Exhibit 10(i)

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

EXECUTION COPY
 
 

SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
 
This SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (the “Agreement”)
is dated as of March 23, 2010 by and among ActiveCare, Inc., a Delaware
corporation (the “Company”), and each of the purchasers of shares of Series B
Convertible Preferred Stock of the Company whose names are set forth on Exhibit
A hereto and such purchasers’ respective successors and assigns (individually, a
“Purchaser” and collectively, the “Purchasers”).
 
The parties hereto agree as follows:
 
ARTICLE I.
PURCHASE AND SALE OF PREFERRED STOCK
 
Section 1.01          Purchase and Sale of Stock. Upon the following terms and
conditions, the Company shall issue and sell to the Purchasers and each of the
Purchasers shall purchase from the Company, the number of shares of the
Company’s Series B Convertible Preferred Stock, par value $0.00001 per share
(the “Series B Convertible Preferred Stock”), at a purchase price equal to $1.75
per share (the “Preferred Shares”), convertible into shares of the Company’s
common stock, par value $0.00001 per share (the “Common Stock”), in the amounts
set forth opposite such Purchaser’s name on Exhibit A hereto. The designation,
rights, preferences and other terms and provisions of the Series B Convertible
Preferred Stock are set forth in the Certificate of Designation of the Relative
Rights and Preferences of the Series B Convertible Preferred Stock attached
hereto as Exhibit B (the “Certificate of Designation”). The Company and the
Purchasers are executing and delivering this Agreement in accordance with and in
reliance upon the exemption from securities registration afforded by Rule 506 of
Regulation D (“Regulation D”) as promulgated by the United States Securities and
Exchange Commission (the “Commission”) under the Securities Act of 1933, as
amended (the “Securities Act”), or Section 4(2) of the Securities Act.
 
Section 1.02          Warrants. The Company agrees to issue to each of the
Purchasers a Class C Warrant in substantially the form attached hereto as
Exhibit C (the “Warrants”),  to purchase a number of shares of Common Stock
equal to one hundred percent (100%) of the number of Conversion Shares initially
issuable upon conversion of such Purchaser’s Preferred Shares purchased. The
number of Warrants each Purchaser shall be issued pursuant to this Agreement is
set forth opposite such Purchaser’s name on Exhibit A hereto. The Warrants shall
have an initial term of five (5) years from the Closing Date and shall have an
exercise price per share equal to $3.00 (as defined in the applicable Warrant).
 
Section 1.03          Conversion Shares. The Company has authorized and has
reserved and covenants to continue to reserve, free of preemptive rights and
other similar contractual rights of stockholders, a number of shares of Common
Stock equal to one hundred twenty percent (120%) of the number of shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all of the Preferred Shares and exercise of the Warrants then outstanding.
Any shares of Common Stock issuable upon conversion of the Preferred Shares and
exercise of the Warrants (and such shares when issued) are herein referred to as
the “Conversion Shares” and the “Warrant Shares”, respectively. The Preferred
Shares, the Conversion Shares and the Warrant Shares are sometimes collectively
referred to as the “Shares”.

 
 

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
Section 1.04          Purchase Price and Closing. Subject to the terms and
conditions hereof, the Company agrees to issue and sell to the Purchasers and,
in consideration of and in express reliance upon the representations,
warranties, covenants, terms and conditions of this Agreement, the Purchasers,
severally but not jointly with respect to the amounts set forth opposite the
name of each such Purchaser respectively on Exhibit A, agree to purchase the
Preferred Shares and the Warrants for an aggregate purchase price of $700,000
(the “Purchase Price”). The closing of the purchase and sale of the Preferred
Shares and the Warrants to be acquired by the Purchasers from the Company under
this Agreement shall take place at the offices of Haynes and Boone, LLP, 1221
Avenue of the Americas, 26th Floor, New York, New York 10020 (the “Closing”) at
10:00 a.m., New York time (i) on or before March 24, 2010; provided, that all of
the conditions set forth in Article IV hereof and applicable to the Closing
shall have been fulfilled or waived in accordance herewith, or (ii) at such
other time and place or on such date as the Purchasers and the Company may agree
upon (the “Closing Date”). Subject to the terms and conditions of this
Agreement, at the Closing the Company shall deliver or cause to be delivered to
each Purchaser (x) a certificate for the number of Preferred Shares set forth
opposite the name of such Purchaser on Exhibit A hereto, (y) a Warrant to
purchase such number of shares of Common Stock as is set forth opposite the name
of such Purchaser on Exhibit A attached hereto and (z) any other documents
required to be delivered pursuant to Article IV hereof.
 
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
 
Section 2.01          Representations and Warranties of the Company. The Company
hereby represents and warrants to the Purchasers, as of the date hereof and the
Closing Date (except as set forth on the Schedule of Exceptions attached hereto
with each numbered Schedule corresponding to the section number herein), as
follows:
 
(a)           Organization, Good Standing and Power. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has the requisite corporate power to own,
lease and operate its properties and assets and to conduct its business as it is
now being conducted. The Company does not have any subsidiaries except as set
forth in the Company’s Annual Report on Form 10-K for the year ended September
30, 2009, including the accompanying financial statements (the “Form 10-K”), or
in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended
December 31, 2009 (the “Form 10-Q”), or on Schedule 2.01(g) hereto. The Company
and each such subsidiary 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 or property owned by it makes such qualification
necessary except for any jurisdiction(s) (alone or in the aggregate) in which
the failure to be so qualified will not have a Material Adverse Effect (as
defined in Section 2.01(c) hereof) on the Company’s financial condition.
 
(b)           Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and perform this Agreement, the
Irrevocable Transfer Agent Instructions (as defined in Section 3.14 hereof), the
Certificate of Designation and the Warrants (collectively, the “Transaction
Documents”) and to issue and sell the Shares and the Warrants in accordance with
the terms hereof and otherwise carry out its obligations thereunder. The
execution, delivery and performance of the Transaction Documents by the Company
and the consummation by it of the transactions contemplated hereby and thereby
have been duly and validly authorized by all necessary corporate action, and no
further consent or authorization of the Company or its Board of Directors or
stockholders is required. This Agreement has been duly executed and delivered by
the Company. The other Transaction Documents will have been duly executed and
delivered by the Company at the Closing. Each of the Transaction Documents
constitutes, or shall constitute when executed and delivered, a valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or affecting
generally the enforcement of, creditor’s rights and remedies or by other
equitable principles of general application.

 
-2-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
(c)           Capitalization. The authorized capital stock of the Company, the
number of shares of such capital stock issued and outstanding, and the number of
shares of capital stock reserved for issuance upon the exercise or conversion of
all outstanding warrants, stock options, and other securities issued by the
Company, as of the date hereof, are set forth on Schedule 2.01(c) hereto.  All
of the outstanding shares of the Common Stock and any other outstanding security
of the Company have been duly and validly authorized and validly issued, fully
paid and nonassessable and were issued in accordance with the registration or
qualification provisions of the Securities Act, or pursuant to valid exemptions
therefrom. Except as set forth in this Agreement and as set forth on Schedule
2.01(c) hereto, no shares of Common Stock or any other security of the Company
are entitled to preemptive rights, registration rights, rights of first refusal
or similar rights and there are no outstanding options, warrants, scrip, rights
to subscribe to, call or commitments of any character whatsoever granted by the
Company or existing pursuant to agreements to which the Company is a party and
relating to, or securities or rights convertible into, any shares of capital
stock of the Company. Furthermore, except as set forth in this Agreement and as
set forth on Schedule 2.01(c) hereto, there are no contracts, commitments,
understandings, or arrangements by which the Company is or may become bound to
issue additional shares of the capital stock of the Company or options,
securities or rights convertible into shares of capital stock of the Company.
Except as set forth in this Agreement or as set forth on Schedule 2.01(c)
hereto, the Company is not a party to or bound by any agreement or understanding
granting registration or anti-dilution rights to any person with respect to any
of its equity or debt securities. Except as set forth on Schedule 2.01(c)
hereto, the Company is not a party to, and it has no knowledge of, any agreement
or understanding restricting the voting or transfer of any shares of the capital
stock of the Company. Except as disclosed on Schedule 2.01(c) or 2.01(k) hereto,
(i) there are no outstanding debt securities, or other form of material debt of
the Company or any of its subsidiaries, (ii) there are no outstanding securities
of the Company or any of its subsidiaries that contain any redemption or similar
provisions, and there are no contracts, commitments, understandings, agreements
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, (iii) the
Company does not have any stock appreciation rights or “phantom stock” plans or
agreements, or any similar plan or agreement and (iv) as of the date of this
Agreement, except as disclosed on Schedule 2.01(c) hereto, to the Company’s and
each of its subsidiaries’ knowledge, no Person (as defined below) or group of
related Persons beneficially owns or has the right to acquire by agreement with
or by obligation binding upon the Company, beneficial ownership of in excess of
5% of the Common Stock. Any Person with any right to purchase securities of the
Company that would be triggered as a result of the transactions contemplated
hereby or by any of the other Transaction Documents has waived such rights or
the time for the exercise of such rights has passed. Except as set forth on
Schedule 2.01(c) hereto, there are no options, warrants or other outstanding
securities of the Company (including, without limitation, any equity securities
issued pursuant to any Company stock incentive plan or employee stock purchase
plan) the vesting of which will be accelerated by the transactions contemplated
hereby or by any of the other Transaction Documents. The Company has furnished
or made available to the Purchasers true and correct copies of the Company’s
Certificate of Incorporation as in effect on the date hereof (the
“Certificate”), and the Company’s Bylaws as in effect on the date hereof (the
“Bylaws”). For purposes of this Agreement, “Person” shall mean an individual or
corporation, partnership, trust, incorporated or unincorporated association,
joint venture, limited liability company, joint stock company, government (or an
agency or subdivision thereof) or other entity of any kind. For the purposes of
this Agreement, “Material Adverse Effect” means any material adverse effect on
the business, operations, assets, properties, prospects or financial condition
of the Company and its subsidiaries, taken as a whole, and/or any condition,
circumstance, or situation that would prohibit or otherwise interfere with the
ability of the Company to perform any of its obligations under the Transaction
Documents in any material respect.

 
-3-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
(d)           Issuance of Shares. The Preferred Shares and the Warrants to be
issued at the Closing have been duly authorized by all necessary corporate
action and the Preferred Shares, when paid for or issued in accordance with the
terms hereof, shall be validly issued and outstanding, fully paid and
nonassessable and entitled to the rights and preferences set forth in the
Certificate of Designation. When the Conversion Shares and the Warrant Shares
are issued in accordance with the terms of the Certificate of Designation and
the Warrants, respectively, such shares will be duly authorized by all necessary
corporate action and validly issued and outstanding, fully paid and
nonassessable, and the holders shall be entitled to all rights accorded to a
holder of Common Stock.
 
(e)           No Conflicts. The execution, delivery and performance of the
Transaction Documents by the Company, the performance by the Company of its
obligations under the Certificate of Designation and the Warrants and the
consummation by the Company of the transactions contemplated herein and therein
do not and will not (i) conflict with or violate any provision of the Company’s
Certificate or Bylaws or the organizational documents of any subsidiary of the
Company, (ii) conflict with, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, any
agreement, mortgage, deed of trust, indenture, note, bond, license, lease
agreement, instrument or obligation to which the Company or any subsidiary of
the Company is a party or by which it or its properties or assets are bound,
(iii) create or impose a lien, mortgage, security interest, charge or
encumbrance of any nature on any property of the Company or any subsidiary of
the Company under any agreement or any commitment to which the Company or any
subsidiary of the Company is a party or by which the Company is bound or by
which any of its respective properties or assets are bound or (iv) result in a
violation of any federal, state, local or foreign statute, rule, regulation,
order, judgment or decree (including federal and state securities laws and
regulations) applicable to the Company or any of its subsidiaries or by which
any property or asset of the Company or any of its subsidiaries are bound or
affected, except, in all cases other than violations pursuant to clauses (i) and
(iv) above, for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have or reasonably be expected to have a Material Adverse
Effect.  The business of the Company and its subsidiaries is not being conducted
in violation of any laws, ordinances or regulations of any government entity,
except for possible violations which singly or in the aggregate do not and will
not have a Material Adverse Effect.

 
-4-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
(f)           Commission Documents, Financial Statements.  The Common Stock of
the Company is registered pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), and the Company has
timely filed all reports, schedules, forms, statements and other documents
required to be filed by it with the Commission pursuant to the reporting
requirements of the Exchange Act, including material filed pursuant to Section
13(a) or 15(d) of the Exchange Act from January 1, 2009 through the date hereof
(all of the foregoing including filings incorporated by reference therein being
referred to herein as the “Commission Documents”).  The Company has delivered or
made available to each of the Purchasers true and complete copies of the
Commission Documents.  The Company has not provided to the Purchasers any
material non-public information or other information which, according to
applicable law, rule or regulation, was required to have been disclosed publicly
by the Company but which has not been so disclosed, other than with respect to
the transaction contemplated by this Agreement.  At the times of their
respective filings, the Commission Documents complied in all material respects
with the requirements of the Exchange Act and the rules and regulations of the
Commission promulgated thereunder and other federal, state and local laws, rules
and regulations applicable to such documents and, as for their respective dates,
none of the Commission Documents contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.  The financial statements of the
Company included in the Commission Documents comply as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the Commission or other applicable rules and regulations with
respect thereto.  Such financial statements have been prepared in accordance
with United States generally accepted accounting principles (“GAAP”) applied on
a consistent basis 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 not include footnotes or
may be condensed or summary statements), and fairly present in all material
respects the financial position of the Company and its subsidiaries as of the
dates thereof and the results of operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments).

