CHINA
        NEW ENERGY GROUP COMPANY

      CERTIFICATE
        OF DESIGNATIONS OF PREFERENCES, 

      RIGHTS
        AND LIMITATIONS

      OF

      SERIES
        A CONVERTIBLE PREFERRED STOCK


      


      The
        undersigned, Jiaji Shang,
        does
        hereby certify that:

       

      1. He
        is the
        Chief Executive Officer and Chairman of the Board of Directors of
        CHINA NEW ENERGY GROUP COMPANY,
        a
        Delaware corporation (the “Company”).

       

      2. The
        Company is authorized to issue 10,000,000 shares of Preferred Stock, par
        value
        $0.001 per share (“Preferred
        Stock”),
        none
        of which have been previously issued.

       

      3. The
        following resolutions were duly adopted by the Board of Directors of the
        Company
        (the “Board
        of Directors”):

       

      WHEREAS,
        the Certificate of Incorporation of the Company provides for a class of its
        authorized stock known as Preferred Stock, comprised of 10,000,000 shares,
        $0.001 par value per share, issuable from time to time in one or more series;
        

       

      WHEREAS,
        the Board of Directors is authorized to fix the dividend rights, dividend
        rate,
        voting rights, conversion rights, rights and terms of redemption and liquidation
        preferences of any wholly unissued series of Preferred Stock and the number
        of
        shares constituting any series and the designation thereof, of any of them;
        and

       

      WHEREAS,
        it is the desire of the Board of Directors, pursuant to its authority as
        aforesaid, to fix the rights, preferences, restrictions and other matters
        relating to a series of the preferred stock, which shall consist of up to
        Five
        Million Five Hundred Thousand (5,500,000) shares of the Preferred Stock,
        which
        the Company has the authority to issue, as follows:

       

      NOW,
        THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby provide
        for
        the issuance of a series of Preferred Stock for cash or exchange of other
        securities, rights or property and does hereby fix and determine the rights,
        preferences, restrictions and other matters relating to such series of Preferred
        Stock as follows:

      


      TERMS
        OF PREFERRED STOCK 

      


      Section
        1.
        Definitions.
        Capitalized terms used and not otherwise defined herein shall have the meanings
        ascribed to such terms in the Series A Convertible Preferred Stock Securities
        Purchase Agreement by and between the Company, China Hand Fund, I, LLC, a
        Delaware limited liability company (as amended, modified or supplemented
        from
        time to time in accordance with its terms, a copy of which is on file at
        the
        principal offices of the Company, the “First
        Closing Purchase Agreement”)
        or the
        Series A Convertible Preferred Stock Securities Purchase Agreement, which
        shall
        substantially be in the same form as the First Closing Purchase Agreement,
        to be
        entered into by the Company and each purchaser party thereto (as amended,
        modified or supplemented from time to time in accordance with its terms,
        a copy
        of which is on file at the principal offices of the Company, the “Final
        Closing Purchase Agreement”,
        together with the First Closing Purchase Agreement, each a “Purchase
        Agreement”
and
        collectively, the “Purchase
        Agreements”).
        For
        the purposes hereof, the following terms shall have the following
        meanings:

      


      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

       

      “Board
        of Directors”
means
        the Board of the Directors of the Company.

       

      “Certificate”
means
        this Certificate of Designations of Preferences, Rights and Limitations of
        Series A Convertible Preferred Stock of China New Energy Group Company, as
        amended from time to time.

       

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

      


      “Common
        Stock”
means
        the Company’s common stock, par value $0.001 per share, and stock of any other
        class into which such shares may hereafter have been reclassified or
        changed.

      


      “Conversion
        Date”
shall
        have the meaning set forth in Section 6(a).

      


      “Conversion
        Ratio”
shall
        mean the number of shares of Common Stock issuable upon conversion of one
        share
        of Series A Preferred Stock. Each share of Series A Preferred Stock shall
        be
        initially convertible into to shares of Common Stock on a 1-for-35 basis,
        subject to adjustment as provided in this Certificate.

      


      “Conversion
        Price”
shall
        mean $0.138 per share, subject to adjustment as provided in this
        Certificate.

      


      “Conversion
        Shares”
means,
        collectively, the shares of Common Stock issuable upon conversion of the
        shares
        of Series A Preferred Stock in accordance with the terms of the Purchase
        Agreements and this Certificate.

      


      “Company”
means
        China New Energy Group Company, a Delaware corporation.

       

      “Exchange
        Act”
means
        the Securities Exchange Act of 1934, as amended.

      


      “Fundamental
        Transaction”
shall
        have the meaning set forth in Section 7(h) hereof.

       

      “Holder”
shall
        have the meaning set forth in Section 2 hereof.

       

      “Liquidation”
shall
        have the meaning set forth in Section 5 hereof.

       

      “Liquidation
        Value”
shall
        have the meaning set forth in Section 5 hereof.

       

      “Original
        Purchase Price”
shall
        mean $0.138 per share, subject to adjustment as provided in this
        Certificate.

       

      
        
           

        

        
          2

          
            

          

        

        
           

        

      

       

      “Person”
means
        a
        corporation, an association, a partnership, a limited liability company,
        a
        business association, an individual, a trust, a government or political
        subdivision thereof or a governmental agency.

       

      “Purchaser”
means
        any purchaser who purchased shares of Series A Preferred Stock and Warrants
        pursuant to a Purchase Agreement. 

       

      “Registration
        Rights Agreement(s)”
means
        the Registration Rights Agreement(s), to which the Company and the Purchasers
        are parties, as amended, modified or supplemented from time to time in
        accordance with its terms.

       

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

       

      “Series
        A Preferred Stock”
shall
        have the meaning set forth in Section 2 hereof.

       

      “Subsidiary”
shall
        mean a corporation, limited liability company, partnership, joint venture
        or
        other business entity of which the Company owns beneficially or of record
        more
        than a majority of the equity interests.

       

      “Trading
        Day”
means
        a
        day on which the Common Stock is traded on a Trading Market.

       

      “Trading
        Market”
means
        the following markets or exchanges on which the Common Stock is listed or
        quoted
        for trading on the date in question: the American Stock Exchange, the New
        York
        Stock Exchange, the NASDAQ Global Select Market, the NASDAQ Global Market,
        the
        NASDAQ Capital Market or the OTC Bulletin Board.

       

      “Variable
        Rate Transaction”
shall
        have the meaning set forth in Section 7 hereof

       

      “VWAP”
means,
        for any date, the price determined by the first of the following clauses
        that
        applies: (a) if the Common Stock is then listed or quoted on a Trading Market,
        the daily volume weighted average price of the Common Stock for such date
        (or
        the nearest preceding date) on the primary Trading Market on which the Common
        Stock is then listed or quoted as reported by Bloomberg Financial L.P. (based
        on
        a Trading Day from 9:30 a.m. EST to 4:02 p.m. Eastern Time) using the VAP
        function; (b) if the Common Stock is not then listed or quoted on the
        Trading Market and if prices for the Common Stock are then reported in the
“Pink
        Sheets” published by the National Quotation Bureau Incorporated (or a similar
        organization or agency succeeding to its functions of reporting prices),
        the
        most recent bid price per share of the Common Stock so reported; or (c) in
        all other cases, the fair market value of a share of Common Stock as determined
        by a nationally recognized-independent appraiser selected in good faith by
        the
        Majority Holders.

