SERIES
B CONVERTIBLE PREFERRED STOCK SECURITIES
PURCHASE AGREEMENT

     

    by and
between

     

    CHINA
NEW ENERGY GROUP COMPANY

     

    and

     

    CHINA
HAND FUND I, LLC

     

    As of
April 30, 2009


    
      
         


      

      
         


        
          

        

      

      
         


      

    


    
      Table
of Contents

      


      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      
                                        
                                          
                                            
                                              
                                                
                                                  
                                                    
                                                      
                                                        
                                                          
                                                            
                                                              
                                                                
                                                                  
                                                                    
                                                                      
                                                                        
                                                                          
                                                                            
                                                                              
                                                                                
                                                                                  
                                                                                    
                                                                                      
                                                                                        
                                                                                          
                                                                                            
                                                                                              
                                                                                                
                                                                                                  
                                                                                                    
                                                                                                      
                                                                                                        
                                                                                                          
                                                                                                            
                                                                                                              
                                                                                                                
                                                                                                                  
                                                                                                                    
                                                                                                                      
                                                                                                                        
                                                                                                                          
                                                                                                                            
                                                                                                                              
                                                                                                                                
                                                                                                                                  
                                                                                                                                    
                                                                                                                                      
                                                                                                                                        
                                                                                                                                          
                                                                                                                                            
                                                                                                                                              	
                                                                                                                                                      ARTICLE I AUTHORIZATION AND SALE OF
      SECURITIES

                                                                                                                                                    	 	
                                                                                                                                                      2

                                                                                                                                                    
	 	 	 	 
	
                                                                                                                                                      1.1

                                                                                                                                                    	
                                                                                                                                                      Authorization.

                                                                                                                                                    	 	
                                                                                                                                                      2

                                                                                                                                                    
	
                                                                                                                                                      1.2

                                                                                                                                                    	
                                                                                                                                                      Issuance and Sale of Shares and
      Warrants.

                                                                                                                                                    	 	
                                                                                                                                                      2

                                                                                                                                                    
	
                                                                                                                                                      1.3

                                                                                                                                                    	
                                                                                                                                                      Payment of the Purchase
    Price

                                                                                                                                                    	 	
                                                                                                                                                      2

                                                                                                                                                    
	
                                                                                                                                                      1.4

                                                                                                                                                    	
                                                                                                                                                      Stockholder Rights

                                                                                                                                                    	 	
                                                                                                                                                      2

                                                                                                                                                    
	 	 	 
	ARTICLE II THE CLOSING	 	
                                                                                                                                                      3

                                                                                                                                                    
	 	 	 
	
                                                                                                                                                      2.1

                                                                                                                                                    	
                                                                                                                                                      The Closing

                                                                                                                                                    	 	
                                                                                                                                                      3

                                                                                                                                                    
	
                                                                                                                                                      2.2

                                                                                                                                                    	
                                                                                                                                                      Deliveries at the Closing

                                                                                                                                                    	 	
                                                                                                                                                      3

                                                                                                                                                    
	 	 	 	 
	ARTICLE III CONDITIONS TO THE CLOSING	 	
                                                                                                                                                      4

                                                                                                                                                    
	 	 	 
	
                                                                                                                                                      3.1

                                                                                                                                                    	
                                                                                                                                                      Conditions to Obligation of
      Purchaser

                                                                                                                                                    	 	
                                                                                                                                                      4

                                                                                                                                                    
	
                                                                                                                                                      3.2

                                                                                                                                                    	
                                                                                                                                                      Conditions to Obligations of the
      Company

                                                                                                                                                    	 	
                                                                                                                                                      6

                                                                                                                                                    
	 	 	 	 
	ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE
      COMPANY	 	
                                                                                                                                                      7

                                                                                                                                                    
	 	 	 
	
                                                                                                                                                      4.1

                                                                                                                                                    	
                                                                                                                                                      Organization and Good
    Standing

                                                                                                                                                    	 	
                                                                                                                                                      7

                                                                                                                                                    
	
                                                                                                                                                      4.2

                                                                                                                                                    	
                                                                                                                                                      Capital Structure;

                                                                                                                                                    	 	
                                                                                                                                                      7

                                                                                                                                                    
	
                                                                                                                                                      4.3

                                                                                                                                                    	
                                                                                                                                                      Power, Authorization and
      Validity

                                                                                                                                                    	 	
                                                                                                                                                      8

                                                                                                                                                    
	
                                                                                                                                                      4.4

                                                                                                                                                    	
                                                                                                                                                      Noncontravention

                                                                                                                                                    	 	
                                                                                                                                                      9

                                                                                                                                                    
	
                                                                                                                                                      4.5

                                                                                                                                                    	
                                                                                                                                                      Title to Personal Property and
      Assets.

                                                                                                                                                    	 	
                                                                                                                                                      9

                                                                                                                                                    
	
                                                                                                                                                      4.6

                                                                                                                                                    	
                                                                                                                                                      Subsidiaries.  (a)

                                                                                                                                                    	 	
                                                                                                                                                      10

                                                                                                                                                    
	
                                                                                                                                                      4.7

                                                                                                                                                    	
                                                                                                                                                      Financial
      Statements;

                                                                                                                                                    	 	
                                                                                                                                                      11

                                                                                                                                                    
	
                                                                                                                                                      4.8     
      No Other Liabilities; Reserves.  To the
      Knowledge of the Company, the Company and its Subsidiaries have no debts,
      liabilities, or obligations in a material amount, either individually or in the aggregate, of any nature,
      whether accrued, absolute, contingent, or otherwise, and whether due or to
      become due, that are not reflected or reserved against in the Financial
      Statements, which are required to be disclosed or which would cause a
      Material Adverse Change.  To the Knowledge of the Company, the
      reserves, if any, reflected on the Financial Statements, are adequate in
      light of the contingencies with respect to which they are
      made.  There has been no material change in the Company's
      accounting policies except as described in the notes to the Financial
      Statements.

                                                                                                                                                    	 	
                                                                                                                                                      11

                                                                                                                                                    
	
                                                                                                                                                      4.9

                                                                                                                                                    	
                                                                                                                                                      Absence of Certain Changes and
      Events

                                                                                                                                                    	 	
                                                                                                                                                      11

                                                                                                                                                    
	
                                                                                                                                                      4.10

                                                                                                                                                    	
                                                                                                                                                      Compliance with Laws

                                                                                                                                                    	 	
                                                                                                                                                      13

                                                                                                                                                    
	
                                                                                                                                                      4.11

                                                                                                                                                    	
                                                                                                                                                      Permits

                                                                                                                                                    	 	
                                                                                                                                                      13

                                                                                                                                                    
	
                                                                                                                                                      4.12

                                                                                                                                                    	
                                                                                                                                                      Real Property

                                                                                                                                                    	 	
                                                                                                                                                      14

                                                                                                                                                    
	
                                                                                                                                                      4.13

                                                                                                                                                    	
                                                                                                                                                      Intellectual Property

                                                                                                                                                    	 	
                                                                                                                                                      15

                                                                                                                                                    
	
                                                                                                                                                      4.14

                                                                                                                                                    	
                                                                                                                                                      Contracts

                                                                                                                                                    	 	
                                                                                                                                                      16

                                                                                                                                                    
	
                                                                                                                                                      4.15

                                                                                                                                                    	
                                                                                                                                                      Taxes.

                                                                                                                                                    	 	
                                                                                                                                                      17

                                                                                                                                                    
	
                                                                                                                                                      4.16

                                                                                                                                                    	
                                                                                                                                                      Employees

                                                                                                                                                    	 	
                                                                                                                                                      18

                                                                                                                                                    
	
                                                                                                                                                      4.17

                                                                                                                                                    	
                                                                                                                                                      Employee Benefit Plans

                                                                                                                                                    	 	
                                                                                                                                                      19

                                                                                                                                                    
	
                                                                                                                                                      4.18

                                                                                                                                                    	
                                                                                                                                                      Insurance

                                                                                                                                                    	 	
                                                                                                                                                      19

                                                                                                                                                    
	
                                                                                                                                                      4.19

                                                                                                                                                    	
                                                                                                                                                      Compliance with Environmental
      Requirements

                                                                                                                                                    	 	
                                                                                                                                                      20

                                                                                                                                                    
	
                                                                                                                                                      4.20

                                                                                                                                                    	
                                                                                                                                                      Litigation

                                                                                                                                                    	 	
                                                                                                                                                      20

                                                                                                                                                    
	
                                                                                                                                                      4.21

                                                                                                                                                    	
                                                                                                                                                      No Brokers

                                                                                                                                                    	 	
                                                                                                                                                      20

                                                                                                                                                    
	
                                                                                                                                                      4.22

                                                                                                                                                    	
                                                                                                                                                      Solvency

                                                                                                                                                    	 	
                                                                                                                                                      20

                                                                                                                                                    
	
                                                                                                                                                      4.23

                                                                                                                                                    	
                                                                                                                                                      Related Party Transactions

                                                                                                                                                    	 	
                                                                                                                                                      20

                                                                                                                                                    
	
                                                                                                                                                      4.24

                                                                                                                                                    	
                                                                                                                                                      Disclosure

                                                                                                                                                    	 	
                                                                                                                                                      21

                                                                                                                                                    
	
                                                                                                                                                      4.25

                                                                                                                                                    	
                                                                                                                                                      Securities Act. Since March 31, 2008,
      t

                                                                                                                                                    	 	
                                                                                                                                                      21

                                                                                                                                                    
	
                                                                                                                                                      4.26

                                                                                                                                                    	
                                                                                                                                                      Use of Proceeds.

                                                                                                                                                    	 	
                                                                                                                                                      22

                                                                                                                                                    
	
                                                                                                                                                      4.27

                                                                                                                                                    	
                                                                                                                                                      SAFE
      Compliance.

                                                                                                                                                    	 	
                                                                                                                                                      22

                                                                                                                                                    
	 	 	 
	ARTICLE V REPRESENTATIONS AND WARRANTIES OF
      PURCHASER	 	
                                                                                                                                                      22

                                                                                                                                                    
	 	 	 	 
	
                                                                                                                                                      5.1

                                                                                                                                                    	
                                                                                                                                                      Investment for Own Account

                                                                                                                                                    	 	
                                                                                                                                                      22

                                                                                                                                                    


                                                                                                                                            

                                                                                                                                          

                                                                                                                                        

                                                                                                                                      

                                                                                                                                    

                                                                                                                                  

                                                                                                                                

                                                                                                                              

                                                                                                                            

                                                                                                                          

                                                                                                                        

                                                                                                                      

                                                                                                                    

                                                                                                                  

                                                                                                                

                                                                                                              

                                                                                                            

                                                                                                          

                                                                                                        

                                                                                                      

                                                                                                    

                                                                                                  

                                                                                                

                                                                                              

                                                                                            

                                                                                          

                                                                                        

                                                                                      

                                                                                    

                                                                                  

                                                                                

                                                                              

                                                                            

                                                                          

                                                                        

                                                                      

                                                                    

                                                                  

                                                                

                                                              

                                                            

                                                          

                                                        

                                                      

                                                    

                                                  

                                                

                                              

                                            

                                          

                                        

                                      

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      
                                        
                                          
                                            
                                              
                                                
                                                  
                                                    
                                                      
                                                        
                                                          
                                                            
                                                              
                                                                
                                                                  
                                                                    
                                                                      
                                                                        
                                                                          
                                                                            
                                                                              
                                                                                
                                                                                  
                                                                                    
                                                                                      
                                                                                        
                                                                                          
                                                                                            
                                                                                              
                                                                                                
                                                                                                  
                                                                                                    
                                                                                                      
                                                                                                        
                                                                                                          
                                                                                                            
                                                                                                              
                                                                                                                
                                                                                                                  
                                                                                                                    
                                                                                                                      
                                                                                                                        
                                                                                                                          
                                                                                                                            
                                                                                                                              
                                                                                                                                
                                                                                                                                  
                                                                                                                                    
                                                                                                                                      
                                                                                                                                        	
                                                                                                                                                5.2

                                                                                                                                              	
                                                                                                                                                No Registration

                                                                                                                                              	 	
                                                                                                                                                22

                                                                                                                                              
	
                                                                                                                                                5.3

                                                                                                                                              	
                                                                                                                                                Accredited Investor

                                                                                                                                              	 	
                                                                                                                                                23

                                                                                                                                              
	
                                                                                                                                                5.4

                                                                                                                                              	
                                                                                                                                                Power and Authority

                                                                                                                                              	 	
                                                                                                                                                23

                                                                                                                                              
	
                                                                                                                                                5.5

                                                                                                                                              	
                                                                                                                                                No Approvals.

                                                                                                                                              	 	
                                                                                                                                                23

                                                                                                                                              
	
                                                                                                                                                5.6

                                                                                                                                              	
                                                                                                                                                Noncontravention.

                                                                                                                                              	 	
                                                                                                                                                23

                                                                                                                                              
	
                                                                                                                                                5.7

                                                                                                                                              	
                                                                                                                                                Disclosure of Information.

                                                                                                                                              	 	
                                                                                                                                                24

                                                                                                                                              
	 	 	 
	ARTICLE VI CERTAIN COVENANTS	 	
                                                                                                                                                24

                                                                                                                                              
	 	 	 
	
                                                                                                                                                6.1

                                                                                                                                              	
                                                                                                                                                Regulatory and Other
    Approvals

                                                                                                                                              	 	
                                                                                                                                                24

                                                                                                                                              
	
                                                                                                                                                6.2

                                                                                                                                              	
                                                                                                                                                Information

                                                                                                                                              	 	
                                                                                                                                                24

                                                                                                                                              
	
                                                                                                                                                6.3

                                                                                                                                              	
                                                                                                                                                Information Updates

                                                                                                                                              	 	
                                                                                                                                                25

                                                                                                                                              
	
                                                                                                                                                6.4

                                                                                                                                              	
                                                                                                                                                Conduct of the Company.

                                                                                                                                              	 	
                                                                                                                                                25

                                                                                                                                              
	
                                                                                                                                                6.5

                                                                                                                                              	
                                                                                                                                                Confidentiality

                                                                                                                                              	 	
                                                                                                                                                25

                                                                                                                                              
	
                                                                                                                                                6.6

                                                                                                                                              	
                                                                                                                                                Reservation of Shares.

                                                                                                                                              	 	
                                                                                                                                                26

                                                                                                                                              
	
                                                                                                                                                6.7

                                                                                                                                              	
                                                                                                                                                Compliance with Laws.

                                                                                                                                              	 	
                                                                                                                                                26

                                                                                                                                              
	
                                                                                                                                                6.8

                                                                                                                                              	
                                                                                                                                                Employment Agreements.

                                                                                                                                              	 	
                                                                                                                                                26

                                                                                                                                              
	
                                                                                                                                                6.9      No later than sixty (60) days following the
      Closing, the Company shall enter into employment agreements with
      respect to the employees identified
      on Schedule 6.8 attached hereto in form and substance reasonably
      satisfactory to Purchaser.

                                                                                                                                              	 	
                                                                                                                                                26

                                                                                                                                              
	
                                                                                                                                                6.10

                                                                                                                                              	
                                                                                                                                                Listing, Securities Exchange Act of 1934 and Rule
      144 Requirements.

                                                                                                                                              	 	
                                                                                                                                                26

                                                                                                                                              
	
                                                                                                                                                6.11

                                                                                                                                              	
                                                                                                                                                Directors. Within 60 days
      following

                                                                                                                                              	 	
                                                                                                                                                27

                                                                                                                                              
	
                                                                                                                                                the Closing Date, the Company shall have increased
      the size of the Board to seven (7)
      and shall cause the appointment of the majority of the Board of Directors
      to be “independent
      directors,”. as defined by the rules
      of the American Stock Exchange Company Guide.  Purchaser,
      together with the holders of Series A Preferred Stock, shall
      have the right to nominate an aggregate of four (4) members to the Board
      of Directors and, at the option of Purchaser and holders of Series A
      Preferred Stock, to the board of directors of any Subsidiaries (including
      the Chairman of the Board of Directors of the
      Company or any Subsidiaries) upon Closing. A
      majority of the Board of Directors shall be (A) familiar with the oil and
      gas industry, and (B) based in the United States and available to act as
      the Company’s spokesperson to the US markets in the absence of the senior management members of the
      Company.  This covenant shall expire once the Series B
      Purchasers own less than 25% of the Series B Shares originally purchased
      hereunder.

                                                                                                                                              	 	
                                                                                                                                                27

                                                                                                                                              
	
                                                                                                                                                6.12

                                                                                                                                              	 
      	 	
                                                                                                                                                27

                                                                                                                                              
	
                                                                                                                                                (b)         
      As Purchaser is relying on such
      expected profit in making its investment hereunder, and in order to
      attempt to make whole Purchaser in the event these numbers are not
      met,

                                                                                                                                              	 	
                                                                                                                                                29

                                                                                                                                              
	 	 	 	 
	
                                                                                                                                                ARTICLE VII

                                                                                                                                              	 	
                                                                                                                                                33

                                                                                                                                              
	 	 	 	 
	
                                                                                                                                                7.1

                                                                                                                                              	
                                                                                                                                                Termination of Agreement

                                                                                                                                              	 	
                                                                                                                                                33

                                                                                                                                              
	
                                                                                                                                                7.2

                                                                                                                                              	
                                                                                                                                                Effect of Termination

                                                                                                                                              	 	
                                                                                                                                                34

                                                                                                                                              
	 	 	 
	ARTICLE VIII INDEMNITY	 	
                                                                                                                                                34

                                                                                                                                              
	 	 	 
	
                                                                                                                                                8.1

                                                                                                                                              	
                                                                                                                                                Survival

                                                                                                                                              	 	
                                                                                                                                                34

                                                                                                                                              
	
                                                                                                                                                8.2

                                                                                                                                              	
                                                                                                                                                Indemnity.

