8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report:  April 6, 2004

ISONICS CORPORATION

(Name of small business issuer as specified in its charter)

California	001-12531	77-0338561
State of Incorporation	Commission File Number	IRS Employer Identification No.

5906 McIntyre Street, Golden, Colorado 80403

Address of principal executive offices

303-279-7900

Telephone number, including
Area code

Not applicable

Former name or former address if changed since last report

Item 5 – Other Events

Item 701 Disclosure – Recent Sales of Unregistered Securities

On April 6, 2004, we committed to issue 32,950 shares of our Series D Convertible Preferred Stock and 600,000 common stock warrants to three accredited investors in exchange for their investment of $3,295,000.  In addition, we paid a due diligence fee of $210,000, reimbursement of $19,550 in expenses and issued 2,400,000 common stock warrants to Mercator Advisory Group, LLC (“MAG”).  The three accredited investors (which are all affiliated with MAG) are the Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP and Monarch Pointe Fund, Ltd.  The following sets forth the information required by Item 701 in connection with that transaction:

(a)The transaction was completed effective April 6, 2004, although we will not be able to issue the Series D Convertible Preferred Stock until the certificate of determination for those shares has been filed with the California Secretary of State (expected to occur no later than April 8, 2004).   We will issue 32,950 shares of our Series D Convertible Preferred Stock and 600,000 common stock warrants to three accredited investors.  We issued 2,400,000 common stock warrants to MAG as a portion of its due diligence fee.

(b)There was no placement agent or underwriter for the transaction.  The three accredited investors are affiliated with MAG.

(c)The total offering price was $3,295,000.  No underwriting discounts or commissions were paid.  We paid a fee of $210,000 to MAG as part of its due diligence fee and paid its legal expenses of $19,550.

(d)We relied on the exemption from registration provided by Sections 4(2) and 4(6) under the Securities Act of 1933 for this transaction and Regulation D.  We did not engage in any public advertising or general solicitation in connection with this transaction that followed an earlier investment by funds related to MAG and was in negotiation for more than several weeks.  We provided the accredited investors with disclosure of all aspects of our business, including providing the accredited investors with our reports filed with the Securities and Exchange Commission, our press releases, access to our auditors, and other financial, business, and corporate information.  Based on our investigation, we believe that the accredited investors obtained all information regarding Isonics they requested, received answers to all questions they posed, and otherwise understood the risks of accepting our securities for investment purposes.

(e)The Series D Convertible Preferred Stock has a liquidation preference of $100 per share, and is convertible into common stock at $1.10 per share (90.91 shares of common stock for each share of Series D Convertible Preferred Stock).  Each common stock warrant is exercisable to purchase one share of common stock through April 5, 2007.  One-third of the common stock warrants held by each entity have an exercise price of $1.10 per share; one-third of the common stock warrants have an exercise price of $1.20 per share; and the remaining one-third of the common stock warrants have an exercise price of $1.30 per share.  (At the time we reached agreement with MAG for the transaction on April 1, 2004, the market price for our stock was $1.08 per share and the ten and twenty day average closing prices of our common stock ending at the close of market on April 5 was also $1.08 per share.)  We have an obligation to register the shares underlying the Series D Convertible Preferred Stock and the common stock warrants, including the obligation to file a registration statement within 30 days of April 5, 2004 (subject to a fifteen day extension).

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(f)We will use the proceeds for investment in our semiconductor materials and products business and general corporate purposes.

Item 7 – Financial Statements and Exhibits

(a)Financial Statements of Businesses Acquired.

Not applicable.

(b)Pro forma financial information.

Not applicable.

(c)Exhibits

1Certificate of Determination for Series D Convertible Preferred Stock

2Registration Rights Agreement

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 7^th day of April 2004.

