SERIES
      A CONVERTIBLE PREFERRED STOCK SECURITIES PURCHASE
      AGREEMENT

     

    by
      and
      between

     

    CHINA
      NEW ENERGY GROUP COMPANY

     

    and

     

    CHINA
      HAND FUND I, LLC 

     

    August
      8,
      2008

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Table
      of Contents

    


    
      	
              ARTICLE
                I AUTHORIZATION AND SALE OF SECURITIES

            	
              1

            
	 	 	 
	
              1.1

            	
              Authorization.

            	
              1

            
	
              1.2

            	
              Issuance
                and Sale of Shares and Warrants.

            	
              1

            
	
              1.3

            	
              Payment
                of the Purchase Price

            	
              2

            
	
              1.4

            	
              Stockholder
                Rights

            	
              2

            
	
              1.5

            	
              Exclusivity

            	
              2

            
	 	 
	
              ARTICLE
                II THE CLOSING

            	
              3

            
	 	 
	
              2.1

            	
              The
                Closings

            	
              3

            
	
              2.2

            	
              Deliveries
                at the Closing

            	
              3

            
	 	 
	
              ARTICLE
                III CONDITIONS TO THE CLOSING

            	
              5

            
	 	 
	
              3.1

            	
              Conditions
                to Obligation of Purchaser

            	
              5

            
	
              3.2

            	
              Conditions
                to Obligations of the Company

            	
              7

            
	 	 
	
              ARTICLE
                IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY

            	
              7

            
	 	 
	
              4.1

            	
              Organization
                and Good Standing

            	
              8

            
	
              4.2

            	
              Capital
                Structure

            	
              8

            
	
              4.3

            	
              Power,
                Authorization and Validity

            	
              9

            
	
              4.4

            	
              Noncontravention

            	
              9

            
	
              4.5

            	
              Title
                to Personal Property and Assets

            	
              10

            
	
              4.6

            	
              Subsidiaries

            	
              11

            
	
              4.7

            	
              Financial
                Statements

            	
              11

            
	
              4.8

            	
              Absence
                of Certain Changes and Events

            	
              12

            
	
              4.9

            	
              Compliance
                with Laws

            	
              14

            
	
              4.10

            	
              Permits

            	
              14

            
	
              4.11

            	
              Real
                Property

            	
              14

            
	
              4.12

            	
              Intellectual
                Property

            	
              15

            
	
              4.13

            	
              Contracts

            	
              16

            
	
              4.14

            	
              Taxes

            	
              18

            
	
              4.15

            	
              Employees

            	
              19

            
	
              4.16

            	
              Employee
                Benefit Plans

            	
              20

            
	
              4.17

            	
              Insurance

            	
              20

            
	
              4.18

            	
              Compliance
                with Environmental Requirements

            	
              21

            
	
              4.19

            	
              Litigation

            	
              21

            
	
              4.20

            	
              No
                Brokers

            	
              21

            
	
              4.21

            	
              Solvency

            	
              21

            
	
              4.22

            	
              Related
                Party Transactions

            	
              21

            
	
              4.23

            	
              Disclosure

            	
              22

            
	
              4.24

            	
              Securities
                Act.

            	
              22

            
	
              4.25

            	
              Use
                of Proceeds.

            	
              23

            
	
              4.26

            	
              SAFE
                Compliance.

            	
              23

            
	 	 
	
              ARTICLE
                V REPRESENTATIONS AND WARRANTIES OF PURCHASER

            	
              23

            
	 	 
	
              5.1

            	
              Investment
                for Own Account

            	
              23

            
	
              5.2

            	
              No
                Registration

            	
              24

            
	
              5.3

            	
              Accredited
                Investor

            	
              24

            
	
              5.4

            	
              Power
                and Authority

            	
              24

            
	
              5.5

            	
              No
                Approvals.

            	
              24

            
	
              5.6

            	
              Noncontravention.

            	
              24

            
	
              5.7

            	
              Disclosure
                of Information.

            	
              25

            


    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    
      	
              ARTICLE
                VI CERTAIN COVENANTS

            	
              25

            
	 	 
	
              6.1

            	
              Regulatory
                and Other Approvals

            	
              25

            
	
              6.2

            	
              Information

            	
              25

            
	
              6.3

            	
              Information
                Updates

            	
              26

            
	
              6.4

            	
              Conduct
                of the Company.

            	
              26

            
	
              6.5

            	
              Confidentiality

            	
              26

            
	
              6.6

            	
              Reservation
                of Shares.