                                                                                                                                              	 	
                                                                                                                                                34

                                                                                                                                              
	
                                                                                                                                                8.3

                                                                                                                                              	
                                                                                                                                                Procedures

                                                                                                                                              	 	
                                                                                                                                                35

                                                                                                                                              
	 	 	 
	ARTICLE IX MISCELLANEOUS	 	
                                                                                                                                                36

                                                                                                                                              
	 	 	 
	
                                                                                                                                                9.1

                                                                                                                                              	
                                                                                                                                                Legend

                                                                                                                                              	 	
                                                                                                                                                36

                                                                                                                                              
	
                                                                                                                                                9.2

                                                                                                                                              	
                                                                                                                                                Removal of Legend and Transfer
      Restrictions

                                                                                                                                              	 	
                                                                                                                                                36

                                                                                                                                              
	
                                                                                                                                                9.3

                                                                                                                                              	
                                                                                                                                                Waivers and Amendments

                                                                                                                                              	 	
                                                                                                                                                36

                                                                                                                                              
	
                                                                                                                                                9.4

                                                                                                                                              	
                                                                                                                                                Governing Law

                                                                                                                                              	 	
                                                                                                                                                37

                                                                                                                                              
	
                                                                                                                                                9.5

                                                                                                                                              	
                                                                                                                                                Dispute Resolution

                                                                                                                                              	 	
                                                                                                                                                37

                                                                                                                                              
	
                                                                                                                                                9.6

                                                                                                                                              	
                                                                                                                                                Successors and Assigns

                                                                                                                                              	 	
                                                                                                                                                37

                                                                                                                                              
	
                                                                                                                                                9.7

                                                                                                                                              	
                                                                                                                                                Entire Agreement

                                                                                                                                              	 	
                                                                                                                                                38

                                                                                                                                              
	
                                                                                                                                                9.8

                                                                                                                                              	
                                                                                                                                                Notices, etc.

                                                                                                                                              	 	
                                                                                                                                                38

                                                                                                                                              
	
                                                                                                                                                9.9

                                                                                                                                              	
                                                                                                                                                Severability

                                                                                                                                              	 	
                                                                                                                                                39

                                                                                                                                              
	
                                                                                                                                                9.10

                                                                                                                                              	
                                                                                                                                                Expenses.

                                                                                                                                              	 	
                                                                                                                                                39

                                                                                                                                              
	
                                                                                                                                                9.11

                                                                                                                                              	
                                                                                                                                                Titles and Subtitles

                                                                                                                                              	 	
                                                                                                                                                39

                                                                                                                                              


                                                                                                                                      

                                                                                                                                    

                                                                                                                                  

                                                                                                                                

                                                                                                                              

                                                                                                                            

                                                                                                                          

                                                                                                                        

                                                                                                                      

                                                                                                                    

                                                                                                                  

                                                                                                                

                                                                                                              

                                                                                                            

                                                                                                          

                                                                                                        

                                                                                                      

                                                                                                    

                                                                                                  

                                                                                                

                                                                                              

                                                                                            

                                                                                          

                                                                                        

                                                                                      

                                                                                    

                                                                                  

                                                                                

                                                                              

                                                                            

                                                                          

                                                                        

                                                                      

                                                                    

                                                                  

                                                                

                                                              

                                                            

                                                          

                                                        

                                                      

                                                    

                                                  

                                                

                                              

                                            

                                          

                                        

                                      

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

       

      
        
          
          

        

        
          ii

          
            

          

        

        
          
          

        

      

       

      
        
          
            
              
                	
                        9.12

                      	
                        Counterparts; Facsimile
      Signatures

                      	 	
                        39

                      
	
                        9.13

                      	
                        No Strict Construction

                      	 	
                        39

                      


              

            

          

        

      

       

      Exhibits

       

      
        
          	
                  Exhibit
      A

                	
                  Certain
      Definitions

                
	
                  Exhibit
      B

                	
                  Series
      B Certificate of Designations

                
	
                  Exhibit
      C

                	
                  Form
      of Warrant

                
	
                  Exhibit
      D

                	
                  Amended
      and Restated Registration Rights Agreement

                
	
                  Exhibit
      E

                	
                  Series
      B Securities Escrow Agreement

                
	
                  Exhibit
      F

                	
                  Closing
      Escrow Agreement

                
	
                  Exhibit
      G

                	
                  Disclosure
      Schedules

                


        

      

      


      List of
Schedules


      
        
          
             


          

          
            iii

            
              

            

          

          
             


          

        

      

      


    

    SERIES B CONVERTIBLE
PREFERRED STOCK

     

    SECURITIES PURCHASE
AGREEMENT

     

    THIS
SERIES B CONVERTIBLE PREFERRED STOCK SECURITIES PURCHASE AGREEMENT (this “Agreement”), dated as
of April 30, 2009, is entered into by and between China New Energy Group
Company, a Delaware corporation (the “Company”), China Hand
Fund I, LLC, a limited liability company organized and existing under the laws
of the State of Delaware (“China Hand”, together
with its successors and assigns, the “Purchaser”, together
with the Company, each a “Party” and
collectively the “Parties”). Certain
capitalized terms used in this Agreement are defined in Exhibit A attached
hereto.

     

    WHEREAS,
the Company consummated a private financing transaction pursuant to
a  Series A Convertible Preferred Stock Securities Purchase Agreement,
dated as of August 8, 2008, by and between the Company and China Hand (the
“Series A Securities
Purchase Agreement”), pursuant to which the Company issued and sold to
the purchaser thereunder, for an aggregate purchase price of $9,000,000,
1,857,373 shares of Series A Convertible Preferred Stock of the Company, par
value $0.001 per share having the rights, preferences and designations as set
forth in the Certificate of Designations of Preferences, Rights and Limitations
of Series A Convertible Preferred Stock dated as of August 20, 2008 (the “Series A
Certificate”) and warrants to purchase 13,001,608 shares of its common
stock, par value $0.001 per share, at an initial exercise price of $0.187 per
share (subject to adjustments) for a period of five (5) years following the date
of their issuance (the Series A Securities Purchase Agreement, together with the
other transaction documents contemplated under the Series A Securities Purchase
Agreement that the Company entered into with China Hand and such other parties
signatories thereto in connection with the consummation of the transactions
contemplated under the Series A Securities Purchase Agreement are collectively
referred to as “Series
A Financing Transaction Documents”; and the transactions contemplated
under the Series A Transaction Documents, the “Series A
Financing”.)

     

    WHEREAS,
Series A Financing contemplated an additional investment in the Company by
Purchaser in the amount of $5,400,000; and

     

    WHEREAS,
the Company desires to issue and sell to Purchaser, and Purchaser desires to
acquire, the securities specified herein, all on the terms and subject to the
conditions set forth in this Agreement.

     

    NOW, THEREFORE, in consideration of the
mutual promises, covenants and conditions hereinafter set forth, the parties
hereto mutually agree as follows:

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    ARTICLE
I

    AUTHORIZATION AND SALE OF
SECURITIES

    


    1.1           Authorization.  The
Company, on or prior to the Closing, shall have authorized the issuance and sale
of, in one or a series of transactions and closings, pursuant to the terms and
conditions provided herein, (i) an aggregate of up to 1,479,213 shares of its
Series B Convertible Preferred Stock, par value $.001 per share (“Series B Preferred
Stock”), having the rights, restrictions, privileges and preferences set
forth in the Certificate of Designations of Preferences, Rights and Limitations
of Series B Convertible Preferred Stock attached hereto as Exhibit B (the “Series B
Certificate”), and (ii) warrants to purchase 11,722,077 shares of its
common stock, par value $.001 per share (“Common Stock”) at an
initial exercise price of $0.187 per share (subject to adjustments) for a period
of five (5) years following the date of their issuance, substantially in the
form attached hereto as Exhibit C including
warrants issued hereunder and warrants to be issued to the placement agent in
connection with the transactions contemplated hereunder substantially in the
form attached hereto as Exhibit
C.  The Series B Certificate has been, or prior to the Closing
shall have been, adopted by the Company’s Board of Directors (the “Board of Directors”)
and filed with the Delaware Secretary of State.

     

    1.2                 Issuance and Sale of Shares
and Warrants.  On
the terms and subject to the conditions contained in this Agreement, and in
reliance on the representations and warranties set forth in Article IV of this
Agreement, at the Closing, the Company will issue and sell to Purchaser, and
Purchaser will purchase from the Company, 1,116,388 shares of Series B Preferred
Stock (together with Make Good Escrow Shares (as defined below) and Listing
Shares (as defined below), collectively, “Series B Shares”) and
warrants to purchase 7,814,719 shares of its Common Stock at an initial exercise
price of $0.187 per share (subject to adjustments) for a period of five (5)
years following the date of their issuance, substantially in the form attached
hereto as Exhibit
C (the “Warrants”; shares of
common stock issuable upon exercise of the Warrants, the “Warrant Shares”) for
an aggregate purchase price of Five Million Four Hundred Thousand U.S. Dollars
($5,400,000) (the “Purchase
Price”).

     

    1.3                 Payment of the Purchase
Price  At
the Closing, Purchaser shall pay the Purchase Price in immediately available
funds by wire transfer to the Company Account.

     

    1.4                 Stockholder
Rights.  The
Series B Purchaser shall have the rights specified in the (i) Series B
Certificate, (ii) the Amended and Restated Registration Rights Agreement, dated
as of the date hereof, by and between the Company and Purchaser, substantially
in the form attached as Exhibit D hereto
(the “Amended and
Restated Registration Rights Agreement”), (iii) the Series B Securities
Escrow Agreement, dated as of the date hereof, by and between the Company and
China Hand, substantially in the form attached as Exhibit E hereto (the
“Series B Securities
Escrow Agreement”), and (iv) the Closing Escrow Agreement by and among
the Company and Purchaser, substantially in the form attached hereto as Exhibit F hereto (the
“Closing Escrow
Agreement”, and together with this Agreement, the Series B Certificate,
the Amended and Restated Registration Rights Agreement, the Series B Preferred
Escrow Agreement and the certificates, documents and instrument related to or
contemplated by each of the foregoing agreements, each a “Transaction Document”
and collectively, the “Transaction
Documents”), each of which shall be executed and delivered by the parties
hereto and thereto as of the Closing.

     

    
      
        
        

      

      
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    ARTICLE
II

    THE
CLOSING

     

    2.1                 The
Closing.  The
Closing shall take place at such time, date and place as are mutually agreeable
to by the Company and Purchaser.  The date of the Closing is
hereinafter referred to as the “Closing
Date”.

     

    2.2                 Deliveries at the
Closing.  At
or prior to the Closing:

     

    (a)           the
Company will deliver to Purchaser:

     

    (i)           An
executed Agreement with all exhibits and schedules attached hereto;

     

    (ii)           The
certificates (in such denominations as Purchaser shall request) for the Series B
Preferred Stock and the Warrants (in such denominations as Purchaser shall
request);

     

    (iii)           A
copy of the Series B Certificate, filed with the Delaware Secretary of State, as
amended and in effect as of the Closing Date;

     

    (iv)           Consent
of the holders of Series A Preferred Stock representing all of the shares of
Series A Preferred Stock outstanding as of the date of the Series B
Certificate;

     

    (v)           Certificates,
as of the most recent practicable dates, (A) as to the corporate good standing
of the Company issued by the relevant office of the Company’s jurisdiction of
incorporation, and (B) as to the due qualification of the Company as a foreign
corporation issued by the relevant office of each jurisdiction in which the
Company is required to obtain such qualification;

     

    (vi)           A
certificate of the Company’s Secretary, dated as of the Closing Date, attesting
to and attaching copies of (A) the Certificate of Incorporation of the Company,
as amended (B) Series A and Series B Certificates, (C) the By-laws of the
Company, as amended, each in effect as of the date of the Closing Date; and
(D) the resolutions of the Board of Directors of the Company, authorizing
and approving all matters in connection with this Agreement, each of the other
Transaction Documents and the transactions contemplated hereby and thereby,
including without limitation the filing of the Certificates with the Delaware
Secretary of State;

     

    (vii)           A
certificate of an executive officer of the Company, dated as of the Closing
Date, attesting to the fact that the conditions set forth in Section 3.1(d) have
been satisfied;

     

    (viii)          Each
of the other Transaction Documents to which the Company is a party duly executed
by the Company;

     

    
      
        
        

      

      
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    (ix)           An
opinion from the Company’s legal counsel, Pillsbury Winthrop Shaw Pittman LLP,
concerning this Agreement and other Transaction Documents and the transactions
contemplated hereby and thereby that is reasonably satisfactory to
Purchaser;

     

    (x)           An
opinion from the Company’s legal counsel, Binda Law Firm concerning the
Company’s Subsidiaries in the People’s Republic of China (the “PRC”) and the
compliance status of the Company and certain of its shareholders under the Laws
of the PRC upon consummation of the transactions contemplated hereunder and
under the other Transaction Documents that is reasonably satisfactory to
Purchaser;

     

    (xi)           Executed
disbursement instructions pursuant to the Closing Escrow Agreement;

     

    (xii)           Copies
of (i) all executive employment agreements which have not been disclosed in the
Company’s Form 10-K for the fiscal year ended  December 31,
2008  (the “10-K”), (ii) all past
and present financing documents or other documents where stock could potentially
be issued or issued as payment, (iii) all past and present material litigation
documents which have not been disclosed in the 10-K;  such other
supporting documents and certificates as Purchaser may reasonably request or as
may be required pursuant to this Agreement or any Transaction
Documents.

     

    (b)           Purchaser
will deliver to the Company the Purchase Price, by wire transfer to the Company
Account, an executed copy of this Agreement and each of the other Transaction
Documents to which the Purchaser is a party.

     

    ARTICLE
III

    CONDITIONS TO THE
CLOSING

     

    3.1                 Conditions to Obligation of
Purchaser.  The
obligation of Purchaser to purchase the Series B Shares and the Warrants is
subject to the fulfillment, on or prior to the Closing Date, of the following
conditions, any of which may be waived by Purchaser in its sole
discretion:

     

    (a)           Deliveries at the
Closing.  Each of the documents and other items set forth in
Section 2.2(a) shall have been delivered to Purchaser.

     

    (b)           Series B Certificate.
The Series B Certificate in the form of Exhibit B attached
hereto shall have been filed with the Secretary of State of
Delaware.

     

    (c)           Escrow
Shares.  The Company shall have caused the transfer agent of
the Company to issue and deliver the Make Good Escrow Shares and the Listing
Shares to the escrow agent under the Series B Securities Escrow Agreement to be
held in escrow pursuant to Sections 6.16 and 6.18 hereof and the terms and
conditions of the Series B Securities Escrow Agreement.

     

    (d)           Representations and
Warranties.  The representations and warranties made by the
Company on behalf of itself and its Subsidiaries in Article IV hereof shall be
true and correct in all respects as of the date of this Agreement and as of the
Closing Date, with the same effect as though made as of the Closing Date, except
that the accuracy of representations and warranties that by their terms speak as
of a specified date will be determined as of such date.

     

    
      
        
        

      

      
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    (e)           Performance of
Obligations.  The Company shall have performed in all material
respects all obligations, covenants and agreements herein required to be
performed by it on or prior to the Closing.

     

    (f)           No Material Adverse
Change/Material Adverse Effect.   There shall not have
been any Material Adverse Effect, as determined by Purchaser in its sole
discretion, and no event shall have occurred that could reasonably be expected
to have a Material Adverse Effect.  The Company and its Subsidiaries
shall have conducted their business and operations in the ordinary course of
business consistent with past practice since December 31, 2008.

     

    (g)           Consents and
Waivers.  The Company shall have made all filings with and
notifications of Governmental Authorities required to be made in connection with
the execution and delivery of this Agreement and each other Transaction
Documents and the performance of the transactions contemplated hereby and
thereby.  The Company and Purchaser shall have received all
authorizations, waivers, consents and permits, in form and substance reasonably
satisfactory to Purchaser, including without limitation any necessary waivers
with regard to the change of control triggers or grant of options for Preferred
Stock set out in the Company’s employment agreements and any other notices,
consents and waivers required from all third parties (whether or not set forth
on Section
4.4(a) of the Disclosure Schedules), including without limitation
applicable Governmental Authorities, lessors, lenders, employees and contract
parties, required to permit the consummation of the transactions contemplated by
this Agreement and each of the other Transaction Documents, and to avoid a
breach, default, termination, acceleration or modification of any indenture,
loan or credit agreement or any other material agreement, contract, instrument,
mortgage, lien, lease, permit, authorization, order, writ, judgment, injunction,
decree, determination or arbitration award, as a result of, or in connection
with, the execution and performance of this Agreement and each of the other
Transaction Documents.

     

    (h)           Proceedings
Satisfactory.  All corporate and other proceedings taken prior
to or at the Closing in connection with the transactions contemplated by this
Agreement and each of the other Transaction Documents, and all documents and
instruments related thereto, shall be in form and substance reasonably
satisfactory to Purchaser and its counsel, and the issuance and sale of the
Securities hereunder shall be made in compliance with all applicable federal and
state laws.

     

    (i)           No Violation or
Injunction.  No action or proceeding by or before any court or
other Governmental Authority shall have been instituted or threatened by any
Person or Governmental Authority whatsoever which shall seek to restrain,
prohibit or invalidate the transactions contemplated by this Agreement and each
of the other Transaction Documents, or which might affect the right of the
Company to issue and sell the Securities to Purchaser.

