Exhibit 10.1

SECURITIES PURCHASE AGREEMENT
 
This Securities Purchase Agreement (this “Agreement”) is dated as of February
28, 2008 between China North East Petroleum Holdings, Inc., a Nevada corporation
with its address at 445 Park Avenue, New York, New York 10022 (the “Company”),
and each purchaser identified on the signature pages hereto (each, including its
successors and assigns, a “Purchaser” and collectively the “Purchasers”).
 
WHEREAS, the Purchasers have agreed to purchase, and the Company has agreed to
sell, the Securities (as defined herein) in connection with the Purchasers’
agreement to provide financing to the Company in the amount of U.S. $15,000,000;
 
WHEREAS, subject to the terms and conditions set forth in this Agreement and
pursuant to Regulation S under the U.S. Securities Act of 1933, as amended (the
“Act”) upon original issuance thereof, and until such time as the same is no
longer required under the applicable requirements of the Act, the Debentures,
Warrants and the Warrant Shares (as such terms are defined herein) shall bear
the legends relating to the offer and the sale of the Debentures, Warrants and
the Warrant Shares as required by (i) Regulation S under the Act or (ii) any
other applicable laws or regulations relating to the issuance of the Securities.
 
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Company and each Purchaser agree
as follows:
 
 
ARTICLE I.
DEFINITIONS
 
1.1           Definitions.  In addition to the terms defined elsewhere in this
Agreement: (a) capitalized terms that are not otherwise defined herein have the
meanings given to such terms in the Debentures (as defined herein), and (b) the
following terms have the meanings set forth in this Section 1.1:
 
“Action” shall have the meaning ascribed to such term in Section 3.1(j).
 
“Affiliate” means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a
Person, as such terms are used in and construed under Rule 405 under the
Securities Act.  With respect to a Purchaser, any investment fund or managed
account that is managed on a discretionary basis by the same investment manager
as such Purchaser will be deemed to be an Affiliate of such Purchaser.
 
“Business Day” means any day except Saturday, Sunday, any day which is a federal
legal holiday in the United States or any day on which banking institutions in
the State of New York are authorized or required by law or other governmental
action to close.

 

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“Class A Warrants” means the Common Stock warrants to purchase an aggregate of
1.2 million shares of the Company with an exercise price of U.S. $0.01 per share
and substantially in the form of Exhibit A hereto.
 
“Class B Warrants” means the Common Stock warrants to purchase an aggregate of
1.5 million shares of the Company with an exercise price of U.S. $3.20 per share
and substantially in the form of Exhibit B hereto.
 
“Class C Warrants” means the Common Stock warrants to purchase an aggregate of
2.1 million shares of the Company with an exercise price of U.S. $3.45 per share
and substantially in the form of Exhibit C hereto.
 
“Closing” means the closing of the purchase and sale of the Securities pursuant
to Section 2.1.
 
“Closing Date” means the Trading Day when all of the Transaction Documents have
been executed and delivered by the applicable parties thereto, and all
conditions precedent to (i) the Purchasers’ obligations to pay the Subscription
Amount and (ii) the Company’s obligations to deliver the Securities have been
satisfied or waived.
 
“Commission” means the Securities and Exchange Commission.
 
“Common Stock” means the common stock of the Company, par value $.001 per share,
and any other class of securities into which such securities may hereafter be
reclassified or changed into.
 
“Common Stock Equivalents” means any securities of the Company or the
Subsidiaries which would entitle the holder thereof to acquire at any time
Common Stock, including, without limitation, any debt, preferred stock, rights,
options, warrants or other instrument that is at any time convertible into or
exercisable or exchangeable for, or otherwise entitles the holder thereof to
receive, Common Stock.
 
“Company Counsel” means Crone Rozynko LLP, with offices located at 101
Montgomery Street, Suite 1950, San Francisco, California, 94105.
 
“Corporate Authorization Documents” means (i) the resolutions of the Board of
Directors of the Company, in form and substance satisfactory to the
Purchasers,  authorizing the transactions contemplated herein, including,
without limitation, the issuance of the Debentures and the Warrants and the
execution and delivery of the remaining Transaction Documents (ii) a certificate
of the Secretary of the Company in usual and customary form attesting to the
copies of the certificate of incorporation and bylaws of the Company attached
thereto.

 
 
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 “Debentures” means the 8% Secured Debentures due, subject to the terms therein,
four (4) years from their date of issuance, issued by the Company to the
Purchasers hereunder, in the form of Exhibit D attached hereto.
 
“Disclosure Schedules” shall have the meaning ascribed to such term in Section
3.1.
 
“Effective Date” means the date that the initial Registration Statement filed by
the Company pursuant to the Registration Rights Agreement is first declared
effective by the Commission.
 
“EGS” means Ellenoff, Grossman & Schole LLP with their address at 370 Lexington
Avenue, 19th Floor New York, New York 10017.
 
“Escrow Agent” shall mean Wells Fargo Bank, National Association, 707 Wilshire
Blvd, 17th floor, Los Angeles, Ca  90017.
 
“Escrow Agreement” shall mean the escrow agreement entered into prior to the
date hereof, by and among the Company, the Purchasers and the Escrow Agent
pursuant to which the Purchasers shall deposit Subscription Amounts with the
Escrow Agent to be applied to the transactions contemplated hereunder.
 
“Evaluation Date” shall have the meaning ascribed to such term in Section
3.1(r).
 
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.

“Exempt Issuance” means the issuance of (a) shares of Common Stock or options to
employees, officers or directors of the Company pursuant to any stock or option
plan duly adopted for such purpose by a majority of the non-employee members of
the Board of Directors of the Company or a majority of the members of a
committee of non-employee directors established by the Board of Directors,
provided, however, in no event shall the number of shares reserved under any
such plan or issued under such plan or issued to employees, officers, directors
or officers of the Company exceed a number of shares equal to 5% of the issued
and outstanding shares of Common Stock of the Company on the date hereof or; (b)
securities upon the exercise or exchange of or conversion of any Securities
issued hereunder and/or other securities exercisable or exchangeable for or
convertible into shares of Common Stock issued and outstanding on the date of
this Agreement, provided that such securities have not been amended since the
date of this Agreement to increase the number of such securities or to decrease
the exercise, exchange or conversion price of such securities.
 
“Fundamental Transaction” means any of the following actions or agreements by
the Company or any Subsidiary: (i) a merger or consolidation in which the
Company is not the surviving entity or the shareholders (or owners of registered
capital or other form of ownership) of the Company or its Subsidiary are not the
controlling shareholders after such transaction (ii) a sale of all or
substantially all of the assets of the Company or any Subsidiary, as the case
may be, or (iii) the sale of any of the legal and benefical ownership of any
Subsidiary.

 
 
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“Funding Post Closing Conditions” means the post closing conditions set forth in
Sections 4.6, 4.17 and 4.18(a), 4.18(b) and 4.18(d) hereof and as otherwise
defined in Section 2.3 hereof.
 
“GAAP” shall have the meaning ascribed to such term in Section 3.1(h).
 
“Indebtedness” shall have the meaning ascribed to such term in Section 3.1(aa).
 
“Individual Pledgor” means Mr. Wang Hong Jun with his address at 171 Qingnan
Dajie Zhanjian Road, Song Yuan Jilin People’s Republic of China and who is the
legal and beneficial owner of an aggregate of 6,732,000 shares of Common Stock
of the Company.
 
“Intellectual Property Rights” shall have the meaning ascribed to such term in
Section 3.1(o).
 
“Legend Removal Date” shall have the meaning ascribed to such term in Section
4.1(c).
 
“Liens” means a lien, charge, security interest, encumbrance, right of first
refusal, preemptive right or other restriction.
 
“Material Adverse Effect” shall have the meaning assigned to such term in
Section 3.1(b).
 
“Material Oil Drilling Agreements” means any of the following: (i) Qian-112
Oilfield Cooperative Development Contract effective as of May 28, 2002 by and
between PetroChina Oil and Gas Company Limited Jilin Oil Field Branch Company
and Song Yuan City Yu Qiao Oil and Gas Development Company Limited, and (ii)
He301 Oilfield Cooperative Development Contract effective as of May 28, 2003 by
and between PetroChina Oil and Gas Company Limited Jilin Oil Field Branch
Company and Chang Ling Long De Oil and Gas Development Limited.
 
“Material Permits” shall have the meaning ascribed to such term in Section
3.1(m).
 
“Maximum Rate” shall have the meaning ascribed to such term in Section 6.17.
 
“Onshore Pledge Agreement” means the agreement between the Company and the
Purchasers providing for the pledge by the Company of its legal and beneficial
ownership of 66% of the registered capital of Song Yuan upon the terms set forth
therein, which Onshore Pledge Agreement shall be in the form annexed hereto as
Exhibit E.

 
 
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“Option Agreement” means the agreement between the Company and the Purchasers
granting the Purchasers to acquire an additional 24% of the registered capital
of Song Yuan upon the terms set forth therein, which Option Agreement shall be
in the form annexed hereto as Exhibit F.
 
 “Person” means an individual or corporation, partnership, trust, incorporated
or unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other entity
of any kind.
 
“Personal Pledge Agreement” means the pledge agreement entered into by and
between the Individual Pledgor and the Purchasers whereby the Individual
Pledgor  pledges all of the 6,732,000 shares of Common Stock of the Company
legally and beneficially owned by him (directly and through any affiliates) as
additional collateral security for the repayment of the Debentures, which
Personal Pledge Agreement shall be in the form of Exhibit G.
 
“Pre-Notice” shall have the meaning ascribed to such term in Section 4.13.
 
“PRC” means the People’s Republic of China.
 
“Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an informal investigation or partial proceeding,
such as a deposition), whether commenced or threatened.
 
“Purchaser Party” shall have the meaning ascribed to such term in Section 4.11.
 
“Registration Rights Agreement” means the Registration Rights Agreement, dated
the date hereof, among the Company and the Purchasers, in the form of Exhibit H
attached hereto.
 
“Registration Statement” means a registration statement meeting the requirements
set forth in the Registration Rights Agreement and covering the resale of the
Underlying Shares by each Purchaser as provided for in the Registration Rights
Agreement.
 
“Required Approvals” shall have the meaning ascribed to such term in Section
3.1(e).
 
 “Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.
 
“SEC Reports” shall have the meaning ascribed to such term in Section 3.1(h).
 
“Securities” means the Debentures, Warrants and the Underlying Shares.

 
 
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“Securities Act” means the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder.
 
“Security Agreement” means the Security Agreement, dated the date hereof, among
the Company and the Purchasers, in the form of Exhibit I attached hereto.

“Security Documents” shall mean the Security Agreement, the Personal Pledge
Agreement, the Onshore Pledge Agreement and any other documents and filing
required thereunder in order to grant the Purchasers a first priority security
interest in the assets of the Company as provided in the Security Agreement,
including all UCC-1 filing receipts.
 
“Short Sales” means all “short sales” as defined in Rule 200 of Regulation SHO
under the Exchange Act (but shall not be deemed to include the location and/or
reservation of borrowable shares of Common Stock). 
 
“Song Yuan” means Song Yuan North East Petroleum Technical Service Co. Ltd. a
company existing under the laws of the PRC as a contractual Sino Foreign joint
venture, of which the Company owns 90% of the registered capital.
 
 “Subscription Amount” means, as to each Purchaser, the aggregate amount to be
paid for Debentures and Warrants purchased hereunder as specified below such
Purchaser’s name on the signature page of this Agreement and next to the heading
“Subscription Amount,” in United States dollars and in immediately available
funds.
 
“Subsequent Financing” shall have the meaning ascribed to such term in Section
4.13.
 
“Subsequent Financing Notice” shall have the meaning ascribed to such term in
Section 4.13.
 
“Subsidiary” means any subsidiary of the Company as set forth on Schedule 3.1(a)
and shall, where applicable, include any direct or indirect subsidiary of the
Company formed or acquired after the date hereof.
 
 “Subsidiary Note” means the 8% Note issued by the Company’s subsidiary Song
Yuan to the Company in the principal amount of U.S. $15,000,000.
 
“Trading Day” means a day on which the New York Stock Exchange is open for
trading.
 
“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 American
Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq
Global Select Market, the New York Stock Exchange or the OTC Bulletin Board.
 
 “Transaction Documents” means this Agreement, the Debentures, the Warrants, the
Registration Rights Agreement, the Security Agreement, the Onshore Share Pledge
Agreement, the Option Agreement, the Escrow Agreement, the Personal Pledge
Agreement and all exhibits and schedules thereto and hereto and any other
documents or agreements executed in connection with the transactions
contemplated hereunder.