Isonics Corporation
By:	/s/ James E. Alexander
	James E. Alexander
	President and Chief Executive Officer

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EX-99.1

Exhibit 99.1

CERTIFICATE OF DETERMINATION OF PREFERENCES AND RIGHTS OF
SERIES D CONVERTIBLE PREFERRED STOCK
OF
ISONICS CORPORATION

a California corporation

The undersigned, James E. Alexander and John V. Sakys, certify that:

1.They are the duly acting President and Secretary, respectively, of ISONICS CORPORATION, a corporation organized and existing under the Corporation Code of the State of California (the “Corporation”).

2.Pursuant to authority conferred upon the Board of Directors by the Articles of Incorporation of the Corporation, and pursuant to the provisions of Section 401 of Title 1 of the Corporations Code of the State of California, said Board of Directors, pursuant to a meeting held April 6, 2004, adopted a resolution establishing the rights, preferences, privileges and restrictions of, and the number of shares comprising, the Corporation’s Series D Convertible Preferred Stock, which resolution is as follows:

RESOLVED, that a series of Preferred Stock in Isonics Corporation, a California corporation (the “Corporation”), having the rights, preferences, privileges and restrictions, and the number of shares constituting such series and the designation of such series, set forth below be, and it hereby is, authorized by the Board of Directors of the Corporation pursuant to authority given by the Corporation’s Articles of Incorporation.

NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby fixes and determines the Determinations of, the number of shares constituting, and the rights, preferences, privileges and restrictions relating to, a new series of Preferred Stock as follows:

(a)Determination.  The series of Preferred Stock is hereby designated Series D Convertible Preferred Stock (the “Series D Preferred Stock”).

(b)Authorized Shares.  The number of authorized shares constituting the Series D Preferred Stock shall be 32,950 shares of such series.

(c)Dividends.  Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holder of the Series D Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of any assets of the Corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors.

(d)Liquidation Preference.

(i)Preference upon Liquidation, Dissolution or Winding Up.  In the event of any dissolution or winding up of the Corporation, whether voluntary or involuntary, holders of each outstanding share of Series D Preferred Stock shall be entitled to be paid first out of the assets of the Corporation available for distribution to shareholders, whether such assets are capital, surplus or earnings, an amount equal to $100 (the “Series D Purchase Price”) per share

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of Series D Preferred Stock held (as adjusted for any stock splits, stock dividends or recapitalizations of the Series D Preferred Stock) and any declared but unpaid dividends on such share, before any payment shall be made to the holders of the Common Stock, or any other stock of the Corporation ranking junior to the Series D Preferred Stock with regard to any distribution of assets upon liquidation, dissolution or winding up of the Corporation.  The holders of the Series D Preferred Stock shall be entitled to share ratably, in accordance with the respective preferential amounts payable on such stock, in any distribution which is not sufficient to pay in full the aggregate of the amounts payable thereon. If, upon any liquidation, dissolution or winding up of the Corporation, the assets to be distributed to the holders of the Series D Preferred Stock shall be insufficient to permit payment to such shareholders of the full preferential amounts aforesaid, then all of the assets of the Corporation available for distribution to shareholders shall be distributed to the holders of Series D Preferred Stock. Each holder of the Series D Preferred Stock shall be entitled to receive that portion of the assets available for distribution as the number of outstanding shares of Series D Preferred Stock held by such holder bears to the total number of shares of Series D Preferred Stock.  Such payment shall constitute payment in full to the holders of the Series D Preferred Stock upon the liquidation, dissolution or winding up of the Corporation.  After such payment shall have been made in full, or funds necessary for such payment shall have been set aside by the Corporation in trust for the account of the holders of Series D Preferred Stock, so as to be available for such payment, such holders of Series D Preferred Stock shall be entitled to no further participation in the distribution of the assets of the Corporation.

(ii)Consolidation, Merger and Other Corporate Events.  A consolidation or merger of the Corporation (except into or with a subsidiary corporation) or a sale, lease, mortgage, pledge, exchange, transfer or other disposition of all or substantially all of the assets of the Corporation or any reclassification of the stock of the Corporation (other than a change in par value or from no par to par, or from par to no par or as the result of an event described in subsections (iii) through (vi) of paragraph (f)), shall be regarded as a liquidation, dissolution or winding up of the affairs of the Corporation within the meaning of this paragraph (d).  In no event shall the issuance of new classes of stock, whether senior, junior or on a parity with the Series D Preferred Stock, be deemed a “reclassification” under or otherwise limited by the terms hereof.

