SECURITIES PURCHASE AGREEMENT
 
Dated as of October 14, 2008
 
between
 
CHINA BIO ENERGY HOLDING GROUP CO., LTD.
 
and
 
THE PURCHASER LISTED ON EXHIBIT A

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

 
TABLE OF CONTENTS

   
PAGE
   
ARTICLE I Purchase and Sale of the Debenture
2
     
Section 1.1
Purchase and Sale of the Debenture
2
Section 1.2
Preferred Shares and Common Conversion Shares
2
Section 1.3
Purchase Price and Closing
2
   
ARTICLE II Representations and Warranties of the Company
3
     
Section 2.1
Representations and Warranties of the Company
3
Section 2.2
Representations, Warranties and Covenants of the Purchaser
12
   
ARTICLE III Covenants
15
     
Section 3.1
Securities Compliance
15
Section 3.2
Registration and Listing
15
Section 3.3
Inspection Rights
16
Section 3.4
Compliance with Laws
16
Section 3.5
Keeping of Records and Books of Account
16
Section 3.6
Reporting Requirements
16
Section 3.7
Other Agreements
17
Section 3.8
Amendments
17
Section 3.9
Other Agreements
17
Section 3.10
Distributions
17
Section 3.11
Status of Dividends
18
Section 3.12
Use of Proceeds
18
Section 3.13
Disclosure of Transaction
18
Section 3.14
Disclosure of Material Information
19
Section 3.15
Pledge of Securities
19
Section 3.16
Form S-1 Eligibility
19
Section 3.17
Sarbanes-Oxley Act
19
Section 3.18
No Commissions in connection with Conversion of Debenture and Conversion of
Preferred Shares
19
Section 3.19
Post-Closing Covenants
19
Section 3.20
Subsequent Financings
20
Section 3.21
Reservation of Shares
21
Section 3.22
Transfer Agent Instructions
22
Section 3.23
Disposition of Assets
22
Section 3.24
Increase in Authorized Shares of Preferred Stock
22
Section 3.25
State of Delaware Franchise TaxCertificate of Good Standing
23
Section 3.26
Compliance with PRC Labor and Employment Laws
23
Section 3.27
Cap on 2003 Equity Incentive Plan
23

 

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

 
ARTICLE IV Closing Conditions and Closing Deliveries
23
     
Section 4.1
Conditions Precedent to the Obligation of the Company to Sell the Debenture
23
Section 4.2
Conditions Precedent to the Obligation of the Purchaser to Purchase the
Debenture
24
   
ARTICLE V Stock Certificate Legend
26
     
Section 5.1
Legend
26
   
ARTICLE VI Indemnification
27
     
Section 6.1
Indemnification of Purchaser
27
Section 6.2
Indemnification of Company
27
Section 6.3
Indemnification Procedure
28
   
ARTICLE VII Miscellaneous
29
     
Section 7.1
Fees and Expenses
29
Section 7.2
Specific Enforcement, Consent to Jurisdiction
29
Section 7.3
Entire Agreement; Amendment
29
Section 7.4
Notices
30
Section 7.5
Waivers
30
Section 7.6
Headings
31
Section 7.7
Successors and Assigns
31
Section 7.8
No Third Party Beneficiaries
31
Section 7.9
Governing Law
31
Section 7.10
Survival
31
Section 7.11
Counterparts
31
Section 7.12
Publicity
31
Section 7.13
Severability
31
Section 7.14
Further Assurances
32

 
ii

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

EXHIBITS

A.
Purchaser and Amount

B.
Form of Series B Certificate of Designation

C.
Form of Registration Rights Agreement

D.
Form of Conversion Notice

E.
Form of Share Escrow Agreement

F.
Form of Management Escrow Agreement

G.
Form of Opinion of Counsel

H.
Form of Debenture

I.
Form of Irrevocable Transfer Agent Instructions

iii

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

 
SECURITIES PURCHASE AGREEMENT
 
This SECURITIES PURCHASE AGREEMENT (the “Agreement”) is dated as of October 14,
2008 by and between China Bio Energy Holding Group Co., Ltd., a Delaware
corporation (the “Company”), and the Purchaser set forth on Exhibit A hereto
(the “Purchaser”).

RECITALS

A.  The common stock of the Company is a currently traded publicly on the
Over-the-Counter Bulletin Board;

B. The Company and the Purchaser are executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by the
provisions of Regulation D (“Regulation D”), as promulgated by the U.S.
Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933,
as amended (the “Securities Act”); and

C. The Purchaser wishes to purchase from the Company, and the Company wishes to
sell and issue to the Purchaser, upon the terms and conditions stated in this
Agreement, a convertible debenture in the principal amount of $9,000,000 (the
“Debenture”), convertible into an aggregate of 2,465,753 shares of Series B
Convertible Preferred Stock, par value $0.001 (equivalent to a purchase price of
$3.65 per share) (the “Preferred Shares”), which shall initially convert into an
aggregate of 2,465,753 shares of the Company’s Common Stock, subject to
adjustment; and

D. Contemporaneous with the sale of the Debenture, the parties hereto will
execute and deliver a Registration Rights Agreement, in the form attached hereto
as Exhibit C (the “Registration Rights Agreement”), pursuant to which the
Company will agree to provide certain registration rights under the Securities
Act, and the rules and regulations promulgated thereunder, and applicable state
securities laws, a Share Escrow Agreement, in the form attached hereto as
Exhibit E and a Management Escrow Agreement, in the form attached hereto as
Exhibit F.
 
Now, therefore, in consideration of the mutual representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
 

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

 
ARTICLE I
 
Purchase and Sale of the Debenture

Section 1.1 Purchase and Sale of the Debenture. Upon the following terms and
conditions, the Company shall issue and sell to the Purchaser and the Purchaser
shall purchase from the Company a convertible debenture in the principal amount
of $9,000,000 (the “Debenture”), convertible into 2,465,753 of shares of the
Company’s Series B Convertible Preferred Stock, par value $0.001 per share (the
“Preferred Shares”), (equivalent to a purchase price of $3.65 per Preferred
Share), which is initially convertible into 2,465,753 shares of the Company’s
common stock, par value $0.0001 per share (the “Common Stock”). The terms of the
Debenture are set forth in the Debenture, a form of which is attached hereto as
Exhibit H. The designation, rights, preferences and other terms and provisions
of the Preferred Shares are set forth in the Certificate of Designation of the
Relative Rights and Preferences of the Series B Convertible Preferred Stock
attached hereto as Exhibit B (the “Certificate of Designation”). The Company and
the Purchaser are executing and delivering this Agreement in accordance with and
in reliance upon the exemption from securities registration afforded by Rule 506
of Regulation D (“Regulation D”), as promulgated by the United States Securities
and Exchange Commission (the “Commission”), under the Securities Act of 1933, as
amended (the “Securities Act”), or Section 4(2) of the Securities Act.
 
Section 1.2 Preferred Shares and Common Conversion Shares. Subject to the filing
and effectiveness of an amendment to increase the authorized number of shares of
preferred stock of the Company and the Certificate of Designation, the Company
will authorize and reserve, and covenants to continue to reserve, free of
preemptive rights and other similar contractual rights of stockholders, a number
of Preferred Shares equal to one hundred ten percent (110%) of the number of
Preferred Shares as shall from time to time be sufficient to effect the
conversion of the Debenture. The Company has authorized and has reserved and
covenants to continue to reserve, free of preemptive rights and other similar
contractual rights of stockholders, a number of shares of Common Stock equal to
one hundred ten percent (110%) of the number of shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all of the Preferred
Shares. Any shares of Common Stock issuable upon conversion of the Preferred
Shares are herein referred to as the “Common Conversion Shares”. The Preferred
Shares and the Common Conversion Shares are sometimes collectively referred to
as the “Shares”. The Debenture and the Shares are sometimes collectively
referred to as the “Securities”.
 
Section 1.3 Purchase Price and Closing. Subject to the terms and conditions
hereof, the Company agrees to issue and sell to the Purchaser and, in
consideration of and in express reliance upon the representations, warranties,
covenants, terms and conditions of this Agreement, the Purchaser agrees to
purchase the Debenture for an aggregate purchase price of $9,000,000 (the
“Purchase Price”). The closing of the purchase and sale of the Debenture to be
acquired by the Purchaser from the Company under this Agreement shall take place
at the offices of Loeb & Loeb LLP, 345 Park Avenue, New York, NY 10154 (the
“Closing”) at 10:00 p.m., New York time (i) on or before ________________, 2008;
provided, that all of the conditions set forth in Article IV hereof and
applicable to the Closing shall have been fulfilled or waived in accordance
herewith, or (ii) at such other time and place or on such date as the Purchaser
and the Company may agree upon in writing signed by the Company and the
Purchaser (the "Closing Date"). Subject to the terms and conditions of this
Agreement, at the Closing the Company shall deliver or cause to be delivered to
the Purchaser (x) Debenture in the aggregate principal amount set forth opposite
the name of such Purchaser on Exhibit A hereto, (y) any other documents required
to be delivered pursuant to Article IV hereof. 

2

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

 
ARTICLE II
 
Representations and Warranties of the Company
 
Section 2.1 Representations and Warranties of the Company. For purposes of this
Section 2.1 only, the Company hereby represents and warrants to the Purchaser,
as of the date hereof (except as set forth on the Disclosure Schedules attached
hereto as Schedules 2.1 (the “Company Disclosure Schedules”), which are divided
into sections that correspond to the sections of this Section 2.1. The Company
Disclosure Schedule comprises a list of all exceptions to the truth and accuracy
of, and of all disclosures or descriptions required by, the representations and
warranties set forth in the remaining sections of this Section 2.1. For purposes
of this Section 2.1, any statement, facts, representations, or admissions
contained in the public filings made by the Company with the United States
Securities and Exchange Commissions, are deemed to be included in the Company
Disclosure Schedules and all such information is deemed to be fully disclosed to
the Purchaser), as follows:
 
(a) Organization, Good Standing and Power. Except as set forth on Schedule
2.1(a), the Company is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware, and has the requisite
corporate power to own, lease and operate its properties and assets and to
conduct its business as it is now being conducted. Except as set forth on
Schedule 2.1(a), the Company and each of its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted or property owned by it makes such
qualification necessary, except for any jurisdiction(s) (alone or in the
aggregate) in which the failure to be so qualified could not reasonably be
expected to have a Material Adverse Effect (as defined in Section 2.1(c) hereof)
.
 
(b) Authorization; Enforcement. The Company has the requisite corporate power
and authority to enter into and perform this Agreement, the Debenture, the
Registration Rights Agreement, substantially in the form attached hereto as
Exhibit C (the “Registration Rights Agreement”), the Share Escrow Agreement,
substantially in the form attached hereto as Exhibit E (the “Share Escrow
Agreement”), the Management Escrow Agreement, substantially in the form attached
hereto as Exhibit F (the “Management Escrow Agreement”) and the Certificate of
Designation (collectively, the “Transaction Documents”) and to issue and sell
the Debenture and, upon conversion, the Shares in accordance with the terms
hereof, in the Debentures and in the Certificate of Designation. The execution,
delivery and performance of the Transaction Documents by the Company, and the
consummation by it of the transactions contemplated hereby and thereby, have
been duly and validly authorized by all necessary corporate action, and no
further consent or authorization of the Company or its Board of Directors or
stockholders is required. This Agreement and each of the Transaction Documents,
when executed and delivered at the Closing will have been duly executed and
delivered and shall constitute a valid and binding obligation of the Company
enforceable against the Company in accordance with their respective terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation, conservatorship,
receivership or similar laws relating to, or affecting generally the enforcement
of, creditor’s rights and remedies or by other equitable principles of general
application.
 