 
-5-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
(g)           Subsidiaries. Schedule 2.01(g) hereto sets forth each subsidiary
of the Company, showing the jurisdiction of its incorporation or organization
and showing the percentage of each Person’s ownership. For the purposes of this
Agreement, “subsidiary” shall mean any corporation or other entity of which at
least a majority of the securities or other ownership interest having ordinary
voting power (absolutely or contingently) for the election of directors or other
persons performing similar functions are at the time owned directly or
indirectly by the Company and/or any of its other subsidiaries. All of the
outstanding shares of capital stock of each subsidiary have been duly authorized
and validly issued, and are fully paid and nonassessable.  There are no
outstanding preemptive, conversion or other rights, options, warrants or
agreements granted or issued by or binding upon any subsidiary for the purchase
or acquisition of any shares of capital stock of any subsidiary or any other
securities convertible into, exchangeable for or evidencing the rights to
subscribe for any shares of such capital stock. Neither the Company nor any
subsidiary is subject to any obligation (contingent or otherwise) to repurchase
or otherwise acquire or retire any shares of the capital stock of any subsidiary
or any convertible securities, rights, warrants or options of the type described
in the preceding sentence. Neither the Company nor any subsidiary is party to,
nor has any knowledge of, any agreement restricting the voting or transfer of
any shares of the capital stock of any subsidiary.
 
(h)           No Material Adverse Change. Since September 30, 2009, neither the
Company nor any subsidiary has experienced or suffered any Material Adverse
Effect or any event, occurrence or development that could reasonably be expected
to result in a Material Adverse Effect.
 
(i)            No Undisclosed Liabilities. Neither the Company nor any of its
subsidiaries has any liabilities, obligations, claims or losses (whether
liquidated or unliquidated, secured or unsecured, absolute, accrued, contingent
or otherwise) other than those incurred in the ordinary course of the Company’s
or its subsidiaries respective businesses since September 30, 2009, and which,
individually or in the aggregate, do not or would not have a Material Adverse
Effect on the Company or its subsidiaries.
 
(j)            No Undisclosed Events or Circumstances. No event or circumstance
has occurred or exists with respect to the Company or its subsidiaries or their
respective businesses, properties, prospects, operations or financial condition,
which, under applicable law, rule or regulation, requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed.
 
(k)           Indebtedness. Schedule 2.01(k) hereto sets forth as of a recent
date all outstanding secured and unsecured Indebtedness of the Company or any
subsidiary, or for which the Company or any subsidiary has commitments. For the
purposes of this Agreement, “Indebtedness” shall mean (a) any liabilities for
borrowed money or amounts owed in excess of $50,000 (other than trade accounts
payable incurred in the ordinary course of business), (b) all guaranties,
endorsements and other contingent obligations in respect of Indebtedness of
others, whether or not the same are or should be reflected in the Company’s
balance sheet (or the notes thereto), except guaranties by endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business; and (c) the present value of any lease payments in
excess of $25,000 due under leases required to be capitalized in accordance with
GAAP. Neither the Company nor any subsidiary is in default with respect to any
Indebtedness.

 
-6-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
(l)            Title to Assets. Each of the Company and its subsidiaries has
good and marketable title to all of its real and personal property set forth in
the Form 10-K and the Form 10-Q, free and clear of any mortgages, pledges,
charges, liens, security interests or other encumbrances (collectively, “Liens”)
except for those that, individually or in the aggregate, do not cause and are
not reasonably likely to cause a Material Adverse Effect. All leases of the
Company and each of its subsidiaries are valid and subsisting and in full force
and effect.
 
(m)           Actions Pending. There is no action, suit, claim, investigation,
arbitration, alternate dispute resolution proceeding or any other proceeding
pending or, to the knowledge of the Company, threatened against the Company or
any subsidiary which questions the validity of this Agreement or any of the
other Transaction Documents or the transactions contemplated hereby or thereby
or any action taken or to be taken pursuant hereto or thereto. Except as set
forth in Schedule 2.01(m), there is no action, suit, claim, investigation,
arbitration, alternate dispute resolution proceeding or any other proceeding
pending or, to the knowledge of the Company, threatened, against or involving
the Company, any subsidiary or any of their respective properties or assets.
There are no outstanding orders, judgments, injunctions, awards or decrees of
any court, arbitrator or governmental or regulatory body against the Company or
any subsidiary or any officers or directors of the Company or subsidiary in
their capacities as such.
 
(n)           Compliance with Law. The business of the Company and its
subsidiaries has been and is presently being conducted in accordance with all
applicable federal, state, local and foreign governmental laws, rules,
regulations and ordinances, except for such noncompliance that, individually or
in the aggregate, would not cause a Material Adverse Effect. The Company and
each of its subsidiaries have all franchises, permits, licenses, consents and
other governmental or regulatory authorizations and approvals necessary for the
conduct of its business as now being conducted by it unless the failure to
possess such franchises, permits, licenses, consents and other governmental or
regulatory authorizations and approvals, individually or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect.
 
(o)           Taxes. The Company and each of its subsidiaries has accurately
prepared and filed all federal, state, foreign and other tax returns required by
law to be filed by it, has paid or made provisions for the payment of all taxes
shown to be due and all additional assessments, and adequate provisions have
been and are reflected in the financial statements of the Company and its
subsidiaries for all current taxes and other charges to which the Company or any
subsidiary is subject and that are not currently due and payable. None of the
federal income tax returns of the Company or any subsidiary have been audited by
the Internal Revenue Service (the “IRS”). The Company has no knowledge of any
additional assessments, adjustments or contingent tax liability (whether federal
or state) of any nature whatsoever, whether pending or threatened against the
Company or any subsidiary for any completed tax period, nor of any basis for any
such assessment, adjustment or contingency.

 
-7-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
(p)           Certain Fees. No brokers, finders or financial advisory fees or
commissions will be payable by the Company or any subsidiary or any Purchaser
with respect to the transactions contemplated by this Agreement. The Purchasers
shall have no obligation with respect to any fees or with respect to any claims
(other than such fees or commissions owed by a Purchaser pursuant to written
agreements executed by such Purchaser which fees or commissions shall be the
sole responsibility of such Purchaser) made by or on behalf of other Persons for
fees of a type contemplated in this Section that may be due in connection with
the transactions contemplated by this Agreement.
 
(q)           Disclosure. Neither this Agreement or the Schedules hereto nor any
other documents, certificates or instruments furnished to the Purchasers by or
on behalf of the Company or any subsidiary in connection with the transactions
contemplated by this Agreement (the “Disclosure Materials”) contain any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements made herein or therein, in the light of the circumstances
under which they were made herein or therein, not misleading.
 
(r)            Intellectual Property. The Company and each of its subsidiaries
owns or possesses all patents, trademarks, domain names (whether or not
registered) and any patentable improvements or copyrightable derivative works
thereof, websites and intellectual property rights relating thereto, service
marks, trade names, copyrights, licenses and authorizations as set forth in
Schedule 2.01(r) hereto, and all rights with respect to the foregoing, that are
necessary for the conduct of its business as now conducted without any conflict
with the rights of others (the “Intellectual Property”). There are no material
options, licenses or agreements relating to the Intellectual Property, nor is
the Company or any subsidiary bound by or a party to any material options,
licenses or agreements relating to the patents, patent applications, patent
rights, inventions, know-how, trade secrets, trademarks, trademark applications,
service marks, service names, trade names or copyrights of any other person or
entity. There is no claim or action or proceeding pending or, to the Company’s
knowledge, threatened that challenges the right of the Company or any subsidiary
with respect to any Intellectual Property or challenges the validity or scope of
any Intellectual Property owned or licensed by the Company or any
subsidiary.  There is no claim or action or proceeding pending or, to the
Company’s knowledge, threatened by others that the Company or any subsidiary
violates any patent, trademark, copyright, trade secret or other proprietary
right of others. The Company is unaware of any reasonably discernable facts or
circumstances that might give rise to any claim, action or proceeding against
the Company or any subsidiary for infringement of any issued patent, trademark,
or copyright of any third party.

 
-8-

--------------------------------------------------------------------------------

 
EXECUTION COPY

(s)           Environmental Compliance. The Company and each of its subsidiaries
have obtained all approvals, authorization, certificates, consents, licenses,
orders and permits or other similar authorizations of all governmental
authorities, or from any other person, that are required under any Environmental
Laws and used in its business or in the business of any of its subsidiaries,
unless the failure to possess such approvals, authorizations, certificates,
consents, licenses, orders or permits, individually or in the aggregate could
not reasonably be expected to have a Material Adverse Effect. “Environmental
Laws” shall mean all applicable laws relating to the protection of the
environment, including, without limitation, all requirements pertaining to
reporting, licensing, permitting, controlling, investigating or remediating
emissions, discharges, releases or threatened releases of hazardous substances,
chemical substances, pollutants, contaminants or toxic substances, materials or
wastes, whether solid, liquid or gaseous in nature, into the air, surface water,
groundwater or land, or relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of hazardous
substances, chemical substances, pollutants, contaminants or toxic substances,
material or wastes, whether solid, liquid or gaseous in nature. Except for such
instances as would not individually or in the aggregate have a Material Adverse
Effect, the Company and each of its subsidiaries are also in compliance with all
other limitations, restrictions, conditions, standards, requirements, schedules
and timetables required or imposed under all Environmental Laws and there are no
past or present events, conditions, circumstances, incidents, actions or
omissions relating to or in any way affecting the Company or its subsidiaries
that violate or may violate any Environmental Law after the Closing Date or that
may give rise to any environmental liability, or otherwise form the basis of any
claim, action, demand, suit, proceeding, hearing, study or investigation (i)
under any Environmental Law, or (ii) based on or related to the manufacture,
processing, distribution, use, treatment, storage (including without limitation
underground storage tanks), disposal, transport or handling, or the emission,
discharge, release or threatened release of any hazardous substance.
 
(t)           Books and Record Internal Accounting Controls. The books and
records of the Company and its subsidiaries accurately reflect in all material
respects the information relating to the business of the Company and its
subsidiaries, the location and collection of their assets, and the nature of all
transactions giving rise to the obligations or accounts receivable of the
Company or any subsidiary. Except as set forth in the Commission Documents, the
Company and each of its subsidiaries maintain a system of internal accounting
controls sufficient, in the judgment of the Company, to provide reasonable
assurance that (i) transactions are executed in accordance with management’s
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with GAAP and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management’s general or specific authorization and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate actions are taken with respect to any
differences. The Company has established disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and its
subsidiaries and designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its subsidiaries, is
made known to the certifying officers by others within those entities.

 
-9-

--------------------------------------------------------------------------------

 
EXECUTION COPY

(u)           Material Agreements. Neither the Company nor any subsidiary is a
party to any written or oral contract, instrument, agreement, commitment,
obligation, plan or arrangement, a copy of which would be required to be filed
with the Commission as an exhibit to a registration statement on Form S-1 or
applicable form (collectively, “Material Agreements”) if the Company or any
subsidiary were registering securities under the Securities Act that has not
been so filed. The Company and each of its subsidiaries have in all material
respects performed all the obligations required to be performed by them to date
under the foregoing agreements, have received no notice of default and are not
in default under any Material Agreement now in effect, the result of which could
cause a Material Adverse Effect. Except as set forth on Schedule 2.01(u) hereto,
no written or oral contract, instrument, agreement, commitment, obligation, plan
or arrangement of the Company or of any subsidiary limits or shall limit the
payment of dividends on the Company’s Preferred Shares, other preferred stock,
if any, or its Common Stock.
 
(v)           Transactions with Affiliates. Except as set forth in Schedule
2.01(v) hereto there are no loans, leases, agreements, contracts, royalty
agreements, management contracts or arrangements or other continuing
transactions between (a) the Company or any subsidiary on the one hand, and (b)
on the other hand, any officer or director of the Company, or any of its
subsidiaries, or any person owning 5% or more of any class of the Company’s
voting securities or any member of the immediate family of such officer,
director or stockholder or any corporation or other entity controlled by such
officer, director or stockholder, or a member of the immediate family of such
officer, director or stockholder.
 
