (a “Pledge Amendment”), in respect of the
additional Pledged Equity to be pledged pursuant to this Agreement; provided
that the failure of such Pledgor to execute a Pledge Amendment with respect to
any additional Pledged Equity shall not impair the security interest of
Collateral Agent therein or otherwise adversely affect the rights and remedies
of Collateral Agent hereunder with respect thereto.  Upon each such
acquisition, the representations and warranties contained in Section 5
hereof shall be deemed to have been made by such Pledgor as to the Pledged
Equity described in such Pledge Amendment.

 

(c)           Each Pledgor shall promptly notify
Collateral Agent in writing of any rights to Intellectual Property Collateral
acquired by such Pledgor after the date hereof.  Promptly after the filing
of an application for any Trademark Registration, Patent or Copyright
Registration, each Pledgor shall execute and deliver to Collateral Agent an IP
Supplement, and submit a Grant for recordation with respect thereto in the
applicable IP Filing Office; provided, the failure of any Pledgor to
execute an IP Supplement or submit a Grant for recordation with respect to any
additional Intellectual Property Collateral shall not impair the security
interest of Collateral Agent therein or otherwise adversely affect the rights
and remedies of Collateral Agent hereunder with respect thereto.  Upon
delivery to Collateral Agent of an IP Supplement, Schedules VII, VIII, IX
annexed hereto and Schedule A to each Grant, as applicable, shall be
deemed modified to include a reference to any right, title or interest in any
existing Intellectual Property Collateral or any Intellectual Property
Collateral set forth on Schedule A to such IP Supplement.  Upon
each such acquisition, the representations and warranties contained in
Section 5(h) hereof shall be deemed to have been made by such Pledgor
as to such Intellectual Property Collateral, whether or not such IP Supplement
is delivered.

 

(d)           Company agrees to use commercially
reasonable efforts to perfect, within 30 days after the Issue Date, the Lien
granted hereby on the Equity Interests owned by Company in Power-One Ltd.
(Cayman Islands) by means of a legal pledge, in a manner that ensures the first
priority of such Lien and is otherwise on customary terms reasonably acceptable
to Collateral Agent.

 

SECTION 8.              Voting Rights; Dividends; Etc.

 

(a)           So long as no Event of Default shall
have occurred and be continuing:

 

(i)            each Pledgor shall be entitled to
exercise or refrain from exercising any and all voting and other consensual
rights pertaining to the Pledged Collateral or any part thereof for any purpose
not inconsistent with the terms of this Agreement or the Indenture Documents; provided,
however, that such Pledgor shall not exercise or refrain from exercising
any such right if Collateral Agent shall have notified such Pledgor that, in
Collateral Agent’s judgment, such action would have a material adverse effect
on the value of the Pledged Collateral or any part thereof; and

 

15

 

(ii)           each Pledgor shall be entitled to
receive and retain any and all dividends, other distributions and interest paid
in respect of the Pledged Collateral.

 

(b)          Upon the occurrence and during the
continuation of an Event of Default:

 

(i)            upon written notice from Collateral
Agent to Pledgors, all rights of Pledgors to exercise the voting and other
consensual rights that they would otherwise be entitled to exercise pursuant to
Section 8(a)(i) shall cease, and all such rights shall thereupon
become vested in Collateral Agent who shall thereupon have the sole right to
exercise such voting and other consensual rights;

 

(ii)           all rights of Pledgors to receive the
dividends, other distributions and interest payments that they would otherwise
be authorized to receive and retain pursuant to
Section 8(a)(ii) shall cease, and all such rights shall thereupon
become vested in Collateral Agent who shall thereupon have the sole right to
receive and hold as Pledged Collateral such dividends, other distributions and
interest payments; and

 

(iii)          all dividends, principal, interest
payments and other distributions that are received by Pledgors contrary to the
provisions of paragraph (ii) of this Section 8(b) shall be received
in trust for the benefit of Collateral Agent, shall be segregated from other
funds of Pledgors and shall forthwith be paid over to Collateral Agent as
Pledged Collateral in the same form as so received (with any necessary
endorsements).

 

(c)           In order to permit Collateral Agent
to exercise the voting and other consensual rights that it may be entitled to
exercise pursuant to Section 8(b)(i) and to receive all dividends and
other distributions which it may be entitled to receive under Section 8(a)(ii) or
Section 8(b)(ii), (i) each Pledgor shall promptly execute and deliver
(or cause to be executed and delivered) to Collateral Agent all such proxies,
dividend payment orders and other instruments as Collateral Agent may from time
to time reasonably request and (ii) without limiting the effect of the
immediately preceding clause (i), each Pledgor hereby grants to Collateral
Agent an irrevocable proxy to vote the Pledged Equity and to exercise all other
rights, powers, privileges and remedies to which a holder of the Pledged Equity
would be entitled (including, without limitation, giving or withholding written
consents of holders of Equity Interests, calling special meetings of holders of
Equity Interests and voting at such meetings), which proxy shall be effective,
automatically and without the necessity of any action (including any transfer
of any Pledged Equity on the record books of the issuer thereof) by any other
Person (including the issuer of the Pledged Equity or any officer or agent
thereof), upon the occurrence of an Event of Default and which proxy shall only
terminate upon the payment in full of the Secured Obligations.

 

SECTION 9.              Collateral Agent Appointed Attorney-in-Fact. 
Each Pledgor hereby irrevocably appoints Collateral Agent as such Pledgor’s
attorney-in-fact, with full authority in the place and stead of Pledgor and in
the name of such Pledgor, Collateral Agent or otherwise, from time to time in
Collateral Agent’s discretion to take any action and to execute any instrument
that Collateral Agent may deem necessary or advisable to accomplish the
purposes of this Agreement, including without limitation:

 

16

 

(a)           to file one or more financing or
continuation statements, or amendments thereto, relative to all or any part of
the Pledged Collateral without the signature of such Pledgor;

 

(b)           upon the occurrence and during the
continuance of an Event of Default, to ask, demand, collect, sue for, recover,
compound, receive and give acquittance and receipts for moneys due and to
become due under or in respect of any of the Pledged Collateral;

 

(c)           upon the occurrence and during the
continuance of an Event of Default, to receive, endorse and collect any
instruments made payable to such Pledgor representing any dividend, principal
or interest payment or other distribution in respect of the Pledged Collateral
or any part thereof and to give full discharge for the same;

 

(d)           upon the occurrence and during the
continuance of an Event of Default, to file any claims or take any action or
institute any proceedings that Collateral Agent may deem necessary or desirable
for the collection of any of the Pledged Collateral or otherwise to enforce the
rights of Collateral Agent with respect to any of the Pledged Collateral;

 

(e)           to pay or discharge taxes or Liens
levied or placed upon or threatened against the Pledged Collateral, the
legality or validity thereof and the amounts necessary to discharge the same to
be determined by Collateral Agent in its sole discretion, any such payments
made by Collateral Agent to become obligations of such Pledgor to Collateral
Agent, due and payable immediately without demand;

 

(f)            upon the occurrence and during the
continuance of an Event of Default, generally to sell, transfer, pledge, make
any agreement with respect to or otherwise deal with any of the Pledged
Collateral as fully and completely as though Collateral Agent were the absolute
owner thereof for all purposes, and to do, at Collateral Agent’s option and
such Pledgor’s expense, at any time or from time to time, all acts and things
that Collateral Agent deems necessary to protect, preserve or realize upon the
Pledged Collateral and Collateral Agent’s security interest therein in order to
effect the intent of this Agreement, all as fully and effectively as such
Pledgor might do; and

 

(g)           upon the occurrence and during the
continuance of an Event of Default, to obtain and adjusted insurance required
to be maintained by such Pledgor.

 

However,
Collateral Agent shall have no obligation to do any of the foregoing or to take
any actions relating to the Pledged Collateral, and Collateral Agent may,
without liability to any Pledgor or any other Person, take or refrain from
taking any such actions, as Collateral Agent in its sole discretion deems to be
in the interest of Collateral Agent.

 

SECTION 10.            Collateral Agent May Perform; No Assumption.

 

(a)           If any Pledgor fails to perform any
agreement contained herein, Collateral Agent may itself perform, or cause
performance of, such agreement, and the expenses of Collateral Agent incurred
in connection therewith shall be payable by such Pledgor under
Section 15(b).

 

17

 

(b)           Anything contained herein to the
contrary notwithstanding, (i) each Pledgor shall remain liable under any
agreements included in or related to the Pledged Collateral, to the extent set
forth therein, to perform all of its duties and obligations thereunder to the
same extent as if this Agreement had not been executed, (ii) the exercise
by Collateral Agent of any of its rights hereunder shall not release any
Pledgor from any of its duties or obligations under any such agreements, and
(iii) Collateral Agent shall not have any obligation or liability under
any such agreements by reason of this Agreement, nor shall Collateral Agent be
obligated to perform any of the obligations or duties of any Pledgor thereunder
or to take any action to collect or enforce any claim for payment assigned
hereunder.

 

SECTION 11.            Standard of Care.

 

(a)           The powers conferred on Collateral
Agent under this Agreement are solely to protect the interests of Collateral
Agent in the Pledged Collateral and shall not impose any duty upon Collateral
Agent to exercise any such powers.  Except for the exercise of reasonable
care in the custody of any Pledged Collateral in its possession and the
accounting for moneys actually received by it hereunder, Collateral Agent shall
have no duty as to any Pledged Collateral, it being understood that Collateral
Agent shall have no responsibility for (a) ascertaining or taking action
with respect to calls, conversions, exchanges, maturities, tenders or other
matters relating to any Pledged Collateral, whether or not Collateral Agent has
or is deemed to have knowledge of such matters, (b) taking any necessary
steps (other than steps taken in accordance with the standard of care set forth
above to maintain possession of the Pledged Collateral) to preserve rights
against any prior parties or any other rights pertaining to any Pledged Collateral,
(c) taking any necessary steps to collect or realize upon the Secured
Obligations or any guarantee therefor, or any part thereof, or any of the
Pledged Collateral, or (d) initiating any action to protect the Pledged
Collateral against the possibility of a decline in market value. 
Collateral Agent shall be deemed to have exercised reasonable care in the
custody and preservation of Pledged Collateral in its possession if such
Pledged Collateral is accorded treatment substantially equal to that which
Collateral Agent accords its own property consisting of negotiable securities.

 

(b)           The duties and obligations of
Collateral Agent shall be determined solely by the express provisions of this
Agreement and Collateral Agent shall not be liable except for the performance
of such duties and obligations as are specifically set out in this
Agreement.  Collateral Agent shall not be
required to inquire as to the performance or observation of any obligation,
term or condition under any agreement or arrangement by the Trustee, the Issuer
or any other party to the transaction documents.  Collateral Agent shall be under no liability
to any party hereto by reason of any failure on the part of any party hereto or
any maker, guarantor, endorser or other signatory of any document or any other
Person to perform such Person’s obligations under any such document.

 

(c)           Collateral Agent shall not be
responsible in any manner for the validity or sufficiency of this Agreement or
of any Pledged Collateral delivered hereunder or under the Pledged Equity
agreements, or for the value or collectibility of any note, check or other
instrument, if any, so delivered, or for any representations made or
obligations assumed by any party other than Collateral Agent. Collateral Agent
shall not be bound to examine or inquire into or be liable for any defect or
failure in the right or title of each Pledgor to all or any of such 

 

18

 

assets whether such
defect or failure was known to Collateral Agent or might have been discovered
upon examination or inquiry and whether capable of remedy or not.

 

(d)           Collateral Agent shall be fully
protected in acting on and relying upon any written notice direction, request,
waiver, consent, receipt or other paper or document which Collateral Agent in
good faith believes to have been signed and presented by the proper party or
parties.

 

(e)           Collateral Agent shall not be
responsible for any unsuitability, inadequacy or unfitness of any security
interest created hereunder or pursuant to any other security document
pertaining to this matter nor shall it be obligated to make any investigation
into, and shall be entitled to assume, the adequacy and fitness of any security
interest created hereunder or pursuant to any other security document
pertaining to this matter.

 

(f)            Collateral Agent shall not be liable
for any error of judgment, or for any act done or step taken or omitted by it
in good faith or for any mistake in act or law, or for anything which it may do
or refrain from doing in connection herewith, except its own gross negligence
or willful misconduct.

 

(g)           Collateral Agent may seek the advice,
at the expense of Company, of legal counsel in the event of any dispute or
question as to the construction of any of the provisions of this Agreement or
its duties hereunder, and it shall incur no liability and shall be fully
protected in respect of any action taken, omitted or suffered by it in good
faith in accordance with the advice or opinion of such counsel.

 

(h)           Collateral Agent shall not be
required to use or risk its own funds or otherwise incur any liability in the
performance of its obligations or duties, or in exercise of any rights or
powers, and shall not be required to take any action which, in Collateral Agent’s
sole judgment, could involve it in expense or liability unless furnished with
security and indemnity which Collateral Agent deems in its sole discretion to
be satisfactory.

 

(i)            In the absence of gross negligence,
willful misconduct or bad faith on the part of Collateral Agent, Collateral
Agent may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon any certificates or
opinions furnished to Collateral Agent which conform to the requirements of this
Agreement.

 

(j)            Collateral Agent shall not be liable
with respect to any action taken or omitted to be taken by it in good faith in
accordance with any direction given under this Agreement.

 

(k)           Collateral Agent may conclusively
rely and shall be fully protected in acting or refraining from acting upon any
resolution, certificate, statement, instrument, opinion, report, notice,
request, consent, order, approval or other paper or document reasonably
believed by it to be genuine and to have been signed or presented by the proper
party or parties.

 

(l)            Collateral Agent shall not be bound
to make any investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request, consent,
approval or other paper or document.

 

19

 

(m)          Collateral Agent may act through
agents and attorneys-in-fact under this Agreement and shall not be responsible
for the conduct or negligence of any agent appointed with due care.  Collateral Agent may also appoint additional
institutions as co-collateral agents, pledgee’s or chargee’s with respect to
the Pledged Equity or any of the other Pledged Collateral.

 

(n)           Collateral Agent may resign and be
discharged from its duties hereunder at any time by giving written notice of
such resignation to Company. Upon such notice, a successor collateral agent
shall be appointed by Company and such successor collateral agent shall become
the successor collateral agent hereunder upon the resignation date specified in
such notice.  If Company shall fail to
have appointed a successor collateral agent within 30 days after Collateral
Agent has given written notice of its resignation to Company, Collateral Agent
may petition a court of competent jurisdiction to appoint a successor
collateral agent.

 

(o)           In no event shall Collateral Agent be
liable for any indirect, special, punitive or consequential loss or damage of
any kind whatsoever, including, but not limited to, lost profits, even if it
has been advised of the likelihood of such loss or damage and regardless of the
form of action.

 

(p)           In no event shall Collateral Agent be
liable for any failure or delay in the performance of its obligations hereunder
because of circumstances beyond its control, including, but not limited to,
acts of God, flood, war (whether declared or undeclared), terrorism, strikes,
work stoppages, civil or military disturbances, nuclear or natural
catastrophes, fire, riot, embargo, loss or malfunctions of utilities, communications
or computer (software and hardware) services, government action, including any
laws, ordinances, regulations, governmental action or the like which delay,
restrict or prohibit the providing of the services contemplated by this
Agreement.

 

(q)           Collateral Agent agrees to accept and
act upon facsimile transmission of written instructions pursuant to this
Agreement; provided, however, that (a) the party providing such written
instructions, subsequent to such transmission of written instructions, shall
provide the originally executed instructions or directions to Collateral Agent
in a timely manner, and (b) such originally executed instructions or
directions shall be signed by an authorized representative of the party
providing such instructions or directions.

 

(r)            The Pledgors and Collateral Agent
hereby appoint BNY Corporate Trustee Services Limited, The Bank of New York
Trust Company (Cayman) Limited, The Bank of New York (Luxembourg) S.A. and The
Bank of New York, as co-collateral agents with respect to the Pledged Equity
(the “Pledged Equity Co-Collateral Agents”).  Upon an Event of Default, the Pledged Equity
Co-Collateral Agents shall take all enforcement actions with respect to the
Pledged Equity as directed by Collateral Agent. 
From time to time Collateral Agent may also appoint additional
institutions as co-collateral agents, pledgees or chargees with respect to the
Pledged Equity or any of the other Pledged Collateral.