       

      Rank
        of Series or Classes.
        For
        purposes of this Certificate, any stock of any series or class of the Company
        shall be deemed to rank:

       

      (a)
        senior to the shares of Series A Preferred Stock, as to dividends or upon
        liquidation, dissolution or winding up, as the case may be, if the holders
        of
        such class or classes shall be entitled to the receipt of dividends or of
        amounts distributable upon dissolution, liquidation or winding up of the
        Company, as the case may be, in preference or priority to the
        Holders;

       

      
        
           

        

        
          3

          
            

          

        

        
           

        

      

       

      (b)
        on a
        parity with shares of Series A Preferred Stock, as to dividends or upon
        liquidation, dissolution or winding up, as the case may be, whether or not
        the
        dividend rates, dividend payment dates or redemption or liquidation prices
        per
        share or sinking fund provisions, if any, be different from those of Series
        A
        Preferred Stock, if the holders of such stock shall be entitled to the receipt
        of dividends or of amounts distributable upon dissolution, liquidation or
        winding up of the Company, as the case may be, in proportion to their respective
        dividend rates or liquidation prices, without preference or priority, one
        over
        the other, as between the holders of such stock and the Holders;

       

      (c)
        junior to shares of Series A Preferred Stock as to dividends or upon
        liquidation, dissolution or winding up, as the case may be, if such class
        shall
        be Common Stock or if the Holders shall be entitled to receipt of dividends
        or
        of amounts distributable upon dissolution, liquidation or winding up of the
        Company, as the case may be, in preference or priority to the holders of
        shares
        of such class or classes.

       

      Section
        2.
        Designation
        and Amount.
        The
        series of Preferred Stock, par value $0.001 per share shall be designated
        as the
        Company’s Series A Convertible Preferred Stock (the “Series
        A Preferred Stock”)
        and
        the number of shares so designated shall be Five Million Five Hundred Thousand
        (5,500,000) (which shall not be subject to increase without the consent of
        all
        of the holders of at least 50% of the then outstanding shares of Series A
        Preferred Stock (each a “Holder”
and
        collectively, the “Holders”).
        In
        the event of the conversion of shares of Series A Preferred Stock into Common
        Stock, pursuant to Section 6 hereof, or in the event that the Company shall
        otherwise acquire and cancel any shares of Series A Preferred Stock, the
        shares
        of Series A Preferred Stock so converted or otherwise acquired and canceled
        shall have the status of authorized but unissued shares of Preferred Stock,
        without designation as to series until such stock is once more designated
        as
        part of a particular series by the Board of Directors. In addition, if the
        Company shall not issue the maximum number of shares of Series A Preferred
        Stock, the Company may, from time to time, by resolution of the Board of
        Directors and the approval of the holders of a majority of the outstanding
        shares of Series A Preferred Stock (the “Majority
        Holders”),
        reduce the number of shares of Series A Preferred Stock authorized, provided,
        that no such reduction shall reduce the number of authorized shares to a
        number
        which is less than the number of shares of Series A Preferred Stock then
        issued
        or reserved for issuance. The number of shares by which the Series A Preferred
        Stock is reduced shall have the status of authorized but unissued shares
        of
        Preferred Stock, without designation as to series, until such stock is once
        more
        designated as part of a particular series by the Company’s Board of Directors.
        The Board of Directors shall cause to be filed with the Secretary of State
        of
        the State of Delaware such certificate as shall be necessary to reflect any
        reduction in the number of shares constituting the Series A Preferred
        Stock.

      


      Section
        3.
        Dividends
        and Other Distributions.
        

      


      (a) For
        so
        long as any shares of Series A Preferred Stock shall remain outstanding,
        no
        dividends shall be declared or payable with respect to the Common Stock.
        

       

      (b) The
        Holders shall be entitled to cumulative dividends in preference to any dividends
        on the Common Stock at the rate of 6% of the Original Purchase Price per
        annum
        compounded daily and payable semi-annually. Dividends shall begin to accrue
        on
        the date of issuance of the Series A Preferred Stock and shall be computed
        on
        the basis of a 360-day year consisting of twelve 30-day months and shall
        be
        payable semi-annually in arrears on June 1 and December 1 of each year (each,
        a
        "Dividend
        Date")
        with
        the first Dividend Date being December 1, 2008. If a Dividend Date is not
        a
        business day, then the dividend shall be due and payable on the business
        day
        immediately following such Dividend Date. Dividends shall be payable in shares
        of Common Stock ("Dividend
        Shares")
        or, at
        the option of the Company, in cash, provided that the dividends which accrued
        during any period shall be payable in cash only if the Company indicates
        that
        the dividend will be paid in cash in the Dividend Notice (as defined below).
        At
        least five (5) days prior to the applicable Dividend Date (the "Dividend
        Notice Date"),
        the
        Company shall provide written notice (the "Dividend
        Notice")
        to
        each Holder indicating that the dividend is to be paid in cash. Dividends
        paid
        in Dividend Shares shall be paid in a number of fully paid and nonassessable
        shares (rounded up to the nearest whole share) of Common Stock equal to the
        quotient of (i) the amount of interest payable divided by (a) the product
        of (A)
        90% and (B) the average of VWAP for each day during the period commencing
        twenty
        (20) days preceding but not including the Dividend Date. If any Dividend
        Shares
        are to be issued on a Dividend Date, then the Company shall within five (5)
        business days of the applicable Dividend Date, issue and deliver to such
        Holder
        a certificate, registered in the name of the Holder or its designee, for
        the
        number of shares of Common Stock to which the Holder shall be entitled.


       

      
        
           

        

        
          4

          
            

          

        

        
           

        

      

       

      Section
        4.
         Voting
        Rights.
        

       

      (a) Except
        as
        otherwise provided herein or by law and in addition to any right to vote
        as a
        separate class as provided by law, the holders of the Series A Preferred
        Stock
        shall have full voting rights and powers equal to the voting rights and powers
        of holders of Common Stock and shall be entitled to notice of any stockholders
        meeting in accordance with the Bylaws of the Company, and shall be entitled
        to
        vote, with respect to any question upon which holders of Common Stock have
        the
        right to vote, including, without limitation, the right to vote for the election
        of directors, voting together with the holders of Common Stock as one class.
        Subject to the limitation set forth in the last sentence of Section 4(c)
        hereof,
        each holder of shares of Series A Preferred Stock shall be entitled to the
        number of votes equal to the number of shares of Common Stock into which
        such
        shares of Series A Preferred Stock would be converted if converted on the
        record
        date for the taking of a vote (regardless of the number of shares of Common
        Stock that the Corporation is then authorized to issue) or, if no record
        date is
        established, at the day prior to the date such vote is taken or any written
        consent of stockholders is first executed. Fractional votes shall not, however,
        be permitted and any fractional voting rights resulting from the above formula
        (after aggregating all shares into which shares of Preferred Stock held by
        each
        holder would be converted) shall be rounded to the nearest whole number (with
        one-half being rounded upward). 