(w)           Securities Act of 1933. Based in material part upon the
representations herein of the Purchasers, the Company has complied and will
comply with all applicable federal and state securities laws in connection with
the offer, issuance and sale of the Shares and Warrants hereunder. Neither the
Company nor anyone acting on its behalf, directly or indirectly, has or will
sell, offer to sell or solicit offers to buy any of the Shares, the Warrants or
similar securities to, or solicit offers with respect thereto from, or enter
into any preliminary conversations or negotiations relating thereto with, any
person, or has taken or will take any action so as to bring the issuance and
sale of any of the Shares and the Warrants under the registration provisions of
the Securities Act and applicable state securities laws, and 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 any of the Shares and the Warrants.
 
(x)           Certain Registration Matters. Assuming the accuracy of the
Purchasers’ representations and warranties set forth herein, no registration
under the Securities Act is required for the offer and sale of the Shares or the
Warrants by the Company to the Purchasers under the Transaction Documents.
 
(y)           Governmental Approvals. Except for the filing of any notice prior
or subsequent to the Closing Date that may be required under applicable state
and/or federal securities laws (which if required, shall be filed on a timely
basis), including the filing of a Form D, and the filing of the Certificate of
Designation with the Secretary of State for the State of Delaware, no
authorization, consent, approval, license, exemption of, filing or registration
with any court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, is or will be necessary for, or in
connection with, the execution or delivery of the Shares and the Warrants, or
for the performance by the Company of its obligations under the Transaction
Documents.

 
-10-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
(z)           Employees. Neither the Company nor any subsidiary has any
collective bargaining arrangements or agreements covering any of its employees.
Except as set forth on Schedule 2.01(z) hereto, neither the Company nor any
subsidiary has any employment contract, agreement regarding proprietary
information, non-competition agreement, non-solicitation agreement,
confidentiality agreement, or any other similar contract or restrictive
covenant, relating to the right of any officer, employee or consultant to be
employed or engaged by the Company or such subsidiary. No officer, consultant or
key employee of the Company or any subsidiary whose termination, either
individually or in the aggregate, could have a Material Adverse Effect, has
terminated or, to the knowledge of the Company, has any present intention of
terminating his or her employment or engagement with the Company or any
subsidiary.
 
(aa)           Absence of Certain Developments. Except as set forth on Schedule
2.01(aa) hereto, since September 30, 2009 neither the Company nor any subsidiary
has:
 
 
(i)
issued any stock, bonds or other corporate securities or any rights, options or
warrants with respect thereto;

 
 
(ii)
borrowed any amount or incurred or become subject to any liabilities (absolute
or contingent) except current liabilities incurred in the ordinary course of
business that are comparable in nature and amount to the current liabilities
incurred in the ordinary course of business during the comparable portion of its
prior fiscal year, as adjusted to reflect the current nature and volume of the
Company’s or such subsidiary’s business;

 
 
(iii)
discharged or satisfied any lien or encumbrance or paid any obligation or
liability (absolute or contingent), other than current liabilities paid in the
ordinary course of business;

 
 
(iv)
declared or made any payment or distribution of cash or other property to
stockholders with respect to its stock, or purchased or redeemed, or made any
agreements so to purchase or redeem, any shares of its capital stock;

 
 
(v)
sold, assigned or transferred any other tangible assets, or canceled any debts
or claims, except in the ordinary course of business;

 
 
(vi)
sold, assigned or transferred any patent rights, trademarks, trade names,
copyrights, trade secrets or other intangible assets or intellectual property
rights, or disclosed any proprietary confidential information to any person
except to customers in the ordinary course of business or to the Purchasers or
their representatives;

 
 
-11-

--------------------------------------------------------------------------------

 
EXECUTION COPY

 

 
(vii)
suffered any substantial losses or waived any rights of material value, whether
or not in the ordinary course of business, or suffered the loss of any material
amount of prospective business from an existing customer;

 
 
(viii)
made any changes in employee compensation except in the ordinary course of
business and consistent with past practices;

 
 
(ix)
made capital expenditures or commitments therefor that aggregate in excess of
$50,000;

 
 
(x)
entered into any other contract or agreement involving payment obligations of
more than $25,000 other than in the ordinary course of business, or entered into
any other material contract or agreement involving payment obligations of more
than $50,000 or performable over a period of more than one year, whether or not
in the ordinary course of business;

 
 
(xi)
made charitable contributions or pledges in excess of $10,000;

 
 
(xii)
suffered any material damage, destruction or casualty loss, whether or not
covered by insurance;

 
 
(xiii)
experienced any material problems with labor or management in connection with
the terms and conditions of their employment; or

 
 
(xiv)
entered into an agreement, written or otherwise, to take any of the foregoing
actions.

 
(bb)           Investment Company Act Status. The Company is not, and as a
result of and immediately upon the Closing will not be, an “investment company”
or a company “controlled” by an “investment company,” within the meaning of the
Investment Company Act of 1940, as amended.
 
(cc)           ERISA. No liability to the Pension Benefit Guaranty Corporation
has been incurred with respect to any Plan (as defined below) by the Company or
any of its subsidiaries that is or would be materially adverse to the Company
and its subsidiaries. The execution and delivery of this Agreement and the
issuance and sale of the Preferred Shares and Warrants will not involve any
transaction that is subject to the prohibitions of Section 406 of ERISA or in
connection with which a tax could be imposed pursuant to Section 4975 of the
Internal Revenue Code of 1986, as amended (the “Code”), provided that, if any of
the Purchasers, or any person or entity that owns a beneficial interest in any
of the Purchasers, is an “employee pension benefit plan” (within the meaning of
Section 3(2) of ERISA) with respect to which the Company is a “party in
interest” (within the meaning of Section 3(14) of ERISA), the requirements of
Sections 407(d)(5) and 408(e) of ERISA, if applicable, are met. As used in this
Section 2.01(cc), the term “Plan” shall mean an “employee pension benefit plan”
(as defined in Section 3 of ERISA) that is or has been established or
maintained, or to which contributions are or have been made, by the Company or
any subsidiary or by any trade or business, whether or not incorporated, which,
together with the Company or any subsidiary, is under common control, as
described in Section 414(b) or (c) of the Code.

 
-12-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
(dd)           Dilutive Effect. The Company understands and acknowledges that
its obligation to issue Conversion Shares upon conversion of the Preferred
Shares in accordance with this Agreement and the Certificate of Designation and
its obligation to issue the Warrant Shares upon the exercise of the Warrants in
accordance with this Agreement and the Warrants, is, in each case, absolute and
unconditional regardless of the dilutive effect that such issuance may have on
the ownership interest of other stockholders of the Company.
 
(ee)           No Integrated Offering. Neither the Company, nor any subsidiary
nor any of its or their affiliates, nor any person acting on its or their
behalf, has directly or indirectly made any offers or sales of any security or
solicited any offers to buy any security under circumstances that would cause
the offering of the Shares and the Warrants pursuant to this Agreement to be
integrated with prior offerings by the Company for purposes of the Securities
Act that would prevent the Company from selling the Shares and the Warrants
pursuant to Rule 506 under the Securities Act, or any applicable
exchange-related stockholder approval provisions, nor will the Company or any of
its affiliates or subsidiaries take any action or steps that would cause the
offering of the Shares or the Warrants to be integrated with other offerings.
The Company does not have any registration statement pending but not yet
effective before the Commission or currently under the Commission’s review and
except as set forth on Schedule 2.01(ee) hereto, since September 10, 2009, the
Company has not offered or sold any of its equity securities or debt securities
convertible into shares of Common Stock.
 
(ff)           Sarbanes-Oxley Act. The Company is in compliance with the
applicable provisions of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley
Act”), and the rules and regulations promulgated thereunder that are effective,
and intends to comply with other applicable provisions of the Sarbanes-Oxley Act
and the rules and regulations promulgated thereunder upon the effectiveness of
such provisions.
 
(gg)           Independent Nature of Purchasers. The Company acknowledges that
the obligations of each Purchaser under the Transaction Documents are several
and not joint with the obligations of any other Purchaser, and no Purchaser
shall be responsible in any way for the performance of the obligations of any
other Purchaser under the Transaction Documents. The Company acknowledges that
to the best of its knowledge, the decision of each Purchaser to purchase
securities pursuant to this Agreement has been made by such Purchaser
independently of any other purchase and independently of any information,
materials, statements or opinions as to the business, affairs, operations,
assets, properties, liabilities, results of operations, condition (financial or
otherwise) or prospects of the Company or of its subsidiaries that may have been
made or given by any other Purchaser or by any agent or employee of any other
Purchaser, and no Purchaser or any of its agents or employees shall have any
liability to any Purchaser (or any other person) relating to or arising from any
such information, materials, statements or opinions. The Company acknowledges
that nothing contained herein, or in any Transaction Document, and no action
taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute
the Purchasers as a partnership, an association, a joint venture or any other
kind of entity, or create a presumption that the Purchasers are in any way
acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents. The Company acknowledges
that each Purchaser shall be entitled to independently protect and enforce its
rights, including without limitation, the rights arising out of this Agreement
or out of the other Transaction Documents, and it shall not be necessary for any
other Purchaser to be joined as an additional party in any proceeding for such
purpose. The Company acknowledges that for reasons of administrative convenience
only, the Transaction Documents have been prepared by counsel for one of the
Purchasers and such counsel does not represent all of the Purchasers but only
such Purchaser and the other Purchasers have retained their own individual
counsel with respect to the transactions contemplated hereby. The Company
acknowledges that it has elected to provide all Purchasers with the same terms
and Transaction Documents for the convenience of the Company and not because it
was required or requested to do so by the Purchasers.

 
-13-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
(hh)          DTC Status. The Company’s current transfer agent is a participant
in and the Common Stock is eligible for transfer pursuant to the Depository
Trust Company Automated Securities Transfer Program. The name, address,
telephone number, fax number, contact person and email address of the Company’s
transfer agent is set forth on Schedule 2.01(hh) hereto.
 
(ii)           Insurance. Except as set forth on Schedule 2.01(ii) hereto, the
Company and its subsidiaries are insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which the Company and its subsidiaries are
engaged. To the best of Company’s knowledge, such insurance contracts and
policies are valid and in full force and effect. Neither the Company nor any
subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business without a significant increase in cost.
 
(jj)           Application of Takeover Protections. The Company and its Board of
Directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Company’s Certificate (or similar charter
documents) or the laws of its state of incorporation that is or could become
applicable to the Purchasers as a result of the Purchasers and the Company
fulfilling their obligations or exercising their rights under the Transaction
Documents, including without limitation the Company’s issuance of the Shares and
the Warrants and the Purchasers’ ownership of the Shares and the Warrants.

 
-14-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
(kk)           Foreign Corrupt Practices. Neither the Company nor any
subsidiary, nor to the knowledge of the Company, any agent or other person
acting on behalf of the Company or any subsidiary, has (i) directly or
indirectly, used any corporate funds for unlawful contributions, gifts,
entertainment or other unlawful expenses related to foreign or domestic
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to any foreign or domestic political
parties or campaigns from corporate funds, (iii) failed to disclose fully any
contribution made by the Company (or made by any person acting on its behalf of
which the Company is aware) which is in violation of law or (iv) violated in any
material respect any provision of the Foreign Corrupt Practices Act of 1977, as
amended.
 
(ll)             Off-Balance Sheet Arrangements. There is no transaction,
arrangement, or other relationship between the Company and an unconsolidated or
other off balance sheet entity that is not disclosed in its financial statements
that should be disclosed in accordance with GAAP and that would be reasonably
likely to have a Material Adverse Effect.
 
(mm)           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 or that could reasonably be expected to cause or
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 Shares or the Warrants or
(ii) sold, bid for, purchased, or paid any compensation for soliciting purchases
of, any of the Shares and the Warrants.
 
(nn)           No Disagreements with Accountants. There are no unresolved
disagreements regarding the Company’s accounting policies presently existing, or
reasonably anticipated by the Company to arise, between the Company and the
accountants formerly or presently employed by the Company. The Company’s
accountants are set forth in the Schedule 2.01(nn) hereto. To the Company’s
knowledge, such accountants are an independent registered public accounting firm
as required by the Securities Act.
 
(oo)           Material Non-Public Information. Except with respect to the
transactions contemplated hereby, the Company has not provided any Purchaser or
its agents or counsel with any information that the Company believes constitutes
material non-public information.
 
(pp)           Solvency.  Except as set forth on Schedule 2.01(pp) hereto, the
Company has not taken any steps to seek protection pursuant to any bankruptcy
law nor does the Company have any knowledge or reason to believe that its
creditors intend to initiate involuntary bankruptcy proceedings or any actual
knowledge of any fact which would reasonably lead a creditor to do so.
 
Section 2.02          Representations and Warranties of the Purchasers. Each of
the Purchasers hereby makes the following representations and warranties to the
Company with respect solely to itself and not with respect to any other
Purchaser:

 
-15-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
(a)           Organization and Standing of the Purchasers. If the Purchaser is
an entity, such Purchaser is a corporation, limited liability company or
partnership duly incorporated or organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or
organization.
 
