ex10_2.htm


  
    Exhibit 10.2

    SECURITY
AGREEMENT

    


    This
SECURITY AGREEMENT, dated as of February 28, 2008 (this “Agreement”), is among
CHINA NORTH EAST PETEROLUM
HOLDINGS LIMITED, a Nevada corporation (the “Company” or the
“Debtor”) and the holders of the Company’s 8% Secured Debentures due February
27, 2012 and issued on February 28, 2008 in the original aggregate
principal amount of U.S. $15,000,000 (collectively, the “Debentures”) signatory hereto,
their endorsees, transferees and assigns (collectively, the “Secured Party”).

    


    W
I T N E S S E T H:

    


                  WHEREAS,
pursuant to the Securities Purchase Agreement (as defined in the
Debentures), the Secured Party has agreed to extend the loan in the principal
amount of U.S. $15,000,000.00 to the Company evidenced by the
Debentures;

    


                
WHEREAS, in order to induce the Secured Party to extend the loan, the Debtor has
agreed to execute and deliver to the Secured Party this Agreement and to grant
the Secured Party a security interest in certain property of such Debtor to
secure the prompt payment, performance and discharge in full of all of the
Company’s obligations under the Debentures.

     

     
NOW, THEREFORE, in consideration of the agreements herein contained and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the Party hereto hereby agree as follows:

    


                
 1.              Certain Definitions. As used
in this Agreement, the following terms shall have the meanings set forth in this
Section 1.  Terms used but not otherwise defined in this Agreement
that are defined in Article 9 of the UCC (such as “account”, “chattel paper”,
“commercial tort claim”, “deposit account”, “document”, “equipment”, “fixtures”,
“general intangibles”, “goods”, “instruments”, “inventory”, “investment
property”, “letter-of-credit rights”, “proceeds” and “supporting obligations”)
shall have the respective meanings given such terms in Article 9 of the UCC
under the laws of the State of New York.

    


    (a)           “Collateral” means the
collateral in which the Secured Party is granted a security interest by
this Agreement and which shall include the following personal property of the
Debtor, whether presently owned or existing or hereafter acquired or coming into
existence, wherever situated, and all additions and accessions thereto and all
substitutions and replacements thereof, and all proceeds, products and accounts
thereof, including, without limitation, all proceeds from the sale or transfer
of the Collateral and of insurance covering the same and of any tort claims in
connection therewith, and all dividends, interest, cash, notes, securities,
equity interest or other property at any time and from time to time
acquired, receivable or otherwise distributed in respect of, or in exchange for,
any or all of the Pledged Securities (as defined below):

     

    
      
         


      

      
        1

        
          

        

      

      
         


      

    

     

    (i)            
All goods, including, without limitation, (A) all machinery, equipment,
computers, motor vehicles, trucks, tanks, boats, ships, appliances, furniture,
special and general tools, fixtures, test and quality control devices and other
equipment of every kind and nature and wherever situated, together with all
documents of title and documents representing the same, all additions and
accessions thereto, replacements therefor, all parts therefor, and all
substitutes for any of the foregoing and all other items used and useful in
connection with Debtor’s businesses and all improvements thereto; and (B) all
inventory;

    


    (ii)
           All contract
rights and other general intangibles, including, without limitation, all
partnership interests, membership interests, stock or other securities, rights
under any of the Organizational Documents, agreements related to the Pledged
Securities (except with respect to the Company’s ownership of the registered
capital of Song Yuan North East Petroleum Technical Service Co. Ltd. (“Song Yuan
Technical”), which shall be subject to the terms provided in the
Onshore Share Pledge Agreement, licenses, distribution and other
agreements, computer software (whether “off-the-shelf”, licensed from any third
party or developed by Debtor), computer software development rights, leases,
franchises, customer lists, quality control procedures, grants and rights,
goodwill, trademarks, service marks, trade styles, trade names, patents, patent
applications, copyrights, and income tax refunds;

     

    (iii)           All
accounts, together with all instruments, all documents of title representing any
of the foregoing, all rights in any merchandising, goods, equipment, motor
vehicles and trucks which any of the same may represent, and all right, title,
security and guaranties with respect to each account, including any right of
stoppage in transit;

    


    (iv)           All documents, letter-of-credit
rights, instruments and chattel paper;

    


    (v)          
 All commercial tort claims;

    


    (vi)           All
deposit accounts and all cash (whether or not deposited in such deposit
accounts);

    


    (vii)          All
investment property;

    


    (viii)         All
supporting obligations; and

    


    (ix)           All
files, records, books of account, business papers, and computer programs;
and


    
      
         


      

      
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    (x)           
The 8% Secured Debenture in the aggregate principal amount of U.S.$15,000,000.00
executed by Song Yuan Technical in favor of the Company (the “Intercompany
Debenture”) and dated of even date herewith.

    


    (xi)           
66% of the registered capital of Song Yuan Technicalbeneficially owned by the
Company, and such number of shares in thefuture so as to represent, for so long
as any principal and or interest on the Debentures remain unpaid, 66% of the
total registered capital of Song Yuan Technical owned by the Company, the terms
and provisions of such pledge being governed by the Onshore Share Pledge
Agreement executed by the Company and the Secured
Party.  

    


    (xii)          The
products and proceeds of all of the foregoing Collateral set forth in clauses
(i)-(xi) above.

    


    Without
limiting the generality of the foregoing, the “Collateral” shall
include all investment property and general intangibles respecting ownership,
including, without limitation, the shares of capital stock and the other equity
interests listed on Schedule B hereto (as the same
may be modified from time to time pursuant to the terms hereof), and any other
shares of capital stock and/or other equity interests of any other direct or
indirect subsidiary of Debtor obtained in the future, and, in each case, all
certificates representing such shares and/or equity interests and, in each case,
all rights, options, warrants, stock, other securities and/or equity interests
that may hereafter be received, receivable or distributed in respect of, or
exchanged for, any of the foregoing and all rights arising under or in
connection with the Pledged Securities, including, but not limited to, all
dividends, interest and cash.

     

    Notwithstanding
the foregoing, nothing herein shall be deemed to constitute an assignment of any
asset which, in the event of an assignment, becomes void by operation of
applicable law or the assignment of which is otherwise prohibited by applicable
law (in each case to the extent that such applicable law is not overridden by
Sections 9-406, 9-407 and/or 9-408 of the UCC or other similar applicable law);
provided, however, that to the
extent permitted by applicable law, this Agreement shall create a valid security
interest in such asset and, to the extent permitted by applicable law, this
Agreement shall create a valid security interest in the proceeds of such
asset.

     

    
      
         


      

      
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    (b)           “Intellectual
Property” means the collective reference to all rights, priorities and
privileges relating to intellectual property, whether arising under United
States, multinational or foreign laws or otherwise, including, without
limitation, (i) all copyrights arising under the laws of the United States, any
other country or any political subdivision thereof, whether registered or
unregistered and whether published or unpublished, all registrations and
recordings thereof, and all applications in connection therewith, including,
without limitation, all registrations, recordings and applications in the United
States Copyright Office, (ii) all letters patent of the United States, any other
country or any political subdivision thereof, all reissues and extensions
thereof, and all applications for letters patent of the United States or any
other country and all divisions, continuations and continuations-in-part
thereof, (iii) all trademarks, trade names, corporate names, company names,
business names, fictitious business names, trade dress, service marks, logos,
domain names and other source or business identifiers, and all goodwill
associated therewith, now existing or hereafter adopted or acquired, all
registrations and recordings thereof, and all applications in connection
therewith, whether in the United States Patent and Trademark Office or in any
similar office or agency of the United States, any State thereof or any other
country or any political subdivision thereof, or otherwise, and all common law
rights related thereto, (iv) all trade secrets arising under the laws of the
United States, any other country or any political subdivision thereof, (v) all
rights to obtain any reissues, renewals or extensions of the foregoing, (vi) all
licenses for any of the foregoing, and (vii) all causes of action for
infringement of the foregoing.