            	
              27

            
	
              6.7

            	
              Compliance
                with Laws.

            	
              27

            
	
              6.8

            	
              Employment
                Agreements.

            	
              27

            
	
              6.9

            	
              [Intentionally
                omitted]

            	
              27

            
	
              6.10

            	
              Corporate
                Existence; No Conflicting Agreements.

            	
              27

            
	
              6.11

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

            	
              27

            
	
              6.12

            	
              [intentionally
                omitted.]

            	
              28

            
	
              6.13

            	
              Auditor.

            	
              28

            
	
              6.14

            	
              Investor
                and Public Relations.

            	
              28

            
	
              6.15

            	
              Directors.

            	
              28

            
	
              6.16

            	
              Committees
                of the Board.

            	
              28

            
	
              6.17

            	
              Right
                of First Refusal.

            	
              29

            
	
              6.18

            	
              Deliveries
                from Escrow Based on Income Targets.

            	
              30

            
	
              (ii)
                the Company’s audited consolidated After-Tax Net Income for the fiscal
                year ending December 31, 2009 shall be at least $6.0
                million

            	
              31

            
	
              (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,

            	
              31

            
	
              6.19

            	
              Performance
                Incentive.

            	
              33

            
	
              6.20

            	
              Exchange
                Listing

            	
              33

            
	
              6.21

            	
              Non
                Compete.

            	
              33

            
	
              6.22

            	
              Lock-Up
                Agreement.

            	
              34

            
	
              6.23

            	
              Pledge
                of Securities.

            	
              34

            
	
              6.24

            	
              Employment
                and Consulting Contracts.

            	
              34

            
	
              6.25

            	
              Appointment
                of Chief Financial Officer.

            	
              34

            
	
              6.26

            	
              [intentionally
                omitted.]

            	
              34

            
	
              6.27

            	
              Subsequent
                Registrations.

            	
              34

            
	
              6.28

            	
              Disclosure
                of Transaction.

            	
              34

            
	
              6.29

            	
              Other
                Restrictions.

            	
              35

            
	
              6.30

            	
              Reverse
                Split

            	
              35

            
	 	 
	
              ARTICLE
                VII

            	
              35

            
	 	 
	
              7.1

            	
              Termination
                of Agreement

            	
              35

            
	
              7.2

            	
              Effect
                of Termination

            	
              36

            
	 	 
	
              ARTICLE
                VIII INDEMNITY

            	
              36

            
	 	 
	
              8.1

            	
              Survival

            	
              36

            
	
              8.2

            	
              Indemnity

            	
              36

            
	
              8.3

            	
              Procedures

            	
              37

            
	 	 
	
              ARTICLE
                IX MISCELLANEOUS

            	
              38

            
	 	 
	
              9.1

            	
              Legend

            	
              38

            
	
              9.2

            	
              Removal
                of Legend and Transfer Restrictions

            	
              39

            
	
              9.3

            	
              Waivers
                and Amendments

            	
              39

            
	
              9.4

            	
              Governing
                Law

            	
              39

            
	
              9.5

            	
              Dispute
                Resolution

            	
              39

            
	
              9.6

            	
              Successors
                and Assigns

            	
              40

            
	
              9.7

            	
              Entire
                Agreement

            	
              40

            
	
              9.8

            	
              Notices,
                etc.

            	
              40

            
	
              9.9

            	
              Severability

            	
              41

            
	
              9.10

            	
              Expenses.

            	
              42

            
	
              9.11

            	
              Titles
                and Subtitles

            	
              42

            
	
              9.12

            	
              Counterparts;
                Facsimile Signatures

            	
              42

            
	
              9.13

            	
              No
                Strict Construction

            	
              42

            


    


    
      
        
        

      

      
        ii

        
          

        

      

      
        
        

      

    

    


    Exhibits

     

    
      	
              Exhibit
                A

            	
              Certain
                Definitions

            
	
              Exhibit
                B

            	
              Certificate
                of Designation for Series A Convertible Preferred Stock

            
	
              Exhibit
                C

            	
              Form
                of Warrant

            
	
              Exhibit
                D

            	
              Registration
                Rights Agreement

            
	
              Exhibit
                E

            	
              Shareholder
                Agreement

            
	
              Exhibit
                F

            	
              Share
                Escrow Agreement

            
	
              Exhibit
                G

            	
              Closing
                Escrow Agreement

            
	