 
 
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“Transfer Agent” means Interest Transfer Company, Inc. with a mailing address of
1981 East Murray Holladay Road, Suite 100, Salt Lake City, UT 84117 and a
facsimile number of (801) 277-3147 and any successor transfer agent of the
Company.
 
“Underlying Shares” means the shares of Common Stock issued and issuable upon
exercise of the Warrants
 
 “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, 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 OTC Bulletin Board is not a Trading Market, the volume weighted
average price of the Common Stock for such date (or the nearest preceding date)
on the OTC Bulletin Board; (c) if the Common Stock is not then listed or quoted
on the OTC Bulletin Board and if prices for the Common Stock are then reported
in the “Pink Sheets” published by Pink Sheets, LLC (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 Purchasers of a majority in interest of
the Securities then outstanding and reasonably acceptable to the Company, the
fees and expenses of which shall be paid by the Company.
 
“Warrants” means any of the Class A Warrants, Class B Warrants and Class C
Warrants.
 
 
ARTICLE II.
PURCHASE AND SALE
 
2.1           Closing.
 
(a)           On the Closing Date, upon the terms and subject to the conditions
set forth herein, substantially concurrent with the execution and delivery of
this Agreement by the parties hereto, the Company agrees to sell, and the
Purchasers, severally and not jointly, agree to purchase, in the aggregate, up
to $15,000,000 in principal amount of the Debentures and the Class A Warrants,
Class B Warrants and the Class C Warrants.  Each Purchaser shall deliver to the
Company, via wire transfer or a certified check, immediately available funds
equal to its Subscription Amount to the account as specified in the Escrow
Agreement and the Company shall deliver to each Purchaser its respective
Debenture and the respective Warrants, as determined pursuant to Section 2.2(a),
and the Company and each Purchaser shall deliver the other items set forth in
Section 2.2 deliverable at the Closing.  Upon satisfaction of the conditions set
forth in Sections 2.2 and 2.3, the Closing shall occur at the offices of EGS or
such other location or via email and facsimile as the parties shall mutually
agree.
 

 
 
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(b)           Allocation of Purchase Price. The Company and its independent
auditors shall confirm the amount of the aggregate purchase price of $15,000,000
allocated by the Company to each of the Debenture and the Warrants and shall
provide the Purchasers with such determination. The allocation shall be made in
accordance with United States GAAP.
 
2.2            Deliveries.
 
(a)           On the Closing Date, the Company shall deliver or cause to be
delivered to each Purchaser the following:
 
 
(i)
this Agreement duly executed by the Company;

 
 
(ii)
a legal opinion of Company Counsel, in substantially the form ofExhibit J
attached hereto;

 
 
(iii) 
a Debenture with a principal amount equal to such Purchaser’sSubscription
Amount, registered in the name of such Purchaser andthe corresponding Warrants;

 
 
(iv)
the Security Agreement, duly executed by the Company along with all of the
Security Documents duly executed by the parties thereto;

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

 
 
(vi) 
the Onshore Share Pledge Agreement duly executed by theCompany;

 
 
(vii)
the Escrow Agreement;

 
 
(vii) 
the Corporate Authorization Documents and a true and correctexecuted copy of the
Subsidiary Note;

 
 
(viii) 
the Warrants; and

 
 
(ix) 
the Option Agreement;

 
(b)           On the Closing Date, each Purchaser shall deliver or cause to be
delivered to the Company the following:
 
 
(i)
this Agreement duly executed by such Purchaser;

 
 
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(ii)
such Purchaser’s Subscription Amount by wire transfer to the Escrow account as
specified in writing by the Company and Escrow Agent;

 
 
(iii) 
the Security Agreement. Onshore Share Pledge Agreement andOption  Agreement duly
executed by such Purchaser;

 
 
(iv)
the Registration Rights Agreement duly executed by suchPurchaser; and

 
 
(v) 
the Escrow Agreement duly executed by such Purchaser.

 
(c)           On the Closing Date, the Individual Pledgor shall deliver the
PersonalPledge Agreement, the certificate(s) for the shares subject to the
Personal PledgeAgreement and at least one undated stock power signature
medallion guaranteed.

2.3           Closing Conditions and Release of Funds from Escrow.
 
(a)          The obligations of the Company hereunder in connection with the
Closing are subject to the following conditions being met:
 
 
(i) 
the accuracy in all material respects on the Closing Date of therepresentations
and warranties of the Purchasers contained herein;

 
 
(ii) 
all obligations, covenants and agreements of each Purchaserrequired to be
performed at or prior to the Closing Date shall havebeen performed; and

 
 
(iii)
the delivery by each Purchaser of the items set forth in Section2.2(b) of this
Agreement.

 
(b)           The respective obligations of the Purchasers hereunder in
connection with the Closing are subject to the following conditions being met:
 
 
(i)
the accuracy in all material respects when made and on the ClosingDate of the
representations and warranties of the Companycontained herein;

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

 
 
(iii) 
the delivery by the Company of the items set forth in Section2.2(a) of this
Agreement;

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

 
 
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(v)
from the date hereof to the Closing Date, trading in the CommonStock shall not
have been suspended by the Commission or theCompany’s principal Trading 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 L.P. shall not have been suspended or limited, or minimum prices shall
not have been established on securities whose trades are reported by such
service, or on any Trading Market, nor shall a banking moratorium have been
declared either by the United States or New York State authorities nor shall
there have occurred any material outbreak or escalation of hostilities or other
national or international calamity of such magnitude in its effect on, or any
material adverse change in, any financial market which, in each case, in the
reasonable judgment of each Purchaser, makes it impracticable or inadvisable to
purchase the Securities at the Closing.

 
(c)           Prior to the release of funds, the parties shall execute a written
notice to the Escrow Agent with respect to the release of any funds from Escrow,
and no funds shall be released without a joint written instruction.  The
Subscription Funds shall be released from the escrow as follows:

(i)           Upon closing, the sum of $1,750,000 shall be released to the
Company, of which $510,000 shall be utilized by the Company to pay its capital
contribution to Song Yuan as provide in Section 4.5 hereof

(ii)           Upon satisfaction by the Company, to the satisfaction of the
Purchasers,  of (A) the covenant contained in Section 3.3 (f) hereof and (B) the
post closing conditions set forth in Sections 4.6, 4.17 and 4.18(a), 4.18(b) and
4.18(d) hereof (sometimes collectively referred to as the “Funding Post Closing
Conditions”), all remaining funds in escrow shall be released from escrow.

 
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
 
3.1           Representations and Warranties of the Company.  For purposes of
this Article III, the term the “Company” shall be deemed to include the Company
and each Subsidiary.  Except as set forth in the Company’s SEC Reports and the
Disclosure Schedules which Disclosure Schedules shall be deemed a part hereof
and shall qualify any representation or otherwise made herein to the extent of
the disclosure contained in the corresponding section of the Disclosure
Schedules, the Company hereby makes the following representations and warranties
to each Purchaser:

 
 
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(a)  Subsidiaries.  All of the direct and indirect Subsidiaries of the Company
are set forth on Schedule 3.1(a).  The Company owns, directly or indirectly, all
of the capital stock or other equity interests of each Subsidiary free and clear
of any Liens, and all of the issued and outstanding shares of capital stock of
each Subsidiary are validly issued and are fully paid, non-assessable and free
of preemptive and similar rights to subscribe for or purchase securities.
 
(b)  Organization and Qualification.  The Company and each of the Subsidiaries
is an entity duly incorporated or otherwise organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization (as applicable), with the requisite power and authority to own and
use its properties and assets and to carry on its business as currently
conducted.  Neither the Company nor any Subsidiary is in violation or default of
any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter documents.  Each of the
Company and the Subsidiaries is duly qualified to conduct business and is in
good standing as a foreign corporation or other entity in each jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not have or reasonably be expected to result
in (i) a material adverse effect on the legality, validity or enforceability of
any Transaction Document, (ii) a material adverse effect on the results of
operations, assets, business, prospects or condition (financial or otherwise) of
the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse
effect on the Company’s ability to perform in any material respect on a timely
basis its obligations under any Transaction Document (any of (i), (ii) or (iii),
a “Material Adverse Effect”) and no Proceeding has been instituted in any such
jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or
curtail such power and authority or qualification.
 
(c)  Authorization; Enforcement.  The Company has the requisite corporate power
and authority to enter into and to consummate the transactions contemplated by
each of the Transaction Documents and otherwise to carry out its obligations
hereunder and thereunder.  The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
action on the part of the Company and no further action is required by the
Company, its board of directors or its stockholders in connection therewith
other than in connection with the Required Approvals.  Each Transaction Document
has been (or upon delivery will have been) duly executed by the Company and,
when delivered in accordance with the terms hereof and thereof, will constitute
the valid and binding obligation of the Company enforceable against the Company
in accordance with its terms except (i) as limited by general equitable
principles and applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors’ rights
generally, (ii) as limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies and (iii) insofar as
indemnification and contribution provisions may be limited by applicable law.

 
 
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(d)  No Conflicts.  The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the other
transactions contemplated hereby and thereby do not and will not: (i) conflict
with or violate any provision of the Company’s or any Subsidiary’s certificate
or articles of incorporation, bylaws or other organizational or charter
documents, or (ii) conflict with, or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, result in the
creation of any Lien upon any of the properties or assets of the Company or any
Subsidiary, or give to others any rights of termination, amendment, acceleration
or cancellation (with or without notice, lapse of time or both) of, any
agreement, credit facility, debt or other instrument (evidencing a Company or
Subsidiary debt or otherwise) or other understanding to which the Company or any
Subsidiary is a party or by which any property or asset of the Company or any
Subsidiary is bound or affected, or (iii) subject to the Required Approvals,
conflict with or result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or governmental
authority to which the Company or a Subsidiary is subject (including federal and
state securities laws and regulations), or by which any property or asset of the
Company or a Subsidiary is bound or affected; except in the case of each of
clauses (ii) and (iii), such as could not have or reasonably be expected to
result in a Material Adverse Effect.
 
(e)  Filings, Consents and Approvals.  The Company is not required to obtain any
consent, waiver, authorization or order of, give any notice to, or make any
filing or registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, other than
(i) filings required pursuant to Section 4.6, (ii) the filing with the
Commission of the Registration Statement, (iii)  filings with the proper
authorities in the PRC as set forth on Schedule 3.1(e) hereto (iv)
(collectively, the “Required Approvals”).
 
(f)  Issuance of the Securities.  The Securities are duly authorized and, when
issued and paid for in accordance with the applicable Transaction Documents,
will be duly and validly issued, fully paid and nonassessable, free and clear of
all Liens imposed by the Company other than restrictions on transfer provided
for in the Transaction Documents.  The Underlying Shares, when issued in
accordance with the terms of the Transaction Documents, will be validly issued,
fully paid and nonassessable, free and clear of all Liens imposed by the Company
other than restrictions on transfer provided for in the Transaction
Documents.  The Company has reserved from its duly authorized capital stock a
number of shares of Common Stock for issuance of the Underlying Shares at least
equal to the Required Minimum on the date hereof.
 
(g)  Capitalization.  The capitalization of the Company is as set forth on
Schedule 3.1(g), which Schedule 3.1(g) shall also include the number of shares
of Common Stock owned beneficially, and of record, by Affiliates of the Company
as of the date hereof.

 
 
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The Company has not issued any capital stock since its most recently filed
periodic report under the Exchange Act, other than pursuant to the exercise of
employee stock options under the Company’s stock option plans, the issuance of
shares of Common Stock to employees pursuant to the Company’s employee stock
purchase plans and pursuant to the conversion or exercise of Common Stock
Equivalents outstanding as of the date of the most recently filed periodic
report under the Exchange Act.  No Person has any right of first refusal,
preemptive right, right of participation, or any similar right to participate in
the transactions contemplated by the Transaction Documents.  Except as a result
of the purchase and sale of the Securities, there are no outstanding options,
warrants, scrip rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities, rights or obligations convertible into or
exercisable or exchangeable for, or giving any Person any right to subscribe for
or acquire, any shares of Common Stock, or contracts, commitments,
understandings or arrangements by which the Company or any Subsidiary is or may
become bound to issue additional shares of Common Stock or Common Stock
Equivalents. The issuance and sale of the Securities will not obligate the
Company to issue shares of Common Stock or other securities to any Person (other
than the Purchasers) and will not result in a right of any holder of Company
securities to adjust the exercise, conversion, exchange or reset price under any
of such securities. All of the outstanding shares of capital stock of the
Company are validly issued, fully paid and nonassessable, have been issued in
compliance with all federal and state securities laws, and none of such
outstanding shares was issued in violation of any preemptive rights or similar
rights to subscribe for or purchase securities.  No further approval or
authorization of any stockholder, the Board of Directors of the Company or
others is required for the issuance and sale of the Securities.  There are no
stockholders agreements, voting agreements or other similar agreements with
respect to the Company’s capital stock to which the Company is a party or, to
the knowledge of the Company, between or among any of the Company’s
stockholders.
 