(iii)Distribution of Cash and Other Assets.  In the event of a liquidation, dissolution or winding up of the Corporation resulting in the availability of assets other than cash for distribution to the holders of the Series D Preferred Stock, the holders of the Series D Preferred Stock shall be entitled to a distribution of cash and/or assets equal to the value of the liquidation preference stated in subsection (i) of this paragraph (d), which valuation shall be made solely by the Board of Directors, and provided that such Board of Directors was acting in good faith, shall be conclusive.

(iv)Distribution to Junior Security Holders.  After the payment or distribution to the holders of the Series D Preferred Stock of the full preferential amounts aforesaid, the holders of the Common Stock then outstanding, or any other stock of the Corporation ranking as to assets upon liquidation, dissolution or winding up of the Corporation junior to the Series D Preferred Stock, shall be entitled to receive ratably all of the remaining assets of the Corporation.

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(v)Preference; Priority.  References to a stock that is “senior” to, on a “parity” with or “junior” to other stock as to liquidation shall refer, respectively, to rights of priority of one series or class of stock over another in the distribution of assets on any liquidation, dissolution or winding up of the Corporation. The Series D Preferred Stock shall be senior to the Common Stock of the Corporation and senior to any subsequent series of Preferred Stock issued by the Corporation.

(e)Voting Rights.  Except as otherwise required by law, the holder of shares of Series D Preferred Stock shall not have the right to vote on matters that come before the shareholders.

(f)Conversion Rights.  The holders of Series D Preferred Stock will have the following conversion rights:

(i)Right to Convert.  Subject to and in compliance with the provisions of this paragraph (f), any issued and outstanding shares of Series D Preferred Stock may, at the option of the holder, be converted at any time or from time to time into fully paid and nonassessable shares of Common Stock at the conversion rate in effect at the time of conversion, determined as provided herein; provided, that a holder of Series D Preferred Stock may at any given time convert only up to that number of shares of Series D Preferred Stock so that, upon conversion, the aggregate beneficial ownership of the Corporation’s Common Stock (calculated pursuant to Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of such holder and all persons affiliated with such holder is not more than 9.99% of the Corporation’s Common Stock then outstanding.

(ii)Mechanics of Conversion.  Before any holder of Series D Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Common Stock, and shall give written notice to the Corporation at such office that he elects to convert the same and shall state therein the number of shares of Series D Preferred Stock being converted.  Thereupon, the Corporation shall promptly issue and deliver at such office to such holder of Series D Preferred Stock a certificate or certificates for the number of shares of Common Stock to which he shall be entitled.  Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series D Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date.

(iii)Conversion Price.  The number of shares into which one share of Series D Preferred Stock shall be convertible shall be determined by dividing $100 (the “Series D Purchase Price”) by the then existing Conversion Price (as set forth below), which shall be subject to adjustment from time to time in certain instances, as provided below in this paragraph (f) (the “Conversion Ratio”). The initial “Conversion Price” per share for the Series D Preferred Stock shall be equal to the Market Price (as defined below and subject to adjustment as described below).

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For purposes of determining the Conversion Price, the “Market Price”shall equal  $1.10.

For purposes of illustration only, if the Market Price is $1.12 at time of conversion, the Conversion Ratio will be $100/$1.12 = 89.29 to 1, allowing 32,950 shares of Series D Preferred Stock to be converted into 2,942,106 shares of Common Stock.

(iv)Adjustment for Stock Splits and Combinations.  If the Corporation shall at any time, or from time to time after the Original Issuance Date, effect a subdivision of the outstanding Common Stock, the Conversion Price in effect immediately prior thereto shall be proportionately decreased, and conversely, if the Corporation shall at any time or from time to time after the Original Issuance Date combine the outstanding shares of Common Stock, the Conversion Price then in effect immediately before the combination shall be proportionately increased.  Any adjustment under this paragraph (f)(iv) shall become effective at the close of business on the date the subdivision or combination becomes effective.