(b)           Authorization and Power. Each Purchaser has the requisite power
and authority to enter into and perform this Agreement and to purchase the
Preferred Shares and the Warrants being sold to it hereunder. The execution,
delivery and performance of this Agreement by such Purchaser and the
consummation by it of the transactions contemplated hereby have been duly
authorized by all necessary corporate or partnership action, and no further
consent or authorization of such Purchaser or its Board of Directors,
stockholders, or partners, as the case may be, is required. This Agreement has
been duly authorized, executed and delivered by such Purchaser and constitutes,
or shall constitute when executed and delivered, a valid and binding obligation
of the Purchaser enforceable against the Purchaser in accordance with the terms
thereof.
 
(c)           Purchase For Own Account. Each Purchaser is acquiring the
Preferred Shares and the Warrants solely for its own account and not with a view
to or for sale in connection with distribution. Each Purchaser does not have a
present intention to sell the Preferred Shares or the Warrants, nor a present
arrangement (whether or not legally binding) or intention to effect any
distribution of the Preferred Shares or the Warrants to or through any person or
entity; provided, however, that by making the representations herein and subject
to Section 2.02(g) below, such Purchaser does not agree to hold the Preferred
Shares or the Warrants for any minimum or other specific term and reserves the
right to dispose of the Preferred Shares or the Warrants at any time in
accordance with federal and state securities laws applicable to such
disposition. Each Purchaser acknowledges that it is able to bear the financial
risks associated with an investment in the Preferred Shares and the Warrants and
that it has been given full access to such records of the Company and its
subsidiaries and to the officers of the Company and its subsidiaries and
received such information as it has deemed necessary or appropriate to conduct
its due diligence investigation and has sufficient knowledge and experience in
investing in companies similar to the Company in terms of the Company’s stage of
development so as to be able to evaluate the risks and merits of its investment
in the Company.
 
(d)           Status of Purchasers. Such Purchaser is an “accredited investor”
as defined in Regulation D promulgated under the Securities Act. Such Purchaser
is not required to be registered as a broker-dealer under Section 15 of the
Exchange Act and such Purchaser is not a broker-dealer.
 
(e)           Opportunities for Additional Information. Each Purchaser
acknowledges that such Purchaser has had the opportunity to ask questions of and
receive answers from, or obtain additional information from, the executive
officers of the Company concerning the financial and other affairs of the
Company, and to the extent deemed necessary in light of such Purchaser’s
personal knowledge of the Company’s affairs, such Purchaser has asked such
questions and received answers to the full satisfaction of such Purchaser, and
such Purchaser desires to invest in the Company. Neither such inquiries nor any
other investigation conducted by or on behalf of such Purchaser or its
representatives or counsel shall modify, amend or affect such Purchaser’s right
to rely on the truth, accuracy and completeness of the Disclosure Materials and
the Company’s representations and warranties contained in the Transaction
Documents.

 
-16-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
(f)            No General Solicitation. Each Purchaser acknowledges that the
Preferred Shares and the Warrants were not offered to such Purchaser by means of
any form of general or public solicitation or general advertising, or publicly
disseminated advertisements or sales literature, including (i) any
advertisement, article, notice or other communication published in any
newspaper, magazine, or similar media, or broadcast over television or radio or
(ii) any seminar or meeting to which such Purchaser was invited by any of the
foregoing means of communications.
 
(g)           Rule 144. Such Purchaser understands that the Shares and the
Warrants must be held indefinitely unless such Shares or Warrants are registered
under the Securities Act or an exemption from registration is available. Such
Purchaser acknowledges that such Purchaser is familiar with Rule 144 of the
rules and regulations of the Commission, as amended, promulgated pursuant to the
Securities Act (“Rule 144”), and that such person has been advised that Rule 144
permits resales only under certain circumstances. Such Purchaser understands
that to the extent that Rule 144 is not available, such Purchaser will be unable
to sell any Shares or Warrants without either registration under the Securities
Act or the existence of another exemption from such registration requirement.
 
(h)           General. Such Purchaser understands that the Preferred Shares and
the Warrants are being offered and sold in reliance on a transactional exemption
from the registration requirement of federal and state securities laws and the
Company is relying upon the truth and accuracy of the representations,
warranties, agreements, acknowledgments and understandings of such Purchaser set
forth herein in order to determine the applicability of such exemptions and the
suitability of such Purchaser to acquire the Preferred Shares and the Warrants.
 
(i)            Governmental Review.  The Purchaser understands that no United
States federal or state agency or any other government or governmental agency
has passed upon or made any recommendation or endorsement of the Shares or the
Warrants.
 
(j)            Independent Investment. Except as may be disclosed in any filings
with the Commission by the Purchasers under Section 13 and/or Section 16 of the
Exchange Act, no Purchaser has agreed to act with any other Purchaser for the
purpose of acquiring, holding, voting or disposing of the Shares and the
Warrants purchased hereunder for purposes of Section 13(d) under the Exchange
Act, and each Purchaser is acting independently with respect to its investment
in the Shares and the Warrants.
 

 
-17-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
ARTICLE III.
COVENANTS
 
The Company covenants with the Purchasers as follows (subject to the provisions
of Section 7.03 hereof), which covenants are for the benefit of the Purchasers
and their permitted assignees (as defined herein).

Section 3.01           Securities Compliance. The Company shall notify the
Commission in accordance with its rules and regulations, of the transactions
contemplated by any of the Transaction Documents, including filing a Form D with
respect to the Shares and the Warrants as required under Regulation D, and shall
take all other necessary action and proceedings as may be required and permitted
by applicable law, rule and regulation, for the legal and valid issuance of the
Shares and the Warrants to the Purchasers or subsequent holders. The Company
shall, on or before the Closing Date, take such action as the Company shall
reasonably determine is necessary to be taken on or before the Closing Date in
order to obtain an exemption for or to qualify the Shares and the Warrants for
sale to the Purchasers at the Closing pursuant to this Agreement under
applicable securities or “Blue Sky” laws of the states of the United States (or
to obtain an exemption from such qualification), and shall provide evidence of
any such action so taken to the Purchasers on or prior to the Closing Date. The
Company shall make all filings and reports relating to the offer and sale of the
Shares and the Warrants required under applicable securities or “Blue Sky” laws
of the states of the United States following the Closing Date.
 
Section 3.02           Reporting Obligations and Sales of Unregistered
Securities.  So long as any Purchaser holds any Shares or Warrants, the Company
shall cause its Common Stock to continue to be registered under Sections 12(b)
or 12(g) of the Exchange Act, to comply in all respects with its reporting and
filing obligations under the Exchange Act and shall not take any action or file
any document (whether or not permitted by the Securities Act or the rules
promulgated thereunder) to terminate or suspend its reporting and filing
obligations under the Exchange Act or Securities Act, except as permitted
herein. The Company further covenants that it will take such further action as
the Purchasers may reasonably request, all to the extent required from time to
time to enable the Purchasers to sell the Shares and Warrants, without
registration under the Securities Act within the limitation of the exemptions
provided by Rule 144 promulgated under the Securities Act. Upon the request of
the Purchasers, the Company shall deliver to the Purchasers a written
certification of a duly authorized officer as to whether it has complied with
such requirements.
 
Section 3.03           Listing.  So long as any Purchaser holds any Shares or
Warrants, the Company shall take all action necessary to continue the listing or
trading of the Company’s Common Stock on the Over the Counter Bulletin Board
automated quotation system maintained by the Financial Industry Regulatory
Authority, Inc. (the “OTCBB”). Furthermore, upon the Company satisfying the
initial listing standards of either the Nasdaq Capital Market, the Nasdaq Global
Market or the Nasdaq Global Select Market, the Company shall use its best
efforts to have its Common Stock (including the Conversion Shares and the
Warrant Shares) approved for trading on either the Nasdaq Capital Market, the
Nasdaq Global Market or the Nasdaq Global Select Market, as the case may be,
and, upon any such approval, to take all action necessary to continue the
listing or trading of the Company’s Common Stock on one of these three national
exchanges.

 
-18-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
Section 3.04           Inspection Rights. So long as any Purchaser holds any
Shares or Warrants, the Company shall permit, during normal business hours and
upon reasonable request and reasonable notice, each Purchaser or any employees,
agents or representatives thereof, for purposes reasonably related to such
Purchaser’s interests as a stockholder, to examine and make reasonable copies of
and extracts from the records and books of account of, and visit and inspect the
properties, assets, operations and business of the Company and any subsidiary,
and to discuss the affairs, finances and accounts of the Company and any
subsidiary with any of its officers, consultants, directors, and key employees.
 
Section 3.05          Compliance with Laws. The Company shall comply, and cause
each subsidiary to comply, with all applicable laws, rules, regulations and
orders, noncompliance with which could have a Material Adverse Effect.
 
Section 3.06           Keeping of Records and Books of Account. The Company
shall keep and cause each subsidiary to keep adequate records and books of
account, in which complete entries will be made in accordance with GAAP
consistently applied, reflecting all financial transactions of the Company and
its subsidiaries, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and other
purposes in connection with its business shall be made.
 
Section 3.07           Reporting Requirements. So long as any Purchaser holds
any Shares or Warrants, if the Commission ceases making periodic reports filed
under the Exchange Act available via the Internet, then at a Purchaser’s request
the Company shall furnish the following to such Purchaser:
 
(a)           Quarterly Reports filed with the Commission on Form 10-Q as soon
as practical after the document is filed with the Commission, and in any event
within five (5) days after the document is filed with the Commission;
 
(b)           Annual Reports filed with the Commission on Form 10-K as soon as
practical after the document is filed with the Commission, and in any event
within five (5) days after the document is filed with the Commission; and
 
(c)           Copies of all notices and information, including, without
limitation, notices and proxy statements in connection with any meetings, that
are provided to holders of shares of Common Stock, contemporaneously with the
delivery of such notices or information to such holders of Common Stock.
 
Section 3.08          Amendments. The Company shall not amend or waive any
provision of the Certificate or Bylaws of the Company in any way that would
adversely affect the liquidation preferences, dividends rights, conversion
rights, voting rights or redemption rights of the Preferred Shares; provided,
however, that (i) any other class or series of equity securities which by its
terms shall rank pari passu or senior to the Preferred Shares may be created and
issued with the prior written consent of the holders of seventy-five percent
(75%) of the Preferred Shares then outstanding and (ii) any creation and
issuance of another series of Junior Stock (as defined in the Certificate of
Designation) or any other class or series of equity securities which by its
terms shall rank junior to the Preferred Shares shall not be deemed to
materially and adversely affect such rights, preferences or privileges.

 
-19-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
Section 3.09           Other Agreements. The Company shall not enter into any
agreement in which the terms of such agreement would restrict or impair the
right or ability to perform of the Company or any subsidiary under any
Transaction Document.

Section 3.10           Distributions. So long as any Purchaser holds any Shares
or Warrants, the Company agrees that it shall not (i) declare or pay any
dividends or make any distributions to any holder(s) of Common Stock or (ii)
purchase or otherwise acquire for value, directly or indirectly, any Common
Stock or other equity security of the Company (other than repurchases from
employees of the Company not to exceed $50,000 in the aggregate amount per
fiscal year, or provided that all dividends have been paid upon the Preferred
Shares, repurchases pursuant to Rule 10b-18 under the Exchange Act of up to
$50,000 per fiscal year).
 
Section 3.11           Status of Dividends. The Company covenants and agrees
that (i) in no report to stockholders or to any governmental body having
jurisdiction over the Company or otherwise will it treat the Preferred Shares
other than as equity capital or the dividends paid thereon other than as
dividends paid on equity capital unless required to do so by a governmental body
having jurisdiction over the accounts of the Company or by a change in GAAP
required as a result of action by an authoritative accounting standards setting
body and (ii) it will take no action that would result in the dividends paid by
the Company on the Preferred Shares out of the Company’s current or accumulated
earnings and profits being ineligible for the dividends received deduction
provided by Section 243(a)(1) of the Code. The preceding sentence shall not be
deemed to prevent the Company from designating the Preferred Stock as
“Convertible Preferred Stock” in its annual and quarterly financial statements.
In the event that the Purchasers have reasonable cause to believe that dividends
paid by the Company on the Preferred Shares out of the Company’s current or
accumulated earnings and profits will not be treated as eligible for the
dividends received deduction provided by Section 243(a)(1) of the Code, or any
successor provision, the Company will, at the reasonable request of the
Purchasers of 51% of the outstanding Preferred Shares, join with the Purchasers
in the submission to the IRS of a request for a ruling that dividends paid on
the Preferred Shares will be so eligible for federal income tax purposes. In
addition, the Company will reasonably cooperate with the Purchasers in any
litigation, appeal or other proceeding challenging or contesting any ruling,
technical advice, finding or determination that earnings and profits are not
eligible for the dividends received deduction provided by Section 243(a)(1) of
the Code, or any successor provision to the extent that the position to be taken
in any such litigation, appeal, or other proceeding is not contrary to any
provision of the Code. Notwithstanding the foregoing, nothing herein contained
shall be deemed to preclude the Company from claiming a deduction with respect
to such dividends if (i) the Code shall hereafter be amended, or final Treasury
regulations thereunder are issued or modified, to provide that dividends on the
Preferred Shares should not be treated as dividends for federal income tax
purposes or that a deduction with respect to all or a portion of the dividends
on the Preferred Shares is allowable for federal income tax purposes or (ii) in
the absence of such an amendment, issuance or modification and after a
submission of a request for ruling or technical advice, the IRS shall issue a
published ruling or advise that dividends on the Preferred Shares should not be
treated as dividends for federal income tax purposes. If the IRS specifically
determines that the Preferred Shares constitute debt, the Company may file
protective claims for refund.