(h)  SEC Reports; Financial Statements.  The Company has filed all reports,
schedules, forms, statements and other documents required to be filed by the
Company under the Securities Act and the Exchange Act, including pursuant to
Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or
such shorter period as the Company was required by law or regulation to file
such material) (the foregoing materials, including the exhibits thereto and
documents incorporated by reference therein, being collectively referred to
herein as the “SEC Reports”) on a timely basis or has received a valid extension
of such time of filing and has filed any such SEC Reports prior to the
expiration of any such extension.  As of their respective dates, the SEC Reports
complied in all material respects with the requirements of the Securities Act
and the Exchange Act, as applicable, and none of the SEC Reports, when filed,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.  The financial statements of the Company included in the SEC Reports
comply in all material respects with applicable accounting requirements and the
rules and regulations of the Commission with respect thereto as in effect at the
time of filing.  Such financial statements have been prepared in accordance with
United States generally accepted accounting principles applied on a consistent
basis during the periods involved (“GAAP”), except as may be otherwise specified
in such financial statements or the notes thereto and except that unaudited
financial statements may not contain all footnotes required by GAAP, and fairly
present in all material respects the financial position of the Company and its
consolidated Subsidiaries as of and for the dates thereof and the results of
operations and cash flows for the periods then ended, subject, in the case of
unaudited statements, to normal, immaterial, year-end audit adjustments.

 
 
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(i)  Material Changes.  Since the date of the latest unaudited financial
statements included within the SEC Reports, except as specifically disclosed in
a subsequent SEC Report filed prior to the date hereof, (i) there has been no
event, occurrence or development that has had or that could reasonably be
expected to result in a Material Adverse Effect, (ii) the Company has not
incurred any liabilities (contingent or otherwise) other than (A) trade payables
and accrued expenses incurred in the ordinary course of business consistent with
past practice and (B) liabilities not required to be reflected in the Company’s
financial statements pursuant to GAAP or disclosed in filings made with the
Commission, (iii) the Company has not altered its method of accounting, (iv) the
Company has not declared or made any dividend or distribution of cash or other
property to its stockholders or purchased, redeemed or made any agreements to
purchase or redeem any shares of its capital stock and (v) the Company has not
issued any equity securities to any officer, director or Affiliate, except
pursuant to existing Company stock option plans. The Company does not have
pending before the Commission any request for confidential treatment of
information.  Except for the issuance of the Securities contemplated by this
Agreement or as set forth on Schedule 3.1(i), no event, liability or development
has occurred or exists with respect to the Company or its Subsidiaries or their
respective business, properties, operations or financial condition, that would
be required to be disclosed by the Company under applicable securities laws at
the time this representation is made or deemed made that has not been publicly
disclosed at least one Trading Day prior to the date that this representation is
made.
 
(j)  Litigation.  Other than as disclosed on Schedule 3.1(l) there is no action,
suit, inquiry, notice of violation, proceeding or investigation pending or, to
the knowledge of the Company, threatened against or affecting the Company, any
Subsidiary or any of their respective properties before or by any court,
arbitrator, governmental or administrative agency or regulatory authority
(federal, state, county, local or foreign) (collectively, an “Action”) which (i)
adversely affects or challenges the legality, validity or enforceability of any
of the Transaction Documents or the Securities or (ii) could, if there were an
unfavorable decision, have or reasonably be expected to result in a Material
Adverse Effect.  Neither the Company nor any Subsidiary, nor any director or
officer thereof, is or has been the subject of any Action involving a claim of
violation of or liability under federal or state securities laws or a claim of
breach of fiduciary duty.  There has not been, and to the knowledge of the
Company, there is not pending or contemplated, any investigation by the
Commission involving the Company or any current or former director or officer of
the Company.  The Commission has not issued any stop order or other order
suspending the effectiveness of any registration statement filed by the Company
or any Subsidiary under the Exchange Act or the Securities Act.

 
 
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(k)  Labor Relations.  No material labor dispute exists or, to the knowledge of
the Company, is imminent with respect to any of the employees of the Company
which could reasonably be expected to result in a Material Adverse Effect.  None
of the Company’s or its Subsidiaries’ employees is a member of a union that
relates to such employee’s relationship with the Company or such Subsidiary, and
neither the Company nor any of its Subsidiaries is a party to a collective
bargaining agreement, and the Company and its Subsidiaries believe that their
relationships with their employees are good.  No executive officer, to the
knowledge of the Company, is, or is now expected to be, in violation of any
material term of any employment contract, confidentiality, disclosure or
proprietary information agreement or non-competition agreement, or any other
contract or agreement or any restrictive covenant in favor of any third party,
and the continued employment of each such executive officer does not subject the
Company or any of its Subsidiaries to any liability with respect to any of the
foregoing matters.  The Company and its Subsidiaries are in compliance with all
U.S. federal, state, local and foreign laws and regulations relating to
employment and employment practices, terms and conditions of employment and
wages and hours, except where the failure to be in compliance could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
 
(l)  Compliance.  Neither the Company nor any Subsidiary (i) is in default under
or in violation of (and no event has occurred that has not been waived that,
with notice or lapse of time or both, would result in a default by the Company
or any Subsidiary under), nor has the Company or any Subsidiary received notice
of a claim that it is in default under or that it is in violation of, any
indenture, loan or credit agreement or any other agreement or instrument
(including, without limitation, the Material Oil Drilling Contracts)  to which
it is a party or by which it or any of its properties is bound (whether or not
such default or violation has been waived), (ii) is in violation of any order of
any court, arbitrator or governmental body, or (iii) is or has been in violation
of any statute, rule or regulation of any governmental authority, including
without limitation all foreign, federal, state and local laws applicable to its
business and all such laws that affect the environment, except in each case as
could not have or reasonably be expected to result in a Material Adverse Effect.
 
(m)  Regulatory Permits.  The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits could not reasonably be expected to result in a Material
Adverse Effect (“Material Permits”), and neither the Company nor any Subsidiary
has received any notice of proceedings relating to the revocation or
modification of any Material Permit. Schedule 3.1(m) sets forth a complete list
of all permits and licenses and regulatory approvals required by the
subsidiaries to operate their respective business in the PRC, each of which has
been obtained and has not been revoked or amended.  The Company and its
Subsidiaries have paid all fees for permits and licenses required to be paid by
them in the PRC in connection with the operation of their respective businesses.

 
 
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(n)   Title to Assets.  The Company and the Subsidiaries have good and
marketable title in fee simple to all real property owned by them and good and
marketable title in all personal property owned by them that is material to the
business of the Company and the Subsidiaries, in each case free and clear of all
Liens, except for Liens as do not materially affect the value of such property
and do not materially interfere with the use made and proposed to be made of
such property by the Company and the Subsidiaries and Liens for the payment of
PRC, federal, state or other taxes, the payment of which is neither delinquent
nor subject to penalties.  Any real property and facilities held under lease by
the Company and the Subsidiaries are held by them under valid, subsisting and
enforceable leases with which the Company and the Subsidiaries are in compliance
in all respects.
 
(o)  Patents and Trademarks.  The Company and the Subsidiaries have, or have
rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, trade secrets, inventions, copyrights,
licenses and other intellectual property rights and similar rights necessary or
material for use in connection with their respective businesses as described in
the SEC Reports and which the failure to so have could have a Material Adverse
Effect (collectively, the “Intellectual Property Rights”).  Neither the Company
nor any Subsidiary has received a notice (written or otherwise) that any of the
Intellectual Property Rights used by the Company or any Subsidiary violates or
infringes upon the rights of any Person. To the knowledge of the Company, all
such Intellectual Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights.  The
Company and its Subsidiaries have taken reasonable security measures to protect
the secrecy, confidentiality and value of all of their intellectual properties,
except where failure to do so could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
 
(p)  Insurance.  The Company and the Subsidiaries have no insurance against
losses and risks including, but not limited to, directors and officers insurance
coverage.  Neither the Company nor any Subsidiary has any reason to believe that
it will not be able to obtain such coverage from  insurers as may be necessary
to continue its business.  The Company shall apply to obtain directors and
officers insurance within 90 days of the Closing and  maintain it for so long as
any principal or interest on the Debentures remain unpaid.
 
(q)  Transactions with Affiliates and Employees.  Except as set forth in the SEC
Reports, none of the officers or directors of the Company and, to the knowledge
of the Company, none of the employees of the Company is presently a party to any
transaction with the Company or any Subsidiary (other than for services as
employees, officers and directors), including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any officer, director or such employee or, to the knowledge of the
Company, any entity in which any officer, director, or any such employee has a
substantial interest or is an officer, director, trustee or partner, in each
case in excess of $60,000 other than for (i) payment of salary or consulting
fees for services rendered, (ii) reimbursement for expenses incurred on behalf
of the Company and (iii) other employee benefits, including stock option
agreements under any stock option plan of the Company.

 
 
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(r)  Sarbanes-Oxley; Internal Accounting Controls.  The Company is in material
compliance with all provisions of the Sarbanes-Oxley Act of 2002 which are
applicable to it as of the Closing Date.  The Company and the Subsidiaries
maintain a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management’s general or specific authorizations, (ii) transactions are recorded
as necessary to permit preparation of financial statements in conformity with
GAAP and to maintain asset accountability, (iii) access to assets is permitted
only in accordance with management’s general or specific authorization, and (iv)
the recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The Company has established disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and
designed such disclosure controls and procedures to ensure that information
required to be disclosed by the Company in the reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Commission’s rules and forms.  The Company’s
certifying officers have evaluated the effectiveness of the Company’s disclosure
controls and procedures as of the end of the period covered by the Company’s
most recently filed periodic report under the Exchange Act (such date, the
“Evaluation Date”).  The Company presented in its most recently filed periodic
report under the Exchange Act the conclusions of the certifying officers about
the effectiveness of the disclosure controls and procedures based on their
evaluations as of the Evaluation Date.  Since the Evaluation Date, there have
been no changes in the Company’s internal control over financial reporting (as
such term is defined in the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
 
(s)  Certain Fees.  Other than as described on Schedule 3.1(s) no brokerage or
finder’s fees or commissions are or will be payable by the Company to any
broker, financial advisor or consultant, finder, placement agent, investment
banker, bank or other Person with respect to the transactions contemplated by
the Transaction Documents.  The Purchasers shall have no obligation with respect
to any fees or with respect to any claims made by or on behalf of other Persons
for fees of a type contemplated in this Section that may be due in connection
with the transactions contemplated by the Transaction Documents.
 
(t)  Private Placement.  Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.4, no registration under
the Securities Act is required for the offer and sale of the Securities by the
Company to the Purchasers as contemplated hereby. The issuance and sale of the
Securities hereunder does not contravene the rules and regulations of the
Trading Market.

 
 
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(u)  Investment Company. The Company is not, and is not an Affiliate of, and
immediately after receipt of payment for the Securities, will not be or be an
Affiliate of, an “investment company” within the meaning of the Investment
Company Act of 1940, as amended.  The Company shall conduct its business in a
manner so that it will not become subject to the Investment Company Act of 1940,
as amended.
 
(v)  Registration Rights.  Other than each of the Purchasers, no Person has any
right to cause the Company to effect the registration under the Securities Act
of any securities of the Company.
 
(w)  Listing and Maintenance Requirements.  The Company’s Common Stock is
registered pursuant to Section 12(b) or 12(g) of the Exchange Act, and the
Company has taken no action designed to, or which to its knowledge is likely to
have the effect of, terminating the registration of the Common Stock under the
Exchange Act nor has the Company received any notification that the Commission
is contemplating terminating such registration.  The Company has not, in the
twelve (12) months preceding the date hereof, received notice from any Trading
Market on which the Common Stock is or has been listed or quoted to the effect
that the Company is not in compliance with the listing or maintenance
requirements of such Trading Market. The Company is, and has no reason to
believe that it will not in the foreseeable future continue to be, in compliance
with all such listing and maintenance requirements. The Company shall file any
and all application with the Nasdaq Stock Market or the American Stock Exchange
to obtain a listing for its Common Stock within 12 months of the date of the
Closing and, assuming the Common Stock is accepted for listing, shall use its
best efforts to maintain such listing for so long as the Debentures remain
unpaid.
 