3

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

 
(c) Capitalization. The authorized capital stock of the Company and the shares
thereof currently issued and outstanding, are set forth on Schedule 2.1(c)
hereto. All of the outstanding shares of the Common Stock have been duly and
validly authorized and issued. Except as set forth on Schedule 2.1(c) hereto and
as contemplated by this Agreement and the Transaction Documents, no shares of
Common Stock are entitled to preemptive rights or registration rights and there
are no outstanding options, warrants, scrip, rights to subscribe to, call
relating to, or securities or rights convertible into, any shares of capital
stock of the Company. Except as set forth on Schedule 2.1(c) hereto and as
contemplated by the Transaction Documents, there are no contracts, commitments,
understandings, or arrangements by which the Company is or may become bound to
issue additional shares of the capital stock of the Company or options,
securities or rights convertible into shares of capital stock of the Company.
Except as set forth on Schedule 2.1(c) hereto and as contemplated by this
Agreement and the Transaction Documents, the Company is not a party to any
agreement granting registration or anti-dilution rights to any person with
respect to any of its equity or debt securities. Except as disclosed on Schedule
2.1(c), the Company is not a party to, and it has no knowledge of, any agreement
restricting the voting or transfer of any shares of the capital stock of the
Company. To the Company’s knowledge, the offer and sale of all capital stock,
convertible securities, rights, warrants, or options of the Company issued prior
to the Closing complied with all applicable Federal and state securities laws
and no stockholder has a right of rescission or claim for damages with respect
thereto which would have a Material Adverse Effect (as defined below). The
Company has furnished or made available to the Purchaser true and correct copies
of the Company’s Certificate of Incorporation as in effect on the date hereof
(the “Certificate”), and the Company’s Bylaws as in effect on the date hereof
(the “Bylaws”). For the purposes of this Agreement, “Material Adverse Effect”
means any material adverse effect on (i) the business, operations, properties,
or financial condition of the Company and its subsidiaries, taken as a whole, or
(ii) the ability of the Company to perform any of its obligations under the
Transaction Documents.
 
(d) Issuance of the Securities. The Debenture is duly authorized by all
necessary corporate action, and when issued and paid for in accordance with the
terms of this Agreement, will be validly issued and paid, fully paid and
non-assessable. The Preferred Shares when issued in accordance with the terms of
the Debenture will be duly authorized by all necessary corporate action, validly
issued and outstanding, fully paid and nonassessable and entitled to the rights
and preferences set forth in the Certificate of Designation. The Common
Conversion Shares, when issued in accordance with the terms of the Certificate
of Designation, will be duly authorized by all necessary corporate action and
validly issued and outstanding, fully paid and nonassessable, and the holders
shall be entitled to all rights accorded to a holder of Common Stock.
 
4

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

 
(e) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company, the performance by the Company of its obligations
hereunder and thereunder and the consummation by the Company of the transactions
contemplated herein and therein do not and will not (i) violate any provision of
the Company’s Certificate or Bylaws, (ii) conflict with, or constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, mortgage, deed of trust, indenture, note, bond,
license, lease agreement, instrument or obligation to which the Company is a
party or by which it or its properties or assets are bound, (iii) create or
impose a lien, mortgage, security interest, charge or encumbrance of any nature
on any property of the Company under any agreement or any commitment to which
the Company is a party or by which the Company is bound or by which any of its
respective properties or assets are bound, or (iv) to the Company’s knowledge,
result in a violation of any federal, state, local or foreign statute, rule,
regulation, order, judgment or decree (including Federal and state securities
laws and regulations) applicable to the Company or any of its subsidiaries or by
which any property or asset of the Company or any of its subsidiaries are bound
or affected, except, in all cases other than violations pursuant to clauses (i)
and (iv) above, for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect. To the Company’s knowledge, the
business of the Company and its subsidiaries is not being conducted in violation
of any laws, ordinances or regulations of any governmental entity, except for
possible violations which singularly or in the aggregate do not and will not
have a Material Adverse Effect. To the Company’s knowledge, the Company is not
required under Federal, state or local law, rule or regulation to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency in order for it to execute, deliver or perform any
of its obligations under the Transaction Documents, or issue and sell the
Securities in accordance with the terms hereof or thereof (other than (x) any
consent, authorization or order that has been obtained as of the date hereof,
(y) any filing or registration that has been made as of the date hereof or (z)
any filings which may be required to be made by the Company with the Commission
or state securities administrators subsequent to the Closing, any registration
statement which may be filed pursuant hereto, and the Certificate of
Designation); provided that, for purposes of the representation made in this
sentence, the Company is assuming and relying upon the accuracy of the relevant
representations and agreements of the Purchaser herein.
 
(f) Commission Documents, Financial Statements. Except as indicated on Schedule
2.1(f), the Company has timely filed, or filed within the applicable extension
period, all reports, schedules, forms, statements and other documents required
to be filed by it with the Commission pursuant to the reporting requirements of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including
material filed pursuant to Section 13(a) or 15(d) of the Exchange Act (all of
the foregoing including filings incorporated by reference therein being referred
to herein as the “Commission Documents”) since October 23, 2007, and to the best
of the Company’s knowledge all Commission Documents prior to October 23, 2007
were so filed. True and complete copies of all of the Commission Documents are
available to the Purchaser through the Commission’s EDGAR database on
www.sec.gov. The Company has not provided to the Purchaser any material
non-public information or other information which, according to applicable law,
rule or regulation, was required to have been disclosed publicly by the Company
but which has not been so disclosed, other than with respect to the transactions
contemplated by this Agreement. At the times of their respective filings, the
Company’s Form 10-K for the year ended December 31, 2007, including the
accompanying financial statements (the “Form 10-K”) and the Company’s Form 10-Q
for the fiscal quarters ended March 31, 2008 and June 30, 2008 (the “Form
10-Qs”) complied in all material respects with the requirements of the Exchange
Act and the rules and regulations of the Commission promulgated thereunder and
other federal, state and local laws, rules and regulations applicable to such
documents, and, as of their respective dates, neither the Form 10-K, nor the
Form 10-Qs contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of the Company included in the
Commission Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the
Commission or other applicable rules and regulations with respect thereto. Such
financial statements have been prepared in accordance with United States
generally accepted accounting principles (“GAAP”) applied on a consistent basis
during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto or (ii) in the case of unaudited
interim statements, to the extent they may not include footnotes), and fairly
present in all material respects the financial position of the Company as of the
dates thereof and the results of operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments).
 
5

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

 
(g) Subsidiaries. Set forth on Schedule 2.1(g) is a list of the Company’s
subsidiaries. For the purposes of this Agreement, “subsidiary” shall mean any
corporation or other entity of which at least a majority of the securities or
other ownership interest having ordinary voting power (absolutely or
contingently) for the election of directors or other persons performing similar
functions are at the time owned directly or indirectly by the Company and/or any
of its other subsidiaries.
 
(h) No Material Adverse Change. Except as set forth on Schedule 2.1(h), since
June 30, 2008, the Company has not experienced or suffered any Material Adverse
Effect.
 
(i) No Undisclosed Liabilities. Neither the Company nor any of its subsidiaries
has any liabilities, obligations, claims or losses (whether liquidated or
unliquidated, secured or unsecured, absolute, accrued, contingent or otherwise)
other than those incurred in the ordinary course of the Company’s or its
subsidiaries respective businesses since June 30, 2008, and which, individually
or in the aggregate, do not or would not have a Material Adverse Effect on the
Company or its subsidiaries.
 
(j) No Undisclosed Events or Circumstances. No event or circumstance has
occurred or exists with respect to the Company or its subsidiaries or their
respective businesses, properties, prospects, operations or financial condition,
which, under applicable law, rule or regulation, requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed since June 30, 2007.
 
(k) Indebtedness. Schedule 2.1(k) hereto sets forth as of a recent date all
outstanding secured and unsecured Indebtedness of the Company or any subsidiary,
or for which the Company or any subsidiary has commitments, in each case that
have not previously been set forth in the Commission Documents. For the purposes
of this Agreement, “Indebtedness” shall mean (a) any liabilities for borrowed
money or amounts owed in excess of $100,000 (other than trade accounts payable
incurred in the ordinary course of business), (b) all guaranties, endorsements
and other contingent obligations in respect of Indebtedness of others, whether
or not the same are or should be reflected in the Company’s balance sheet (or
the notes thereto), except guaranties by endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of
business; and (c) the present value of any lease payments in excess of $25,000
due under leases required to be capitalized in accordance with GAAP. Except as
set forth on Schedule 2.1(k), neither the Company nor any subsidiary is in
default with respect to any Indebtedness.
 
6

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

 
(l) Title to Assets. Except as set forth on Schedule 2.1(l), each of the Company
and the subsidiaries has good and marketable title to all of its real and
personal property, free and clear of any mortgages, pledges, charges, liens,
security interests or other encumbrances, except for those disclosed in the
Financial Statements and the Commission Documents or such that, individually or
in the aggregate, do not cause a Material Adverse Effect. Solely with respect to
the Company, all of its real and personal property is reflected in the Financial
Statements and the Commission Documents. Except as set forth on Schedule 2.1(l),
all leases of the Company and each of its subsidiaries are valid and subsisting
and in full force and effect.
 
(m) Actions Pending. There is no action, suit, claim, investigation,
arbitration, alternate dispute resolution proceeding or any other proceeding
pending or, to the knowledge of the Company, threatened against the Company or
any subsidiary which questions the validity of this Agreement or any of the
other Transaction Documents or the transactions contemplated hereby or thereby
or any action taken or to be taken pursuant hereto or thereto. There is no
action, suit, claim, investigation, arbitration, alternate dispute resolution
proceeding or any other proceeding pending or, to the knowledge of the Company,
threatened, against or involving the Company, any subsidiary or any of their
respective properties or assets. There are no outstanding orders, judgments,
injunctions, awards or decrees of any court, arbitrator or governmental or
regulatory body against the Company or any subsidiary or any officers or
directors of the Company or subsidiary in their capacities as such.
 
(n) Compliance with Law. The business of the Company and the business of the
subsidiaries has been and is presently being conducted in accordance with all
applicable federal, state and local governmental laws, rules, regulations and
ordinances, except for such noncompliance that, individually or in the
aggregate, would not cause a Material Adverse Effect. Neither the Company, nor
the subsidiaries has received notice of any violation of applicable federal,
state or local governmental laws, rules, regulations and ordinances. The Company
and each of its subsidiaries have all franchises, permits, licenses, consents
and other governmental or regulatory authorizations and approvals necessary for
the conduct of its business as now being conducted by it unless the failure to
possess such franchises, permits, licenses, consents and other governmental or
regulatory authorizations and approvals, individually or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect.
 
7

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

 
(o) Taxes. The Company and each of the subsidiaries has accurately prepared and
filed all federal, state and other tax returns required by law to be filed by
it, has paid or made provisions for the payment of all taxes shown to be due and
all additional assessments, and adequate provisions have been and are reflected
in the financial statements of the Company and the subsidiaries for all current
taxes and other charges to which the Company or any subsidiary is subject and
which are not currently due and payable. None of the federal income tax returns
of the Company have been audited by the Internal Revenue Service, or with
respect to the subsidiaries, none of their respective tax returns have been
audited by any governmental entity in the jurisdiction in which each such
subsidiary may be subject to taxation. Neither the Company, nor any subsidiary,
has any knowledge of any additional assessments, adjustments or contingent tax
liability (whether federal, state or foreign) of any nature whatsoever, whether
pending or threatened against the Company or any subsidiary for any period, nor
of any basis for any such assessment, adjustment or contingency.
 
(p) Certain Fees. No brokers, finders or financial advisory fees or commissions
will be payable by the Company or any subsidiary with respect to the
transactions contemplated by this Agreement.
 
(q) Disclosure. Neither this Agreement or the Schedules hereto nor any other
documents, certificates or instruments furnished to the Purchaser by or on
behalf of the Company or any subsidiary in connection with the transactions
contemplated by this Agreement contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements made
herein or therein, in the light of the circumstances under which they were made
herein or therein, not misleading.
 