              Exhibit
                H

            	
              Disclosure
                Schedules

            


    

    


    List
      of
      Schedules

    
      	
              Schedule
                6.10

            	
              List
                of Employees

            
	
              Schedule
                6.23

            	
              Members
                of the Management

            
	
              Schedule
                6.24

            	
              Persons
                subject to Lock-Up Agreement

            


    


    
      
        
        

      

      
        iii

        
          

        

      

      
        
        

      

    


    


    SECURITIES
      PURCHASE AGREEMENT

     

    THIS
      SERIES A CONVERTIBLE PREFERRED STOCK SECURITIES PURCHASE AGREEMENT (this
“Agreement”),
      dated
      as of August 8, 2008, 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 (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 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 4,497,445 shares of its
      Series A Convertible Preferred Stock, par value $.001 per share (“Series
      A Preferred Stock”),
      having the rights, restrictions, privileges and preferences set forth in the
      Certificate of Designations of Preferences, Rights and Limitations of Series
      A
      Convertible Preferred Stock attached hereto as Exhibit
      B
      (the
“Series
      A Certificate”),
      including shares of Series A Preferred Stock issued or issuable hereunder and
      shares of Series A Preferred Stock to be issued or issuable in the Additional
      Series A Financing, and (ii) warrants to purchase an aggregate of up to
      31,224,490 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, warrants to be issued in the Additional
      Series A Financing, and warrants to be issued to the placement agent in
      connection with the transactions contemplated hereunder and in the Additional
      Series A Financing, substantially in the form attached hereto as Exhibit
      C.
      The
      Series A 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, 1,857,373 shares of Series A Preferred Stock
      (together with Make Good Escrow Shares (as defined below) and Listing Shares
      (as
      defined below), collectively, “Series
      A Shares”)
      and
      warrants to purchase 13,001,608 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 Nine Million U.S. Dollars ($9,000,000) (the
“Purchase
      Price”).
      The
      Parties acknowledge and agree that the Company contemplates the sale and
      issuance of additional shares of Series A Preferred Stock of up to 1,116,388
      shares (the “Additional
      Series A Shares”)
      and
      warrants to purchase additional shares of its Common Stock of up to 7,814,719
      shares (the “Additional
      Warrants”)
      for an
      aggregate purchase price of up to Five Million Four Hundred Thousand U.S.
      Dollars ($5,400,000) under the terms and conditions substantially similar to
      the
      terms and conditions provided herein and in each other Transaction Document
      (as
      defined below) (such issuance and sale of the Additional Series A Shares and
      Additional Warrants and the transactions related thereto, the “Additional
      Series A Financing”;
      the
      closing of the Additional Series A Financing, the “Final
      Closing”;
      the
      date on which the Final Closing shall occur, the “Final
      Closing Date”;
      the
      purchasers who shall have purchased Additional Series A Shares and Additional
      Warrants in the Additional Series A Financing and together with its successors
      and assigns, each an “Additional
      Purchaser”
and
      collectively, the “Additional
      Purchasers”
and
      together with Purchaser, each a “Series
      A Purchaser”
and
      collectively, the “Series
      A Purchasers”).
      


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    1.3 Payment
      of the Purchase
      PriceAt
      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 A Purchaser shall have the rights specified in that certain Registration
      Rights Agreement by and among the Company, Purchaser and the Additional
      Purchasers (when and if such Additional Purchasers shall become parties thereto
      in accordance with the terms thereof), substantially in the form attached as
      Exhibit D
      hereto
      (the “Registration
      Rights Agreement”),
      in
      that certain Shareholders Agreement by and among the Company, Purchaser, and
      the
      Additional Purchasers (when and if such Additional Purchasers shall become
      parties thereto in accordance with the terms thereof), substantially in the
      form
      attached as Exhibit E
      hereto
      (the “Shareholders
      Agreement”),
      in
      that certain Share Escrow Agreement by and among the Company, Purchaser and
      the
      Additional Purchasers (when and if such Additional Purchasers shall become
      parties thereto in accordance with the terms thereof), substantially in the
      form
      attached as Exhibit
      F
      hereto
      (the “Share
      Escrow Agreement”),
      the
      Closing Escrow Agreement by and among the Company, Purchaser and the Additional
      Purchasers (when and if such Additional Purchasers shall become parties thereto
      in accordance with the terms thereof), substantially in the form attached as
      Exhibit
      G
      hereto
      (the “Closing
      Escrow Agreement”,
      and
      together with this Agreement, the Series A Certificate, the Registration Rights
      Agreement, the Shareholders Agreement, the Share 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. 

