Exhibit 10.1

DEBENTURE AND WARRANT PURCHASE AGREEMENT

Dated as of August 18, 2008

by and between

ELECTRO ENERGY, INC.

and

THE QUERCUS TRUST

TABLE OF CONTENTS

TABLE OF CONTENTS
(continued)

DEBENTURE AND WARRANT PURCHASE AGREEMENT

        This DEBENTURE AND WARRANT PURCHASE AGREEMENT, dated as of August 18, 2008 (this “ Agreement ”), by and between Electro Energy, Inc., a Florida corporation (the “ Company ”), and The Quercus Trust (the “ Purchaser ”).

W I T N E S S E T H:

        WHEREAS, the parties hereto entered into that certain Debenture and Warrant Purchase Agreement, dated as of December 7, 2007 (the “2007 Purchase Agreement”), and capitalized terms contained herein, to the extent they are not defined herein, shall have the meanings as may be expressly provided in the 2007 Purchase Agreement.

        WHEREAS, the parties hereto entered into that certain Warrant Purchase Agreement, dated July 23, 2008 (the “July, 2008 Warrant Purchase Agreement”).

        WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to Section 4(2) of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the “ Securities Act ”), the Company desires to issue and sell to the Purchaser, and the Purchaser desires to purchase from the Company, securities of the Company as more fully described in this Agreement.

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

ARTICLE I

PURCHASE AND SALE OF DEBENTURES AND WARRANTS

                1.1.     Purchase and Sale of Debentures and Warrants .

                (a)     Upon the following terms and conditions, and upon each of two (2) of Purchaser’s notifications to the Company that the Comapny has reached a set of business milestones, set forth on Schedule 1.1(a) hereto (each, a “Milestone Set ”), the Company shall issue and sell to the Purchaser, and the Purchaser shall purchase from the Company, a 10% Senior Secured Convertible Debenture in the principal amount of Six Hundred Twenty Five Thousand Dollars ($625,000), in the form attached hereto as Exhibit A (each a “ Debenture ”). The Company and the Purchaser are executing and delivering this Agreement in accordance with and in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act, including Regulation D (“ Regulation D ”), and/or upon such other exemption from the registration requirements of the Securities Act as may be available with respect to the investment to be made hereunder.

                (b)     Upon the terms and conditions contained herein, and upon each of two (2) of Purchaser’s notifications to the Company that the Company has reached a Milestone Set , the Company shall issue to Purchaser a Warrant to Purchase Common Stock, in substantially the form attached hereto as Exhibit B (each, a “ Warrant ”), to purchase up to One Million Five Hundred Sixty-Two Thousand Five Hundred ( 1,562,500 ) shares of the Company’s common stock, par value $0.001 per share (the “ Common Stock ”). Each Warrant shall expire three (3) years following the date of its issuance and shall have an exercise price per share equal to the Warrant Price (as defined in the Warrant).

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                (c)     Purchase Price. Subject to the terms and conditions hereof and upon the Company’s reaching each of the two Milestone Sets, the Company agrees to issue and sell to the Purchaser and, in consideration of and in express reliance upon the representations, warranties, covenants, terms and conditions of this Agreement, the Purchaser agrees to purchase, a Debenture and a Warrant for a purchase price of Six Hundred Twenty-Five Thousand Dollars ($625,000) (the “ Purchase Price ”), in cash.

                (d)     Closing. The closing of the purchase and sale of the first of two Debentures and Warrants to be acquired by the Purchaser from the Company under this Agreement shall take place at the offices of Lev & Berlin, P.C., 200 Connecticut Avenue, 5 ^th Floor, Norwalk, Connecticut 06854 at 10:00 a.m., Eastern time, (i) on August 18, 2008; 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 Purchaser and the Company may agree upon (the “First Closing Date ”). The closing of the purchase and sale of the second of two sets of Debentures and Warrants to be acquired by the Purchaser from the Company under this Agreement shall take place at the offices of Lev & Berlin, P.C. at 10:00 a.m., Eastern time, (i) on that date that is within three business days of the Purchaser’s notification to the Seller that the second Milestone Set has been reached, 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 Purchaser and the Company may agree upon (the “Second Closing Date ”). Subject to the terms and conditions of this Agreement, at each Closing Date the Company shall deliver or cause to be delivered to the Purchaser a Debenture and a Warrant and any other documents required to be delivered pursuant to Article IV hereof. At each closing, the Purchaser shall deliver the Purchase Price by wire transfer to a bank account designated by the Company.