 
-20-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
Section 3.12          Use of Proceeds. The net proceeds from the sale of the
Preferred Shares and the Warrants shall be used by the Company for research and
development expense, sales and marketing expense, and inventory purchases, as
set forth on Schedule 3.12 hereto; provided, however, the net proceeds from the
sale of the Preferred Shares and the Warrants hereunder shall not be used to
redeem any Common Stock or securities convertible, exercisable or exchangeable
into Common Stock or to settle any outstanding litigation.
 
Section 3.13           Reservation of Shares. So long as any Purchaser holds any
Shares or Warrants, the Company shall take all action necessary to at all times
have authorized, and reserved for the purpose of issuance, no less than one
hundred twenty percent (120%) of the aggregate number of shares of Common Stock
needed to provide for the issuance of the Conversion Shares and the Warrant
Shares.
 
Section 3.14          Transfer Agent Instructions. The Company shall issue
irrevocable instructions to its transfer agent, and any subsequent transfer
agent, to issue certificates, registered in the name of each Purchaser or its
respective nominee(s), for the Conversion Shares and the Warrant Shares in such
denominations as specified from time to time by each Purchaser to the Company
upon conversion of the Preferred Shares or exercise of the Warrants in the form
of Exhibit D attached hereto (the “Irrevocable Transfer Agent Instructions”).
The Company warrants that no instruction other than the Irrevocable Transfer
Agent Instructions referred to in this Section 3.14 will be given by the Company
to its transfer agent and that the Shares shall otherwise be freely transferable
on the books and records of the Company as and to the extent provided in this
Agreement.
 
Section 3.15          Disposition of Assets. So long as any Purchaser holds any
Preferred Shares, neither the Company nor any subsidiary shall sell, transfer or
otherwise dispose of any of its properties, assets and rights including, without
limitation, its software and intellectual property, to any person except (i) for
sales to customers in the ordinary course of business, (ii) for sales or leases
of permanently retired, obsolete or worn out assets or assets no longer used or
useful in the business or (iii) with the prior written consent of the holders of
seventy-five percent (75%) of the Preferred Shares then outstanding.
 
Section 3.16           Reverse Stock Split. So long as any Purchaser holds any
Preferred Shares, the Company shall not effect a reverse stock split of its
Common Stock without the prior written consent of the holders of seventy-five
percent (75%) of the Preferred Shares then outstanding.
 
Section 3.17          Disclosure of Transaction. The Company shall issue a press
release describing the material terms of the transactions contemplated hereby
(the “Press Release”) as soon as practicable after the Closing but in no event
later than 9:00 a.m. New York time on the first Trading Day (as defined below)
following the Closing Date. The Company shall also file with the Commission a
Current Report on Form 8-K (the “Form 8-K”) describing the material terms of the
transactions contemplated hereby (and attaching as exhibits thereto this
Agreement, the Certificate of Designation, the form of Warrant and the Press
Release) as soon as practicable following the Closing Date but in no event later
than four (4) Trading Days following the Closing Date, which Press Release and
Form 8-K shall be subject to prior review and comment by the Purchasers.
“Trading Day” means any day during which the OTCBB (or other principal exchange
on which the Common Stock is traded) shall be open for trading.

 
-21-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
Section 3.18           Disclosure of Material Information. The Company covenants
and agrees that neither it nor any other person acting on its behalf has
provided or will provide any Purchaser or its agents or counsel with any
information that the Company believes constitutes material non-public
information, unless prior thereto such Purchaser shall have executed a written
agreement regarding the confidentiality and use of such information. The Company
understands and confirms that each Purchaser shall be relying on the foregoing
representations in effecting transactions in securities of the Company.
 
Section 3.19          Pledge of Securities. The Company acknowledges and agrees
that the Shares may be pledged by a Purchaser in connection with a bona fide
margin agreement or other loan or financing arrangement that is secured by the
Common Stock. The pledge of Common Stock shall not be deemed to be a transfer,
sale or assignment of the Common Stock hereunder, and no Purchaser effecting a
pledge of Common Stock shall be required to provide the Company with any notice
thereof or otherwise make any delivery to the Company pursuant to this Agreement
or any other Transaction Document; provided that a Purchaser and its pledgee
shall be required to comply with the provisions of Article V hereof in order to
effect a sale, transfer or assignment of Common Stock to such pledgee. At the
Purchasers’ expense, the Company hereby agrees to execute and deliver such
documentation as a pledgee of the Common Stock may reasonably request in
connection with a pledge of the Common Stock to such pledgee by a Purchaser.
 
Section 3.20           Subsequent Financings.
 
(a)           For a period of one (1) year following the following the Closing
Date, the Company covenants and agrees to promptly notify (in no event later
than five (5) days after making or receiving an applicable offer) in writing (a
“Rights Notice”) each Purchaser of the terms and conditions of any proposed
offer or sale to, or exchange with (or other type of distribution to) any third
party (a “Subsequent Financing”), of Common Stock or any debt or equity
securities convertible, exercisable or exchangeable into Common Stock; provided,
however, that prior to delivering a Rights Notice to each Purchaser, the Company
shall first deliver to each Purchaser a written notice of the Company’s
intention to effect a Subsequent Financing (“Pre-Notice”) within three (3)
Trading Days of receiving an applicable offer, which Pre-Notice shall ask such
Purchaser if it wants to review the details of such financing. Each Purchaser
must notify the Company within three (3) Trading Days of receipt of the
Pre-Notice that such Purchaser elects to review the details of such financing
(“Pre-Notice Acceptance”). Upon the Company’s receipt of a Pre-Notice
Acceptance, and only upon the Company’s receipt of a Pre-Notice Acceptance, the
Company shall promptly, but no later than two (2) Trading Days after such
receipt, deliver a Rights Notice to such Purchaser. The Rights Notice shall
describe, in reasonable detail, the proposed Subsequent Financing, the names and
investment amounts of all investors participating in the Subsequent Financing
(if known at such time), the proposed closing date of the Subsequent Financing,
which shall be within twenty (20) calendar days from the date of the Rights
Notice, and all of the terms and conditions thereof and proposed definitive
documentation to be entered into in connection therewith. The Rights Notice
shall provide each Purchaser an option (the “Rights Option”) during the ten (10)
Trading Days following delivery of the Rights Notice (the “Option Period”) to
inform the Company whether such Purchaser will purchase up to its pro rata
portion of all or a portion of the securities being offered in such Subsequent
Financing on the same, absolute terms and conditions as contemplated by such
Subsequent Financing. If any Purchaser elects not to participate in such
Subsequent Financing, the other Purchasers may participate on a pro-rata basis
so long as such participation in the aggregate does not exceed the aggregate
Purchase Price of all Purchasers hereunder. For purposes of this Section, all
references to “pro rata” means, for any Purchaser electing to participate in
such Subsequent Financing, the percentage obtained by dividing (x) the number of
Preferred Shares purchased by such Purchaser at the Closing by (y) the total
number of all of the Preferred Shares purchased by all of the participating
Purchasers at the Closing. Delivery of any Rights Notice constitutes a
representation and warranty by the Company that there are no other material
terms and conditions, arrangements, agreements or otherwise except for those
disclosed in the Rights Notice, to provide additional compensation to any party
participating in any proposed Subsequent Financing, including, but not limited
to, additional compensation based on changes in the purchase price or any type
of reset or adjustment of a purchase or conversion price or to issue additional
securities at any time after the closing date of a Subsequent Financing. If the
Company does not receive notice of exercise of the Rights Option from the
Purchasers within the Option Period, the Company shall have the right to close
the Subsequent Financing on the scheduled closing date with a third party;
provided that all of the material terms and conditions of the closing are the
same as those provided to the Purchasers in the Rights Notice. If the closing of
the proposed Subsequent Financing does not occur on that date, any closing of
the contemplated Subsequent Financing or any other Subsequent Financing shall be
subject to all of the provisions of this Section 3.20(a), including, without
limitation, the delivery of a new Rights Notice. The provisions of this Section
3.20(a) shall not apply to issuances of securities in a Permitted Financing (as
defined hereinafter).

 
-22-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
(b)           For purposes of this Agreement, a Permitted Financing shall not be
considered a Subsequent Financing. A “Permitted Financing” shall mean (i)
securities issued (other than for cash) in connection with a merger,
acquisition, or consolidation, (ii) securities issued pursuant to the conversion
or exercise of convertible or exercisable securities issued or outstanding on or
prior to the date of this Agreement or issued pursuant to this Agreement (so
long as the conversion or exercise price of such securities are not amended to
lower such price, except as a result of stock dividends, subdivisions or
combinations, and/or adversely affect the Purchasers), (iii) securities issued
in connection with bona fide strategic license agreements or other partnering
arrangements so long as such issuances are not for the purpose of raising
capital, (iv) shares of Common Stock issued for consideration per share of at
least $1.75 (as adjusted for any stock dividend, stock split, stock combination,
reclassification or similar transaction) or options with an exercise price of at
least $1.75 per share (as adjusted for any stock dividend, stock split, stock
combination, reclassification or similar transaction), in each case, issued to
employees, officers, consultants or directors of the Company pursuant to any
stock or option plan duly adopted for such purpose by a majority of the
non-employee members of the Board of Directors or a majority of the members of a
committee of non-employee directors established for such purpose and (v) the
payment of dividends on the Preferred Shares in shares of Common Stock or
additional Preferred Shares.

 
-23-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
(c)           So long as any Preferred Shares are outstanding, the Company shall
be prohibited from effecting or entering into an agreement to effect any
Subsequent Financing involving a “Variable Rate Transaction”. The term “Variable
Rate Transaction” shall mean a transaction in which the Company issues or sells
(i) any debt or equity securities that are convertible into, exchangeable or
exercisable for, or include the right to receive additional shares of Common
Stock either (A) at a conversion, exercise or exchange rate or other price that
is based upon and/or varies with the trading prices of or quotations for the
shares of Common Stock at any time after the initial issuance of such debt or
equity securities, or (B) with a conversion, exercise or exchange price that is
subject to being reset at some future date after the initial issuance of such
debt or equity security or upon the occurrence of specified or contingent events
directly or indirectly related to the business of the Company or the market for
the Common Stock or (ii) enters into any agreement, including, but not limited
to, an equity line of credit, whereby the Company may sell securities at a
future determined price.
 
Section 3.21          Indebtedness and Liens.  So long as any Purchaser holds
any Shares or Warrants, the Company shall not, nor shall the Company allow any
of its subsidiaries to, without the prior written consent of the holders of
seventy-five percent (75%) of the Preferred Shares then outstanding, (a) enter
into, create, incur, assume, guarantee or suffer to exist any indebtedness for
borrowed money of any kind in excess of an aggregate of $250,000, including but
not limited to, a guarantee, on or with respect to any of its property or assets
now owned or hereafter acquired or any interest therein or any income or profits
therefrom) or (b) enter into, create, incur, assume or suffer to exist any Liens
of any kind, on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits therefrom
other than, (i) Liens for any indebtedness or guaranteed indebtedness, in each
case, not in excess of an aggregate of $250,000, (ii) Liens for taxes,
assessments and other governmental charges or levies not yet due or Liens for
taxes, assessments and other governmental charges or levies being contested in
good faith and by appropriate proceedings for which adequate reserves (in the
good faith judgment of the management of the Company) have been established in
accordance with GAAP and (iii) Liens imposed by law which were incurred in the
ordinary course of the Company’s business, such as carriers’, warehousemen’s and
mechanics’ Liens, statutory landlords’ Liens, and other similar Liens arising in
the ordinary course of the Company’s business, and which (x) do not individually
or in the aggregate materially detract from the value of such property or assets
or materially impair the use thereof in the operation of the business of the
Company and its subsidiaries or (y) are being contested in good faith by
appropriate proceedings, which proceedings have the effect of preventing for the
foreseeable future the forfeiture or sale of the property or asset subject to
such Lien.
 
Section 3.22           Integration.  The Company shall not, and shall use its
best efforts to ensure that no affiliate of the Company shall, sell, offer for
sale or solicit offers to buy or otherwise negotiate in respect of any security
(as defined in Section 2 of the Securities Act) that would be integrated with
the offer or sale of the Preferred Shares and the Warrants in a manner that
would require the registration under the Securities Act of the sale of the
Preferred Shares and the Warrants to the Purchasers.