     

    (j)           Payment of Fees and
Expenses.   The Company shall have paid all of Purchaser’s
reasonable legal fees and related expenses with respect to the transactions
contemplated by this Agreement and each of the other Transaction Documents, up
to US$100,000.

     

    
      
        
        

      

      
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    (k)           No Suspension,
Etc.  Quotation of the 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 Closing), and, at any time prior to the Closing Date,
trading in securities generally as reported by Bloomberg Financial Markets
(“Bloomberg”)
shall not have been suspended or limited, or minimum prices shall not have been
established on securities whose trades are reported by Bloomberg, or on the New
York Stock Exchange, nor shall a banking moratorium have been declared either by
the United States or New York State authorities, nor shall there have occurred
any material outbreak or escalation of hostilities or other national or
international calamity or crisis of such magnitude in its effect on, or any
material adverse change in any financial market which, in each case, in the
judgment of Purchaser, makes it impracticable or inadvisable to purchase the
Series B Shares.

     

    (l)           The
Company shall have filed all forms, reports and documents set forth on Section 4.24 of the
Disclosure Schedules so that the Company is current in its reporting obligations
under the Securities Act and the Exchange Act, and the rules and regulations of
the Commission thereunder.

     

     

    3.2                 Conditions to Obligations of
the Company  The
Company's obligation to issue and sell the Series B Shares and the Warrants to
Purchaser at the Closing is subject to the fulfillment on or prior to the
Closing Date of the following conditions, any of which may be waived by the
Company in its sole discretion:

     

    (a)           Payment of Purchase
Price.  Purchaser shall have delivered to the Company the
Purchase Price as set forth in Section 2.2(b).

     

    (b)           Representations and
Warranties.  The representations and warranties made by
Purchaser in Article V hereof shall be true and correct in all respects as of
the date of this Agreement and as of the Closing Date, with the same effect as
though made as of the Closing Date, except that the accuracy of representations
and warranties that by their terms speak as of a specified date will be
determined as of such date.

     

    (c)           Transaction
Documents.  Purchaser shall have executed and delivered each of
the other Transaction Documents to which it is a party, in each case in form and
substance satisfactory to the Company.

     

    (d)           Proceedings
Satisfactory.  All corporate and other proceedings taken prior
to or at the Closing in connection with the transactions contemplated by this
Agreement and each of the other Transaction Documents, and all documents and
instruments related thereto, shall be in form and substance reasonably
satisfactory to the Company and its counsel, and the issuance and sale of the
Series B Shares and the Warrants hereunder shall be made in compliance with all
applicable federal and state laws.

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    (e)           No Violation or
Injunction.  No action or proceeding by or before any court or
other Governmental Authority shall have been instituted or threatened by any
Person or Governmental Authority whatsoever which shall seek to restrain,
prohibit or invalidate the transactions contemplated by this Agreement and each
of the other Transaction Documents, or which might affect the right of the
Company to issue and sell the Securities to Purchaser.

     

    ARTICLE
IV

    REPRESENTATIONS AND
WARRANTIES OF THE COMPANY

    


    In order
to induce Purchaser to enter into this Agreement and consummate the transactions
contemplated hereby, the Company hereby makes to Purchaser the representations
and warranties contained in this Article IV on behalf of itself and, where
applicable, its Subsidiaries.  Such representations and warranties are
subject to the qualifications and exceptions set forth in the corresponding
Section of the Disclosure Schedules, attached hereto as Exhibit G and
delivered to Purchaser pursuant to this Agreement.  The Disclosure
Schedules make explicit reference to the particular representation or warranty
(or Section of a representation or warranty) as to which exception is
taken.

     

    4.1                 Organization and Good
Standing.  The
Company (a) is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and (b) is duly qualified or
registered to do business as a foreign corporation in each jurisdiction
(i) listed on Section 4.1 of the
Disclosure Schedules and (ii) except where the failure to be so qualified or
licensed would not reasonably be expected to result in a Material Adverse
Effect.  The Company has provided to Purchaser complete and accurate
copies of the Certificate of Incorporation, as amended, and By-laws, as amended,
of the Company.

     

    4.2                 Capital Structure;
Outstanding Capital
Stock.  As of the Closing and after giving effect to the
transactions contemplated hereby, the authorized capital stock of the Company
will consist of the following shares and other rights and
securities:

     

    (i)           Preferred
Stock.  A total of 10,000,000 authorized shares of Preferred
Stock (“Preferred
Stock”), (i) of which 5,500,000 shares are designated as Series A
Preferred Stock, par value $0.001 per share, 2,461,018 of which Series A
Preferred Stock are issued and outstanding and (ii) of which 2,000,000 shares
will be designated as Series B Preferred Stock, of which 1,479,213 shares
(including 2009 Make Good Escrow Shares and Listing Shares) will be issued and
outstanding, immediately following the consummation of the transactions
contemplated hereby.

     

    (ii)           Common
Stock.  A total of 500,000,000 authorized shares of Common
Stock, par value $0.001 per share, of which 100,000,041 shares will be issued
and outstanding and 63,494,532 shares will be reserved for issuance of Warrant
Shares and Conversion Shares following the consummation of the transactions
contemplated hereby.

     

    
      
        
        

      

      
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    (b)           Options, Warrants, Reserved
Shares, Treasury Stock.  Except as set forth on Section 4.2(b) of the
Disclosure Schedules, there are no outstanding subscriptions, options, warrants,
agreements, arrangements, commitments or rights of any kind (including
conversion rights) for or relating to the issuance by, or purchase or
acquisition from, the Company of any shares of the Company's capital stock or
any securities convertible into or ultimately exchangeable or exercisable for
any shares of the Company's capital stock, or other similar rights, including
stock appreciation and phantom stock rights, nor is the Company obligated in any
manner to issue any shares of its capital stock or other
securities.  Except pursuant to this Agreement, a Transaction
Document, or a Series A Financing Transaction Document, the Company has no
obligation to purchase, redeem or otherwise acquire any of its capital stock or
any securities convertible into or ultimately exchangeable or exercisable for
any shares of the Company’s capital stock, or other similar
rights.  As of the Closing, except as set forth on Section 4.2(b) of the
Disclosure Schedules or as permitted by a Series A Financing Transaction
Document, there are (A) no preemptive rights, rights of first refusal, put
or call rights or obligations or antidilution rights with respect to the
issuance, sale or redemption of the Company’s capital stock, (B) no rights to
have the Company’s capital stock registered for sale to the public in connection
with the laws of any jurisdiction, (C) no documents, instruments or agreements
relating to the voting of the Company’s voting securities or restrictions on the
transfer of the Company’s capital stock, or (D) no agreements, documents or
commitments (written or oral) of the Company providing for the acceleration of
vesting (or lapse of a repurchase right) upon the occurrence of any event with
respect to any outstanding securities, options, warrants or other purchase
rights.  The Company holds no shares of its capital stock in its
treasury.

     

    (c)           Security
Holders.  Section 4.2(c) of the
Disclosure Schedules contains a complete and accurate list of the names of all
current stockholders of the Company and all current holders of outstanding
warrants, options, or other rights ultimately exchangeable, exercisable or
convertible for or into capital stock, segregated by the type of security held
by each such holder, the amount of such security held by such holder, the
exercise price, if any, for such security, and in the case of securities
exchangeable, exercisable or convertible into Common Stock, the amount of Common
Stock into which such securities are exchangeable, exercisable or
convertible.

     

    (d)           Compliance with Securities
Laws.  As of the Closing and after giving effect to the
transactions contemplated hereby, all of the issued and outstanding securities
of the Company will have been duly and validly authorized and issued, and will
be fully paid and non-assessable, free and clear of all Liens (other than
restrictions under any Transaction Documents, any Series A Financing Transaction
Document, or applicable federal and state securities laws), and will have been
offered, issued, sold and delivered in compliance with applicable federal, state
and foreign securities laws and not subject to any preemptive rights which have
not been waived.

     

    4.3                 Power, Authorization and
Validity.  The
Company has the corporate power, legal capacity and corporate authority to carry
on its business as presently conducted, to enter into and perform its
obligations under this Agreement and each of the other Transaction Documents to
which it is a party, and to carry out the transactions contemplated hereby and
thereby, and to issue, sell and deliver the Securities.

     

    
      
        
        

      

      
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    (a)           The
execution, delivery and performance by the Company of this Agreement and each of
the other Transaction Documents to which it is a party, the sale, issuance and
delivery of the Securities, have been duly and validly approved and authorized
by all necessary corporate action on the part of the Company and its
shareholders, if necessary.

     

    (b)           This
Agreement and each of the other Transaction Documents to which it is a party
have been duly executed and delivered by the Company and, assuming due execution
and delivery by the other parties thereto, constitute or will constitute valid
and binding obligations of the Company, enforceable against the Company in
accordance with their terms, subject to applicable bankruptcy, insolvency,
reorganization, fraudulent transfer, moratorium or similar laws affecting
creditors’ rights generally and general principles of equity.

     

    4.4                 Noncontravention.  The
execution and delivery by the Company of this Agreement and each of the other
Transaction Documents to which it is a party, the consummation by the Company of
the transactions contemplated hereby and thereby, the performance by the Company
of its obligations hereunder and thereunder, and the sale, issuance and delivery
of the Securities, do not and will not conflict with, or result in any violation
or breach of, or default (with or without notice or lapse of time or both)
under, or give rise to a right of, or result in, termination, cancellation or
acceleration of any obligation or to a loss of a material benefit under, or
result in the creation of any Lien in or upon any of the properties or assets of
the Company or its Subsidiaries under, or give rise to any increased,
additional, accelerated or guaranteed rights or entitlements under, any
provision of (i) the Company’s Certificate of Incorporation, as amended,
and as in effect on the date hereof, or the Bylaws, as amended, and as in effect
on the date hereof, of the Company, (ii) except as set forth in Section 4.4 of
the Disclosure Schedules, any agreement to which the Company or any Subsidiary
is a party or otherwise bound or otherwise under which the Company or any
Subsidiary has rights or benefits, or (iii) any Law or Order; in each case
applicable to the Company, its Subsidiaries or any of their properties or
assets; except, in the case of clauses (ii) and (iii) above where any such
conflict, violation, breach, default, right of termination, cancellation or
acceleration, creation of Lien, or increased, additional, accelerated or
guaranteed rights or entitlements, would not result in a Material Adverse
Effect.

     

    (a)           No
consent, approval, order or authorization of, registration, declaration or
filing with, or notice to, any Governmental Authority is required by or with
respect to the Company in connection with the execution and delivery by the
Company of this Agreement and each of the other Transaction Documents, the
consummation by the Company of the transactions contemplated hereby and thereby,
or the performance by the Company of its obligations hereunder and thereunder,
or the sale, issuance and delivery of the Securities, except for such consents,
approvals, orders, authorizations, registrations, declarations, filings and
notices set forth in Section 4.4(a) of the
Disclosure Schedules.

     

    4.5                 Title to Personal Property
and Assets. The
Company or one of its Subsidiaries is the true and lawful owner and has good and
valid title to all assets (tangible or intangible) reflected on the audited
consolidated balance sheet of the Company included in the Annual Report on Form
10-K for fiscal year ended December 31, 2008 (the “Balance Sheet”, and
the date of the Balance Sheet, the “Balance Sheet Date”)
or thereafter acquired, except those sold or otherwise disposed of for fair
value in the ordinary course of business consistent with past practice since the
Balance Sheet Date, in each case free and clear of all Liens other than
Permitted Liens; and except where the failure to have good and valid title would
not result in a Material Adverse Effect.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    (b)           The
Company and its Subsidiaries collectively own or lease all tangible assets
sufficient for the conduct of its businesses as presently
conducted.  Each tangible asset of the Company or any of its
Subsidiaries is located at one of the Owned Real Properties or Leased
Properties.  The tangible assets of the Company and its Subsidiaries
are free from material defects, have been maintained in accordance with the past
practice of the Company and generally accepted industry practice, are in
satisfactory working order and are suitable for the purposes for which they are
presently used.  All material leased personal property of the Company
and its Subsidiaries is in good working order, ordinary wear and tear excepted,
and is in all material respects in the condition required of such property by
the terms of the lease applicable thereto.

     

    4.6                 Subsidiaries.  (a) Section 4.6(a) of the
Disclosure Schedules sets forth, with respect to each Subsidiary of the Company:
(i) the name of such Subsidiary, (ii) the number and type of outstanding capital
stock or other voting or equity interests of such Subsidiary, (iii) the
jurisdiction of organization of such Subsidiary, and (iv) the jurisdiction in
which such Subsidiary is qualified or holds licenses to do business as a foreign
corporation or other entity.

     

    (b)           Each
Subsidiary of the Company (i) is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization, (ii) has all
requisite power and authority to carry on its business as now being conducted
and as proposed to be conducted, and (iii) except where failure to be so
qualified or licensed would not reasonably be expected to result in a Material
Adverse Effect, is duly qualified or licensed to do business, and (iv) is in
good standing in each jurisdiction in which the nature of its business or the
ownership, leasing or operation of its properties makes such qualification or
licensing necessary, which jurisdictions are listed in Section 4.6(a) of the
Disclosure Schedules.  The Company has provided to Purchaser complete
and accurate copies of the certificate of incorporation, as amended, and Bylaws,
as amended (or other similar organizational documents) of each
Subsidiary.

     

    (c)           Except
as set forth in Section 4.6(c) of the
Disclosure Schedules, neither the Company nor any of its Subsidiaries has any
written agreement in respect of any strategic partnership, joint venture,
cooperation arrangement or other similar relationship providing for joint
development efforts, nor does the Company or a Subsidiary have any direct or
indirect interest in or control over any corporation, partnership, joint venture
or other entity of any kind.  The term “control” for purposes
of this Section 4.6 shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.

     

    
      
        
        

      

      
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    4.7                 Financial
Statements;  GAAP Treatment of Financial
Statements.

     

    (a) The financial statements of the
Company included in the SEC Documents (as defined below) (the “Financial
Statements”) comply as to form and substance 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”) consistently
applied during the periods covered thereby, and fairly present in all material
respects the financial position of the Company and its Subsidiaries as of the
dates thereof and the results of operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments.

     

    4.8                 No Other Liabilities;
Reserves.  To the Knowledge of the Company, the Company and its
Subsidiaries have no debts, liabilities, or obligations in a material amount,
either individually or in the aggregate, of any nature, whether accrued,
absolute, contingent, or otherwise, and whether due or to become due, that are
not reflected or reserved against in the Financial Statements, which are
required to be disclosed or which would cause a Material Adverse
Change.  To the Knowledge of the Company, the reserves, if any,
reflected on the Financial Statements, are adequate in light of the
contingencies with respect to which they are made.  There has been no
material change in the Company's accounting policies except as described in the
notes to the Financial Statements.

     

    4.9                 Absence of Certain Changes
and Events.  Since
the Balance Sheet Date, except as contemplated herein, in the other Transaction
Documents, in any Series A Financing Transaction Document, or as set forth on
Section 4.9 of
the Disclosure Schedules, the Company and its Subsidiaries have
not:

     

    (a)           to
the Knowledge of the Company, suffered any Material Adverse Change;

     

    (b)           suffered
any damage, destruction or loss, whether or not covered by insurance, in an
amount in excess of $100,000;

     

    (c)           granted
or agreed to make any increase in the compensation payable or to become payable
by the Company or a Subsidiary to any officer or employee, except for normal
raises for nonexecutive personnel made in the ordinary course of business that
are usual and normal in amount;

     

    (d)           declared,
set aside or paid any dividend or made any other distribution on or in respect
of the shares of capital stock of the Company or a Subsidiary, or declared or
agreed to any direct or indirect redemption, retirement, purchase or other
acquisition by the Company or a Subsidiary of such shares;

     

    (e)           issued
any shares of capital stock of the Company or a Subsidiary, or any warrants,
rights or options thereof, or entered into any commitment relating to the shares
of capital stock of the Company or a Subsidiary;

     

    (f)           adopted
or proposed the adoption of any change in the Company’s Certificate of
Incorporation or Bylaws;

     

    
      
        
        

      

      
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    (g)           made
any change in the accounting methods or practices they follow, whether for
general financial or Tax purposes, or any change in depreciation or amortization
policies or rates adopted therein, or any Tax election;

     

    (h)           sold,
leased, abandoned or otherwise disposed of any real property or any machinery,
equipment or other operating property other than in the ordinary course of their
business;

     

    (i)          
 sold, assigned, transferred, licensed or otherwise disposed of any Company
Intellectual Property or interest thereunder or other intangible asset except in
the ordinary course of their business;

     

    (j)           
been involved in any dispute involving any employee which would reasonably be
expected to result in a Material Adverse Change;

     

    (k)           entered
into, terminated or modified any employment, severance, termination or similar
agreement or arrangement with, or granted any bonuses (or bonus opportunity) to,
or otherwise increased the compensation of any executive officer or Key
Employee;

     

    (l)           
entered into any material commitment or transaction (including without
limitation any borrowing or capital expenditure);

     

    (m)          amended
or modified, or waived any default under, any Material Contract;

     

    (n)           to
the Knowledge of the Company, incurred any material liabilities, contingent or
otherwise, either matured or unmatured (whether or not required to be reflected
in financial statements in accordance with GAAP, and whether due or to become
due), except for accounts payable or accrued salaries that have been incurred by
the Company since the Balance Sheet Date, in the ordinary course of its business
and consistent with the Company’s past practices;

     

    (o)           permitted
or allowed any of their material property or assets to be subjected to any Lien,
except for Permitted Liens;

     

    (p)           settled
any claim, litigation or action, whether now pending or hereafter made or
brought;

     

    (q)           made
any capital expenditure or commitment for additions to property, plant or
equipment individually in excess of $100,000, or in the aggregate, in excess of
$250,000;

     

    (r)           
paid, loaned or advanced any amount to, or sold, transferred or leased any
properties or assets to, or entered into any agreement or arrangement with any
of their Affiliates, officers, directors or stockholders or, to the Company's
Knowledge, any Affiliate or associate of any of the foregoing;

     

    
      
        
        

      

      
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    (s)           made
any amendment to, or terminated any agreement that, if not so amended or
terminated, would be material to the business, assets, liabilities, operations
or financial performance of the Company or a Subsidiary;

     

    (t)           compromised
or settled any claims relating to Taxes, any Tax audit or other Tax proceeding,
or filed any amended Tax Returns;

     

    (u)           merged
or consolidated with any other Person, or acquired a material amount of assets
of any other Person;

     

    (v)           entered
into any agreement in contemplation of the transactions specified herein other
than this Agreement and the other Transaction Documents; or

     

    (w)           agreed
to take any action described in this Section 4.9 or which would reasonably be
expected to otherwise constitute a breach of any of the representations or
warranties contained in this Agreement or any other Transaction
Documents.