                (e)     Underlying 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 sufficient number of its authorized but unissued shares of Common Stock to effect the conversions of the Debentures and exercises of the Warrants Any shares of Common Stock issuable upon conversion of the Debentures and exercise of the Warrants (and such shares when issued) are herein referred to as the “Underlying Shares.” The Debentures and the Warrants, and the Underlying Shares are sometimes collectively referred to herein as the “Securities.”

ARTICLE II

REPRESENTATIONS AND WARRANTIES

                2.1.     Representations and Warranties of the Company . The Company hereby represents and warrants to the Purchaser, as of the date hereof and the Closing Date (except as set forth below; and as may be modified by or updated by the Commission Documents) that the Company’s representations and warranties set forth in Section 2.1 of the 2007 Purchase Agreement are hereby repeated and incorporated herein by reference with the following modifications and additions:

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                (a)     Capitalization . The authorized capital stock of the Company as of the date hereof is set forth on Schedule 2.1(a) hereto.

                (b)     Commission Documents; Financial Statements . At the times of their respective filings, the Forms 10-QSB (or Form 10-Q, as the case may be) for the three most recent fiscal quarters (collectively, the “ Forms 10-QSB ”) and the Form 10-KSB for the fiscal year ended December 31, 2007 (the “ Form 10-KSB ”) complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission promulgated thereunder, and the Forms 10-QSB and Form 10-KSB did not contain any untrue statement of a material fact or omit 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.

                (c)     Ratification of Price Adjusment to Securities . Upon the issuance of a Debenture and a Warrant as provided herein, in accordance with Section 5(d) of the warrant that the Company issued to the Purchaser pursuant to the 2007 Purchase Agreement, on December 7, 2007 (the “2007 Warrant”), the Warrant Price, as that term is defined therein, shall be reduced to $1.25.

                (d)     Ranking of Securities Issued to KIT Financial, Inc. The $500,000 Senior Secured Convertible Debenture to be issued to KIT Financial, Inc. (“KIT”), or any of its affiliates (the “KIT Debenture”) shall rank in payment and security (i) junior to that certain 10% Senior Secured Convertible Debenture issued to the Purchaser pursuant to the 2007 Purchase Agreement and (ii) pari passu to the Debentures issued to the Purchaser pursuant hereto. .

                2.2.     Representations and Warranties of the Purchaser . The Purchaser hereby represents and warrants to the Company as follows as of the date hereof and as of the Closing Date that the Purchaser’s representations and warranties that are set forth in Sections 2.2 of the 2007 Purchase Agreement are hereby repeated and incorporated herein by reference. The Purchaser also hereby waives the right of first refual contained in Section 3.18 of the 2007 Purchase Agreement with respect to the issuance and sale by the Company of the KIT Debenture and those certain warrants to purchase the Company’s Stock to be issued to KIT in connection with its purchase of the KIT Debenture.

ARTICLE III

COVENANTS

        The Company covenants with the Purchaser as follows, which covenants are for the benefit of the Purchaser and its permitted assignees.

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                3.1.     Securities Compliance . The Company shall notify the Commission in accordance with its rules and regulations, of the transactions contemplated herein and by any of the documents executed in connection herewith, including the Debenture(s) and the Warrant(s) and the Registration Rights Agreement, dated as of the date hereof (the “Transaction Documents”), 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 Securities to the Purchaser, or its subsequent holders.

                3.2.     Registration and Listing . The Company shall cause its Common Stock to continue to be registered under Sections 12(g) of the Exchange Act, to comply in all respects with its reporting and filing obligations under the Exchange Act, to comply with all requirements related to any registration statement filed pursuant to this Agreement, and to 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 such registration or to terminate or suspend its reporting and filing obligations under the Exchange Act or Securities Act, except as permitted herein. The Company will take all action necessary to continue the listing or trading of its Common Stock on the Nasdaq Capital Market or other exchange or market on which the Common Stock is trading. Subject to the terms of the Transaction Documents, the Company further covenants that it will take such further action as the Purchaser may reasonably request, all to the extent required from time to time to enable the Purchaser to sell the Securities 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 Purchaser, the Company shall deliver to the Purchaser a written certification of a duly authorized officer as to whether it has complied with the issuer requirements of Rule 144.