 

The Pledgors
hereby agree that all rights, privileges, protections, immunities and benefits
given to the Trustee under the Indenture and Collateral Agent hereunder
(including, but not limited to, the right to be indemnified by the
Pledgors)  are extended to the Pledged
Equity 

 

20

 

Co-Collateral Agents and any other co-collateral agent, pledgee or
chargee appointed by Collateral Agent with respect to the Pledged Equity or any
of the other Pledged Collateral.

 

SECTION 12.            Insurance Matters.

 

(a)           Each Pledgor will maintain with
financially sound and reputable insurers insurance with respect to its
Inventory insured with casualty or physical hazard insurance on an “all risks”
basis, with a full replacement cost endorsement and an “agreed amount” clause
in an amount equal to 100% of the full replacement cost of such
Inventory.  Such insurance shall be in such minimum amounts that such
Pledgor will not be deemed a co-insurer under applicable insurance laws,
regulations and policies and otherwise shall be in such amounts, contain such
terms, be in such forms and be for such periods as may be reasonably
satisfactory to Collateral Agent.  In addition, within thirty (30) days of
the date of this Agreement, all such insurance shall name Collateral Agent as
an additional insured.

 

(b)           The proceeds of any casualty
insurance in respect of any casualty loss of any of the Pledged Collateral
shall be held by Collateral Agent as cash collateral for the Secured
Obligations.  Collateral Agent may, at its sole option, disburse from time
to time all or any part of such proceeds so held as cash collateral, upon such
terms and conditions as Collateral Agent may reasonably prescribe, for direct
application by such Pledgor solely to the repair or replacement of the
inventory property so damaged or destroyed, or Collateral Agent may apply all
or any part of such proceeds to the Secured Obligations.

 

(c)           All policies of insurance shall
provide for at least thirty (30) days’ prior written cancellation notice to
Collateral Agent.  In the event of failure by any Pledgor to provide and
maintain insurance as herein provided, Collateral Agent may (but shall have no
obligation to), at its option, provide such insurance and charge the amount
thereof to such Pledgor.  Within thirty (30) days of the date of this
Agreement, and on each annual anniversary date thereafter, Company shall
furnish Collateral Agent with certificates of insurance and policies evidencing
compliance with the foregoing insurance provision.

 

SECTION 13.            Remedies.

 

(a)           If any Event of Default shall have
occurred and be continuing, Collateral Agent may (and upon the written
direction and indemnity of the Holders of a majority in principal amount of the
outstanding Securities under the Indenture shall) exercise in respect of the
Pledged Collateral, in addition to all other rights and remedies provided for
herein or otherwise available to it, all the rights and remedies of a secured
party on default under the UCC (whether or not the UCC applies to the affected
Pledged Collateral), and Collateral Agent may also in its sole discretion (and
upon the written direction and indemnity of the Holders of a majority in
principal amount of the outstanding Securities under the Indenture shall),
without notice except as specified below, sell the Pledged Collateral or any
part thereof in one or more parcels at public or private sale, at any exchange
or broker’s board or at any of Collateral Agent’s offices or elsewhere, for
cash, on credit or for future delivery, at such time or times and at such price
or prices and upon such other terms as Collateral Agent may deem commercially
reasonable, irrespective of the impact of any such sales on the market price of
the Pledged Collateral.  Collateral Agent may be the purchaser of any or
all of the Pledged Collateral at any 

 

21

 

such sale, and shall be
entitled, for the purpose of bidding and making settlement or payment of the
purchase price for all or any portion of the Pledged Collateral sold at any
such public sale, to use and apply any of the Secured Obligations as a credit
on account of the purchase price for any Pledged Collateral payable by
Collateral Agent at such sale.  Each purchaser at any such sale shall hold
the property sold absolutely free from any claim or right on the part of Pledgors,
and each Pledgor hereby waives (to the extent permitted by applicable law) all
rights of redemption, stay and/or appraisal which it now has or may at any time
in the future have under any rule of law or statute now existing or
hereafter enacted.  Each Pledgor agrees that, to the extent notice of sale
shall be required by law, at least ten days’ notice to such Pledgor of the time
and place of any public sale or the time after which any private sale is to be
made shall constitute reasonable notification.  Collateral Agent shall not
be obligated to make any sale of Pledged Collateral regardless of notice of
sale having been given.  Collateral Agent may adjourn any public or
private sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time and
place to which it was so adjourned.  Each Pledgor hereby waives any claims
against Collateral Agent arising by reason of the fact that the price at which
any Pledged Collateral may have been sold at such a private sale was less than
the price which might have been obtained at a public sale, even if Collateral
Agent accepts the first offer received and does not offer such Pledged
Collateral to more than one offeree.  If the proceeds of any sale or other
disposition of the Pledged Collateral are insufficient to pay all the Secured
Obligations, Pledgors shall be jointly and severally liable for the deficiency
and the fees of any attorneys employed by Collateral Agent to collect such
deficiency.

 

(b)           Each Pledgor recognizes that, by
reason of certain prohibitions contained in the Securities Act of 1933, as from
time to time amended (the “Securities Act”),
and applicable state securities laws, Collateral Agent may be compelled, with
respect to any sale of all or any part of the Pledged Equity conducted without
prior registration or qualification of such Pledged Equity under the Securities
Act and/or such state or other applicable securities laws, to limit purchasers
to those who will agree, among other things, to acquire the Pledged Equity for
their own account, for investment and not with a view to the distribution or
resale thereof.  Each Pledgor acknowledges that any such private placement
may be at prices and on terms less favorable than those obtainable through a
sale without such restrictions (including, without limitation, an offering made
pursuant to a registration statement under the Securities Act) and,
notwithstanding such circumstances, such Pledgor agrees that any such private
placement shall, in and of itself, not be deemed to be commercially
unreasonable and that Collateral Agent shall have no obligation to delay the
sale of any Pledged Equity for the period of time necessary to permit the
issuer thereof to register it for a form of sale requiring registration under
the Securities Act or under applicable state or other securities laws, even if
such issuer would, or should, agree to so register it.

 

(c)           If Collateral Agent determines to
exercise its right to sell any or all of the Pledged Equity, upon written
request, each Pledgor shall and shall cause each issuer of any Pledged Equity
to be sold hereunder from time to time to furnish to Collateral Agent all such
information as Collateral Agent may request in order to determine the amount of
Pledged Equity that may be sold by Collateral Agent in exempt transactions
under the Securities Act and the rules and regulations of the Securities
and Exchange Commission thereunder, as the same are from time to time in
effect.

 

22

 

(d)           Collateral Agent shall not be liable
for any decline in the value of any Collateral or for any loss realized upon
any sale or other disposition of the Pledged Collateral.

 

SECTION 14.            Application of Proceeds. 
Except as expressly provided elsewhere in this Agreement, all proceeds received
by Collateral Agent in respect of any sale of, collection from, or other
realization upon all or any part of the Collateral shall be applied in the
order of priority specified in Section 7.06 of the Indenture.

 

SECTION 15.            Indemnity and Expenses.

 

(a)           Pledgors jointly and severally agree
to indemnify Collateral Agent and the Pledged Equity Co-Collateral Agents
(including their officers, directors, employees and agents) from and against any
and all claims, losses and liabilities in any way relating to, growing out of
or resulting from this Agreement and the transactions contemplated hereby
(including, without limitation, enforcement of this Agreement and any Account
Control Agreement), except to the extent such claims, losses or liabilities
result solely from their gross negligence or willful misconduct as finally
determined by a court of competent jurisdiction.

 

(b)           Pledgors jointly and severally agree
to pay to Collateral Agent and the Pledged Equity Co-Collateral Agents upon
demand the amount of any and all costs and expenses, including the reasonable
fees and expenses of its counsel and of any experts and agents, that Collateral
Agent may incur in connection with (i) the administration of this
Agreement, (ii) the custody or preservation of, or the sale of, collection
from, or other realization upon, any of the Pledged Collateral, (iii) the
exercise or enforcement of any of the rights of Collateral Agent hereunder, or (iv) the
failure by any Pledgor to perform or observe any of the provisions hereof.

 

(c)           The obligations of Pledgors in this Section 15
shall survive the termination of this Agreement, the resignation or removal of
Collateral Agent and the Pledged Equity Co-Collateral Agents, and the discharge
of Pledgors’ other obligations under this Agreement and the Indenture
Documents, as the case may be.

 

SECTION 16.            Set-Off.  Each
Pledgor hereby irrevocably authorizes Collateral Agent and each other Secured
Party at any time and from time to time while an Event of Default shall have
occurred and be continuing, without notice to such Pledgor or any other
Pledgor, any such notice being expressly waived by each Pledgor, to set-off and
appropriate and apply any and all deposits (general or special, time or demand,
provisional or final), in any currency, and any other credits, indebtedness or
claims, in any currency, in each case whether direct or indirect, absolute or
contingent, matured or unmatured, at any time held or owing by Collateral Agent
or such Secured Party to or for the credit or the account of such Pledgor, or
any part thereof in such amounts as Collateral Agent or such Secured Party may
elect, against and on account of the obligations and liabilities of such
Pledgor to Collateral Agent or such Secured Party hereunder and claims of every
nature and description of Collateral Agent or such Secured Party against such
Pledgor, in any currency, whether arising hereunder or under the Indenture
Documents, as Collateral Agent or such Secured Party may elect, whether or not
Collateral Agent or any Secured Party has made any demand for payment and
although such obligations, liabilities and claims may be contingent or
unmatured.  Collateral Agent and each other
Secured Party shall

 

23

 

notify such Pledgor promptly of
any such set-off and the application made by Collateral Agent or such Secured
Party of the proceeds thereof, provided that the failure to give such notice
shall not affect the validity of such set-off and application.  The rights of Collateral Agent and each other
Secured Party under this Section 16 are in addition to other rights
and remedies (including, without limitation, other rights of set-off) which
Collateral Agent or such Secured Party may have.

 

SECTION 17.       Continuing
Security Interest; Assigns.  This Agreement
shall create a continuing security interest in the Pledged Collateral and shall
(a) remain in full force and effect until the payment in full of all
Secured Obligations, (b) be binding upon each Pledgor, its successors and
assigns, and (c) inure, together with the rights and remedies of
Collateral Agent hereunder, to the benefit of Collateral Agent and its
successors, transferees and assigns; provided,
however, that neither Secured Party nor any Pledgor may assign this Agreement
without the prior written consent of the other.  Upon the payment in full
of all Secured Obligations, the security interest granted hereby shall
terminate and all rights to the Pledged Collateral shall revert to Pledgors. 
Upon any such termination Collateral Agent will, at Pledgors’ expense, execute
and deliver to Pledgors such documents as Pledgors shall reasonably request to
evidence such termination.

 

SECTION 18.       Additional
Pledgors.  From time to time subsequent to
the date hereof, additional Subsidiaries of Company may become parties hereto
as additional Pledgors (each an “Additional
Pledgor”), by executing a counterpart of this Agreement
substantially in the form of Schedule VI annexed hereto.  Upon delivery of
any such counterpart to Collateral Agent, notice of which is hereby waived by
Pledgors, each such Additional Pledgor shall be a Pledgor and shall be as fully
a party hereto as if such Additional Pledgor were an original signatory
hereto.  Each Pledgor expressly agrees that its obligations arising
hereunder shall not be affected or diminished by the addition or release of any
other Pledgor hereunder, nor by any election of Collateral Agent not to cause
any Subsidiary of Company to become an Additional Pledgor hereunder.  This
Agreement shall be fully effective as to any Pledgor that is or becomes a party
hereto regardless of whether any other Person becomes or fails to become or
ceases to be a Pledgor hereunder.

 

SECTION 19.       Amendments;
Etc.  No amendment, modification, termination
or waiver of any provision of this Agreement, and no consent to any departure
by any Pledgor therefrom, shall in any event be effective unless the same shall
be in writing and signed by Collateral Agent and, in the case of any such amendment
or modification, by Pledgors.  Any such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
it was given.

 

SECTION 20.       Notices. 
Any notice or other communication herein required or permitted to be given
shall be in writing and may be personally served or sent by telefacsimile or
United States mail or courier service and shall be deemed to have been given
when delivered in person or by courier service, upon receipt of telefacsimile,
or three Business Days after depositing it in the United States mail with
postage prepaid and properly addressed; provided that notices to Collateral
Agent shall not be effective until received.  For the purposes hereof, the
address of each party hereto shall be as set forth under such party’s name on
the signature 

 

24

 

pages hereof or such other
address as shall be designated by such party in a written notice delivered to
the other party hereto.

 

SECTION 21.       Failure
or Indulgence Not Waiver; Remedies Cumulative. 
No failure or delay on the part of Collateral Agent in the exercise of any
power, right or privilege hereunder shall impair such power, right or privilege
or be construed to be a waiver of any default or acquiescence therein, nor
shall any single or partial exercise of any such power, right or privilege
preclude any other or further exercise thereof or of any other power, right or
privilege.  All rights and remedies existing under this Agreement are
cumulative to, and not exclusive of, any rights or remedies otherwise
available.

 

SECTION 22.       Severability. 
In case any provision in or obligation under this Agreement shall be invalid,
illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining
provisions or obligations, or of such provision or obligation in any other
jurisdiction, shall not in any way be affected or impaired thereby.

 

SECTION 23.       Headings. 
Section and subsection headings in this Agreement are included herein for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose or be given any substantive effect.

 

SECTION 24.       Governing
Law; Terms.  THIS AGREEMENT SHALL BE GOVERNED
BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF
NEW YORK.

 

SECTION 25.       Consent
to Jurisdiction and Service of Process.  ALL
JUDICIAL PROCEEDINGS BROUGHT AGAINST ANY PLEDGOR ARISING OUT OF OR RELATING TO
THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN THE
SUPREME COURT OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND OF THE
UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK, AND ANY
APPELLATE COURT FROM ANY THEREOF.  BY EXECUTING AND DELIVERING THIS
AGREEMENT, EACH PLEDGOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES,
IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE
JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM
NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH
PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL,
RETURN RECEIPT REQUESTED, TO SUCH PLEDGOR AT ITS ADDRESS PROVIDED IN ACCORDANCE
WITH SECTION 20; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE
IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER SUCH PLEDGOR IN ANY SUCH
PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING
SERVICE IN EVERY RESPECT; (V) AGREES THAT COLLATERAL AGENT RETAINS THE
RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING
PROCEEDINGS AGAINST SUCH PLEDGOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES
THAT THE PROVISIONS OF THIS SECTION 25 RELATING TO JURISDICTION AND VENUE
SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER
APPLICABLE LAW.

 

25

 

NOTWITHSTANDING
THE FOREGOING, NOTHING IN THIS SECTION 25 SHALL LIMIT THE RIGHT OF
COLLATERAL AGENT TO TAKE PROCEEDINGS AGAINST ANY PLEDGOR IN ANY OTHER COURT OF
COMPETENT JURISDICTION, NOR SHALL THE TAKING OF PROCEEDINGS IN ANY ONE OR MORE
JURISDICTIONS PRECLUDE THE TAKING OF PROCEEDINGS IN ANY OTHER
JURISDICTIONS, WHETHER CONCURRENTLY OR NOT, TO THE EXTENT PERMITTED BY THE LAW
OF SUCH OTHER JURISDICTION.

 

SECTION 26.       Waiver
of Jury Trial.   EACH OF THE PLEDGORS AND COLLATERAL AGENT
HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING BASED UPON, ARISING
OUT OF OR RELATING TO THIS AGREEMENT.  In the event of litigation, this
Agreement may be filed as a written consent to a trial by the court.

 

SECTION 27.       Acknowledgments. 
Each Pledgor hereby acknowledges that:

 

(a)           it has been advised by counsel in the
negotiation, execution and delivery of this Agreement and the Indenture
Documents to which it is a party;

 

(b)           neither Collateral Agent nor any
other Secured Party has any fiduciary relationship with or duty to any Pledgor
arising out of or in connection with this Agreement or the Indenture Documents,
and the relationship between the Pledgors, on the one hand, and the Secured
Parties, on the other hand, in connection herewith or therewith is solely that
of debtor and creditor; and

 

(c)           no joint venture is created hereby or
by the Indenture Documents or otherwise exists by virtue of the transactions
contemplated hereby among the Secured Parties or among the Pledgors and the
Secured Parties.

 

(d)           its agreement to fulfill its
obligations hereunder is a material and essential part of the consideration and
inducement of Collateral Agent to enter into this Agreement, and without such
agreement by such Pledgor, the Securities would not be purchased.