     

    4.10                 Compliance with
Laws.  The
Company and its Subsidiaries are, and since their respective formations have
been, in compliance in all material respects with all applicable Laws of any
Governmental Authority applicable to their business or operations. 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 in all material respects as now being conducted by
it except where the failure to so comply would not have a Material Adverse
Effect.  Neither the Company nor any of its Subsidiaries has received
a notice or other written communication alleging a possible violation by the
Company or a Subsidiary of any applicable Law of any Governmental Authority
applicable to their business or operations.

     

    4.11                 Permits.  The
Company and its Subsidiaries validly hold and have in full force and effect all
material Permits necessary for them to own, lease or operate their properties
and assets and to carry on their business as now conducted, and there has
occurred no violation of, or default (with or without notice or lapse of time or
both) under, or event giving to any other Person any right of termination,
amendment or cancellation of, any such Permit.  The Company and its
Subsidiaries have complied in all material respects with the terms and
conditions of all Permits issued to or held by them, and such Permits will not
be subject to suspension, modification, revocation or nonrenewal as a result of
the consummation of the transactions set forth in this Agreement or any other
Transaction Documents, or the execution and delivery hereof or
thereof.  No proceeding is pending or, to the Knowledge of the
Company, threatened, seeking the revocation or limitation of any
Permit.


    
      
         


      

      
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    4.12                 Real
Property.

     

    (a)           Owned Real
Property.  Section 4.11(a) of the Disclosure Schedules lists
all real property owned by the Company or its Subsidiaries (each, an “Owned Real Property”
and together, the “Owned Real
Properties”), including the address of such properties.  The
Company or a Subsidiary of the Company has good and marketable title to each
parcel of Owned Real Property (including all buildings, structures, fixtures and
improvements thereon and all rights thereto), free and clear of all Liens,
except Permitted Liens, none of which materially interfere with the use of, or
materially detracts from the value of, or the marketability of, such Owned Real
Property.

     

    (b)           Leased Real
Property.   Section 4.12(b) of
the Disclosure Schedules lists all real property leased by the Company or its
Subsidiaries (each, a “Leased Property” and
together, the “Leased
Properties”).  The Company has delivered to Purchaser complete
and accurate copies of all such leases, and any operating agreements relating
thereto.  With respect to each Leased Property, (i) the Company
or a Subsidiary of the Company has good and valid title to the leasehold estate
relating thereto, free and clear of all Liens, assignments, subleases,
easements, covenants, rights of way and other similar restrictions of any nature
whatsoever, other than Permitted Liens, (ii) the lease relating to such Leased
Property is in writing and is valid and binding, in full force and effect and
enforceable against the Company or the leasing Subsidiary and, to the Knowledge
of the Company, the other parties thereto, in accordance with its terms, subject
to applicable bankruptcy, insolvency, reorganization, fraudulent transfer,
moratorium or similar laws affecting creditors’ rights generally and general
principles of equity, and (iii) the Company is not and, to the Knowledge of the
Company, no other party to the lease relating to such Leased Property is, in
breach or violation of, or in default under, such lease.

     

    (c)           There
are no rights of first refusal, options to purchase, purchase agreements,
contracts for deed or installment sale agreements in effect with respect to all
or any part of the Real Property.

     

    (d)           The
Real Property comprises all of the real property used by the Company in
connection with the operation of the Company Business.

     

    (e)           The
buildings and improvements on the Real Property are in good operating condition
and in a state of good and working maintenance and repair, ordinary wear and
tear excepted, and are adequate and suitable for their current uses and
purposes.

     

    (f)           There
are no physical conditions or defects on any part of the Real Property which
would impair or would reasonably be expected to impair the continued operation
of the Company Business.


    
      
         


      

      
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    4.13                 Intellectual
Property

     

    (a)           All Necessary Rights; Absence
of Actions and Judgments.   Section  4.13(a)
of the Disclosure Schedules sets forth all of the Company Intellectual
Property.  The Company owns and has good and exclusive title, or has a
valid, subsisting and enforceable license (sufficient for the conduct of its
business) to all Company Intellectual Property; except where the failure to have
good and/or exclusive title or a valid, subsisting and enforceable license would
not have a Material Adverse Effect.  Except as set forth in Section 4.13(a)
of the Disclosure Schedules, to the Knowledge of the Company, there are no
proceedings or actions currently before any Governmental Authority anywhere in
the world relating to Company Intellectual Property, and no Company Intellectual
Property is subject to any outstanding Order or Contract (including any
settlement agreement) restricting in any manner the Use, transfer, or licensing
thereof by the Company, or which may affect the validity, Use or enforceability
thereof.  To the Knowledge of the Company, the Company has the right
to bring actions for infringement of all Company Intellectual Property owned by
or exclusively licensed to it.

     

    (b)           No
Violation.  The execution, delivery and performance of this
Agreement and each of the other Transaction Documents, and the consummation of
the transactions contemplated hereby or thereby, will not (i) breach,
violate or conflict with, or result in the modification, cancellation, or
suspension of any instrument or other Contract relating to any Company
Intellectual Property, (ii) cause the forfeiture or termination or give rise to
a right of forfeiture or termination of any Company Intellectual Property or any
of the Company’s rights therein or thereto, (iii) in any way impair any existing
right of the Company to Use, or to bring any action for the infringement of, any
Company Intellectual Property, or any portion thereof, or (iv) give rise to any
right or acceleration of any royalties, fees or other payments to any third
party. Immediately following the Closing Date, the Company will be permitted to
exercise all of the Company’s rights under all Contracts relating to Company
Intellectual Property to the same extent the Company was able to in the absence
of the transactions contemplated hereby.

     

    (c)           No
Infringement.  To the Knowledge of the Company, no Use of the
Company Intellectual Property by the Company or any of its Subsidiaries
breaches, has violated or conflicted with, or violates or conflicts with any
license (or sublicense) or other Contract of the Company with any third
party.  To the Knowledge of the Company, the Use of the Company
Intellectual Property and the conduct of the Company Business have not, and do
not, infringe or misappropriate, any common law or statutory rights of any third
party, including, without limitation, rights relating to defamation, contractual
rights, Intellectual Property or other proprietary rights, rights of privacy or
publicity.  To the Knowledge of the Company, no third party has
breached or violated or is breaching or violating any Contract with the Company
or any of its Subsidiaries relating to any Company Intellectual Property, or has
infringed or misappropriated or is infringing or misappropriating any Company
Intellectual Property except as set forth in Section 4.13(c) of
the Disclosure Schedules.  Neither the Company nor any of its
Subsidiaries has received any notice (whether in the form of invitation to
license or otherwise) from any third party that any Company Intellectual
Property or the conduct of the Company Business, has infringed or
misappropriated or does or will infringe or misappropriate any common law or
statutory rights of any other third party, including, without limitation, rights
relating to defamation, contractual rights, Intellectual Property or other
proprietary rights, rights of privacy or publicity, nor, to the Knowledge of the
Company, is there any basis for any such assertion. There is no pending or,
to the Knowledge of the Company, threatened claim, litigation or proceeding
contesting or challenging the ownership of or the validity or enforceability of,
or the Company’s right to Use, any Company Intellectual Property, nor, to the
Knowledge of the Company, is there any basis for any such claim, litigation or
proceeding.


    
      
         


      

      
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    4.14                 Contracts  Except
as disclosed in Section 4.14(a) of
the Disclosure Schedules, or as permitted under the Series A Financing
Transaction Documents, neither the Company nor any Subsidiary is party or
subject to, or bound by:

     

    (i)           any
agreements, contracts or commitments that call for prospective fixed and/or
contingent payments or expenditures by or to the Company or a Subsidiary of more
than $100,000, or which is otherwise material and not entered into in the
ordinary course of business;

     

    (ii)          any
contract, lease or agreement involving payments in excess of $100,000, which is
not cancelable by the Company or the Subsidiary, as applicable, without penalty
on not less than 60 days notice;

     

    (iii)         any
contract, including any distribution agreements, containing covenants directly
or explicitly limiting the freedom of the Company or a Subsidiary to compete in
any line of business or with any Person or to offer any of its products or
services;

     

    (iv)         any
indenture, mortgage, promissory note, loan agreement, guaranty or other
agreement or commitment for the borrowing of money or pledging or granting a
security interest in any assets;

     

    (v)          any
employment contracts, non-competition agreements, invention assignments,
severance or other agreements with officers, directors, employees, stockholders
or consultants of the Company or a Subsidiary or Persons related to or
affiliated with such Persons;

     

    (vi)         any
stock redemption or purchase agreements or other agreements affecting or
relating to the capital stock of the Company or a Subsidiary, including, without
limitation, any agreement with any stockholder of the Company or a Subsidiary
which includes, without limitation, antidilution rights, voting arrangements or
operating covenants;

     

    (vii)        any
pension, profit sharing, retirement, stock option or stock ownership
plans;

     

    (viii)       any
royalty, dividend or similar arrangement based on the revenues or profits of the
Company or a Subsidiary or based on the revenues or profits derived from any
material contract;

     

    (ix)         any
acquisition, merger, asset purchase or other similar agreement;

     

    (x)          any
sales agreement which entitles any customer to a right of set-off, or right to a
refund after acceptance thereof;

     

    (xi)         any
agreement with any supplier or licensor containing any provision permitting such
supplier or licensor to change the price or other terms upon a breach or failure
by the Company or its Subsidiary, as applicable, to meet its obligations under
such agreement; or


    
      
         


      

      
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    (xii)        any
agreement under which the Company or a Subsidiary has granted any Person
registration rights for securities.

     

    (b)           The
Company has delivered to Purchaser accurate and complete copies of all written
contracts identified in Section 4.14(b) of
the Disclosure Schedules (collectively, the “Material Contracts”),
including all amendments thereto.  Neither the Company nor any
Subsidiary has entered into any oral contracts which, if written, would be
required to be disclosed in Section 4.14(b) of
the Disclosure Schedules.  Each of the Material Contracts is valid and
in full force and effect, is enforceable in accordance with its terms, subject
to applicable bankruptcy, insolvency, reorganization, fraudulent transfer,
moratorium or similar laws affecting creditors’ rights generally and general
principles of equity, and will continue to be so immediately following the
Closing Date.

     

    (c)           Actions
with Respect to Material Contracts.

     

    (i)           Neither
the Company nor any Subsidiary has violated or breached, or committed any
default under, any Material Contract in any material respect, and, to the
Company's Knowledge, no other Person has violated or breached, or committed any
default under any Material Contract in any material respect; and

     

    (ii)          To
the Company's Knowledge, no event has occurred, and no circumstance or condition
exists, that (with or without notice or lapse of time) will, or would reasonably
be expected to, (A) result in a material violation or breach of any of the
provisions of any Material Contract, (B) give any Person the right to declare a
default or exercise any remedy under any Material Contract, (C) give any Person
the right to accelerate the maturity or performance of any Material Contract or
(D) give any Person the right to cancel, terminate or modify any Material
Contract.

     

    (d)           No
Consents.  Except as set forth in Section 4.14(d) of
the Disclosure Schedules, none of the Material Contracts contains any provision
which would require the consent of third parties to the sale, issuance and/or
delivery of the Shares, or any of the other transactions as contemplated
hereunder or under any of the other Transaction Documents, or which would be
altered as a result of such transactions.

     

    4.15                 Taxes.  The
Company and its Subsidiaries have timely and properly filed all Tax Returns
required to be filed by them for all years and periods (and portions thereof)
for which any such Tax Returns were due.  All such filed Tax Returns
are accurate in all material respects.  The Company has timely paid
all Taxes due and payable (whether or not shown on filed Tax
Returns).  There are no pending assessments, asserted deficiencies or
claims for additional Taxes that have not been paid.  The reserves for
Taxes, if any, reflected on the Financial Statements are adequate, and there are
no Liens for Taxes on any property or assets of the Company and any of its
Subsidiaries (other than Liens for Taxes not yet due and
payable).  There have been no audits or examinations of any Tax
Returns by any Governmental Authority, and the Company or its Subsidiaries have
not received any notice that such audit or examination is pending or
contemplated.  No claim has been made by a Governmental Authority in a
jurisdiction where the Company or any of its Subsidiaries does not file Tax
Returns that it is or may be subject to taxation by that
jurisdiction.  To the Knowledge of the Company, no state of facts
exists or has existed which would constitute grounds for the assessment of any
penalty or any further Tax liability beyond that shown on the respective Tax
Returns.  There are no outstanding agreements or waivers extending the
statutory period of limitation for the assessment or collection of any
Tax.


    
      
         


      

      
        17

        
          

        

      

      
         


      

    


    (b)           All
Taxes that the Company or its Subsidiaries has been required to collect or
withhold have been duly withheld or collected and, to the extent required, have
been paid to the proper Taxing authority.

     

    (c)           Neither
the Company nor any of its Subsidiaries is a party to any Tax-sharing agreement
or similar arrangement with any other Person.

     

    (d)           Neither
the Company nor any of its Subsidiaries is currently under any contractual
obligation to pay to any Governmental Authority any Tax obligations of, or with
respect to any transaction relating to, any other Person, or to indemnify any
other Person with respect to any Tax, other than pursuant to this
Agreement.

     

    (e)           The
Company has made all necessary disclosures required by Treasury Regulation
Section 1.6011-4.  The Company has not been a participant in a
“reportable transaction” within the meaning of Treasury Regulation Section
1.6011-4(b).

     

    (f)           No
payment or benefit paid or provided, or to be paid or provided, to current or
former employees, directors or other service providers of the Company (including
pursuant to this Agreement or the Rights Agreements) will fail to be deductible
for federal income tax purposes under Section 280G of the Code.

     

    4.16                 Employees.

     

    (a)           The
Company and its Subsidiaries are not party to any collective bargaining
agreements and, to the Company’s Knowledge, there are no attempts to organize
the employees of the Company or any Subsidiary.

     

    (b)           The
Company and its Subsidiaries are not delinquent in payments to any of their
employees for any wages, salaries, commissions, bonuses or other direct
compensation for any service performed as of the date hereof or amounts required
to be reimbursed to such employees.  The Company has delivered to
Purchaser copies of all employment agreements to which the Company or a
Subsidiary is a party (collectively, the “Employment
Agreements”) and which have not previously been filed by the Company with
the Commission.  Except as set forth in Section 4.16(b)
of the Disclosure Schedules, the Company and its Subsidiaries have no policy,
practice, plan or program of paying severance pay or any form of severance
compensation in connection with the termination of employment
services.


    
      
         


      

      
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    (c)           Each
Person who performs services for the Company or a Subsidiary has been, and is,
properly classified by the Company or such Subsidiary as an employee or an
independent contractor.

     

    (d)           To
the Company's Knowledge, no employee or advisor of the Company or a Subsidiary
is or is alleged to be in violation of any term of any employment contract,
disclosure agreement, proprietary information and inventions agreement or any
other contract or agreement or any restrictive covenant or any other common law
obligation to a former employer relating to the right of any such employee to be
employed by the Company or such Subsidiary because of the nature of the business
conducted or to be conducted by the Company or such Subsidiary or to the use of
trade secrets or proprietary information of others, and the employment of the
employees of the Company and its Subsidiaries does not subject the Company or
the Company's stockholders to any liability.  There is neither pending
nor, to the Company's Knowledge, threatened any actions, suits, proceedings or
claims, or, to the Company’s Knowledge, any basis therefor or threat thereof
with respect to any contract, agreement, covenant or obligation referred to in
the preceding sentence.

     

    4.17                 Employee Benefit
Plans.  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 Securities will not involve any transaction which is
subject to the prohibitions of Section 406 of ERISA or in connection with which
a tax could be imposed pursuant to Section 4975 of the Internal Revenue Code of
1986, as amended, provided that, if any of the Purchasers, or any person or
entity that owns a beneficial interest in any of the Purchasers, is an “employee
pension benefit plan” (within the meaning of Section 3(2) of ERISA) with respect
to which the Company is a “party in interest” (within the meaning of Section
3(14) of ERISA), the requirements of Sections 407(d)(5) and 408(e) of ERISA, if
applicable, are met.  As used in this Section 4.16, 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..