       

      (b) For
        so
        long as any shares of Series A Preferred Stock shall remain outstanding,
        without
        the affirmative approval of the Holders of 75% of the shares of the Series
        A
        Preferred Stock then outstanding (by vote or written consent, as provided
        by
        law), the Company shall not: 

       

      i. in
        any
        manner authorize, issue or create (by reclassification or otherwise) any
        new
        class or series of shares having rights, preferences or privileges equal
        or
        senior to the Series A Preferred Stock;

       

      ii. adversely
        alter or change the rights, preferences, designations or privileges of the
        Series A Preferred Stock;

       

      iii. amend
        the
        Company’s Articles of Incorporation or By-laws in a manner that adversely
        affects the rights, preferences, designations or privileges of the
        Holders;

       

      
        
           

        

        
          5

          
            

          

        

        
           

        

      

       

      iv. increase
        or decrease the authorized number of shares of preferred stock of the Company
        or
        otherwise reclassify the Company's outstanding securities; 

       

      v. redeem,
        purchase or otherwise acquire (or pay into or set funds aside for a sinking
        fund
        for such purpose) any share or shares of Preferred Stock or Common Stock;
        provided,
        however, that this restriction shall not apply to repurchases of shares of
        Common Stock from employees, officers, directors, consultants or other persons
        performing services for the Company or any subsidiary pursuant to agreements
        that are approved by the Board under which the Company has the option to
        repurchase such shares at cost upon the occurrence of certain events, such
        as
        the termination of employment, or through the exercise of any right of first
        refusal; and provided further,
        that
        this restriction shall not apply to any conversion, redemption or other
        acquisition of shares of Series A Convertible Stock pursuant to this
        Certificate, any Transaction Documents or as contemplated under the Additional
        Series A Financing (as defined in the First Closing Purchase Agreement);
        or


       

      vi. voluntarily
        file for bankruptcy, liquidate the Company’s assets or make an assignment for
        the benefit of the Company’s creditors.

       

      (c) 
        Until
        the expiration of two (2) years following the Closing Date (or, if the Final
        Closing shall have occurred, then the expiration of two (2) years following
        the
        Final Closing Date) (the “Restricted
        Period”),
        neither the Company nor any Subsidiary shall (i) sell all or substantially
        all
        of its assets, or (ii) at any given date during the Restricted Period, issue
        debt any debt securities or otherwise incur any debt in a manner as to cause
        its
        debt-to-equity ratio to exceed 50% without obtaining prior approval of the
        Majority Holders. 

       

      (d) 
        For so
        long as 20% of the shares of Series A Preferred Stock shall remain outstanding,
        the Company shall not issue (i) any Preferred Stock (with the exception of
        the
        Series A Preferred Stock issued pursuant to the Purchase Agreements), or
        (ii)
        any convertible debt exchangeable or convertible into the Company’s Common Stock
        without consent of the Holders of such outstanding shares of Series A Preferred
        Stock.

       

      (e) Whenever
        Holders are required or permitted to take any action by vote, such action
        may be
        taken without a meeting on written consent, setting forth the action so taken
        and signed by the holders of the outstanding capital stock of the Company
        having
        not less than the minimum number of votes that would be necessary to authorize
        or take such action at a meeting at which all shares entitled to vote thereon
        were present and voted. When voting together with the holders of Common Stock
        as
        a single class on an as converted basis, each share of Series A Preferred
        Stock
        shall carry a number of votes equal to the number of shares of Common Stock
        issuable upon conversion of such Series A Preferred Stock at the then applicable
        Conversion Ratio, which is initially thirty five (35) shares of Common Stock
        for
        each share of Series A Preferred Stock; provided,
        that
        the number of votes carried by a Holder’s Series A Preferred Stock on an as
        converted basis shall be subject to the beneficial ownership limitation set
        forth in Section 6(e) hereof unless a waiver shall have been given by such
        Holder in compliance with Section 6(e) hereof. 

       

      
        
           

        

        
          6

          
            

          

        

        
           

        

      

       

      Section
        5.
        Liquidation.
        Upon
        any liquidation, dissolution or winding-up of the Company, whether voluntary
        or
        involuntary (each, a “Liquidation
        Event”),
        the
        Holders shall be entitled to receive out of the assets of the Company, whether
        such assets are capital or surplus, for each share of Series A Preferred
        Stock
        an amount equal to $4.83, plus any accumulated but unpaid dividends thereon
        (the
“Liquidation
        Value”),
        before any distribution or payment shall be made to the holders of any
        securities which are junior to the Series A Preferred Stock upon the occurrence
        of a Liquidation Event and after any distributions or payments made to holders
        of any class or series of securities which are senior to the Series A Preferred
        Stock upon the occurrence of a Liquidation Event. If the assets of the Company
        shall be insufficient to pay in full such amounts, then the entire assets
        to be
        distributed to the Holders shall be distributed among the Holders ratably
        in
        accordance with the respective amounts that would be payable on such shares
        if
        all amounts payable thereon were paid in full. In the event the assets of
        the
        Company available for distribution to the holders of shares of Series A
        Preferred Stock upon the occurrence of a Liquidation Event shall be insufficient
        to pay in full all amounts to which such holders are entitled pursuant to
        this
        Section 5, no such distribution shall be made on account of any shares of
        any
        other class or series of capital stock of the Company ranking on a parity
        with
        the shares of Series A Preferred Stock upon the occurrence of such Liquidation
        Event unless proportionate distributive amounts shall be paid on account
        of the
        shares of Series A Preferred Stock, ratably, in proportion to the full
        distributable amounts for which holders of all such parity shares are
        respectively entitled upon the occurrence of such Liquidation Event. At the
        election of a Holder made by written notice delivered to the Company at least
        two (2) business days prior to the effective date of the subject transaction,
        as
        to the shares of Series A Preferred Stock held by such Holder, a Fundamental
        Transaction or Change in Control shall be treated as a Liquidation Event
        as to
        such Holder. 

      


      Section
        6.
        Conversion.

      


      (a) Conversions
        at Option of Holder.
        Each
        share of Series A Preferred Stock shall be initially convertible (subject
        to the
        limitations set forth in Section 6(e)), into such number of shares of Common
        Stock based on the Conversion Ratio at the option of the Holders, at any
        time
        and from time to time on or after its issuance. A Holder shall effect
        conversions by providing the Company with the form of conversion notice attached
        hereto as Annex
        A
        (a
“Notice
        of Conversion”)
        as
        fully and originally executed by the Holder, together with the delivery by
        the
        Holder to the Company of the stock certificate(s) representing the number
        of
        shares of Series A Preferred Stock to be converted, with such stock certificates
        being duly endorsed in full for transfer to the Company or with an applicable
        stock power duly executed by the Holder in the manner and form as deemed
        reasonable by the Company’s transfer agent for the Common Stock. Each Notice of
        Conversion shall specify the number of shares of Series A Preferred Stock
        to be
        converted, the number of shares of Series A Preferred Stock owned prior to
        the
        conversion at issue, the number of shares of Series A Preferred Stock owned
        subsequent to the conversion at issue, the stock certificate number and the
        shares of Series A Preferred Stock represented thereby which are accompanying
        the Notice of Conversion, and the date on which such conversion is to be
        effected, which date may not be prior to two Trading Days following the date
        the
        Holder mails such Notice of Conversion and the applicable stock certificates
        to
        the Company by overnight delivery service (the “Conversion
        Date”).
        If no
        Conversion Date is specified in a Notice of Conversion, the Conversion Date
        shall be the Trading Day immediately following the date that such Notice
        of
        Conversion and applicable stock certificates are received by the Company.
        The
        calculations and entries set forth in the Notice of Conversion shall control
        in
        the absence of manifest or mathematical error. Shares of Series A Preferred
        Stock converted into Common Stock in accordance with the terms hereof shall
        be
        canceled and may not be reissued. 