(x)  Application of Takeover Protections.  The Company and its board of
directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Company’s certificate of incorporation (or
similar charter documents) or the laws of its state of incorporation that is or
could become applicable to the Purchasers as a result of the Purchasers and the
Company fulfilling their obligations or exercising their rights under the
Transaction Documents, including without limitation as a result of the Company’s
issuance of the Securities and the Purchasers’ ownership of the Securities.
 
(y)  Disclosure.  Except with respect to the material terms and conditions of
the transactions contemplated by the Transaction Documents, the Company confirms
that neither it nor any other Person acting on its behalf has provided any of
the Purchasers or their agents or counsel with any information that it believes
constitutes or might constitute material, nonpublic information.  The Company
understands and confirms that the Purchasers will rely on the foregoing
representation in effecting transactions in securities of the Company.  All
disclosure furnished by or on behalf of the Company to the Purchasers regarding
the Company, its business and the transactions contemplated hereby, including
the Disclosure Schedules to this Agreement, is true and correct and does not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading.   The press releases
disseminated by the Company during the twelve months preceding the date of this
Agreement taken as a whole do 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 and when made, not misleading.  The Company acknowledges
and agrees that no Purchaser makes or has made any representations or warranties
with respect to the transactions contemplated hereby other than those
specifically set forth in Section 3.4 hereof.

 
 
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(z)  No Integrated Offering. Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.4, neither the Company,
nor any of its Affiliates, nor any Person acting on its or their behalf has,
directly or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would cause this
offering of the Securities to be integrated with prior offerings by the Company
for purposes of (i) the Securities Act which would require the registration of
any such securities under the Securities Act, or (ii) any applicable shareholder
approval provisions of any Trading Market on which any of the securities of the
Company are listed or designated.
 
(aa)  Tax Status.  Except for matters that would not, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect, the Company and each Subsidiary has filed all necessary federal, state
and foreign income and franchise tax returns (including, without limitation, all
PRC tax returns and filings) and has paid or accrued all taxes shown as due
thereon, has paid all PRC taxes and the Company has no knowledge of a tax
deficiency which has been asserted or threatened against the Company or any
Subsidiary.  The Company warrants that the transactions contemplated by the
Transaction Documents including the Option Agreement will not subject the
Company or its subsidiaries to U.S. taxation or require the Company to deem
income in any material amount from its subsidiaries to be subject to U.S.
taxation.
 
(bb)  No General Solicitation. Neither the Company nor any person acting on
behalf of the Company has offered or sold any of the Securities by any form of
general solicitation or general advertising.  The Company has offered the
Securities for sale only to the Purchasers and certain other “accredited
investors” within the meaning of Rule 501 under the Securities Act.
 
(cc)  Foreign Corrupt Practices.  Neither the Company, nor to the knowledge of
the Company, any agent or other person acting on behalf of the Company, has (i)
directly or indirectly, used any funds for unlawful contributions, gifts,
entertainment or other unlawful expenses related to foreign or domestic
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to any foreign or domestic political
parties or campaigns from corporate funds, (iii) failed to disclose fully any
contribution made by the Company (or made by any person acting on its behalf of
which the Company is aware) which is  in violation of law, or (iv) violated in
any material respect any provision of the Foreign Corrupt Practices Act of 1977,
as amended.
 
 
 
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(dd) Accountants.  The Company’s accounting firm is set forth on Schedule
3.1(ee) of the Disclosure Schedule.  To the knowledge and belief of the Company,
such accounting firm (i) is a registered public accounting firm as required by
the Exchange Act and (ii) shall express its opinion with respect to the
financial statements to be included in the Company’s Annual Report on Form 10-K
for the year ending December 31, 2007.
 
(ee)  Seniority.  As of the Closing Date, no Indebtedness or other claim against
the Company is senior to the Debentures or the Subsidiary Note in right of
payment, whether with respect to interest or upon liquidation or dissolution, or
otherwise, other than indebtedness secured by purchase money security interests
(which is senior only as to underlying assets covered thereby) and capital lease
obligations (which is senior only as to the property covered thereby).
 
(ff)  No Disagreements with Accountants and Lawyers.  There are no disagreements
of any kind presently existing, or reasonably anticipated by the Company to
arise, between the Company and the accountants and lawyers formerly or presently
employed by the Company and the Company is current with respect to any fees owed
to its accountants and lawyers which could affect the Company’s ability to
perform any of its obligations under any of the Transaction Documents.
 
(gg)  Acknowledgment Regarding Purchasers’ Purchase of Securities.  The Company
acknowledges and agrees that each of the Purchasers is acting solely in the
capacity of an arm’s length purchaser with respect to the Transaction Documents
and the transactions contemplated thereby.  The Company further acknowledges
that no Purchaser is acting as a financial advisor or fiduciary of the Company
(or in any similar capacity) with respect to the Transaction Documents and the
transactions contemplated thereby and any advice given by any Purchaser or any
of their respective representatives or agents in connection with the Transaction
Documents and the transactions contemplated thereby is merely incidental to the
Purchasers’ purchase of the Securities.  The Company further represents to each
Purchaser that the Company’s decision to enter into this Agreement and the other
Transaction Documents has been based solely on the independent evaluation of the
transactions contemplated hereby by the Company and its representatives.
 
(hh)  Regulation M Compliance.  The Company has not, and to its knowledge no one
acting on its behalf has, (i) taken, directly or indirectly, any action designed
to cause or to result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or paid any compensation for
soliciting purchases of, any of the securities of the Company or (iii) paid or
agreed to pay to any Person any compensation for soliciting another to purchase
any other securities of the Company.
 
(ii)  Environmental Law Compliance
 
(i)           The Company and each of its Subsidiaries has at all times complied
with all environmental legislation in force, relevant or applicable to each
company, where in the PRC or elsewhere (the “Environmental Legislation”) and
there is nothing in, on, or under the Property upon which the presence,
existence or condition of which constitutes a breach of such Environmental
Legislation nor is there or has there been any manufacturing, storage,
generation, servicing, treatment, disposal or other process carried on at the
Property in such a way as to amount to a breach of the same.

 
 
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(ii)           No complaints have been received from any third party
(includingany employee of any of the Company and/or its subsidiaries or
governmental, regulatory,supervisory oradministrative body) with regard to any
breach of the Environmental Legislation in connection with the Property and the
development and construction thereon and, after due and careful enquiry, the
Vendor is not aware of any events, circumstances or matters which may lead to
such complaint.

(iii)           No toxic industrial waste or toxic substance (as defined in
anyEnvironmental  Legislation) or any other similar substance (howsoever termed)
has beensplit, released, discharged or disposed in the soil or water in, under,
around or upon the Property.

For purposes of this clause, the term “Property” shall mean any and all
locations in which the Company and/or each of its subsidiaries carry on their
respective business operations.

(jj)  The Company and each Subsidiary is in compliance with the terms and
conditions of all of its contracts and leases and other agreements with
PetroChina Limited and its Affiliates, and is not aware of any dispute or
disagreement with PetroChina Limited or its Affiliates regarding such contracts
or leases. The Company is not aware of, and has not received any notice of
(whether written or oral) or any disputes, defaults or claims under the Material
Oil Drilling Contracts
 
(kk)           Internal Controls.  The Company maintains a system of
internalaccounting controls sufficient to provide reasonable assurance that
(i) transactions areexecuted in accordance with management’s general or specific
authorization, (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 quarterly
intervals and appropriate action is taken with respect to any material
differences.

 
 
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(ll)           Solvency and Adequate Capital.  All Indebtedness represented by
theDebentures is being incurred for proper purposes and in good faith.  Based on
thefinancial condition of the Company as of the Closing Date without giving
effect to the receipt by the Company of the proceeds from the sale of the
Securities hereunder, (i) the fair saleable value of the Company’s assets
exceeds the amount that will be required to be paid on or in respect of the
Company’ existing debts and other liabilities (including contingent liabilities)
as they mature; (ii) the present fair saleable value of theassets of the Company
is greater than the amount that will be required to pay theprobable liabilities
of the Company on their respective debt as they become absolute and mature, and
(iii) the Company are able to realize upon their assets and pay their debt and
other liabilities (including contingent obligations) as they mature; (iv) the
Company’s assets do not constitute unreasonably small capital to carry on their
respective businesses as now conducted and as proposed to be conducted including
their respective capital needs taking into account the particular capital
requirements of the business conducted by the Company, and projected capital
requirements and capital availability thereof; and (v) the current cash flow of
each of the Company, together with the proceeds the Company would receive, were
it to liquidate all of its assets, after taking into account all anticipated
uses of the cash, would be sufficient to pay all amounts on or in respect of its
liabilities when such amounts are required to be paid.  None of the Company
intends to incur debts beyond its ability to pay such debts as they mature
(taking into account the timing and amounts of cash to be payable on or in
respect of its debt).  The Company has no knowledge of any facts or
circumstances which lead it to believe that it or any other Company will file
for reorganization or liquidation under the bankruptcy or reorganization laws of
any jurisdiction within one year from the Closing Date.  Schedule 3.1(ll) sets
forth as of the date hereof 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 US$50,000 (other
than trade accounts payable incurred in the ordinary course of business), (b)
all guaranties (including liens granted over the property of any Subsidiary of
the Company as security for Indebtedness of any Person that is not affiliate
with the Company), 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 consolidated 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 US$50,000 due under leases required to
be capitalized in accordance with GAAP. The Company is not and is not reasonably
likely to be, in default with respect to any Indebtedness and no waiver of
default is currently in effect.  The Company has agreed or consented to cause or
permit in the future (upon the happening of a contingency or otherwise) any of
its property, whether now owned or hereafter acquired, to be subject to a Lien
(other than pursuant to the Security Documents).  The Company is not a party to,
or otherwise subject to any provision contained in, any instrument evidencing
Indebtedness of any of the Company, any agreement relating thereto or any other
agreement (including, but not limited to, its Charter Document) which limits the
amount of, or otherwise imposes restrictions on the incurring of, Indebtedness
of the Company on a consolidated basis.
 
(mm)    No Sale to the U.S.  The Company is not, nor any person that directly,
or indirectly through one or more intermediaries, controls or is controlled by,
or is under common control with, the Company  (each such person, an
“Affiliate”), or any person acting on its or their behalf has, directly or
indirectly, made offers or sales of any security, or solicited offers to buy,
sell or offer to sell or otherwise negotiate in respect of, in the United States
or to any United States citizen or resident, any security which is or would be
integrated with the sale of the Securities in a manner or under circumstances
that would require the registration of the Securities under the Act.

 
 
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(nn)           No Directed Selling Efforts.  The Company has not, nor has any of
theirrespective Affiliates, or any person acting on its or their behalf (other
than the Purchaser,its Affiliates or persons acting on its behalf, as to whom
the Company make no representation) has engaged in any directed selling efforts
(within the meaning of Regulation S) with respect to the Securities; and each of
the Company, its Subsidiaries, their respective Affiliates and each person
acting on its or their behalf has complied with the offering restrictions
requirement of Regulation S.
 
(oo)           Sovereign Immunity.  Under the laws of their respective
jurisdiction of incorporation and the PRC, neither the Company nor any
Subsidiary , is, nor are  any of their respective properties, assets or
revenues,  entitled to any right of immunity on the grounds of sovereignty from
any legal action, suit or proceeding, from set-off or counterclaim, from the
jurisdiction of any court, from service of process, from attachment prior to or
in aid of execution of judgment, or from other legal process or proceeding for
the giving of any relief or for the enforcement of any judgment.
 
(pp)           PFIC.  The Company is not nor intends to become a “passive
foreigninvestment company” (a “PFIC”) within the meaning of Section 1297 of the
InternalRevenue Code.
 
(qq)           Money Laundering Laws.  The operations of the Company are and
havebeen conducted at all times in compliance with the money laundering statutes
ofapplicable jurisdictions, the rules and regulations thereunder and any related
or similar rules, regulations or guidelines, issued, administered or enforced by
any applicable governmental agency (collectively, the “Money Laundering Laws”)
and no action, suit or proceeding by or before any court or governmental agency,
authority or body or any arbitrator involving any of the Company with respect to
the Money Laundering Laws is pending or, to the best knowledge of the Company,
threatened.
 