                3.3.     Inspection Rights . Provided the same would not be in violation of Regulation FD, the Company shall permit, during normal business hours and upon reasonable request and reasonable advance notice, the Purchaser or any employees, agents or representatives thereof, so long as the Purchaser shall hold the Debenture or shall beneficially own any Underlying Shares, for purposes reasonably related to the Purchaser’s interests as a stockholder, to examine the publicly available, non-confidential 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 publicly available, non-confidential affairs, finances and accounts of the Company and any Subsidiary with any of its officers, consultants, directors and key employees.

                3.4.     Compliance with Laws . The Company shall comply, and cause each Subsidiary to comply, with all applicable laws, rules, regulations and orders, noncompliance with which would be reasonably likely to have a Material Adverse Effect.

                3.5.     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.

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                3.6.     Reporting Requirements . If the Commission ceases making the Company’s periodic reports available via the Internet without charge, then the Company shall furnish the following to the Purchaser so long as the Purchaser shall beneficially own Securities:

                (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, information and proxy statements in connection with any meetings that are, in each case, provided to holders of shares of Common Stock, contemporaneously with the delivery of such notices or information to such holders of Common Stock.

                3.7.     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.

                3.8.     Use of Proceeds . The net proceeds from the sale of the Securities hereunder shall be used by the Company for working capital and general corporate purposes, including growth initiatives.

                3.9.     Reporting Status . So long as the Purchaser beneficially owns any of the Securities, the Company shall timely file all reports required to be filed with the Commission pursuant to the Exchange Act, and the Company shall not terminate its status as an issuer required to file reports under the Exchange Act even if the Exchange Act or the rules and regulations thereunder would permit such termination.

                3.10.     Disclosure of Transaction . The Company shall issue a press release describing the material terms of the transactions contemplated hereby (the “ Press Release ”) not later than the second Trading Day 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 form of Debenture and Warrant and the Press Release) as soon as practicable following the Closing Date but in no event more than four (4) Trading Days following the Closing Date, which Press Release and Form 8-K shall be subject to prior review and reasonable comment by the Purchaser. “ Trading Day ” means any day during which the principal exchange on which the Common Stock is traded shall be open for trading.

                3.11.     Amendments . The Company shall not amend or waive any provision of the Articles or By-laws of the Company in any way that would adversely affect exercise rights, voting rights, or redemption rights of the holder of the Securities.

                3.12.     Reservation of Shares . So long as any of the Debentures or Warrants remain outstanding, the Company shall take all action necessary to at all times have authorized and reserved for the purpose of issuance of a sufficient number of shares of Common Stock needed to provide for the issuance of the Underlying Shares.

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                3.13.     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 the Purchaser, for the Underlying Shares in such amounts as specified from time to time by the Purchaser to the Company upon conversion of the Debentures or exercise of the Warrants in the form of Exhibit D attached to the 2007 Purchase Agreement (the “ Irrevocable Transfer Agent Instructions ”). Prior to registration of the Underlying Shares under the Securities Act, all such certificates shall bear the restrictive legend specified in Section 5.1 of this Agreement. The Company warrants that no instruction other than the Irrevocable Transfer Agent Instructions referred to in this Section 3.13 will be given by the Company to its transfer agent and that the Underlying Shares shall otherwise be freely transferable on the books and records of the Company as and to the extent provided in this Agreement. If the Purchaser provides the Company with an opinion of counsel, in a generally acceptable form, to the effect that a public sale, assignment or transfer of the Underlying Shares may be made without registration under the Securities Act or the Purchaser provides the Company with reasonable assurances that the Underlying Shares can be sold pursuant to Rule 144 without any restriction as to the number of securities acquired as of a particular date that can then be immediately sold, the Company shall permit the transfer, and, in the case of the Underlying Shares, promptly instruct its transfer agent to issue one or more certificates in such name and in such denominations as specified by the Purchaser and without any restrictive legend.

                3.14.     Form S-3 Eligibility . The Company currently meets the “registrant eligibility” and transaction requirements set forth in the general instructions to Form S-3 applicable to “resale” registrations on Form S-3 and the Company shall file all reports required to be filed by the Company with the Commission in a timely manner.

                3.15     Right of First Refusal .

                (a)     For the twelve (12) month period following the Closing, the Purchaser will have the right of first refusal (the “Initial Purchase Right ”) to purchase, on the same terms as other investors, up to one hundred percent (100%) of any debt securities, equity securities, securities convertible into equity securities, or options or warrants therefor (“ Purchase Securities ”) that the Company proposes to offer, other than the securities excluded by paragraph (e) below.