       

      
        
           

        

        
          7

          
            

          

        

        
           

        

      

       

      (b) Adjustment
        of Conversion Ratio.
        If the
        Conversion Price is adjusted pursuant to this Certificate or any Purchase
        Agreement, the Conversion Ratio shall likewise be adjusted and the new
        Conversion Ratio shall be determined by multiplying the Conversion Ratio
        in
        effect by a fraction, the numerator of which is the Conversion Price in effect
        before the adjustment and the denominator of which is the new Conversion
        Price.
        Thereafter, subject to any further adjustments in the Conversion Price, each
        share of Series A Preferred Stock shall be initially convertible into Common
        Stock based on the new Conversion Ratio.

       

      (c) Automatic
        Conversion Upon Change in Control.
        Subject
        to Section 5, all of the outstanding shares of Series A Preferred Stock shall
        be
        automatically converted into the Conversion Shares upon the close of business
        on
        the business day immediately preceding the date fixed for consummation of
        any
        transaction resulting in a Change in Control of the Company. A “Change
        in Control”
means
        a
        consolidation or merger of the Company with or into another company or entity
        in
        which the Company is not the surviving entity or the sale of all or
        substantially all of the assets of the Company to another company or entity
        not
        controlled by the then existing stockholders of the Company in a transaction
        or
        series of transactions. The Company shall not be obligated to issue certificates
        evidencing the Conversion Shares unless certificates evidencing the shares
        of
        Series A Preferred Stock so converted are either delivered to the Company
        or its
        transfer agent or the holder notifies the Company or its transfer agent in
        writing that such certificates have been lost, stolen or destroyed and executes
        an agreement satisfactory to the Company to indemnify the Company from any
        loss
        incurred by it in connection therewith. Upon the conversion of the shares
        of
        Series A Preferred Stock pursuant to this Section 6(c), the Company shall
        promptly send written notice thereof, by hand delivery or by overnight delivery,
        to the holders of record of all of the Series A Preferred Stock at their
        addresses then shown on the records of the Company, which notice shall state
        that certificates evidencing shares of Series A Preferred Stock must be
        surrendered at the office of the Company (or of its transfer agent for the
        Common Stock, if applicable).

       

      (d) Mandatory
        Conversion.
        

       

      i. Subject
        to Section 6(d)(iv) hereof, the Company shall have the right at any time,
        on
        written notice (the “Mandatory
        Conversion Notice”)
        to all
        the Holders given not less than twenty (20) Trading Days prior to the date
        by
        which the Holders are required to have converted their shares of Series A
        Preferred Stock (the “Mandatory
        Conversion Date”),
        to
        require that the Holders convert their Series A Preferred Stock in whole
        or in
        part; provided,
        that
        (i) the VWAP shall equal or exceed the Target Price (as defined below) for
        at
        least twenty (20) Trading Days in any 30 consecutive Trading Day period ending
        on the Notice Date (as defined below), and the Trading Volume (as defined
        below)
        shall equal or exceed the Target Volume (as defined below) on each Trading
        Day
        during such 30 consecutive Trading Day period ending on the Notice Date;
        provided
        further,
        that
        the Company may only mandate the Holders to convert their shares of Series
        A
        Preferred Stock pursuant to this Section if a registration statement filed
        by
        the Company pursuant to the Registration Rights Agreement covering the sale
        by
        the Holders of the Conversion Shares (each a “Registration
        Statement”)
        is
        current and effective and the right of the Company to mandate conversion
        only
        applies with respect to the Conversion Shares included in such registration
        statement.

       

      ii. The
        Mandatory Conversion Notice provided hereunder shall be mailed by first class
        mail, postage prepaid or overnight courier, and sent by telecopier or e-mail,
        and shall be deemed given on the date of receipt of the notice by the Holder
        (the “Notice
        Date”).
        Subject to Section 6(d)(iv) hereof, upon receipt of the Mandatory Conversion
        Notice, the Holder must (i) convert the number of shares of Series A Preferred
        Stock subject to mandatory conversion under the Mandatory Conversion Notice
        no
        later than the Mandatory Conversion Date; or (ii) notify the Company of its
        intent to transfer in whole or in part of such Holder’s Series A Preferred
        Stock. In the event Holder elects to transfer its Series A Preferred Stock,
        then
        the subsequent Holder must convert the Series A Preferred Stock so transferred
        on or before the Mandatory Conversion Date. 

       

      
        
           

        

        
          8

          
            

          

        

        
           

        

      

       

      iii. As
        used
        in this Section 6(d), the following terms shall have the meanings set forth
        below:

       

      1 “Target
        Price”
shall
        mean two hundred percent (300%) of the Conversion Price.

       

      2 “Trading
        Volume”
shall
        mean the trading volume of the Common Stock (as reported by Bloomberg L.P.
        or
        the Nasdaq Stock Market or the New York or American Stock Exchange, as the
        case
        may be).

       

      3 “Target
        Volume”
shall
        mean 100,000 shares (as adjusted to reflect any stock split, combination
        of shares,
        reclassification,
        recapitalization or other similar event affecting the number of outstanding
        shares of stock or securities).

       

      iv. Notwithstanding
        any other provision of this Section 6(d):

       

      1 In
        the
        event that, at any time subsequent to the Notice Date and before the Mandatory
        Conversion Date, the resale of the Conversion Shares are not covered by a
        current and effective Registration Statement, the Company’s right to mandate the
        conversion of the Series A Preferred Stock shall terminate with respect to
        all
        Series A Preferred Stock that have not then been converted. Nothing in the
        preceding sentence shall be construed to prohibit or restrict the Company
        from
        thereafter calling the Series A Preferred Stock for conversion in the manner
        provided for, and subject to the provisions of, this Section 6(d). 

       

      2 In
        the
        event that the exercise by the Company of its right pursuant to this Section
        6(d) would result in a violation of Section (6)(e) hereof, the Company shall
        not
        have the right to call for conversion of the Series A Preferred Stock to
        the
        extent that the conversion of the Series A Preferred Stock as to which the
        Mandatory Exercise Notice is given would result in such a
        violation.

       

      3 Subject
        to compliance with Section (6)(e) hereof, the Company shall have the right
        to
        call for conversion of the Series A Preferred Stock as to a Holder only if
        the
        Company is calling for conversion of the Series A Preferred Stock of all
        other
        Holders in accordance with this Section on a pro rata basis. 