3.2           Other Representations and Warranties Relating to the PRC by the
Company.
 
(a)           The constitutional documents and certificates and related material
contracts of the Company and the Company’s subsidiaries have been established
under the laws of the PRC for purposes of this Section 3.2 (sometimes referred
to as a “PRC Company”) and are valid and have been duly approved or registered
(as applicable) by competent PRC Governmental Authorities.
 
(b)           All material consents, approvals, authorizations or licenses
requisite under PRC law for the due and proper establishment and operation of
each PRC Company have been duly obtained from the relevant PRC Governmental
Authorities and are in full force and effect.

 
 
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(c)           All filings and registrations with the PRC Governmental
Authorities required in respect of each of the PRC the Company and their
respective operations including, without limitation, the registrations with the
Ministry of Commerce, the State Administration of Industry and Commerce, the
State Administration for Foreign Exchange, tax bureau and customs authorities
have been duly completed in accordance with the relevant PRC rules and
regulations.
 
(d)           The Company has complied with all relevant PRC laws and
regulations regarding the contribution and payment of its registered share
capital, the payment schedule of which has been approved by the relevant PRC
Government Authorities.  There are no outstanding rights of, or commitments made
by, the Company to sell any equity interest in any PRC Company, or by any of the
other PRC Company’ shareholders to sell any equity interest in such other PRC
the Company. To the extent that any controlling shareholder of the Company or
any Subsidiary is subject to or under the jurisdiction of Circular 75 issued by
the PRC State Administration of Foreign Exchange on October 21, 2005, including
any amendment, implementing rules, or official interpretation thereof or any
replacement, successor or alternative legislation having the same subject matter
thereof (collectively “Circular 75”), each of the Company and its Subsidiaries
and any controlling shareholder represents and warrants  to the Purchaser that
it shall fully complied in all respects with Circular 75 and any related
requirement of law, including without limitation, the completion of any
applicable foreign exchange registration, settlement or remittance requirement
therein within 90 days of the Closing.
 
(e)           The Company is not in receipt of any letter or notice from any
relevant PRC Governmental Authority notifying it of revocation of any licenses
or qualifications issued to it or any subsidy granted to it by any PRC
Governmental Authority for non-compliance with the terms thereof or with
applicable PRC laws, or the need for compliance or remedial actions in respect
of the activities carried out by the Company.
 
(f)           The Company has conducted its business activities within the
permitted scope of business or has otherwise operated its business in compliance
with all relevant legal requirements and with all requisite licenses and
approvals granted by competent PRC Governmental Authorities.
 
(g)           As to licenses, approvals and government grants and concessions
requisite or useful for the conduct of any part of the PRC, the Company’s
business which are subject to periodic renewal, the Company has no knowledge of
any grounds on which such requisite renewals will not be granted by the relevant
PRC Governmental Authorities.
 
(h)           With regard to employment and staff or labor, each of the Company
has complied with all applicable PRC laws and regulations in all material
respects, including without limitation, laws and regulations pertaining to
welfare funds, social benefits, medical benefits, insurance, retirement
benefits, pensions or the like.

 
 
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(i)           All of the Material Oil Drilling Agreements have been duly
authorized by the Company and any Subsidiary party thereto, and such agreements
constitute the valid and binding obligations of the Company or the Subsidiary,
as the case may be, enforceable against the Company or the Subsidiary in
accordance with its terms except (i) as limited by general equitable principles
and applicable bankruptcy, insolvency, reorganization, moratorium and other laws
of general application affecting enforcement of creditors’ rights generally,
(ii) as limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies and (iii) insofar as
indemnification and contribution provisions may be limited by applicable law.
 
3.3                           Covenants of the Company
 
(a)           Prior to making any public disclosure or filings as may be
required byapplicable law with respect to this Agreement and the transactions
contemplated hereby,to provide the Purchaser and its counsel with the reasonable
opportunity to review and comment on such public disclosure documents and
consider in good faith any comments received from the Purchaser or its counsel.
 
(b)           The Company will use its reasonable efforts not to become, and
cause itsSubsidiaries not to become, a PFIC.  If the Company determines that it
or any of itsSubsidiaries has become a PFIC, the Company will promptly notify
the Purchaser and provide all information requested by the Purchaser that is
necessary for the Purchaser to make a qualified electing fund (QEF) election
under Section 1295 of the Internal Revenue Code.
 
(c)           The Company shall not, directly or indirectly, use the proceeds of
the saleof the Debentures, or lend, contribute or otherwise make available such
proceeds to anySubsidiary, joint venture or other Person for the purposes of
financing the activities of any Person currently subject to any U.S. sanctions
administered by OFAC.
 
(d)           The  Company shall conduct its operations at all times in
compliance withthe Money Laundering Laws of applicable jurisdictions, the rules
and regulationsthereunder and any related or similar rules, regulations or
guidelines, issued administered or enforced by any applicable Governmental
Authorities.
 
(e)           The Company agrees that it will not register any transfer of the
Securitiesthat is not (i) made in accordance with the provisions of Regulation S
under the Act, (ii)made pursuant to registration under the Act, or (iii) made
pursuant to an available exemption under the Act.
 
(f)           The Company shall, as soon as reasonably practicable, use its
reasonablebest efforts to (i) obtain approvals from, and complete filing
procedures with, relevantGovernmental Authorities in order to create valid and
enforceable security interests over all of the equity interests of Song Yuan
North East Petroleum Technical Service Co., Ltd.  pursuant to the Onshore Share
Pledge Agreement, and (ii) procure a Person who is reasonably acceptable to
Purchaser as sponsor to act on behalf of the Company in making the foregoing
filings and completing such procedures which sponsor shall act at the
instruction of the Collateral Agent. If the PRC Governmental Authorities require
anyamendments, modifications or changes to the Onshore Share Pledge Agreements
as acondition to their approval of such agreements, then the Company shall use
its best efforts to effect such amendments, modifications or changes to such
agreements, as the case may be, to obtain such approvals from the relevant
Governmental Authorities

 
 
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(g)           The Company shall use its best efforts to assist the Purchaser to
timely filethe UCC Financing Statement under Article 9 of the UCC of Nevada with
the Secretaryof the State of the State of Nevada (and such other states as may
be requested by Purchasers) with respect to the pledge of equity interests of
the Company, which initial filing shall be completed no later than five (5) days
from the date of the Closing.
 
3.4           Representations and Warranties of the Purchasers.  Each Purchaser,
for itself and for no other Purchaser hereby, represents and warrants as of the
date hereof and as of the Closing Date to the Company as follows:
 
(a)           Organization; Authority.  Such Purchaser is an entity duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with full right, corporate or partnership power
and authority to enter into and to consummate the transactions contemplated by
the Transaction Documents and otherwise to carry out its obligations hereunder
and thereunder. The execution and delivery of the Transaction Documents and
performance by such Purchaser of the transactions contemplated by the
Transaction Documents have been duly authorized by all necessary corporate or
similar action on the part of such Purchaser.  Each Transaction Document to
which it is a party has been duly executed by such Purchaser, and when delivered
by such Purchaser in accordance with the terms hereof, will constitute the valid
and legally binding obligation of such Purchaser, enforceable against it in
accordance with its terms, except (i) as limited by general equitable principles
and applicable bankruptcy, insolvency, reorganization, moratorium and other laws
of general application affecting enforcement of creditors’ rights generally,
(ii) as limited by laws relating to the availability of specific performance,
injunctive relief or other equitable remedies and (iii) insofar as
indemnification and contribution provisions may be limited by applicable law.
 
(b)           Own Account.  Such Purchaser understands that the Securities are
“restricted securities” and have not been registered under the Securities Act or
any applicable state securities law and is acquiring the Securities as principal
for its own account and not with a view to or for distributing or reselling such
Securities or any part thereof in violation of the Securities Act or any
applicable state securities law, has no present intention of distributing any of
such Securities in violation of the Securities Act or any applicable state
securities law and has no direct or indirect arrangement or understandings with
any other persons to distribute or regarding the distribution of such Securities
(this representation and warranty not limiting such Purchaser’s right to sell
the Securities pursuant to the Registration Statement or otherwise in compliance
with applicable federal and state securities laws) in violation of the
Securities Act or any applicable state securities law.  Such Purchaser is
acquiring the Securities hereunder in the ordinary course of its business.

 
 
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(c)           Purchaser Status.  At the time such Purchaser was offered the
Securities, it was, and at the date hereof it is, and on each date on which it
exercises any Warrants or converts any Debentures it will be either: (i) an
“accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or
(a)(8) under the Securities Act or (ii) a “qualified institutional buyer” as
defined in Rule 144A(a) under the Securities Act.  Such Purchaser is not
required to be registered as a broker-dealer under Section 15 of the Exchange
Act.
 
(d)           Experience of Such Purchaser.  Such Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has so
evaluated the merits and risks of such investment.  Such Purchaser is able to
bear the economic risk of an investment in the Securities and, at the present
time, is able to afford a complete loss of such investment.
 
(e)           General Solicitation.  Such Purchaser is not purchasing the
Securities as a result of any advertisement, article, notice or other
communication regarding the Securities published in any newspaper, magazine or
similar media or broadcast over television or radio or presented at any seminar
or any other general solicitation or general advertisement.
 
(f)           Short Sales and Confidentiality Prior To The Date Hereof.  Other
than consummating the transactions contemplated hereunder, such Purchaser has
not directly or indirectly, nor has any Person acting on behalf of or pursuant
to any understanding with such Purchaser, executed any purchases or sales,
including Short Sales, of the securities of the Company during the period
commencing from the time that such Purchaser first received a term sheet
(written or oral) from the Company or any other Person representing the Company
setting forth the material terms of the transactions contemplated hereunder
until the date hereof (“Discussion Time”).  Notwithstanding the foregoing, in
the case of a Purchaser that is a multi-managed investment vehicle whereby
separate portfolio managers manage separate portions of such Purchaser's assets
and the portfolio managers have no direct knowledge of the investment decisions
made by the portfolio managers managing other portions of such Purchaser's
assets, the representation set forth above shall only apply with respect to the
portion of assets managed by the portfolio manager that made the investment
decision to purchase the Securities covered by this Agreement.  Other than to
other Persons party to this Agreement, such Purchaser has maintained the
confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this transaction).
 
(g)           Status Of Purchasers. The Purchaser is not a “U.S. Person” (as
defined inRule 902 of Regulation S under the Act) and it understands that no
action has been orwill be taken in any jurisdiction by the Company that would
permit a public offering of the Securities in any country or jurisdiction where
action for that purpose is required. It is not acquiring the Securities for the
account or benefit of any U.S. persons except in accordance with exemption from
registration requirements of the Act below or in a transaction not subject
thereto.

 
 
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(h)           Investment Intent.  The Purchaser is not acquiring the Securities
with aview to any distribution thereof that would violate the Act or the
securities laws of anystate of the United States or any other applicable
jurisdiction.
 
(i)           Resale Restrictions.  The Purchaser (A) agrees that it will not
offer, sell orotherwise transfer any of the Securities nor, unless in compliance
with the Act or asallowed underRegulation S, engage in hedging transactions
involving such securities, on or prior to (x) the date which is 40 days (in the
case of the Debentures) or six months (in the case of the Warrants and the
Warrant Shares) after the later of the date of the commencement of the offering
and the date of original issuance (or of any predecessor of any Security
proposed to be transferred by the Purchaser) and (y) such later date, if any, as
may be required by applicable law, except (a) to the Company, (b) pursuant to a
registration statement that has been declared effective under the Act, (c), (d)
pursuant to offers and sales to Persons who are not “U.S. Persons” (within the
meaning of Regulation S) that occur outside the United States within the meaning
of Regulation S or (e) pursuant o any other available exemption from the
registration requirements of the Act, and (B) agrees that it will giveto each
person to whom such Security is transferred a notice substantially to the effect
of  this paragraph.  The Purchaser acknowledges that the Securities are
“restricted securities” as defined in Rule 144 under the Act and subject to
resale restrictions during the period set forth in Regulation S.
 
(l)           No Directed Selling Efforts. No form of “directed selling efforts”
(asdefined in Rule 902 of Regulation S under the Act), general solicitation or
generaladvertising in violation of the Act has been or will be used nor will any
offers by means of any directed selling efforts in the United States be made by
the Purchaser or any of its representatives in connection with the offer and
sale of any of the Debentures.
 