     

    1.5 ExclusivityThe
      Parties agree that subject to the consummation of the transactions contemplated
      hereunder, Purchase shall have the exclusive right in investing in the
      Additional Series A Financing and such exclusive right shall expire 30 days
      following the filing of the Company’s Annual Report on Form 10-K for the fiscal
      year ending December 31, 2008. Notwithstanding the foregoing, upon request
      by
      the Company and at the sole discretion of the Purchaser, Purchaser may waive
      such exclusive right prior to its expiration. 


    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    ARTICLE
      II

    THE
      CLOSING

     

    2.1 The
      Closings.
      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
      A
      Preferred Stock and the Warrants (in such denominations as Purchaser shall
      request);

     

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

     

    (iv) 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;

     

    (v) 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,
      (B) Series A Certificate, (C) the By-laws of the Company, 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;

     

    (vi) 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 Sections 3.1(d)
      through 3.1(k) have been satisfied; 

     

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

     

    (viii) The
      agreement dated a date on or prior to the Closing Date by and among the Company,
      Purchaser, Fountainhead Capital Management Limited (“Fountainhead”)
      and La
      Pergola Investments Limited (“La
      Pergola”)
      that
      is reasonably satisfactory to Purchaser duly executed by the Company,
      Fountainhead and La Pergola (the “Fountainhead
      Agreement”);
      

     


    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    (ix) Copies
      of
      all SEC correspondence, if any, since the filing on March 31, 2008, of a current
      report on Form 8-K (the “Comprehensive
      Form 8-K”)
      by the
      Company relating to its reverse acquisition of Willsky Development, Ltd.
      (“Willsky”),
      which
      contains “Form 10 Information” regarding Willsky and its subsidiaries and any
      correspondence which was issued prior to the filing of the Company’s
      Comprehensive Form 8-K, if any, which has not been resolved to the satisfaction
      of the SEC;

     

    (x) An
      opinion from the Company’s legal counsel, Thelen Reed Brown Raysman &
Steiner, LLP, concerning this Agreement and other Transaction Documents and
      the
      transactions contemplated hereby and thereby that is reasonably satisfactory
      to
      Purchaser;

     

    (xi) 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;

     

    (xii) Executed
      disbursement instructions pursuant to the Closing Escrow Agreement, which shall
      provide that the Escrow Agent (as defined in the Closing Escrow Agreement)
      continue to hold out of the Purchase Price $250,000 to pay the Company’s
      anticipated obligations to its investor relations company; 

     

    (xiii) Copies
      of
      (i) all executive employment agreements which have not been disclosed in the
      Comprehensive Form 8-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 Company’s Comprehensive Form 8-K; and

     

    (xiv) 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.


    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    ARTICLE
      III

    CONDITIONS
      TO THE CLOSING

     

    3.1 Conditions
      to Obligation of Purchaser.
      The
      obligation of Purchaser to purchase the Series A 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
      A Certificate.
      The
      Series A 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
      Share Escrow Agreement to be held in escrow pursuant to Sections 6.20 and 6.23
      hereof and the terms and conditions of the Share 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.

     

    (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, 2007. 

     

    (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.


    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    (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. 

     

    (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 A 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.


    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    3.2 Conditions
      to Obligations of the Company The
      Company's obligation to issue and sell the Series A 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 A Shares and the Warrants hereunder
      shall be made in compliance with all applicable federal and state
      laws.

     

    (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
      H
      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. 


    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

    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(a) 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”),
      of
      which 7,000,000 will be designated as Series A Preferred Stock, par value $0.001
      per share, 2,461,019 of which Series A Preferred Stock will be issued and
      outstanding (including Make Good Escrow Shares and Listing Shares) 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 100,000,000 shares will be issued and outstanding and 125,140,474 shares
      will be reserved for issuance of Warrant Shares and Conversion Shares following
      the consummation of the transactions contemplated hereby. 

     

    (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
      as
      pursuant to this Agreement or a 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 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.


    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    


    (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
      and 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. 

     

    (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. 

     

    (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.


    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    4.5 Title
      to Personal Property and Assets  (a) 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 Willsky for fiscal year ended December 31, 2007
      included in Amendment No. 2 to the Comprehensive Form 8-K filed by the Company
      with the Commission on June 28, 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. 