       

      v. The
        Mandatory Conversion Notice shall specify (i) the number of Series A Preferred
        Stock required to be converted, (ii) the Mandatory Exercise Date, which shall
        be
        no less than twenty (20) Trading Days following the Notice Date, and (iii)
        the
        place where the shares of Series A Preferred Stock subject to the Mandatory
        Conversion Notice shall be delivered. No failure to mail such notice nor
        any
        defect therein or in the mailing thereof shall affect the validity of the
        proceedings for the Company’s right to mandate conversion of the Series A
        Preferred Stock by the Holder except as to a Holder (x) to whom notice was
        not
        mailed or (y) whose notice was defective. 

       

      
        
           

        

        
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      (e) Beneficial
        Ownership Limitation.
        Notwithstanding anything to the contrary set forth in this Certificate, at
        no
        time may a Holder convert shares of Series A Preferred Stock if the number
        of
        shares of Common Stock to be issued pursuant to such conversion would cause
        the
        number of shares of Common Stock owned by such Holder at such time to equal
        or
        exceed, when aggregated with all other shares of Common Stock owned by such
        Holder at such time, the number of shares of Common Stock which would result
        in
        such Holder beneficially owning (as determined in accordance with Section
        13(d)
        of the Securities Exchange Act of 1934, as amended, and the rules thereunder)
        in
        excess of 4.9% of the then issued and outstanding shares of Common Stock
        outstanding at such time; provided,
        however,
        that
        upon a Holder providing the Company with sixty-one (61) days notice (the
        "Waiver
        Notice")
        that
        such Holder wishes to waive this Section 6(e) with regard to any or all shares
        of Common Stock issuable upon conversion of such Holder’s Series A Preferred
        Stock, this Section 6(e) shall be of no force or effect with regard to those
        shares of Series A Preferred Stock referenced in the Waiver Notice. For
        purposes of this Section 6(e), in determining the number of outstanding shares
        of Common Stock, the Holder may rely on the number of outstanding shares
        of
        Common Stock as reflected in the most recent of the following: (A) the Company’s
        most recent quarterly reports (Form 10-Q), annual reports (Form 10-K), or
        definitive proxy statement or information statement as filed with the Commission
        under the Exchange Act, (B) a more recent public announcement by the Company,
        or
        (C) any other written notice by the Company or the Company’s transfer agent
        setting forth the number of shares of Common Stock outstanding.  Upon the
        written or oral request of the Holder, the Company shall within two (2) Trading
        Days confirm orally and in writing to the Holder the number of shares of
        Common
        Stock then outstanding.  In any case, the number of outstanding shares of
        Common Stock shall be determined after giving effect to the conversion or
        exercise of securities of the Company, including the Series A Preferred Stock,
        by the Holder or its affiliates since the date as of which such number of
        outstanding shares of Common Stock was publicly reported by the Company.
        

       

      (f) Mechanics
        of Conversion

       

      i. Delivery
        of Certificate Upon Conversion.
        Except
        as otherwise set forth herein, not later than three (3) Trading Days after
        each
        Conversion Date (the “Share
        Delivery Date”),
        the
        Company shall deliver to the Holder (A) a certificate or certificates which,
        after the effective date of the Registration Statement covering the sale
        of the
        Conversion Shares of such Holder (the “Effective
        Date”),
        shall
        be free of restrictive legends and trading restrictions (other than those
        required by the Purchase Agreements) representing the number of Conversion
        Shares being acquired upon the conversion of shares of Series A Preferred
        Stock,
        and (B) if applicable, a bank check in the amount of accrued and unpaid
        dividends (if the Company has elected or is required to pay accrued dividends
        in
        cash). After the Effective Date, the Company shall, upon request of the Holder,
        deliver any certificate or certificates required to be delivered by the Company
        under this Section electronically through the Depository Trust Company or
        another established clearing Company performing similar functions if the
        Company’s transfer agent has the ability to deliver shares of Common Stock in
        such manner. If in the case of any Notice of Conversion such certificate
        or
        certificates are not delivered to or as directed by the applicable Holder
        by the
        third Trading Day after the Conversion Date, the Holder shall be entitled
        to
        elect by written notice to the Company at any time on or before its receipt
        of
        such certificate or certificates thereafter, to rescind such conversion,
        in
        which event the Company shall immediately return the certificates representing
        the shares of Series A Preferred Stock tendered for conversion.

       

      
        
           

        

        
          10

          
            

          

        

        
           

        

      

       

      ii. Obligation
        Absolute; Partial Liquidated Damages.
        The
        Company’s obligations to issue and deliver the Conversion Shares upon conversion
        of Series A Preferred Stock in accordance with the terms hereof are absolute
        and
        unconditional, irrespective of any action or inaction by the Holder to enforce
        the same, any waiver or consent with respect to any provision hereof, the
        recovery of any judgment against any Person or any action to enforce the
        same,
        or any setoff, counterclaim, recoupment, limitation or termination, or any
        breach or alleged breach by the Holder or any other Person of any obligation
        to
        the Company or any violation or alleged violation of law by the Holder or
        any
        other person, and irrespective of any other circumstance which might otherwise
        limit such obligation of the Company to the Holder in connection with the
        issuance of such Conversion Shares. In the event a Holder shall elect to
        convert
        any or all of its Series A Preferred Stock, the Company may not refuse
        conversion based on any claim that such Holder or any one associated or
        affiliated with the Holder of has been engaged in any violation of law,
        agreement or for any other reason (other than the inability of the Company
        to
        issue shares of Common Stock as a result of the limitation set forth in Section
        6(e) hereof) unless an injunction from a court, on notice, restraining and
        or
        enjoining conversion of all or part of this Series A Preferred Stock shall
        have
        been sought and obtained and the Company posts a surety bond for the benefit
        of
        the Holder in the amount of 150% of the Liquidation Value of Series A Preferred
        Stock which is subject to the injunction, which bond shall remain in effect
        until the completion of arbitration/litigation of the dispute and the proceeds
        of which shall be payable to such Holder to the extent it obtains judgment.
        In
        the absence of an injunction precluding the same, the Company shall issue
        Conversion Shares or, if applicable, cash, upon a properly noticed conversion.
        Nothing herein shall limit a Holder’s right to pursue actual damages for the
        Company’s failure to deliver certificates representing the Conversion Shares
        upon conversion within the period specified herein and such Holder shall
        have
        the right to pursue all remedies available to it hereunder, at law or in
        equity
        including, without limitation, a decree of specific performance and/or
        injunctive relief.