(r) Intellectual Property. The Company and each of the subsidiaries owns or
possesses all patents, trademarks, domain names (whether or not registered) and
any patentable improvements or copyrightable derivative works thereof, websites
and intellectual property rights relating thereto, service marks, trade names,
copyrights, licenses and authorizations, and all rights with respect to the
foregoing, which are necessary for the conduct of its business as now conducted
without any conflict with the rights of others.
 
(s) Environmental Compliance. The Company and each of its subsidiaries have
obtained all material approvals, authorization, certificates, consents,
licenses, orders and permits or other similar authorizations of all governmental
authorities, or from any other person, that are required under any Environmental
Laws. Except as set forth on Schedule 2.1(s), the Company and its subsidiaries
are in material compliance with applicable environmental requirements in the
operation of their respective business, except to the extent that any non
compliance, individually or in the aggregate, does not cause a Material Adverse
Effect. “Environmental Laws” shall mean all applicable laws relating to the
protection of the environment including, without limitation, all requirements
pertaining to reporting, licensing, permitting, controlling, investigating or
remediating emissions, discharges, releases or threatened releases of hazardous
substances, chemical substances, pollutants, contaminants or toxic substances,
materials or wastes, whether solid, liquid or gaseous in nature, into the air,
surface water, groundwater or land, or relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
hazardous substances, chemical substances, pollutants, contaminants or toxic
substances, material or wastes, whether solid, liquid or gaseous in nature. The
Company has all necessary governmental approvals required under all
Environmental Laws and used in its business or in the business of any of its
subsidiaries. The Company and each of its subsidiaries are also in compliance
with all other limitations, restrictions, conditions, standards, requirements,
schedules and timetables required or imposed under all Environmental Laws.
Except for such instances as would not individually or in the aggregate have a
Material Adverse Effect, there are no past or present events, conditions,
circumstances, incidents, actions or omissions relating to or in any way
affecting the Company or its subsidiaries that violate or may violate any
Environmental Law after the Closing Date or that may give rise to any
environmental liability, or otherwise form the basis of any claim, action,
demand, suit, proceeding, hearing, study or investigation (i) under any
Environmental Law, or (ii) based on or related to the manufacture, processing,
distribution, use, treatment, storage (including without limitation underground
storage tanks), disposal, transport or handling, or the emission, discharge,
release or threatened release of any hazardous substance.
 
8

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

 
(t) Books and Record Internal Accounting Controls. The books and records of the
Company and its subsidiaries accurately reflect in all material respects the
information relating to the business of the Company and the subsidiaries, the
location and collection of their assets, and the nature of all transactions
giving rise to the obligations or accounts receivable of the Company or any
subsidiary. The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient, in the judgment of the Company, to
provide reasonable assurance that (i) transactions are executed in accordance
with management’s general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain asset accountability, (iii) access to
assets is permitted only in accordance with management’s general or specific
authorization and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
 
(u) Material Agreements. Except as set forth on Schedule 2.1(u) or with respect
to the transactions contemplated herein, neither the Company nor any subsidiary
is a party to any written or oral contract, instrument, agreement, commitment,
obligation, plan or arrangement, a copy of which would be required to be filed
with the Commission as an exhibit to a registration statement on Form S-1 or
other applicable form (collectively, “Material Agreements”) if the Company or
any subsidiary were registering securities under the Securities Act. Except as
set forth on Schedule 2.1(u), the Company and each of its subsidiaries has in
all material respects performed all the obligations required to be performed by
them to date under the foregoing agreements, have received no notice of default
and are not in default under any Material Agreement now in effect, the result of
which could cause a Material Adverse Effect.
 
(v) Transactions with Affiliates. Except as set forth in the Financial
Statements, the Commission Documents or Schedule 2.1(v), there are no loans,
leases, agreements, contracts, royalty agreements, management contracts or
arrangements or other continuing transactions between (a) the Company or any
subsidiary on the one hand, and (b) on the other hand, any officer, employee,
consultant or director of the Company, or any of its subsidiaries, or any person
owning any capital stock of the Company or any subsidiary or any member of the
immediate family of such officer, employee, consultant, director or affiliate or
any corporation or other entity controlled by such officer, employee,
consultant, director or affiliate, or a member of the immediate family of such
officer, employee, consultant, director or affiliate.
 
9

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

 
(w) Securities Act of 1933. Based in material part upon the representations
herein of the Purchaser, the Company has complied and will comply with all
applicable federal and state securities laws in connection with the offer,
issuance and sale of the Shares and the Warrants hereunder. Neither the Company
nor anyone acting on its behalf, directly or indirectly, has or will sell, offer
to sell or solicit offers to buy any of the Securities or similar securities to,
or solicit offers with respect thereto from, or enter into any preliminary
conversations or negotiations relating thereto with, any person, or has taken or
will take any action, so as to bring the issuance and sale of any of the
Securities under the registration provisions of the Securities Act and
applicable state securities laws, and neither the Company nor any of its
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the Securities Act) in connection with the offer or sale of
any of the Securities.
 
(x) Governmental Approvals. Except for the filing of any notice prior or
subsequent to the Closing Date that may be required under applicable state
and/or federal securities laws (which if required, shall be filed on a timely
basis), including the filing of a Form D and a registration statement or
statements pursuant to the Registration Rights Agreement, and the filing of the
Certificate of Designation with the Secretary of State for the State of
Delaware, no authorization, consent, approval, license, exemption of, filing or
registration with any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, is or will be necessary
for, or in connection with, the execution or delivery of the Debenture, or for
the performance by the Company of its obligations under the Transaction
Documents.
 
(y) Employees. Neither the Company nor any subsidiary has any collective
bargaining arrangements or agreements covering any of its employees. Except as
set forth on Schedule 2.1(y), neither the Company nor any subsidiary has any
employment contract, agreement regarding proprietary information,
non-competition agreement, non-solicitation agreement, confidentiality
agreement, or any other similar contract or restrictive covenant, relating to
the right of any officer, employee or consultant to be employed or engaged by
the Company or such subsidiary. No officer, consultant or key employee of the
Company or any subsidiary whose termination, either individually or in the
aggregate, could have a Material Adverse Effect, has terminated or, to the
knowledge of the Company, has any present intention of terminating his or her
employment or engagement with the Company or any subsidiary.
 
(z) Absence of Certain Developments. Except as set forth on Schedule 2.1(z) or
in the Commission Documents, since June 30, 2008, neither the Company nor any
subsidiary has:
 
(i) issued any stock, bonds or other corporate securities or any rights, options
or warrants with respect thereto;
 
(ii) borrowed any amount or incurred or become subject to any liabilities
(absolute or contingent) except current liabilities incurred in the ordinary
course of business which are comparable in nature and amount to the current
liabilities incurred in the ordinary course of business during the comparable
portion of its prior fiscal year, as adjusted to reflect the current nature and
volume of the Company’s or such subsidiary’s business;
 
10

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

 
(iii) discharged or satisfied any lien or encumbrance or paid any obligation or
liability (absolute or contingent), other than current liabilities paid in the
ordinary course of business;
 
(iv) declared or made any payment or distribution of cash or other property to
stockholders with respect to its stock, or purchased or redeemed, or made any
agreements so to purchase or redeem, any shares of its capital stock;
 
(v) sold, assigned or transferred any other tangible assets, or canceled any
debts or claims, except in the ordinary course of business;
 
(vi) sold, assigned or transferred any patent rights, trademarks, trade names,
copyrights, trade secrets or other intangible assets or intellectual property
rights, or disclosed any proprietary confidential information to any person
except to customers in the ordinary course of business or to the Purchaser or
its representatives;
 
(vii) suffered any substantial losses or waived any rights of material value,
whether or not in the ordinary course of business, or suffered the loss of any
material amount of prospective business;
 
(viii) made any changes in employee compensation except in the ordinary course
of business and consistent with past practices;
 
(ix) made capital expenditures or commitments therefor that aggregate in excess
of $100,000;
 
(x) entered into any other transaction other than in the ordinary course of
business, or entered into any other material transaction, whether or not in the
ordinary course of business;
 
(xi) made charitable contributions or pledges in excess of $25,000;
 
(xii) suffered any material damage, destruction or casualty loss, whether or not
covered by insurance;
 
(xiii) experienced any material problems with labor or management in connection
with the terms and conditions of their employment;
 
(xiv) effected any two or more events of the foregoing kind which in the
aggregate would be material to the Company or its subsidiaries; or
 
(xv) entered into an agreement, written or otherwise, to take any of the
foregoing actions.
 
11

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

 
(aa) Public Utility Holding Company Act and Investment Company Act Status. The
Company is not a “holding company” or a “public utility company” as such terms
are defined in the Public Utility Holding Company Act of 1935, as amended. The
Company is not, and as a result of and immediately upon the Closing will not be,
an “investment company” or a company “controlled” by an “investment company,”
within the meaning of the Investment Company Act of 1940, as amended.
 
(bb) ERISA. No liability to the Pension Benefit Guaranty Corporation has been
incurred with respect to any Plan (as defined below) by the Company or any of
its subsidiaries which is or would be materially adverse to the Company and its
subsidiaries. The execution and delivery of this Agreement and the issuance and
sale of the Preferred Shares will not involve any transaction which is subject
to the prohibitions of Section 406 of the Employee Retirement Income Security
Act of 1974, as amended (“ERISA”), or in connection with which a tax could be
imposed pursuant to Section 4975 of the Internal Revenue Code of 1986, as
amended (the “Code”), provided that, if the Purchaser, or any person or entity
that owns a beneficial interest in any of the Purchaser, is an “employee pension
benefit plan” (within the meaning of Section 3(2) of ERISA) with respect to
which the Company is a “party in interest” (within the meaning of Section 3(14)
of ERISA), the requirements of Sections 407(d)(5) and 408(e) of ERISA, if
applicable, are met. As used in this Section 2.1(bb), the term “Plan” shall mean
an “employee pension benefit plan” (as defined in Section 3 of ERISA) which is
or has been established or maintained, or to which contributions are or have
been made, by the Company or any subsidiary or by any trade or business, whether
or not incorporated, which, together with the Company or any subsidiary, is
under common control, as described in Section 414(b) or (c) of the Code.
 
(cc) No Integrated Offering. Neither the Company, nor any of its affiliates, nor
any person acting on its or their behalf, has directly or indirectly made any
offers or sales of any security or solicited any offers to buy any security
under circumstances that would cause the offering of the Securities pursuant to
this Agreement to be integrated with prior offerings by the Company for purposes
of the Securities Act which would prevent the Company from selling the
Securities pursuant to Rule 506 under the Securities Act, or any applicable
exchange-related stockholder approval provisions, nor will the Company or any of
its affiliates or subsidiaries take any action or steps that would cause the
offering of the Securities to be so integrated with other offerings. The Company
does not have any registration statement pending before the Commission or
currently under the Commission’s review and the Company has not in the last six
(6) months publicly offered or sold any of its equity securities or debt
securities convertible into shares of Common Stock.
 
Section 2.2 Representations, Warranties and Covenants of the Purchaser. The
Purchaser hereby makes the following representations, warranties and covenants
to the Company with respect solely to itself and not with respect to any other
Purchaser:
 
12

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

 
(a) Organization and Standing of the Purchaser. The Purchaser is a corporation,
partnership or limited liability company duly incorporated or organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization.
 
(b) Authorization and Power. The Purchaser has the requisite power and authority
to enter into and perform this Agreement and to purchase the Debenture being
sold to it hereunder. The execution, delivery and performance of this Agreement
and the Registration Rights Agreement by such Purchaser and the consummation by
it of the transactions contemplated hereby and thereby have been duly authorized
by all necessary corporate or partnership action, and no further consent or
authorization of such Purchaser or its Board of Directors, stockholders,
members, managers or partners, as the case may be, is required. Each of this
Agreement and the Registration Rights Agreement has been duly authorized,
executed and delivered by such Purchaser and constitutes, or shall constitute
when executed and delivered, a valid and binding obligation of the Purchaser
enforceable against the Purchaser in accordance with the terms thereof, except
as such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation, conservatorship, receivership or
similar laws relating to, or affecting generally the enforcement of, creditor’s
rights and remedies or by other equitable principles of general application.
 