     

    (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.

     


    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    4.6 Subsidiaries(a) Section
      4.6(a)
      of the
      Disclosure Schedules set 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.

     

    4.7 Financial
      Statements(a) GAAP
      Treatment of Financial Statements.
      The
      financial statements of the Company included in the SEC Documents (as defined
      below) (the “Historical
      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).


    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    (b) 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.

     

    4.8 Absence
      of Certain Changes and Events.
      Since
      the Balance Sheet Date, except as contemplated herein or in the other
      Transaction Documents or as set forth on Section
      4.8
      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;

     

    (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;


    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    (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; 

     

    (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;


    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

     

    (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 4.8 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.

     

    4.9 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.

     

    4.10 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. 

     

    4.11 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. 


    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    (b) Leased
      Real Property.
      Section
      4.11(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.

     

    4.12 Intellectual
      Property. 

     

    (a) All
      Necessary Rights; Absence of Actions and Judgments.
      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 4.12(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. 


    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    (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
      4.12(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. 

     

    4.13 Contracts 
      (a) 
      Except
      as disclosed in Section 4.13(a)
      of
      the Disclosure Schedules, neither the Company nor any Subsidiary is party or
      subject to, or bound by:


    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

     

    (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

     

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


    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

     

    (b) The
      Company has delivered to Purchaser accurate and complete copies of all written
      contracts identified in Section
      4.13(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
      4.13(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
      4.13(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.

     

    4.14 Taxes(a) 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.



    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

     

    (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.

     

    4.15 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 4.15(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.

     

    (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.


    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

     

    (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.

     

    4.16 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 2.1(ac), 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..

     

    4.17 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
      4.17
      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
      4.17
      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. 


    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

     

    4.18 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. 

     

    4.19 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.

     

    4.20 No
      Brokers.
      Except
      as disclosed in Section
      4.20
      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.

     

    4.21 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.

     

    4.22 Related
      Party Transactions.
      Except
      as set forth in Section
      4.22
      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.

     

    (a) Except
      for the agreements listed in Section 4.22(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.


    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

     

    (b) To
      the
      Company's Knowledge, except as set forth in Section
      4.22
      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
      4.22(d)
      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).

     

    4.23 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).

     

    4.24 Securities
      Act.
      (a) Except
      as
      disclosed on Section
      4.24
      of the
      Disclosure Schedules, 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. Prior to the Closing, 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.

     

    (b) 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.


    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

     

    4.25 Use
      of
      Proceeds. Except
      as
      set forth on Section
      4.25
      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. 

     

     

    4.26 SAFE
      Compliance. 
      (a) 
      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”),
      (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 and (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, or any successor rule or regulation
      under the Law of the People’s Republic of China (collectively, the “PRC
      Regulations”).
      The
      Company represents that each individual set forth in Section
      4.27
      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.


    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

     

    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.

     

    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.


    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

     

    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.


    
      
        
        

      

      
        25

        
          

        

      

      
        
        

      

    

     

    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 Final 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 Final 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 Final 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.


    
      
        
        

      

      
        26

        
          

        

      

      
        
        

      

    

     

    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 A 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 [Intentionally
      omitted] 

     

    6.10 Corporate
      Existence; No Conflicting Agreements. For
      so
      long as any Series A 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 A 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.

     

    6.11 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 A Purchaser owns any Securities. For so long as any Series
      A
      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 A 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.
      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. 


    
      
        
        

      

      
        27

        
          

        

      

      
        
        

      

    

     

    6.12 [intentionally
      omitted.] 

     

    6.13 Auditor. 

     

    Within
      ninety (90) days following the Closing, the Company shall replace its
      independent public auditor with an independent public auditor that is reasonably
      acceptable to Purchaser. 

     

    6.14 Investor
      and Public Relations. 
      The
      Company shall deposit or cause to be deposited Five Hundred Thousand Dollars
      ($500,000) of the Purchase Price funded on the Closing Date in an escrow account
      pursuant to the Closing Escrow Agreement to be used by the Company in connection
      with investor and public relations.

     

    6.15 Directors. 
      (a) 
      No later
      than sixty (60) days after the Final Closing Date, the Company shall increase
      the size of the Board to seven 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 shall have the right
      to
      nominate two members to the Board of Directors and, at Purchaser’s option, to
      the board of directors of any Subsidiaries (including the Honorary Chairman
      of
      the Board of Directors of the Company and/or any Subsidiaries) upon Closing,
      and
      shall have the right to nominate additional two members to the Board of
      Directors and, at Purchaser’s option, to the board of directors of any
      Subsidiaries (including the Chairman of the Board of Directors of the Company
      or
      any Subsidiaries) upon Final 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 A Purchasers own less than 25% of the Series A Shares
      originally purchased hereunder.