       

      iii. Compensation
        for “Buy-In on Failure to Timely Deliver Certificates Upon
        Conversion.
        If the
        Company fails to deliver to the Holder such certificate or certificates pursuant
        to Section 6(f)(1) by a Share Delivery Date, and if after such Share Delivery
        Date the Holder purchases (in an open market transaction or otherwise) Common
        Stock to deliver in satisfaction of a sale by such Holder of the Conversion
        Shares which the Holder was entitled to receive upon the conversion relating
        to
        such Share Delivery Date (a “Buy-In”),
        then
        the Company shall pay in cash to the Holder the amount by which (x) the Holder’s
        total purchase price (including brokerage commissions, if any) for the Common
        Stock so purchased exceeds (y) the product of (1) the aggregate number of
        shares
        of Common Stock that such Holder was entitled to receive from the conversion
        at
        issue multiplied by (2) the price at which the sell order giving rise to
        such
        purchase obligation was executed. For example, if the Holder purchases Common
        Stock having a total purchase price of $11,000 to cover a Buy-In with respect
        to
        an attempted conversion of shares of Series A Preferred Stock with respect
        to
        which the aggregate sale price giving rise to such purchase obligation is
        $10,000, the Company shall be required to pay the Holder $1,000 hereunder.
        The
        Holder shall provide the Company written notice indicating the amounts payable
        to the Holder in respect of the Buy-In, together with applicable confirmations
        and other evidence reasonably requested by the Company. Nothing herein shall
        limit a Holder’s right to pursue any other remedies available to it hereunder,
        at law or in equity including, without limitation, a decree of specific
        performance and/or injunctive relief with respect to the Company’s failure to
        timely deliver certificates representing shares of Common Stock upon conversion
        of the shares of Series A Preferred Stock as required pursuant to the terms
        hereof.

       

      
        
           

        

        
          11

          
            

          

        

        
           

        

      

       

      (g) Reservation
        of Shares Issuable Upon Conversion.
        The
        Company covenants that it will at all times reserve and keep available out
        of
        its authorized and unissued shares of Common Stock solely for the purpose
        of
        issuance upon conversion of the Series A Preferred Stock, each as herein
        provided, free from preemptive rights or any other actual or contingent purchase
        rights of persons other than the Holders, not less than such number of shares
        of
        the Common Stock as shall (subject to any additional requirements of the
        Company
        as to reservation of such shares set forth in the Purchase Agreements) be
        issuable upon the conversion of all outstanding shares of Series A Preferred
        Stock. The Company covenants that all shares of Common Stock that shall be
        so
        issuable shall, upon issue, be duly and validly authorized, issued and fully
        paid, nonassessable. The Company shall immediately, in accordance with the
        laws
        of the State of Delaware, increase the authorized amount of its Common Stock
        if,
        at any time, the authorized amount of its Common Stock, remaining unissued
        shall
        not be sufficient to permit the conversion of all shares of Series A Preferred
        Stock.

       

      (h) Fractional
        Shares.
        No
        fractional shares shall be issued upon the conversion of any share or shares
        of
        the Series A Preferred Stock, and the number of shares of Common Stock to
        be
        issued shall be rounded up to the nearest whole share. The number of shares
        issuable upon conversion shall be determined on the basis of the total number
        of
        shares of Series A Preferred Stock the holder is at the time converting into
        Common Stock and the number of shares of Common Stock issuable upon such
        aggregate conversion.

       

      (i) No
        Charge for Conversion; Transfer Taxes.
        The
        issuance of certificates for shares of Common Stock upon the conversion of
        shares of Series A Preferred Stock shall be made without charge to the
        converting Holders for such certificates. The issuance of certificates for
        shares of the Common Stock on conversion of the Series A Preferred Stock
        shall
        be made without charge to the Holders thereof for any documentary stamp or
        similar taxes that may be payable in respect of the issue or delivery of
        such
        certificate, provided that the Company shall not be required to pay any tax
        that
        may be payable in respect of any transfer involved in the issuance and delivery
        of any such certificate upon conversion in a name other than that of the
        Holder
        of such shares of Series A Preferred Stock so converted and the Company shall
        not be required to issue or deliver such certificates unless or until the
        person
        or persons requesting the issuance thereof shall have paid to the Company
        the
        amount of such tax or shall have established to the satisfaction of the Company
        that such tax has been paid.

       

      (j) Absolute
        Obligation.
        Except
        as expressly provided herein, no provision of this Certificate shall alter
        or
        impair the obligation of the Company, which is absolute and unconditional,
        to
        pay the liquidated damages (if any) on, the shares of Series A Preferred
        Stock
        at the time, place, and rate, and in the coin or currency, herein
        prescribed.

       

      Section
        7.
         Certain
        Adjustments.

       

      (a) Stock
        Dividends and Stock Splits.
        If the
        Company, at any time subsequent to the Closing Date as long as any shares
        of
        Series A Preferred Stock shall remain outstanding: (i) shall pay a stock
        dividend or otherwise make a distribution or distributions on shares of its
        Common Stock or any other equity or equity equivalent securities payable
        in
        shares of Common Stock (which, for avoidance of doubt, shall not include
        any
        securities issued pursuant to the Purchase Agreements), (ii) subdivide
        outstanding shares of Common Stock into a larger number of shares, (iii)
        combine
        outstanding shares of Common Stock into a smaller number of shares, or (iv)
        issue by reclassification of shares of the Common Stock any shares of capital
        stock of the Company, then the Conversion Price shall be multiplied by a
        fraction of which the numerator shall be the number of shares of Common Stock
        (excluding treasury shares, if any) outstanding before such event and of
        which
        the denominator shall be the number of shares of Common Stock outstanding
        after
        such event. Any adjustment made pursuant to this Section shall become effective
        immediately after the record date for the determination of stockholders entitled
        to receive such dividend or distribution and shall become effective immediately
        after the effective date in the case of a subdivision, combination or
        reclassification.

       

      
        
           

        

        
          12

          
            

          

        

        
           

        

      

       

      (b) Subsequent
        Transactions.
        Except
        as contemplated under the Purchase Agreements, for so long as any shares
        of
        Series A Preferred Stock shall remain outstanding, the Company shall not
        effect
        or enter into an agreement to effect any transactions involving a “Variable Rate
        Transaction” or an “MFN Transaction” (each as defined below). Following the
        Closing Date, if the Company enters into a Variable Rate Transaction or MFN
        Transaction (except for the Additional Series A Financing), despite the
        prohibition hereof and in the Purchase Agreements, in addition to other remedies
        that the Company may have, the Company shall be deemed to have issued Common
        Stock at the lowest possible conversion or exercise price at which such
        securities may be converted or exercised and Holders shall be entitled to
        adjustment to the Conversion Price pursuant to Section 7(c) hereof and receive
        additional shares or other rights and benefits to the effect that Holder
        shall
        enjoy substantially similar terms and conditions as those offered in the
        Variable Rate Transaction and/r MFN Transaction. The term “Variable
        Rate Transaction”
shall
        mean a transaction in which the Company issues or sells (i) any debt or equity
        securities that are convertible into, exchangeable or exercisable for, or
        include the right to receive additional shares of Common Stock either (A)
        at a
        conversion, exercise or exchange rate or other price that is based upon and/or
        varies with the trading prices of or quotations for the shares of Common
        Stock
        at any time after the initial issuance of such debt or equity securities,
        or (B)
        with a conversion, exercise or exchange price that is subject to being reset
        at
        some future date after the initial issuance of such debt or equity security
        or
        upon the occurrence of specified or contingent events directly or indirectly
        related to the business of the Company or the market for the Common Stock.
        The
        term “MFN
        Transaction”
shall
        mean a transaction in which the Company issues or sells any securities in
        a
        capital raising transaction or series of related transactions on terms and
        conditions more favorable than those granted to the investors under the Purchase
        Agreements and related transaction documents. Any Purchaser shall be entitled
        to
        obtain injunctive relief against the Company to preclude any such issuance,
        which remedy shall be in addition to any right to collect damages.
        Notwithstanding the foregoing, this Section 7(b) shall not apply in respect
        of
        an Exempt Issuance, except that no Variable Rate Transaction or MFN Transaction
        shall be an Exempt Issuance.