(v)Adjustment for Certain Dividends and Distributions.  In the event the Corporation at any time, or from time to time after the Original Issuance Date, shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Conversion Price for the Series D Preferred Stock then in effect shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Conversion Price for such Series D Preferred Stock then in effect by a fraction:

(A)the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and

(B)the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price for the Series D Preferred Stock shall be recomputed accordingly as of the close of business on such record date and thereafter, the Conversion Price for the Series D Preferred Stock shall be adjusted pursuant to this paragraph (f)(v) as of the time of actual payment of such dividends or distributions.

(vi)Adjustments for Other Dividends and Distributions.  In the event the Corporation at any time or from time to time after the Original Issuance Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event provision shall be made so that the holders of such Series D Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation that

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they would have received had their Series D Preferred Stock been converted into Common Stock on the date of such event and had thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period giving application to all adjustments called for during such period under this paragraph (f) with respect to the rights of the holders of the Series D Preferred Stock.

(vii)Adjustment for Reclassification Exchange or Substitution.  If the Common Stock issuable upon the conversion of the Series D Preferred Stock shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this paragraph (f)), then and in each such event the holder of each share of Series D Preferred Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change, by holders of the number of shares of Common Stock into which such shares of Series D Preferred Stock might have been converted immediately prior to such reorganization, reclassification, or change, all subject to further adjustment as provided herein.

(viii)Adjustment for Event of Default.  Upon (A) commencement by the Corporation of a voluntary case or proceeding under the bankruptcy laws, (B) the Corporation’s failure to discharge or stay a bankruptcy proceeding within 60 days of such action being taken against the Corporation, (C) the Corporation’s failure to file the Registration Statement with the SEC within 45 days of the Closing Date, other than due to a delay not caused by the Corporation, (D) the de-listing of the Corporation’s Common Stock from the Small Cap Market (as such terms are defined in that certain Subscription Agreement dated April 5, 2004 by and among the Corporation and the purchasers named therein (the “Subscription Agreement”), or (E) failure to pay the due diligence fee or expenses as set forth in the Subscription Agreement, the Conversion Price shall be adjusted to $1.00.

(ix)Reorganization, Mergers, Consolidations or Sales of Assets.  If at any time or from time to time there shall be a capital reorganization of the Common Stock (other than a subdivision, combination, reclassification or exchange of shares provided for elsewhere in this paragraph (f)) or a merger or consolidation of the Corporation with or into another corporation, or the sale of all or substantially all of the Corporation’s properties and assets to any other person, then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the holders of the Series D Preferred Stock shall thereafter be entitled to receive upon conversion of such Series D Preferred Stock, the number of shares of stock or other securities or property of the Corporation or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation or sale.  In any such case, appropriate adjustment shall be made in the application of the provisions of this paragraph (f) with respect to the rights of the holders of the Series D Preferred Stock after the reorganization, merger, consolidation or sale to the end that the provisions of this paragraph (f) (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series D Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable.

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(x)Certificate of Adjustment.  In each case of an adjustment or readjustment of the Conversion Price for the number of shares of Common Stock or other securities issuable upon conversion of the Series D Preferred Stock, the Corporation shall compute such adjustment or readjustment in accordance herewith and the Corporation’s Chief Financial Officer shall prepare and sign a certificate showing such adjustment or readjustment, and shall mail such certificate by first class mail, postage prepaid, to each registered holder of the Series D Preferred Stock at the holder’s address as shown in the Corporation’s books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based.

(xi)Notices of Record Date.  In the event of (A) any taking by the Corporation of a record of the holders of any class or series of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution or (B) any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation or any transfer of all or substantially all of the assets of the Corporation to any other corporation, entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series D Preferred Stock at least 10 days prior to the record date specified therein, a notice specifying (1) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (2) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective and (3) the time, if any is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares, of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up.