 

SECTION 28.       Counterparts. 
This Agreement may be executed in one or more counterparts and by different
parties hereto in separate counterparts, each of which when so executed and
delivered shall be deemed an original, but all such counterparts together shall
constitute but one and the same instrument; signature pages may be
detached from multiple separate counterparts and attached to a single
counterpart so that all signature pages are physically attached to the
same document.

 

SECTION 29.       Suretyship
Waivers by Pledgors, etc.

 

(a)           Each Pledgor jointly and severally agrees
that its obligations hereunder are irrevocable, absolute, independent and
unconditional and shall not be affected by any circumstance which constitutes a
legal or equitable discharge of a guarantor or surety other than payment in
full of the Secured Obligations.  In furtherance of the foregoing and
without limiting the generality thereof, each Pledgor agrees as follows:  (i) Collateral
Agent may from time to 

 

26

 

time, without notice or
demand and without affecting the validity or enforceability of this Agreement
or giving rise to any limitation, impairment or discharge of such Pledgor’s
liability hereunder, (A) renew, extend, accelerate or otherwise change the
time, place, manner or terms of payment or performance of the Secured
Obligations, (B) settle, compromise, release or discharge, or accept or
refuse any offer of performance with respect to, or substitutions for, the
Secured Obligations or any agreement relating thereto and/or subordinate the
payment of the same to the payment of any other obligations, (C) request
and accept guaranties of the Secured Obligations and take and hold other
security for the payment of the Secured Obligations, (D) release,
exchange, compromise, subordinate or modify, with or without consideration, any
other security for payment of the Secured Obligations, any guaranties of the
Secured Obligations, or any other obligation of any Person with respect to the
Secured Obligations, (E) enforce and apply any other security now or
hereafter held by or for the benefit of Collateral Agent in respect of the
Secured Obligations and direct the order or manner of sale thereof, or exercise
any other right or remedy that Collateral Agent may have against any such
security, as Collateral Agent in its discretion may determine consistent with
the Indenture and any applicable security agreement, including foreclosure on
any such security pursuant to one or more judicial or nonjudicial sales,
whether or not every aspect of any such sale is commercially reasonable, and (F) exercise
any other rights available to Collateral Agent under the Indenture, at law or
in equity; and (ii) this Agreement and the obligations of such Pledgor
hereunder shall be valid and enforceable and shall not be subject to any
limitation, impairment or discharge for any reason (other than payment in full
of the Secured Obligations), including without limitation the occurrence of any
of the following, whether or not such Pledgor shall have had notice or
knowledge of any of them:  (A) any failure to assert or enforce or
agreement not to assert or enforce, or the stay or enjoining, by order of
court, by operation of law or otherwise, of the exercise or enforcement of, any
claim or demand or any right, power or remedy with respect to the Secured
Obligations or any agreement relating thereto, or with respect to any guaranty
of or other security for the payment of the Secured Obligations, (B) any
waiver, amendment or modification of, or any consent to departure from, any of
the terms or provisions of the Indenture or any agreement or instrument
executed pursuant thereto, or of any guaranty or other security for the Secured
Obligations, (C) the Secured Obligations, or any agreement relating
thereto, at any time being found to be illegal, invalid or unenforceable in any
respect, (D) the application of payments received from any source to the
payment of indebtedness other than the Secured Obligations, even though
Collateral Agent might have elected to apply such payment to any part or all of
the Secured Obligations, (E) any failure to perfect or continue perfection
of a security interest in any collateral which secures any of the Secured
Obligations, (F) any defenses, set-offs or counterclaims which Company may
allege or assert against Collateral Agent in respect of the Secured
Obligations, including but not limited to failure of consideration, breach of
warranty, payment, statute of frauds, statute of limitations, accord and
satisfaction and usury, and (G) any other act or thing or omission, or
delay to do any other act or thing, which may or might in any manner or to any
extent vary the risk of such Pledgor as an obligor in respect of the Secured
Obligations.

 

(b)           Each Pledgor hereby waives, for the
benefit of Collateral Agent:  (i) any right to require Collateral
Agent, as a condition of payment or performance by such Pledgor, to (A) proceed
against Company, any guarantor of the Secured Obligations or any other Person, (B) proceed
against or exhaust any other security held from Company, any guarantor of the
Secured Obligations or any other Person, (C) proceed against or have
resort to any balance of 

 

27

 

any deposit account or
credit on the books of Collateral Agent in favor of Company or any other
Person, or (D) pursue any other remedy in the power of Collateral Agent
whatsoever; (ii) any defense arising by reason of the incapacity, lack of
authority or any disability or other defense of Company including, without
limitation, any defense based on or arising out of the lack of validity or the
unenforceability of the Secured Obligations or any agreement or instrument
relating thereto or by reason of the cessation of the liability of Company from
any cause other than payment in full of the Secured Obligations; (iii) any
defense based upon any statute or rule of law which provides that the
obligation of a surety must be neither larger in amount nor in other respects
more burdensome than that of the principal; (iv) any defense based upon
Collateral Agent’s errors or omissions in the administration of the Secured
Obligations, except behavior which amounts to bad faith; (v) (A) any
principles or provisions of law, statutory or otherwise, which are or might be
in conflict with the terms of this Agreement and any legal or equitable
discharge of such Pledgor’s obligations hereunder, (B) the benefit of any
statute of limitations affecting such Pledgor’s liability hereunder or the
enforcement hereof, (C) any rights to set-offs, recoupments and
counterclaims, and (D) promptness, diligence and any requirement that
Collateral Agent protect, secure, perfect or insure any other security interest
or lien or any property subject thereto; (vi) notices, demands,
presentments, protests, notices of protest, notices of dishonor and notices of
any action or inaction, notices of default under the Indenture or any agreement
or instrument related thereto, notices of any renewal, extension or
modification of the Secured Obligations or any agreement related thereto,
notices of any extension of credit to Company and notices of any of the matters
referred to in Section 29(a) and any right to consent to any thereof;
and (vii) to the fullest extent permitted by law, any defenses or benefits
that may be derived from or afforded by law which limit the liability of or
exonerate guarantors or sureties, or which may conflict with the terms of this
Agreement.

 

(c)           [Intentionally Omitted].

 

(d)           Until the Secured Obligations shall
have been paid in full, each Pledgor shall withhold exercise of (i) any
claim, right or remedy, direct or indirect, that such Pledgor now has or may
hereafter have against Company or any of its assets in connection with this
Agreement or the performance by such Pledgor of its obligations hereunder, in
each case whether such claim, right or remedy arises in equity, under contract,
by statute, under common law or otherwise and including without limitation (A) any
right of subrogation, reimbursement or indemnification that such Pledgor now
has or may hereafter have against Company, (B) any right to enforce, or to
participate in, any claim, right or remedy that Collateral Agent now has or may
hereafter have against Company, and (C) any benefit of, and any right to
participate in, any other collateral or security now or hereafter held by
Collateral Agent, and (ii) any right of contribution such Pledgor now has
or may hereafter have against any guarantor of any of the Secured
Obligations.  Each Pledgor further agrees that, to the extent the
agreement to withhold exercise of its rights of subrogation, reimbursement,
indemnification and contribution as set forth herein is found by a court of
competent jurisdiction to be void or voidable for any reason, any rights of
subrogation, reimbursement or indemnification such Pledgor may have against
Company or against any other collateral or security, and any rights of
contribution such Pledgor may have against any such guarantor, shall be junior
and subordinate to any rights Collateral Agent may have against Company, to all
right, title and interest Collateral Agent may have in any such other
collateral or security, and to any right Collateral Agent may have against any
such guarantor.

 

28

 

(e)           Collateral Agent shall have no
obligation to disclose or discuss with Pledgors its assessment, or any Pledgor’s
assessment, of the financial condition of Company.  Each Pledgor has
adequate means to obtain information from Company on a continuing basis
concerning the financial condition of Company and its ability to perform its
obligations under the Indenture, and each Pledgor assumes the responsibility
for being and keeping informed of the financial condition of Company and of all
circumstances bearing upon the risk of nonpayment of the Secured Obligations. 
Each Pledgor hereby waives and relinquishes any duty on the part of Collateral
Agent to disclose any matter, fact or thing relating to the business,
operations or condition of Company now known or hereafter known by Collateral
Agent.

 

[Remainder of page intentionally left
blank]

 

29

 

IN WITNESS WHEREOF,
Pledgors and Collateral Agent have caused this Agreement to be duly executed
and delivered by their respective officers thereunto duly authorized as of the
date first written above.

 

	
   

  	
  PLEDGORS:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  POWER-ONE, INC., a Delaware corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  / s / Randall Holliday

  
	
   

  	
   

  	
  Title:
  Secretary

  
				

 

	
   

  	
  Notice
  

  	
  740
  Calle Plano

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
  Camarillo,
  CA 93012

  
	
   

  	
   

  	
  Attn:
  Randall H. Holliday

  

 

 

	
   

  	
  P-O DELAWARE, INC., a Delaware 

  corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  / s / Randall Holliday

  
	
   

  	
   

  	
  Title:
  Secretary

  

 

	
   

  	
  Notice
  

  	
  740
  Calle Plano

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
  Camarillo,
  CA 93012

  
	
   

  	
   

  	
  Attn:
  Randall H. Holliday

  

 

 

	
   

  	
  PAI CAPITAL LLC, a Delaware limited 

  liability company

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  / s / Randall Holliday

  
	
   

  	
   

  	
  Title:
  Member

  

 

	
   

  	
  Notice
  

  	
  740
  Calle Plano

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
  Camarillo,
  CA 93012

  
	
   

  	
   

  	
  Attn:
  Randall H. Holliday

  

 

S-1

 

	
   

  	
  PLEDGORS:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  HC POWER, INC., a California corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  / s / Randall Holliday

  
	
   

  	
   

  	
  Title:
  Secretary

  

 

	
   

  	
  Notice

  	
  740
  Calle Plano

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
  Camarillo,
  CA 93012

  
	
   

  	
   

  	
  Attn:
  Randall H. Holliday

  

 

 

	
   

  	
  P-O NEVADA CORP., a
  Nevada corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  / s / Randall Holliday

  
	
   

  	
   

  	
  Title:
  Secretary

  

 

	
   

  	
   

  	
   

  
	
   

  	
  Notice
  

  	
  740
  Calle Plano

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
  Camarillo,
  CA 93012

  
	
   

  	
   

  	
  Attn:
  Randall H. Holliday

  

 

S-2

 

	
   

  	
  SECURED PARTY:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  THE BANK OF NEW YORK TRUST 

  COMPANY, N.A., as Collateral Agent

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  / s/ Teresa Petta

  
	
   

  	
   

  	
  Title:
  Vice President

  

 

	
   

  	
  Notice
  

  	
  700 South Flower Street, suite 

  
	
   

  	
  Address:

  	
  500 

  
	
   

  	
   

  	
  Los Angeles, CA 90017

  

 

 

	
   

  	
  ACKNOWLEDGED BY:

  
	
   

  	
   

  
	
   

  	
  THE BANK OF NEW YORK

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Tania Sibree

  
	
   

  	
  Title:

  	
   Vice President  

  
	
   

  	
   

  	
   

  
	
   

  	
  Notice
  Address: Level 12, Three Pacific Place,

  1 Queen’s Road East, Hong Kong

  

 

	
   

  	
  BNY
  CORPORATE TRUSTEE SERVICES 

  LIMITED

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s / Mark Elsom

  
	
   

  	
   

  	
  Title:
  Assistant Vice President

  

 

	
   

  	
  Notice
  

  	
  40th Floor, One Canada Square, 

  
	
   

  	
  Address:

  	
  London, E14 5AL

  

 

	
   

  	
  THE BANK OF NEW YORK TRUST 

  COMPANY (CAYMAN) LIMITED

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Illegible

  
	
   

  	
   

  	
  Title:
  Field Secretaries (Cayman) Limited

  

 

S-3

 

	
   

  	
  Notice
  Address:

  	
   

  

 

	
   

  	
  THE BANK OF NEW YORK 

  (LUXEMBOURG) S.A

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   / s / Adriana Pierelli

  
	
   

  	
   

  	
   Title:
  MD and General Manager

  

 

	
   

  	
  Notice
  

  	
  Italian Branch, Via Carducci 31 

  
	
   

  	
  Address:

  	
  20123 Milan, Italy

  

 

S-4

 

SCHEDULE I

 

Pledged Equity

 

	
  Issuer

  	
   

  	
  Class of 

  Equity Interest

  	
   

  	
  Certificate 

  Nos.

  	
   

  	
  Amount of 

  Equity 

  Interests

  	
   

  	
  Percentage 

  Pledged

  	
   

  
	
  DOMESTIC SUBSIDIARIES

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  P-O Delaware, Inc. (Delaware)

  	
   

  	
  Common
  Stock

  	
   

  	
  2

  	
   

  	
  100%

  	
   

  	
  100%

  	
   

  
	
  P-O Nevada Corp. (Nevada)

  	
   

  	
  Common
  Stock

  	
   

  	
  2

  	
   

  	
  100%

  	
   

  	
  100%

  	
   

  
	
  PAI Capital LLC (Delaware)

  	
   

  	
  Membership
  Interest

  	
   

  	
  N/A

  	
   

  	
  100%

  	
   

  	
  100%

  	
   

  
	
  HC Power, Inc. (California)

  	
   

  	
  Common
  Stock

  	
   

  	
  40

  	
   

  	
  100%

  	
   

  	
  100%

  	
   

  
	
  FOREIGN SUBSIDIARIES

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Power-One Limited (Cayman Islands)

  	
   

  	
  Ordinary

  	
   

  	
  2

  	
   

  	
  100%

  	
   

  	
  Up
  to 66%

  	
   

  
	
  Power-One Asia Pacific Electronics (Shenzhen) Co. (China)

  	
   

  	
  Not
  applicable

  	
   

  	
  Not
  applicable

  	
   

  	
  100%

  	
   

  	
  Up
  to 66%

  	
   

  
	
  Power-One Italy Holdings S.p.A. (Italy)

  	
   

  	
  Ordinary

  	
   

  	
  Certificate
  to be issued

  	
   

  	
  100%

  	
   

  	
  Up
  to 66%

  	
   

  
	
  Power-One Limited (UK)

  	
   

  	
  Ordinary

  	
   

  	
  5

  	
   

  	
  100%

  	
   

  	
  Up
  to 66%

  	
   

  

 

I-1

 

SCHEDULE II

 

Property and Assets

 

All
of the property and assets (other than leased or owned real property, and
foreign intellectual property) of the entities listed below as Pledgors,
including all such property and assets that are now owned and all such property
and assets that may hereafter be acquired, and including, but not limited to,
inventory, accounts, equipment, chattel paper, documents, instruments,
copyrights, trademarks, service marks, patents and related rights, general
intangibles, deposit accounts, cash and cash equivalents, investment property
(including, but not limited to, interests in subsidiaries) and any and all
proceeds and products of any of the foregoing and any of the proceeds or
products thereof:

 

The
Pledgors of the collateral described herein shall include the following:

 

Power-One, Inc.,

 

P-O
Delaware, Inc.,

 

PAI
Capital LLC,

 

HC
Power, Inc., and

 

P-O
Nevada Corp.

 

Notwithstanding the
foregoing, the Pledged Collateral shall not include the following assets:

 

(a)           certain power supply products to be sold to Emerson
Process Management Power and Water Solutions, Inc. and Fisher-Rosemount
Systems, Inc. for a purchase price of approximately $1.59 million;

 

(b)           certain non-exclusive licensing and second source rights
relating to the Company’s Z-One digital power management and control products
intellectual property; and

 

(c)           certain
products relating to power management of residential appliances (i.e., the Company’s
digital motor control product line).

 

II-1

 

SCHEDULE III

 

Filing Offices

 

	
  Pledgor

  	
   

  	
  Filing Offices

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Power-One, Inc.

  	
   

  	
  Delaware

  	
   

  
	
  P-O Delaware, Inc.

  	
   

  	
  Delaware

  	
   

  
	
  PAI Capital LLC

  	
   

  	
  Delaware

  	
   

  
	
  HC Power, Inc.

  	
   

  	
  California

  	
   

  
	
  P-O Nevada Corp.