       

      (c) Price
        Adjustment Upon Dilutive Issuances.
        

       

      i. For
        so
        long as any shares of Series A Preferred Stock shall remain outstanding,
        following the Closing Date, in the event the Company closes on the sale or
        issuance of (A) Common Stock at a price, or (B) any securities convertible
        into
        or exchangeable for, directly or indirectly, Common Stock (“Convertible
        Securities”),
        or
        any rights or warrants or options to purchase any such Common Stock or
        Convertible Securities (collectively, the “Additional
        Issuances”)
        with
        an exercise price or conversion price, which is less than the Conversion
        Price
        then in effect (such lower sales price, conversion or exercise price, as
        the
        case may be, being referred to as the “Lower
        Price”),
        then
        and in such event, the Conversion Price shall be reduced, concurrently with
        such
        issue or sale, to the Lower Price. 

       

      
        
           

        

        
          13

          
            

          

        

        
           

        

      

       

      ii. Notwithstanding
        anything to the contrary set forth in Section 7(c)(i), no adjustment shall
        be
        made to the Conversion Price and/or the Conversion Ratio with regard to (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 $20,000,000 and shall
        have been approved in advance by the Majority Holders, (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 (each an “Exempt
        Issuance”).

       

      (d) Pro
        Rata Distributions.
        If the
        Company, at any time after the Closing, shall distribute to all holders of
        Common Stock (and not to Holders) evidences of its indebtedness or assets
        or
        rights or warrants to subscribe for or purchase any security, then in each
        such
        case the Conversion Price shall be determined by multiplying such Conversion
        Price in effect immediately prior to the record date fixed for determination
        of
        stockholders entitled to receive such distribution by a fraction of which
        the
        denominator shall be the VWAP determined as of the record date mentioned
        above,
        and of which the numerator shall be such VWAP on such record date less the
        then
        fair market value at such record date of the portion of such assets or evidence
        of indebtedness so distributed applicable to one outstanding share of the
        Common
        Stock as determined by the Board of Directors in good faith. In either case
        the
        adjustments shall be described in a statement provided to the Holders of
        the
        portion of assets or evidences of indebtedness so distributed or such
        subscription rights applicable to one share of Common Stock. Such adjustment
        shall be made whenever any such distribution is made and shall become effective
        immediately after the record date mentioned above.

       

      (e) Price
        Reset upon Restatement of 2007 Financials.
        For the
        period of time between the Closing and the filing of an Annual Report on
        Form
        10-K for the Fiscal Year ended December 31, 2008, in the event the Company
        restates its audited and consolidated financial statements for the fiscal
        year
        ended December 31, 2007 to the effect that the restated consolidated [After-Tax]
        Net Income (the “Restated 2007 After-Tax Net Income”) is lower than 90% of
        $2,832,889, the current audited and consolidated After-Tax Net Income for
        the
        fiscal year ended December 31, 2007, then the Conversion Price shall be adjusted
        as follows: the new Conversion Price shall be equal to the amount calculated
        by
        dividing (A) the product of Restated 2007 After-Tax Net Income and 5.45,
        by (B)
        the total number of Common Stock issued and outstanding immediately prior
        to the
        Closing. 

       

      
        
           

        

        
          14

          
            

          

        

        
           

        

      

       

      (f) Calculations.
        All
        calculations under this Section 7 shall be made to the nearest cent or the
        nearest 1/100th of a share, as the case may be. The number of shares of Common
        Stock outstanding at any given time shall not include shares owned or held
        by or
        for the account of the Company or any of its subsidiaries. For purposes of
        this
        Section 7, the number of shares of Common Stock deemed to be issued and
        outstanding as of a given date shall be the sum of the number of shares of
        Common Stock (excluding treasury shares and shares owned by subsidiaries,
        if
        any) actually issued and outstanding.

       

      (g) Notice
        to Holders.

       

      i. Adjustment
        to Conversion Price.
        Whenever
        the Conversion Price is adjusted pursuant to any of this Section 7, the Company
        shall promptly mail to each Holder a notice setting forth the Conversion
        Price
        after such adjustment and setting forth a brief statement of the facts requiring
        such adjustment. 

       

      ii. Notices
        of Other Events.
        If (A)
        notwithstanding Section 3(a), the Company shall declare a dividend (or any
        other
        distribution) on the Common Stock; (B) the Company shall declare a redemption
        of
        the Common Stock; (C) the Company shall authorize the granting to all holders
        of
        the Common Stock rights or warrants to subscribe for or purchase any shares
        of
        capital stock of any class or of any rights; (D) the approval of any
        stockholders of the Company shall be required in connection with any
        reclassification of the Common Stock or any Fundamental Transaction, (E)
        the
        Company shall authorize the voluntary or involuntary dissolution, liquidation
        or
        winding up of the affairs of the Company; then in each such case, the Company
        shall cause to be filed at each office or agency maintained for the purpose
        of
        conversion of the Series A Preferred Stock, and shall cause to be mailed
        to
        the Holders at their last addresses as they shall appear upon the stock
        books of
        the
        Company, at least 10 calendar days prior to the applicable record or effective
        date hereinafter specified, a notice stating (x) the date on which a record
        is
        to be taken for the purpose of such dividend, distribution, redemption, rights
        or warrants, or if a record is not to be taken, the date as of which the
        holders
        of the Common Stock of record to be entitled to such dividend, distributions,
        redemption, rights or warrants are to be determined or (y) the date on which
        such reclassification is expected to become effective or close, and the date
        as
        of which it is expected that holders of the Common Stock of record shall
        be
        entitled to exchange their shares of the Common Stock for securities, cash
        or
        other property deliverable upon such reclassification or Fundamental
        Transaction; provided,
        that
        the failure to mail such notice or any defect therein or in the mailing thereof
        shall not affect the validity of the corporate action required to be specified
        in such notice.