    


                  
 (c)            “Majority in
Interest” means, at any time of determination, the majority in
interest (based on then-outstanding principal amounts of Debentures at the time
of such determination) of the Secured Party.

    


                  
 (d)            “Necessary
Endorsement” means undated stock powers endorsed in blank or other
proper instruments of assignment duly executed and such other instruments or
documents as Secured Party (as that term is defined below) may reasonably
request.

    


    (e)            “Obligations” means
all of the liabilities and obligations (primary, secondary, direct,
contingent, sole, joint or several) due or to become due, or that are now or may
be hereafter contracted or acquired, or owing to, of Debtor to the Secured
Party, including, without limitation, all obligations under this Agreement, the
Debentures, and any other instruments, agreements or other documents executed
and/or delivered in connection herewith or therewith, in each case, whether now
or hereafter existing, voluntary or involuntary, direct or indirect, absolute or
contingent, liquidated or unliquidated, whether or not jointly owed with others,
and whether or not from time to time decreased or extinguished and later
increased, created or incurred, and all or any portion of such obligations or
liabilities that are paid, to the extent all or any part of such payment is
avoided or recovered directly or indirectly from any of the Secured Party as a
preference, fraudulent transfer or otherwise as such obligations may be amended,
supplemented, converted, extended or modified from time to
time.  Without limiting the generality of the foregoing, the term
“Obligations” shall include, without limitation: (i) principal of, and interest
on the Debentures and the loans extended pursuant thereto; (ii) any and all
other fees, indemnities, costs, obligations
and liabilities of the Debtor from time to time under or in connection with this
Agreement, the Debentures, and any other instruments, agreements or other
documents executed and/or delivered in connection herewith or therewith; and
(iii) all amounts (including but not limited to post-petition interest) in
respect of the foregoing that would be payable but for the fact that the
obligations to pay such amounts are unenforceable or not allowable due to the
existence of a bankruptcy, reorganization or similar proceeding involving
Debtor.


    
      
         


      

      
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    (f)       
    “Organizational
Documents” means with respect to Debtor, the documents by which such
Debtor was organized (such as a certificate of incorporation, certificate of
limited partnership or articles of organization, and including, without
limitation, any certificates of designation for preferred stock or other forms
of preferred equity) and which relate to the internal governance of such Debtor
(such as bylaws, a partnership agreement or an operating, limited liability or
members agreement).

    


      
 (g)            “Pledged Securities”
shall have the meaning ascribed to such term in Section 4(i).

    


    (h)          
 “UCC”
means the Uniform Commercial Code of the State of New York and or any other
applicable law of any state or states which has jurisdiction with respect to
all, or any portion of, the Collateral or this Agreement, from time to
time.  It is the intent of the Party that defined terms in the UCC
should be construed in their broadest sense so that the term “Collateral” will
be construed in its broadest sense.  Accordingly if there are, from
time to time, changes to defined terms in the UCC that broaden the definitions,
they are incorporated herein and if existing definitions in the UCC are broader
than the amended definitions, the existing ones shall be
controlling.

    


               2.           Grant of Security Interest in Collateral. As an
inducement for the Secured Party to extend the loans as evidenced by the
Debentures and to secure the complete and timely payment, performance and
discharge in full, as the case may be, of all of the Obligations, the Debtor
hereby unconditionally and irrevocably pledges, grants and hypothecates to the
Secured Party a security interest in and to, a lien upon and a right of set-off
against all of their respective right, title and interest of whatsoever kind and
nature in and to, the Collateral (a “Security Interest” and,
collectively, the “Security Interests”).
Notwithstanding the foregoing, the Secured Party’s security interest with
respect to the Pledged Securities and its beneficial ownership of the registered
capital of Song Yuan North East Petroleum Technical Service Co. Ltd. shall be
governed by the terms and provisions of the Onshore Share Pledge Agreement
and Option Agreement executed by the Company and the Secured Party on the date
hereof.

    


               3.           Delivery of Certain
Collateral.  Contemporaneously or prior to the execution of
this Agreement, the Debtor shall deliver or cause to be delivered to the Secured
Party (a) any and all certificates and other instruments representing or
evidencing the Pledged Securities, and (b) any and all certificates and other
instruments or documents representing any of the other Collateral, in each case,
together with all Necessary Endorsements.  The Debtor is,
contemporaneously with the execution hereof, delivering to Secured
Party or have previously delivered to Secured Party, a true and correct
copy of each Organizational Document governing any of the Pledged
Securities.


    
      
         


      

      
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4.             Representations, Warranties,
Covenants and Agreements of the Debtors. Except as set forth under the
corresponding section of the disclosure schedules delivered to the Secured Party
concurrently herewith (the “Disclosure
Schedules”), which Disclosure Schedules shall be deemed a part hereof,
the Debtor represents and warrants to, and covenants and agrees with, the
Secured Party as follows:

    


    (a)           
The Debtor has the requisite corporate, partnership, limited liability company
or other power and authority to enter into this Agreement and otherwise to carry
out its obligations hereunder. The execution, delivery and performance by the
Debtor of this Agreement and the filings contemplated therein have been duly
authorized by all necessary action on the part of such Debtor and no further
action is required by such Debtor.  This Agreement has been duly
executed by the Debtor.  This Agreement constitutes the legal, valid
and binding obligation of the Debtor, enforceable against the Debtor in
accordance with its terms except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization and similar laws of general
application relating to or affecting the rights and remedies of creditors and by
general principles of equity.

     

      
 (b)           The
Debtor has no place of business or offices where their respective books of
account and records are kept (other than temporarily at the offices of its
attorneys or accountants) or places where Collateral is stored or located,
except as set forth on Schedule A attached
hereto.  Except as specifically set forth on Schedule A, the
Debtor is the record owner of the real property where such Collateral is
located, and there exist no mortgages or other liens on any such real property
except for Permitted Liens (as defined in the Debentures).  Except as
disclosed on Schedule
A, none of such Collateral is in the possession of any consignee, bailee,
warehouseman, Secured Party or processor.

    


    (c)           The
Debtor is the sole owner of the Collateral (except for non-exclusive licenses
granted by Debtor in the ordinary course of business), free and clear of any
liens, security interests, encumbrances, rights or claims, and are fully
authorized to grant the Security Interests.  There is not on file in
any governmental or regulatory authority, agency or recording office an
effective financing statement, security agreement, license or transfer or any
notice of any of the foregoing (other than those that will be filed in favor of
the Secured Party pursuant to this Agreement) covering or affecting any of the
Collateral.  Except pursuant to this Agreement, as long as this
Agreement shall be in effect, the Debtor shall not execute and shall not
knowingly permit to be on file in any such office or agency any other financing
statement or other document or instrument (except to the extent filed or
recorded in favor of the Secured Party pursuant to the terms of this
Agreement).


    
      
         


      

      
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    (d)           No
written claim has been received that any Collateral or Debtor's use of any
Collateral violates the rights of any third party. There has been no adverse
decision to Debtor's claim of ownership rights in or exclusive rights to use the
Collateral in any jurisdiction or to Debtor's right to keep and maintain such
Collateral in full force and effect, and there is no proceeding involving said
rights pending or, to the best knowledge of Debtor, threatened before any court,
judicial body, administrative or regulatory agency, arbitrator or other
governmental authority.