 
ARTICLE IV.
POST CLOSING COVENANTS AND OTHER AGREEMENTS OF THE PARTIES
 
4.1           Transfer Restrictions.
 
(a)           The Securities may only be disposed of in compliance with state
and federal securities laws.  In connection with any transfer of Securities
other than pursuant to an effective registration statement, Regulation S or Rule
144, to the Company or to an Affiliate of a Purchaser or in connection with a
pledge as contemplated in Section 4.1(c), the Company may require the transferor
thereof to provide to the Company an opinion of counsel selected by the
transferor and reasonably acceptable to the Company, the form and substance of
which opinion shall be reasonably satisfactory to the Company, to the effect
that such transfer does not require registration of such transferred Securities
under the Securities Act.  As a condition of transfer, any such transferee shall
agree in writing to be bound by the terms of this Agreement and shall have the
rights of a Purchaser under this Agreement and the Registration Rights
Agreement.
 
(b)           The Purchasers agree to the imprinting, so long as is required by
this Section 4.1, of a legend on any of the Securities in the following form:

 
 
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THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO
THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
ACCEPTABLE TO THE COMPANY.  THIS SECURITY  MAY BE PLEDGED IN CONNECTION WITH A
BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
 
(c)           The Company acknowledges and agrees that a Purchaser may from time
to time pledge pursuant to a bona fide margin agreement with a registered
broker-dealer or grant a security interest in some or all of the Securities to a
financial institution that is an “accredited investor” as defined in Rule 501(a)
under the Securities Act and who agrees to be bound by the provisions of this
Agreement and the Registration Rights Agreement and, if required under the terms
of such arrangement, such Purchaser may transfer pledged or secured Securities
to the pledgees or secured parties.  Such a pledge or transfer would not be
subject to approval of the Company and no legal opinion of legal counsel of the
pledgee, secured party or pledgor shall be required in connection
therewith.  Further, no notice shall be required of such pledge.  At the
appropriate Purchaser’s expense, the Company will execute and deliver such
reasonable documentation as a pledgee or secured party of Securities may
reasonably request in connection with a pledge or transfer of the Securities,
including, if the Securities are subject to registration pursuant to the
Registration Rights Agreement, the preparation and filing of any required
prospectus supplement under Rule 424(b)(3) under the Securities Act or other
applicable provision of the Securities Act to appropriately amend the list of
Selling Stockholders thereunder.
 
(d)         Certificates evidencing the Underlying Shares shall not contain any
legend (including the legend set forth in Section 4.1(b) hereof): (i) while a
registration statement (including the Registration Statement) covering the
resale of such security is effective under the Securities Act, or (ii) following
any sale of such Underlying Shares pursuant to Rule 144, or (iii) if such
Underlying Shares are eligible for sale under Rule 144 or (iv) if such legend is
not required under applicable requirements of the Securities Act (including
judicial interpretations and pronouncements issued by the staff of the
Commission). The Company shall cause its counsel to issue a legal opinion to the
Transfer Agent promptly after the Effective Date if required by the Transfer
Agent to effect the removal of the legend hereunder.  If all or any portion of a
Debenture or Warrant is converted or exercised (as applicable) at a time when
there is an effective registration statement to cover the resale of the
Underlying Shares, or if such Underlying Shares may be sold under Rule 144 or if
such legend is not otherwise required under applicable requirements of the
Securities Act (including judicial interpretations and pronouncements issued by
the staff of the Commission) then such Underlying Shares shall be issued free of
all legends.  The Company agrees that following the Effective Date or at such
time as such legend is no longer required under this Section 4.1(c), it will, no
later than three Trading Days following the delivery by a Purchaser to the
Company or the Transfer Agent of a certificate representing Underlying Shares,
as applicable, issued with a restrictive legend (such third Trading Day, the
“Legend Removal Date”), deliver or cause to be delivered to such Purchaser a
certificate representing such shares that is free from all restrictive and other
legends.  The Company may not make any notation on its records or give
instructions to the Transfer Agent that enlarge the restrictions on transfer set
forth in this Section.  Certificates for Underlying Shares subject to legend
removal hereunder shall be transmitted by the Transfer Agent to the Purchaser by
crediting the account of the Purchaser’s prime broker with the Depository Trust
Company System as directed by such Purchaser.

 
 
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(e)          In addition to such Purchaser’s other available remedies, the
Company shall pay to a Purchaser, in cash, as partial liquidated damages and not
as a penalty, for each $1,000 of Underlying Shares (based on the VWAP 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 4.1(c),
$5.00 per Trading Day (increasing to $10.00 per Trading Day 45 Trading Days
after such damages have begun to accrue) for each Trading Day after the Legend
Removal Date until such certificate is delivered without a legend.  Nothing
herein shall limit such Purchaser’s right to pursue actual damages for the
Company’s failure to deliver certificates representing any Securities as
required by the Transaction Documents, and such Purchaser shall have the right
to pursue all remedies available to it at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief.
 
(f)           Each Purchaser, severally and not jointly with the other
Purchasers, agrees that such Purchaser will sell any Securities pursuant to
either the registration requirements of the Securities Act, including any
applicable prospectus delivery requirements, or an exemption therefrom, and that
if Securities are sold pursuant to a Registration Statement, they will be sold
in compliance with the plan of distribution set forth therein, and acknowledges
that the removal of the restrictive legend from certificates representing
Securities as set forth in this Section 4.1 is predicated upon the Company’s
reliance upon this understanding.
 
4.2           Acknowledgment of Dilution.  The Company acknowledges that the
issuance of the Underlying Shares may result in dilution of the outstanding
shares of Common Stock, which dilution may be substantial under certain market
conditions.  The Company further acknowledges that its obligations under the
Transaction Documents, including without limitation its obligation to issue the
Underlying Shares pursuant to the Transaction Documents, are unconditional and
absolute and not subject to any right of set off, counterclaim, delay or
reduction, regardless of the effect of any such dilution or any claim the
Company may have against any Purchaser and regardless of the dilutive effect
that such issuance may have on the ownership of the other stockholders of the
Company.

 
 
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4.3           Furnishing of Information.  So long as the Purchaser owns
Securities, the Company covenants to timely file (or obtain extensions in
respect thereof and file within the applicable grace period) all reports
required to be filed by the Company after the date hereof pursuant to the
Exchange Act even if the Company is not then subject to the reporting
requirements of the Exchange Act.  As long as any Purchaser owns Securities, if
the Company is not required to file reports pursuant to the Exchange Act, it
will prepare and furnish to the Purchasers and make publicly available in
accordance with Rule 144(c) such information as is required for the Purchasers
to sell the Securities under Rule 144. The Company further covenants that it
will take such further action as any holder of Securities may reasonably
request, to the extent required from time to time to enable such Person to sell
such Securities without registration under the Securities Act within the
requirements of the exemption provided by Rule 144.
 
4.4           Integration.  The Company shall not sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with the
offer or sale of the Securities to the Purchasers in a manner that would require
the registration under the Securities Act of the sale of the Securities to the
Purchasers or that would be integrated with the offer or sale of the Securities
for purposes of the rules and regulations of any Trading Market.
 
4.5           Capital Contribution.  Within 10 business days after Closing, the
Company shall make all necessary governmental filings in the PRC to obtain
approval for a capital contribution to Song Yuan North East Petroleum Technical
Service Co., Ltd. in an amount equal to U.S.$ 510,000 so that the total capital
contribution is U.S. $1,121,000 and the Company shall use its best efforts to
obtain such approval as promptly as possible.
 
4.6           Governmental Approval.  The Company shall, as soon as reasonably
practicable, and in no event later than a date which is 90 days after the
Closing, use its reasonable best efforts to (i) obtain approvals from, and
complete filing procedures with, relevant Governmental Authorities in order to
create valid and enforceable security interests over all of the equity interests
and registered capital of Song Yuan North East Petroleum Technical Service Co.,
Ltd. pursuant to the Onshore Share Pledge Agreement, and (ii) procure a Person
who is reasonably acceptable to Purchaser as sponsor to act on behalf of the
Company in making the foregoing filings and completing such procedures which
sponsor shall act at the instruction of the Collateral Agent. If the PRC
Governmental Authorities require any amendments, modifications or changes to the
Onshore Share Pledge Agreement as a condition to their approval of such
agreements, or in the event that there are changes, modifications or amendments
to any PRC laws which would render the Onshore Pledge Agreement or any
previously executed agreements or documents invalid or insufficient under PRC
Law, then the Company shall use its best efforts to effect such amendments,
modifications or changes to such agreements or documents, as the case may be, to
obtain such approvals from the relevant Governmental Authorities.

 
 
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4.7            Securities Laws Disclosure; Publicity.  The Company shall, by
8:30 a.m. (New York City time) on the Trading Day following the date hereof,
issue a Current Report on Form 8-K disclosing the material terms of the
transactions contemplated hereby and attaching the Transaction Documents as
exhibits thereto.  The Company and each Purchaser shall consult with each other
in issuing any other press releases with respect to the transactions
contemplated hereby, and neither the Company nor any Purchaser shall issue any
such press release or otherwise make any such public statement without the prior
consent of the Company, with respect to any press release of any Purchaser, or
without the prior consent of each Purchaser, with respect to any press release
of the Company, which consent shall not unreasonably be withheld or delayed,
except if such disclosure is required by law, in which case the disclosing party
shall promptly provide the other party with prior notice of such public
statement or communication.  Notwithstanding the foregoing, the Company shall
not publicly disclose the name of any Purchaser, or include the name of any
Purchaser in any filing with the Commission or any regulatory agency or Trading
Market, without the prior written consent of such Purchaser, except (i) as
required by federal securities law in connection with (A) any registration
statement contemplated by the Registration Rights Agreement and (B) the filing
of final Transaction Documents (including signature pages thereto) with the
Commission and (ii) to the extent such disclosure is required by law or Trading
Market regulations, in which case the Company shall provide the Purchasers with
prior notice of such disclosure permitted under this clause (ii).
 
4.8          Shareholder Rights Plan.  No claim will be made or enforced by the
Company or, with the consent of the Company, any other Person, that any
Purchaser is an “Acquiring Person” under any control share acquisition, business
combination, poison pill (including any distribution under a rights agreement)
or similar anti-takeover plan or arrangement in effect or hereafter adopted by
the Company, or that any Purchaser could be deemed to trigger the provisions of
any such plan or arrangement, by virtue of receiving Securities under the
Transaction Documents or under any other agreement between the Company and the
Purchasers.
 
4.9           Non-Public Information.  Except with respect to the material terms
and conditions of the transactions contemplated by the Transaction Documents,
the Company covenants and agrees that neither it nor any other Person acting on
its behalf will provide any Purchaser or its agents or counsel with any
information that the Company believes constitutes material non-public
information, unless prior thereto such Purchaser shall have executed a written
agreement regarding the confidentiality and use of such information.  The
Company understands and confirms that each Purchaser shall be relying on the
foregoing covenant in effecting transactions in securities of the Company.
 
4.10        Use of Proceeds.  The Company shall use the net proceeds from the
sale of the Securities hereunder for the purposes set forth on Schedule 4.10
attached hereto and shall not use such proceeds for the satisfaction of any
portion of the debt and obligations of the Company or its Subsidiaries (other
than payment of trade payables in the ordinary course of the Company’s business
and prior practices), the redemption of any Common Stock or Common Stock
Equivalents or the settlement of any outstanding litigation.  Schedule 4.10 also
includes a list of existing liabilities and payables which the Company agrees
shall not be paid from the net proceeds of the sale of the Securities without
the prior consent of the Purchasers. Prior to any disbursement of funds by the
Company, the Company shall notify the Purchaser of the intended disbursement of
funds, shall provide Purchasers with evidence satisfactory to it of the amount
owed to the intended recipient and Purchasers shall have the right to approve
such payments, which approval shall not be unreasonably withheld.