       

      
        
           

        

        
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      (h) Fundamental
        Transaction.
        If, at
        any time while any shares of Series A Preferred Stock shall remain outstanding,
        (i) the Company effects any merger or consolidation of the Company with or
        into
        another Person, (ii) the Company effects any sale of all or substantially
        all of
        its assets in one or a series of related transactions, (iii) any tender offer
        or
        exchange offer (whether by the Company or another Person) is completed pursuant
        to which holders of Common Stock are permitted to tender or exchange their
        shares for other securities, cash or property, or (iv) the Company effects
        any
        reclassification of the Common Stock or any compulsory share exchange pursuant
        to which the Common Stock is effectively converted into or exchanged for
        other
        securities, cash or property (in any such case, a “Fundamental
        Transaction”),
        then
        upon any subsequent conversion of this Series A Preferred Stock, the Holder
        shall have the right to receive, for each Conversion Share that would have
        been
        issuable upon such conversion absent such Fundamental Transaction, the same
        kind
        and amount of securities, cash or property as it would have been entitled
        to
        receive upon the occurrence of such Fundamental Transaction as if it had
        been,
        immediately prior to such Fundamental Transaction, the holder of one share
        of
        Common Stock (the “Alternate
        Consideration”).
        For
        purposes of any such conversion, the determination of the Conversion Price
        shall
        be appropriately adjusted to apply to such Alternate Consideration based
        on the
        amount of Alternate Consideration issuable in respect of one share of Common
        Stock in such Fundamental Transaction, and the Company shall apportion the
        Conversion Price among the Alternate Consideration in a reasonable manner
        reflecting the relative value of any different components of the Alternate
        Consideration. If holders of Common Stock are given any choice as to the
        securities, cash or property to be received in a Fundamental Transaction,
        then
        the Holder shall be given the same choice as to the Alternate Consideration
        it
        receives upon any conversion of this Series A Preferred Stock following such
        Fundamental Transaction. To the extent necessary to effectuate the foregoing
        provisions, any successor to the Company or surviving entity in such Fundamental
        Transaction shall file a new Certificate with the same terms and conditions
        and
        issue to the Holder new preferred stock consistent with the foregoing provisions
        and evidencing the Holder’s right to convert such preferred stock into Alternate
        Consideration. The terms of any agreement pursuant to which a Fundamental
        Transaction is effected shall include terms requiring any such successor
        or
        surviving entity to comply with the provisions of this paragraph (h) and
        insuring that this Series A Preferred Stock (or any such replacement security)
        will be similarly adjusted upon any subsequent transaction analogous to a
        Fundamental Transaction. Notwithstanding the foregoing or any other provisions
        of this Certificate, in the event that the agreement relating to a Fundamental
        Transaction provides for the conversion or exchange of the Series A Preferred
        Stock into equity or debt securities, cash or other consideration and the
        agreement is approved by the Majority Holders, then the Holders shall have
        only
        the rights set forth in such agreement.

       

      Section
        8.
         Miscellaneous.
        

      


      (a) Notices.
        Any and
        all notices or other communications or deliveries to be provided by the Holders
        hereunder, including, without limitation, any Notice of Conversion, shall
        be in
        writing and delivered personally, by facsimile, sent by a nationally recognized
        overnight courier service, addressed to the Company, at its principal address
        as
        reflected in its most recent filing with the Commission. Any and all notices
        or
        other communications or deliveries to be provided by the Company hereunder
        shall
        be in writing and delivered personally, by facsimile, sent by a nationally
        recognized overnight courier service addressed to each Holder at the facsimile
        telephone number or address of such Holder appearing on the books of the
        Company, or if no such facsimile telephone number or address appears, at
        the
        principal place of business of the Holder. Any notice or other communication
        or
        deliveries hereunder shall be deemed given when received, and any notice
        by
        telecopier shall be effective if confirmation of receipt is given by the
        party
        to whom the notice is transmitted. 

       

      (b) Lost
        or Mutilated Preferred Stock Certificate.
        If a
        Holder’s Series A Preferred Stock certificate shall be mutilated, lost, stolen
        or destroyed, the Company shall execute and deliver, in exchange and
        substitution for and upon cancellation of a mutilated certificate, or in
        lieu of
        or in substitution for a lost, stolen or destroyed certificate, a new
        certificate for the shares of Series A Preferred Stock so mutilated, lost,
        stolen or destroyed but only upon receipt of evidence of such loss, theft
        or
        destruction of such certificate, and of the ownership thereof, and indemnity,
        if
        requested, all reasonably satisfactory to the Company.

       

      
        
           

        

        
          16

          
            

          

        

        
           

        

      

       

      (c) Next
        Trading Day.
        Whenever any payment or other obligation hereunder shall be due on a day
        other
        than a Trading Day, such payment shall be made on the next succeeding Trading
        Day.

       

      (d) Headings.
        The
        headings contained herein are for convenience only, do not constitute a part
        of
        this Certificate and shall not be deemed to limit or affect any of the
        provisions hereof.

       

      (e) Amendment.
        This
        Certificate constitutes an agreement between the Company and the Holders.
        For as
        long as any shares of Series A Preferred Stock shall remain outstanding,
        there
        terms hereof may be amended, modified, repealed or waived only by the
        affirmative vote or written consent of holders of a majority of the then
        outstanding shares of Series A Preferred Stock, voting together as a class
        and
        series.

      


      RESOLVED,
        FURTHER,
        that
        the Chairman, the president or any vice-president, and the secretary or any
        assistant secretary, of the Company be and they hereby are authorized and
        directed to prepare and file a Certificate of Designation of Preferences,
        Rights
        and Limitations in accordance with the foregoing resolution and the provisions
        of Delaware law.

       

      IN
        WITNESS WHEREOF, the undersigned has executed this Certificate this as of
        this
        August 20, 2008.

       

      
        	
                /s/
                  Jiaji Shang

              	 
	
                Name:
                  Jiaji Shang

              
	
                Title:
                  Chief Executive Officer

                and
                  Chairman of the Board of

                Directors

              


      


      
        
           

        

        
          17

          
            

          

        

        
           

        

      

      


      ANNEX
        A

      


      NOTICE
        OF CONVERSION

      


      (TO
        BE
        EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT SHARES

      OF
        SERIES
        A PREFERRED STOCK)

      


      The
        undersigned hereby elects to convert the number of shares of Series A
        Convertible Preferred Stock indicated below, into shares of common stock,
        par
        value $0.001 per share (the “Common
        Stock”),
        of
        CHINA NEW ENERGY GROUP COMPANY,
        a
        Delaware corporation (the “Company”),
        according to the conditions hereof, as of the date written below. If shares
        are
        to be issued in the name of a person other than undersigned, the undersigned
        will pay all transfer taxes payable with respect thereto and is delivering
        herewith such certificates and opinions as reasonably requested by the Company
        in accordance therewith. No fee will be charged to the Holder for any
        conversion, except for such transfer taxes, if any.

      Conversion
        calculations:

      


      Date
        to
        Effect Conversion:

      ________________________________________

      


      Number
        of
        shares of Common Stock owned prior to Conversion:

      _______________

      


      Number
        of
        shares of Series A Preferred Stock to be Converted:

      ________________

      


      Value
        of
        shares of Series A Preferred Stock to be Converted:

      ____________________

      


      Number
        of
        shares of Common Stock to be Issued:

      ___________________________

      


      Certificate
        Number of Series A Preferred Stock attached

      hereto:
        _________________

      


      Number
        of
        Shares of Series A Preferred Stock represented by attached

      certificate:
        _________

      


      Number
        of
        shares of Series A Preferred Stock subsequent to

      Conversion:
        ________________

      


      
        	 	
                [HOLDER]

              
	 	 	 
	 	
                By:

              	 	 
	 	 	
                Name:

              
	 	 	
                Title:

              


      

      


      
        
           

        

        
          18