  	
   

  	
  Nevada

  	
   

  

 

III-1

 

SCHEDULE IV

 

Office Locations, Type and Jurisdiction of Organization

 

	
  Name of
  

  Pledgor

  	
   

  	
  Type
  of 

  Organization

  	
   

  	
  Office
  

  Locations

  	
   

  	
  Jurisdiction
  of 

  Organization

  	
   

  	
  Organization
  Number

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Power-One, Inc.

  	
   

  	
  Corporation

  	
   

  	
  Camarillo, CA

  	
   

  	
  Delaware

  	
   

  	
  77-0420182

  	
   

  
	
  P-O Delaware, Inc.

  	
   

  	
  Corporation

  	
   

  	
  Camarillo, CA

  	
   

  	
  Delaware

  	
   

  	
  3621936

  	
   

  
	
  PAI Capital LLC

  	
   

  	
  Limited liability
  company

  	
   

  	
  Camarillo, CA

  	
   

  	
  Delaware

  	
   

  	
  20-8164367

  	
   

  
	
  HC Power, Inc.

  	
   

  	
  Corporation

  	
   

  	
  Camarillo, CA

  	
   

  	
  California

  	
   

  	
  1260082

  	
   

  
	
  P-O Nevada Corp.

  	
   

  	
  Corporation

  	
   

  	
  Camarillo, CA

  	
   

  	
  Nevada

  	
   

  	
  C18404-00

  	
   

  

 

Names
of Pledgors Used in Past Five Years

 

Not applicable

 

IV-1

 

SCHEDULE V

 

Pledge Amendment

 

This
Pledge Amendment, dated                         ,
     , is delivered pursuant to Section 7(b) of
the Security Agreement referred to below.  The undersigned hereby agrees
that this Pledge Amendment may be attached to the Security Agreement dated                  ,         ,
among                         ,
as Company, the other Pledgors named therein, and                         ,
as Collateral Agent (the “Security Agreement,”
capitalized terms defined therein being used herein as therein defined) and
that the Pledged Equity listed on this Pledge Amendment shall be deemed to be
part of the Pledged Equity and shall become part of the Pledged Collateral and
shall secure all Secured Obligations.

 

	
   

  	
  [NAME
  OF PLEDGOR]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Title:

  

 

	
  Issuer

  	
   

  	
  Class of 

  Equity 

  Interests

  	
   

  	
  Certificate  

  Nos.

  	
   

  	
  Amount of 

  Equity 

  Interests

  	
   

  	
  Percentage 

  Ownership 

  Interest

  	
   

  	
  Percentage 

  Pledged

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

V-1

 

SCHEDULE VI

 

Form of Counterpart

 

COUNTERPART (this
“Counterpart”), dated                         ,
is delivered pursuant to Section 18 of the Security Agreement referred to
below.  The undersigned hereby agrees that this Counterpart may be attached
to the Security Agreement, dated as of                         ,
                        (as
it may be from time to time amended, modified or supplemented, the “Security Agreement”; capitalized terms
used herein not otherwise defined herein shall have the meanings ascribed
therein), among Power-One, Inc., PAI Capital LLC and The Bank Of New York
Trust Company, N.A., as Collateral Agent.  The undersigned, by executing
and delivering this Counterpart, hereby becomes a Pledgor under the Security
Agreement in accordance with Section 18 thereof and agrees to be bound by
all of the terms thereof.  Without limiting the generality of the
foregoing, the items of property described in the schedule attached hereto
shall be deemed to be part of the and shall become part of the Pledged
Collateral and shall secure all Secured Obligations.

 

	
   

  	
  [NAME
  OF ADDITIONAL PLEDGOR]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

VI-1

 

EXHIBIT I TO

SECURITY AGREEMENT

 

[FORM OF GRANT OF TRADEMARK SECURITY
INTEREST]

 

GRANT OF TRADEMARK SECURITY INTEREST

 

WHEREAS, [NAME OF PLEDGOR], a                
corporation (“Pledgor”), owns and
uses in its business, and will in the future adopt and so use, various
intangible assets, including the Trademark Collateral (as defined below); and

 

WHEREAS, pursuant to (i) that certain
Indenture dated as of June 17, 2008 (as such Indenture may be amended,
amended and restated, supplemented or otherwise modified from time to time, the
“Indenture”) among The Bank of New York
Trust Company, N.A., as Trustee for the Holders (as defined in the Indenture)
(in such capacity, the “Trustee”), the
Company, as Issuer, and (ii) the Purchase Agreement dated as of June [    ],
2008 (as such Purchase Agreement may be amended, amended and restated,
supplemented or otherwise modified from time to time, the “Purchase
Agreement”) among the Company, and Lehman Brothers Inc., as Initial
Purchaser, the Company issued the 8.0% Senior Secured Notes due 2013 (the “Notes”), and (iii) the terms of a Security Agreement
dated as of June 17, 2008 (as further amended, supplemented or otherwise
modified from time to time, the “Security Agreement”;
capitalized terms used in this Agreement without definition have the respective
meanings assigned such terms in the Security Agreement), among Grantor,
Collateral Agent and the other grantors named therein, Grantor has agreed to
create in favor of Collateral Agent a secured and protected interest in, and
Collateral Agent has agreed to become a secured creditor with respect to, the
Trademark Collateral;

 

NOW, THEREFORE, for
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, subject to the terms and conditions of the Security Agreement, to
evidence further the security interest granted by Pledgor to Collateral Agent
pursuant to the Security Agreement, Pledgor hereby grants to Collateral Agent a
security interest in all of Pledgor’s right, title and interest in and to the
following, in each case whether now or hereafter existing or in which Pledgor
now has or hereafter acquires an interest and wherever the same may be located
(the “Trademark Collateral”):

 

(i)            all rights, title
and interest (including rights acquired pursuant to a license or otherwise) in
and to all trademarks, service marks, designs, logos, indicia, tradenames,
trade dress, corporate names, company names, business names, fictitious
business names, trade styles and/or other source and/or business identifiers
and applications pertaining thereto, owned by such Pledgor, or hereafter
adopted and used, in its business (including, without limitation, the
trademarks set forth on Schedule A annexed hereto) (collectively,
the “Trademarks”), all
registrations that have been or may hereafter be issued or applied for thereon
in the United States and any state thereof and in foreign countries (including,
without limitation, the registrations and applications set forth on Schedule A
annexed hereto), all common law and other rights (but in no event any of the
obligations) in and to the Trademarks in the United States and any state
thereof 

 

I-1

 

and in foreign countries, and all goodwill of
such Pledgor’s business symbolized by the Trademarks and associated therewith;
and

 

(ii)           all proceeds,
products, rents and profits of or from any and all of the foregoing Trademark
Collateral and, to the extent not otherwise included, all payments under
insurance (whether or not Collateral Agent is the loss payee thereof), or any
indemnity, warranty or guaranty, payable by reason of loss or damage to or
otherwise with respect to any of the foregoing Trademark Collateral.  For
purposes of this Grant of Trademark Security Interest, the term “proceeds” includes whatever is receivable
or received when Trademark Collateral or proceeds are sold, licensed,
exchanged, collected or otherwise disposed of, whether such disposition is
voluntary or involuntary.

 

Pledgor does hereby further acknowledge and affirm that the rights and
remedies of Collateral Agent with respect to the security interest in the
Trademark Collateral granted hereby are more fully set forth in the Security
Agreement, the terms and provisions of which are incorporated by reference
herein as if fully set forth herein.

 

[The remainder of this page is intentionally left blank.]

 

I-2

 

IN WITNESS WHEREOF,
Pledgor has caused this Grant of Trademark Security Interest to be duly
executed and delivered by its officer thereunto duly authorized as of the
     day of     ,     .

 

 

	
   

  	
  [NAME
  OF PLEDGOR]

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  

 

I-3

 

SCHEDULE A

 

TO

 

GRANT OF TRADEMARK SECURITY INTEREST

 

	
  Owner

  	
   

  	
  Trademark

  Description

  	
   

  	
  Registration/Appl.

  Number

  	
   

  	
  Registration/Appl.

  Date

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

I-A-1

 

EXHIBIT II TO

SECURITY AGREEMENT

 

[FORM OF GRANT OF PATENT SECURITY
INTEREST]

 

GRANT OF PATENT SECURITY INTEREST

 

WHEREAS, [NAME OF PLEDGOR], a                      
corporation (“Pledgor”), owns and
uses in its business, and will in the future adopt and so use, various
intangible assets, including the Patent Collateral (as defined below); and

 

WHEREAS, pursuant to (i) that certain
Indenture dated as of June 17, 2008 (as such Indenture may be amended,
amended and restated, supplemented or otherwise modified from time to time, the
“Indenture”) among The Bank of New York
Trust Company, N.A., as Trustee for the Holders (as defined in the Indenture)
(in such capacity, the “Trustee”), the
Company, as Issuer, and (ii) the Purchase Agreement dated as of June [    ],
2008 (as such Purchase Agreement may be amended, amended and restated,
supplemented or otherwise modified from time to time, the “Purchase
Agreement”) among the Company, and Lehman Brothers Inc., as Initial
Purchaser, the Company issued the 8.0% Senior Secured Notes due 2013 (the “Notes”), and (iii) the terms of a Security Agreement
dated as of June 17, 2008 (as further amended, supplemented or otherwise
modified from time to time, the “Security Agreement”;
capitalized terms used in this Agreement without definition have the respective
meanings assigned such terms in the Security Agreement), among Grantor,
Collateral Agent and the other grantors named therein, Grantor has agreed to
create in favor of Collateral Agent a secured and protected interest in, and
Collateral Agent has agreed to become a secured creditor with respect to, the
Patent Collateral;

 

NOW, THEREFORE, for
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, subject to the terms and conditions of the Security Agreement, to
evidence further the security interest granted by Pledgor to Collateral Agent
pursuant to the Security Agreement, Pledgor hereby grants to Collateral Agent a
security interest in all of Pledgor’s right, title and interest in and to the
following, in each case whether now or hereafter existing or in which Pledgor
now has or hereafter acquires an interest and wherever the same may be located
(the “Patent Collateral”):

 

(i)            all rights, title
and interest (including rights acquired pursuant to a license or otherwise) in
and to all patents and patent applications and rights and interests in patents
and patent applications under any domestic or foreign law that are presently,
or in the future may be, owned or held by such Pledgor and all patents and
patent applications and rights, title and interests in patents and patent applications
under any domestic or foreign law that are presently, or in the future may be,
owned by such Pledgor in whole or in part (including, without limitation, the
patents and patent applications set forth on Schedule A annexed hereto),
all rights (but not obligations) corresponding thereto to sue for past, present
and future infringements and all re-issues, divisions, continuations, renewals,
extensions and continuations-in-part thereof; and

 

(ii)           all proceeds,
products, rents and profits of or from any and all of the foregoing Patent
Collateral and, to the extent not otherwise included, all payments under
insurance (whether or not Collateral Agent is the loss payee thereof), or any
indemnity, warranty or 

 

II-1

 

guaranty, payable by reason of loss or damage
to or otherwise with respect to any of the foregoing Patent Collateral. 
For purposes of this Grant of Patent Security Interest, the term “proceeds” includes whatever is receivable
or received when Patent Collateral or proceeds are sold, licensed, exchanged,
collected or otherwise disposed of, whether such disposition is voluntary or
involuntary.

 

Pledgor does hereby further acknowledge and affirm that the rights and
remedies of Collateral Agent with respect to the security interest in the
Patent Collateral granted hereby are more fully set forth in the Security
Agreement, the terms and provisions of which are incorporated by reference
herein as if fully set forth herein.

 

[The remainder of this page intentionally left blank.]

 

II-2

 

IN WITNESS WHEREOF,
Pledgor has caused this Grant of Patent Security Interest to be duly executed
and delivered by its officer thereunto duly authorized as of the
       day of              
,        .

 

 

	
   

  	
  [NAME
  OF PLEDGOR]

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  

 

II-3

 

SCHEDULE A

TO

GRANT OF PATENT SECURITY INTEREST

 

Patents Issued:

 

	
  Patent No.

  	
   

  	
  Issue Date

  	
   

  	
  Invention

  	
   

  	
  Inventor

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

Patents Pending:

 

	
  Applicant’s

  Name

  	
   

  	
  Date

  Filed

  	
   

  	
  Application

  Number

  	
   

  	
  Invention

  	
   

  	
  Inventor

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

II-A-1

 

EXHIBIT III TO

SECURITY AGREEMENT

 

[FORM OF GRANT OF COPYRIGHT SECURITY
INTEREST]

 

GRANT OF COPYRIGHT SECURITY INTEREST

 

WHEREAS, [NAME OF PLEDGOR], a                      
corporation (“Pledgor”), owns and
uses in its business, and will in the future adopt and so use, various
intangible assets, including the Copyright Collateral (as defined below); and

 

WHEREAS, pursuant to (i) that certain
Indenture dated as of June 17, 2008 (as such Indenture may be amended,
amended and restated, supplemented or otherwise modified from time to time, the
“Indenture”) among The Bank of New York
Trust Company, N.A., as Trustee for the Holders (as defined in the Indenture)
(in such capacity, the “Trustee”), the
Company, as Issuer, and (ii) the Purchase Agreement dated as of June [    ],
2008 (as such Purchase Agreement may be amended, amended and restated,
supplemented or otherwise modified from time to time, the “Purchase
Agreement”) among the Company, and Lehman Brothers Inc., as Initial
Purchaser, the Company issued the 8.0% Senior Secured Notes due 2013 (the “Notes”), and (iii) the terms of a Security Agreement
dated as of June 17, 2008 (as further amended, supplemented or otherwise
modified from time to time, the “Security Agreement”;
capitalized terms used in this Agreement without definition have the respective
meanings assigned such terms in the Security Agreement), among Grantor,
Collateral Agent and the other grantors named therein, Grantor has agreed to
create in favor of Collateral Agent a secured and protected interest in, and
Collateral Agent has agreed to become a secured creditor with respect to, the
Copyright Collateral;

 

NOW, THEREFORE, for
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, subject to the terms and conditions of the Security Agreement, to
evidence further the security interest granted by Pledgor to Collateral Agent
pursuant to the Security Agreement, Pledgor hereby grants to Collateral Agent a
security interest in all of Pledgor’s right, title and interest in and to the
following, in each case whether now or hereafter existing or in which Pledgor
now has or hereafter acquires an interest and wherever the same may be located
(the “Copyright Collateral”):

 

(i)            all rights, title and
interest (including rights acquired pursuant to a license or otherwise) under
copyright in various published and unpublished works of authorship including,
without limitation, computer programs, computer data bases, other computer
software layouts, trade dress, drawings, designs, writings, and formulas
(including, without limitation, the works set forth on Schedule A
annexed hereto, as the same may be amended pursuant hereto from time to time)
(collectively, the “Copyrights”),
all copyright registrations issued to Pledgor and applications for copyright
registration that have been or may hereafter be issued or applied for thereon
in the United States and any state thereof and in foreign countries (including,
without limitation, the registrations set forth on Schedule A
annexed hereto, as the same may be amended pursuant hereto from time to time)
(collectively, the “Copyright Registrations”),
all common law and other rights in and to the Copyrights in the United States
and any state thereof and in 

 

III-1

 

foreign countries including all copyright
licenses (but with respect to such copyright licenses, only to the extent
permitted by such licensing arrangements) (the “Copyright Rights”), including, without limitation,
each of the Copyrights, rights, titles and interests in and to the Copyrights,
all derivative works and other works protectable by copyright, which are
presently, or in the future may be, owned, created (as a work for hire for the
benefit of Pledgor), authored (as a work for hire for the benefit of Pledgor),
or acquired by Pledgor, in whole or in part, and all Copyright Rights with
respect thereto and all Copyright Registrations therefor, heretofore or
hereafter granted or applied for, and all renewals and extensions thereof,
throughout the world, including all proceeds thereof (such as, by way of
example and not by limitation, license royalties and proceeds of infringement
suits), the right (but not the obligation) to renew and extend such Copyright
Registrations and Copyright Rights and to register works protectable by
copyright and the right (but not the obligation) to sue in the name of such
Pledgor or in the name of Collateral Agent or Lenders for past, present and
future infringements of the Copyrights and Copyright Rights; and

 

(ii)           all proceeds, products, rents
and profits of or from any and all of the foregoing Copyright Collateral and,
to the extent not otherwise included, all payments under insurance (whether or
not Collateral Agent is the loss payee thereof), or any indemnity, warranty or
guaranty, payable by reason of loss or damage to or otherwise with respect to
any of the foregoing Copyright Collateral.  For purposes of this Grant of
Copyright Security Interest, the term “proceeds”
includes whatever is receivable or received when Copyright Collateral or proceeds
are sold, licensed, exchanged, collected or otherwise disposed of, whether such
disposition is voluntary or involuntary.