(c) No Conflicts. The execution, delivery and performance of this Agreement and
the Registration Rights Agreement by such Purchaser and the consummation by such
Purchaser of the transactions contemplated hereby and thereby or relating hereto
do not and will not (i) result in a violation of such Purchaser’s charter
documents or bylaws or other organizational documents or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of any agreement, indenture or
instrument or obligation to which such Purchaser is a party or by which its
properties or assets are bound, or result in a violation of any law, rule, or
regulation, or any order, judgment or decree of any court or governmental agency
applicable to such Purchaser or its properties (except for such conflicts,
defaults and violations as would not, individually or in the aggregate, have a
material adverse effect on such Purchaser’s ability to perform its obligations
hereunder). Such Purchaser is not required to obtain any consent, authorization
or order of, or make any filing or registration with, any court or governmental
agency in order for it to execute, deliver or perform any of its obligations
under this Agreement or the Registration Rights Agreement or to purchase the
Debenture in accordance with the terms hereof, provided that for purposes of the
representation made in this sentence, such Purchaser is assuming and relying
upon the accuracy of the relevant representations and agreements of the Company
herein.
 
13

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

 
(d) Acquisition for Investment. The Purchaser is acquiring the Debenture solely
for its own account for the purpose of investment and not as a nominee or with a
view to or for sale in connection with distribution. The Purchaser does not have
a present intention to sell the Debenture, nor a present arrangement (whether or
not legally binding) or intention to effect any distribution of the Debenture to
or through any person or entity; provided, however, that by making the
representations herein and subject to Section 2.2(h) below, the Purchaser does
not agree to hold the Securities for any minimum or other specific term and
reserves the right to dispose of the Securities at any time in accordance with
Federal and state securities laws applicable to such disposition. The Purchaser
acknowledges that it is able to bear the financial risks associated with an
investment in the Debenture and that it has been given full access to such
records of the Company and the subsidiaries and to the officers of the Company
and the subsidiaries and received such information as it has deemed necessary or
appropriate to conduct its due diligence investigation and has sufficient
knowledge and experience in investing in companies similar to the Company in
terms of the Company’s stage of development so as to be able to evaluate the
risks and merits of its investment in the Company.
 
(e) Status of Purchaser. The Purchaser is an “accredited investor” as defined in
Regulation D promulgated under the Securities Act. The Purchaser is not required
to be registered as a broker-dealer under Section 15 of the Exchange Act and the
Purchaser is not a broker-dealer.
 
(f) Opportunities for Additional Information. The Purchaser acknowledges that
such Purchaser has had the opportunity to ask questions of and receive answers
from, or obtain additional information from, the executive officers of the
Company concerning the financial and other affairs of the Company, and to the
extent deemed necessary in light of such Purchaser’s personal knowledge of the
Company’s affairs, such Purchaser has asked such questions and received answers
to the full satisfaction of such Purchaser, and such Purchaser desires to invest
in the Company.
 
(g) No General Solicitation. The Purchaser acknowledges that the Debenture were
not offered to such Purchaser by means of any form of general or public
solicitation or general advertising, or publicly disseminated advertisements or
sales literature, including (i) any advertisement, article, notice or other
communication published in any newspaper, magazine, or similar media, or
broadcast over television or radio, or (ii) any seminar or meeting to which such
Purchaser was invited by any of the foregoing means of communications.
 
(h) Rule 144. The Purchaser understands that the Securities must be held
indefinitely unless such Securities are registered under the Securities Act or
an exemption from registration is available. Such Purchaser acknowledges that
such Purchaser is familiar with Rule 144 of the rules and regulations of the
Commission, as amended, promulgated pursuant to the Securities Act (“Rule 144”),
and that such person has been advised that Rule 144 permits resales only under
certain circumstances. Such Purchaser understands that to the extent that Rule
144 is not available, such Purchaser will be unable to sell any Securities
without either registration under the Securities Act or the existence of another
exemption from such registration requirement.
 
(i) General. The Purchaser understands that the Securities are being offered and
sold in reliance on a transactional exemption from the registration requirement
of Federal and state securities laws and the Company is relying upon the truth
and accuracy of the representations, warranties, agreements, acknowledgments and
understandings of such Purchaser set forth herein in order to determine the
applicability of such exemptions and the suitability of such Purchaser to
acquire the Securities.
 
14

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

 
(j) Trading Activities. The Purchaser agrees that it shall not, directly or
indirectly, in its own capacity or through an agent, engage in any short sales
(as defined in Rule 200 of Regulation SHO under the Exchange Act) with respect
to the Conversion Shares, or any hedging transaction or securitization,
including obtaining shares of Common Stock to borrow, which establishes any
short position with respect to the Common Stock, whether on a U.S. domestic
exchange or any foreign exchange. 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 from the Company or any other person (i) a term sheet
(written or oral) or (ii) a draft of any Transaction Document, in each case
setting forth the material terms of the transactions contemplated hereunder,
until the date hereof.
 
(k) Certain Fees. Except as set forth on Schedule 2.2(l) hereto, no brokers,
finders or financial advisory fees or commissions will be payable by the
Purchaser with respect to the transactions contemplated by this Agreement.
 
ARTICLE III
 
Covenants
 
The Company covenants with each of the Purchaser as follows, which covenants are
for the benefit of the Purchaser and their permitted assignees hereunder.
 
Section 3.1 Securities Compliance. The Company shall notify the Commission in
accordance with its rules and regulations of the transactions contemplated by
any of the Transaction Documents, including filing a Form D with respect to the
Debenture, Preferred Shares and Common Conversion Shares as required under
Regulation D and applicable “blue sky” laws, and shall take all other necessary
action and proceedings as may be required and permitted by applicable law, rule
and regulation, for the legal and valid issuance of the Securities.
 
Section 3.2 Registration and Listing. The Company shall (a) either (i) cause its
Common Stock to continue to be registered under Section 12(b) or 12(g) of the
Exchange Act, or (ii) continue to voluntarily file all reports required to be
filed as if the Company were so registered, and in any event shall comply in all
respects with its reporting and filing obligations under the Exchange Act and
the Company shall not cease filing reports under the Exchange Act even if the
Exchange Act or the rules and regulations thereunder would permit such
termination, (b) comply with all requirements related to any registration
statement filed pursuant to this Agreement, and (c) not take any action or file
any document (whether or not permitted by the Securities Act or the rules
promulgated thereunder) to terminate or suspend such registration or to
terminate or suspend its reporting and filing obligations under the Exchange Act
or Securities Act, except as permitted herein. The Company will take all action
necessary to continue the listing or trading of its Common Stock on the OTC
Bulletin Board or other exchange or market on which the Common Stock is trading
or may be traded in the future. Upon the request of the Purchaser, the Company
shall deliver to the Purchaser a written certification of a duly authorized
officer as to whether it has complied with such requirements. Subject to the
terms of the Transaction Documents, the Company further covenants that it will
take such further action as the Purchaser may reasonably request, all to the
extent required from time to time, to enable the Purchaser to sell the Shares
without registration under the Securities Act within the limitation of the
exemptions provided by Rule 144. 
 
15

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

 
Section 3.3 Inspection Rights. The Company shall permit, during normal business
hours and upon reasonable request and reasonable notice, the Purchaser or any
employees, agents or representatives thereof, so long as the Purchaser shall
beneficially own equity securities of the Company, in the aggregate,
representing more than 5% of the total combined voting power of all voting
securities then outstanding, for purposes reasonably related to the Purchaser’s
interests as a stockholder, to examine and make reasonable copies of and
extracts from the records and books of account of, and visit and inspect the
properties, assets, operations and business of the Company and any subsidiary,
and to discuss the affairs, finances and accounts of the Company and any
subsidiary with any of its officers, consultants, directors, and key employees,
except for any such information that shall be considered material non-public
information by the Company. 
 
Section 3.4 Compliance with Laws. The Company shall comply, and cause each
subsidiary to comply, with all applicable laws, rules, regulations and orders,
noncompliance with which could have a Material Adverse Effect.
 
Section 3.5 Keeping of Records and Books of Account. The Company shall keep and
cause each subsidiary to keep adequate records and books of account, in which
complete entries will be made in accordance with GAAP consistently applied,
reflecting all financial transactions of the Company and its subsidiaries, and
in which, for each fiscal year, all proper reserves for depreciation, depletion,
obsolescence, amortization, taxes, bad debts and other purposes in connection
with its business shall be made.
 
Section 3.6 Reporting Requirements. If the Commission ceases making periodic
reports filed under the Exchange Act available via the Internet, then at a
Purchaser’s request the Company shall furnish the following to such Purchaser so
long as such Purchaser shall beneficially own any Shares:
 
(a) Quarterly Reports filed with the Commission on Form 10-Q as soon as
practical after the document is filed with the Commission, and in any event
within five (5) days after the document is filed with the Commission;
 
(b) Annual Reports filed with the Commission on Form 10-K as soon as practical
after the document is filed with the Commission, and in any event within five
(5) days after the document is filed with the Commission; and
 
16

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

 
(c) Copies of all notices and information, including without limitation notices
and proxy statements in connection with any meetings, that are provided to
holders of shares of Common Stock, contemporaneously with the delivery of such
notices or information to such holders of Common Stock.
 
Section 3.7 Other Agreements. The Company shall not enter into any agreement in
which the terms of such agreement would restrict or impair the right or ability
of the Company or any subsidiary to perform under any Transaction Document.
 
Section 3.8 Amendments. The Company shall not amend or waive any provision of
the Certificate or Bylaws of the Company in any way that would adversely affect
the liquidation preferences, dividends rights, conversion rights, voting rights
or redemption rights of the Preferred Shares; provided, however, that any
creation and issuance of another series of Junior Stock (as defined in the
Certificate of Designation) shall not be deemed to materially and adversely
affect such rights, preferences or privileges.
 
Section 3.9 Other Agreements. The Company shall not enter into any agreement in
which the terms of such agreement would restrict or impair the right or ability
of the Company or any subsidiary to perform under any Transaction Document.
 
Section 3.10 Distributions. So long as any Debenture or any Preferred Shares
remain outstanding, the Company agrees that it shall not (i) declare or pay any
dividends or make any distributions to any holder(s) of Common Stock without
prior written consent from a majority of the holders of the Debenture (on an as
converted basis) or the Preferred Shares at such time, or (ii) purchase or
otherwise acquire for value, directly or indirectly, any Common Stock or other
equity security of the Company, other than pursuant to a repurchase plan
approved by the Company’s board of directors.
 