    


    (e)           The
Debtor shall at all times maintain its books of account and records relating to
the Collateral at its principal place of business and its Collateral at the
locations set forth on Schedule A attached
hereto and may not relocate such books of account and records or tangible
Collateral unless it delivers to the Secured Party at least 30 days prior to
such relocation (i) written notice of such relocation and the new location
thereof (which must be within the United States) and (ii) evidence that
appropriate financing statements under the UCC and other necessary documents
have been filed and recorded and other steps have been taken to perfect the
Security Interests to create in favor of the Secured Party a valid, perfected
and continuing perfected first priority lien in the Collateral.

    


    (f)           This
Agreement creates in favor of the Secured Party a valid security interest
in the Collateral, subject only to Permitted Liens (as defined in the
Debentures) securing the payment and performance of the
Obligations.  Upon making the filings described in the immediately
following paragraph, all security interests created hereunder in any Collateral
which may be perfected by filing Uniform Commercial Code financing statements
shall have been duly perfected.  Except for the filing of the Uniform
Commercial Code financing statements referred to in the immediately following
paragraph, the recordation of the Intellectual Property Security Agreement (as
defined below) with respect to copyrights and copyright applications in the
United States Copyright Office referred to in paragraph (m), the execution and
delivery of deposit account control agreements satisfying the requirements of
Section 9-104(a)(2) of the UCC with respect to each deposit account of the
Debtors, and the delivery of the certificates and other instruments provided in
Section 3, no action is necessary to create, perfect or protect the security
interests created hereunder.  Without limiting the generality of the
foregoing, except for the filing of said financing statements, the recordation
of said Intellectual Property Security Agreement, and the execution and delivery
of said deposit account control agreements, no consent of any third Party and no
authorization, approval or other action by, and no notice to or filing with, any
governmental authority or regulatory body is required for (i) the execution,
delivery and performance of this Agreement, (ii) the creation or perfection of
the Security Interests created hereunder in the Collateral or (iii) the
enforcement of the rights of Secured Party and the Secured Party
hereunder.


    
      
         


      

      
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     (g)         The
Debtor hereby authorizes Secured Party to file one or more financing statements
under the UCC, with respect to the Security Interests, with the proper filing
and recording agencies in any jurisdiction deemed proper by it.

    


     (h)         The
execution, delivery and performance of this Agreement by the Debtors does not
(i) violate any of the provisions of any Organizational Documents of Debtor or
any judgment, decree, order or award of any court, governmental body or
arbitrator or any applicable law, rule or regulation applicable to Debtor or
(ii) conflict with, or constitute a default (or an event that with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation (with or without
notice, lapse of time or both) of, any agreement, credit facility, debt or other
instrument (evidencing Debtor's debt or otherwise) or other understanding to
which Debtor is a party or by which any property or asset of Debtor is bound or
affected. If any, all required consents (including, without limitation, from
stockholders or creditors of Debtor) necessary for Debtor to enter into and
perform its obligations hereunder have been obtained.

    


     (i)          The
capital stock and other equity interests listed on Schedule B hereto (the “Pledged Securities”)
represent such capital stock and other equity interests and registered capital
owned, directly or indirectly, by the Company.  All of the Pledged
Securities are validly issued, fully paid and nonassessable, and the Company is
the legal and beneficial owner of the Pledged Securities, free and clear of any
lien, security interest or other encumbrance except for the security interests
created by this Agreement and other Permitted Liens (as defined in the
Debentures).  The registered capital of Song Yuan North East Petroleum
Technical Service Co. Ltd. has been duly recorded as being owned by the Company
in an amount equal to 90% of the total registered capital.  For
purposes hereof, the term Pledged Securities shall also include any share
capital, capital stock or registered capital of which the Company becomes an
owner after the date hereof.

    


    (j)           The
ownership and other equity interests in partnerships and limited liability
companies (if any) included in the Collateral (the “Pledged Interests”)
by their express terms do not provide that they are securities governed by
Article 8 of the UCC and are not held in a securities account or by any
financial intermediary.

    


    (k)          Except
for Permitted Liens (as defined in the Debentures), the Debtor shall at all
times maintain the liens and Security Interests provided for hereunder as valid
and perfected first priority liens and security interests in the Collateral in
favor of the Secured Party until this Agreement and the Security Interest
hereunder shall be terminated pursuant to Section 11 hereof.  The
Debtor hereby agrees to defend the same against the claims of any and all
persons and entities. The Debtor shall safeguard and protect all Collateral for
the account of the Secured Party.  At the request of Secured Party,
the Debtor will sign and deliver to Secured Party on behalf of the Secured Party
at any time or from time to time one or more financing statements pursuant to
the UCC in form reasonably satisfactory to Secured Party and will pay the cost
of filing the same in all public offices wherever filing is, or is deemed by
Secured Party to be, necessary or desirable to effect the rights and obligations
provided for herein. Without limiting the generality of the foregoing, the
Debtor shall pay all fees, taxes and other amounts necessary to maintain the
Collateral and the Security Interests hereunder, and the Debtor shall obtain and
furnish to Secured Party from time to time, upon demand, such releases and/or
subordinations of claims and liens which may be required to maintain the
priority of the Security Interests hereunder.


    
      
         


      

      
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    (l)          
No Debtor will transfer, pledge, hypothecate, encumber, license, sell or
otherwise dispose of any of the Collateral (except for non-exclusive licenses
granted by a Debtor in its ordinary course of business and sales of inventory by
a Debtor in its ordinary course of business) without the prior written consent
of a Majority in Interest.

    


    (m)         The
Debtor shall keep and preserve its equipment, inventory and other tangible
Collateral in good condition, repair and order and shall not operate or locate
any such Collateral (or cause to be operated or located) in any area excluded
from insurance coverage.

    


    (n)          The
Debtor shall use its reasonable efforts to obtain, if available,
through  financially sound and reputable insurers, insurance with
respect to the Collateral, including Collateral hereafter acquired, against loss
or damage of the kinds and in the amounts customarily insured against by
entities of established reputation having similar properties similarly situated
and in such amounts as are customarily carried under similar circumstances by
other such entities and otherwise as is prudent for entities engaged in similar
businesses but in any event sufficient to cover the full replacement cost
thereof. 

    


    (o)          The
Debtor shall, within ten (10) days of obtaining knowledge thereof, advise the
Secured Party promptly, in sufficient detail, of any material adverse change in
the Collateral, and of the occurrence of any event which would have a material
adverse effect on the value of the Collateral or on the Secured Party’ security
interest, through Secured Party, therein.

    


     (p)         The
Debtor shall promptly execute and deliver to Secured Party such further deeds,
mortgages, assignments, security agreements, financing statements or other
instruments, documents, certificates and assurances and take such further action
as Secured Party may from time to time request and may in its sole discretion
deem necessary to perfect, protect or enforce the Secured Party’ security
interest in the Collateral including, without limitation, if applicable, the
execution and delivery of a separate security agreement with respect to the
Debtor’s Intellectual Property (“Intellectual Property
Security Agreement”) in which the Secured Party have been granted a
security interest hereunder, substantially in a form reasonably acceptable to
Secured Party, which Intellectual Property Security Agreement, other than as
stated therein, shall be subject to all of the terms and conditions
hereof.