(xii)Fractional Shares.  No fractional shares of Common Stock shall be issued upon conversion of the Series D Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to the product of such fraction multiplied by the fair market value of one share of the Corporation’s Common Stock on the date of conversion, as determined in good faith by the Board of Directors.

(xiii)Reservation of Stock Issuable Upon Conversion.  The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series D Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series D Preferred Stock, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series D Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose.

(xiv)Notices. Any notice required by the provisions of this paragraph (f) to be given to the holders of shares of Series D Preferred Stock shall be deemed given (A) if deposited in the United States mail, postage prepaid, or (B) if given by any other reliable or generally

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accepted means (including by facsimile or by a nationally recognized overnight courier service), in each case addressed to each holder of record at his address (or facsimile number) appearing on the books of the Corporation.

(xv)Payment of Taxes.  The Corporation will pay all transfer taxes and other governmental charges that may be imposed in respect of the issue or delivery of shares of Common Stock upon conversion of shares of Series D Preferred Stock.

(xvi)No Dilution or Impairment.  The Corporation shall not amend its Articles of Incorporation or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, without the approval of a majority of the then outstanding Series D Preferred Stock.

(g)No Reissuance of Preferred Stock.  Any shares of Series D Preferred Stock acquired by the Corporation by reason of purchase, conversion or otherwise shall be canceled, retired and eliminated from the shares of Series D Preferred Stock that the Corporation shall be authorized to issue.  All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth in the Articles of Incorporation or in any certificate of Determination creating a series of Preferred Stock or any similar stock or as otherwise required by law.

(h)Severability.  If any right, preference or limitation of the Series D Preferred Stock set forth herein is invalid, unlawful or incapable of being enforced by reason of any rule, law or public policy, all other rights, preferences and limitations set forth herein that can be given effect without the invalid, unlawful or unenforceable right, preference or limitation shall nevertheless remain in full force and effect, and no right, preference or limitation herein shall be deemed dependent upon any other such right, preference or limitation unless so expressed herein.

3.The number of authorized shares of Preferred Stock of the Corporation is 10,000,000, and the number of shares of Series D Stock, none of which has been issued, is 32,950.

Each of the undersigned declares under penalty of perjury that the matters set out in the foregoing Certificate are true of his own knowledge.  Executed at Golden, Colorado, on this 5th day of April, 2004.

  /s/ James E. Alexander

James E. Alexander, President

  /s/ John V. Sakys

John V. Sakys, Secretary

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EX-99.2

Exhibit 99.2

EXHIBIT C
to Securities Purchase Agreement

REGISTRATION RIGHTS AGREEMENT

AGREEMENT dated as of April 5, 2004, between MERCATOR MOMENTUM FUND, L.P., MERCATOR MOMENTUM FUND III, L.P., and MERCATOR POINTE FUND, LTD. (collectively, the “Funds”) and MERCATOR ADVISORY GROUP, LLC (“Mercator”) (the Funds and Mercator are referred to individually as a “Holder” and collectively as the “Holders”), and Isonics Corporation, a California corporation (the “Company”).

WHEREAS, the Funds have purchased, for $3,295,000, an aggregate of 32,950 shares of Series D Convertible Preferred Stock (together, the “Series D Stock”) from the Company, and have the right to cause their Series D Stock to be converted into shares of Common Stock, without par value (the “Common Stock”), of the Company, pursuant to the conversion formula set forth in the Certificate of Determination;

WHEREAS, each Fund and Mercator has purchased a Warrant (together, the “Warrants”) from the Company, and the Holders, together, have the right to purchase in the aggregate up to 3,000,000 shares of the Common Stock through the exercise of the Warrants;

WHEREAS, the Company desires to grant to the Holders the registration rights set forth herein with respect to the shares of Common Stock issuable upon the conversion of the Series D Stock and the exercise of the Warrants, as well as the Isonics Principal Stockholders Shares.