17

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

 
Section 3.11  Status of Dividends. The Company covenants and agrees that (i) no
Federal income tax return or claim for refund of Federal income tax or other
submission to the Internal Revenue Service (the “Service”) will adversely affect
the Debenture, Preferred Shares, any other series of its Preferred Stock, or the
Common Stock, and no deduction shall operate to jeopardize the availability to
Purchasers of the dividends received deduction provided by Section 243(a)(1) of
the Code or any successor provision, (ii) in no report to shareholders or to any
governmental body having jurisdiction over the Company or otherwise will it
treat the Preferred Shares other than as equity capital or the dividends paid
thereon other than as dividends paid on equity capital unless required to do so
by a governmental body having jurisdiction over the accounts of the Company or
by a change in generally accepted accounting principles required as a result of
action by an authoritative accounting standards setting body, and (iii) it will
take no action which would result in the dividends paid by the Company on the
Preferred Shares out of the Company’s current or accumulated earnings and
profits being ineligible for the dividends received deduction provided by
Section 243(a)(1) of the Code. The preceding sentence shall not be deemed to
prevent the Company from designating the Preferred Stock as “Convertible
Preferred Stock” in its annual and quarterly financial statements in accordance
with its prior practice concerning other series of preferred stock of the
Company. In the event that the Purchasers have reasonable cause to believe that
dividends paid by the Company on the Preferred Shares out of the Company’s
current or accumulated earnings and profits will not be treated as eligible for
the dividends received deduction provided by Section 243(a)(1) of the Code, or
any successor provision, the Company will, at the reasonable request of the
Purchasers of 51% of the outstanding Preferred Shares, join with the Purchasers
in the submission to the Service of a request for a ruling that dividends paid
on the Shares will be so eligible for Federal income tax purposes, at the
Purchasers expense. In addition, the Company will reasonably cooperate with the
Purchasers (at Purchasers’ expense) in any litigation, appeal or other
proceeding challenging or contesting any ruling, technical advice, finding or
determination that earnings and profits are not eligible for the dividends
received deduction provided by Section 243(a)(1) of the Code, or any successor
provision to the extent that the position to be taken in any such litigation,
appeal, or other proceeding is not contrary to any provision of the Code.
Notwithstanding the foregoing, nothing herein contained shall be deemed to
preclude the Company from claiming a deduction with respect to such dividends if
(i) the Code shall hereafter be amended, or final Treasury regulations
thereunder are issued or modified, to provide that dividends on the Preferred
Shares or Common Conversion Shares should not be treated as dividends for
Federal income tax purposes or that a deduction with respect to all or a portion
of the dividends on the Shares is allowable for Federal income tax purposes, or
(ii) in the absence of such an amendment, issuance or modification and after a
submission of a request for ruling or technical advice, the Service shall issue
a published ruling or advise that dividends on the Shares should not be treated
as dividends for Federal income tax purposes. If the Service specifically
determines that the Preferred Shares or Common Conversion Shares, constitute
debt, the Company may file protective claims for refund.
 
Section 3.12  Use of Proceeds. The net proceeds from the sale of the Securities
hereunder shall be used by the Company for working capital and general corporate
purposes and not to redeem any Common Stock or securities convertible,
exercisable or exchangeable into Common Stock or to settle any outstanding
litigation. 
 
Section 3.13 Disclosure of Transaction. The Company shall issue a press release
describing the material terms of the transactions contemplated hereby (the
“Press Release”) as soon as practicable after the Closing but in no event later
than 9:00 A.M. Eastern Time on the first Trading Day following the Closing. The
Company shall also file with the Commission a Current Report on Form 8-K (the
“Form 8-K”) describing the material terms of the transactions contemplated
hereby (and attaching as exhibits thereto this Agreement, the form of Debenture,
the Registration Rights Agreement, the Certificate of Designation, the Share
Escrow Agreement, the Management Escrow Agreement and the Press Release) as soon
as practicable following the Closing Date but in no event more than four (4)
Trading Days following the Closing Date, which Press Release and Form 8-K shall
be subject to prior review and comment by counsel for the Purchaser. “Trading
Day” means any day during which the OTC Bulletin Board (or other quotation venue
or principal exchange on which the Common Stock is traded) shall be open for
trading. 
 
18

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

 
Section 3.14 Disclosure of Material Information. The Company covenants and
agrees that neither it nor any other person acting on its behalf has provided or
will provide any Purchaser or its agents or counsel with any information that
the Company believes constitutes material non-public information (other than
with respect to the transactions contemplated by this Agreement), 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 the Purchaser shall be relying on the foregoing representations in
effecting transactions in securities of the Company.
 
Section 3.15 Pledge of Securities. The Company acknowledges and agrees that the
Shares may be pledged by a Purchaser in connection with a bona fide margin
agreement or other loan or financing arrangement that is secured by the Common
Stock. The pledge of Common Stock shall not be deemed to be a transfer, sale or
assignment of the Common Stock hereunder, and no Purchaser effecting a pledge of
Common Stock shall be required to provide the Company with any notice thereof or
otherwise make any delivery to the Company pursuant to this Agreement or any
other Transaction Document; provided that a Purchaser and its pledgee shall be
required to comply with the provisions of Article V hereof in order to effect a
sale, transfer or assignment of Common Stock to such pledgee. At the Purchaser's
expense, the Company hereby agrees to execute and deliver such documentation as
a pledgee of the Common Stock may reasonably request in connection with a pledge
of the Common Stock to such pledgee by a Purchaser.
 
Section 3.16 Form S-1 Eligibility. The Company currently meets the “registrant
eligibility” and transaction requirements set forth in the general instructions
to Form S-1 applicable to “resale” registrations on Form S-1. 
 
Section 3.17 Sarbanes-Oxley Act. The Company shall use its best efforts to be in
compliance with the applicable provisions of the Sarbanes-Oxley Act of 2002, and
the rules and regulations promulgated thereunder, as required under such Act.
 
Section 3.18 No Commissions in connection with Conversion of Debenture and
Conversion of Preferred Shares. In connection with the conversion of the
Debenture into Preferred Shares and the subsequent conversion of the Preferred
Shares into Common Stock, neither the Company nor any Person acting on its
behalf will take any action that would result in the Conversion Shares being
exchanged by the Company other than with the then existing holders of the
Debenture or Preferred Shares, as the case may be, exclusively where no
commission or other remuneration is paid or given directly or indirectly for
soliciting the exchange in compliance with Section 3(a)(9) of the Securities
Act. 
 
Section 3.19  Post-Closing Covenants. The Company shall use its best efforts to
(i) hire a Chief Financial Officer, (ii) hire an Investor Relations Officer and
(iii) fulfill NASDAQ’s corporate governance requirements including but not
limited to appointing three persons to serve as “independent” directors (as such
term is defined under the NASDAQ Stock Market rules) on the Company’s Board of
Directors and forming the Audit Committee and the Compensation Committee of the
Company’s Board of Directors. The Company will perform its obligations within
four months of the Closing Date with respect to clauses (i) and (ii) and within
one month after the Closing Date with respect to clause (iii). Such persons
referred to in clauses (i), (ii) and (iii) shall be approved by the Purchaser,
which approval the Purchaser shall not unreasonably withhold. The Company will
enter into the Management Escrow Agreement, pursuant to which $750,000 of the
Purchase Price shall be delivered into an escrow account maintained by Loeb &
Loeb LLP, which funds shall be released in installments of $250,000 upon the
appointment of (i) a Chief Financial Officer, (ii) a Vice President of Investor
Relations, and (iii) upon the Company’s compliance with NASDAQ’s corporate
governance requirements as set forth in clause (iii) above.
 
19

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

 
Section 3.20 Subsequent Financings. 
 
(a) For a period of twenty-four (24) months following the Closing Date, subject
to Section 3.22(e), the Company covenants and agrees to promptly notify (in no
event later than five (5) days after making or receiving an applicable offer) in
writing (a "Rights Notice") the Purchaser of all of the terms and conditions of
any proposed offer or sale to, or exchange with (or other type of distribution
to) any third party (a “Subsequent Financing”), of Common Stock or any debt or
equity securities convertible, exercisable or exchangeable into Common Stock.
The Purchaser shall have the right, for a period of twenty (20) calendar days
following receipt of the Rights Notice (the “Option Period”), to accept or
reject the right to invest in the Subsequent Financing (“First Refusal Right”)
by written notice to the Company. If the Purchaser elects to exercise its First
Refusal Rights, it shall deliver a notice of same to the Company within the
Option Period and then the Company shall be obligated to pursue the Subsequent
Financing with the Purchaser on the same terms and conditions as set forth in
the Rights Notice. If, and only if, the Company receives written notice from the
Purchaser that it will not exercise its First Refusal Rights, then and only
then, may the Company pursue the Subsequent Financing with a third party;
provided that, such third party Subsequent Financing shall: (i) not commence
until after the expiration of the Option Period; (ii) close within thirty (30)
days of the expiration of the Option Period (“Third Party Closing Date”); and
(iii) be carried out on the same terms and conditions as set forth in the Rights
Notice. Delivery of any Rights Notice constitutes a representation and warranty
by the Company that there are no other material terms and conditions,
arrangements, agreements or otherwise except for those disclosed in the Rights
Notice, to provide additional compensation to any party participating in any
proposed Subsequent Financing, including, but not limited to, additional
compensation based on changes in the Purchase Price or any type of reset or
adjustment of a purchase or conversion price or to issue additional securities
at any time after the closing date of a Subsequent Financing. If the closing of
the third party Subsequent Financing does not occur on the Third Party Closing
Date, any closing of the third party Subsequent Financing or any other
Subsequent Financing shall be subject to all of the provisions of this Section
3.22(a), including, without limitation, the delivery of a new Rights Notice. The
provisions of this Section 3.22(a) shall not apply to issuances of securities in
a Permitted Financing.
 
(b) For purposes of this Agreement, a Permitted Financing (as defined
hereinafter) shall not be considered a Subsequent Financing. A "Permitted
Financing" shall mean (i) securities issued (other than for cash) in connection
with a merger, acquisition, or consolidation, (ii) securities issued pursuant to
the conversion or exercise of convertible or exercisable securities issued or
outstanding on or prior to the date of this Agreement or issued pursuant to this
Agreement (so long as the conversion or exercise price in such securities are
not amended to lower such price and/or adversely affect the Purchasers), (iii)
securities issued in connection with bona fide strategic license agreements or
other partnering arrangements so long as such issuances are not for the purpose
of raising capital, (iv) Common Stock issued or the issuance or grants of
options to purchase Common Stock pursuant to the Company’s stock option plans
and employee stock purchase plans outstanding as they exist on the date of this
Agreement, (v) the payment of dividends on the Preferred Shares in shares of
Common Stock, and, (vi) any warrants issued to the placement agent and its
designees for the transactions contemplated by this Agreement.
 
20

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

 
(c) So long as any Debenture or Preferred Shares remain outstanding, the Company
agrees that it shall not issue any “Variable Rate Securities” for a period of
two (2) years from the Closing Date. “Variable Rate Securities” shall mean any
debt or equity securities that are convertible into, exchangeable or exercisable
for, or include the right to receive additional shares of, Common Stock either
(A) at a conversion, exercise or exchange rate or other price that is based
upon, or varies with, the trading prices of or quotations for the shares of
Common Stock at any time after the initial issuance of such debt or equity
securities or (B) with a conversion, exercise or exchange price that is subject
to being reset at some future date after the initial issuance of such debt or
equity security based solely upon the occurrence of specified or contingent
events directly or indirectly related to the operations of the Company or the
market for the Common Stock.

(d) For the period commencing on the Closing Date and ending on the date that is
one hundred eighty (180) days following the effective date of the Registration
Statement (as defined in the Registration Rights Agreement), and any additional
registration statements thereunder, the Company shall not file any registration
statement under the Securities Act without the prior written consent of the
Purchasers.

(e) Disclosure of Material Information. The Company covenants and agrees that
neither it nor any other person acting on its behalf will provide the Purchaser
or its agents or counsel with any information that the Company believes
constitutes material non-public information, unless prior thereto the Company
shall have given three (3) business days notice that it intends to disclose such
information to the Purchaser (“Inside Information Notice”) and such Purchaser
shall have agreed in writing that it is willing to accept such information,
subject to a non-disclosure agreement to be executed by the Purchaser. If the
Purchaser does not agree to accept such information, it will be deemed to have
waived its rights pursuant to Section 3.22 (a) in connection with the Subsequent
Financing contemplated in the related Inside Information Notice, but not for any
additional Subsequent Financings for which it may be entitled to receive notice
hereunder. The Company understands and confirms that the Purchaser will rely on
the foregoing representations in effecting transactions in securities of the
Company.
 
Section 3.21  Reservation of Shares. So long as any of the Debenture or the
Preferred Shares remain outstanding, the Company shall take all action necessary
to at all times have authorized, and reserved for the purpose of issuance, (i)
no less than one hundred ten percent (110%) of the aggregate number of Preferred
Stock needed to provide for the issuance of the Preferred Shares upon conversion
of the Debenture and (ii) no less than one hundred ten percent (110%) of the
aggregate number of shares of Common Stock needed to provide for the issuance of
the Common Conversion Shares upon conversion of the Preferred Shares.
 