     

    6.16 Committees
      of the Board. No
      later
      than sixty (60) days after the Closing Date, the Company shall have (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 A Purchasers own less than 25% of the Series A Shares originally
      purchased hereunder.


    
      
        
        

      

      
        28

        
          

        

      

      
        
        

      

    

     

    6.17 Right
      of First Refusal. 
      (a) 
      For a
      period of two (2) years following the Closing Date (or, if the Final Closing
      shall have occurred, two (2) years following the Final 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 A 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 A 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 A 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 A 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 A Purchaser elects not to participate
      in such Subsequent Financing, the other Series A 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 A Purchasers paid for the purchase
      of
      the Series A Preferred Stock hereunder and in the Additional Series A Financing.
      

     

    (b) For
      purposes of this Section, all references to “pro
      rata”
means,
      for any Series A Purchaser electing to participate in such Subsequent Financing,
      the percentage obtained by dividing (x) the aggregate number of Series A
      Preferred Stock purchased by such Series A Purchaser at the Closing and/or
      Final
      Closing by (y) the total number of all of the Series A Preferred Stock purchased
      by all of the Series A Purchasers at the Closing and Final Closing. Delivery
      of any Rights Notice constitutes a representation and warranty by the Company
      that there are no other material terms and conditions, arrangements, agreements
      or otherwise except for those disclosed in the Rights Notice, to provide
      additional compensation to any party participating in any proposed Subsequent
      Financing, including, but not limited to, additional compensation based on
      changes in the purchase price or any type of reset or adjustment of a purchase
      or conversion price or to issue additional securities at any time after the
      closing date of a Subsequent Financing. If the Company does not receive notice
      of exercise of the Rights Option from the Series A 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 A 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 6.20(a), including, without
      limitation, the delivery of a new Rights Notice. The provisions of this Section
      6.20(a) shall not apply to issuances of securities in a Permitted
      Financing. 


    
      
        
        

      

      
        29

        
          

        

      

      
        
        

      

    

     

    (c) 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 pursuant
      to
      the conversion or exercise of convertible or exercisable securities issued
      or
      outstanding on or prior to the Closing Date or issued pursuant to the 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 First 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 Final Closing Date
      (as
      defined in the First Purchase Agreement) 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.

     

    6.18 Deliveries
      from Escrow Based on Income Targets.

     

    (a)
      The
      Company expects that

    


    (i)
      the
      Company’s audited consolidated After-Tax Net Income for the fiscal year ending
      December 31, 2008 shall be at least $4.3 million and the Earnings Per Share
      on a
      Fully-diluted Basis shall be at least $0.0261; provided that the Closing shall
      have occurred on or prior to August 15 ; provided further, that if the Closing
      shall have been delayed through no fault of Purchaser, the Earnings Per Share
      on
      a Fully-diluted Basis shall remain $0.0261 (the “2008
      Target Numbers”)
      and


    
      
        
        

      

      
        30

        
          

        

      

      
        
        

      

    

    


    (ii)
      the
      Company’s audited consolidated After-Tax Net Income for the fiscal year ending
      December 31, 2009 shall be at least $6.0 million and
      the
      Earnings Per Share on a Fully-diluted Basis shall be at least
      $0.0294;
      provided that the Final Closing shall have occurred within 30 days of the filing
      of the Company’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2008 (or the audited consolidated After-Tax Net Income shall be at least
      $4.5 million and the Earnings Per Share on a Fully-diluted Basis shall be at
      least $0.0273 if the Final Closing shall not have occurred (the
      “2009
      Target Numbers”,
      together with 2008 Target Number, the “Target
      Numbers”). The
      Target Numbers regarding Earnings Per Share on a Fully-diluted Basis shall
      be
      adjusted to reflect the effect of any stock split and stock combination.


    


    (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 and Final Closing
      the
      Make Good Escrow Shares (as defined below). 