                (b)     Subsequent to the twelve (12) month period following the Closing, the Purchaser will have the right of first refusal (the “Pro-Rata Purchase Right ”) to purchase, on the same terms as other investors, that percentage of any Purchase Securities that the Company proposes to offer, other than the securities excluded by paragraph (e) below, which is equal to the Purchaser’s pro rata ownership of the Common Stock of the Company on a fully diluted basis. The Initial Purchase Right and the Pro-Rata Purchase Right are collectively referred to herein as the “Purchase Rights”.

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                (c)     If the Company proposes to issue any Purchase Securities, it shall give the Purchaser written notice of its intention, describing the Purchase Securities, the price and the terms and conditions upon which the Company proposes to issue the same, together with a signed and accepted term sheet. The Purchaser shall have ten (10) Trading Days from the giving of such notice to elect to purchase all or part (in the case of the Initial Purchase Right), or part (in the case of the Pro-Rata Purchase Right), of the Purchase Securities for the price and upon the terms and conditions specified in the notice by giving written notice to the Company and stating therein the quantity of such Purchase Securities to be purchased.

                (d)     The Purchaser shall then effect the purchase of the Purchase Securities at the closing of the issuance of Purchase Securities described in the notice delivered by the Company pursuant to paragraph (c) above. On the date of such closing, the Company shall deliver to the Purchaser the certificates representing the Purchase Securities to be purchased by the Purchaser, each certificate to be properly endorsed for transfer, and at such time, the Purchaser shall pay the purchase price for the Purchase Securities.

                (e)     If the Purchaser fails to exercise in full its Purchase Right, the Company shall have ninety (90) days thereafter to sell the Purchase Securities in respect of which the Purchaser’s rights were not exercised, at a price and upon general terms and conditions no more favorable to the purchaser thereof than specified in the Company’s notice to the Purchaser pursuant to paragraph (c) above. If the Company has not sold such Purchase Securities within such ninety (90) days, the Company shall not thereafter issue or sell any Purchase Securities, without first again complying with this Section 3.15.

                (f)     The Purchase Right established by this Section 3.15 shall have no application to any of the following issuances of Purchase Securities (collectively, the “ Excluded Securities ”):

                3.16     Consultant. The July, 2008 Warrant Purchase Agreement is hereby amended to delete in its entirety Section 3.16 thereof, which relates to Company’s engagement of the services of Mr. Lyle Deitch.

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                3.17     Prohibition from Exercise, Shareholder Approval . Until the Company has obtained the approval of the transaction and issuance(s) of securities contemplated herein by a majority of the Company’s holders of Common Stock, which the Company shall use its commercially reasonable efforts to obtain as soon as possible, but in no event later than the Company’s next annual meeting, which shall be held no later than October 31, 2008, Purchaser shall not convert either of the Debentures or exercise either of the Warrants to the extent that the aggregate number of shares issuable upon such conversion or exercise, together with (i) any penalty shares issued pursuant to the Registration Rights Agreement between the Company and the original Holder executed in connection with this transaction, and the Registration Rights Agreement dated July 23, 2008, and (ii) shares of Common Stock that may have been issued upon the exercise of the warrant issued to the Purchaser pursuant to that certain Warrant Purchase Agreement dated July 23, 2008, results in an aggregate issuance of that number of shares of Common Stock that, is greater than Nineteen and Nine-Tenth’s percent (19.9%) of the Company’s total number of outstanding shares of Common Stock as of July 23, 2008.

                3.18     Withdrawal of Registration Statement . The Company shall promptly withdraw the Registration Statement that the Company submitted to the SEC on July 10, 2008 and shall file a new registration statement within 90 days of Purchaser’s written demand, as set forth in the Registration Rights Agreements, dated December 7, 2007 and July 23, 2008, as amended by Section 7.2 hereof, and with the Registration Rights Agreement dated as of the date hereof.

                3.19     Board Representation . In the event that the Purchaser does not exercise its right to appoint one representative to the Company’s Board of Directors pursuant to the terms of the 2007 Purchase Agreement, it shall have the right to appoint an observer of Board proceedings.