    
      
         


      

      
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    (q)          The
Debtor shall permit Secured Party and its representatives to inspect the
Collateral during normal business hours and upon reasonable prior notice, and to
make copies of records pertaining to the Collateral as may be reasonably
requested by Secured Party from time to time.

    


    (r)           The
Debtor shall take all steps reasonably necessary to diligently pursue and seek
to preserve, enforce and collect any rights, claims, causes of action and
accounts receivable in respect of the Collateral.

    


    (s)          The
Debtor shall promptly notify the Secured Party in sufficient detail upon
becoming aware of any attachment, garnishment, execution or other legal process
levied against any Collateral and of any other information received by such
Debtor that may materially affect the value of the Collateral, the Security
Interest or the rights and remedies of the Secured Party hereunder.

    


    (t)           All
information heretofore, herein or hereafter supplied to the Secured Party by or
on behalf of Debtor with respect to the Collateral is accurate and complete in
all material respects as of the date furnished.

    


    (u)          The
Debtors shall at all times preserve and keep in full force and effect their
respective valid existence and good standing and any rights and franchises
material to its business.

    


    (v)         No
Debtor will change its name, type of organization, jurisdiction of organization,
organizational identification number (if it has one), legal or corporate
structure, or identity, or add any new fictitious name unless it provides at
least 30 days prior written notice to the Secured Party of such change and, at
the time of such written notification, such Debtor provides any financing
statements or fixture filings necessary to perfect and continue the perfection
of the Security Interests granted and evidenced by this Agreement.

    


    (w)         Except
in the ordinary course of business, no Debtor may consign any of its inventory
or sell any of its inventory on bill and hold, sale or return, sale on approval,
or other conditional terms of sale without the consent of Secured Party which
shall not be unreasonably withheld.

    


    (x)          Debtor
may not relocate its chief executive office to a new location without providing
30 days prior written notification thereof to the Secured Party and so long as,
at the time of such written notification, Debtor provides any financing
statements or fixture filings necessary to perfect and continue the perfection
of the Security Interests granted and evidenced by this
Agreement.


    
      
         


      

      
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 (y)          The Debtor
was organized and remains organized solely under the laws of the state of
Nevada.

    


    (z)           
(i) The actual name of the Debtor is the name set forth in Schedule C attached hereto;
(ii) no Debtor has any trade names except as set forth on Schedule C attached hereto;
(iii) no Debtor has used any name other than that stated in the preamble hereto
or as set forth on Schedule C for the preceding
five years; and (iv) no entity has merged into Debtor or been acquired by Debtor
within the past five years except as set forth on Schedule C.

    


    (aa)          At
any time and from time to time that any Collateral consists of instruments,
certificated securities or other items that require or permit possession by the
secured party to perfect the security interest created hereby, the applicable
Debtor shall deliver such Collateral to Secured Party.

    


            
   (bb)         The
Debtor, in its capacity as issuer, hereby agrees to comply with any and all
orders and instructions of Secured Party regarding the Pledged Interests
consistent with the terms of this Agreement without the further consent of
Debtor as contemplated by Section 8-106 (or any successor section) of the
UCC.  Further, the Debtor agrees that it shall not enter into a
similar agreement (or one that would confer “control” within the meaning of
Article 8 of the UCC) with any other person or entity.

     

    (cc)          The
Debtor shall cause all tangible chattel paper constituting Collateral to be
delivered to Secured Party, or, if such delivery is not possible, then to cause
such tangible chattel paper to contain a legend noting that it is subject to the
security interest created by this Agreement.  To the extent that any
Collateral consists of electronic chattel paper, the applicable Debtor shall
cause the underlying chattel paper to be “marked” within the meaning of Section
9-105 of the UCC (or successor section thereto).

    


    (dd)         If
there is any investment property or deposit account included as Collateral that
can be perfected by “control” through an account control agreement, the
applicable Debtor shall cause such an account control agreement, in form and
substance in each case satisfactory to Secured Party, to be entered into and
delivered to Secured Party .

    


    (ee)          To
the extent that any Collateral consists of letter-of-credit rights, the
applicable Debtor shall cause the issuer of each underlying letter of credit to
consent to an assignment of the proceeds thereof to the Secured
Party.

    


    (ff)           To
the extent that any Collateral is in the possession of any third party, the
applicable Debtor shall join with Secured Party in notifying such third party of
the Secured Party’ security interest in such Collateral and shall use its best
efforts to obtain an acknowledgement and agreement from such third party with
respect to the Collateral, in form and substance reasonably satisfactory to
Secured Party.


    
      
         


      

      
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    (gg)         If
Debtor shall at any time hold or acquire a commercial tort claim, such Debtor
shall promptly notify the Secured Party in a writing signed by such Debtor of
the particulars thereof and grant to the Secured Party in such writing a
security interest therein and in the proceeds thereof, all upon the terms of
this Agreement, with such writing to be in form and substance satisfactory to
Secured Party.

    


    (hh)         The
Debtor shall immediately provide written notice to the Secured Party of any and
all accounts which arise out of contracts with any governmental authority and,
to the extent necessary to perfect or continue the perfected status of the
Security Interests in such accounts and proceeds thereof, shall execute and
deliver to Secured Party an assignment of claims for such accounts and cooperate
with Secured Party in taking any other steps required, in its judgment, under
the Federal Assignment of Claims Act or any similar federal, state or local
statute or rule to perfect or continue the perfected status of the Security
Interests in such accounts and proceeds thereof.

    


     (ii)           The
Debtor shall vote the Pledged Securities to comply with the covenants and
agreements set forth herein, the Securities Purchase Agreement  and in
the Debenture.

    


     (jj)           The
Debtor shall register the pledge of the applicable Pledged Securities on the
books of such Debtor and, when applicable, with the appropriate governmental
authority.  The Debtor shall notify each issuer of Pledged Securities
to register the pledge of the applicable Pledged Securities in the name of the
Secured Party on the books of such issuer.  Further, except with
respect to certificated securities delivered to Secured Party, the applicable
Debtor shall deliver to Secured Party an acknowledgement of pledge (which, where
appropriate, shall comply with the requirements of the relevant UCC with respect
to perfection by registration) signed by the issuer of the applicable Pledged
Securities, which acknowledgement shall confirm that: (a) it has registered the
pledge on its books and records; and (b) at any time directed by Secured Party
during the continuation of an Event of Default, such issuer will transfer the
record ownership of such Pledged Securities into the name of any designee of
Secured Party, will take such steps as may be necessary to effect the transfer,
and will comply with all other instructions of Secured Party regarding such
Pledged Securities without the further consent of the applicable
Debtor.

    


    (kk)         
In the event that, upon an occurrence of an Event of Default, Secured Party
shall sell all or any of the Pledged Securities to another party or Party
(herein called the “Transferee”) or shall
purchase or retain all or any of the Pledged Securities, the Debtor shall, to
the extent applicable: (i) deliver to Secured Party or the Transferee, as the
case may be, the articles of incorporation, bylaws, minute books, stock
certificate books, corporate seals, deeds, leases, indentures, agreements,
evidences of indebtedness, books of account, financial records and all other
Organizational Documents and records of the Debtors and their direct and
indirect subsidiaries; (ii) use its best efforts to obtain resignations of the
persons then serving as officers and directors of the Debtors and their direct
and indirect subsidiaries, if so requested; and (iii) use its best
efforts to obtain any approvals that are required by any governmental or
regulatory body in order to permit the sale of the Pledged Securities to the
Transferee or the purchase or retention of the Pledged Securities by Secured
Party and allow the Transferee or Secured Party to continue the business of the
Debtors and their direct and indirect subsidiaries.