 
-24-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
Section 3.23           Directors and Officers Insurance. So long as any
Purchaser holds any Shares or Warrants, the Company shall maintain directors and
officers insurance of at least $2 million from an insurance company acceptable
to the Purchasers.

Section 3.24           Key Man Life Insurance.  Until the earlier of (a) the
election by the holders of seventy-five percent (75%) of the Preferred Shares
then outstanding to terminate such coverage or (b) such time as the Purchasers
do not hold any Shares or Warrants, the Company shall maintain $3 million of key
man life insurance for James Dalton, which policy shall name the Purchasers,
together with the purchasers under that certain Series A Convertible Preferred
Stock Purchase Agreement, dated as of September 10, 2009, by and among the
Company and each of the purchases whose names are set forth on Exhibit A thereto
(the “Series A Purchasers”), as amended, as its sole beneficiaries, and the
premiums of which shall be paid by the Purchasers and the Series A Purchasers.
 
ARTICLE IV.
CONDITIONS
 
Section 4.01          Conditions Precedent to the Obligation of the Company to
Sell the Preferred Shares and the Warrants. The obligation hereunder of the
Company to issue and sell the Preferred Shares and the Warrants to the
Purchasers is subject to the satisfaction or waiver, at or before the Closing,
of each of the conditions set forth below. These conditions are for the
Company’s sole benefit and may be waived by the Company at any time in its sole
discretion.
 
(a)           Accuracy of Each Purchaser’s Representations and Warranties. The
representations and warranties of each Purchaser shall be true and correct in
all respects as of the date when made and as of the Closing Date as though made
at that time, except for representations and warranties that are expressly made
as of a particular date, which shall be true and correct in all material
respects as of such date.
 
(b)           Performance by the Purchasers. Each Purchaser shall have
performed, satisfied and complied in all respects with all covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by such Purchaser at or prior to the Closing.
 
(c)           No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction that
prohibits the consummation of any of the transactions contemplated by this
Agreement.
 
(d)           Delivery of Purchase Price. The Purchase Price for the Preferred
Shares and the Warrants shall have been delivered to the Company.
 
(e)           Delivery of Transaction Documents. The Transaction Documents shall
have been duly executed and delivered by the Purchasers to the Company.

 
-25-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
Section 4.02           Conditions Precedent to the Obligation of the Purchasers
to Purchase the Preferred Shares and the Warrants. The obligation hereunder of
each Purchaser to acquire and pay for the Preferred Shares and the Warrants is
subject to the satisfaction or waiver, at or before the Closing, of each of the
conditions set forth below. These conditions are for each Purchaser’s sole
benefit and may be waived by such Purchaser at any time in its sole discretion.

(a)           Accuracy of the Company’s Representations and Warranties. Each of
the representations and warranties of the Company in this Agreement shall be
true and correct in all respects as of the date when made and as of the Closing
Date as though made at that time, except for representations and warranties that
are expressly made as of a particular date, which shall be true and correct in
all respects as of such date.
 
(b)           Performance by the Company. The Company shall have performed,
satisfied and complied in all respects with all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the Closing.
 
(c)           No Suspension, Etc. Trading in the Company’s Common Stock on the
OTCBB shall not have been suspended by the Commission or the Financial Industry
Regulatory Authority, Inc. (except for any suspension of trading of limited
duration agreed to by the Company, which suspension shall be terminated prior to
the applicable Closing), and, at any time prior to the Closing Date, trading in
securities generally as reported by Bloomberg Financial Markets (“Bloomberg”)
shall not have been suspended or limited, or minimum prices shall not have been
established on securities whose trades are reported by Bloomberg, or on the New
York Stock Exchange, nor shall a banking moratorium have been declared either by
the United States or New York State authorities, nor shall there have occurred
any material outbreak or escalation of hostilities or other national or
international calamity or crisis of such magnitude in its effect on, or any
material adverse change in any financial market which, in each case, in the
judgment of such Purchaser, makes it impracticable or inadvisable to purchase
the Preferred Shares and the Warrants.
 
(d)           No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction that
prohibits the consummation of any of the transactions contemplated by this
Agreement.
 
(e)           No Proceedings or Litigation. No action, suit or proceeding before
any arbitrator or any governmental authority shall have been commenced, and no
investigation by any governmental authority shall have been threatened, against
the Company or any subsidiary, or any of the officers, directors or affiliates
of the Company or any subsidiary seeking to restrain, prevent or change the
transactions contemplated by this Agreement, or seeking damages in connection
with such transactions.
 
(f)           Certificate of Designation of Rights and Preferences. The
Certificate of Designation in the form of Exhibit B attached hereto shall have
been filed with the Secretary of State of Delaware.
 
 
-26-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
(g)           Opinion of Counsel, Etc. The Purchasers shall have received an
opinion of Durham Jones & Pinegar P.C., counsel to the Company, dated the date
of the Closing, in the form of Exhibit E hereto, and such other certificates and
documents as the Purchasers or its counsel shall reasonably require incident to
the Closing.

(h)          Certificates. The Company shall have executed and delivered to the
Purchasers the certificates (in such denominations as such Purchaser shall
request) for the Preferred Shares and the Warrants being acquired by such
Purchaser at the Closing (in such denominations as such Purchaser shall
request).
 
(i)           Resolutions. The Board of Directors of the Company shall have
adopted resolutions consistent with Section 2.01(b) hereof in a form reasonably
acceptable to the Purchasers (the “Resolutions”).
 
(j)           Reservation of Shares. The Company shall have reserved out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Preferred Shares and the exercise of the Warrants, a number of
shares of Common Stock equal to one hundred twenty percent (120%) of the
aggregate number of Conversion Shares issuable upon conversion of the Preferred
Shares outstanding on the Closing Date and the number of Warrant Shares issuable
upon exercise of the number of Warrants outstanding on the Closing Date.
 
(k)          Transfer Agent Instructions. The Irrevocable Transfer Agent
Instructions, in the form of Exhibit D attached hereto, shall have been
delivered to and acknowledged in writing by the Company’s transfer agent.
 
(l)           Secretary’s Certificate. The Company shall have delivered to the
Purchasers a secretary’s certificate, dated as of the Closing Date, as to (i)
the Resolutions, (ii) the Certificate, (iii) the Bylaws, (iv) the Certificate of
Designation, each as in effect at the Closing, and (v) the authority and
incumbency of the officers of the Company executing the Transaction Documents
and any other documents required to be executed or delivered in connection
therewith.
 
(m)          Officer’s Certificate. The Company shall have delivered to the
Purchasers a certificate of an executive officer of the Company, dated as of the
Closing Date, confirming the accuracy of the Company’s representations,
warranties and covenants as of the Closing Date and confirming the compliance by
the Company with the conditions precedent set forth in this Section 4.02 as of
the Closing Date.
 
(n)          Material Adverse Effect. Since the date of execution of this
Agreement, no event or series of events shall have occurred that reasonably
could have or result in a Material Adverse Effect.
 
(o)          Completion of Due Diligence. The Purchasers shall have
satisfactorily completed their financial and legal due diligence investigation
of the Company.

 
-27-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
(p)          Payment of Past Dividends.  The Company shall have paid all accrued
but unpaid dividends on its Series A Convertible Preferred Stock, $0.00001 par
value per share, to the holders of such shares of its Series A Convertible
Preferred Stock.
 
ARTICLE V.
STOCK CERTIFICATE LEGEND
 

Section 5.01           Legend. Each certificate representing the Preferred
Shares, the Warrants, and, if appropriate, securities issued upon conversion
thereof, shall be stamped or otherwise imprinted with a legend substantially in
the following form (in addition to any legend required by applicable state
securities or “blue sky” laws):
 
THESE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE “SECURITIES”) HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”) OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE
STATE SECURITIES LAWS OR THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL
THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.
 
The Company agrees to reissue certificates representing any of the Conversion
Shares and the Warrant Shares without the legend set forth above if at such
time, prior to making any transfer of any such securities, such holder thereof
shall give written notice to the Company describing the manner and terms of such
transfer and removal as the Company may reasonably request. Such proposed
transfer and removal will not be effected until (i) the Company has received an
opinion of counsel reasonably satisfactory to the Company, to the effect that
the registration of the Conversion Shares or the Warrant Shares under the
Securities Act is not required in connection with such proposed transfer, (ii) a
registration statement under the Securities Act covering such proposed
disposition has been filed by the Company with the Commission and has become
effective under the Securities Act, (iii) the Company has received other
evidence reasonably satisfactory to the Company that such registration and
qualification under the Securities Act and state securities laws are not
required or (iv) the holder provides the Company with reasonable assurances that
such security can be sold pursuant to Rule 144 under the Securities Act. The
Company will respond to any such notice from a holder within three (3) Trading
Days (the “Legend Removal Date”). In the case of any proposed transfer under
this Section 5.01, the Company will use reasonable efforts to comply with any
such applicable state securities or “blue sky” laws, but shall in no event be
required (x) to qualify to do business in any state where it is not then
qualified, (y) to take any action that would subject it to tax or to the general
service of process in any state where it is not then subject or (z) to comply
with state securities or “blue sky” laws of any state for which registration by
coordination is unavailable to the Company. The restrictions on transfer
contained in this Section 5.01 shall be in addition to, and not by way of
limitation of, any other restrictions on transfer contained in any other section
of this Agreement. Whenever a certificate representing the Conversion Shares or
the Warrant Shares is required to be issued to a Purchaser without a legend, in
lieu of delivering physical certificates representing the Conversion Shares or
the Warrant Shares (provided that a registration statement under the Securities
Act providing for the resale of the Conversion Shares or the Warrant Shares is
then in effect, as the case may be, or the Conversion Shares or the Warrant
Shares may be sold pursuant to Rule 144 of the Securities Act without
restriction), the Company shall cause its transfer agent to electronically
transmit the Conversion Shares or the Warrant Shares, as the case may be, to a
Purchaser by crediting the account of such Purchaser’s Prime Broker with the
Depository Trust Company (“DTC”) through its Deposit Withdrawal Agent Commission
(“DWAC”) system (to the extent not inconsistent with any provisions of this
Agreement) provided that the Company and the Company’s transfer agent are
participating in DTC through the DWAC system.

 
-28-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
Section 5.02           Liquidated Damages. In addition to such Purchasers’ other
available remedies, the Company shall pay to a Purchaser, in cash, as partial
liquidated damages and not as a penalty, for each $2,000 of Conversion Shares or
the Warrant Shares (based on the VWAP (as defined hereinafter) of the Common
Stock on the date such securities are submitted to the transfer agent) delivered
for removal of the restrictive legend and subject to Section 5.01, $10 per
Trading Day (increasing to $20 per Trading Day five (5) Trading Days after such
damages have begun to accrue) for each Trading Day after the fourth (4th)
Trading Day following the Legend Removal Date until such certificate is
delivered without a legend. Nothing herein shall limit such Purchasers’ rights
to pursue actual damages for the Company’s failure to deliver certificates
representing any securities as required by the Transaction Documents, and such
Purchaser shall have the right to pursue all remedies available to it at law or
in equity including, without limitation, a decree of specific performance and/or
injunctive relief.
 
For purposes hereof, “VWAP” means, for any date, the price determined by the
first of the following clauses that applies: (a) if the Common Stock is then
listed or quoted on a Trading Market (as defined hereinafter), the daily volume
weighted average price of the Common Stock for such date (or the nearest
preceding date) on the Trading Market on which the Common Stock is then listed
or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m.
(New York City time) to 4:02 p.m. (New York City time); (b)  if the OTCBB is not
a Trading Market, the volume weighted average price of the Common Stock for such
date (or the nearest preceding date) on the OTCBB; (c) if the Common Stock is
not then quoted for trading on the OTCBB and if prices for the Common Stock are
then reported in the “Pink Sheets” published by Pink OTC Markets Inc. (or a
similar organization or agency succeeding to its functions of reporting prices),
the most recent bid price per share of the Common Stock so reported; or (d) in
all other cases, the fair market value of a share of Common Stock as determined
by an independent appraiser selected in good faith by the holders of a majority
of the Preferred Stock then outstanding and reasonably acceptable to the
Company.
 
For purposes hereof, “Trading Market” means the following markets or exchanges
on which the Common Stock is listed or quoted for trading on the date in
question: the NYSE Amex Equities, the Nasdaq Capital Market, the Nasdaq Global
Market, the Nasdaq Global Select Market, the New York Stock Exchange or the
OTCBB.
 