     

    4.18                 Insurance.  The
Company and its Subsidiaries maintain and keep in force with good and
responsible insurance companies insurance in such amounts with such coverage or
risks as are customary for similar businesses that operate in the same
geographic regions as the Company and adequate to the needs of the Company and
its Subsidiaries.  Section 4.18 of the
Disclosure Schedules sets forth a list of such insurance, stating the name and
address of the insurance provider and the amount of insurance. Except as set
forth in Section
4.18 of the Disclosure Schedules, there are no claims by the Company or a
Subsidiary pending under any such policies.  Such insurance policies
are in full force and effect; all premiums with respect thereto are currently
paid, and the Company and its Subsidiaries are in compliance with the terms
thereof.  Each insurance policy shall continue to be in full force and
effect immediately following the consummation of the transactions contemplated
by this Agreement and the other Transaction Documents.  To the
Company’s Knowledge, there is no threatened termination of any such insurance
policies.


    
      
         


      

      
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    4.19                 Compliance with
Environmental Requirements.  Since
their  inception,  neither the Company, nor any of
its  Subsidiaries  have
been,  in  violation of any applicable law relating to
the  environment or occupational health and safety, where
such  violation  would have a Material Adverse
Effect.  Each of Company and its Subsidiaries has operated all
facilities and properties owned, leased or operated by it in material compliance
with the Environmental Laws.

     

    4.20                 Litigation.  There
is no action, suit, proceeding or investigation pending or, to the Company’s
Knowledge, currently threatened against the Company, any Subsidiary or any of
their properties or assets (a) that may impair the right or ability of the
Company to carry on the Company Business; (b) that questions the validity
of this Agreement or the other Transaction Documents or the Company’s ability to
consummate the transactions contemplated hereby and thereby, or (c) that,
if adversely determined, would reasonably be expected to have a Material Adverse
Effect, and there is no basis for any of the foregoing.  Neither the
Company nor any Subsidiary is a party to, named in, or subject to any
Order.  There is no action, suit, proceeding or investigation by the
Company currently pending or which the Company intends to initiate.

     

    4.21                 No
Brokers.  Except
as disclosed in Section 4.21 of the
Disclosure Schedules, neither the Company nor, to the Company's Knowledge, any
Company stockholder is obligated for the payment of fees or expenses of any
broker or finder in connection with the origin, negotiation or execution of this
Agreement or in connection with any transaction contemplated
hereby.

     

    4.22                 Solvency.  The
Company has not (a) made a general assignment for the benefit of creditors; (b)
filed any voluntary petition in bankruptcy or suffered the filing of any
involuntary petition by its creditors; (c) suffered the appointment of a
receiver to take possession of all, or substantially all, of its assets; (d)
suffered the attachment or other judicial seizure of all, or substantially all,
of its assets; (e) admitted in writing its inability to pay its debts as they
come due; or (f) made an offer of settlement, extension or composition to its
creditors generally.

     

    4.23                 Related Party
Transactions. Except
as set forth in Section 4.23 of the
Disclosure Schedules, none of the Company or any of its Affiliates, officers,
directors, stockholders or employees, or any Affiliate of any of such Person,
has any material interest in any property, real or personal, tangible or
intangible, including Company Intellectual Property used in or pertaining to the
business of the Company, except for the normal rights of a stockholder, or, to
the Knowledge of the Company, any supplier, distributor or customer of the
Company.


    
      
         


      

      
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    (a)           Except
for the agreements listed in Section 4.23(a) of
the Disclosure Schedules, there are no agreements, understandings or proposed
transactions between the Company and any of its officers, directors, employees,
Affiliates, or, to the Company's Knowledge, any Affiliate thereof.

     

    (b)           To
the Company's Knowledge, except as set forth in Section 4.23 of the
Disclosure Schedules, no employee, officer or director of the Company or a
Subsidiary has any direct or indirect ownership interest in any firm or
corporation with which the Company is affiliated or with which the Company has a
business relationship, or any firm or corporation that competes with the
Company.  To the Company's Knowledge, no member of the immediate
family of any officer or director of the Company is directly or indirectly
interested in any Material Contract.

     

    (c)           Except
as set forth in Section 4.23(c) of
the Disclosure Schedules, there are no amounts owed (cash and stock) to
officers, director, consultants and Key Employees (salary, bonuses or other
forms of compensation).

     

    4.24                 Disclosure. This
Agreement (including exhibits hereto and the financial statements delivered to
Purchaser), the Disclosure Schedules and the certificates and statements
furnished pursuant to this Agreement by or on behalf of the Company do not
contain any untrue statement of a material fact or omit to state a fact
necessary in order to make the statements contained therein not misleading in
the light of the circumstances under which they were made.  To the
Company’s Knowledge, none of the current executive officers or directors of the
Company during the previous five years have been (i) subject to a voluntary or
involuntary petition under the federal bankruptcy laws or any state insolvency
law or the appointment of a receiver, fiscal agent or similar officer by a court
for his or her business or property or (ii) convicted in a criminal proceeding
or named as a subject of a pending criminal proceeding (excluding traffic
violations and other minor offenses).

     

    4.25                 Securities Act. Since
March 31, 2008, the
Company has filed all forms, reports and documents (the "SEC Documents")
required to be filed by it with the Commission pursuant to the Securities Act
and/or the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act"), as
the case may be, and the rules and regulations of the Commission thereunder
through the date of this Agreement. As of their respective filing dates, the SEC
Documents complied in all material respects with the requirements of the
Securities Act and/or the Exchange Act, as the case may be, and the rules and
regulations of the Commission thereunder applicable to such SEC Documents, and
were complete and correct in all material respects, and none of the SEC
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.  Subject to the accuracy of Purchaser’s
representations in Article V hereof, the offer, sale and issuance of the
Securities in conformity with the terms of this Agreement and the other
Transaction Documents, constitute or will constitute transactions exempt from
the registration and prospectus delivery requirements of the Securities Act, and
the qualification or registration requirements of any applicable state
securities laws as such laws exist on the date hereof, and neither the Company
nor any authorized agent acting on its behalf will take any action hereafter
that would cause the loss of such exemption.


    
      
         


      

      
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    4.26                 Use of
Proceeds.  Except
as set forth on Section 4.26 of the
Disclosure Schedule, the Company will use the proceeds from the sale of the
Securities primarily for working capital, general corporate purposes and acquisitions
previously approved by the Board of Directors and Purchaser and not for the
satisfaction of any portion of the Company’s debt (other than payment of trade
payables and accrued expenses in the ordinary course of the Company’s Business
and consistent with prior practices), for the redemption of any Common Stock or
securities convertible, exercisable or exchangeable into Common Stock, or for
the settlement of any outstanding litigation.

     

    4.27                 SAFE
Compliance.  Except
for the individuals set forth in Section 4.27 of the
Disclosure Schedule, there is no shareholder of the Company that is subject to
the registration requirements under (i) Circular 75 issued by the State
Administration of Foreign Exchange of the People’s Republic of China on October
21, 2005, titled “Notice Regarding Certain Administrative Measures on Financing
and Inbound Investment by PRC Residents Through Offshore Special Purpose
Vehicles,” effective as of November 1, 2005 (“Circular 75”), as
amended, (ii) the Interim Regulation on Merger and Acquisition of Domestic
Enterprise by Foreign Investors, promulgated on August 8, 2006 and effective as
of September 8, 2006, as amended, or (iii) Circular 106 issued by the State
Administration of Foreign Exchange of the People’s Republic of China on May 29,
2007 regarding the implementation measures of Circular 75, as amended, or any
successor rule or regulation under the Law of the People’s Republic of China of
each of the foregoing (collectively, the “PRC Regulations”).  The
Company represents that each individual set forth in Section 4.26 of the
Disclosure Schedule are in compliance with the registration requirements under
the PRC Regulations and the upon request by Purchaser shall provide Purchaser
documentation that is reasonably satisfactory to Purchaser evidencing that each
such individual has complied with the registration requirements under the PRC
Regulations.

     

    ARTICLE V

    REPRESENTATIONS AND
WARRANTIES OF PURCHASER

    


    Purchaser represents and warrants to
the Company as follows:

     

    5.1                 Investment for Own
Account.  The
Securities are being or will be acquired for Purchaser's own account, for
investment and not with a view to, or for resale in connection with, any
distribution or public offering thereof within the meaning of the Securities
Act, or applicable state securities laws.

     

    5.2                 No
Registration.  Purchaser
understands that (a) the Securities have not been registered under the
Securities Act by reason of their issuance in a transaction exempt from the
registration and prospectus delivery requirements of the Securities Act pursuant
to Section 4(2) thereof and have not been qualified under any state
securities laws on the grounds that the offering and sale of securities
contemplated by this Agreement are exempt from registration thereunder, and (b)
the Company's reliance on such exemptions is predicated on Purchaser's
representations set forth herein.  Purchaser understands that the
resale of the Securities may be restricted indefinitely, unless a subsequent
disposition thereof is registered under the Securities Act and registered under
any state securities law or is exempt from such registration.


    
      
         


      

      
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    5.3                 Accredited
Investor.  Purchaser
is an “accredited investor” as that term is defined in Rule 501 of Regulation D
promulgated under the Securities Act, and is able to bear the economic risk of
the purchase of the Securities pursuant to the terms of this Agreement and the
other Transaction Documents, including a complete loss of Purchaser's investment
in the Securities.  Purchaser understands that the purchase of the
Securities involves substantial risk. Purchaser: (i) has experience as an
investor in securities of companies in the exploration stage and acknowledges
that Purchaser is able to fend for itself, can bear the economic risk of
Purchaser's investment in the Securities and has such knowledge and experience
in financial or business matters that Purchaser is capable of evaluating the
merits and risks of this investment in the Securities and protecting its own
interests in connection with this investment and/or (ii) has a preexisting
personal or business relationship with the Company and certain of its officers,
directors or controlling persons of a nature and duration that enables such
Purchaser to be aware of the character, business acumen and financial
circumstances of such persons.

     

    5.4                 Power and
Authority.  Purchaser
has the full right, power and authority to enter into and perform its
obligations under this Agreement and each of the other Transaction Documents to
which it is a party, and this Agreement and each of the other Transaction
Documents to which it is a party constitute valid and binding obligations of
Purchaser, enforceable in accordance with their terms, subject to applicable
bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or
similar Laws affecting creditors’ rights generally and general principles of
equity.

     

    5.5                 No
Approvals.  No
consent, approval or authorization of, or designation, declaration or filing
with, any Governmental Authority on the part of Purchaser is required in
connection with the valid execution and delivery of this Agreement or each of
the other Transaction Documents, the consummation by Purchaser of the
transactions contemplated hereby and thereby, the performance by Purchaser of
its obligations hereunder and thereunder, or the purchase of the
Securities.

     

    5.6                 Noncontravention.  The
execution and delivery by Purchaser of this Agreement and each of the other
Transaction Documents to which it is a party, the consummation by Purchaser of
the transactions contemplated hereby and thereby, the performance by Purchaser
of its obligations hereunder and thereunder, and the purchase of the Securities,
do not and will not conflict with, or result in any violation or breach of, or
default (with or without notice or lapse of time or both) under, or give rise to
a right of, or result in, termination, cancellation or acceleration of any
obligation or to a loss of a material benefit under, or result in the creation
of any Lien in or upon any of the properties or assets of Purchaser, or give
rise to any increased, additional, accelerated or guaranteed rights or
entitlements under, any provision of (i) Purchaser’s organizational documents,
as amended, and as in effect on the date hereof, (ii) any agreement to which
Purchaser is a party or otherwise bound or otherwise under which Purchaser has
rights or benefits, or (iii) any Law or Order; in each case applicable to
Purchaser or any of its properties or assets.


    
      
         


      

      
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    5.7                 Disclosure of
Information.  Purchaser
has received or has had full access to all the information it considers
necessary or appropriate to make an informed investment decision with respect to
the Securities.  The Purchaser further has had an opportunity to ask
questions and receive answers from the Company regarding the terms and
conditions of the offering of the Securities and to obtain additional
information (to the extent the Company possessed such information or could
acquire it without unreasonable effort or expense) necessary to verify any
information furnished to Purchaser or to which Purchaser had access. The
foregoing, however, does not in any way limit or modify the representations and
warranties made by the Company in Article IV.

     

    ARTICLE VI

    CERTAIN
COVENANTS

     

    6.1                 Regulatory and Other
Approvals.  Each
party hereto shall, prior to the Closing, (a) take all commercially reasonable
steps necessary or desirable, and proceed diligently and in good faith use all
commercially reasonable efforts, as promptly as practicable, to obtain any and
all consents, approvals or actions of, to make all filings with and to give all
notices to Governmental Authorities or any other Person required to consummate
the transactions contemplated hereby and by each of the other Transaction
Documents, and (b) provide such other information and communications to
such Governmental Authorities or other Persons as such Governmental Authorities
or other Persons may reasonably request in connection therewith.  The
Company shall provide prompt notification to Purchaser when any such consent,
approval, action, filing or notice referred to in clause (a) above is obtained,
taken, made or given, as applicable, and will advise Purchaser of any material
communications (and, unless precluded by law, provide copies of any such
communications that are in writing) with any Governmental Authority or other
Person regarding any of the transactions contemplated by this Agreement or each
of the other Transaction Documents.

     

    6.2                 Information.  Unless
otherwise restricted by an agreement or arrangement with a third party or by
Law, to the extent commercially reasonable, the Company shall, prior to the
Closing, (a) provide Purchaser and its officers, directors, employees,
agents, counsel, accountants, financial advisors, consultants and other
representatives (collectively, “Representatives”)
with full access, upon reasonable prior notice and during normal business hours,
to the key employees and agents of the Company and to the Company’s assets and
accountants, and (b) furnish Purchaser and its Representatives with all such
information and data concerning the Company’s businesses as Purchaser or any of
such other Persons reasonably may request in connection with such investigation
subject to the Representatives’ being bound by appropriate confidentiality
obligations and restrictions; provided that, if the
Company is not able to grant Purchaser or its Representatives access and furnish
information required by this Section 6.2 due to restrictions imposed by third
party agreements or arrangements, it shall notify Purchaser (which such notice
shall describe in reasonable detail the basis for withholding information and
general nature of such information) and use all reasonable efforts to obtain a
waiver of such restrictions from the relevant third parties.


    
      
         


      

      
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    6.3                 Information
Updates.  The
Company shall, prior to the Closing, notify Purchaser in writing of, and as
promptly as practical will provide Purchaser with true and complete copies of,
any and all material information or documents relating to, any event,
transaction or circumstance, as soon as practicable after it becomes known to
the Company, occurring after the date of this Agreement and prior to the Closing
that causes any covenant of the Company under this Agreement or any other
Transaction Documents to be breached or that renders untrue any representation
or warranty of the Company contained in this Agreement as if the same were made
on or as of the date of such event, transaction or circumstance.

     

    6.4           Conduct of the
Company.  From the
date hereof until the Closing Date, the Company shall, and shall cause each of
its Subsidiaries to, conduct its business in the ordinary course of business
consistent with past practice and shall preserve intact its business
organization and relationships with third parties and to keep available the
services of its present officers and employees.  Without limiting the
generality of the foregoing, from the date hereof until the Closing Date, other
than as contemplated by this Agreement or any other Transaction Documents, the
Company shall not, and shall cause each of its Subsidiaries not to, without
Purchaser’s prior written consent, take any action that would constitute a
breach or violation of Section 4.8 of this Agreement.  This covenant
shall automatically expire if the Closing Date shall not have occurred on or
before 30 days following the Company’s filing of its Annual Report on Form 10-K
for the fiscal year ended December 31, 2008.

     

    6.5                 Confidentiality.  Each
of the parties hereto hereby agrees that any information regarding (i) a party
to this Agreement or such party’s business, assets, management or operating
plans (“Party
Confidential Information”), (ii) the terms and conditions of this
Agreement, (iii) the Purchaser’s acquisition of the Securities or (iv) the
negotiation and execution of this Agreement shall be held in confidence by both
parties, and neither party shall make any disclosure of any such information
unless (a) the release of such information is ordered pursuant to a
subpoena or other order from a court or Governmental Authority of competent
jurisdiction, (b) the release of such information is otherwise required by
applicable law, including, without limitation, the requirement of the Company
under the Exchange Act to file a current report on Form 8-K that discloses the
transactions contemplated hereby and includes copies of this Agreement and the
other Transaction Documents, or (c) such information has been made
generally available to the public other than by disclosure in violation of this
Agreement or any applicable Law or other restriction; provided that
disclosure of such information may be made by Purchaser to any Affiliate, or to
any transferee or assignee of the Securities, so long as such Affiliate,
transferee or assignee is bound by confidentiality obligations reasonably
similar in substance to those set forth in this Section 6.5.  The
confidentiality obligations of each party with respect to the other party’s
Party Confidential Information shall continue for a period of two (2) years
following the date hereof, and during such period neither party shall use the
other party’s Party Confidential Information for any purpose other than in
connection with the transactions contemplated herein or in any of the other
Transaction Documents. Each of the parties hereto hereby further agrees that
such party shall obtain no intellectual property or other rights with respect to
any information disclosed by the other party to such party in any investigation
pursuant to Section 6.2, or during the negotiation and execution of this
Agreement or the effectuation of the transactions contemplated hereby, and all
such information shall remain the property of the disclosing
party.  Each party agrees that it shall, upon learning that disclosure
of such information is sought in or by a court or Governmental Authority of
competent jurisdiction or through other means, give prompt notice to the other
party and allow the other party, at its expense, to undertake appropriate action
to prevent disclosure of, or to obtain a protective order for, the
information.


    
      
         


      

      
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    6.6                 Reservation of
Shares.  As
of the date hereof, the Company has reserved and the Company shall continue to
reserve and keep available at all times, free of preemptive rights, the maximum
number of shares of Common Stock for the purpose of enabling the Company to
issue the Conversion Shares and the Warrant Shares.