ARTICLE IV
CONDITIONS

                4.1.     Conditions Precedent to the Obligation of the Company to Close and to Sell the Securities. The obligation hereunder of the Company to close and issue and sell the Securities to the Purchaser at the Closing is subject to the satisfaction or waiver, at or before the Closing 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 the Purchaser’s Representations and Warranties . The representations and warranties of the Purchaser shall be true and correct in all material respects (except for those representations and warranties that are qualified by materiality or Material Adverse Effect, which 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 (except for those representations and warranties that are qualified by materiality or Material Adverse Effect, which shall be true and correct in all respects) as of such date.

                (b)     Performance by the Purchaser . The Purchaser shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Purchaser at or prior to the Closing Date.

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                (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 which prohibits the consummation of any of the transactions contemplated by this Agreement.

                (d)     Delivery of Purchase Price . The Purchase Price for the Securities shall have been delivered to the Company on each Closing Date.

                (e)     Delivery of Transaction Documents . The Transaction Documents shall have been duly executed and delivered by the Purchaser to the Company.

                4.2.     Conditions Precedent to the Obligation of the Purchaser to Close and to Purchase the Securities. The obligation hereunder of the Purchaser to purchase the Securities and consummate the transactions contemplated by this Agreement 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 Purchaser’s sole benefit and may be waived by the 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 and the other Transaction Documents shall be true and correct in all material respects (except for those representations and warranties that are qualified by materiality or Material Adverse Effect, which 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 (except for those representations and warranties that are qualified by materiality or Material Adverse Effect, 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 material 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 Date.

                (c)     No Suspension, Etc . Trading in the Common Stock shall not have been suspended by the Commission or the Nasdaq Capital Market (except for any suspension of trading of limited duration agreed to by the Company, which suspension shall be terminated prior to the Closing), and, at any time prior to the Closing Date, trading in securities generally as reported by Bloomberg Financial Markets (“ 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 the Purchaser, makes it impracticable or inadvisable to purchase the Securities.

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                (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 which 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, to the Company’s knowledge, 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)     Opinion of Counsel . The Purchaser shall have received an opinion of counsel to the Company, dated the date of the Closing, substantially in the form of Exhibit E annexed to the 2007 Purchase Agreement , with such exceptions and limitations as shall be reasonably acceptable to counsel to the Purchaser.

                (g)     Debenture and Warrant . At or prior to each Closing Date, the Company shall have delivered to the Purchaser a Debenture and a Warrant (in such denominations as the Purchaser may request).

                (h)     Officer’s Certificate . On the Closing Date, the Company shall have delivered to the Purchaser a certificate signed by an executive officer on behalf 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 (except those representations and warranties made as of a specific date) and confirming the compliance by the Company with the conditions precedent set forth in paragraphs (b) to (e) and (i) of this Section 4.2 as of the Closing Date (provided that, with respect to the matters in paragraphs (d) and (e) of this Section 4.2, such confirmation shall be based on the knowledge of the executive officer after due inquiry).

ARTICLE V

CERTIFICATE LEGEND

                5.1.     Legend . Each certificate representing the Securities 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):

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        The Company agrees to issue or reissue certificates representing any of the Underlying Shares, without the legend set forth above if at such time, prior to making any transfer of any such Underlying Shares, 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: (a) either (i) the Company has received an opinion of counsel reasonably satisfactory to the Company, to the effect that the registration of the Underlying 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 (which may include an opinion of counsel provided by the Company), or (iv) the holder provides the Company with reasonable assurances that such security can be sold pursuant to Rule 144 under the Securities Act (which may include an opinion of counsel provided by the Company); and (b) either (i) the Company has received an opinion of counsel reasonably satisfactory to the Company, to the effect that registration or qualification under the securities or “blue sky” laws of any state is not required in connection with such proposed disposition, (ii) compliance with applicable state securities or “blue sky” laws has been effected, or (iii) the holder provides the Company with reasonable assurances that a valid exemption exists with respect thereto (which may include an opinion of counsel provided by the Company). The Company will respond to any such notice from a holder within three (3) business days. In the case of any proposed transfer under this Section 5.1, the Company will use commercially 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 5.1 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 Underlying Shares is required to be issued to the Purchaser without a legend, in lieu of delivering physical certificates representing the Underlying Shares, provided the Company’s transfer agent is participating in the Depository Trust Company (“ DTC ”) Fast Automated Securities Transfer program, the Company shall use its reasonable best efforts to cause its transfer agent to electronically transmit the Underlying Shares to the Purchaser by crediting the account of the Purchaser’s Prime Broker with DTC through its Deposit Withdrawal Agent Commission (“ DWAC ”) system (to the extent not inconsistent with any provisions of this Agreement).