     

    
      
         


      

      
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    (ll)            Without
limiting the generality of the other obligations of the Debtors hereunder, the
Debtor shall promptly (i) cause to be registered at the United States Copyright
Office all of its material copyrights, (ii) cause the security interest
contemplated hereby with respect to all Intellectual Property registered at the
United States Copyright Office or United States Patent and Trademark Office to
be duly recorded at the applicable office, and (iii) give Secured Party notice
whenever it acquires (whether absolutely or by license) or creates any
additional material Intellectual Property.

    


    (mm)        The
Debtor will from time to time, at the joint and several expense of the Debtors,
promptly execute and deliver all such further instruments and documents, and
take all such further action as may be necessary or desirable, or as Secured
Party may reasonably request, in order to perfect and protect any security
interest granted or purported to be granted hereby or to enable the Secured
Party to exercise and enforce their rights and remedies hereunder and with
respect to any Collateral or to otherwise carry out the purposes of this
Agreement.

    


    (nn)          Schedule D attached hereto
lists all of the patents, patent applications, trademarks, trademark
applications, registered copyrights, and domain names owned by any of the Debtor
as of the date hereof.  Schedule D lists all material
licenses in favor of Debtor for the use of any patents, trademarks, copyrights
and domain names as of the date hereof.  All material patents and
trademarks of the Debtors have been duly recorded at the United States Patent
and Trademark Office and all material copyrights of the Debtors have been duly
recorded at the United States Copyright Office.

    


    (oo)          None
of the account debtors or other persons or entities obligated on any of the
Collateral is a governmental authority covered by the Federal Assignment of
Claims Act or any similar federal, state or local statute or rule in respect of
such Collateral.

    


               5.          
 Effect of Pledge on
Certain Rights. If any of the Collateral
subject to this Agreement consists of nonvoting equity or ownership interests
(regardless of class, designation, preference or rights) that may be converted
into voting equity or ownership interests upon the occurrence of certain events
(including, without limitation, upon the transfer of all or any of the other
stock or assets of the issuer), it is agreed that the pledge of such equity or
ownership interests pursuant to this Agreement or the enforcement of any of
Secured Party’s rights hereunder shall not be deemed to be the type of event
which would trigger such conversion rights notwithstanding any provisions in the
Organizational Documents or agreements to which Debtor is subject or to which
Debtor is party.


    
      
         


      

      
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               6.
             Defaults. The following events
shall be “Events of
Default”:

    


    (a)   The
occurrence of an Event of Default (as defined in the Debentures) under the
Debentures or under the Securities Purchase Agreement between the Company and
Secured Party dated of even date herewith;

    


    (b)   Any
representation or warranty of Debtor in this Agreement or the Securities
Purchase Agreement shall prove to have been incorrect in any material respect
when made;

    


    (c)   The
failure by Debtor to observe or perform any of its obligations hereunder for
five (5) business days after delivery to such Debtor of notice of such failure
by or on behalf of a Secured Party unless such default is capable of cure but
cannot be cured within such time frame and such Debtor is using best efforts to
cure same in a timely fashion;

    


    (d)   If
any provision of this Agreement shall at any time for any reason be declared to
be null and void, or the validity or enforceability thereof shall be contested
by Debtor, or a proceeding shall be commenced by Debtor, or by any governmental
authority having jurisdiction over Debtor, seeking to establish the invalidity
or unenforceability thereof, or Debtor shall deny that Debtor has any liability
or obligation purported to be created under this Agreement; or

    


    (e)  If
Debtor shall sell any securities (including any debt or equity securities)
representing capital stock of Song Yuan Technical, or grant or issue or sell any
securities or options to acquire any ownership interest in Song Yuan Technical,
such that the Debtor ceases to be the legal and beneficial owner of 90% of the
capital stock (or registered capital) of Song Yuan Technical.

    


               7.           
  Duty To Hold In
Trust.

    


    (a)           Upon
the occurrence of any Event of Default and at any time thereafter, the Debtor
shall, upon receipt of any revenue, income, dividend, interest or other sums
subject to the Security Interests, whether payable pursuant to the Debentures or
otherwise, or of any check, draft, note, trade acceptance or other instrument
evidencing an obligation to pay any such sum, hold the same in trust for the
Secured Party and shall forthwith endorse and transfer any such sums or
instruments, or both, to the Secured Party, pro-rata in proportion to their
respective
then-currently outstanding principal amount of Debentures for application to the
satisfaction of the Obligations (and if any Debenture is not outstanding,
pro-rata in proportion to the initial purchases of the remaining
Debentures).


    
      
         


      

      
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    (b)           If
Debtor shall become entitled to receive or shall receive any securities or other
property (including, without limitation, shares of Pledged Securities or
instruments representing Pledged Securities acquired after the date hereof, or
any options, warrants, rights or other similar property or certificates
representing a dividend, or any distribution in connection with any
recapitalization, reclassification or increase or reduction of capital, or
issued in connection with any reorganization of such Debtor or any of its
direct or indirect subsidiaries) in respect of the Pledged Securities (whether
as an addition to, in substitution of, or in exchange for, such Pledged
Securities or otherwise), such Debtor agrees to (i) accept the same as Secured
Party of the Secured Party; (ii) hold the same in trust on behalf of and ; and
(iii) to deliver any and all certificates or instruments evidencing the same to
Secured Party on or before the close of business on the fifth business day
following the receipt thereof by such Debtor, in the exact form received
together with the Necessary Endorsements, to be held by Secured Party subject to
the terms of this Agreement as Collateral.

    


               8.           
  Rights and Remedies
Upon Default.

    


               (a)         
  Upon the occurrence of any Event of Default and at any time
thereafter, the Secured Party, acting through Secured Party, shall have the
right to exercise all of the remedies conferred hereunder and under the
Debentures, and the Secured Party shall have all the rights and remedies of a
secured party under the UCC.  Without limitation, Secured Party, shall
have the following rights and powers:

    


    (i)            
Secured Party shall have the right to take possession of the Collateral and, for
that purpose, enter, with the aid and assistance of any person, any premises
where the Collateral, or any part thereof, is or may be placed and remove the
same, and the Debtor shall assemble the Collateral and make it available to
Secured Party at places which Secured Party shall reasonably select, whether at
such Debtor's premises or elsewhere, and make available to Secured Party,
without rent, all of such Debtor’s respective premises and facilities for the
purpose of Secured Party taking possession of, removing or putting the
Collateral in saleable or disposable form.

    


    (ii)            
Upon notice to the Debtor by Secured Party, all rights of the Debtor to exercise
the voting and other consensual rights which it would otherwise be entitled to
exercise and all rights of the Debtor to receive the dividends and interest
which it would otherwise be authorized to receive and retain, shall
cease.  Upon such notice, Secured Party shall have the right to
receive, any interest, cash dividends or other payments on the Collateral and,
at the option of Secured Party, to exercise in  Secured Party’s
discretion all voting rights pertaining thereto.  Without limiting the
generality of the foregoing, Secured Party shall have the right (but not the
obligation) to exercise all rights with respect to the Collateral as it were the
sole and absolute owner thereof, including, without limitation, to vote and/or
to exchange, at its sole discretion, any or all of the Collateral in connection
with a merger, reorganization, consolidation, recapitalization or other
readjustment concerning or involving the Collateral or Debtor or any of its
direct or indirect subsidiaries.