 
 
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4.11           Indemnification of Purchasers.  Subject to the provisions of this
Section 4.11, the Company will indemnify and hold each Purchaser and its
directors, officers, shareholders, members, partners, employees and agents (and
any other Persons with a functionally equivalent role of a Person holding such
titles notwithstanding a lack of such title or any other title), each Person who
controls such Purchaser (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act), and the directors, officers, shareholders,
agents, members, partners or employees (and any other Persons with a
functionally equivalent role of a Person holding such titles notwithstanding a
lack of such title or any other title) of such controlling person (each, a
“Purchaser Party”) harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys’ fees and
costs of investigation that any such Purchaser Party may suffer or incur as a
result of or relating to (a) any breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (b) any action instituted against a Purchaser
in any capacity, or any of them or their respective Affiliates, by any
stockholder of the Company who is not an Affiliate of such Purchaser, with
respect to any of the transactions contemplated by the Transaction Documents
(unless such action is based upon a breach of such Purchaser’s representations,
warranties or covenants under the Transaction Documents or any agreements or
understandings such Purchaser may have with any such stockholder or any
violations by the Purchaser of state or federal securities laws or any conduct
by such Purchaser which constitutes fraud, gross negligence, willful misconduct
or malfeasance).  If any action shall be brought against any Purchaser Party in
respect of which indemnity may be sought pursuant to this Agreement, such
Purchaser Party shall promptly notify the Company in writing, and the Company
shall have the right to assume the defense thereof with counsel of its own
choosing reasonably acceptable to the Purchaser Party.  Any Purchaser Party
shall have the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Purchaser Party except to the extent that (i)
the employment thereof has been specifically authorized by the Company in
writing, (ii) the Company has failed after a reasonable period of time to assume
such defense and to employ counsel or (iii) in such action there is, in the
reasonable opinion of such separate counsel, a material conflict on any material
issue between the position of the Company and the position of such Purchaser
Party, in which case the Company shall be responsible for the reasonable fees
and expenses of no more than one such separate counsel.  The Company will not be
liable to any Purchaser Party under this Agreement (i) for any settlement by a
Purchaser Party effected without the Company’s prior written consent, which
shall not be unreasonably withheld or delayed; or (ii) to the extent, but only
to the extent that a loss, claim, damage or liability is attributable to any
Purchaser Party’s breach of any of the representations, warranties, covenants or
agreements made by such Purchaser Party in this Agreement or in the other
Transaction Documents.
 
4.12           Reservation and Listing of Securities.

 
 
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(a)           The Company shall maintain a reserve from its duly authorized
shares of Common Stock for issuance pursuant to the Transaction Documents in
such amount as may be required to fulfill its obligations in full under the
Transaction Documents.
 
(b)           If, on any date, the number of authorized but unissued (and
otherwise unreserved) shares of Common Stock is less than the Required Minimum
on such date, then the Board of Directors of the Company shall use commercially
reasonable efforts to amend the Company’s certificate or articles of
incorporation to increase the number of authorized but unissued shares of Common
Stock to at least the Required Minimum at such time, as soon as possible and in
any event not later than the 75th day after such date.
 
(c)           The Company shall, if applicable: (i) in the time and manner
required by the principal Trading Market, prepare and file with such Trading
Market an additional shares listing application covering a number of shares of
Common Stock at least equal to the Required Minimum on the date of such
application, (ii) take all steps necessary to cause such shares of Common Stock
to be approved for listing on such Trading Market as soon as possible
thereafter, (iii) provide to the Purchasers evidence of such listing, and (iv)
maintain the listing of such Common Stock on any date at least equal to the
Required Minimum on such date on such Trading Market or another Trading Market.
 
(d)           The Company shall make an application with the Nasdaq Stock Market
or the American Stock Exchange to obtain a listing of its Common Stock promptly
following the Closing Date, and to use its best efforts obtain such
listing  within a date which is 12 months after the Closing Date.

4.13           Participation in Future Financing.
 
(a)           From the date hereof until the date that the Purchases hold in the
aggregate an amount less than 500,000 shares of the Company’s issued and
outstanding common stock pursuant to the Warrants (on an as-exercised basis)
upon any issuance by the Company or any of its Subsidiaries of Common Stock or
Common Stock Equivalents (a “Subsequent Financing”), each Purchaser shall have
the right to participate in up to an amount of the Subsequent Financing equal to
such Purchaser’s pro-rata percentage of the Company’s total issued and
outstanding common stock on  an as-exercised basis on the same terms, conditions
and price provided for in the Subsequent Financing.
 
(b)           At least ten (10) Trading Days prior to the closing of the
Subsequent Financing, the Company shall deliver to each Purchaser a written
notice of its intention to effect a Subsequent Financing (“Pre-Notice”), which
Pre-Notice shall ask such Purchaser if it wants to review the details of such
financing (such additional notice, a “Subsequent Financing Notice”).  Upon the
request of a Purchaser, and only upon a request by such Purchaser, for a
Subsequent Financing Notice, the Company shall promptly, but no later than 1
Trading Day after such request, deliver a Subsequent Financing Notice to such
Purchaser.  The Subsequent Financing Notice shall describe in reasonable detail
the proposed terms of such Subsequent Financing, the amount of proceeds intended
to be raised thereunder and the Person or Persons through or with whom such
Subsequent Financing is proposed to be effected and shall include a term sheet
or similar document relating thereto as an attachment.  The Subsequent Financing
Notice shall also include an analysis or description of the effect of such
Subsequent Financing upon the exercise price of the Warrants and the
capitalization of the Company.

 
 
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(c)           Any Purchaser desiring to participate in such Subsequent Financing
must provide written notice to the Company by not later than 5:30 p.m. (New York
City time) on the 10th Trading Day after all of the Purchasers have received the
Pre-Notice that the Purchaser is willing to participate in the Subsequent
Financing, the amount of the Purchaser’s participation, and that the Purchaser
has such funds ready, willing, and available for investment on the terms set
forth in the Subsequent Financing Notice.  If the Company receives no notice
from a Purchaser as of such 10th Trading Day, such Purchaser shall be deemed to
have notified the Company that it does not elect to participate.
 
(d)           If by 5:30 p.m. (New York City time) on the 10th Trading Day after
all of the Purchasers have received the Pre-Notice, notifications by the
Purchasers of their willingness to participate in the Subsequent Financing (or
to cause their designees to participate) is, in the aggregate, less than the
total amount of the Subsequent Financing, then the Company may effect the
remaining portion of such Subsequent Financing on the terms and with the Persons
set forth in the Subsequent Financing Notice.
 
(e)           The Company must provide the Purchasers with a second Subsequent
Financing Notice, and the Purchasers will again have the right of participation
set forth above in this Section 4.13, if the Subsequent Financing subject to the
initial Subsequent Financing Notice is not consummated for any reason on the
terms set forth in such Subsequent Financing Notice within 60 Trading Days after
the date of the initial Subsequent Financing Notice.
 
(f)           Notwithstanding the foregoing, this Section 4.13 shall not apply
in respect of an Exempt Issuance.
 
4.14           Subsequent Equity Sales.
 
(a)           From the date hereof until 180 days after the Effective Date,
neither the Company nor any Subsidiary shall issue shares of Common Stock or
Common Stock Equivalents; provided, however, the 180 day period set forth in
this Section 4.13 shall be extended for the number of Trading Days during such
period in which (i) trading in the Common Stock is suspended by any Trading
Market, or (ii) following the Effective Date, the Registration Statement is not
effective or the prospectus included in the Registration Statement may not be
used by the Purchasers for the resale of the Underlying Shares.
 
(b)           From and after the Effective Date the Company shall not issue
inconnection with an acquisition transaction (whether in one transaction or a
series oftransactions (and regardless of the structure of any such transaction,
including, without limitation, a purchase of securities of the to be acquired
entity, a purchase or assets or a joint venture) or the purchase) shares of its
Common Stock (or securities convertible into Common Stock) equal to or in excess
of 20% of the shares of Common Stockoutstanding on the date hereof without the
prior written consent of the Purchaser, whichconsent shall not be unreasonably
withheld.

 
 
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4.15           Equal Treatment of Purchasers.  No consideration shall be offered
or paid to any Person to amend or consent to a waiver or modification of any
provision of any of the Transaction Documents unless the same consideration is
also offered to all of the parties to the Transaction Documents. Further, the
Company shall not make any payment of principal or interest on the Debentures in
amounts which are disproportionate to the respective principal amounts
outstanding on the Debentures at any applicable time.  For clarification
purposes, this provision constitutes a separate right granted to each Purchaser
by the Company and negotiated separately by each Purchaser, and is intended 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 Securities or otherwise.
 
4.16           Short Sales and Confidentiality After The Date Hereof. Each
Purchaser severally and not jointly with the other Purchasers, covenants that
neither it nor any Affiliate acting on its behalf or pursuant to any
understanding with it will execute any Short Sales during the period commencing
at the Discussion Time and ending at the time that the transactions contemplated
by this Agreement are first publicly announced as described in Section 4.7. 
Each Purchaser, severally and not jointly with the other Purchasers, covenants
that until such time as the transactions contemplated by this Agreement are
publicly disclosed by the Company as described in Section 4.7, such Purchaser
will maintain the confidentiality of the existence and terms of this transaction
and the information included in the Disclosure Schedules.  Each Purchaser
understands and acknowledges, and agrees, severally and not jointly with any
other Purchaser, to act in a manner that will not violate the positions of the
Commission as set forth in Item 65, Section A, of the Manual of Publicly
Available Telephone Interpretations, dated July 1997, compiled by the Office of
Chief Counsel, Division of Corporation Finance. Notwithstanding the foregoing,
no Purchaser makes any representation, warranty or covenant hereby that it will
not engage in Short Sales in the securities of the Company after the time that
the transactions contemplated by this Agreement are first publicly announced as
described in Section 4.7.  Notwithstanding the foregoing, in the case of a
Purchaser that is a multi-managed investment vehicle whereby separate portfolio
managers manage separate portions of such Purchaser’s assets and the portfolio
managers have no direct knowledge of the investment decisions made by the
portfolio managers managing other portions of such Purchaser’s assets, the
covenant set forth above shall only apply with respect to the portion of assets
managed by the portfolio manager that made the investment decision to purchase
the Securities covered by this Agreement.
 
4.17           Amendment to Profit Sharing Arrangements.  The Company shall
obtain, within 30 days of Closing, a written agreement with Ju Guizhi, in form
and substance acceptable to the Purchasers, whereby the parties agree that the
profit sharing arrangement between Ju Guizhi and the Company is amended to
reflect that the Company is entitled to 90% of the profits of the Company.
 
 
 
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4.18         Cancellation of Trust Agreements.
 
(a)  Within 30 days of the Closing, the Company shall enter into a written
agreement with each of (i) Ai Chang Shan to release an amount of the registered
capital of Changling Long De Oil and Gas Development Co., Ltd. (“Long De”) held
in trust by Ai Chang Shan for the benefit of Song Yuan Technical, equal to 10%
of all outstanding registered capital of Long De, from such trust and transfer
ownership of such registered capital to Song Yuan Technical and (ii) Sun Peng to
release all of the registered capital of Long De held by Sun Peng for the
benefit of Song Yuan Technical, equal to 10% of all outstanding registered
capital of Long De, from such trust and transfer ownership of such registered
capital to Song Yuan Technical.

(b)  Within 30 days of the Closing, the Company shall enter into a written
agreement with Meng Xiang Yun to release all registered capital of Song Yuan
City Yu Qiao Oil and Gas Exploration Limited Corp. (“Yu Qiao”) held by Meng
Xiang Yun in trust for the benefit of Song Yuan Technical, equal to 20% of all
outstanding registered capital of Yu Qiao, from such trust and transfer
ownership of such registered capital to Song Yuan Technical.

(c)  Within 90 days of the Closing, the Company shall enter into a written
agreement with Wang Bing Wu to transfer ownership of all of the registered
capital of Yu Qiao held by Wang Bing Wu in trust for the benefit of Song Yuan
Technical, equal to 10% of all outstanding registered capital of Yu Qiao, to
Wang Hong Jun to continue to hold in trust for the benefit of Song Yuan
Technical.

(d)  The Company shall make all appropriate applications with the proper
authorities in the PRC to register the ownership transfer and termination of
trust contemplated in Sections 4.18(a) and 4.18(b) within 45 days of the
Closing.

(e)  The Company shall make all appropriate applications with the proper
authorities in the PRC to register the ownership transfer contemplated in
Section 4.18(c) within 90 days of the Closing.

4.19         Right to Appoint Nominee to Board of Directors. Effective at
Closing, the Purchasers shall have the right (but not the obligation), for so
long as at least any of the principal amount of Debenture remains unpaid,  to
have a nominee, reasonably acceptable to the Company, serve on the Board of
Directors of the Company, which nominee shall serve as an independent
director.  The Board of Directors shall consist of not more than five (5)
persons. Further, the Purchasers shall have the right, but not the obligation to
approve the independent members of the Board if Directors.
 
4.20         Prior Approval of Fundamental Transactions. Prior to entering into
any agreement, term sheet or letter of intent with respect to a Fundamental
Transaction, the Company and any Subsidiary which is the subject of such
proposed Fundamental Transaction, shall obtain the prior written approval of the
Purchaser holding at least 66% of the principal amount of Debentures then
outstanding.