 
-29-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
ARTICLE VI.
INDEMNIFICATION
 
Section 6.01          General Indemnity.  The Company agrees to indemnify and
hold harmless the Purchasers (and their respective directors, officers,
managers, partners, members, shareholders, affiliates, agents, successors and
assigns) from and against any and all losses, liabilities, deficiencies, costs,
damages and expenses (including, without limitation, reasonable attorneys’ fees,
charges and disbursements) incurred by the Purchasers as a result of any
inaccuracy in or breach of the representations, warranties or covenants made by
the Company herein.  Each Purchaser severally but not jointly agrees to
indemnify and hold harmless the Company and its directors, officers, affiliates,
agents, successors and assigns from and against any and all losses, liabilities,
deficiencies, costs, damages and expenses (including, without limitation,
reasonable attorneys’ fees, charges and disbursements) incurred by the Company
as result of any inaccuracy in or breach of the representations, warranties or
covenants made by such Purchaser herein. The maximum aggregate liability of each
Purchaser pursuant to its indemnification obligations under this Article VI
shall not exceed the portion of the Purchase Price paid by such Purchaser
hereunder.
 
Section 6.02           Indemnification Procedure.  Any party entitled to
indemnification under this Article VI (an “indemnified party”) will give written
notice to the indemnifying party of any matter giving rise to a claim for
indemnification; provided, that the failure of any party entitled to
indemnification hereunder to give notice as provided herein shall not relieve
the indemnifying party of its obligations under this Article VI except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice.  In case any such action, proceeding or claim is brought against an
indemnified party in respect of which indemnification is sought hereunder, the
indemnifying party shall be entitled to participate in and, unless in the
reasonable judgment of the indemnifying party a conflict of interest between it
and the indemnified party exists with respect to such action, proceeding or
claim (in which case the indemnifying party shall be responsible for the
reasonable fees and expenses of one separate counsel for the indemnified
parties), to assume the defense thereof with counsel reasonably satisfactory to
the indemnified party.  In the event that the indemnifying party advises an
indemnified party that it will not contest such a claim for indemnification
hereunder, or fails, within thirty (30) days of receipt of any indemnification
notice to notify, in writing, such person of its election to defend, settle or
compromise, at its sole cost and expense, any action, proceeding or claim (or
discontinues its defense at any time after it commences such defense), then the
indemnified party may, at its option, defend, settle or otherwise compromise or
pay such action or claim.  In any event, unless and until the indemnifying party
elects in writing to assume and does so assume the defense of any such claim,
proceeding or action, the indemnified party’s costs and expenses arising out of
the defense, settlement or compromise of any such action, claim or proceeding
shall be losses subject to indemnification hereunder.  The indemnified party
shall cooperate fully with the indemnifying party in connection with any
negotiation or defense of any such action or claim by the indemnifying party and
shall furnish to the indemnifying party all information reasonably available to
the indemnified party which relates to such action or claim.  The indemnifying
party shall keep the indemnified party fully apprised at all times as to the
status of the defense or any settlement negotiations with respect thereto.  If
the indemnifying party elects to defend any such action or claim, then the
indemnified party shall be entitled to participate in such defense with counsel
of its choice at its sole cost and expense.  The indemnifying party shall not be
liable for any settlement of any action, claim or proceeding effected without
its prior written consent.  Notwithstanding anything in this Article VI to the
contrary, the indemnifying party shall not, without the indemnified party’s
prior written consent, settle or compromise any claim or consent to entry of any
judgment in respect thereof which imposes any future obligation on the
indemnified party or which does not include, as an unconditional term thereof,
the giving by the claimant or the plaintiff to the indemnified party of a
release from all liability in respect of such claim.  The indemnification
obligations to defend the indemnified party required by this Article VI shall be
made by periodic payments of the amount thereof during the course of
investigation or defense, as and when bills are received or expense, loss,
damage or liability is incurred, so long as the indemnified party shall refund
such moneys if it is ultimately determined by a court of competent jurisdiction
that such party was not entitled to indemnification.  The indemnity agreements
contained herein shall be in addition to (a) any cause of action or similar
rights of the indemnified party against the indemnifying party or others, and
(b) any liabilities the indemnifying party may be subject to pursuant to the
law.  No indemnifying party will be liable to the indemnified party under this
Agreement to the extent, but only to the extent that a loss, claim, damage or
liability is attributable to the indemnified party’s breach of any of the
representations, warranties or covenants made by such party in this Agreement or
in the other Transaction Documents.  To the extent that the foregoing
undertaking by an indemnifying party is unenforceable for any reason, the
indemnifying party will make the maximum contribution to the payment and
satisfaction of each of the indemnified liabilities that is permissible under
applicable law.

 
-30-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
ARTICLE VII.
MISCELLANEOUS
 
Section 7.01           Fees and Expenses. Except as otherwise set forth in this
Agreement and the other Transaction Documents, each party shall pay the fees and
expenses of its advisors, counsel, accountants and other experts, if any, and
all other expenses, incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement, provided
however, that the Company shall pay all actual attorneys’ fees and expenses
(including disbursements and out-of-pocket expenses) incurred by the Purchasers
in connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Transaction Documents and the transactions contemplated
thereunder up to an aggregate amount equal to $15,000.  The Company shall pay
all stamp or other similar taxes and duties levied in connection with issuance
of the Shares and the Warrants pursuant hereto.
 
Section 7.02           Specific Enforcement, Consent to Jurisdiction.
 
(a)           The Company and the Purchasers acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement or the other Transaction Documents were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed
that the parties shall be entitled to seek an injunction or injunctions to
prevent or cure breaches of the provisions of this Agreement and to enforce
specifically the terms and provisions hereof or thereof, this being in addition
to any other remedy to which any of them may be entitled by law or equity.
 
 
-31-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
(b)           Each of the Company and the Purchasers (i) hereby irrevocably
submits to the jurisdiction of the United States District Court sitting in the
Southern District of New York and the courts of the State of New York located in
New York County for the purposes of any suit, action or proceeding arising out
of or relating to this Agreement or any of the other Transaction Documents or
the transactions contemplated hereby or thereby and (ii) hereby waives, and
agrees not to assert in any such suit, action or proceeding, any claim that it
is not personally subject to the jurisdiction of such court, that the suit,
action or proceeding is brought in an inconvenient forum or that the venue of
the suit, action or proceeding is improper. Each of the Company and the
Purchasers consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address in effect for
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing in this
Section 7.02 shall affect or limit any right to serve process in any other
manner permitted by law.
 
Section 7.03          Entire Agreement; Amendment. This Agreement (including all
exhibits and schedules hereto) and the Transaction Documents contain the entire
understanding and agreement of the parties with respect to the matters covered
hereby and, except as specifically set forth herein or in the Transaction
Documents, neither the Company nor any of the Purchasers makes any
representations, warranty, covenant or undertaking with respect to such matters
and they supersede all prior understandings and agreements with respect to said
subject matter, all of which are merged herein. No provision of this Agreement
may be waived or amended other than by a written instrument signed by the
Company and the holders of Preferred Shares convertible into at least
seventy-five percent (75%) of the Conversion Shares issuable upon the conversion
of the Preferred Shares then outstanding, and no provision hereof may be waived
other than by a written instrument signed by the party against whom enforcement
of any such amendment or waiver is sought. No such amendment shall be effective
to the extent that it applies to less than all of the holders of the Preferred
Shares then outstanding. No consideration shall be offered or paid to any person
to amend or consent to a waiver or modification of any provision of any of the
Transaction Documents unless the same consideration is also offered to all of
the parties to the Transaction Documents or holders of Preferred Shares, as the
case may be.
 
Section 7.04           Notices. Any notice, demand, request, waiver or other
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery by telex (with correct answer back
received), telecopy, e-mail or facsimile at the address or number designated
below (if delivered on a business day during normal business hours where such
notice is to be received), or the first business day following such delivery (if
delivered other than on a business day during normal business hours where such
notice is to be received) or (b) on the second business day following the date
of mailing by express courier service, fully prepaid, addressed to such address,
or upon actual receipt of such mailing, whichever shall first occur. The
addresses for such communications shall be:
 
 
-32-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
(a)           If to the Company:
 
ActiveCare, Inc.
5095 West 2100 South
Salt Lake City, UT 84120
Attention: James J. Dalton
Fax No.: (801) 974-9553

with copies to:

Durham Jones & Pinegar P.C.
111 East Broadway, Suite 900
Salt Lake City, UT  84111
Attention: Kevin R. Pinegar, Esq.
Fax No.: (801) 415-3500
 
 
(b)           If to any Purchaser at the address of such Purchaser set forth on
Exhibit A to this Agreement, with copies to:
 
Haynes and Boone, LLP
1221 Avenue of the Americas, 26th  Floor
New York, New York 10022
Attention: Rick A. Werner, Esq.
Fax No.: (212) 884-8234

and

Peter J. Weisman, P.C.
767 Third Avenue, 6th Floor
New York, New York 10017
Fax No.: (212) 676-5665

Any party hereto may from time to time change its address for notices by giving
at least ten (10) days written notice of such changed address to the other party
hereto.
 
Section 7.05          Waivers. No waiver by either party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provisions, condition or requirement hereof, nor shall any delay or omission of
any party to exercise any right hereunder in any manner impair the exercise of
any such right accruing to it thereafter.
 
Section 7.06           Headings. The article, section and subsection headings in
this Agreement are for convenience only and shall not constitute a part of this
Agreement for any other purpose and shall not be deemed to limit or affect any
of the provisions hereof.
 
Section 7.07           Successors and Assigns; Restrictions on Transfer. This
Agreement shall be binding upon and inure to the benefit of the parties and
their successors and assigns. The Company may not assign this Agreement or any
rights or obligations hereunder without the prior written consent of the
Purchasers.

 
-33-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
Section 7.08           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.

Section 7.09           Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York, without
giving effect to any of the conflicts of law principles which would result in
the application of the substantive law of another jurisdiction. This Agreement
shall not be interpreted or construed with any presumption against the party
causing this Agreement to be drafted. Each party hereby irrevocably waives, to
the fullest extent permitted by applicable law, any and all rights to a trial by
jury in any legal proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
 
Section 7.10           Survival. The representations and warranties of the
Company and the Purchasers shall survive the execution and delivery hereof and
the Closing hereunder for the applicable statute of limitations period.
 
Section 7.11           Counterparts. This Agreement may be executed in any
number of counterparts, each of which when so executed shall be deemed to be an
original and, all of which taken together shall constitute one and the same
Agreement and shall become effective when counterparts have been signed by each
party and delivered to the other parties hereto, it being understood that all
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid binding
obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
were the original thereof.
 
Section 7.12           Publicity. The Company agrees that it will not disclose,
and will not include in any public announcement, the name of the Purchasers
without the consent of the Purchasers unless and until such disclosure is
required by law or applicable regulation, and then only to the extent of such
requirement.
 
Section 7.13           Severability. The provisions of this Agreement and the
Transaction Documents are severable and, in the event that any court of
competent jurisdiction shall determine that any one or more of the provisions or
part of the provisions contained in this Agreement or the Transaction Documents
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision or part of a provision of this Agreement or the Transaction
Documents and such provision shall be reformed and construed as if such invalid
or illegal or unenforceable provision, or part of such provision, had never been
contained herein, so that such provisions would be valid, legal and enforceable
to the maximum extent possible.
 
Section 7.14          Further Assurances. From and after the date of this
Agreement, upon the request of any Purchaser or the Company, each of the Company
and the Purchasers shall execute and deliver such instrument, documents and
other writings as may be reasonably necessary or desirable to confirm and carry
out and to effectuate fully the intent and purposes of this Agreement, the
Preferred Shares, the Conversion Shares, the Warrants, the Warrant Shares, the
Certificate of Designation and the other Transaction Documents.

 
-34-

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
Section 7.15          Limitation of Liability.  Notwithstanding anything herein
to the contrary, the Company acknowledges and agrees that the liability of a
Purchaser arising directly or indirectly, under any Transaction Document of any
and every nature whatsoever shall be satisfied solely out of the assets of such
Purchaser, and that no trustee, officer, other investment vehicle or any other
affiliate of such Purchaser or any investor, shareholder or holder of shares of
beneficial interest of such a Purchaser shall be personally liable for any
liabilities of such Purchaser.
 
Section 7.16           Like Treatment of Purchasers.  No consideration shall be
offered or paid to any Person to amend or consent to a waiver or modification of
any provision of any of the Transaction Documents unless the same consideration
is also offered to all of the parties to the Transaction Documents. Further, the
Company shall not make any payments or issue any securities to the Purchasers in
amounts which are disproportionate to the respective numbers of outstanding
Preferred Shares held by any Purchasers at any applicable time.  For
clarification purposes, this provision constitutes a separate right granted to
each Purchaser by the Company and negotiated separately by each Purchaser, and
is intended for the Company to treat the Purchasers as a class and shall not in
any way be construed as the Purchasers acting in concert or as a group with
respect to the purchase, disposition or voting of the Shares, the Warrants or
otherwise.
 