21

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

 
Section 3.22  Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, to issue
certificates, registered in the name of the Purchaser or its respective
nominee(s), for the Preferred Shares and Conversion Shares, as applicable, in
such amounts as specified from time to time by the Purchaser to the Company upon
conversion of the Debenture or the Preferred Shares, respectively, in the form
of Exhibit I attached hereto (the “Irrevocable Transfer Agent Instructions”).
Prior to registration of the Common Conversion Shares under the Securities Act,
all such certificates shall bear the restrictive legend specified in Section 5.1
of this Agreement. The Company warrants that no instruction other than the
Irrevocable Transfer Agent Instructions referred to in this Section 3.22 will be
given by the Company to its transfer agent and that the Shares shall otherwise
be freely transferable on the books and records of the Company as and to the
extent provided in this Agreement and the Registration Rights Agreement. If the
Purchaser provides the Company with an opinion of counsel, in a generally
acceptable form, to the effect that (i) a public sale, assignment or transfer of
the Securities may be made without registration under the Securities Act or (ii)
such Securities can be sold pursuant to Rule 144 without any restriction as to
the number of securities acquired as of a particular date that can then be
immediately sold, the Company shall permit the transfer, and, in the case of the
Shares, promptly instruct its transfer agent to issue one or more certificates
in such name and in such denominations as specified by the Purchaser and without
any restrictive legend. The Company acknowledges that a breach by it of its
obligations under this Section 3.22 will cause irreparable harm to the
Purchasers by vitiating the intent and purpose of the transactions contemplated
hereby. Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 3.22 will be inadequate and agrees,
in the event of a breach or threatened breach by the Company of the provisions
of this Section 3.22, that the Purchaser shall be entitled, in addition to all
other available remedies, to an order and/or injunction restraining any breach
and requiring immediate issuance and transfer, without the necessity of showing
economic loss and without any bond or other security being required.
 
Section 3.23  Disposition of Assets. So long as the Debenture or any Preferred
Shares remain outstanding, neither the Company nor any subsidiary shall sell,
transfer or otherwise dispose of any of its properties, assets and rights
including, without limitation, its software and intellectual property, to any
person except for licenses or sales to customers in the ordinary course of
business or with the prior written consent of the holders of a majority of the
Debenture (on an as converted basis) and the Preferred Shares then outstanding.
 
Section 3.24 Increase in Authorized Shares of Preferred Stock. The Company shall
file immediately after the closing of the transactions contemplated by this
Agreement, an information statement on Schedule 14C with the Commission
disclosing the approval of its Board of Directors, holders of a majority of its
Common Stock and holders of its Series A Preferred Stock to file an amendment to
increase its number of authorized shares of Preferred Stock to 10,000,000
shares.The Company acknowledges that it shall be liable for payment of
liquidated damages under the Debenture if the Company has not so increased its
authorized shares of Preferred Stock by December 10, 2008.

22

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

 
Section 3.25 Certificate of Good Standing. The Company covenants and agrees that
if it is unable to deliver a certificate of good standing from the State of
Delaware on the Closing Date, as provided in Section 4.2 (p), the Company shall
obtain such certificate of good standing no later than one (1) business day
after the date of the Closing.
 
Section 3.26  Compliance with PRC Labor and Employment Laws. No later than sixty
(60) days after the Closing the Company shall be in compliance with the Labor
Contract Law of the PRC, which was effective on January 1, 2008. The Company
agrees to engage JunZeJun Law Office to assist in such compliance.
 
Section 3.27  Cap on 2003 Equity Incentive Plan. At any time, and from time to
time that the Company grants awards under its 2003 Equity Incentive Plan, the
maximum number of awards granted shall be no more than 10% of the total number
of shares of Common Stock issued and outstanding at such time.
 
ARTICLE IV
 
Closing Conditions and Closing Deliveries
 
Section 4.1 Conditions Precedent to the Obligation of the Company to Sell the
Debenture. The obligation hereunder of the Company to issue and sell the
Debenture to the Purchaser is subject to the satisfaction or waiver, at or
before the Closing, of each of the conditions set forth below. These conditions
are for the Company’s sole benefit and may be waived by the Company at any time
in its sole discretion. 
 
(a) Accuracy of the Purchaser’s Representations and Warranties. The
representations and warranties of the Purchaser shall be true and correct in all
material respects as of the date when made and as of the Closing Date applicable
to the Purchaser as though made at that time, except for representations and
warranties that are expressly made as of a particular date, which shall be true
and correct in all material respects as of such date.
 
(b) Performance by the Purchaser. The Purchaser shall have performed, satisfied
and complied in all material respects with all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with by the Purchaser at or prior to the Closing.
 
(c) No Injunction. No statute, rule, regulation, executive order, decree, ruling
or injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this Agreement.
 
(d) Purchase Price. The Purchaser shall have delivered the Purchase Price by
wire transfer of immediately available funds to a bank account designed by the
Company in writing.
 
23

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

 
(e) Directors’ Certificate. The Purchaser shall have delivered to the Company a
certificate of the Director of the Purchaser, dated as of the Closing Date,
confirming the accuracy of the Purchaser’s representations, warranties and
covenants as of the Closing Date and confirming the compliance by the Purchaser
with the Purchaser with the conditions precedent set forth in this Section 4.1
as of the Closing Date.
 
(f) Transaction Documents. The Purchaser shall have executed each Transaction
Documents to which it is a party.
 
Section 4.2 Conditions Precedent to the Obligation of the Purchaser to Purchase
the Debenture. The obligation hereunder of the Purchaser to acquire and pay for
the Debenture is subject to the satisfaction or waiver, at or before the
Closing, of each of the conditions set forth below. These conditions are for the
Purchaser’s sole benefit and may be waived by such Purchaser at any time in its
sole discretion. 
 
(a) Accuracy of the Company’s Representations and Warranties. Each of the
representations and warranties of the Company in this Agreement and the
Registration Rights Agreement shall be true and correct in all respects as of
the date when made and shall be true and correct in all material respects as of
the Closing Date applicable to the Purchaser as though made at that time (except
for representations and warranties that are expressly made as of a particular
date, which shall be true and correct in all material respects as of such date).
 
(b) Performance by the Company. The Company shall have performed, satisfied and
complied in all respects with all covenants, agreements and conditions required
by this Agreement to be performed, satisfied or complied with by the Company at
or prior to the Closing.
 
(c) No Suspension, Etc. Trading in the Company’s Common Stock shall not have
been suspended by the Commission or the OTC Bulletin Board (except for any
suspension of trading of limited duration agreed to by the Company, which
suspension shall be terminated prior to the applicable Closing), and, at any
time prior to the Closing Date applicable to such Purchaser, trading in
securities generally as reported by Bloomberg Financial Markets (“Bloomberg”)
shall not have been suspended or limited, or minimum prices shall not have been
established on securities whose trades are reported by Bloomberg, or on the New
York Stock Exchange, nor shall a banking moratorium have been declared either by
the United States or New York State authorities, nor shall there have occurred
any material outbreak or escalation of hostilities or other national or
international calamity or crisis of such magnitude in its effect on, or any
material adverse change in any financial market which, in each case, in the
judgment of such Purchaser, makes it impracticable or inadvisable to purchase
the Preferred Shares.
 
(d) No Injunction. No statute, rule, regulation, executive order, decree, ruling
or injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this Agreement.
 
24

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

 
(e) No Proceedings or Litigation. No action, suit or proceeding before any
arbitrator or any governmental authority shall have been commenced, and no
investigation by any governmental authority shall have been threatened, against
the Company or any subsidiary, or any of the officers, directors or affiliates
of the Company or any subsidiary seeking to restrain, prevent or change the
transactions contemplated by this Agreement, or seeking damages in connection
with such transactions.
 
(f) Material Adverse Effect. There have been no events or occurrences on or
before the Closing Date which, individually or in the aggregate, have had or
could reasonably be expected to have a Material Adverse Effect.  
 
(g) Certificates. The Company shall cause to be delivered to the Purchaser’s
prime broker dealer, at the address listed on Exhibit A, via overnight service,
the original Debenture; provided however that in no event shall the Debenture be
delivered after the first (1st) business day following the Closing.  
 
(h) Officer’s Certificate. The Company shall have delivered to the Purchaser a
certificate of an executive officer of the Company, dated as of the Closing
Date, confirming the accuracy of the Company’s representations, warranties and
covenants as of the Closing Date and confirming the compliance by the Company
with the conditions precedent set forth in this Section 4.2 as of the Closing
Date.
 
(i) Resolutions. The Board of Directors of the Company shall have adopted
resolutions consistent with Section 2.1(b) hereof (the “Resolutions”).
 
(j) Secretary’s Certificate. The Company shall have delivered to such Purchaser
a secretary’s certificate, dated as of the Closing Date, certifying (i) the
Resolutions, (ii) the Certificate, (iii) the Bylaws, each as in effect at the
Closing, and (iv) the authority and incumbency of the officers of the Company
executing the Transaction Documents and any other documents required to be
executed or delivered in connection therewith.
 
(k) Share Escrow Agreement. The Company shall have executed and delivered the
Share Escrow Agreement to the Purchaser.
 
(l) Management Escrow Agreement. The Company shall have executed and delivered
the Management Escrow Agreement to the Purchaser.
 
(m) Registration Rights Agreement. At the Closing, the Company shall have
executed and delivered the Registration Rights Agreement to the Purchaser.
 
(n) Opinion of Counsel, Etc.  At the Closing, the Purchaser shall have received
an opinion of counsel to the Company, dated the date of the Closing, in
substantially the form of Exhibit G hereto, and such other certificates and
documents as the Purchaser or their respective counsel shall reasonably require
incident to the Closing.
 
25

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

 
(o) Increase in Authorized Shares of Preferred Stock. The Company shall have
taken the actions necessary to amend its Certificate of Incorporation to
increase its number of authorized shares of preferred stock to 10,000,000
shares, including, without limitation, obtaining the required consent of its
Board of Directors, holders of a majority of its Common Stock and holders of its
Series A Preferred Stock.
 
(p) Delivery of Good Standing Certificate. The Company shall have (i) filed its
outstanding annual franchise tax reports for the 2007 fiscal year and for the
first two quarters of the 2008 fiscal year, and (ii) submitted payment in the
amount of $31,978.93 for payment of delinquent franchise taxes for those
periods, and shall provide evidence of the same. In the event the Company is
able to obtain a good standing certificate from the Secretary of State of
Delaware on the Closing Date, they Company shall deliver such good standing
certificate to the Purchaser.
 
ARTICLE V
 
Stock Certificate Legend
 
Section 5.1 Legend. The Debenture, the certificate representing the Preferred
Shares, when issued, and, if appropriate, the Common Conversion Shares issued
upon conversion thereof, shall be stamped or otherwise imprinted with a legend
substantially in the following form (in addition to any legend required by
applicable state securities or “blue sky” laws):
 
THESE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE “SECURITIES”) HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”) OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE
STATE SECURITIES LAWS OR THE COMPANY SHALL HAVE RECEIVED AN OPINION OF COUNSEL
THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.
 