NOW, THEREFORE, the parties hereto mutually agree as follows:

1.Registrable Securities.  As used herein the terms “Registrable Security” means each of the shares of Common Stock (i) issued upon the conversion of the Series D Stock (the “Conversion Shares”) or (ii) upon exercise of the Warrants (the “Warrant Shares”), provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination that (a) it has been effectively registered under the Securities Act of 1933, as amended (the “Securities Act”), and disposed of pursuant thereto, or  (b) registration under the Securities Act is no longer required for the immediate public distribution of such security.  The term “Registrable Securities” means any and/or all of the securities falling within the foregoing definition of a “Registrable Security.”  In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of “Registrable Security” as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1.

2.Registration.

(a)The Company shall file a registration statement (the “Registration Statement”) with the Securities and Exchange Commission (the “Commission”) within forty-five (45) days of the date of this Agreement in order to register the resale of the Registrable Securities under the Securities Act.  Once effective, the Company shall maintain the effectiveness of the Registration Statement until the earlier of (i) the date that all of the Registrable Securities have

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been sold, or  (ii) the date that the Company receives an opinion of counsel to the Company that all of the Registrable Securities may be freely traded without registration under the Securities Act, under Rule 144 promulgated under the Securities Act or otherwise.

(b)As the number of shares of Common Stock that can be acquired by the Holders upon the conversion of the Series D Stock may vary, from time to time, based on the market price of the Common Stock, it is not possible to determine the maximum number of shares of Common Stock that can be acquired by the Holders through the conversion of the Series D Stock.  Therefore, the Company will initially include in the Registration Statement as Registrable Securities that number of shares of Common Stock that is not less than the sum of (i) 125% of the maximum number of Conversion Shares that could be acquired by Holders on the date of this Agreement, and (ii) 3,000,000 Warrant Shares.

(c)If at any time the number of shares of Common Stock covered by the Registration Statement is less than the sum of (i) the number of any and all Registrable Securities held by the Holders, (ii) the number of Warrant Shares that could be acquired by the Holders through the exercise of the Warrants, and (iii) the number of Conversion Shares that could be acquired by the Holders through the conversion of the Series D Stock, the Company shall register additional shares of Common Stock under the Securities Act.

(d)Depending on whether the Registration Statement has previously become effective with the Commission, the Company shall register additional shares under Section 2(c) either by amending the Registration Statement to increase the number of shares that it covers or by filing a new registration statement.  Any such new registration statement shall thereafter be deemed part of the Registration Statement for the purposes of this Agreement.

3.Covenants of the Company with Respect to Registration.

The Company covenants and agrees as follows:

(a)The Company shall use its best efforts to cause the Registration Statement to become effective with the Commission as promptly as possible and in no event more than 100 days after the date of this Agreement (provided, however, that the Company shall not be liable to the Holders or in default of this covenant in event that the Commission’s review process delays such effectiveness).  If any stop order shall be issued by the Commission in connection therewith, the Company shall use its best reasonable efforts to obtain promptly the removal of such order.  Following the effective date of the Registration Statement, the Company shall, upon the request of any Holder, forthwith supply such reasonable number of copies of the Registration Statement, preliminary prospectus and prospectus meeting the requirements of the Securities Act, and any other documents necessary or incidental to the public offering of the Registrable Securities, as shall be reasonably requested by the Holder to permit the Holder to make a public distribution of the Holder’s Registrable Securities.  The obligations of the Company hereunder with respect to the Holder’s Registrable Securities are subject to the Holder’s furnishing to the Company such appropriate information concerning the Holder, the Holder’s Registrable Securities and the terms of the Holder’s offering of such Registrable Securities as the Company may reasonably request in writing.

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(b)The Company shall pay all costs, fees and expenses in connection with the Registration Statement filed pursuant to Section 2 hereof including, without limitation, the Company’s legal and accounting fees, printing expenses, and blue sky fees and expenses; provided, however, that each Holder shall be solely responsible for the fees of any counsel retained by the Holder in connection with such registration and any transfer taxes or underwriting discounts, commissions or fees applicable to the Registrable Securities sold by the Holder pursuant thereto.