 
 
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 ARTICLE V.
 
COLLATERAL AND SECURITY INTERESTS
 
5.1           Change in PRC Law. If at any time after the Issue Date of the
Debentures there is a change in PRC law or interpretation in PRC law that
permits the encumbrance of any Subsidiary’s assets or property by a Lien without
the approval of any governmental body of the PRC, then the Company shall cause
any such the Subsidiary, and any other Persons who shall be necessary,   to,
concurrently:
 
(a)           execute and deliver to the Purchasers a Security Document upon
substantially the same terms granting a Lien upon such assets or Property to the
Purchasers of Debentures, which Lien shall be first priority if such assets or
Property is not then encumbered by any other Lien (other than Liens required by
law) or a second priority Lien if such assets or Property is at that time so
encumbered;
 
(b)           cause the Lien to be granted in such Security Document to be duly
perfected in any manner permitted by law; and
 
(c)           deliver to the Purchasers an Opinion of Counsel confirming as to
such Security Document the matters set forth as to the Security Documents and
Liens thereunder in the Opinions of Counsel delivered to Purchasers on the Issue
Date and, if the property subject to such Security Document is an interest in
real estate, such local counsel opinions, insurance policies, surveys and other
supporting documents as the Trustee may reasonably request.
 
 
ARTICLE VI.
MISCELLANEOUS
 
6.1           Termination.  This Agreement may be terminated by any Purchaser,
as to such Purchaser’s obligations hereunder only and without any effect
whatsoever on the obligations between the Company and the other Purchasers, by
written notice to the other parties, if the Closing has not been consummated on
or before February 29, 2008; provided, however, that such termination will not
affect the right of any party to sue for any breach by the other party (or
parties).
 
6.2           Fees and Expenses.  At the Closing, the Company has agreed to
reimburse Lotusbox Investments Limited (“Lotusbox”) the sum of up to $125,000,
for its legal fees and expenses, of which $17,500 has been paid prior to the
Closing.  The Company shall deliver to each Purchaser, prior to the Closing, a
completed and executed copy of the Closing Statement attached hereto as Annex
A.  Except as expressly set forth in the Transaction Documents to the contrary,
each party shall pay the fees and expenses of its advisers, counsel, accountants
and other experts, if any, and all other expenses incurred by such party
incident to the negotiation, preparation, execution, delivery and performance of
this Agreement. The Company shall pay all transfer agent fees, stamp taxes and
other taxes and duties levied in connection with the delivery of any Securities
to the Purchasers.

 
 
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6.3           Entire Agreement.  The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and schedules.
 
6.4           Notices.  Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (a) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number set forth on the signature pages attached hereto prior to 5:30
p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the
date of transmission, if such notice or communication is delivered via facsimile
at the facsimile number set forth on the signature pages attached hereto on a
day that is not a Trading Day or later than 5:30 p.m. (New York City time) on
any Trading Day, (c) the second Trading Day following the date of mailing, if
sent by U.S. nationally recognized overnight courier service, or (d) upon actual
receipt by the party to whom such notice is required to be given.  The address
for such notices and communications shall be as set forth on the signature pages
attached hereto.
 
6.5           Amendments; Waivers.  No provision of this Agreement may be
waived, modified, supplemented or amended except in a written instrument signed,
in the case of an amendment, by the Company and the Purchasers of at least 66%
principal amount of debentures still held by Purchasers or, in the case of a
waiver, by the party against whom enforcement of any such waived provision is
sought.  No waiver of any default with respect to any provision, condition or
requirement of this Agreement shall be deemed to be a continuing waiver in the
future or a waiver of any subsequent default or a waiver of any other provision,
condition or requirement hereof, nor shall any delay or omission of any party to
exercise any right hereunder in any manner impair the exercise of any such
right.
 
6.6           Headings.  The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
 
6.7           Successors and Assigns.  This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted
assigns.  The Company may not assign this Agreement or any rights or obligations
hereunder without the prior written consent of each Purchaser (other than by
merger).  Any Purchaser may assign any or all of its rights under this Agreement
to any Person to whom such Purchaser assigns or transfers any Securities,
provided that such transferee agrees in writing to be bound, with respect to the
transferred Securities, by the provisions of the Transaction Documents that
apply to the “Purchasers.”
 
6.8           No Third-Party Beneficiaries.  This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.10.
 
 
 
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6.9           Governing Law.  All questions concerning the construction,
validity, enforcement and interpretation of the Transaction Documents shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York, without regard to the principles of conflicts of law
thereof.  Each party agrees that all legal proceedings concerning the
interpretations, enforcement and defense of the transactions contemplated by
this Agreement and any other Transaction Documents (whether brought against a
party hereto or its respective affiliates, directors, officers, shareholders,
employees or agents) shall be commenced exclusively in  the City of New York,
New York and shall be arbitrated in accordance with the rules of the
International Chamber of Commerce before three (3) arbitrators and otherwise
held in accordance with its rules.  Each party shall choose one arbitrator and
the two arbitrators shall choose the third.  The third arbitrator so chosen
shall have a background in either corporate finance, banking or law. The
arbitration shall be conducted in the English language and the arbitration award
shall include the allocation of costs and expenses among the parties. The
arbitration ruling shall be final and binding. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof.  Nothing contained herein shall be deemed to limit in any way any right
to serve process in any other manner permitted by law.  Any ruling by the
arbitration panel shall be binding and non appealable.
 
6.10           Survival.  The representations and warranties shall survive the
Closing and the delivery of the Securities for the applicable statue of
limitations.
 
6.11           Execution.  This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart.  In the event that any signature is
delivered by facsimile transmission or by e-mail delivery of a “.pdf” format
data file, such signature shall create a valid and binding obligation of the
party executing (or on whose behalf such signature is executed) with the same
force and effect as if such facsimile or “.pdf” signature page were an original
thereof.
 
6.12           Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their commercially reasonable efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or
unenforceable.
 
6.13           Rescission and Withdrawal Right.  Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) any of
the other Transaction Documents, whenever any Purchaser exercises a right,
election, demand or option under a Transaction Document and the Company does not
timely perform its related obligations within the periods therein provided, then
such Purchaser may rescind or withdraw, in its sole discretion from time to time
upon written notice to the Company, any relevant notice, demand or election in
whole or in part without prejudice to its future actions and rights; provided,
however, in the case of a rescission of a conversion of a Debenture or exercise
of a Warrant, the Purchaser shall be required to return any shares of Common
Stock delivered in connection with any such rescinded conversion or exercise
notice.

 
 
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6.14           Replacement of Securities.  If any certificate or instrument
evidencing any Securities is mutilated, lost, stolen or destroyed, the Company
shall issue or cause to be issued in exchange and substitution for and upon
cancellation thereof (in the case of mutilation), or in lieu of and substitution
therefor, a new certificate or instrument, but only upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction.  The
applicant for a new certificate or instrument under such circumstances shall
also pay any reasonable third-party costs (including customary indemnity)
associated with the issuance of such replacement Securities.
 
6.15           Remedies.  In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers and the Company will be entitled to specific performance under the
Transaction Documents.  The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations contained in the Transaction Documents and hereby agrees to waive
and not to assert in any action for specific performance of any such obligation
the defense that a remedy at law would be adequate.
 
6.16           Payment Set Aside. To the extent that the Company makes a payment
or payments to any Purchaser pursuant to any Transaction Document or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered
from, disgorged by or are required to be refunded, repaid or otherwise restored
to the Company, a trustee, receiver or any other person under any law
(including, without limitation, any bankruptcy law, state or federal law, common
law or equitable cause of action), then to the extent of any such restoration
the obligation or part thereof originally intended to be satisfied shall be
revived and continued in full force and effect as if such payment had not been
made or such enforcement or setoff had not occurred.
 
6.17           Usury.  To the extent it may lawfully do so, the Company hereby
agrees not to insist upon or plead or in any manner whatsoever claim, and will
resist any and all efforts to be compelled to take the benefit or advantage of,
usury laws wherever enacted, now or at any time hereafter in force, in
connection with any claim, action or proceeding that may be brought by any
Purchaser in order to enforce any right or remedy under any Transaction
Document.  Notwithstanding any provision to the contrary contained in any
Transaction Document, it is expressly agreed and provided that the total
liability of the Company under the Transaction Documents for payments in the
nature of interest shall not exceed the maximum lawful rate authorized under
applicable law (the “Maximum Rate”), and, without limiting the foregoing, in no
event shall any rate of interest or default interest, or both of them, when
aggregated with any other sums in the nature of interest that the Company may be
obligated to pay under the Transaction Documents exceed such Maximum Rate.  It
is agreed that if the maximum contract rate of interest allowed by law and
applicable to the Transaction Documents is increased or decreased by statute or
any official governmental action subsequent to the date hereof, the new maximum
contract rate of interest allowed by law will be the Maximum Rate applicable to
the Transaction Documents from the effective date forward, unless such
application is precluded by applicable law.  If under any circumstances
whatsoever, interest in excess of the Maximum Rate is paid by the Company to any
Purchaser with respect to indebtedness evidenced by the Transaction Documents,
such excess shall be applied by such Purchaser to the unpaid principal balance
of any such indebtedness or be refunded to the Company, the manner of handling
such excess to be at such Purchaser’s election.

 
 
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6.18           Independent Nature of Purchasers’ Obligations and Rights.  The
obligations of each Purchaser under any Transaction Document are several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance or non-performance of the obligations
of any other Purchaser under any Transaction Document.  Nothing contained herein
or in any other Transaction Document, and no action taken by any Purchaser
pursuant thereto, shall be deemed to constitute the Purchasers as a partnership,
an association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Documents.  Each Purchaser shall be entitled to independently
protect and enforce its rights, including without limitation the rights arising
out of this Agreement or out of the other Transaction Documents, and it shall
not be necessary for any other Purchaser to be joined as an additional party in
any proceeding for such purpose.  Each Purchaser has been represented by its own
separate legal counsel in their review and negotiation of the Transaction
Documents.  For reasons of administrative convenience only, Purchasers and their
respective counsel have chosen to communicate with the Company through EGS.  EGS
does not represent all of the Purchasers but only Lotusbox.  The Company has
elected to provide all Purchasers with the same terms and Transaction Documents
for the convenience of the Company and not because it was required or requested
to do so by the Purchasers.
 
6.19           Liquidated Damages.  The Company’s obligations to pay any partial
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
partial liquidated damages and other amounts have been paid notwithstanding the
fact that the instrument or security pursuant to which such partial liquidated
damages or other amounts are due and payable shall have been canceled.
 
6.20           Construction. The parties agree that each of them and/or their
respective counsel has reviewed and had an opportunity to revise the Transaction
Documents and, therefore, the normal rule of construction to the effect that any
ambiguities are to be resolved against the drafting party shall not be employed
in the interpretation of the Transaction Documents or any amendments hereto.
 

 
(Signature Pages Follow)
 

 
 
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IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.
 
CHINA NORTH EAST PETROLEUM HOLDINGS, LIMITED
 
Address for Notice:
               
By:
/s/ Wang Hongjun    
Fax:
  Name: Wang Hongjun       Title: Chairman and President            

With a copy to (which shall not constitute notice):
 
Crone Rozynko LLP
101 Montgomery Street
Suite 1950
San Francisco, CA 94105
Fax: (415) 955-8910
 
 
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
 
 
 
 
 
 
 

 
 
 
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PURCHASER SIGNATURE PAGES TO SECURITIES PURCHASE AGREEMENT

IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.
 
 
Name of Purchaser:  Lotusbox Investments Limited
 
Signature of Authorized Signatory of Purchaser: /s/ Diana The Hui Ling
 
Name of Authorized Signatory: Diana The Hui Ling
 
Title of Authorized Signatory: General Counsel, signing authority pursuant to
Lotusbox Investments Limited’s Board of Directors’ Resolutions dated 25 February
2008

Email Address of Purchaser: c/o suresh.withana@harmonycapitalmanagers.com;
Diana.the@harmonycapital.com.sg

Facsimile Number of Purchaser: +65 6720 1688
 
Address for Notice of Purchaser:  c/o 137, Telok Ayer Street, #04-04/05,
Singapore 068602

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

Mario Difilippo
c/o UBS
3rd Floor, 1285 Avenue of the Americas
New York, NY  10019

With a copy to the Purchaser’s address as stated above.

Subscription Amount: US$15,000,000

Warrant Shares: 4,800,000

EIN Number:  [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]
 
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