     

    6.7                 Compliance with
Laws.  For so
long as any Series B Purchaser owns any Securities, the Company shall comply in
all material respects with the Company’s reporting, filing and other obligations
under the securities Laws.

     

    6.8                 Employment
Agreements. No later
than sixty (60) days following the Closing, the Company shall enter into
employment agreements with respect to the employees identified on Schedule 6.8
attached hereto in form and substance reasonably satisfactory to
Purchaser.

     

    6.9                 Corporate Existence; No
Conflicting Agreements. For so long as any Series B Purchaser owns
Securities, the Company shall take all steps necessary to preserve and continue
the corporate existence of the Company.  For so long as any Series B
Purchaser owns any Securities, the Company shall not enter into any agreement,
the terms of which agreement would restrict or impair the right or ability of
the Company to perform any of its obligations under this Agreement or any of the
other agreements attached as exhibits hereto.

     

    6.10               Listing, Securities Exchange
Act of 1934 and Rule 144 Requirements.  The
Company shall continue its obligation to report to the Commission under Section
12 of the 1934 Act and shall use its best efforts to comply in all material
respects with its reporting and filing obligations under the 1934 Act for so
long as any Series B Purchaser owns any Securities. For so long as any Series B
Purchaser owns Securities, the Company shall not take any action or file any
document (whether or not permitted by the Securities Act or the rules
promulgated thereunder) to terminate or suspend such registration or to
terminate or suspend its reporting and filing obligations under the Exchange Act
or Securities Act except as permitted under the Transaction
Documents.  For so long as any Series B Purchaser owns any Securities,
the Company shall take all action necessary to continue the quotation or listing
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.  Subject to the terms of the Transaction Documents, the
Company further covenants that it shall take such further action as Purchaser
may reasonably request, all to the extent required from time to time to enable
Purchaser to sell the Securities and without registration under the Securities
Act within the limitation of the exemptions provided by Rule 144, including
without limitation the timely filing of the SEC Reports. Upon the request of
Purchaser, the Company shall deliver to Purchaser a written certification of a
duly authorized officer as to whether it has complied with such
requirements.


    
      
         


      

      
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    6.11                 Directors. Within 60
days following the
Closing Date, the Company shall have increased the size of the Board to seven
(7) and shall cause the appointment of the majority of the Board of Directors to
be “independent directors,”. as defined by
the rules of the American Stock Exchange Company Guide.  Purchaser,
together with the holders of Series A Preferred Stock, shall have the right to
nominate an aggregate of four (4) members to the Board of Directors and, at the
option of Purchaser and holders of Series A Preferred Stock, to the board of
directors of any Subsidiaries (including the Chairman of the Board of Directors
of the Company or any Subsidiaries) upon Closing.   A majority of
the Board of Directors shall be (A) familiar with the oil and gas industry, and
(B) based in the United States and available to act as the Company’s
spokesperson to the US markets in the absence of the senior management members
of the Company.  This covenant shall expire once the Series B
Purchasers own less than 25% of the Series B Shares originally purchased
hereunder.

     

    6.12                 Committees. Within 60
days following the Closing Date, the Company shall maintain (i) an audit
committee comprised solely of not less than three independent directors, (ii) a
compensation committee comprised of not less than three directors, a majority of
whom are independent directors, and (iii) a corporate governance and nominating
committee of not than three directors, a majority of whom are independent
directors. The appointment of the Chairman of the audit committee and the Vice
Chairman of the Board of Directors (who shall serve as the Chairman of the
corporate governance and nominating committee) shall be approved by Purchaser,
which approval shall not be unreasonably withheld.  This covenant
shall expire once the Series B Purchasers own less than 25% of the Series B
Shares issued hereunder.

    


    6.13                 Right of First
Refusal.  For a period of two (2) years following the Closing
Date, the Company shall promptly notify (in no event later than five (5) Trading
Days after making or receiving an applicable offer) in writing (a "Rights Notice") each
Series B Purchaser of the terms and conditions of any proposed offer or sale to
any third party by the Company in a transaction that is exempt from the
registration requirements of the Securities Act, of Common Stock or any debt or
equity securities convertible, exercisable or exchangeable into Common Stock (a
“Subsequent
Financing”).  The Rights Notice shall describe, in reasonable
detail, the proposed Subsequent Financing, the names and investment amounts of
all investors participating in the Subsequent Financing, the proposed closing
date of the Subsequent Financing, which shall not be less than ten (10) Trading
Days from the date of the receipt of the Rights Notice by the Series B
Purchasers, and all of the terms and conditions thereof and proposed definitive
documentation to be entered into in connection therewith.  The Rights
Notice shall provide each Series B Purchaser an option (the “Rights Option”)
during the five (5) Trading Days following delivery of the Rights Notice (the
“Option
Period”) to inform the Company whether such Series B Purchaser will
purchase up to its pro rata portion of all or a portion of the securities being
offered in such Subsequent Financing on the same, absolute terms and conditions
as contemplated by such Subsequent Financing.  If a Series B Purchaser
elects not to participate in such Subsequent Financing, the other Series B
Purchasers may participate on a pro-rata basis so long as such participation in
the aggregate does not exceed the total purchase price that the Series B
Purchasers paid for the purchase of the Series B Preferred Stock
hereunder.


    
      
         


      

      
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    (a)           For
purposes of this Section, all references to “pro rata” means, for
any Series B Purchaser electing to participate in such Subsequent Financing, the
percentage obtained by dividing (x) the aggregate number of Series B Preferred
Stock purchased by such Series B Purchaser hereunder by (y) the total number of
all of the Series B Preferred Stock purchased by all of the Series B Purchasers
hereunder. Delivery of any Rights Notice constitutes a representation and
warranty by the Company that there are no other material terms and conditions,
arrangements, agreements or otherwise except for those disclosed in the Rights
Notice, to provide additional compensation to any party participating in any
proposed Subsequent Financing, including, but not limited to, additional
compensation based on changes in the purchase price or any type of reset or
adjustment of a purchase or conversion price or to issue additional securities
at any time after the closing date of a Subsequent Financing.  If the
Company does not receive notice of exercise of the Rights Option from the Series
B Purchasers within the Option Period, the Company shall have the right to close
the Subsequent Financing on the scheduled closing date with a third party; provided that all of
the material terms and conditions of the closing are the same as those provided
to the Series B Purchasers in the Rights Notice.  If the closing of
the proposed Subsequent Financing does not occur on that date, any closing of
the contemplated Subsequent Financing or any other Subsequent Financing shall be
subject to all of the provisions of this Section 6.13(a), including, without
limitation, the delivery of a new Rights Notice.  The provisions of
this Section 6.13(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"
means collectively issuances by the Company of (i) securities issued pursuant to
a bona fide firm underwritten public offering of the Company’s securities;
provided such underwritten public offering shall provide gross proceeds to the
Company of not less than $10,000,000 and shall have been approved in advance by
the Majority Holder, (ii) securities issued (other than for cash) in connection
with a strategic merger, acquisition, or consolidation provided that the
issuance of such securities in connection with such strategic merger,
acquisition or consolidation has been approved in advance by the Majority
Holders, (iii) securities issued or issuable hereunder, or pursuant to the
conversion or exercise of convertible or exercisable securities issued or
outstanding on or prior to the Series A Financing Closing Date or issued
pursuant to the Series A Securities Purchase Agreements (so long as the
conversion or exercise price in such securities are not amended to lower such
price and/or adversely affect the Holders), (iv) 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 and provided
that the issuance of such securities in connection with such bona fide strategic
license, agreements or other partnering arrangements has been approved in
advance by the Majority Holders, (v) Common Stock issued or the issuance or
grants of options to purchase Common Stock pursuant to the Company’s equity
incentive plans outstanding as they exist on the Closing Date (as defined in the
1st Securities Purchase Agreement), (vi) the issuance or grants of options
to purchase Common Stock to employees, officers or directors of the Company
pursuant to any equity incentive plan duly adopted by the Board of Directors or
a committee thereof established for such purpose so long as such issuances in
the aggregate do not exceed ten percent (10)% of the issued and outstanding
shares of Common Stock as of the Closing Date  and the specified
price at which the options may be exercised is equal to or greater than the VWAP
as of the date of such grant, and (vii) any warrants, shares of Common Stock or
other securities issued to a placement agent and its designees for the
transactions contemplated by the Purchase Agreements.


    
      
         


      

      
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    6.14                 Deliveries from Escrow Based
on Income Targets.

    


    (a)           The
Company expects that  the Company’s audited consolidated After-Tax Net
Income for the fiscal year ending December 31, 2009 shall be at least $5.0
million (the “2009
Target Numbers”).

    


    (b)           As
Purchaser is relying on such expected profit in making its investment hereunder,
and in order to attempt to make whole Purchaser in the event these numbers are
not met, the Company shall deliver to the Escrow Agent at the Closing the Make
Good Escrow Shares (as defined below).

    


    (c)           If
the Company’s audited and consolidated After-Tax Net Income for the fiscal
year ending December 31, 2009 does not meet the 2009 Target Number for such
year, and the Percentage Shortfall (as defined below) for such year is less than
fifty percent (50%), but equal or greater than fifteen percent (15%), then an
Adjustment Percentage for such year shall be determined.  For purposes
of this Section, the “Percentage Shortfall”
shall mean the percentage obtained by dividing (w) the
amount of the shortfall of the After-Tax Net Income from the applicable Target
Number by (x)
the applicable Target Number for such year.   For purposes of
this Section, the “Adjustment
Percentage” for 2009 shall mean the percentage that the Percentage
Shortfall for such year bears to fifty percent (50%).  For example, if
the Percentage Shortfall for 2009 is 20%, the Adjustment Percentage would be
40%, and 40% of the total number of Company Deposited Escrow Shares then
required to be in escrow would be delivered to the Purchasers on a pro rata
basis, with the balance being returned to the  Company pursuant to
this Agreement.

    


    (d) The
Parties hereby agree that:

    


    (i)           If
the Percentage Shortfall for 2009 is less than fifty percent (50%) but equal or
greater than fifteen percent (15%), then the Escrow Agent shall deliver to the
Purchaser on a pro rata basis such number of shares of Series B Preferred Stock
as is determined by multiplying the Adjustment Percentage by the Make Good
Escrow Shares and return the balance.  

     

    (ii)          If
the Percentage Shortfall for 2009 is equal to or greater than fifty percent
(50%), then the Escrow Agent shall deliver all of the remaining Make Good Escrow
Shares then held by the Escrow Agent to Purchaser.

     

    (iii)         If
the Percentage Shortfall for 2009 is less than fifteen percent (15%), then all
of the Make Good Escrow Shares shall be returned to the Company for
cancellation.


    
      
         


      

      
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    (e) At
the Closing, the Company shall issue and deposit the number of shares of Series
B Preferred Stock equal to 30% of the number of shares of Series B Preferred
Stock issued hereunder to be held by the Escrow Agent pursuant to the terms and
conditions of the Series B Securities Escrow Agreement (the “Make Good Escrow
Shares”).

    


    (f) The
determination regarding the number and the distribution, if any, of the Make
Good Escrow Shares to be distributed to the Purchaser pursuant to this Section
6.14 shall be made within five (5) Trading Days after the date the Company is
required to file its Annual Report on Form 10-K for 2009 with the Commission
(after giving effect to any extension pursuant to Rule 12b-25 of the Exchange
Act).  In the event that the Company does not file its Annual Report
on Form 10-K for the year ended December 31, 2009 with the Commission within
thirty (30) days after the date such filing was required, after giving effect to
any extension pursuant to Rule 12b-25 of the Exchange Act, all of Make Good
Escrow Shares shall be delivered to the Purchaser within five (5) Trading Days
following the expiration of such thirty (30) day period.

    


    (g) The
Parties understand that, pursuant to the Series B Securities Escrow Agreement,
the Escrow Agent will not make any deliveries of shares without the signed
written instructions from the Company and the Purchaser.

    


    (h)
Notwithstanding anything to the contrary contained in this Section 6.14 or in
the Series B Securities Escrow Agreement, the Parties agree that for purposes of
determining whether or not the Target Numbers have been achieved,

    


    (i) the
release of any or all of the Make Good Escrow Shares shall not be counted as an
expense, charge, or other deduction from revenues in calculating net income even
though GAAP may require contrary treatment,

    


    (ii) any
registration delay payments arising under the Registration Rights Agreement that
are accrued or paid by the Company to any Series B Purchaser will be excluded
from the calculation of net income, and

    


    (i) So
long as the Make Good Escrow Shares remain in escrow, such shares shall not be
counted in calculating a quorum for stockholder voting purposes nor shall such
shares be voted at any meeting of stockholders or included in a written
consent.

    


    6.15                 Performance
Incentive.  Purchaser
shall deposit the number of shares of Series B Preferred Stock equal to 2% of
the total number of shares of Series B Preferred Stock issued hereunder (or
22,328 shares) into a separate escrow account (the “Performance Incentive
Shares”) to be held by the Escrow Agent as performance incentive to the
persons set forth in Schedule 6.15 (the
“Members of the
Management”) attached hereto pursuant to the terms and conditions of the
Series B Securities Escrow Agreement.  If the Company’s audited and
consolidated After-Tax Net Income and Earnings Per Share on a Fully-Diluted
Basis for the fiscal year ended December 31, 2009 meet the Target Number, the
Performance Incentive Shares shall be converted into Common Stock at the then
applicable Conversion Ratio (as defined in the Series B Certificate) and shall
be distributed to the Members of the Management within ten (10) Trading Days
after the date the Company is required to file its Annual Report on Form 10-K
for the applicable fiscal year with the Commission (after giving effect to any
extension pursuant to Rule 12b-25 of the Exchange Act).


    
      
         


      

      
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    6.16                 Exchange
Listing  The
Company agrees that (i) the Company shall list and trade its shares of Common
Stock on the Nasdaq Capital Market or the Nasdaq Global Market or any successor
market thereto(collectively, “Nasdaq”), or American
Stock Exchange or any successor market thereto (together with Nasdaq, each a
“National Stock
Exchange”) and shall include in the listing application the Conversion
Shares and Warrant Shares, and shall take such other action as necessary or
desirable to cause its Common Stock to be listed on such National Stock Exchange
as promptly as possible and shall in no event be later than January 31, 2010,
and (ii) the Company shall take all action reasonably necessary and desirable to
continue the listing and trading of its Common Stock on the National Stock
Exchange and shall comply in all material respects with the Company’s reporting,
filing and other obligations under the bylaws or rules of the National Stock
Exchange. At the Closing, the Company shall issue and deposit the number of
shares of Series B Preferred Stock equal to 2.5% of the number of shares Series
B Preferred Stock issued hereunder (collectively, the “Listing Shares”) into
an escrow account to be held by the Escrow Agent pursuant to the Series B
Securities Escrow Agreement.  In the event shares of Common Stock are
not listed and trading on a National Stock Exchange by January 31, 2010, the
Listing Shares shall be distributed to the Series B Purchasers on a pro-rata
basis no later than February 28, 2010.

    


    6.17                 Non
Compete.  The
Company and any Affiliated or related entities under the control of the Company
may not, be involved in any business or ventures which in any way may be deemed
to be competitive or have a similar nature in any way to the Company Business
unless such activity is fully within the Company.  Within thirty days
(30) following the Closing, the Company shall, and the Company shall cause its
Affiliated or related entities under the control of the Company to, enter into
non-compete agreements with its respective directors and officers with standard
and customary terms that are reasonably satisfactory to Purchaser.

    


    6.18                 Pledge of
Securities.  The
Company acknowledges and agrees that the Securities may be pledged by 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 Purchaser
effecting a pledge of Common Stock shall not 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. At Purchasers' expense, the
Company hereby agrees to execute and deliver such documentation as a pledgee of
the Common Stock may reasonably request in connection with a pledge of the
Common Stock to such pledgee by Purchaser.

    


    6.19                 Employment and Consulting
Contracts.  For
so long as any shares of Series B Preferred Stock shall remain
outstanding,  the Company shall obtain approval from the compensation
committee of the Board of Directors (the “Compensation
Committee”) (or prior to the establishment of the Compensation Committee,
the majority of the independent directors of the Board of Directors) that any
awards other than salary are customary, appropriate and reasonable for any
officer, director or consultants whose compensation is more than $100,000 per
annum.  This Section 6.19 does not apply to attorneys, accountants and
other persons who provide professional services to the Company.


    
      
         


      

      
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    6.20                 Appointment of Chief
Financial Officer.  The Company shall continue to employ a
chief financial officer who is proficient in English and Chinese, knowledgeable
with respect to the capital markets in the United States, familiar with SEC
reporting and the generally accepted accounting principles in the United States
and is reasonably acceptable to Purchaser.

    


    6.21                 Subsequent
Registrations.  Except
as set forth in Section 6.21 of the
Disclosure Schedule, the Company shall not file any registration statement
(other than on Form S-8) with the Commission with respect to any securities of
the Company prior to the time that all Conversion Shares and Warrant Shares are
registered pursuant to one or more effective registration statement(s) except as
permitted under the First Closing Transaction Documents, and the prospectus and
amendments forming a portion of such registration statement(s) is available for
resale of all Conversion Shares and Warrant Shares.

    


    6.22                 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 fourth Trading Day following such 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 as soon as
practicable following the Closing Date but in no event more than four (4)
Trading Day following such Closing Date, which Press Release and Form 8-K shall
be subject to prior review and comment by Purchaser.