(c)The Company will take all necessary action which may be required to qualify or register the Registrable Securities included in the Registration Statement for the offer and sale under the securities or blue sky laws of such states as are reasonably requested by each Holder of such securities, provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction.

4.Additional Terms.

(a)The Company shall indemnify and hold harmless the Holders and each underwriter, within the meaning of the Securities Act, who may purchase from or sell for any Holder, any Registrable Securities, from and against any and all losses, claims, damages and liabilities caused by any untrue statement of a material fact contained in the Registration Statement, any other registration statement filed by the Company under the Securities Act with respect to the registration of the Registrable Securities, any post-effective amendment to such registration statements, or any prospectus included therein or caused by any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission based upon information furnished or required to be furnished in writing to the Company by the Holders or underwriter expressly for use therein, which indemnification shall include each person, if any, who controls any Holder or underwriter within the meaning of the Securities Act and each officer, director, employee and agent of each Holder and underwriter; provided, however, that the indemnification in this Section 4(a) with respect to any prospectus shall not inure to the benefit of any Holder or underwriter (or to the benefit of any person controlling any Holder or underwriter) on account of any such loss, claim, damage or liability arising from the sale of Registrable Securities by the Holder or underwriter, if a copy of a subsequent prospectus correcting the untrue statement or omission in such earlier prospectus was provided to such Holder or underwriter by the Company prior to the subject sale and the subsequent prospectus was not delivered or sent by the Holder or underwriter to the purchaser prior to such sale and provided further, that the Company shall not be obligated to so indemnify any Holder or any such underwriter or other person referred to above unless the Holder or underwriter or other person, as the case may be, shall at the same time indemnify the Company, its directors, each officer signing the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act, from and against any and all losses, claims, damages and liabilities caused by any untrue statement of a material fact contained in the Registration Statement, any registration statement or any prospectus required to be filed or furnished by reason of this Agreement or caused by any omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, insofar as such losses, claims, damages or liabilities are caused by any untrue

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statement or omission based upon information furnished in writing to the Company by the Holder or underwriter expressly for use therein.

(b)If for any reason the indemnification provided for in the preceding section is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, claim, damage, liability or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by the indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnified party and the indemnifying party, as well as any other relevant equitable considerations.

(c)Neither the filing of a Registration Statement by the Company pursuant to this Agreement nor the making of any request for prospectuses by the Holder shall impose upon any Holder any obligation to sell the Holder’s Registrable Securities.

(d)Each Holder, upon receipt of notice from the Company that an event has occurred which requires a Post-Effective Amendment to the Registration Statement or a supplement to the prospectus included therein, shall promptly discontinue the sale of Registrable Securities until the Holder receives a copy of a supplemented or amended prospectus from the Company, which the Company shall provide as soon as practicable after such notice.

(e)If the Company fails to keep the Registration Statement referred to above continuously effective during the requisite period, then the Company shall, promptly upon the request of any Holder, use its best efforts to update the Registration Statement or file a new registration statement covering the Registrable Securities remaining unsold, subject to the terms and provisions hereof.

(f)Each Holder agrees to provide the Company with any information or undertakings reasonably requested by the Company in order for the Company to include any appropriate information concerning the Holder in the Registration Statement or in order to promote compliance by the Company or the Holder with the Securities Act.

(g)The Company agrees that it shall cause each of its directors, officers and shareholders owning ten percent (10%) or more of the Company’s outstanding Common Stock to refrain from selling any shares of the Company’s Common Stock until the Registration Statement has been declared effective.

(h)Each Holder agrees with the Company that such Holder will not short sell the Company’s shares of Common Stock, either before or after the effective date of the Registration Statement.