    
      
         


      

      
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    (iii)         
 Subject to applicable law, including any limitations under the law’s of
the People’s Republic of China,  Secured Party shall have the right to
operate the business of the Debtor using the Collateral and shall have the right
to assign, sell, lease or otherwise dispose of and deliver all or any part of
the Collateral, at public or private sale or otherwise, either with or without
special conditions or stipulations, for cash or on credit or for future
delivery, in such parcel or parcels and at such time or times and at such place
or places, and upon such terms and conditions as Secured Party may deem
commercially reasonable, all without (except as shall be required by applicable
statute and cannot be waived) advertisement or demand upon or notice to Debtor
or right of redemption of a Debtor, which are hereby expressly
waived.  Upon each such sale, lease, assignment or other transfer of
Collateral, Secured Party may, unless prohibited by applicable law which cannot
be waived, purchase all or any part of the Collateral being sold, free from and
discharged of all trusts, claims, right of redemption and equities of Debtor,
which are hereby waived and released.

    


    (iv)           Secured
Party shall have the right (but not the obligation) to notify any account
debtors and any obligors under instruments or accounts to make payments directly
to Secured Party, on behalf of the Secured Party, and to enforce the Debtors’
rights against such account debtors and obligors.

    


    (v)            Secured
Party, may (but is not obligated to) direct any financial intermediary or any
other person or entity holding any investment property to transfer the same to
Secured Party or its designee.

    


    (vi)           Secured
Party may (but is not obligated to) transfer any or all Intellectual
Property registered in the name of Debtor at the United States Patent and
Trademark Office and/or Copyright Office into the name of the Secured Party or
any designee or any purchaser of any Collateral.

    


               (b)         
  Secured Party shall comply with any applicable law in connection
with a disposition of Collateral and such compliance will not be considered
adversely to affect the commercial reasonableness of any sale of the
Collateral.  Secured Party may sell the Collateral without giving any
warranties and may specifically disclaim such warranties.  If Secured
Party sells any of the Collateral on credit, the Debtor will only be credited
with payments actually made by the purchaser.  In addition, the Debtor
waives any and all rights that it may have to a judicial hearing in advance of
the enforcement of any of Secured Party’s rights and remedies hereunder,
including, without limitation, Secured Party's right following an Event
of Default to take immediate possession of the Collateral and to exercise its
rights and remedies with respect thereto. The Debtor hereby agrees that Secured
Party shall have the right to sell the Pledged Securities to any third party
willing to purchase the Pledged Securities at Fair Market Value (for purposes
of this Section 8, “FMV”).  FMV shall mean the purchase price
that a willing buyer would be willing to pay and a willing seller would be
willing to accept in an arm's length transaction, provided that neither party is
under any compulsion to buy or sell, as the case may be.  The FMV
shall be evidenced by a written offer or purchase agreement, a copy of which
shall be made available to the Debtor. In the event of the sale of the Pledged
Securities in accordance with this section 8, the sale of such Pledged
Securities and be deemed commercially reasonable.

     

    
      
         


      

      
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    (c)      
     For the purpose of enabling Secured Party to
further exercise rights and remedies under this Section 8 or elsewhere provided
by agreement or applicable law, the Debtor hereby grants to Secured Party, for
the benefit of Secured Party and the Secured Party, an irrevocable, nonexclusive
license (exercisable without payment of royalty or other compensation to such
Debtor) to use, license or sublicense following an Event of Default, any
Intellectual Property now owned or hereafter acquired by such Debtor, and
wherever the same may be located, and including in such license access to all
media in which any of the licensed items may be recorded or stored and to all
computer software and programs used for the compilation or printout
thereof.

    


    (d)          
Notwithstanding anything to the contrary in this Agreement, the parties
acknowledge and agree that the rights of Secured Party with respect to the
capital stock (or registered capital) of Song Yuan  shall be subject
to and governed by the Onshore Pledge Agreement and the Option Agreement
executed by the Company and the Secured Party. 

    


               9.            Applications of Proceeds. The
proceeds of any such sale, lease or other disposition of the Collateral
hereunder or from payments made on account of any insurance policy insuring any
portion of the Collateral shall be applied first, to the expenses of retaking,
holding, storing, processing and preparing for sale, selling, and the like
(including, without limitation, any taxes, fees and other costs incurred in
connection therewith) of the Collateral, to the reasonable attorneys’ fees and
expenses incurred by Secured Party in enforcing the Secured Party’ rights
hereunder and in connection with collecting, storing and disposing of the
Collateral, and then to satisfaction of the Obligations pro rata among the
Secured Party (based on then-outstanding principal amounts of Debentures at the
time of any such determination), and to the payment of any other amounts
required by applicable law, after which the Secured Party shall pay to the
applicable Debtor any surplus proceeds. If, upon the sale, license or other
disposition of the Collateral, the proceeds thereof are insufficient to pay all
amounts to which the Secured Party is legally entitled, the Debtors will be
liable for the deficiency, together with interest thereon, at the rate of 18%
per annum or the lesser amount permitted by applicable law (the “Default Rate”),
and the reasonable fees of any attorneys employed by the Secured Party to
collect such deficiency.  To the extent permitted by applicable law,
the Debtor waives all claims, damages and demands against the Secured Party
arising out of the repossession, removal, retention or sale of the Collateral,
unless due solely to the gross negligence or willful misconduct of the Secured
Party as determined by a final judgment (not subject to further appeal) of a
court of competent jurisdiction.


    
      
         


      

      
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              10.           Securities Law
Provision.  The Debtor recognizes that Secured Party may be
limited in its ability to effect a sale to the public of all or part of the
Pledged Securities by reason of certain prohibitions in the Securities Act of
1933, as amended, or other federal or state securities laws (collectively, the
“Securities
Laws”), and may be compelled to resort to one or more sales to a
restricted group of purchasers who may be required to agree to acquire the
Pledged Securities for their own account, for investment and not with a view to
the distribution or resale thereof.  The Debtor agrees that sales so
made may be at prices and on terms less favorable than if the Pledged Securities
were sold to the public, and that Secured Party has no obligation to delay the
sale of any Pledged Securities for the period of time necessary to register the
Pledged Securities for sale to the public under the Securities
Laws.  The Debtor shall cooperate with Secured Party in its attempt to
satisfy any requirements under the Securities Laws (including, without
limitation, registration thereunder if requested by Secured Party) applicable to
the sale of the Pledged Securities by Secured Party.

     

              11.           Costs and Expenses. The Debtor
agrees to pay all reasonable out-of-pocket fees, costs and expenses incurred in
connection with any filing required hereunder, including without limitation, any
financing statements pursuant to the UCC, continuation statements, partial
releases and/or termination statements related thereto or any expenses of any
searches reasonably required by Secured Party.  The Debtors shall also
pay all other claims and charges which in the reasonable opinion of Secured
Party is reasonably likely to prejudice, imperil or otherwise affect the
Collateral or the Security Interests therein.  The Debtors will also,
upon demand, pay to Secured Party the amount of any and all reasonable expenses,
including the reasonable fees and expenses of its counsel and of any experts,
which Secured Party, may incur in connection with (i) the enforcement of this
Agreement, (ii) the custody or preservation of, or the sale of, collection from,
or other realization upon, any of the Collateral, or (iii) the exercise or
enforcement of any of the rights of the Secured Party under the Debentures.
Until so paid, any fees payable hereunder shall be added to the principal amount
of the Debentures and shall bear interest at the Default Rate.