ARTICLE VI

INDEMNIFICATION

                6.1.     Company Indemnity . The Company agrees to indemnify and hold harmless the Purchaser (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 Purchaser as a result of any inaccuracy in or breach of the representations, warranties or covenants made by the Company herein, and the Purchaser agrees to indemnify and hold harmless the Company to the same extent as a result of any inaccuracy in or breach of the representations, warranties or covenants made by the Purchaser herein.

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                6.2.     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 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.

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ARTICLE VII

MISCELLANEOUS

                7.1     Protective Provisions . So long as at least an aggregate of twenty-five percent (25%) of the original principal balances of (i) the Debentures(s) and (ii) the KIT Debenture remain outstanding, consent of the holders of a majority of the outstanding Debenture(s) shall be required for any action (by merger, reclassification or otherwise) that (i) results in the redemption or repurchase of any stock, (ii) results in any merger or other corporate reorganization that results in a change of control of the Company, or any transaction in which all or substantially all of the assets of the Company are sold, (iii) authorizes the issuance of debt in excess of Five Hundred Thousand Dollars ($500,000), (iv) changes the business of the Company, or (v) involves any transaction or compensation arrangements between the Company and its officers and directors. Notwithstanding the foregoing, upon successful and timely completion of both Milestone Sets as set forth herein, and the completion of the transactions contemplated and described herein, the Purchaser will consent to an incentive and compensatory award by the Company of warrants to members of the Company’s management equal to three percent (3%) of the number of outstanding common shares of the Company on a fully-diluted basis at an exercise price and other terms equivalent to those set forth herein, including without limitation repricing and anti-dilution protection. One-third (?) of such award will be made to the CEO and two-thirds (?) will be made to other members of the management team and consultants at the discretion of the CEO, all subject to reasonable approval of the grants by Investor.

                7.2     Amendments to Registration Rights Agreements . The registration rights agreements between the Company and the Purchaser, dated December 7, 2007 and July 23, 2008 are hereby amended to provide that the Company shall file a Registration Statement covering all or a portion of the Registrible Securities, as those terms are defined therein, as soon as possible following Purchaser’s written request to do so, but in no event later than ninety (90) days following such written request, subject to the terms and conditions contained therein.

                7.3    Amendments to Existing Warrant . That certain warrant issued to the Purchaser pursuant to the July, 2008 Warrant Purchase Agreement (the “Existing Warrant”) is hereby amended as follows: (1) The Warrant Price is reduced to $1.00 per share, (2) Section 5(d) of the Existing Warrant is amended to reduce the minimum price set forth therein to $0.4545 per share and (3) Upon any decrease in the Warrant Price, the number of Warrant Shares shall be increased to the number of shares determined by multiplying the Warrant Price that was in effect immediately prior to such decrease by the number of Warrant Shares issuable upon exercise of the Warrant prior to such decrease and dividing the product by the Warrant Price resulting from the decrease.

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                7.4     Amendment to Existing Debenture . That certain 10% Senior Secured Convertible Debenture issued by the Company to the Purchaser on December 7, 2007 is hereby amended to permit the Purchaser to convert such debenture at any time following the execution of this Agreement.

                7.5     Amendment to Security Agreement . The definition of “Secured Obligations”, contained in that certain Security Agreement between the Purchaser and the Company, dated December 7, 2007, is hereby amended to include the Debentures.

                7.6     Short Sales . The Purchaser covenants that neither it nor any affiliate acting on its behalf or pursuant to any understanding with it will pledge, hypothecate, loan or execute any “short sales,” as such term is defined in Rule 200 of Regulation SHO under the Exchange Act, or other hedging transactions with broker-dealers or other financial institutions that may, in turn, engage in “short sales” of the Common Stock, during the twelve (12) month period prior to conversion of the Debenture.

                7.7     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 that the Company shall pay all actual, reasonable and necessary attorneys’ fees and expenses (including disbursements and out-of-pocket expenses) incurred by the Purchaser in connection with (i) the preparation, negotiation, execution and delivery of this Agreement and the other Transaction Documents and the transactions contemplated thereunder, which payment shall not exceed $20,000 and shall be made at the Closing, and (ii) any amendments, modifications or waivers of this Agreement or any of the other Transaction Documents. The Company shall also pay all reaso