    


    (c)
      If
      either or both of the Company’s audited and consolidated After-Tax
      Net Income
      and the applicable Earnings Per Share on a Fully-diluted Basis for the fiscal
      years ending December 31, 2008 or 2009 does not meet the applicable 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 greater of (A) 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 or (B) the percentage obtained by
dividing
      (y) the
      amount of the shortfall of the Earnings
      Per Share on a Fully-Diluted Basis for such year from
      the
      applicable Target Number for such year by
      (z) the
      applicable Target Number for such year. For purposes of this Section, the
“Adjustment
      Percentage”
for
      2008 or 2009 shall mean the percentage that the Percentage Shortfall for such
      year bears to fifty percent (50%). For example, if the Percentage Shortfall
      for
      2008 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 retained
      by the Escrow Agent pursuant to this Agreement.

    


    (d)
      The
      Parties hereby agree that:

    


    (i) If
      the
      Percentage Shortfall for 2008 or 2009, as applicable, is less than fifty percent
      (50%) but equal or greater than fifteen percent (15%), then the Escrow Agent
      shall deliver to the Series A Purchasers on a pro rata basis such number of
      shares of Series A Preferred Stock as is determined by multiplying the
      Adjustment Percentage by Make Good Escrow Stock and retain the balance.
 

     

    (ii) If
      the
      Percentage Shortfall for 2008 or 2009, as applicable, 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.
      


    
      
        
        

      

      
        31

        
          

        

      

      
        
        

      

    

     

    (iii) If
      the
      Percentage Shortfall for 2008 is less than fifteen percent (15%), then all
      of
      the Make Good Escrow Shares shall remain in escrow as Make Good Escrow Shares
      for fiscal year 2009 to be distributed in accordance with this Section 6.19(d).
      

     

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

     

    (e)
      At
      the Closing, the Company shall issue and deposit the number of shares of Series
      A Preferred Stock equal to 30% of the number of shares of Series A Preferred
      Stock issued hereunder to be held by the Escrow Agent pursuant to the terms
      and
      conditions of the Share Escrow Agreement (collectively, the “2008
      Make Good Escrow Shares”).
      Upon
      distribution to Purchaser of the Make Good Escrow Shares for fiscal year 2008
      pursuant to this Section, if any, within 10 days of the date on which such
      distribution is required to be made hereof, the Company shall replenish the
      Make
      Good Escrow Shares by issuing and delivering the number of shares of Series
      A
      Preferred Stock equal to the number of Series A Preferred Stock so distributed
      to be held in escrow for 2009 distributions pursuant to this Section 6.18 (such
      total number of shares of Series A Preferred Stock held in escrow, the
“2009
      Make Good Escrow Shares”
and
      together with 2008 Make Good Escrow Shares, collectively, 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
      6.18 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 the applicable fiscal year
      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, 2008 or 2009, as
      applicable, 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 the remaining 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 Share 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 6.18 or
      in
      the Share 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 A Purchaser will be excluded
      from the calculation of net income, and 


    
      
        
        

      

      
        32

        
          

        

      

      
        
        

      

    

    


    (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.

     

    6.19 Performance
      Incentive. 
      Purchaser
      shall deposit the number of shares of Series A Preferred Stock equal to 2%
      of
      the total number of shares of Series A Preferred Stock issued hereunder (or
      46,434 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
      6.19
      (the
“Members
      of the Management”)
      attached hereto pursuant to the terms and conditions of the Share Escrow
      Agreement. If the Company’s audited and consolidated After-Tax Net Income and
      Earnings Per Share on a Fully-Diluted Basis for each of the fiscal years ended
      December 31, 2008 and 2009 meet the applicable Target Number, the Performance
      Incentive Shares shall be converted into Common Stock at the then applicable
      Conversion Ratio (as defined in the Series A 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. 

     

    6.20 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
      A
      Preferred Stock equal to 2.5% of the number of shares Series A Preferred Stock
      issued hereunder and at the Final Closing, the Company shall issue and deposit
      the number of shares of Series A Preferred Stock equal to 2.5% of the number
      of
      shares of Series A Preferred Stock issued in the Additional Series A Financing
      (collectively, the “Listing
      Shares”),
      into
      an escrow account to be held by the Escrow Agent pursuant to the Share 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 A Purchasers on a pro-rata basis no later than
      February 28, 2010. 

     

    6.21 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 ninety days (90)
      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.



    
      
        
        

      

      
        33

        
          

        

      

      
        
        

      

    

     

    6.22 Lock-Up
      Agreement. The
      persons listed on Schedule
      6.24
      attached
      hereto shall be subject to certain lock-up provisions provided in the
      Shareholders Agreement, which shall provide the manner in which such persons
      may
      sell, transfer or dispose of their shares of Common Stock.