5.Governing Law.  The Registrable Securities will be, if and when issued, delivered in California.  This Agreement shall be deemed to have been made and delivered in the State of California and shall be governed as to validity, interpretation, construction, effect and in all other respects by the internal substantive laws of the State of California, without giving effect to the choice of law rules thereof.

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6.Amendment.  This Agreement may only be amended by a written instrument executed by the Company and the Holders.

7.Entire Agreement.  This Agreement constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.

8.Execution in Counterparts.  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document.

9.Notices.  All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed duly given when delivered by hand or mailed by registered or certified mail, postage prepaid, return receipt requested, as follows:

If to the Holders,	Mercator Advisory Group, LLC
Mercator Momentum	Fund, L.P.
	Mercator Momentum Fund III, L.P.
	Monarch Pointe Fund, Ltd.
	555 South Flower Street, Suite 4500
	Los Angeles, CA  90071
	Attention: David Firestone
With a copy to:	Sheppard Mullin Richter & Hampton LLP
	333 South Hope Street
	48th Floor
	Los Angeles, CA 90071-1448
	Telephone No.: (213) 620-1780
	Facsimile No.:  (213) 620-1398
	Attention:       David C. Ulich
If to the Company,	Isonics Corporation
	5906 McIntyre Street
	Golden, CO  80403
	Attention:  President
	Telephone:  (303) 279-7900
	Facsimile:   (303) 279-7300
With a copy to:	Burns, Figa & Will, P.C.
	6400 South Fiddlers Green Circle, Suite 1030
	Englewood, CO  80111
	Attention:  Herrick K. Lidstone, Jr.
	Telephone:  (303) 796-2626

10.Binding Effect; Benefits.  Any Holder may assign its rights hereunder.  This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective heirs, legal representatives, successors and assigns.  Nothing herein contained, express

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or implied, is intended to confer upon any person other than the parties hereto and their respective heirs, legal representatives and successors, any rights or remedies under or by reason of this Agreement.

11.Headings.  The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement.

12.Severability.  Any provision of this Agreement which is held by a court of competent jurisdiction to be prohibited or unenforceable in any jurisdiction(s) shall be, as to such jurisdiction(s), ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction.

13.Governing Law; Jurisdiction.  This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to be performed in the State of California.  Each of the parties irrevocably agrees that any and all suits or proceedings based on or arising under this Agreement may be brought only in and shall be resolved in the federal or state courts located in the City of Los Angeles, California and consents to the jurisdiction of such courts for such purpose.  Each of the parties irrevocably waives the defense of an inconvenient forum to the maintenance of such suit or proceeding in any such court.  Each of the parties further agrees that service of process upon such party mailed by first class mail to the address set forth in Section 9 shall be deemed in every respect effective service of process upon such party in any such suit or proceeding.  Nothing herein shall affect the right of a Fund to serve process in any other manner permitted by law.  Each of the parties agrees that a final non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner.

14.Attorneys’ Fees and Disbursements.  If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party or parties shall be entitled to receive from the other party or parties reasonable attorneys’ fees and disbursements in addition to any other relief to which the prevailing party or parties may be entitled.

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

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IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the date first above written.

ISONICS CORPORATION
By:		/s/ James E. Alexander
Name:			James E. Alexander
Its:	Chairman and Chief Executive Officer
HOLDERS:
MERCATOR MOMENTUM FUND, L.P.
BY:  MERCATOR ADVISORY GROUP, LLC,
GENERAL PARTNER
By:		/s/ Harry Aharonian
Name:				Harry Aharonian
Its:				Portfolio Manager
MERCATOR MOMENTUM FUND III, L.P.
BY MERCATOR ADVISORY GROUP, LLC
By:		/s/ Harry Aharonian
Name:				Harry Aharonian
Its:				Portfolio Manager

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MONARCH POINTE FUND, LTD.
By:	/s/ Harry Aharonian
Name:		Harry Aharonian
Its:		Portfolio Manager
MERCATOR ADVISORY GROUP, LLC
By:	/s/ Harry Aharonian
Name:		Harry Aharonian
Its:		Portfolio Manager

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