 

Pledgor does hereby further acknowledge and affirm that the rights and
remedies of Collateral Agent with respect to the security interest in the
Copyright Collateral granted hereby are more fully set forth in the Security
Agreement, the terms and provisions of which are incorporated by reference
herein as if fully set forth herein.

 

IN WITNESS WHEREOF,
Pledgor has caused this Grant of Copyright Security Interest to be duly
executed and delivered by its officer thereunto duly authorized as of the
       day of             ,       .

 

 

	
   

  	
  [NAME OF
  PLEDGOR]

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
					

 

III-2

 

SCHEDULE A

TO

GRANT OF COPYRIGHT SECURITY INTEREST

 

U.S.
Copyright Registrations:

 

	
  Title

  	
   

  	
  Registration

  No.

  	
   

  	
  Date of Issue

  	
   

  	
  Registered Owner

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

Foreign
Copyright Registrations:

 

	
  Country

  	
   

  	
  Title

  	
   

  	
  Registration

  No.

  	
   

  	
  Date of Issue

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

Pending
U.S. Copyright Registration Applications:

 

	
  Title

  	
   

  	
  Appl.
  No.

  	
   

  	
  Date of

  Application

  	
   

  	
  Copyright
  Claimant

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

Pending
Foreign Copyright Registration Applications:

 

	
  Country

  	
   

  	
  Title

  	
   

  	
  Appl. No.

  	
   

  	
  Date of
  Application

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

III-A-1

 

EXHIBIT IV TO

SECURITY AGREEMENT

 

IP SUPPLEMENT

 

This IP SUPPLEMENT, dated as of           ,
is delivered pursuant to and supplements (i) the Security Agreement, dated
as of                                  ,
        (said Security Agreement, as it
may heretofore have been and as it may hereafter be further amended, restated,
supplemented or otherwise modified from time to time, being the “Security Agreement”), among                               [Insert
Company name], [Insert Name of Pledgor] (“Pledgor”),
the other Pledgors named therein, and [Insert name of Lender], as Collateral
Agent, and (ii) the [Grant of Trademark Security Interest] [Grant of
Patent Security Interest] [Grant of Copyright Security Interest] dated as of                 ,        (the
“Grant”) executed by
Pledgor.  Capitalized terms used herein not otherwise defined herein shall
have the meanings ascribed thereto in the Grant.

 

Pledgor grants to Collateral Agent a security interest in all of
Pledgor’s right, title and interest in and to the [Trademark Collateral]
[Patent Collateral] [Copyright Collateral] set forth on Schedule A
annexed hereto.  All such [Trademark Collateral] [Patent Collateral]
[Copyright Collateral] shall be deemed to be part of the [Trademark Collateral]
[Patent Collateral] [Copyright Collateral] and shall be hereafter subject to
each of the terms and conditions of the Security Agreement and the Grant.

 

IN WITNESS WHEREOF, Pledgor has caused this IP Supplement to be duly
executed and delivered by its duly authorized officer as of                                .

 

	
   

  	
  [PLEDGOR]

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
					

 

V-1Exhibit 10.1

 

Execution Copy

 

SECURITIES
PURCHASE AGREEMENT

 

THIS  SECURITIES PURCHASE AGREEMENT (this “Agreement”),
dated as of June 13, 2008, by and among
ISONICS CORPORATION, a California corporation (the “Company”),
and the Buyers listed on Schedule I attached hereto (individually, a “Buyer”
or collectively “Buyers”).

 

WITNESSETH

 

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

 

WHEREAS, the parties
desire that, upon the terms and subject to the conditions contained herein, the
Company shall issue and sell to the Buyer(s), as provided herein, and the Buyer(s) shall
purchase (i) up to One Million Five Hundred Thousand Dollars ($1,500,000)
of notes in the form attached hereto as “Exhibit A” (the “Notes”)
and (ii) warrants substantially in the form attached hereto as “Exhibit B”
(the “Warrants”), to acquire up to that number of additional shares of
the Company’s common stock, no par value per share (the “Common Stock”)
set forth opposite such Buyer’s name on Schedule I (as exercised, the “Warrant
Shares”) of which One Million One Hundred Seventy-Five Thousand Dollars
($1,175,000) shall be funded within five (5) business day following the
date hereof (the “First Closing”), Fifty Thousand Dollars ($50,000) shall
be funded upon the change of the Company’s transfer agent to Worldwide Stock
Transfer (the “Second Closing”) and Two Hundred Seventy Five Thousand
Dollars ($275,000) shall be funded at the Company’s request (the “Third
Closing”) (individually referred to as a “Closing” collectively
referred to as the “Closings”), for a total purchase price of up to One
Million Five Hundred Dollars ($1,500,000), (the “Purchase Price”) in the
respective amounts set forth opposite each Buyer(s) name on Schedule I
(the “Subscription Amount”);

 

WHEREAS, on June 5,
2006, the Company issued Secured Convertible Debenture (No. CCP-2) in the
amount of Three Million Dollars ($3,000,000) to YA Global Investments, L.P.
(f/k/a Cornell Capital Partners L.P.) (“YA Global”), a Buyer, and on June 13,
2006, such Secured Convertible Debenture was amended and restated as Secured
Convertible Debenture (No. CCP-4) (“Debenture CCP-4”);

 

WHEREAS, on November 16,
2006, the Company issued Secured Convertible Debenture (No. CCP-5) in the
amount of Three Million Dollars ($3,000,000) to YA Global (“Debenture CCP-5”);

 

WHEREAS,
contemporaneously with the execution and delivery of this Agreement, the
Company and YA Global have agreed to amend and restate Debenture CCP-4 and
Debenture CCP-5 into one note in the amount of Six Million Dollars ($6,000,000)
in the form attached hereto as Exhibit A (such notes, the “Amendment
Notes”);

 

WHEREAS, on May 31,
2006, the Company issued Secured Convertible Debenture (No. CCP-1) in the
amount of Ten Million Dollars ($10,000,000) to YA Global and on June 13,
2006, 

 

 

such Secured Convertible
Debenture was amended and restated as Secured Convertible Debenture (No. CCP-3)
(“Debenture CCP-3”);

 

WHEREAS, on April 11,
2007, the Company issued Secured Convertible Debenture (No. CCP-2007-1) in
the amount of Two Million Dollars ($2,000,000) to YA Global (“Debenture
CCP-2007-1”);

 

WHEREAS,
contemporaneously with the execution and delivery of this Agreement the Company
and YA Global have agreed to amend Debenture CCP-3 and Debenture CCP-2007-1
pursuant to an amendment in substantially the form attached hereto as Exhibit Y
(the “Debenture Amendments”);

 

WHEREAS,
contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement
(the “Registration Rights Agreement”) pursuant to which the Company has
agreed to provide certain registration rights under the Securities Act and the rules and
regulations promulgated there under, and applicable state securities laws;

 

WHEREAS, contemporaneously with the execution and delivery of this Agreement, (i) the Buyer, the
Company, and each subsidiary of the Company are executing and delivering a
Security Agreement (all such security agreements shall be referred to as the “Security
Agreement”) pursuant to which the Company and its wholly owned subsidiaries
agree to provide the Buyer a security interest in Pledged Property (as this
term is defined in the Security Agreement), and (ii) each subsidiary of
the Company is executing and delivering a Guaranty dated the date hereof (the “Guaranty” and collectively with
the Security Agreement, the “Security Documents”) in favor of the Buyer;

 

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

 

WHEREAS, the Notes,
the Warrants, and the Warrants Shares collectively are referred to herein as
the “Securities”).

 

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

 

1.     PURCHASE AND SALE OF NOTES.

 

(a)           Purchase of Notes.  Subject to the satisfaction (or waiver) of
the terms and conditions of this Agreement, each Buyer agrees, severally and
not jointly, to purchase at each Closing and the Company agrees to sell and
issue to each Buyer, severally and not jointly, at each Closing, Notes in
amounts corresponding with the Subscription Amount set forth opposite each
Buyer’s name on Schedule I hereto and the Warrants to acquire up that number of
Warrant Shares as set forth opposite such Buyer’s name in column (5) on
Schedule I .

 

(b)           Closing Dates.  The First Closing of the purchase and sale of
the Notes and Warrants shall take place at 10:00 a.m. Eastern Standard
Time on the fifth (5th) 

 

 

business day following the
date hereof, subject to notification of satisfaction of the conditions to the
First Closing set forth herein and in Sections 6 and 7 below (or such later
date as is mutually agreed to by the Company and the Buyer(s)) (the “First
Closing Date”), the Second Closing of the purchase and sale of the Notes
shall take place at 4:00 p.m. Eastern Standard Time on the date following
the date on which the Buyers receive written notice that the conditions to the
Second Closing set forth herein and in Sections 6 and 7 below have been
satisfied (or such later date as is mutually agreed to by the Company and the
Buyer(s)) (the “Second Closing Date”) and the Third Closing of the
purchase and sale of the Notes shall take place at 4:00 p.m. Eastern
Standard Time on the date following the date on which the Buyers receive
written notice that the Company wishes to consummate the Third Closing (or such
later date as is mutually agreed to by the Company and the Buyer(s)) (the “Third
Closing Date”) (collectively referred to a the “Closing Dates”).  The Closings shall occur on the respective
Closing Dates at the offices of Yorkville Advisors, LLC, 101 Hudson Street, Suite 3700,
Jersey City, New Jersey 07302 (or such other place as is mutually agreed to by
the Company and the Buyer(s)).

 

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

 

2.     BUYER’S
REPRESENTATIONS AND WARRANTIES.

 

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

 

(a)           Investment
Purpose.  Each Buyer is acquiring the
Securities for its own account for investment only and not with a view towards,
or for resale in connection with, the public sale or distribution thereof,
except pursuant to sales registered or exempted under the Securities Act;
provided, however, that by making the representations herein, such Buyer
reserves the right to dispose of the Securities at any time in accordance with
or pursuant to an effective registration statement covering such Securities or
an available exemption under the Securities Act.  Such Buyer does not presently have any
agreement or understanding, directly or indirectly, with any Person to
distribute any of the Securities.

 

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

 

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

 

 

(d)           Information.  Each Buyer and its advisors (and his or, its
counsel), if any, have been furnished with all materials relating to the
business, finances and operations of the Company and information he deemed
material to making an informed investment decision regarding his purchase of
the Securities, which have been requested by such Buyer.  Each Buyer and its advisors, if any, have
been afforded the opportunity to ask questions of the Company and its
management.  Neither such inquiries nor
any other due diligence investigations conducted by such Buyer or its advisors,
if any, or its representatives shall modify, amend or affect such Buyer’s right
to rely on the Company’s representations and warranties contained in Section 3
below.  Each Buyer understands that its
investment in the Securities involves a high degree of risk.  Each Buyer is in a position regarding the
Company, which, based upon employment, family relationship or economic
bargaining power, enabled and enables such Buyer to obtain information from the
Company in order to evaluate the merits and risks of this investment.  Each Buyer has sought such accounting, legal
and tax advice, as it has considered necessary to make an informed investment
decision with respect to its acquisition of the Securities.

 

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

 

(f)            Transfer or
Resale.  Each Buyer understands that
except as provided in the Registration Rights Agreement: (i) the
Securities have not been and are not being registered under the Securities Act
or any state securities laws, and may not be offered for sale, sold, assigned
or transferred unless (A) subsequently registered thereunder, (B) such
Buyer shall have delivered to the Company an opinion of counsel, in a generally
acceptable form, to the effect that such Securities to be sold, assigned or
transferred may be sold, assigned or transferred pursuant to an exemption from
such registration requirements, or (C) such Buyer provides the Company
with reasonable assurances (in the form of seller and broker representation
letters) that the Buyer is not an affiliate of the Company and that such
Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A
promulgated under the Securities Act, as amended (or a successor rule thereto)
(collectively, “Rule 144”), in each case following the applicable
holding period set forth therein; (ii) any sale of the Securities made in
reliance on Rule 144 may be made only in accordance with the terms of Rule 144
and further, if Rule 144 is not applicable, any resale of the Securities
under circumstances in which the seller (or the person through whom the
sale is made) may be deemed to be an underwriter (as that term is defined in
the Securities Act) may require compliance with some other exemption under the
Securities Act or the rules and regulations of the SEC thereunder; and (iii) neither
the Company nor any other person is under any obligation to register the
Securities under the Securities Act or any state securities laws or to comply
with the terms and conditions of any exemption thereunder.

 

(g)           Legends.  Each Buyer agrees to the imprinting, so long
as is required by this Section 2(g), of a restrictive legend in
substantially the following form:

 

THE
SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE 

 

 

SECURITIES
LAWS.  THE SECURITIES HAVE BEEN ACQUIRED
SOLELY FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TOWARD RESALE AND MAY NOT
BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF
COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS.

 

Certificates evidencing the Warrant Shares
shall not contain any legend (including the legend set forth above), (i) while
a registration statement (including the Registration Statement) covering the
resale of such security is effective under the Securities Act, (ii) following
any sale of such Warrant Shares pursuant to Rule 144, (iii) if such
Warrant Shares are eligible for sale under Rule 144, 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 SEC).  The Company shall cause its
counsel to issue a legal opinion to the Company’s transfer agent promptly after
the effective date (the “Effective Date”) of a Registration Statement if
required by the Company’s transfer agent to effect the removal of the legend
hereunder.  If all or any portion of the
Warrants are exercised by a Buyer that is not an Affiliate of the Company (a “Non-Affiliated
Buyer”) at a time when there is an effective registration statement to
cover the resale of the Warrant Shares, such Warrant 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 2(g), it will, no later than three (3) Trading
Days following the delivery by a Non-Affiliated Buyer to the Company or the
Company’s transfer agent of a certificate representing Warrant Shares issued
with a restrictive legend (such third Trading Day, the “Legend Removal Date”),
deliver or cause to be delivered to such Non-Affiliated Buyer 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.  Each Buyer acknowledges that
the Company’s agreement hereunder to remove all legends from Warrant Shares is
not an affirmative statement or representation that such Warrant Shares are
freely tradable.  Each Buyer, severally
and not jointly with the other Buyers, agrees that the removal of the
restrictive legend from certificates representing Securities as set forth in
this Section 3(g) is predicated upon the Company’s reliance that the Buyer will
sell any Securities pursuant to either the registration requirements of the
Securities Act, including any applicable prospectus delivery requirements, or an
exemption therefrom, and that if Securities are sold pursuant to a Registration
Statement, they will be sold in compliance with the plan of distribution set
forth therein.

 

(h)           Authorization,
Enforcement.  This
Agreement has been duly and validly authorized, executed and delivered on
behalf of such Buyer and is a valid and binding agreement of such Buyer
enforceable in accordance with its terms, except as such enforceability may be
limited by general principles of equity or applicable bankruptcy, insolvency, 

 

 

reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies.

 

(i)            Receipt of
Documents.  Each Buyer
and his or its counsel has received and read in their entirety:  (i) this Agreement and each
representation, warranty and covenant set forth herein and the Transaction
Documents (as defined herein); (ii) all due diligence and other
information necessary to verify the accuracy and completeness of such representations,
warranties and covenants; (iii) the Company’s Form 10-K for the
fiscal year ended April 30, 2007; (iv) the Company’s Forms 10-Q for
the fiscal quarters ended July 31, 2007, October 31, 2007 and January 31,
2008 and (v) answers to all questions each Buyer submitted to the Company
regarding an investment in the Company; and each Buyer has relied on the
information contained therein and has not been furnished any other documents,
literature, memorandum or prospectus.

 

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

 

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

 

(l)            YA Global, a
Buyer hereunder and the holder of Debentures CCP-3, CCP-4, CCP-5 and CCP-2007-1
and certain warrants issued in connection therewith, hereby consents to the
transactions contemplated hereby and represents and warrants that to the best
of its knowledge, the completion of the transactions hereby will not violate,
constitute a default under, or constitute an event that may create a default
under any of such instruments, or create an event that will result in a
dilution adjustment to any of such instruments except as contemplated in the
Debenture Amendments.