    


              12.           Responsibility for Collateral.
The Debtors assume all liabilities and responsibility in connection with all
Collateral, and the Obligations shall in no way be affected or diminished by
reason of the loss, destruction, damage or theft of any of the Collateral or its
unavailability for any reason.  Without limiting the generality of the
foregoing, (a) neither Secured Party nor any Secured Party (i) has any duty
(either before or after an Event of Default) to collect any amounts in respect
of the Collateral or to preserve any rights relating to the Collateral, or (ii)
has any obligation to clean-up or otherwise prepare the Collateral for sale, and
(b) the Debtor shall remain obligated and liable under each contract or
agreement included in the Collateral to be observed or performed by such Debtor
thereunder.  Neither Secured Party nor any Secured Party shall have
any obligation or liability under any such contract or agreement by reason of or
arising out of this Agreement or the receipt by Secured Party or any Secured
Party of any payment relating to any of the Collateral, nor shall Secured Party
or any Secured Party be obligated in any manner to perform any of the
obligations of Debtor under or pursuant to any such contract or agreement, to
make inquiry as to the nature or sufficiency of any payment received by Secured
Party or any Secured Party in respect of the Collateral or as to the sufficiency
of any performance by any party under any such contract or agreement, to present
or file any claim, to take any action to enforce any performance or to collect
the payment of any amounts which may have been assigned to Secured Party or to
which Secured Party or any Secured Party may be entitled at any time or
times.


    
      
         


      

      
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              13.           Security Interests Absolute. All rights of the
Secured Party and all obligations of the Debtors hereunder, shall be absolute
and unconditional, irrespective of: (a) any lack of validity or enforceability
of this Agreement, the Debentures or any agreement entered into in connection
with the foregoing, or any portion hereof or thereof; (b) any change in the
time, manner or place of payment or performance of, or in any other term of, all
or any of the Obligations, or any other amendment or waiver of or any consent to
any departure from the Debentures or any other agreement entered into in
connection with the foregoing; (c) any exchange, release or nonperfection of any
of the Collateral, or any release or amendment or waiver of or consent to
departure from any other collateral for, or any guarantee, or any other
security, for all or any of the Obligations; (d) any action by the Secured Party
to obtain, adjust, settle and cancel in its sole discretion any insurance claims
or matters made or arising in connection with the Collateral; or (e) any other
circumstance which might otherwise constitute any legal or equitable defense
available to a Debtor, or a discharge of all or any part of the Security
Interests granted hereby.  Until the Obligations shall have been paid
and performed in full, the rights of the Secured Party shall continue even if
the Obligations are barred for any reason, including, without limitation, the
running of the statute of limitations or bankruptcy.  The Debtor
expressly waives presentment, protest, notice of protest, demand, notice of
nonpayment and demand for performance. In the event that at any time any
transfer of any Collateral or any payment received by the Secured Party
hereunder shall be deemed by final order of a court of competent jurisdiction to
have been a voidable preference or fraudulent conveyance under the bankruptcy or
insolvency laws of the United States, or shall be deemed to be otherwise due to
any party other than the Secured Party, then, in any such event, the Debtor’s
obligations hereunder shall survive cancellation of this Agreement, and shall
not be discharged or satisfied by any prior payment thereof and/or cancellation
of this Agreement, but shall remain a valid and binding obligation enforceable
in accordance with the terms and provisions hereof.  The Debtor waives
all right to require the Secured Party to proceed against any other person or
entity or to apply any Collateral which the Secured Party may hold at any time,
or to marshal assets, or to pursue any other remedy. The Debtor waives any
defense arising by reason of the application of the statute of limitations to
any obligation secured hereby.


    
      
         


      

      
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              14.           Term of Agreement. This
Agreement and the Security Interests shall terminate on the date on which all
payments under the Debentures have been indefeasibly paid in full and all other
Obligations have been paid or discharged; provided, however, that all
indemnities of the Debtors contained in Section 4.11 of the Securities Purchase
Agreement shall be deemed incorporated herein and shall survive and remain
operative and in full force and effect regardless of the termination of this
Agreement.

    


     
15.           Power of Attorney; Further
Assurances.

     

    (a)           The
Debtor authorizes Secured Party, and does hereby make, constitute and appoint
Secured Party and its officers, Secured Party, successors or assigns with
full power of substitution, as such Debtor’s true and lawful attorney-in-fact,
with power, in the name of Secured Party or such Debtor, to, after the
occurrence and during the continuance of an Event of Default, (i) endorse any
note, checks, drafts, money orders or other instruments of payment (including
payments payable under or in respect of any policy of insurance) in respect of
the Collateral that may come into possession of Secured Party; (ii) to sign and
endorse any financing statement pursuant to the UCC or any invoice, freight or
express bill, bill of lading, storage or warehouse receipts, drafts against
debtors, assignments, verifications and notices in connection with accounts, and
other documents relating to the Collateral; (iii) to pay or discharge taxes,
liens, security interests or other encumbrances at any time levied or placed on
or threatened against the Collateral; (iv) to demand, collect, receipt for,
compromise, settle and sue for monies due in respect of the Collateral; (v) to
transfer any Intellectual Property or provide licenses respecting any
Intellectual Property; and (vi) generally, at the option of Secured Party, and
at the expense of the Debtors, at any time, or from time to time, to execute and
deliver any and all documents and instruments and to do all acts and things
which Secured Party deems necessary to protect, preserve and realize upon the
Collateral and the Security Interests granted therein in order to effect the
intent of this Agreement and the Debentures all as fully and effectually as the
Debtors might or could do; and the Debtor hereby ratifies all that said attorney
shall lawfully do or cause to be done by virtue hereof.  This power of
attorney is coupled with an interest and shall be irrevocable for the term of
this Agreement and thereafter as long as any of the Obligations shall be
outstanding.  The designation set forth herein shall be deemed to
amend and supersede any inconsistent provision in the Organizational Documents
or other documents or agreements to which Debtor is subject or to which Debtor
is a party.  Without limiting the generality of the foregoing, after
the occurrence and during the continuance of an Event of Default, Secured Party
is specifically authorized to execute and file any applications for or
instruments of transfer and assignment of any patents, trademarks, copyrights or
other Intellectual Property with the United States Patent and Trademark Office
and the United States Copyright Office.


    
      
         


      

      
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     (b)           On
a continuing basis, the Debtor will make, execute, acknowledge, deliver, file
and record, as the case may be, with the proper filing and recording agencies in
any jurisdiction, including, without limitation, the jurisdictions indicated on
Schedule C
attached hereto, all such instruments, and take all such action as may
reasonably be deemed necessary or advisable, or as reasonably requested by
Secured Party, to perfect the Security Interests granted hereunder and otherwise
to carry out the intent and purposes of this Agreement, or for assuring and
confirming to Secured Party the grant or perfection of a perfected security
interest in all the Collateral under the UCC.

    


    (c)           The
Debtor hereby irrevocably appoints Secured Party as such Debtor’s
attorney-in-fact, with full authority in the place and instead of such Debtor
and in the name of such Debtor, from time to time in Secured Party’s discretion,
to take any action and to execute any instrument which Secured Party may deem
necessary or advisable to accomplish the purposes of this Agreement, including
the filing, in its sole discretion, of one or more financing or continuation
statements and amendments thereto, relative to any of the Collateral without the
signature of such Debtor where permitted by law, which financing statements may
(but need not) describe the Collateral as “all assets” or “all personal
property” or words of like import, and ratifies all such actions taken by
Secured Party.  This power of attorney is coupled with an interest and
shall be irrevocable for the term of this Agreement and thereafter as long as
any of the Obligations shall be outstanding.