     

    6.23 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.

     

    6.24 Employment
      and Consulting Contracts. For
      so
      long as any shares of Series A 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
      6.27 does not apply to attorneys, accountants and other persons who provide
      professional services to the Company. 

     

    6.25 Appointment
      of Chief Financial Officer. No
      later
      than ninety (90) days after the Closing Date, the Company shall hire 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. 

     

    6.26 [intentionally
      omitted.] 

     

    6.27 Subsequent
      Registrations. Except
      as
      set forth in Section
      6.30
      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), and
      the
      prospectus and amendments forming a portion of such registration statement(s)
      is
      available for resale of all Conversion Shares and Warrant Shares. 

     

    6.28 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. 


    
      
        
        

      

      
        34

        
          

        

      

      
        
        

      

    

     

    6.29 Other
      Restrictions. For
      so
      long as at least 25% of the shares of Series A 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 A 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.

     

    6.30 Reverse
      Split Within
      the earlier of (i) ninety (90) days of the Final Closing and (ii) March 31,
      2009
      (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.

    


    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.


    
      
        
        

      

      
        35

        
          

        

      

      
        
        

      

    

     

    (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.

     

    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 6.5, 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(a) 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.


    
      
        
        

      

      
        36

        
          

        

      

      
        
        

      

    

     

    (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 following cap, it shall be entitled to indemnification for the total
      amount of such damages. 

     

    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.


    
      
        
        

      

      
        37

        
          

        

      

      
        
        

      

    

     

    (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.

     

    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.


    
      
        
        

      

      
        38

        
          

        

      

      
        
        

      

    

     

    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. 

     

    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.


    
      
        
        

      

      
        39

        
          

        

      

      
        
        

      

    

     

    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 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.

     

    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:
      


    
      
        
        

      

      
        40

        
          

        

      

      
        
        

      

    


    


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

    


    Thelen
      Reid Brown Raysman & Steiner LLP

    701
      8th
      Street NW

    Washington,
      D.C. 20001

    Attn.:
      Louis A. Bevilacqua, Esq.

    Tel.
      No.:

    Fax
      No.::
      (202) 508-4321

    Email:
      

    


    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,

    


    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.


    
      
        
        

      

      
        41

        
          

        

      

      
        
        

      

    

     

    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]


    
      
        
        

      

      
        42

        
          

        

      

      
        
        

      

    


    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/ Shang
              Jiaji
	 
	
              Name:
                

            	
              Shang
                Jiaji

            
	
              Title:

            	
              Chief
                Executive Officer

            
	 	
              Chairman
                of the Board of Directors

            
	 	 
	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 years 2008 or 2009, as
      applicable.

     

    “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 A 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
      H.

     

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

     

    “Earnings
      Per Share on a Fully-Diluted Basis”
means
      the Company’s After-Tax Net Income divided by the number of shares of Common
      Stock of the Company on a Fully Diluted Basis. For purposes of this calculation,
      “Fully-Diluted Basis” means that all shares of Common Stock issuable upon
      conversion of convertible securities and upon exercise of warrants and options
      (whether or not vested) are deemed outstanding regardless of whether (i) such
      shares are treated as outstanding for determining diluted earnings per share
      under GAAP, or (ii) such securities are “in the money”.
      Notwithstanding anything to the contrary in the foregoing, Fully-diluted Basis
      shall not include any Warrant Shares, any Listing Shares or Make Good Escrow
      Shares (unless and until they are required to be distributed to the Series
      A
      Purchasers pursuant to Sections 6.20 and Section 6.18, respectively, and the
      relevant sections of the Share Escrow Agreement),or any shares of Common Stock
      issuable upon exercise of any warrants to be issued in the Additional Series
      A
      Financing or shares of Common Stock issuable upon exercise of any warrants
      issued to Kuhns Brother Securities Corporation for its services provided as
      placement agent in connection with the Closing and the Final
      Closing.


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    “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).

     

    “Fountainhead
      Agreement” has the meaning set forth in Section 2.2(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 4.13(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 6.5.

     

    “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 A Shares, Warrants, Conversion Shares and Warrant
      Shares.

     

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

     

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

     

    “Series
      A 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 Registration Rights Agreement, the Share
      Escrow Agreement, the Shareholders Agreement, the Fountainhead Agreement, the
      Closing Escrow Agreement and the Series A 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.