 

3.     REPRESENTATIONS
AND WARRANTIES OF THE COMPANY.

 

Except as set forth under the corresponding
section of the Disclosure Schedules which Disclosure Schedules shall be deemed
a part hereof and to qualify any representation or warranty otherwise made
herein to the extent of such disclosure, the Company hereby makes the
representations and warranties set forth below to each Buyer:

 

(a)           Subsidiaries.  All of the direct and indirect subsidiaries
of the Company are set forth on Schedule 3(a).  The Company owns, directly or indirectly, all
of 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.  The Company
and its subsidiaries are corporations duly organized and validly existing in
good standing under the laws of the jurisdiction in which they are
incorporated, and have the requisite corporate power to own their properties
and to carry on their business as now being conducted.  Each of the Company and its subsidiaries is
duly qualified as a foreign corporation to do business and is in good standing
in every jurisdiction in which the nature of the business conducted by it makes
such qualification necessary, except to the extent that the failure to be so
qualified or be in good standing would not have or reasonably be expected to
result in (i) a material adverse effect on the legality, validity or
enforceability of any Transaction Document, (ii) a material adverse effect
on the results of operations, assets, business or condition (financial or
otherwise) 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 Document (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.

 

(c)           Authorization,
Enforcement, Compliance with Other Instruments.  (i) The Company has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement, the Notes, the Warrants, the Security Documents, the
Registration Rights Agreement, the Irrevocable Transfer Agent Instructions, the
Amendment Notes and the Debenture Amendments and each of the other agreements
entered into by the parties hereto in connection with the transactions
contemplated by this Agreement (collectively the “Transaction Documents”)
and to issue the Securities in accordance with the terms hereof and thereof, (ii) the
execution and delivery of the Transaction Documents by the Company and the consummation
by it of the transactions contemplated hereby and thereby, including, without
limitation, the issuance of the Securities, and the reservation for issuance
and the issuance of the Warrant Shares, have been duly authorized by the
Company’s Board of Directors and no further consent or authorization is
required by the Company, its Board of Directors or its stockholders, (iii) the
Transaction Documents have been duly executed and delivered by the Company, (iv) the
Transaction Documents constitute the valid and binding obligations of the
Company enforceable against the Company in accordance with their terms, except
as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of creditors’
rights and remedies.  The authorized
officer of the Company executing the Transaction Documents knows of no reason
why the Company cannot file the Registration Statement as required under the
Registration Rights Agreement or perform any of the Company’s other obligations
under the Transaction Documents except to the extent that the Company is not
eligible to file a registration statement on Form S-3, and except to the
extent the Company is unable file a registration statement as a result of
management’s inability to issue a management’s assessment on the Company’s
internal control of financial reporting or reports a material weakness in
disclosure controls resulting from the Company’s inability to install a
framework for such assessment as required by §404 of the Sarbanes-Oxley Act of
2002 and the rules and regulations thereunder, and except to the extent
that the Company’s independent certified public accountants issue a report on
the Company’s financial statements including a going concern 

 

 

qualification or, following
a discussion with the SEC, are unwilling to issue any report on or review of
the Company’s financial statements.

 

(d)           Capitalization.  The authorized capital stock of the Company
consists of 175,000,000 shares of Common Stock and 7,650,000 shares of
Preferred Stock, no par value per share (“Preferred Stock”) of which
17,652,987  shares of Common Stock and zero shares
of Preferred Stock are issued and outstanding. 
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.  Except as
disclosed in Schedule 3(d): (i) none of the Company’s capital stock is
subject to preemptive rights or any other similar rights or any liens or
encumbrances suffered or permitted by the Company; (ii) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any capital stock of the
Company or any of its subsidiaries, or contracts, commitments, understandings
or arrangements by which the Company or any of its subsidiaries is or may
become bound to issue additional capital stock of the Company or any of its subsidiaries
or options, warrants, scrip, rights to subscribe to, calls or commitments of
any character whatsoever relating to, or securities or rights convertible into,
or exercisable or exchangeable for, any capital stock of the Company or any of
its subsidiaries; (iii) there are no outstanding debt securities, notes,
credit agreements, credit facilities or other agreements, documents or
instruments evidencing indebtedness of the Company or any of its subsidiaries
or by which the Company or any of its subsidiaries is or may become bound; (iv) there
are no financing statements securing obligations in any material amounts,
either singly or in the aggregate, filed in connection with the Company or any
of its subsidiaries; (v) there are no outstanding securities or
instruments of the Company or any of its subsidiaries which contain any
redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its subsidiaries
is or may become bound to redeem a security of the Company or any of its
subsidiaries; (vi) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities; (vii) the Company does not have any stock appreciation
rights or “phantom stock” plans or agreements or any similar plan or agreement;
and (viii) the Company and its subsidiaries have no liabilities or
obligations required to be disclosed in the SEC Documents but not so disclosed
in the SEC Documents, other than those incurred in the ordinary course of the
Company’s or its subsidiaries’ respective businesses and which, individually or
in the aggregate, do not or would not have a Material Adverse Effect.  The Company has furnished to the Buyers true,
correct and complete copies of the Company’s Certificate of Incorporation, as
amended and as in effect on the date hereof (the “Certificate of Incorporation”), and the Company’s Bylaws, as
amended and as in effect on the date hereof (the “Bylaws”), and the terms of all securities convertible into, or
exercisable or exchangeable for, shares of Common Stock and the material rights
of the holders thereof in respect thereto. 
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.

 

 

(e)           Issuance of
Securities.  The
issuance of the Notes and the Warrants is duly authorized and free from all
taxes, liens and charges with respect to the issue thereof.  Upon exercise in accordance with the terms of
the Warrants, the Warrant Shares when issued will be validly issued, fully paid
and nonassessable, free from all taxes, liens and charges with respect to the
issue thereof.  The Company has reserved
from its duly authorized capital stock the appropriate number of shares of
Common Stock as set forth in this Agreement.

 

(f)            No Conflicts.   The execution, delivery and performance of
the Transaction Documents by the Company and the consummation by the Company of
the transactions contemplated hereby and thereby (including, without
limitation, the issuance of the Notes and the Warrants, and reservation for
issuance and issuance of the Warrant Shares) will not (i) result in a
violation of any certificate of incorporation, certificate of formation, any
certificate of designations or other constituent documents of the Company or
any of its subsidiaries, any capital stock of the Company or any of its
subsidiaries or bylaws of the Company or any of its subsidiaries or (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time
or both would become a default) in any respect under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company or any of its
subsidiaries is a party, or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including foreign, federal and state
securities laws and regulations and the rules and regulations of the National
Association of Securities Dealers Inc.’s OTC Bulletin Board) applicable to the
Company or any of its subsidiaries or by which any property or asset of the
Company or any of its subsidiaries is bound or affected; except in the case of
each of clauses (ii) and (iii), such as could not, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect.  The business of the Company and
its subsidiaries is not being conducted, and shall not be conducted in
violation of any material law, ordinance, or regulation of any governmental
entity.  Except as specifically
contemplated by this Agreement and as required under the Securities Act and any
applicable state securities laws, the Company is not required to obtain any
consent, authorization or order of, or make any filing or registration with,
any court or governmental agency in order for it to execute, deliver or perform
any of its obligations under or contemplated by this Agreement or the
Registration Rights Agreement in accordance with the terms hereof or
thereof.  All consents, authorizations,
orders, filings and registrations which the Company is required to obtain
pursuant to the preceding sentence have been obtained or effected on or prior
to the date hereof.  The Company and its
subsidiaries are unaware of any facts or circumstance, which might give rise to
any of the foregoing.

 

(g)           SEC Documents;
Financial Statements.  The Company
has filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), for the two years preceding the
date hereof (or such shorter period as the Company was required by law or
regulation to file such material) (all of the foregoing filed prior to the date
hereof or amended after the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents incorporated by
reference therein, being hereinafter referred to as the “SEC Documents”)
on timely basis or has received a valid extension of such time of filing and
has filed any such SEC Document prior to the expiration of any such
extension.  The Company has delivered to
the Buyers or their representatives, or made available through the SEC’s
website at http://www.sec.gov., true and complete copies of the SEC
Documents.  As of their respective 

 

 

dates, the SEC Documents
complied in all material respects with the requirements of the Exchange Act and
the rules and regulations of the SEC promulgated thereunder applicable to
the SEC Documents, and none of the SEC Documents, at the time they were filed
with the SEC, 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 the light of the circumstances under which they
were made, not misleading.  As of their
respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto.  Such financial
statements have been prepared in accordance with generally accepted accounting
principles, consistently applied, during the periods involved (except (i) as
may be otherwise indicated in such financial statements or the notes thereto,
or (ii) in the case of unaudited interim statements, to the extent they
may exclude footnotes or may be condensed or summary statements) and fairly
present in all material respects the financial position of the Company as of
the dates thereof and the results of its operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments).  No other
information provided by or on behalf of the Company to the Buyers which is not
included in the SEC Documents, including, without limitation, information
referred to in Section 2(i) of this Agreement, contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstance under
which they are or were made and not misleading.

 

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

 

(i)            Absence of
Litigation.  To the
knowledge of the Company, there is no action, suit, proceeding, inquiry or
investigation before or by any court, public board, government agency,
self-regulatory organization or body pending against or affecting the Company,
the Common Stock or any of the Company’s subsidiaries, wherein an unfavorable
decision, ruling or finding would (i) have a Material Adverse Effect.

 

(j)            Acknowledgment
Regarding Buyer’s Purchase of the Notes.  The Company acknowledges and agrees that each
Buyer is acting solely in the capacity of an arm’s length purchaser with
respect to this Agreement and the transactions contemplated hereby.  The Company further acknowledges that each
Buyer is not 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 each Buyer or any of their
respective representatives or agents in connection with this Agreement and the
transactions contemplated hereby is merely incidental to such Buyer’s purchase
of the Securities.  The Company further
represents to each Buyer that the Company’s decision to enter into this
Agreement has been based solely on the independent evaluation by the Company
and its representatives.

 

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

 

 

(l)            No Integrated
Offering.  Neither the
Company, nor any of its affiliates, nor any person acting on its or their
behalf has, directly or indirectly, made any offers or sales of any security or
solicited any offers to buy any security, under circumstances that would
require registration of the Securities under the Securities Act or cause this
offering of the Securities to be integrated with prior offerings by the Company
for purposes of the Securities Act.

 

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

 

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

 

(o)           Environmental
Laws.  The Company and its
subsidiaries are (i) in compliance with any and all applicable foreign,
federal, state and local laws and regulations relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants (“Environmental Laws”), (ii) have
received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii) are
in compliance with all terms and conditions of any such permit, license or
approval.

 

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

 

(q)           Insurance.  The Company and each of its subsidiaries is
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
subsidiaries are engaged.  Neither the
Company nor any such subsidiary has been refused any insurance coverage sought
or applied for and neither the Company nor any such subsidiary has any reason
to believe that it will not be able to renew its existing insurance 

 

 

coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition, financial or otherwise, or the earnings,
business or operations of the Company and its subsidiaries, taken as a whole.

 

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

 

(s)           Internal
Accounting Controls.  The Company
and each of its subsidiaries maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management’s general or specific authorizations, (ii) transactions
are recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, and (iii) the recorded amounts for assets are compared
with the existing assets at reasonable intervals and appropriate action is
taken with respect to any differences. 
The Company has not, however, established the framework necessary to
assess the Company’s internal control of financial reporting as required by
§404 of the Sarbanes-Oxley Act of 2002 and consequently will have to report
material weaknesses in the Company’s disclosure controls and internal control
of financial reporting.

 

(t)            No Material
Adverse Breaches, etc. 
Except to the extent YA Global or its agents may declare a breach or
default under the outstanding debentures, warrants, or registration rights
agreement and except for the fact that the Company has insufficient working
capital to fund its operations and its financial statements reflect that the
Company’s current liabilities and total liabilities are in excess of the
Company’s current assets and total assets, respectively, neither the Company
nor any of its subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in
the judgment of the Company’s officers has or is expected in the future to have
a Material Adverse Effect on the business, properties, operations, financial
condition, results of operations or prospects of the Company or its
subsidiaries.  Neither the Company nor
any of its subsidiaries is in breach of any contract or agreement which breach,
in the judgment of the Company’s officers, has or is expected to have a
Material Adverse Effect on the business, properties, operations, financial
condition, results of operations or prospects of the Company or its
subsidiaries.

 

(u)           Tax Status.  The Company and each of its subsidiaries has
made and filed all federal and state income and all other tax returns, reports
and declarations required by any jurisdiction to which it is subject and
(unless and only to the extent that the Company and each of its subsidiaries
has set aside on its books provisions reasonably adequate for the payment of
all unpaid and unreported taxes) has paid all taxes and other governmental
assessments and charges that are material in amount, shown or determined to be
due on such returns, reports and declarations, except those being contested in
good faith and has set aside on its books provision reasonably adequate for the
payment of all taxes for periods subsequent to the periods to which such
returns, reports or declarations apply. 
There are no unpaid taxes in any material amount 

 

 

claimed to be due by the
taxing authority of any jurisdiction, and the officers of the Company know of
no basis for any such claim.

 

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

 

(w)          Fees and Rights
of First Refusal.  Except to
the extent any such obligation is owed to YA Global, the Company is not
obligated to offer the securities offered hereunder on a right of first refusal
basis or otherwise to any third parties including, but not limited to, current
or former shareholders of the Company, underwriters, brokers, agents or other
third parties.

 

(x)            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.

 

(y)           Registration
Rights.  Other than each of the Buyers
pursuant to the Transaction Documents and pursuant to other obligations
previously entered into between YA Global and the Company, no Person has any
right to cause the Company to effect the registration under the Securities Act
of any securities of the Company.  There
are no outstanding registration statements not yet declared effective and there
are no outstanding comment letters from the SEC or any other regulatory agency.

 

(z)            Private
Placement.  Assuming
the accuracy of the Buyers’ representations and warranties set forth in Section 2,
no registration under the Securities Act is required for the offer and sale of
the Securities by the Company to the Buyers as contemplated hereby. The
issuance and sale of the Securities hereunder does not contravene the rules and
regulations of the Primary Market.

 

(aa)         Listing and
Maintenance Requirements.  The
Company’s Common Stock is registered pursuant to Section 12(b) or 12(g) of
the Exchange Act, and the Company has taken no action designed to terminate, 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 SEC is contemplating terminating such
registration.  Except to the extent
disclosed in the SEC Documents with respect to the delisting of the Company’s
securities from the Nasdaq Capital Market, the Company has not, in the twelve
(12) months 

 

 

preceding the date hereof,
received notice from any Primary 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 Primary 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.

 

(bb)         Reporting
Status.  With a view to making available to the Buyer the benefits of Rule 144
or any similar rule or regulation of the SEC that may at any time permit
the Buyer to sell securities of the Company to the public without registration,
and as a material inducement to the Buyer’s purchase of the Securities, the
Company represents and warrants to the following: (i) the Company is, and
has been for a period of at least 90 days immediately preceding the date
hereof, subject to the reporting requirements of section 13 or 15(d) of
the Exchange Act (ii) the Company has filed all required reports under
section 13 or 15(d) of the Exchange, as applicable, during the 12 months
preceding the date hereof (or for such shorter period that the Company was
required to file such reports), (iii) the Company is not an issuer defined
as a “Shell Company,” and (iv) the Company is not an issuer that has been
at any time previously an issuer defined as a “Shell Company.”  For the purposes hereof, the term “Shell
Company” shall mean an issuer that meets the description defined in paragraph
(i)(1)(i) of Rule 144.  The
Company affirmatively represents that, because the Company may not be able to
meet the requirements of §404 of the Sarbanes-Oxley Act of 2002 or may have to
report material weaknesses of the Company’s disclosure controls or internal
control of financial reporting, holders of the Company’s securities may not be
able to utilize Rule 144 prior to one year from the date hereof.

 

(cc)         Disclosure.  The
Company has made available to the Buyer and its counsel all the information
reasonably available to the Company that the Buyer or its counsel have
requested for deciding whether to acquire the Securities.  No
representation or warranty of the Company contained in this Agreement (as
qualified by the Disclosure Schedule) or any of the other Transaction
Documents, and no certificate furnished or to be furnished to the Buyer at the
Closing, or any due diligence evaluation materials furnished by the Company or
on behalf of the Company, including without limitation, due diligence
questionnaires, or any other documents, presentations, correspondence, or
information contains any untrue statement of a material fact or omits to state
a material fact necessary in order to make the statements contained herein or
therein not misleading in light of the circumstances under which they were
made.