    


        
         16.           Notices. All notices,
requests, demands and other communications hereunder shall be subject to the
notice provision of the Purchase Agreement (as such term is defined in the
Debentures).

    


                 
17.           Other Security. To the extent
that the Obligations are now or hereafter secured by property other than the
Collateral, endorsement or property of any other person, firm, corporation or
other entity, then Secured Party shall have the right, in its sole discretion,
to pursue, relinquish, subordinate, modify or take any other action with respect
thereto, without in any way modifying or affecting any of the Secured Party’
rights and remedies hereunder.

    


              18.           Miscellaneous.

     

    (a)           No
course of dealing between the Debtor and the Secured Party, nor any failure to
exercise, nor any delay in exercising, on the part of the Secured Party, any
right, power or privilege hereunder or under the Debentures shall operate as a
waiver thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder or thereunder preclude any other or further exercise thereof
or the exercise of any other right, power or privilege.

    


    (b)           All
of the rights and remedies of the Secured Party with respect to the Collateral,
whether established hereby or by the Debentures or by any other agreements,
instruments or documents or by law shall be cumulative and may be exercised
singly or concurrently.


    
      
         


      

      
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    (c)           This
Agreement, together with the exhibits and schedules hereto, contain the entire
understanding of the Party with respect to the subject matter hereof and
supersede all prior agreements and understandings, oral or written, with respect
to such matters, which the Party acknowledge have been merged into this
Agreement and the exhibits and schedules hereto. No provision of this
Agreement may be waived, modified, supplemented or amended except in a written
instrument signed, in the case of an amendment, by the Debtor and the Secured
Party or, in the case of a waiver, by the party against whom enforcement of any
such waived provision is sought.

    


    (d)           If
any term, provision, covenant or restriction of this Agreement is held by a
court of competent jurisdiction to be invalid, illegal, void or unenforceable,
the remainder of the terms, provisions, covenants and restrictions set forth
herein shall remain in full force and effect and shall in no way be affected,
impaired or invalidated, and the Party hereto shall use their commercially
reasonable efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the
intention of the Party that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such that may be
hereafter declared invalid, illegal, void or unenforceable.

    


    (e)           No
waiver of any default with respect to any provision, condition or requirement of
this Agreement shall be deemed to be a continuing waiver in the future or a
waiver of any subsequent default or a waiver of any other provision, condition
or requirement hereof, nor shall any delay or omission of any party to exercise
any right hereunder in any manner impair the exercise of any such
right.

    


    (f)
           This Agreement
shall be binding upon and inure to the benefit of the Party and their successors
and permitted assigns.  The Company may not assign this Agreement or
any rights or obligations hereunder without the prior written consent of each
Secured Party (other than by merger).  Any Secured Party may assign
any or all of its rights under this Agreement to any Person to whom such Secured
Party assigns or transfers any Securities, provided such transferee agrees in
writing to be bound, with respect to the transferred Securities, by the
provisions of this Agreement that apply to the “Secured Party.”

    


    (g)           Each
party shall take such further action and execute and deliver such further
documents as may be necessary or appropriate in order to carry out the
provisions and purposes of this Agreement.


    
      
         


      

      
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    (h)         
All questions concerning the construction, validity, enforcement and
interpretation of this Agreement shall be governed by and construed and enforced
in accordance with the internal laws of the State of New York, without regard to
the principles of conflicts of law thereof.  The Debtor agrees that
all proceedings concerning the interpretations, enforcement and defense of the
transactions contemplated by this Agreement and the Debentures in law or in
equity (whether brought against a party hereto or its respective affiliates,
directors, officers, shareholders, partners, members, employees or Secured
Partys) shall be commenced exclusively before the International Chamber of
Commerce to be held in the City of New York, Borough of Manhattan, United States
of America and shall be determined by three arbitrators, and otherwise held
in accordance with its rules.  Each party shall choose one arbitrator
and the two arbitrators shall choose the third.  The third arbitrator
so chosen shall have a background in either corporate finance or banking law.
The arbitration shall be conducted in the English language and the arbitration
award shall include the allocation of costs and expenses among the parties. The
arbitration ruling shall be final and binding.  Each party hereto
hereby irrevocably waives personal service of process and consents to process
being served in any such proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees
that such service shall constitute good and sufficient service of process and
notice thereof. Nothing contained herein shall be deemed to limit in any way any
right to serve process in any manner permitted by law. 

    


    (i)            This
Agreement may be executed in any number of counterparts, each of which when so
executed shall be deemed to be an original and, all of which taken together
shall constitute one and the same Agreement. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid binding
obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
were the original thereof.

    


    (j)            The
Debtor shall indemnify, reimburse and hold harmless Secured Party and the
Secured Party and their respective partners, members, shareholders, officers,
directors, employees and Secured Party (and any other persons with other
titles that have similar functions) (collectively, “Indemnitees”) from
and against any and all losses, claims, liabilities, damages, penalties, suits,
costs and expenses, of any kind or nature, (including fees relating to the cost
of investigating and defending any of the foregoing) imposed on, incurred by or
asserted against such Indemnitee in any way related to or arising from or
alleged to arise from this Agreement or the Collateral, except any such losses,
claims, liabilities, damages, penalties, suits, costs and expenses which result
from the gross negligence or willful misconduct of the Indemnitee as determined
by a final, nonappealable decision of a court of competent
jurisdiction.  This indemnification provision is in addition to, and
not in limitation of, any other indemnification provision in the Debentures, the
Purchase Agreement (as such term is defined in the Debentures) or any other
agreement, instrument or other document executed or delivered in connection
herewith or therewith.


    
      
         


      

      
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    (l)           
Nothing in this Agreement shall be construed to subject Secured Party or any
Secured Party to liability as a partner in Debtor or any if its direct or
indirect subsidiaries that is a partnership or as a member in Debtor or any of
its direct or indirect subsidiaries that is a limited liability company, nor
shall Secured Party or any Secured Party be deemed to have assumed any
obligations under any partnership agreement or limited liability company
agreement, as applicable, of  Debtor or any if its direct or indirect
subsidiaries or otherwise, unless and until any such Secured Party exercises its
right to be substituted for Debtor as a partner or member, as applicable,
pursuant hereto.

    


    (m)         
To the extent that the grant of the security interest in the Collateral and the
enforcement of the terms hereof require the consent, approval or action of any
partner or member, as applicable, of Debtor or any direct or indirect subsidiary
of Debtor or compliance with any provisions of any of the Organizational
Documents, the Debtor hereby grant such consent and approval and waive any such
noncompliance with the terms of said documents.

    


    [SIGNATURE
PAGES FOLLOW]

     

     

     

     

     

     

     

    
      
        
        

      

      
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                IN
WITNESS WHEREOF, the Parties hereto have caused this Security Agreement to
be duly executed on the day and year first above written.

    
 

    


    
      	 
      CHINA
      NORTH EAST PETROLEUM HOLDINGS, INC.  
	 	 
	 By:	
               /s/ Wang Hongjun

            
	 	Name:
      Wang Hongjun
	 	Title:
      Chairman and President
	 	 
	 	 
	 	 
      
	 
      LOTUSBOX
      INVESTMENTS LIMITED  
	 	 
	 By:	
              /s/ Diana The Hui Ling

            
	 	Name:
      Diana The Hui Ling
	 	Title:
      General Counsel, signing authority pursuant to Lotusbox Investments
      Limited’s Board of Directors’ Resolutions dated 25 February
  2008


    

     

     

     

     

     

    
 

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