Section 7.17           Stay, Extension and Usury Laws.  The Company covenants
(to the extent that it may lawfully do so) that it shall not at any time insist
upon, plead, or in any manner whatsoever claim or take the benefit or advantage
of, any stay, extension or usury law or other law wherever enacted, now or at
any time hereafter in force, that would prohibit or forgive it from paying all
or any portion of payments relating to the Preferred Shares and the Conversion
Shares, or which may affect the covenants under, or the performance of, any of
the Transaction Documents; and the Company (to the extent it may lawfully do so)
hereby expressly waives all benefit or advantage of any such law, and covenants
that it will not, by resort to any such law, hinder, delay or impede the
execution of any power granted to any Purchaser herein or in any of the other
Transaction Documents, but will suffer and permit the execution of every such
power as though no such law has been enacted.
 
[SIGNATURE PAGE FOLLOWS]

 
-35-

--------------------------------------------------------------------------------

 
EXECUTION COPY

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officer as of the date first above
written.
 
 
 
ACTIVECARE, INC.
 
 

By:___________________________________
     Name: James J. Dalton
     Title:  Chief Executive Officer
 
 

HARBORVIEW MASTER FUND, L.P.

By:___________________________________
     Name:
     Title:

GEMINI MASTER FUND, LTD.

By:___________________________________
     Name:
     Title:

 
 
Signature Page to Series B Convertible Preferred Stock Purchase Agreement
 

--------------------------------------------------------------------------------

 
EXECUTION COPY

EXHIBIT A to the
SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ACTIVECARE, INC.
 
 
Names and Addresses of Purchasers
 
Number of Preferred Shares Purchased
 
Number of Warrants Purchased
 
Dollar Amount of Investment
Harborview Master Fund, L.P.
c/o Harborview Advisors, LLC
850 Third Ave, Suite 1801
New York, NY  10022
 
228,571
 
228,571
 
$400,000
             
Gemini Master Fund, Ltd.
c/o Gemini Strategies, LLC
135 Liverpool Drive, Suite C
Cardiff, CA 92007
 
114,286
 
114,286
 
$200,000

 
 

 
A-1

--------------------------------------------------------------------------------

 
EXECUTION COPY

EXHIBIT B to the
SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ACTIVECARE, INC.
 
FORM OF CERTIFICATE OF DESIGNATION
 

 
B-1

--------------------------------------------------------------------------------

 
EXECUTION COPY

EXHIBIT C to the
SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ACTIVECARE, INC.
 
FORM OF CLASS C WARRANT
 

 
C-1

--------------------------------------------------------------------------------

 
EXECUTION COPY

EXHIBIT D to the
SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ACTIVECARE, INC.
 
FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS
 
ACTIVECARE, INC.
 
as of March __, 2010
 
[Transfer Agent name and address]
 
 
 
Ladies and Gentlemen:
 
Reference is made to that certain Series B Convertible Preferred Stock Purchase
Agreement (the “Purchase Agreement”), dated as of March 23, 2010, by and among
ActiveCare, Inc., a Delaware corporation (the “Company”), and the purchasers
named therein (collectively, the “Purchasers”) pursuant to which the Company is
issuing to the Purchasers shares of its Series B Convertible Preferred Stock,
par value $0.00001 per share, (the “Preferred Shares”) and warrants (the
“Warrants”) to purchase shares of the Company’s common stock, par value $0.00001
per share (the “Common Stock”). This letter shall serve as our irrevocable
authorization and direction to you (provided that you are the transfer agent of
the Company at such time) to issue shares of Common Stock upon conversion of the
Preferred Shares (the “Conversion Shares”) and exercise of the Warrants (the
“Warrant Shares”) to or upon the order of a Purchaser from time to time upon (i)
surrender to you of a properly completed and duly executed Conversion Notice or
Exercise Notice, as the case may be, in the form attached hereto as Exhibit I
and Exhibit II, respectively and (ii) in the case of the conversion of Preferred
Shares, a copy of the certificates (with the original certificates delivered to
the Company) representing Preferred Shares being converted or, in the case of
Warrants being exercised, a copy of the Warrants (with the original Warrants
delivered to the Company) being exercised (or, in each case, an indemnification
undertaking with respect to such share certificates or the warrants in the case
of their loss, theft or destruction). So long as you have previously received
(x) written confirmation from counsel to the Company that the Conversion Shares
or the Warrant Shares may be sold without the requirement to be in compliance
with Rule 144(c)(1) of the Securities Act of 1933, as amended (the “Securities
Act”), and otherwise without restriction or limitation pursuant to Rule 144 of
the Securities Act, then certificates representing the Conversion Shares or the
Warrant Shares, as the case may be, shall not bear any legend restricting
transfer of the Conversion Shares and the Warrant Shares, as the case may be,
thereby and should not be subject to any stop-transfer restriction; provided,
however, that if you have not previously received those items and
representations listed above, then the certificates for the Conversion Shares
and the Warrant Shares shall bear the following legend:
 
“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT”), OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS
REGISTERED UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS, OR THE
COMPANY SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH
SECURITIES UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE
SECURITIES LAWS IS NOT REQUIRED.”

 
D-1

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
Please be advised that the Purchasers are relying upon this letter as an
inducement to enter into the Purchase Agreement and, accordingly, each Purchaser
is a third party beneficiary to these instructions.
 
Please execute this letter in the space indicated to acknowledge your agreement
to act in accordance with these instructions. Should you have any questions
concerning this matter, please contact me at (801) 974-9474.
 

 
Very truly yours,
 
   
ACTIVECARE, INC.
 
   
By:______________________________________
 
     Name:
 
     Title:

ACKNOWLEDGED AND AGREED:
 
[TRANSFER AGENT]
 
By:________________________________________________
 
     Name:
 
     Title:
 
Date:______________]
 

 
D-2

--------------------------------------------------------------------------------

 
EXECUTION COPY

EXHIBIT I
 
ACTIVECARE, INC.
CONVERSION NOTICE
 
Reference is made to the Certificate of Designation of the Relative Rights and
Preferences of the Series B Convertible Preferred Stock of ActiveCare, Inc. (the
“Certificate of Designation”). In accordance with and pursuant to the
Certificate of Designation, the undersigned hereby elects to convert the number
of shares of Preferred Stock, par value $0.00001 per share (the “Preferred
Shares”), of ActiveCare, Inc., a Delaware corporation (the “Company”), indicated
below into shares of common stock, par value $0.00001 per share (the “Common
Stock”), of the Company, by tendering the stock certificate(s) representing the
Preferred Shares specified below as of the date specified below.
 
Date of Conversion
     
Number of Preferred Shares to be converted:
 

The Common Stock has been sold pursuant to a registration statement.
 
Yes:           o           No: o
 
Please confirm the following information:
 
Conversion Price:
     
Number of shares of Common Stock to be issued:
     
Number of shares of Common Stock beneficially owned or deemed beneficially owned
by the Holder on the Date of Conversion:
     

Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
 
Issue to:
             
Facsimile Number:
     
Authorization:
   
By:_____________________
 
Title:
Dated________________
 

 

 
D-3

--------------------------------------------------------------------------------

 
EXECUTION COPY

EXHIBIT II
 
EXERCISE FORM
CLASS C WARRANT
 
ACTIVECARE, INC.
 
The undersigned ____________________, pursuant to the provisions of the Class C
Warrant (the “Warrant”), hereby elects to purchase _______________ shares of
Common Stock of ActiveCare, Inc. covered by the within Warrant.
 
Dated:
   
Signature
                 
Address
                     

Number of shares of Common Stock beneficially owned or deemed beneficially owned
by the Holder on the date of Exercise: ___________________________
 
The undersigned is an “accredited investor” as defined in Regulation D under the
Securities Act of 1933, as amended.
 
The undersigned intends that payment of the Warrant Price shall be made as
(check one):
 
Cash Exercise                                       o
 
Cashless Exercise                                o
 
If the Holder has elected a Cash Exercise, the Holder shall pay the sum of
$______________ by certified or official bank check (or via wire transfer) to
the Issuer in accordance with the terms of the Warrant.
 
If the Holder has elected a Cashless Exercise, a certificate shall be issued to
the Holder for the number of shares equal to the whole number portion of the
product of the calculation set forth below, which is _______________. The Issuer
shall pay a cash adjustment in respect of the fractional portion of the product
of the calculation set forth below in an amount equal to the product of the
fractional portion of such product and the Per Share Market Value on the date of
exercise, which product is _____________ .
 
[acar8k20100325ex10i01.jpg]
Where:
 
The number of shares of Common Stock to be issued to the Holder
_________________  (“X”).

 
D-4

--------------------------------------------------------------------------------

 
EXECUTION COPY

The number of shares of Common Stock purchasable upon exercise of all of the
Warrant or, if only a portion of the Warrant is being exercised, the portion of
the Warrant being exercised _______________________ (“Y”).
 
The Warrant Price ___________________ (“A”).
 
The Per Share Market Value of one share of Common Stock on the Trading Day
immediately preceding the date of such election ______________________ (“B”).
 

 
D-5

--------------------------------------------------------------------------------

 
EXECUTION COPY

EXHIBIT E to the
SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
ACTIVECARE, INC.
 
FORM OF OPINION OF COUNSEL
 
1.           The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the state of Delaware and has the
requisite corporate power to own, lease and operate its properties and assets,
and to carry on its business as presently conducted. The Company 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 or property
owned by it makes such qualification necessary.
 
2.           The Company has the requisite corporate power and authority to
enter into and perform its obligations under the Transaction Documents and to
issue the Preferred Stock, the Warrants and the Common Stock issuable upon
conversion of the Preferred Stock and exercise of the Warrants. The execution,
delivery and performance of each of the Transaction Documents by the Company and
the consummation by it of the transactions contemplated thereby have been duly
and validly authorized by all necessary corporate action and no further consent
or authorization of the Company or its Board of Directors or stockholders is
required. Each of the Transaction Documents have been duly executed and
delivered, and the Preferred Stock and the Warrants have been duly executed,
issued and delivered by the Company and each of the Transaction Documents
constitutes a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its respective terms. The Common Stock
issuable upon conversion of the Preferred Stock and exercise of the Warrants is
not subject to any preemptive rights under the Certificate of Incorporation or
the Bylaws.
 
3.           The Preferred Stock and the Warrants have been duly authorized and,
when delivered against payment in full as provided in the Purchase Agreement,
will be validly issued, fully paid and nonassessable. The shares of Common Stock
issuable upon conversion of the Preferred Stock and exercise of the Warrants
have been duly authorized and reserved for issuance, and, when delivered upon
conversion or against payment in full as provided in the Certificate of
Designation and the Warrants, as applicable, will be validly issued, fully paid
and nonassessable.
 
4.           The execution, delivery and performance of and compliance with the
terms of the Transaction Documents and the issuance of the Preferred Stock, the
Warrants and the Common Stock issuable upon conversion of the Preferred Stock
and exercise of the Warrants do not (i) violate any provision of the Certificate
of Incorporation or Bylaws, (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, mortgage, deed of trust, indenture,
note, bond, license, lease agreement, instrument or obligation to which the
Company is a party, (iii) create or impose a lien, charge or encumbrance on any
property of the Company under any agreement or any commitment to which the
Company is a party or by which the Company is bound or by which any of its
respective properties or assets are bound, or (iv) result in a violation of any
federal, state, local or foreign statute, rule, regulation, order, judgment,
injunction or decree (including federal and state securities laws and
regulations) applicable to the Company or by which any property or asset of the
Company is bound or affected, except, in all cases other than violations
pursuant to clauses (i) and (iv) above, for such conflicts, default,
terminations, amendments, acceleration, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect.

 
E-1

--------------------------------------------------------------------------------

 
EXECUTION COPY
 
5.           No consent, approval or authorization of or designation,
declaration or filing with any governmental authority on the part of the Company
is required under federal, state or local law, rule or regulation in connection
with the valid execution and delivery of the Transaction Documents, or the
offer, sale or issuance of the Preferred Stock, the Warrants or the Common Stock
issuable upon conversion of the Preferred Stock and exercise of the Warrants
other than the Certificate of Designation.
 
6.           There is no action, suit, claim, investigation or proceeding
pending or threatened against the Company which questions the validity of this
Agreement or the transactions contemplated hereby or any action taken or to be
taken pursuant hereto or thereto. There is no action, suit, claim, investigation
or proceeding pending, or to our knowledge, threatened, against or involving the
Company or any of its properties or assets and which, if adversely determined,
is reasonably likely to result in a Material Adverse Effect. There are no
outstanding orders, judgments, injunctions, awards or decrees of any court,
arbitrator or governmental or regulatory body against the Company or any
officers or directors of the Company in their capacities as such.
 
7.           The offer, issuance and sale of the Preferred Stock and the
Warrants and the offer, issuance and sale of the shares of Common Stock issuable
upon conversion of the Preferred Stock and exercise of the Warrants pursuant to
the Purchase Agreement, the Certificate of Designation and the Warrants, as
applicable, are exempt from the registration requirements of the Securities Act.
 
8.           The Company is not, and as a result of and immediately upon Closing
will not be, an “investment company” or a company “controlled” by an “investment
company,” within the meaning of the Investment Company Act of 1940, as amended.
 
 
 
E-2

--------------------------------------------------------------------------------