 

(dd)         Manipulation of
Price.  The Company has not, and to its knowledge no one acting on its
behalf has, (i) taken, directly or indirectly, any action designed to
cause or to result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or, paid any compensation for
soliciting purchases of, any of the Securities, or (iii) paid or agreed to
pay to any Person any compensation for soliciting another to purchase any other
securities of the Company, other than, in the case of clauses (ii) and
(iii), compensation paid to the Company’s placement agent in connection with
the placement of the Securities.

 

(ee)         Dilutive Effect.  The Company understands and acknowledges that
the number of Warrant Shares issuable upon exercise of the Warrants will
increase in certain circumstances.  The
Company further acknowledges that its obligation to issue the Warrant 

 

 

Shares upon exercise of the
Warrants in accordance with this Agreement and the Warrants, in each case, is
absolute and unconditional regardless of the dilutive effect that such issuance
may have on the ownership interests of other stockholders of the Company.

 

(ff)           Annual
Operating Plan.  A true and
correct copy of the Company’s Annual Operating for Fiscal Year 2009 the (“Annual
Operating Plan”) is attached hereto as Exhibit X.

 

4.     COMPANY
ACKNOWLEDGMENTS AND RELEASE.

 

(a)           Acknowledgement of Obligations.  The Company hereby
acknowledges, confirms and agrees that as of the date hereof, the Company is
indebted to YA Global under Debentures CCP-3, CCP-4, CCP-5 and CCP-2007-1.

 

(b)           Acknowledgement of Security Interests.  The Company hereby acknowledges, confirms and
agrees that YA Global has and shall continue to have valid, enforceable and
perfected first-priority liens upon and security interests in the Pledged
Property heretofore granted to YA Global pursuant to the Security Agreement
between the Company and YA Global dated May 30, 2006, the Security
Agreement between Isonics Homeland Security and Defense Corporation, a wholly
owned subsidiary of the Company and YA Global dated May 30, 2006, the
Security Agreement between Protection Plus Corporation, a wholly owned
subsidiary of the Company, and YA Global dated May 30, 2006, the Security
Agreement between Isonics Vancouver, Inc., a wholly owned subsidiary of the
Company, and YA Global dated May 30, 2006 and in the Pledged Shares
heretofore granted to YA Global pursuant to the Pledge and Escrow Agreement
among the Company, David Gonzalez, Esq. and YA Global dated April 10,
2007, or otherwise granted to or held by YA Global.

 

(c)           Confirmation
and Release.  YA Global
hereby represents and warrants to the Company that to the best of its knowledge
it has complied with its obligations under all prior agreements (including
debentures, warrants, securities purchase agreements, security agreements)
between YA Global and the Company and, in connection therewith, has made no
misrepresentation to the Company and has complied with all of its legal
requirements (the “Confirmation”). In consideration thereof, the Company does
hereby agree to, on behalf of itself and its agents, representatives,
attorneys, assigns, heirs, subsidiaries, executors and administrators
(collectively, “Company Parties”) RELEASE AND FOREVER DISCHARGE YA
Global and its subsidiaries and its respective affiliates, parents, joint
ventures, officers, directors, shareholders, interest holders, members,
managers, employees, consultants, representatives, successors and assigns,
heirs, executors and administrators (collectively, “Buyer Parties”) from
all causes of action, suits, debts, claims and demands whatsoever known or
unknown, at law, in equity or otherwise, which the Company Parties ever had or
now has, and any claims for reasonable attorneys’ fees and costs, and
including, without limitation, any claims relating to fees, penalties,
liquidated damages, and indemnification for losses, liabilities and
expenses.  Based upon and subject to the
Confirmation, the release contained in this Section is effective without
regard to the legal nature of the claims raised and without regard to whether
any such claims are based upon tort, equity, or implied or express
contract.  It is expressly understood and
agreed that this release shall operate as a clear and unequivocal waiver by the
Company Parties of any such claim whatsoever.

 

 

5.     COVENANTS.

 

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

 

(b)           Form D.  The Company agrees to file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof to each Buyer promptly after such filing.  The Company shall, on or before the Closing
Date, take such action as the Company shall reasonably determine is necessary
to qualify the Securities, or obtain an exemption for the Securities for sale
to the Buyers at the Closing pursuant to this Agreement under applicable
securities or “Blue Sky” laws of the states of the United States, and shall
provide evidence of any such action so taken to the Buyers on or prior to the
Closing Date.

 

(c)           Reporting
Status.  With a view to making
available to the Buyer the benefits of Rule 144 or any similar rule or
regulation of the SEC that may at any time permit the Buyer to sell securities
of the Company to the public without registration, and as a material inducement
to the Buyer’s purchase of the Securities, the Company represents, warrants,
and covenants to the following:

 

(i)            The Company is
subject to the reporting requirements of section 13 or 15(d) of the
Exchange Act and has filed all required reports under section 13 or 15(d) of
the Exchange Act during the 12 months prior to the date hereof (or for such
shorter period that the issuer was required to file such reports), other than Form 8-K
reports;

 

(ii)           from the date
hereof until all the Securities either have been sold by the Buyer, or may
permanently be sold by the Buyer without any restrictions pursuant to Rule 144,
(the “Registration Period”) the Company shall file with the SEC in a
timely manner all required reports under section 13 or 15(d) of the
Exchange Act and such reports shall conform to the requirement of the Exchange
Act and the SEC for filing thereunder to the extent that the Company is capable
of doing so, acknowledging that the Company’s management will not be able to
make its assessment of internal control of financial reporting because the
Company has not implemented the framework required by §404 of the
Sarbanes-Oxley Act of 2002 (which failure will likely result in the Company’s
being required to identify material weaknesses in the Company’s disclosure
controls and internal control of financial reporting), and the Company can give
no assurance that its independent auditors will be able to issue a report on
the Company’s financial statements in the form required by the SEC’s rules and
regulations and any such report issued will contain a going concern
qualification;

 

(iii)          The Company
shall furnish to the Buyer so long as the Buyer owns Securities, promptly upon
request, (i) if true, a written statement by the Company that it has
complied with the reporting requirements of Rule 144, (ii) a copy of
the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and (iii) such other
information as may be reasonably requested to permit the Buyers to sell such
securities pursuant to Rule 144 without registration if Rule 144 is
available; and

 

 

(iv)          During the
Registration Period the Company shall not terminate its status as an issuer
required to file reports under the Exchange Act even if the Exchange Act or the
rules and regulations thereunder would otherwise permit such termination.

 

(d)           Use of Proceeds.  The Company will use the proceeds from the
sale of the Notes for the build up on inventory, capital expenditures and
working capital purposes.

 

(e)           Reservation of
Shares.  On the date hereof, the
Company shall reserve for issuance to the Buyers 13,000,000 shares of Common
Stock for issuance upon exercise of the Warrants (collectively, the “Share
Reserve”).  The Company represents
that it has sufficient authorized and unissued shares of Common Stock available
to create the Share Reserve after considering all other commitments that may
require the issuance of Common Stock. 
The Company shall take all action reasonably necessary to at all times
have authorized, and reserved for the purpose of issuance, such number of
shares of Common Stock as shall be necessary to effect the full exercise of the
Warrants.  If at any time the Share
Reserve is insufficient to effect the full exercise of the Warrants, the
Company shall increase the Share Reserve accordingly.  If the Company does not have sufficient
authorized and unissued shares of Common Stock available to increase the Share
Reserve, the Company shall call and hold a special meeting of the shareholders
within thirty (30) days of such occurrence, for the sole purpose of increasing
the number of shares authorized.  The
Company’s management shall recommend to the shareholders to vote in favor of
increasing the number of shares of Common Stock authorized.  Management shall also vote all of its shares
in favor of increasing the number of authorized shares of Common Stock.

 

(f)            Listings or
Quotation.  The Company’s
Common Stock shall be listed or quoted for trading on any of (a) the
American Stock Exchange, (b) New York Stock Exchange, (c) the Nasdaq
Global Market, (d) the Nasdaq Capital Market, or (e) the Nasdaq OTC
Bulletin Board (which does not include the Pink Sheets LLC) (“OTCBB”)
(each, a “Primary Market”).  The
Company shall promptly secure the listing of all of the Registrable Securities
(as defined in the Registration Rights Agreement) upon each national securities
exchange and automated quotation system, if any, upon which the Common Stock is
then listed (subject to official notice of issuance) and shall maintain such
listing of all Registrable Securities from time to time issuable under the
terms of the Transaction Documents.

 

(g)           Fees and
Expenses.

 

(i)            The Company
shall pay all of its costs and expenses incurred by it connection with the
negotiation, investigation, preparation, execution and delivery of the
Transaction Documents.

 

(ii)           The Company
shall place into escrow $100,000 (the “Monitoring Fees”) upon the First
Closing, directly from the proceeds of the First Closing (as deposited into
escrow, the “Escrow Funds”) which shall be used to compensate Yorkville
Advisors LLC (“Investment Manager”) for monitoring and managing the
purchase and investment made by YA Global Investments, L.P. (“YA Global”)
described herein, pursuant to the Investment Manager’s existing advisory
obligations to YA Global.  Prior to the
Second 

 

 

Closing and, if applicable,
the Third Closing the Buyers and the Company shall agree to proportionate additional
Monitoring Fees to be placed in escrow. 
The Company, Investment Manager, and YA Global shall enter into an
Escrow Agreement of even date herewith in the form attached hereto as Exhibit D
(the “Escrow Agreement”) appointing an escrow agent (the “Escrow
Agent”) to hold the Escrow Funds and to periodically disburse portions of
such Escrow Funds to the Investment Manager from escrow in accordance with the
terms of the Escrow Agreement.  The
Investment Manager shall periodically receive portions of the Escrow Funds in
accordance with the Escrow Agreement until either: (1) the Escrow Funds
shall have been fully disbursed pursuant the Escrow Agreement or (2) the
Securities shall have been Fully Retired. 
“Fully Retired” shall mean that the Buyer shall have fully disposed of
all the Securities issued or issuable hereunder, shall no longer have any
investment in, or ownership of, any of the Securities, all amounts owed to YA
Global under the Transaction Documents shall have been paid, and the
Transaction Documents shall have been terminated.  When the Securities are Fully Retired, the
remaining Escrow Funds shall be returned to the Company or otherwise disbursed
in accordance with the Escrow Agreement.

 

(iii)          The Company
shall pay a structuring and due diligence fee to Yorkville of Seventy Five
Thousand Dollars ($75,000) which shall be paid directly from the proceeds of
the First Closing.  The structuring and
due diligence fee shall be nonrefundable and payable whether or not any Closing
occurs.

 

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

 

(i)            Transactions
With Affiliates.  So long as
any Notes are outstanding, the Company shall not, and shall cause each of its
subsidiaries not to, enter into, amend, modify or supplement, or permit any
subsidiary to enter into, amend, modify or supplement any agreement,
transaction, commitment, or arrangement with any of its or any subsidiary’s
officers, directors, person who were officers or directors at any time during
the previous two (2) years, stockholders who beneficially own five percent
(5%) or more of the Common Stock, or Affiliates (as defined below) or with any
individual related by blood, marriage, or adoption to any such individual or
with any entity in which any such entity or individual owns a five percent (5%)
or more beneficial interest (each a “Related Party”), except for (a) customary
employment arrangements and benefit programs on reasonable terms, (b) any
investment in an Affiliate of the Company, 
(c) any agreement, transaction, commitment, or arrangement on an
arms-length basis on terms no less favorable than terms which would have been
obtainable from a person other than such Related Party, (d) any agreement,
transaction, commitment, or arrangement which is approved by a majority of the
disinterested directors of the Company; for purposes hereof, any director who
is also an officer of the Company or any subsidiary of the Company shall not be
a disinterested director with respect to any such agreement, transaction,
commitment, or arrangement.  “Affiliate”
for purposes hereof means, 

 

 

with respect to any person
or entity, another person or entity that, directly or indirectly, (i) has
a ten percent (10%) or more equity interest in that person or entity, (ii) has
ten percent (10%) or more common ownership with that person or entity, (iii) controls
that person or entity, or (iv) shares common control with that person or
entity.  “Control” or “controls”
for purposes hereof means that a person or entity has the power, direct or
indirect, to conduct or govern the policies of another person or entity.

 

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

 

(k)           Restriction on
Issuance of the Capital Stock. So long as any Notes are
outstanding, the Company shall not, without the prior written consent of the
Buyer(s) and except for Excluded Securities, (i) issue or sell shares
of Common Stock or Preferred Stock without consideration or for a consideration
per share less than the bid price of the Common Stock determined immediately
prior to its issuance, (ii) issue any preferred stock, warrant, option,
right, contract, call, or other security or instrument granting the holder
thereof the right to acquire Common Stock without consideration or for a
consideration less than such Common Stock’s Bid Price determined immediately
prior to it’s issuance, (iii) enter into any security instrument granting
the holder a security interest in any and all assets of the Company, or (iv) file
any registration statement on Form S-8.  For the purposes of this Section, “Excluded
Securities” means shares of Common Stock issued or deemed to be issued by
the Company upon the exercise of any option or warrant, or the conversion of
any convertible security, issued or deemed to have been issued by the Company
and outstanding on the date prior to date of this Agreement, provided that the
terms of such option, warrant or convertible security are not amended or
otherwise modified on or after the date of this Agreement, and provided that
the exercise or conversion price is not reduced, adjusted or otherwise modified
and the number of shares of Common Stock issued or issuable is not increased
(whether by operation of, or in accordance with, the relevant governing
documents or otherwise) on or after the date of this Agreement.

 

(l)            Neither the
Buyer(s) nor any of its affiliates have an open short position in the
Common Stock of the Company, and the Buyer(s) agrees that it shall not,
and that it will cause its affiliates not to, engage in any short sales of or
hedging transactions with respect to the Common Stock as long as any Notes
shall remain outstanding.

 

(m)          Rights of First
Refusal.  So long as any portion of Notes are outstanding, if the Company intends
to raise additional capital by the issuance or sale of capital stock of the Company,
including without limitation shares of any class of common stock, any class of
preferred stock, options, warrants or any other securities convertible or
exercisable into shares of common stock (whether the offering is conducted by
the Company, underwriter, placement agent or any third party) the Company shall
be obligated to offer to the Buyers such issuance or sale of capital stock, by
providing in writing the principal amount of capital it intends to raise and
outline of the material terms of such capital raise, prior to the offering such
issuance 

 

 

or
sale of capital stock to any third parties including, but not limited to,
current or former officers or directors, current or former shareholders and/or
investors of the obligor, underwriters, brokers, agents or other third
parties.  The Buyers shall have ten (10) business days from receipt of
such notice of the sale or issuance of capital stock to accept or reject all or
a portion of such capital raising offer.

 

(n)           Lockup
Agreements.  On the date
hereof, the Company shall obtain from each officer and director a lockup
agreement in the form attached hereto as Exhibit C.

 

(o)           Additional
Registration Statements. 
Until the effective date of the initial Registration Statement, the
Company will not file a registration statement under the Securities Act
relating to securities that are not the Securities.

 

(p)           Review of
Public Disclosures.  All SEC
filings (including, without limitation, all filings required under the Exchange
Act, which include Forms 10-Q and 10-QSB, 10-K and 10K-SB, 8-K, etc) and other
public disclosures made by the Company, including, without limitation, all
press releases, investor relations materials, and scripts of analysts meetings
and calls, shall be reviewed and approved for release by the Company’s
attorneys and, if containing financial information, the Company’s independent
certified public accountants.

 

(q)           Disclosure of
Transaction.  Within four
Business Day following the date of this Agreement, the Company shall file a
Current Report on Form 8-K describing the terms of the transactions
contemplated by the Transaction Documents in the form required by the Exchange
Act and attaching the material Transaction Documents (including, without
limitation, this Agreement, the form of the Notes, the form of Warrant and the
form of the Registration Rights Agreement) as exhibits to such filing.

 

(r)            Revenue.  The Company will not permit its actual
monthly revenue to fall more than 10% below the actual revenue reflected on the
Annual Operating Plan for the quarter ending July 31, 2008 or for any
monthly period thereafter.

 

(s)           EBITDA.  The Company will not permit its monthly
EBITDA to fall more than 10% below the EBITDA reflected on the Annual Operating
Plan for the quarter ending July 31, 2008 or for each quarter thereafter.