26

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

 
The Company agrees to reissue certificates representing any of the Common
Conversion Shares, without the legend set forth above if at such time, prior to
making any transfer of any such securities, such holder thereof shall give
written notice to the Company describing the manner and terms of such transfer
and removal as the Company may reasonably request. Such proposed transfer and
removal will not be effected until: (a) either (i) the Company has received an
opinion of counsel reasonably satisfactory to the Company, to the effect that
the registration of the Common Conversion Shares under the Securities Act is not
required in connection with such proposed transfer, (ii) a registration
statement under the Securities Act covering such proposed disposition has been
filed by the Company with the Commission and has become effective under the
Securities Act and (b) either (i) the Company has received an opinion of counsel
reasonably satisfactory to the Company, to the effect that registration or
qualification under the securities or “blue sky” laws of any state is not
required in connection with such proposed disposition, or (ii) compliance with
applicable state securities or “blue sky” laws has been effected or a valid
exemption exists with respect thereto. The Company will respond to any such
notice from a holder within five (5) business days. In the case of any proposed
transfer under this Section 5.1, the Company will use reasonable efforts to
comply with any such applicable state securities or “blue sky” laws, but shall
in no event be required, (x) to qualify to do business in any state where it is
not then qualified, (y) to take any action that would subject it to tax or to
the general service of process in any state where it is not then subject, or (z)
to comply with state securities or “blue sky” laws of any state for which
registration by coordination is unavailable to the Company. The restrictions on
transfer contained in this Section 5.1 shall be in addition to, and not by way
of limitation of, any other restrictions on transfer contained in any other
section of this Agreement. Whenever a certificate representing the Common
Conversion Shares is required to be issued to a Purchaser without a legend, in
lieu of delivering physical certificates representing the Common Conversion
Shares (provided that a registration statement under the Securities Act
providing for the resale of the Common Conversion Shares is then in effect), the
Company shall cause its transfer agent to electronically transmit the Common
Conversion Shares to a Purchaser by crediting the account of such Purchaser or
such Purchaser's Prime Broker with the Depository Trust Company (“DTC”) through
its Deposit Withdrawal Agent Commission (“DWAC”) system (to the extent not
inconsistent with any provisions of this Agreement).
 
ARTICLE VI
 
Indemnification
 
Section 6.1 Indemnification of Purchaser. The Company agrees to indemnify and
hold harmless the Purchaser (and its respective directors, officers, managers,
partners, members, shareholders, affiliates, agents, successors and assigns)
from and against any and all losses, liabilities, deficiencies, costs, damages
and expenses (including, without limitation, reasonable attorneys’ fees, charges
and disbursements) incurred by the Purchaser as a result of any inaccuracy in or
breach of the representations, warranties or covenants made by the Company
herein, and, in the event the Company is not in compliance with the Labor
Contract Law of the PRC. . 
 
Section 6.2 Indemnification of Company. The Purchaser agrees, severally and not
jointly, to indemnify and hold harmless the Company (and its directors,
officers, managers, partners, members, shareholders, affiliates, agents,
successors and assigns) from and against any and all losses, liabilities,
deficiencies, costs, damages and expenses (including, without limitation,
reasonable attorneys’ fees, charges and disbursements) incurred by the Company
as a result of any inaccuracy in or breach of the representations, warranties or
covenants made by such Purchaser herein; provided, however, that the Purchaser
shall not have any liability pursuant to this Section 6.2 in an amount exceeding
the aggregate purchase price paid to the Company by the Purchaser in connection
with this Agreement and the securities issued hereunder.
 
27

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

 
Section 6.3 Indemnification Procedure. Any party entitled to indemnification
under this Article VI (an “indemnified party”) will give prompt written notice
to the party required to provide indemnification under this Article VI (the
“indemnifying party”) of any matters giving rise to a claim for indemnification;
provided, that the failure of any party entitled to indemnification hereunder to
give notice as provided herein shall not relieve the indemnifying party of its
obligations under this Article VI except to the extent that the indemnifying
party is actually prejudiced by such failure to give prompt notice. In case any
action, proceeding or claim is brought against an indemnified party in respect
of which indemnification is sought hereunder, the indemnifying party shall be
entitled to participate in and, unless in the reasonable judgment of the
indemnified party a conflict of interest between it and the indemnifying party
may exist with respect of such action, proceeding or claim, to assume the
defense thereof with counsel reasonably satisfactory to the indemnified party.
In the event that the indemnifying party advises an indemnified party that it
will contest such a claim for indemnification hereunder, or fails, within thirty
(30) days of receipt of any indemnification notice to notify, in writing, such
person of its election to defend, settle or compromise, at its sole cost and
expense, any action, proceeding or claim (or discontinues its defense at any
time after it commences such defense), then the indemnified party may, at its
option, defend, settle or otherwise compromise or pay such action or claim. In
any event, unless and until the indemnifying party elects in writing to assume
and does so assume the defense of any such claim, proceeding or action, the
indemnified party’s costs and expenses arising out of the defense, settlement or
compromise of any such action, claim or proceeding shall be losses subject to
indemnification hereunder. The indemnified party shall cooperate fully with the
indemnifying party in connection with any negotiation or defense of any such
action or claim by the indemnifying party and shall furnish to the indemnifying
party all information reasonably available to the indemnified party which
relates to such action or claim. The indemnifying party shall keep the
indemnified party fully apprised at all times as to the status of the defense or
any settlement negotiations with respect thereto. If the indemnifying party
elects to defend any such action or claim, then the indemnified party shall be
entitled to participate in such defense with counsel of its choice at its sole
cost and expense. The indemnifying party shall not be liable for any settlement
of any action, claim or proceeding effected without its prior written consent.
Notwithstanding anything in this Article VI to the contrary, the indemnifying
party shall not, without the indemnified party’s prior written consent, settle
or compromise any claim or consent to entry of any judgment in respect thereof
which imposes any future obligation on the indemnified party or which does not
include, as an unconditional term thereof, the giving by the claimant or the
plaintiff to the indemnified party of a release from all liability in respect of
such claim. The indemnification required by this Article VI shall be made by
periodic payments of the amount thereof during the course of investigation or
defense, as and when bills are received or expense, loss, damage or liability is
incurred, so long as the indemnified party irrevocably agrees to refund such
moneys if it is ultimately determined by a court of competent jurisdiction that
such party was not entitled to indemnification. The indemnity agreements
contained herein shall be in addition to (a) any cause of action or similar
rights of the indemnified party against the indemnifying party or others, and
(b) any liabilities the indemnifying party may be subject to pursuant to the
law.
 
28

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

 
ARTICLE VII
 
Miscellaneous
 
Section 7.1 Fees and Expenses. Except as otherwise set forth in this Agreement
and the other Transaction Documents, each party shall pay the fees and expenses
of its advisors, counsel, accountants and other experts, if any, and all other
expenses, incurred by such party incident to the negotiation, preparation,
execution, delivery and performance of this Agreement. The Company shall pay all
reasonable fees and expenses incurred by the Purchaser in connection with the
enforcement of this Agreement or any of the other Transaction Documents,
including, without limitation, all reasonable attorneys' fees and expenses but
only if the Purchaser is successful in any litigation or arbitration relating to
such enforcement. 
 
Section 7.2 Specific Enforcement, Consent to Jurisdiction. 
 
(a) The Company and the Purchaser acknowledge and agree that irreparable damage
would occur in the event that any of the provisions of this Agreement or the
other Transaction Documents were not performed in accordance with their specific
terms or were otherwise breached. It is accordingly agreed that the parties
shall be entitled to an injunction or injunctions to prevent or cure breaches of
the provisions of this Agreement [or the Registration Rights Agreement] and to
enforce specifically the terms and provisions hereof or thereof, this being in
addition to any other remedy to which any of them may be entitled by law or
equity.
 
(b) Each of the Company and the Purchaser (i) hereby irrevocably submits to the
jurisdiction of the United States District Court sitting in the Southern
District of New York and the courts of the State of New York located in New York
county for the purposes of any suit, action or proceeding arising out of or
relating to this Agreement or any of the other Transaction Documents or the
transactions contemplated hereby or thereby and (ii) hereby waives, and agrees
not to assert in any such suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of such court, that the suit, action or
proceeding is brought in an inconvenient forum or that the venue of the suit,
action or proceeding is improper. Each of the Company and the Purchaser consents
to process being served in any such suit, action or proceeding by mailing a copy
thereof to such party at the address in effect for notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing in this Section 7.2 shall affect
or limit any right to serve process in any other manner permitted by law.
 
Section 7.3 Entire Agreement; Amendment. This Agreement and the Transaction
Documents collectively contain the entire understanding and agreement of the
parties with respect to the matters covered hereby and, except as specifically
set forth herein or in the Transaction Documents, neither the Company nor the
Purchaser makes any representations, warranty, covenant or undertaking with
respect to such matters and they supersede all prior understandings and
agreements with respect to said subject matter, all of which are merged herein.
No provision of this Agreement may be waived or amended other than by a written
instrument signed by the Company and the Purchaser (provided that the Purchaser
holds Debenture and/or Preferred Shares at such time), and no provision hereof
may be waived other than by an a written instrument signed by the party against
whom enforcement of any such amendment or waiver is sought. 
 
29

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

 
Section 7.4 Notices. Any notice, demand, request, waiver or other communication
required or permitted to be given hereunder shall be in writing and shall be
effective (a) upon hand delivery by telex (with correct answer back received),
telecopy or facsimile at the address or number designated below (if delivered on
a business day during normal business hours where such notice is to be
received), or the first business day following such delivery (if delivered other
than on a business day during normal business hours where such notice is to be
received) or (b) on the second business day following the date of mailing by
express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be
 
If to the Company:
 
China Bio Energy Holding Group Co., Ltd.
c/oXi'an Baorun Industrial Development Co. Ltd.
Dongxin Century Square,  7th Floor
Xi'an East City High-tech Industrial Development Park
Shannxi Province,  P.R. China
Attn: Mr. Gao Xincheng
Tel:  86 29 82682019
Fax: 86 29 82683629
     
with copies to (which shall not constitute notice):
 
Loeb & Loeb
345 Park Avenue
New York, NY10154
Attn: Mitchell S. Nussbaum
Tel: 212.407.4159
Fax: 212.407-4990
     
If to any Purchaser:
 
At the address of the Purchaser set forth on Exhibit A to this Agreement

 
Any party hereto may from time to time change its address for notices by giving
at least ten (10) days written notice of such changed address to the other party
hereto.
 
Section 7.5 Waivers. No waiver by either party of any default with respect to
any provision, condition or requirement of this Agreement shall be deemed to be
a continuing waiver in the future or a waiver of any other provisions, condition
or requirement hereof, nor shall any delay or omission of any party to exercise
any right hereunder in any manner impair the exercise of any such right accruing
to it thereafter.
 
30

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

 
Section 7.6 Headings. The article, section and subsection headings in this
Agreement are for convenience only and shall not constitute a part of this
Agreement for any other purpose and shall not be deemed to limit or affect any
of the provisions hereof.
 
Section 7.7 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns.  
 
Section 7.8 No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person (other than the indemnified parties under Article VI).
 
Section 7.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York, without giving
effect to any of the conflicts of law principles which would result in the
application of the substantive law of another jurisdiction. This Agreement shall
not be interpreted or construed with any presumption against the party causing
this Agreement to be drafted.
 
Section 7.10 Survival. The representations and warranties of the Company and the
Purchaser shall survive the execution and delivery hereof and the Closings
hereunder for a period of two years following the Closing Date.
 
Section 7.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same Agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other parties hereto, it being understood that all parties need
not sign the same counterpart. In the event that any signature is delivered as a
pdf document via email, such signature shall create a valid binding obligation
of the party executing (or on whose behalf such signature is executed) the same
with the same force and effect as if such pdf signature were the original
thereof.
 
Section 7.12 Publicity. The Company agrees that it will not disclose, and will
not include in any public announcement, the name of the Purchaser without the
consent of the Purchaser unless and until such disclosure is required by law or
applicable regulation, and then only to the extent of such requirement.
 
Section 7.13 Severability. The provisions of this Agreement and the Transaction
Documents are severable and, in the event that any court of competent
jurisdiction shall determine that any one or more of the provisions or part of
the provisions contained in this Agreement or the Transaction Documents shall,
for any reason, be held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision or part of a provision of this Agreement or the Transaction Documents
and such provision shall be reformed and construed as if such invalid or illegal
or unenforceable provision, or part of such provision, had never been contained
herein, so that such provisions would be valid, legal and enforceable to the
maximum extent possible.
 
31

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

 
Section 7.14 Further Assurances. From and after the date of this Agreement, upon
the request of the Purchaser or the Company, each of the Company and the
Purchaser shall execute and deliver such instrument, documents and other
writings as may be reasonably necessary or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement, the
Registration Rights Agreement and the other Transaction Documents.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

32

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

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

 
CHINA BIO ENERGY HOLDING GROUP CO., LTD.
         