    


    6.23                 Other
Restrictions.  For
so long as at least 25% of the shares of Series B Preferred Stock originally
purchased hereunder remain outstanding, neither the Company nor any
Subsidiaries, without the consent of the holders of at least 50% of the then
outstanding shares of Series B Preferred Stock (the “Majority Holders”),
shall (i) involve or engage in any business or undertake any activities that are
not part of, or related to, the business or along the same line of the Company
Business, (iii) sell, transfer, encumber with any Lien or otherwise dispose any
of any material portion of its properties, assets and rights to any person
except for sales to customers in the ordinary course of the Company
Business.

    


    6.24                 Reverse
Split. Within
the earlier of ninety (90) days of the Closing (the “Reverse Split
Deadline”), the Company shall obtain the necessary corporate and
shareholder approval and shall file an amendment to the Company’s Certificate of
Incorporation with the Secretary of State of the State of Delaware effecting one
or more reverse stock splits of the issued and outstanding Common Stock at a
reverse split ratio in each such reverse stock split to be approved by the
Company’s Board of Directors for the purposes of listing its Common Stock on a
National Stock Exchange (the “Reverse Split”);
provided that if Purchaser’s approval is required to effect such Reverse Split,
Purchaser shall not unreasonably withhold its approval.  If the
Reverse Split shall not have been effected on or prior to the Reverse Split
Deadline, the Company shall pay to Purchaser as liquidated damages, not as
penalty, an amount equal to one (1%) of the Purchase Price paid by Purchase
hereunder for each 30 day period the Reverse Split has not occurred, calculated
for each day that the Reverse Split shall not have become effective; provided, however, such
liquidated damages shall in no event exceed 15% of the purchase
price.


    
      
         


      

      
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    6.25                      Dividends.     Within
30 days of the Closing the Company shall issue and deliver to the Purchaser the
appropriate number of shares of Common Stock which shares represent the
dividends on  the Series A  Preferred Stock required to be
paid on December 1, 2008 pursuant to the Certificate of Designation for the
Series A Preferred Stock.

    


    6.26                      Escrow
Shares.   Within 30 days of the Closing the
Company  shall have taken all actions as shall be necessary to cause
the Escrow Agent to deliver to China Hand and its designees the 241,545 make
good escrow shares required to be delivered under the Series A Securities Escrow
Agreement and the Waiver dated as of the date hereof by and between China
Hand  and the Company.

    


    ARTICLE VII

    TERMINATION

     

    7.1                 Termination of
Agreement.  The
parties hereto may terminate this Agreement as provided below:

     

    (a)           Purchaser
and the Company may terminate this Agreement by mutual written consent at any
time prior to the Closing.

     

    (b)           Purchaser
may terminate this Agreement by giving written notice to the Company at any time
prior to the Closing in the event that (i) the Company is in breach of any
covenant contained in this Agreement and such breach is not cured within 30 days
after written notice from Purchaser of such breach; or (ii) the
representations and warranties of the Company contained in this Agreement shall
have been untrue on the date when made (or in the case of any representations or
warranties that are made as of a different date or period, as of such different
date or period), but only to the extent that such breach or inaccuracy of a
representation or warranty is not cured within 30 days after the date of the
applicable notice.

     

    (c)           The
Company may terminate this Agreement by giving written notice to Purchaser at
any time prior to the Closing in the event (i) Purchaser is in breach of
any covenant contained in this Agreement and such breach is not cured within 30
days after written notice from the Company of such breach unless such breach
involves the failure to pay the Purchase Price, in which case, the Purchaser
shall only have five days to cure such breach; or (ii) the representations
and warranties of Purchaser contained in this Agreement shall have been untrue
on the date when made (or in the case of any representations or warranties that
are made as of a different date or period, as of such different date or period),
but only to the extent that such breach or inaccuracy of a representation or
warranty is not cured within 30 days after the date of the applicable
notice.


    
      
         


      

      
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    7.2                 Effect of
Termination.  If
any party terminates this Agreement pursuant to Section 7.1, all obligations of
the parties hereunder will terminate without liability of any party to the other
party; provided, that the
provisions of Sections 6.4, 9.4, 9.5, 9.6, 9.7, 9.8, and 9.10 will survive
termination and remain in full force and effect; and provided, further, that no such
termination shall release any party of liability to any other party for damages
or otherwise by reason of the breach of any of the provisions of this
Agreement.

     

    ARTICLE VIII

    INDEMNITY

     

    8.1                 Survival.  The
representations and warranties of the parties contained in this Agreement shall
survive the Closing for a period of twenty four (24) months; provided, however,
that the representations and warranties contained in Section 4.2 (Capital Structure),
4.3 (Power,
Authorization and Validity), 4.4 (Noncontravention);
and 4.14 (Taxes), shall survive
the Closing for a period equal to the applicable statute of
limitations.  The covenants of the parties shall survive the Closing
until such time as they have been fully performed.

     

    8.2                 Indemnity.  The
Company hereby agrees to indemnify, defend and hold harmless Purchaser, its
respective Affiliates, successors and assigns, and each of their respective
officers, directors, employees and agents (the “Purchaser Indemnified
Parties”), from and against, and agrees to pay or cause to be paid to the
Purchaser Indemnified Parties all amounts equal to the sum of, any and all
claims, demands, costs, expenses, losses and other liabilities of any kind that
the Purchaser Indemnified Parties may incur or suffer (including without
limitation all reasonable legal fees and expenses) which arise or result from
any breach of or failure by the Company to perform any of its representations,
warranties, covenants or agreements in this Agreement.  The rights of
Purchaser hereunder shall be in addition to, and not in lieu of, any other
rights and remedies which may be available to it by Law.

     

    (b)           Purchaser
hereby agrees to indemnify, defend and hold harmless the Company, its respective
Affiliates, successors and assigns, and each of their respective officers,
directors, employees and agents (the “Company Indemnified
Parties” and, together with the Purchaser Indemnified Parties, the “Indemnified
Parties”), from and against, and agrees to pay or cause to be paid to the
Company Indemnified Parties all amounts equal to the sum of, any and all claims,
demands, costs, expenses, losses and other liabilities of any kind that the
Company Indemnified Parties may incur or suffer (including without limitation
all reasonable legal fees and expenses) which arise or result from any breach of
or failure by Purchaser to perform any of its representations, warranties,
covenants or agreements in this Agreement.  The rights of the Company
hereunder shall be in addition to, and not in lieu of, any other rights and
remedies which may be available to it by Law.  Notwithstanding
anything to the contrary provided in the foregoing, the maximum aggregate
liability of Purchaser pursuant to its indemnification obligations under this
Section 8.2(b) shall not exceed the Purchase Price paid by Purchaser
hereunder.

     

    (c)           No
Party shall be entitled to indemnification pursuant to Section 8.2, unless and
until the aggregate amount of all damages to such Party with respect to such
matters for which indemnification is available exceeds $100,000, at which time,
subject to the foregoing cap, it shall be entitled to indemnification for the
total amount of such damages.


    
      
         


      

      
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    8.3                 Procedures.  If
a third party shall notify an Indemnified Party with respect to any matter that
may give rise to a claim for indemnification under the indemnity set forth above
in Section 8.2, the procedure set forth below shall be
followed.

     

    (a)           Notice.  The
Indemnified Party shall give to the party providing indemnification (the “Indemnifying Party”)
written notice of any claim, suit, judgment or matter for which indemnity may be
sought under Section 8.2 promptly but in any event within 30 days after the
Indemnified Party receives notice thereof; provided, however, that failure
by the Indemnified Party to give such notice shall not relieve the Indemnifying
Party from any liability it shall otherwise have pursuant to this Agreement
except to the extent that the Indemnifying Party is actually prejudiced by such
failure.  Such notice shall set forth in reasonable detail, if known,
(i) the basis for such potential claim and (ii) the dollar amount of
such claim.  The Indemnifying Party shall have a period of 20 days
within which to respond thereto.  If the Indemnifying Party does not
respond within such 20-day period, the Indemnifying Party shall be deemed to
have accepted responsibility for such indemnity.

     

    (b)           Defense of
Claim.  With respect to a claim by a third party against an
Indemnified Party for which indemnification may be sought under this Agreement,
the Indemnifying Party shall have the right, at its option, to be represented by
counsel of its choice and to assume the defense or otherwise control the
handling of any claim, suit, judgment or matter for which indemnity is sought,
which is set forth in the notice sent by the Indemnified Party, by notifying the
Indemnified Party in writing to such effect within 20 days of receipt of such
notice; provided, however, that the
Indemnified Party shall have the right to employ counsel to represent it if, in
the Indemnified Party's reasonable judgment based upon the advice of counsel, it
is advisable in light of the separate interests of the Indemnified Party to be
represented by separate counsel, and in that event the fees and expenses of one
such separate counsel shall be paid by the Indemnifying Party.  If the
Indemnifying Party does not give timely notice in accordance with the preceding
sentence, the Indemnifying Party shall be deemed to have given notice that it
does not wish to control the handling of such claim, suit or
judgment.  In the event the Indemnifying Party elects (by notice in
writing within such 20-day period) to assume the defense of or otherwise control
the handling of any such claim, suit, judgment or matter for which indemnity is
sought, the Indemnifying Party shall indemnify and hold harmless the Indemnified
Party from and against any and all fees (including reasonable attorneys' fees,
accountants, consultants and engineering fees) and expenses incurred by the
Indemnifying Party prior to such election.  In the event that the
Indemnifying Party does not assume the defense or otherwise control the handling
of such matter, the Indemnified Party may retain counsel, as an indemnification
expense, to defend such claim, suit, judgment or matter.

     

    (c)           Final
Authority.  Each of the parties shall cooperate in the defense
of any such claim or litigation.  In connection with any claim, suit
or other proceeding with respect to which the Indemnifying Party has assumed the
defense or control, the Indemnifying Party will not consent to the entry of any
judgment or enter into any settlement with respect to any matter which does not
include a provision whereby the plaintiff or claimant in the matter releases the
Indemnified Party from all liability with respect thereto, without the written
consent of the Indemnified Party.  In connection with any claim, suit
or other proceeding with respect to which the Indemnifying Party has not assumed
the defense or control, the Indemnified Party may not compromise or settle such
claim without the consent of the Indemnifying Party, which shall not be
unreasonably withheld.


    
      
         


      

      
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    ARTICLE
IX

    MISCELLANEOUS

     

    9.1                 Legend.  The
Company and Purchaser acknowledge and agree that each certificate representing
the Securities may be endorsed with the following legends:

     

    (a)           The
securities represented by this certificate have not been registered under the
Securities Act of 1933, as amended (the "Act"), or under the
securities laws of certain states. These securities are subject to restrictions
on transferability and resale and may not be transferred or resold except as
permitted under the Act and the applicable state securities laws, pursuant to
registration or exemption therefrom. Investors should be aware that they may be
required to bear the financial risks of this investment for an indefinite period
of time. The issuer of these securities may require an opinion of counsel in
form and substance satisfactory to the issuer to the effect that any proposed
transfer or resale is in compliance with the Act and any applicable state
securities laws.

     

    (b)           Any
other legends required by applicable Laws.

     

    The
Company may instruct its transfer agent not to register the transfer of the
Securities, unless the conditions specified in the foregoing legends are
satisfied.

     

    9.2                 Removal of Legend and
Transfer Restrictions.  Any
legend endorsed on a certificate pursuant to Section 9.1 and the stop transfer
instructions with respect to such Securities shall be removed and the Company
shall issue a certificate without such legend to the holder thereof (a) if such
Securities are registered under the Securities Act and a prospectus meeting the
requirements of Section 10 of the Securities Act is available, (b) if such
legend may be properly removed under the terms of Rule 144 promulgated under the
Securities Act, or (c) if such holder provides the Company with an opinion of
counsel for such holder, reasonably satisfactory to legal counsel for the
Company to the effect that a sale, transfer or assignment of such Securities may
be made without registration.

     

    9.3                 Waivers and
Amendments.  All
waivers and amendments hereunder must be made in writing, and failure of any
party at any time to require another party's performance of any obligation under
this Agreement shall not affect the right subsequently to require performance of
that obligation.  Any waiver of any breach of any provision of this
Agreement shall not be construed as a waiver of any continuing or succeeding
breach of such provision or a waiver or modification of any other
provision.

     

    
      
         


      

      
        36

        
          

        

      

      
         


      

    

     

    9.4                 Governing
Law.  This
Agreement shall be governed in all respects by the laws of the State of New York
without regard to the principles of conflicts of law thereof.

     

    9.5                 Dispute
Resolution.

     

    (a)           Subject
to Section 9.5(b), any dispute, controversy or claim relating to or arising
under, out of or in connection with this Agreement or the validity,
enforceability, construction, performance or breach of this Agreement (“Dispute”) shall be
determined by arbitration administered by the American Arbitration Association
(“AAA”) in
accordance with its International Arbitration Rules (“Rules”) then in force
on the date of commencement of the arbitration.  The arbitration shall
be conducted by a panel of three (3) arbitrators appointed in accordance with
the Rules unless the parties otherwise agree that the arbitration may be
conducted by a single arbitrator appointed in accordance with the
Rules.  The place of arbitration shall be New York, New York, and the
language of the arbitration shall be English.  The arbitrators shall
determine the Dispute and render a final award in accordance with the internal
laws of the State of New York.  The award rendered shall be final and
binding on the parties.  The parties agree that any award shall be
enforceable pursuant to the United Nations Convention on the Recognition and
Enforcement of Foreign Arbitral Awards.  The costs of arbitration,
including administrative fees and fees of arbitrators, shall be shared equally
by the parties unless otherwise specified by the arbitrators.  Each
party shall bear the cost of its own attorneys’ and experts’ fees; provided that
the arbitrators may in their discretion award to the prevailing party the costs
and expenses incurred by the prevailing party in connection with the arbitration
proceeding.

     

    (b)           The
parties recognize that irreparable injury may result from a breach of this
Agreement and that money damages would be inadequate to fully remedy the injury
resulting from such breach.  In order to prevent such injury, the
arbitrators shall have the power to grant temporary or permanent injunctive or
other equitable relief.  Prior to the appointment of the arbitrators a
party may, notwithstanding any other provision of this Agreement, seek temporary
injunctive relief in any court of competent jurisdiction (“Temporary
Relief”).  Any party seeking Temporary Relief shall (if
arbitration has not been commenced) simultaneously commence
arbitration.  Such court ordered Temporary Relief shall not continue
beyond the entry of any temporary or permanent injunctive relief granted by the
arbitrators or any final award by the arbitrators, whichever occurs
first.

     

    9.6                 Successors and
Assigns.  Neither
this Agreement nor any right or obligation hereunder is assignable in whole or
in part, whether by operation of Law or otherwise, by any party without the
express written consent of the other party hereto and any such attempted
assignment shall be void and unenforceable.  Notwithstanding the
foregoing, Purchaser may transfer or assign this Agreement or any right or
obligation hereunder to an Affiliate or Vicis Capital Master Fund (“Vicis”),
which shall not be deemed an Affiliate of China Hand solely by virtue of this
Section 9.6 and Vicis may assign its rights to any of its affiliates, at any
time prior to or after the Closing.  This Agreement and the rights and
obligations hereunder shall be binding upon, and shall inure to the benefit of,
the parties hereto and their respective successors or assignees, and no other
person shall acquire or have any rights under or by virtue of this
Agreement.

     

    
      
        
        

      

      
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    9.7                 Entire
Agreement.  This
Agreement, the exhibits hereto, each of the other Transaction Documents, and the
other documents delivered pursuant hereto and thereto, constitute the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof.

     

    9.8                 Notices,
etc.  All
notices, requests, demands, and other communications under this Agreement shall
be in writing and delivered in person or sent by facsimile or sent by certified
mail, postage prepaid, or by nationally recognized courier service and properly
addressed as follows:

     

    to the
Company:

    


    China New
Energy Group

    17th
Floor, HongJi Building, JinWei Road

    HeBei
District, Tianjin, China 

    Attn:
_________________________

    Tel. No.:
__________________________

    Fax No.:
___________________________

    Email:

    


    with a
copy to, which shall not constitute notice hereunder,

    


    Pillsbury
Winthrop Shaw Pittman LLP

    2300 N
Street , NW

    Wahsington
DC 20037-1122

    Attn.:  Louis
A. Bevilacqua

    Tel.
No.:   (202) 663-8158

    Fax
No.::  (202) 663-8007

    Email:
louis.bevilacqua@pillsburylaw.com

    


    to
Purchaser:

    


    China
Hand Fund I, LLC

    558 Lime
Rock Road

    Lakeville,
CT  06039

    Attn:
Mary Fellows

    Tel. No.:
860-435-7000

    Fax No.:
860-435-6540

    Email:
mfellows@kuhnsbrothers.com

    


    with a
copy to, which shall not constitute notice hereunder,

     

    
      
        
        

      

      
        38

        
          

        

      

      
        
        

      

    

    


    Guzov
Ofsink, LLC

    600
Madison Avenue, 14th Floor

    New York,
New York  10022 USA

    Attn:
Darren L. Ofsink, Esq.

    Tel.:
(212) 371-8008

    Fax No.;
(212) 688-7273

    Email:
dofsink@golawintl.com

    


    Any party
hereto may from time to time change its address for the purpose of notices to
that party by a similar notice specifying a new address, but no such change
shall be deemed to have been given until it is actually received by the party
sought to be charged with its contents.  All notices and other
communications required or permitted under this Agreement which are addressed as
provided in this Section 9.8 if delivered personally, by facsimile or by
nationally recognized courier service, shall be effective upon delivery; and, if
delivered by mail, shall be effective three days following deposit in the United
States mail, postage prepaid.