 

(t)            Cash Flow.  The Company will not permit its monthly Free
Cash Flow to fall more than 10% below the Free Cash Flow reflected on the
Annual Operating Plan for the quarter ending July 31, 2008 or for each
quarter thereafter.

 

(u)           Officer Bonuses.  The Company will not distribute officer
bonuses, allocated pro rata to a given quarter, unless (i) in such quarter
the Company achieves a minimum of 110% of the targeted EBITDA reflected on the
Annual Operating Plan or (ii) the Buyer(s) consent.

 

(v)           Future Debt
Financing.  If the
Company and/or any of its wholly owned subsidiaries (each a “Grantor”)
obtains a commitment for debt financing, the Buyer will upon written request by
any of the Grantors evaluate such financing offer in good faith.  If such 

 

 

financing is acceptable to
the Buyer in the Buyers’ sole reasonable discretion, Buyer will release its
security interest in a portion of the inventory and receivables of the Grantor
granted to the Buyer pursuant to the Security Documents.

 

6.     TRANSFER AGENT
INSTRUCTIONS.

 

(a)           The Company
shall issue the Irrevocable Transfer Agent Instructions to its transfer agent,
and any subsequent transfer agent, irrevocably appointing David Gonzalez, Esq.
as the Company’s agent for purpose instructing its transfer agent to issue
certificates or credit shares to the applicable balance accounts at The
Depository Trust Company (“DTC”), registered in the name of each Buyer
or its respective nominee(s), for the Warrant Shares issued upon exercise of the
Warrants as specified from time to time by each Buyer to the Company upon
exercise of the Warrants.  The Company
shall not change its transfer agent without the express written consent of the
Buyers, which may be withheld by the Buyers in their sole discretion.  The Company warrants that no instruction
other than the Irrevocable Transfer Agent Instructions referred to in this Section 5,
and stop transfer instructions to give effect to Section 2(g) hereof
(in the case of the Warrant Shares prior to registration of such shares under
the Securities Act) will be given by the Company to its transfer agent, and
that the Securities shall otherwise be freely transferable on the books and
records of the Company as and to the extent provided in this Agreement and the
other Transaction Documents.  If a Buyer
effects a sale, assignment or transfer of the Securities in accordance with Section 2(f),
the Company shall promptly instruct its transfer agent to issue one or more
certificates or credit shares to the applicable balance accounts at DTC in such
name and in such denominations as specified by such Buyer to effect such sale,
transfer or assignment and, with respect to any transfer, shall permit the
transfer.  In the event that such sale,
assignment or transfer involves Warrant Shares sold, assigned or transferred
pursuant to an effective registration statement or pursuant to Rule 144,
the transfer agent shall issue such Securities to the Buyer, assignee or
transferee, as the case may be, without any restrictive legend.  Nothing in this Section 6 shall affect
in any way the Buyer’s obligations and agreement to comply with all applicable
securities laws upon resale of Warrant Shares. 
The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Buyer by vitiating the intent and
purpose of the transaction contemplated hereby. 
Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 5 will be inadequate and
agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section 5, that the Buyer(s) shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach and requiring immediate issuance and transfer, without the necessity of
showing economic loss and without any bond or other security being required.

 

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

 

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

 

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

 

 

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

 

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

 

(d)           YA Global shall have
released Two Hundred Thousand Dollars ($200,000) from escrow to the Company for
working capital purposes.

 

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

 

(a)           The obligation of the
Buyer(s) hereunder to purchase the Notes at the First Closing is subject
to the satisfaction, at or before the First Closing Date, of each of the following
conditions, provided that these conditions are for the Buyer’s sole benefit and
may be waived by the Buyer at any time in its sole discretion:

 

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

 

(ii)           The Common Stock
shall be authorized for quotation or trading on the Primary Market, trading in
the Common Stock shall not have been suspended for any reason.

 

(iii)          The representations
and warranties of the Company shall be true and correct in all material
respects (except to the extent that any of such representations and warranties
is already qualified as to materiality in Section 3 above, in which case,
such representations and warranties shall be true and correct without further
qualification) as of the date when made and as of the First Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the First Closing Date

 

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

 

(v)           The Buyers shall
have received an opinion of counsel from counsel to the Company in a form
satisfactory to the Buyers.

 

 

(vi)          The Company shall
have provided to the Buyers a true copy of a certificate of good standing
evidencing the formation and good standing of the Company from the secretary of
state (or comparable office) from the jurisdiction in which the Company is
incorporated, as of a date within 10 days of the First Closing Date.

 

(vii)         The Company shall
have delivered to the Buyers a certificate, executed by the Secretary or
Assistant Secretary of the Company and dated as of the First Closing Date, as
to (i) the resolutions consistent with Section 3(c) as adopted
by the Company’s Board of Directors in a form reasonably acceptable to such
Buyer, (ii) the Certificate of Incorporation and (iii) the Bylaws,
each as in effect at the First Closing.

 

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

 

(ix)           The Company shall
have used its best efforts to provide to the Buyer an acknowledgement, to the
satisfaction of the Buyer, from the Company’s independent certified public
accountants as to its ability to provide all consents required in order to file
a registration statement in connection with this transaction.  In this connection, the Buyer understands
that the Company’s independent certified public accountants have advised the
Company that, before they will issue any report on the Company’s financial
statements for the year ended April 30, 2008, such accountants require a
conference with the SEC regarding the effect of the Company’s inability to
implement a framework necessary to make the management’s assessment of the
Company’s internal control of financial reporting required by §404 of the
Sarbanes-Oxley Act of 2002 (and the material weaknesses that the Company may
have to report in its disclosure controls and internal control of financial
reporting), and if such accountants do not obtain a satisfactory response from
the SEC, such accountants may not issue a report on the Company’s financial
statements for the year ended April 30, 2008 or review financial
statements for any subsequent period.  In
such case, the Company may not be able to file any registration statement.

 

(x)            The Company shall
have created the Share Reserve.

 

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

 

(b)           The obligation of the
Buyer(s) hereunder to accept the Notes at the Second Closing is subject to
the satisfaction, at or before the Second Closing Date, of each of the
following conditions, provided that these conditions are for the Buyer’s sole
benefit and may be waived by the Buyer at any time in its sole discretion:

 

(i)            The Common Stock
shall be authorized for quotation or trading on the Primary Market, trading in
the Common Stock shall not have been suspended for any reason.

 

 

(ii)           The representations
and warranties of the Company shall be true and correct in all material
respects (except to the extent that any of such representations and warranties
is already qualified as to materiality in Section 3 above, in which case,
such representations and warranties shall be true and correct without further
qualification) as of the date when made and as of the Second Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the Second Closing Date.

 

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

 

(iv)          The Company will
have changed its transfer agent to Worldwide Stock Transfer and notified the
Buyer(s) of such change.

 

(v)           The Company shall have
certified, in a certificate executed by two officers of the Company and dated
as of the Second Closing Date, that all conditions to the Second Closing have
been satisfied.

 

(c)           The obligation of the
Buyer(s) hereunder to accept the Notes at the Third Closing is subject to
the satisfaction, at or before the Third Closing Date, of each of the following
conditions, provided that these conditions are for the Buyer’s sole benefit and
may be waived by the Buyer at any time in its sole discretion:

 

(i)            The Common Stock
shall be authorized for quotation or trading on the Primary Market, trading in
the Common Stock shall not have been suspended for any reason.

 

(ii)           The representations
and warranties of the Company shall be true and correct in all material respects
(except to the extent that any of such representations and warranties is
already qualified as to materiality in Section 3 above, in which case,
such representations and warranties shall be true and correct without further
qualification) as of the date when made and as of the Second Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Company at or prior to the Second Closing Date.

 

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

 

(iv)          The Company shall
have certified, in a certificate executed by two officers of the Company and
dated as of the Second Closing Date, that all conditions to the Second Closing
have been satisfied.

 

 

9.     INDEMNIFICATION.

 

(a)           In consideration of
the Buyer’s execution and delivery of this Agreement and acquiring the Notes
hereunder, and in addition to all of the Company’s other obligations under this
Agreement, the Company shall defend, protect, indemnify and hold harmless the
Buyer(s) and each other holder of the Notes, and all of their officers,
directors, employees and agents (including, without limitation, those
retained in connection with the transactions contemplated by this Agreement) (collectively,
the “Buyer Indemnitees”) from and against any and all actions, causes of
action, suits, claims, losses, costs, penalties, fees, liabilities and damages,
and expenses in connection therewith (irrespective of whether any such Buyer
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys’ fees and disbursements (the “Indemnified
Liabilities”), incurred by the Buyer Indemnitees or any of them as a result
of, or arising out of, or relating to (a) any misrepresentation or breach
of any representation or warranty made by the Company in this Agreement, the
Notes or the other Transaction Documents or any other certificate, instrument
or document contemplated hereby or thereby, (b) any breach of any
covenant, agreement or obligation of the Company contained in this Agreement,
or the other Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, or (c) any cause of action, suit
or claim brought or made against such Buyer Indemnitee and arising out of or
resulting from the execution, delivery, performance or enforcement of this
Agreement or any other instrument, document or agreement executed pursuant
hereto by any of the parties hereto, any transaction financed or to be financed
in whole or in part, directly or indirectly, with the proceeds of the issuance
of the Notes or the status of the Buyer or holder of the Notes,  as a Buyer of Notes from the Company.  To the extent that the foregoing undertaking
by the Company may be unenforceable for any reason, the Company shall make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities, which is permissible under applicable law.

 

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

 

 

10.   GOVERNING LAW: MISCELLANEOUS.

 

(a)           Governing Law.  This Agreement shall be governed by and
interpreted in accordance with the laws of the State of New Jersey without
regard to the principles of conflict of laws. 
The parties further agree that any action between them shall be heard in
Hudson County, New Jersey, and expressly consent to the jurisdiction and venue
of the Superior Court of New Jersey, sitting in Hudson County and the United
States District Court for the District of New Jersey sitting in Newark, New
Jersey for the adjudication of any civil action asserted pursuant to this
Paragraph.

 

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

 

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

 

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

 

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

 

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

 

 

	
  If to the Company, to:

  	
   

  	
  Isonics Corporation

  
	
   

  	
   

  	
  5906 McIntyre Street

  
	
   

  	
   

  	
  Golden, CO 80403

  
	
   

  	
   

  	
  Attn: Chief Executive Officer

  
	
   

  	
   

  	
  Telephone: (303) 279-7900

  
	
   

  	
   

  	
  Facsimile: (303) 279-7300

  
	
   

  	
   

  	
   

  
	
  With a copy
  to:

  	
   

  	
  Burns,
  Figa & Will, P.C.

  
	
   

  	
   

  	
  Suite 1000,
  6400 South Fiddlers Green Circle

  
	
   

  	
   

  	
  Greenwood
  Village, CO 80112

  
	
   

  	
   

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

  
	
   

  	
   

  	
  Telephone: (303)
  796-2626

  
	
   

  	
   

  	
  Facsimile: (303)
  796-2777

  
	
   

  	
   

  	
   

  

 

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

 

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

 

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

 

(i)            Survival.  Unless this Agreement is terminated under Section 9(l),
all agreements, representations and warranties contained in this Agreement or
made in writing by or on behalf of any party in connection with the
transactions contemplated by this Agreement shall survive the execution and
delivery of this Agreement and the Closing.

 

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

 

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

 

 

(l)            Termination.  In the event that the First Closing shall not
have occurred with respect to the Buyers on or before five (5) business
days from the date hereof due to the Company’s or the Buyer’s failure to
satisfy the conditions set forth in Sections 6 and 7 above (and the
non-breaching party’s failure to waive such unsatisfied condition(s)), the
non-breaching party shall have the option to terminate this Agreement with
respect to such breaching party at the close of business on such date without
liability of any party to any other party; provided, however, that if this
Agreement is terminated by the Company pursuant to this Section 9(l), the
Company shall remain obligated to reimburse the Buyer(s) for the fees and
expenses of Yorkville Advisors LLC described in Section 4(g) above
(other than the amounts set forth in Section 4(g)(ii)).

 

(m)          Brokerage.  The Company represents that no broker, agent,
finder or other party has been retained by it in connection with the
transactions contemplated hereby and that no other fee or commission has been
agreed by the Company to be paid for or on account of the transactions contemplated
hereby.

 

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

 

[REMAINDER PAGE INTENTIONALLY LEFT BLANK]

 

 

IN WITNESS
WHEREOF,
each Buyer and the Company have caused their respective signature page to
this Securities Purchase Agreement to be duly executed as of the date first
written above.

 

 

	
   

  	
  COMPANY:

  
	
   

  	
  ISONICS CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
  Gregory A. Meadows

  
	
   

  	
  Title:

  	
  Vice President/Assistant Secretary

  
				

 

 

IN WITNESS
WHEREOF,
each Buyer and the Company have caused their respective signature page to
this Securities Purchase Agreement to be duly executed as of the date first
written above.

 

 

	
   

  	
  BUYERS:

  
	
   

  	
  YA GLOBAL INVESTMENTS, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Yorkville Advisors, LLC

  
	
   

  	
  Its:

  	
  Investment Manager

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
  Mark Angelo

  
	
   

  	
  Its:

  	
  Portfolio Manager

  
				

 

 

Execution Copy

 

SCHEDULE I

 

SCHEDULE OF BUYERS

 

	
  (1)

  	
   

  	
  (2)

  	
   

  	
  (3)

  	
   

  	
  (4)

  	
   

  	
  (5)

  	
   

  	
  (6)

  	
   

  	
  (7)

  	
   

  	
  (8)

  	
   

  
	
  Buyer

  	
   

  	
  Subscription Amount

  	
   

  	
  Number of 

  Warrant Shares

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Legal Representative’s

  Address and Facsimile

  Number

  	
   

  
	
   

  	
   

  	
  First Closing

  	
   

  	
  Second Closing

  	
   

  	
  Third Closing

  	
   

  	
  First Closing

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  YA Global Investments, L.P. 

   

  101 Hudson Street, Suite 3700

  Jersey City, NJ 07302

  Attention: Mark Angelo

  Telephone: (201) 985-8300

  Facsimile: (201) 985-8266

  Residence: Cayman Islands

  	
   

  	
  $

  	
  1,175,000

  	
   

  	
  $

  	
  50,000

  	
   

  	
  $

  	
  275,000

  	
   

  	
  13,000,000

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  David Gonzalez, Esq.

  101 Hudson Street, Suite 3700

  Jersey City, New Jersey 07302

  Telephone: (201) 985-8300

  Facsimile: (201) 985-8266

  	
   

  
																			

 

 

Execution Copy

 

LIST OF EXHIBITS:

 

Disclosure Schedule

 

Exhibit A – Form of Notes

 

Exhibit B – Form of Warrant

 

Exhibit C – Form of Lock-Up Agreement

 

Exhibit X – Annual Operating Plan

 

Exhibit Y – Debenture Amendments

 

 

DISCLOSURE SCHEDULE

 

 

EXHIBIT C

 

LOCKUP AGREEMENT

 

The undersigned hereby agrees
that for a period commencing on June     , 200 and
expiring on the date thirty (30) days after the date that all amounts owed to
YA Global Investments, L.P. (the “Buyer”), under the Notes issued to the
Buyer pursuant to the Securities Purchase Agreement between Isonics Corporation
(the “Company”) and the Buyer dated June     ,
2008 have been paid (the “Lock-up Period”), he, she or it will not,
directly or indirectly, without the prior written consent of the Buyer, issue,
offer, agree or offer to sell, sell, grant an option for the purchase or sale
of, transfer, pledge, assign, hypothecate, distribute or otherwise encumber or
dispose of any securities of the Company, including common stock or options,
rights, warrants or other securities underlying, convertible into, exchangeable
or exercisable for or evidencing any right to purchase or subscribe for any
common stock (whether or not beneficially owned by the undersigned), or any
beneficial interest therein (collectively, the “Securities”) except in
accordance with the volume limitations set forth in Rule 144(e) of
the General Rules and Regulations under the Securities Act of 1933, as
amended.

 

In order to enable the
aforesaid covenants to be enforced, the undersigned hereby consents to the
placing of legends and/or stop-transfer orders with the transfer agent of the
Company’s securities with respect to any of the Securities registered in the
name of the undersigned or beneficially owned by the undersigned, and the
undersigned hereby confirms the undersigned’s investment in the Company.

 

Dated:
                         ,
2008

 

	
   

  	
  Signature

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
  City, State, Zip Code:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Print Social Security Number

  
	
   

  	
  or Taxpayer I.D. Number

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