By:
  /s/ Gao Xincheng
   
Name:  Mr. Gao Xincheng
   
Title:    Chief Executive Officer
             
VISION OPPORTUNITY CHINA LP
             
By:
  /s/ Adam Benowitz
   
Name:  Adam Benowitz
   
Title:    Authorized Signatory

 
[Signature Page to Securities Purchase Agreement]

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

EXHIBIT A to the
SECURITIES PURCHASE AGREEMENT FOR
CHINA BIO ENERGY HOLDING GROUP CO., LTD.

Name and Address
of Purchaser and Purchaser’s Primer Broker
 
Number of Preferred Shares Purchased
 
Dollar Amount
Of Investment
 
Vision Opportunity China LP
20 West 55th Street
5th Floor
New York, NY 10019
Attn: Kim Gabriel
Tel: 212-849-8242
Fax: 212-867-1416
Email: k.gabriel@visicap.com
  2,465,753 Shares of Preferred Stock  
$
9,000,000
               
Prime Broker:
Jeffries Prime Brokerage
Attn: Stephen D. Augustin
Vision Opportunity China LP
Account 430-00211
520 Madison Ave., 12th Floor
New York, NY 10022
           

A-1

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

EXHIBIT B to the
SECURITIES PURCHASE AGREEMENT FOR
CHINA BIO ENERGY HOLDING GROUP CO., LTD.

FORM OF CERTIFICATE OF DESIGNATION
(see Tab No. 1)

B-1

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

EXHIBIT C to the
SECURITIES PURCHASE AGREEMENT FOR
CHINA BIO ENERGY HOLDING GROUP CO., LTD.

FORM OF REGISTRATION RIGHTS AGREEMENT

(See Tab No. 2)

C-1

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

EXHIBIT D to the
SECURITIES PURCHASE AGREEMENT FOR
CHINA BIO ENERGY HOLDING GROUP CO., LTD.
 
CHINA BIO ENERGY HOLDING GROUP CO., LTD.
CONVERSION NOTICE
 
Reference is made to the Certificate of Designation of the Relative Rights and
Preferences of the Series B Preferred Stock of CHINA BIO ENERGY HOLDING GROUP
CO., LTD. . (the “Certificate of Designation”). In accordance with and pursuant
to the Certificate of Designation, the undersigned hereby elects to convert the
number of shares of Series B Preferred Stock, par value $0.001 per share (the
“Preferred Shares”), of CHINA BIO ENERGY HOLDING GROUP CO., LTD., a Delaware
corporation (the “Company”), indicated below into shares of Common Stock, par
value $0.0001 per share (the “Common Stock”), of the Company, by tendering the
stock certificate(s) representing the share(s) of Preferred Shares specified
below as of the date specified below.

Date of Conversion:
_____________________________________
   
Number of Preferred Shares to be converted:
_____________
   
Stock certificate no(s). of Preferred Shares to be converted:       ____________
   
The Common Stock has been sold pursuant to the Registration Statement (as
defined in the Registration Rights Agreement): YES ____          NO____
   
Please confirm the following information:
     
Conversion Price:
_____________________________________
   
Number of shares of Common Stock
 
to be issued:
_____________________________________
 
 
Number of shares of Common Stock beneficially owned or deemed beneficially owned
by the Holder on the Date of Conversion: _________________________
   
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
   
Issue to:
_____________________________________
 
_____________________________________
   
Facsimile Number:
_____________________________________
   
Authorization:
_____________________________________
 
By: _________________________________
 
Title: _______________________________
   
Dated:
 

 
D-1

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

EXHIBIT E to the
SECURITIES PURCHASE AGREEMENT FOR
CHINA BIO ENERGY HOLDING GROUP CO., LTD.
 
FORM OF SHARE ESCROW AGREEMENT
(see Tab No. 3)
 
E-1

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

EXHIBIT F to the
SECURITIES PURCHASE AGREEMENT FOR
CHINA BIO ENERGY HOLDING GROUP CO., LTD.
 
FORM OF MANAGEMENT ESCROW AGREEMENT
(see Tab No.4)
 
F-1

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

EXHIBIT G to the
SECURITIES PURCHASE AGREEMENT FOR
CHINA BIO ENERGY HOLDING GROUP CO., LTD.

FORM OF OPINION OF COUNSEL
 
1. The Company is a corporation duly incorporated, validly existing and in good
standing as such under the General Corporation Law of the State of Delaware. The
Company has the requisite corporate power to own, lease and operate its
properties and assets, and to carry on its business as to our knowledge it is
presently conducting such business.

2. The Company has the requisite corporate power and authority to enter into and
perform its obligations under the Transaction Documents and to issue the
Debenture and, subject to filing the Amendment and the Certificate of
Designation, issue the Series B Preferred Stock upon conversion of the
Debenture, and the Common Stock issuable upon conversion of the Series B
Preferred Stock. The execution, delivery and performance of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly and validly authorized by all
necessary corporate action and no further consent or authorization of the
Company or its Board of Directors or stockholders is required, except for the
filing and mailing of the Information Statement. Each of the Transaction
Documents have been duly executed and delivered by the Company, and the
Debenture has been duly executed, issued and delivered by the Company. Each of
the Transaction Documents constitutes a valid and binding obligation of the
Company enforceable against the Company in accordance with its respective terms.
Neither the Series B Preferred Stock issuable upon conversion of the Debenture
when authorized will be, nor the Company’s Common Stock issuable upon conversion
of the Series B Preferred Stock is, subject to any preemptive rights under the
Company’s Certificate of Incorporation, as amended, or the Company’s By-Laws.

3. Upon filing the Amendment and the Certificate of Designation, the shares of
Series B Preferred Stock issuable upon conversion of the Debenture will be duly
authorized and reserved for issuance, and, when delivered upon conversion of the
Debenture, as provided in the Debenture, will be validly issued, fully paid and
nonassessable. The shares of Common Stock issuable upon conversion of the
Preferred Stock have been duly authorized and reserved for issuance, and, when
delivered upon conversion of the Series B Preferred Stock, as provided in the
Certificate of Designation, will be validly issued, fully paid and
nonassessable.

4. The Company’s execution, delivery and performance of, and compliance with the
terms of, the Transaction Documents and the issuance of the Debenture does not,
the Preferred Stock issuable upon conversion of the Debenture and the Common
Stock issuable upon conversion of the Preferred Stock will not, as the case may
be (i) violate any provision of the Company’s Certificate of Incorporation, as
amended, or By-Laws, or (ii) result in a material violation of any federal or
state statute, rule or regulation known to us to be customarily applicable to
transactions of the nature contemplated by the Transaction Documents, or (iii)
conflict with or violate any order, judgment, injunction or decree known to us
to be applicable to the Company, except, with respect to clauses (i) and (iii)
above, for such violations or conflicts as would not, individually or in the
aggregate, have a Material Adverse Effect.
 
G-1

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

 
5. To our knowledge, there is no action, suit, claim, investigation or
proceeding pending or threatened against the Company which questions the
validity of the Purchase Agreement or the transactions contemplated thereby or
any action taken or to be taken pursuant thereto. To our knowledge, there is no
action, suit, claim, investigation or proceeding pending or threatened against
or involving the Company or any of its properties or assets and which, if
adversely determined, is reasonably likely to result in a Material Adverse
Effect. To our knowledge, there are no outstanding orders, judgments,
injunctions, awards or decrees of any court, arbitrator or governmental or
regulatory body against the Company.

6. Based upon, and assuming the truth of, the representations and warranties and
full performance of the covenants, of the Purchaser in the Purchase Agreement,
the offer, issuance and sale of the Debenture are, and the issuance of the (a)
shares of Preferred Stock issuable upon conversion of the Debenture and (b)
shares of Common Stock issuable upon conversion of the Preferred Stock will be
exempt from the registration requirements of Section 5 of the Securities Act.

Very truly yours,

G-2

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

 
EXHIBIT H to the
SECURITIES PURCHASE AGREEMENT FOR
CHINA BIO ENERGY HOLDING GROUP CO., LTD.

FORM OF DEBENTURE

H-1

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

 
EXHIBIT I to the
SECURITIES PURCHASE AGREEMENT FOR
CHINA BIO ENERGY HOLDING GROUP CO., LTD.

FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS
 
as of ____________, 2008                        
 
[Name of Transfer Agent]
[Address]
Telephone: (
Facsimile:
Attn:
 
Ladies and Gentlemen:
 
Reference is made to that certain Securities Purchase Agreement (the “Purchase
Agreement”), dated as of October __, 2008, between China Bio Energy Holding
Group Co., Ltd., a Delaware corporation (the “Company”), and the purchaser named
therein (the “Purchaser”) pursuant to which the Company is issuing to the
Purchaser a debenture convertible into shares of its Series B Convertible
Preferred Stock, par value $0.001 per share (the “Preferred Shares”), which
shall be convertible into shares of the Company’s common stock, par value
$0.0001 per share (the “Common Stock”). This letter shall serve as our
irrevocable authorization and direction to you (provided that you are the
transfer agent of the Company at such time) to issue Preferred Shares upon the
automatic conversion under the Debenture and shares of Common Stock upon
conversion of the Preferred Shares (the “Common Conversion Shares”) to or upon
the order of the Purchaser from time to time upon (i) surrender to you of a
properly completed and duly executed Conversion Notice, as the case may be, in
the form attached hereto as Exhibit I, (ii) in the case of the conversion of
Preferred Shares, a copy of the certificates (with the original certificates
delivered to the Company) representing Preferred Shares being converted (or, in
each case, an indemnification undertaking with respect to such share
certificates in the case of their loss, theft or destruction), and (iii)
delivery of a treasury order or other appropriate order duly executed by a duly
authorized officer of the Company. So long as you have previously received (x)
written confirmation from counsel to the Company that a registration statement
covering resales of the Common Conversion Shares has been declared effective by
the Securities and Exchange Commission (the “SEC”) under the Securities Act of
1933, as amended (the “1933 Act”), and no subsequent notice by the Company or
its counsel of the suspension or termination of its effectiveness and (y) a copy
of such registration statement, and if the Purchaser represents in writing that
the Common Conversion Shares were sold pursuant to the Registration Statement,
then certificates representing the Conversion Share shall not bear any legend
restricting transfer of the Conversion Shares thereby and should not be subject
to any stop-transfer restriction. Provided, however, that if you have not
previously received those items and representations listed above, then the
certificates for the Preferred Shares and the Common Conversion Shares shall
bear the following legend:
 
I-1

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

 
“THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT”), OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS
REGISTERED UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS, OR
XI’AN BAORUN INDUSTRIAL DEVELOPMENT CO., LTD. SHALL HAVE RECEIVED AN OPINION OF
ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND
UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.”
 
and, provided further, that the Company may from time to time notify you to
place stop-transfer restrictions on the certificates for the Common Conversion
Shares in the event a registration statement covering the Common Conversion
Shares is subject to amendment for events then current.
 
A form of written confirmation from counsel to the Company that a registration
statement covering resales of the Common Conversion Shares has been declared
effective by the SEC under the 1933 Act is attached hereto as Exhibit II.
 
Please be advised that the Purchasers are relying upon this letter as an
inducement to enter into the Purchase Agreement and, accordingly, each Purchaser
is a third party beneficiary to these instructions.
 
Please execute this letter in the space indicated to acknowledge your agreement
to act in accordance with these instructions. Should you have any questions
concerning this matter, please contact me at ___________.

 
Very truly yours,
 
CHINA BIO ENERGY HOLDING GROUP CO., LTD.
         
By: _________________________________
 
Name: _______________________________
 
Title: ________________________________
   
ACKNOWLEDGED AND AGREED:
     
[TRANSFER AGENT]
     
By:
______________________________________
 
Name:
______________________________________
 
Title:
______________________________________
 
Date:
__________________
 

 
I-2

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