     

    9.9                 Severability.  In
case any provision of this Agreement shall be declared invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby.

     

    9.10                 Expenses.   The
legal fees and other expenses incurred by the parties with respect to this
Agreement and the other Transaction Documents, and the transactions contemplated
hereby and thereby, shall be paid for by the Company.  At the Closing,
Purchaser may deduct from the Purchase Price the aggregate amount of such fees
and expenses incurred by Purchaser in accordance with Section
3.1(j).  In the event that this Agreement is terminated pursuant to
Sections 7.1(b), the Company will promptly pay to Purchaser, upon demand
therefor, the amount of such fees and expenses incurred by
Purchaser.  Notwithstanding the foregoing, in no event shall the fees
and expenses payable by the Company pursuant to this Section 9.10 exceed
$100,000.

     

    9.11                 Titles and
Subtitles.  The
titles of the paragraphs and subparagraphs of this Agreement are for convenience
of reference only and are not to be considered in construing this
Agreement.

     

    9.12                 Counterparts; Facsimile
Signatures.  This
Agreement may be executed in any number of counterparts, each of which shall be
an original, but all of which together shall constitute one
instrument.  This Agreement may be executed and delivered by facsimile
signatures.

     

    9.13                 No Strict
Construction.  The
parties hereto have participated jointly in the negotiation and drafting of this
Agreement.  In the event an ambiguity or question of intent or
interpretation arises, this Agreement shall be construed as if drafted jointly
by the parties hereto, and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any of the
provisions of this Agreement.

     

     [Signatures follow on the next
page]


    
      
         


      

      
        39

        
          

        

      

      
         


      

    


    IN WITNESS WHEREOF, the
parties hereto have executed this Agreement as of the day and year first above
written.

     

    
      
        
          	
                  THE
      COMPANY:

                
	 
      
	
                  CHINA
      NEW ENERGY GROUP COMPANY

                
	 
      
	
                  By:

                
	 
      
	
                  /s/ James Li

                
	
                  Name:  James
      Li

                
	
                  Title:  
      Authorized  Signatory

                
	 
      
	
                  PURCHASER:

                
	 
      
	
                  CHINA
      HAND FUND I, LLC

                
	 
      
	
                  By:

                
	 
      
	
                  /s/ John D. Kuhns

                
	
                  Name:  John
      D. Kuhns

                
	
                  Title:   
      Member-Manager

                


        

      

    

     

    
      [Signature
Page to Securities Purchase Agreement]

       

    

    
      
        
        

         


      

      
        
        

        
          

        

      

      
         


      

    


    EXHIBIT
A

     

    CERTAIN
DEFINITIONS

     

    For
purposes of the Agreement to which this Exhibit A is
attached, and for purposes of the other Transaction Documents, unless otherwise
specifically defined therein, the following terms have the following
meanings:

     

    “AAA” has the meaning
set forth in Section 9.5(a).

     

    “Affiliate” means,
with respect to any Person, any other Person directly or indirectly controlling,
directly or indirectly controlled by, or under direct or indirect common control
with, such Person or a member of such Person's immediate family; or if such
Person is a partnership, any general partner of such Person or a Person
controlling any such general partner.  For purposes of this
definition, "control" (including "controlled by" and "under common control
with") shall mean the power, directly or indirectly, to direct or cause the
direction of the management and policies of such Person whether through the
ownership of voting securities, by contract or otherwise.

     

    “After-Tax Net Income”
means the Company’s income after taxes determined in accordance with GAAP as
reported in the Company’s Annual Report on Form 10-K for fiscal year
2009.

     

    “Agreement” has the
meaning set forth in the Preamble.

     

    “Balance Sheet” has
the meaning set forth in Section 4.5.

     

    “Balance Sheet Date”
has the meaning set forth in Section 4.7(a).

     

    “Business Day” means
any day other than a Saturday, Sunday or other day on which the national or
state banks located in the State of New York are authorized to be
closed.

     

    “CERCLA” means the
Comprehensive Environmental Response Compensation and Liability Act
of 1980, as amended, 42 U.S.C. § 9601 et seq.

     

    “Certificates” has the
meaning set forth in Section 1.1.

     

    “Closing” has the
meaning set forth in Section 2.1.

     

    “Closing Date” has the
meaning set forth in Section 2.1.

     

    “Code” means the
Internal Revenue Code of 1986, as amended.

     

    “Commission” means the
Securities and Exchange Commission of the United States of America.

     

    “Common Stock” has the
meaning set forth in Section 4.2(a).

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    “Company” has the
meaning set forth in the Preamble.

     

    “Company Account”
means an account of the Company designated in a written notice delivered to
Purchaser at least one Business Day prior to the date of any required payment by
Purchaser to the Company under this Agreement.

     

    “Company Business”
means the business of the Company and its Subsidiaries as currently conducted
and as proposed to be conducted.

     

    “Company Indemnified
Parties” has the meaning set forth in Section 8.2(b).

     

    "Company Intellectual
Property” means all Intellectual Property in existence as of the Closing
Date that is owned by or exclusively licensed to the Company or any of its
Subsidiaries and all other Intellectual Property in existence as of the Closing
Date that is Used in or, to the Knowledge of the Company, necessary for the
conduct of the Company Business, excluding commercially available off-the-shelf
software licenses and any Intellectual Property necessary in connection with any
equipment, machinery or other asset that the Company or any of its Subsidiaries
must purchase from third parties.

     

    “Contracts” means all
contracts, agreements, commitments and understandings relating to the Company
Business or to which the Company is a party or has an interest, whether oral or
written, including, but not limited to, purchase, sale or other commitments,
distributorship, franchise or similar agreements, patent or trademark licensing
agreements (either as licensor or licensee), lease or sublease agreements
(either as lessor or lessee), equipment or vehicle leases, employment agreements
(including, but not limited to, agreements entered into by employees of the
Company relating to the transfer and/or safeguarding of Intellectual Property
rights), consulting agreements, union or collective bargaining agreements,
guarantees, loan agreements, non-competition agreements, severance agreements,
letters of credit, joint venture, limited liability company or partnership
agreements, and supply or requirements contracts.

     

    “Conversion Shares”
means collectively the shares of Common Stock issued or issuable upon conversion
of the Series B Preferred Stock issued or issuable hereunder.

     

    “Disclosure Schedules”
means the exceptions to the Company’s representations and warranties made in
Article IV of this Agreement, set forth on the schedules attached hereto as
Exhibit
G.

     

    “Dispute” has the
meaning set forth in Section 9.5.

     

    “Employment
Agreements” has the meaning set forth in Section 4.16(b).

     

    “Environmental Law”
means all applicable laws (whether imposed by federal, state, local or foreign
statutes, regulation, rules, codes, licenses, permits, administrative orders,
ordinances, judicial orders or otherwise) relating to protection of the
environment, prevention, minimization or remediation of pollution, or control
and tracking of any hazardous substance, hazardous waste or other
waste.  Environmental Law shall include without limitation CERCLA; the
Resource Conservation and Recovery Act of 1976, 42 U.S.C. § 6901 et seq.; the Clean Water Act,
33 U.S.C. § 1311, et
seq.; the Clean Air Act, 42 U.S.C. § 7401-7642; the Toxic
Substances Control Act, 15 U.S.C. § 2601 et seq.; the Federal
Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. § 136-136y, the
Oil Pollution Act; the Emergency Planning and Community Right-to-Know Act of
1986, 42 U.S.C. § 1101, et seq. and similar or
related state, local or foreign laws including without limitation any applicable
national, provincial and local environmental laws and regulations in the
People’s Republic of China.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    “ERISA” means the
Employee Retirement Income Security Act of 1974, as amended, and the rules and
regulations promulgated thereunder.

     

    “Exchange Act” has the
meaning set forth in Section 4.25(a).

     

    “Financial Statements”
has the meaning set forth in Section 4.7(a).

     

    “GAAP” means United
States generally accepted accounting principles, consistently
applied.

     

    “Governmental
Authority” means any: (i) nation, state, commonwealth, province,
territory, county, municipality, district or other jurisdiction of any nature;
(ii) federal, state, local, municipal, foreign or other government; or (iii)
governmental or quasi-governmental authority of any nature (including any
governmental division, department, agency, commission, instrumentality,
official, organization, unit, body or entity and any court or other
tribunal).

     

    “Indemnified Parties”
has the meaning set forth in Section 8.2(b).

     

    “Indemnifying Party”
has the meaning set forth in Section 8.3(a).

     

    "Intellectual
Property" means any and all of the following and all rights in, arising
out of or associated therewith:  (i) all United States,
international and foreign patents and applications therefor and all reissues,
divisions, renewals, extensions, provisionals, continuations and
continuations-in-part thereof; (ii) all inventions (whether patentable or
not), invention disclosures, and improvements, all other rights corresponding
thereto throughout the world, (iii) trade secrets, proprietary information,
know how, technology, technical data and customer lists, and all documentation
relating to any of the foregoing; (iv) all copyrights, copyright
registrations and applications therefor, and all other rights corresponding
thereto throughout the world; (v) all industrial designs and any
registrations and applications therefor throughout the world; (vi) all
domain names, uniform resource locators (“URLs”) and other
names and locators associated with the Internet; (vii) all trade names,
logos, common law trademarks and service marks, trademark and service mark
registrations and applications therefor throughout the world; (viii) all
databases and data collections and all rights therein throughout the world;
(ix) all moral and economic rights of authors and inventors, however
denominated, throughout the world; (x) all software; (xi) all content, text,
graphics, images, audio, video, data, and software included on or used to
operate and maintain the Company’s websites, including all data, documentation,
ASP, HTML, DHTML, SHTML, and XML files, cgi and other scripts, all programming
code (source and object), subscriber and other data, archives, and server and
traffic logs relating to the Company’s websites; (xii) all historical or
archived data relating to any of the Company’s websites and (xiii) any similar
or equivalent rights to any of the foregoing anywhere in the world.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    “IRS” means the
Internal Revenue Service.

     

     “Knowledge,” when used
to refer to the Company, means the actual knowledge of any director of the Board
of Directors of the Company or any Subsidiary of the Company and any officers of
the Company or any Subsidiary of the Company, as well as any other knowledge
which such persons would have possessed had they made reasonable inquiry of
appropriate employees, agents, or books and records of the Company with respect
to the matter in question.

     

    “Law” means any law,
statute, code, ordinance, regulation, rule, Permit, rules of common law,
standards, directives, guidelines and the like, including any judicial and
administrative interpretations thereof, of any Governmental Authority, including
all judicial and administrative Orders.

     

    “Leased Property” or
“Leased
Properties” has the meaning set forth in Section 4.12(b).

     

    “Liens” in respect of
any property or assets, shall mean any encumbrance or title defect of whatever
kind or nature, regardless of form, whether or not registered or registrable and
whether or not consensual or arising by Law, including, but not limited to, any
lien, mortgage, charge, pledge, security interest, assignment, lease, option,
easement, servitude, right-of-way, conditional sales contract, encroachment,
restrictive covenant, right of first refusal, right of use or any other right or
claim of any kind or nature whatsoever (or any agreement to grant or furnish any
of the foregoing) which affects ownership or possession of, or title to, or any
interest in, or the right to use or occupy such property or assets.

     

    “Material Adverse
Change” means a change which would have a Material Adverse
Effect.

     

    “Material Adverse
Effect” means any change in or effect that, either individually or in the
aggregate with all other changes or effects, (i) is or is reasonably likely to
be materially adverse to the assets, business, prospects, results of operations,
or condition (financial or otherwise) of the Company, taken as a whole, or
(ii) would materially impair the ability of the Company or Purchaser to (A)
consummate the transactions contemplated by this Agreement or any Transaction
Documents or (B) perform its respective obligations hereunder or
thereunder.

     

    “Material Contract”
has the meaning set forth in Section 4.14(b).

     

    “Order” means any
order, judgment, ruling, injunction, assessment, award, decree or writ of any
Governmental Authority.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    “Owned Real Property”
or “Owned Real
Properties” has the meaning set forth in Section 4.12(a).

     

    “Party Confidential
Information” has the meaning set forth in Section 6.4.

     

    “PBGC” means the
Pension Benefit Guaranty Corporation.

     

    “Permit” means any
license, permit, authorization, certificate of authority, qualification or
similar document or authority that has been issued or granted by any
Governmental Authority.

     

    “Permitted Liens”
means (i) Liens imposed by Law, such as carrier's, warehousemen's and
mechanic's liens and other similar liens, which arise in the ordinary course of
business with respect to obligations not yet due or being diligently contested
in good faith by appropriate proceedings and for which the Company shall have
set aside adequate reserves on its books as required by GAAP, (ii) Liens for
Taxes that are not yet due, or that are described in the Disclosure Schedules
and are being diligently contested in good faith by appropriate proceedings and
for which the Company shall have set aside adequate reserves on its books as
required by GAAP, (iii) applicable Laws regulating the use or occupancy of real
property or the character, dimensions or locations of the improvements thereon,
including, without limitation, building restrictions and zoning laws, so long as
the same do not materially impair the value of such property or the operation of
the Company’s business as currently conducted, and (iv) covenants, consents,
reservations, servitudes, restrictions, easements, rights of way and other
similar rights for utilities, public streets and roadways, so long as the same
do not materially impair the value of such property or the operation of the
Company’s business as currently conducted.

     

    “Person” means any
individual, corporation, partnership, joint venture, limited liability company,
trust, unincorporated organization or Governmental Authority.

     

    “Plan” has the meaning
set forth in Section 4.2(b).

     

    “Preferred Stock” has
the meaning set forth in Section 4.2(a).

     

    “Purchase Price” has
the meaning set forth in Section 1.2.

     

    “Purchaser” has the
meaning set forth in the Preamble.

     

    “Purchaser Indemnified
Parties” has the meaning set forth in Section 8.2(a).

     

    “Real Property” means
the Leased Properties and the Owned Real Properties.

     

    “Registration Rights
Agreement” has the meaning set forth in Section 1.4.

     

    “Representatives” has
the meaning set forth in Section 6.2.

     

    “Rights Agreements”
has the meaning set forth in Section 1.4.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    “Rules” has the
meaning set forth in Section 9.5(a).

     

    “SEC Documents” has
the meaning set forth in Section 4.25(a).

     

    “Securities” means
collectively Series B Shares, Warrants, Conversion Shares and Warrant
Shares.

     

    “Securities Act” means
the Securities Act of 1933, as amended, and the regulations promulgated
thereto.

     

    “Series B Certificate”
has the meaning set forth in Section 1.1.

     

    “Series B Shares” has
the meaning set forth in Section 1.2.

     

    “Subsidiary” means,
with respect to the Company, any other Person with respect to which the Company
possesses direct or indirect power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting
securities, by contract, or otherwise; provided, that, for purposes of this
Agreement and each of the other Transaction Documents, as of the date of this
Agreement, Willsky and its Subsidiary should be deemed direct and indirect
Subsidiaries of the Company.

     

    “Tax” or “Taxes” means all
federal, state, local, foreign or other governmental taxes, assessments, duties,
fees, levies or similar charges of any kind imposed by a Governmental Authority,
including, but not limited to, all income, profit, gross receipts, franchise,
excise, property, use, intangibles, sales, payroll, social security, employment,
value added, withholding and other taxes, and including all interest, penalties
and additional amounts imposed with respect to such amounts, whether as a
primary obligor or as a result of being a “transferee” (within the meaning of
Section 6901 of the Code or any other applicable Law) of another Person or as a
result of being a member of an affiliated, consolidated, unitary or combined
group.

     

    “Tax Return” means any
return, declaration, report, information return, statement, notice or other
document filed, or required to be filed, with any Governmental Authority
relating to Taxes, including any schedule or attachment thereto, and including
any amendment thereof.

     

    “Temporary Relief” has
the meaning set forth in Section 9.5(b).

     

    “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.

     

    “Transaction
Documents” means collectively, this Agreement, the Amended and Restated
Registration Rights Agreement, the Series B Securities Escrow Agreement, the
Closing Escrow Agreement and the Series B Certificate and the certificates,
documents and instrument related to or contemplated by each of the foregoing
agreements.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    “Use” or “Used” means to use,
make, have made, develop, market, sell, offer to sell, import, transfer,
practice, license (or sublicense), transmit, broadcast, reproduce, perform,
display, modify, create derivative works based upon, distribute (electronically
or otherwise) and disclose.

     

    “Warrants” has the
meaning set forth in Section 1.2.

     

    “Warrant Shares” has
the meaning set forth in Section 1.2.


    
      
         


      

      
        
        

        
          

        

      

      
         


      

    


    EXHIBIT
B

     

    CERTIFICATE
OF DESIGNATION FOR

     

    SERIES
B CONVERTIBLE PREFERRED STOCK

     


    
      
         


      

      
        
        

        
          

        

      

      
         


      

    


    EXHIBIT
C

     

    FORM
OF WARRANT


    
      
         


      

      
        
        

        
          

        

      

      
         


      

    


    EXHIBIT
D

     

    AMENDED
AND RESTATED REGISTRATION RIGHTS AGREEMENT


    
      
         


      

      
        
        

        
          

        

      

      
         


      

    


    EXHIBIT
E

     

    SERIES
B SECURITIES ESCROW AGREEMENT


    
      
         


      

      
        
        

        
          

        

      

      
         


      

    


    EXHIBIT
F

     

    CLOSING
ESCROW AGREEMENT


    
      
         


      

      
        
        

        
          

        

      

      
         


      

    


    EXHIBIT
G

     

    DISCLOSURE
SCHEDULES


    
      
         


      

      
        
        

        
          

        

      

      
         


      

    


    LIST
OF SCHEDULES