ex10_1.htm


  
     Exhibit
10.1

    


    SECURITIES
PURCHASE AGREEMENT

     

    This
Securities Purchase Agreement (this “Agreement”) is dated
as of February 28, 2008 between China North East Petroleum Holdings, Inc., a
Nevada corporation with its address at 445 Park Avenue, New York, New York 10022
(the “Company”), and each
purchaser identified on the signature pages hereto (each, including its
successors and assigns, a “Purchaser” and
collectively the “Purchasers”).

     

    WHEREAS,
the Purchasers have agreed to purchase, and the Company has agreed to sell, the
Securities (as defined herein) in connection with the Purchasers’ agreement to
provide financing to the Company in the amount of U.S. $15,000,000;

     

    WHEREAS,
subject to the terms and conditions set forth in this Agreement and pursuant to
Regulation S under the U.S. Securities Act of 1933, as amended (the “Act”)
upon original issuance thereof, and until such time as the same is no longer
required under the applicable requirements of the Act, the Debentures, Warrants
and the Warrant Shares (as such terms are defined herein) shall bear the legends
relating to the offer and the sale of the Debentures, Warrants and the Warrant
Shares as required by (i) Regulation S under the Act or (ii) any other
applicable laws or regulations relating to the issuance of the
Securities.

     

    NOW,
THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement,
and for other good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the Company and each Purchaser agree as
follows:

     

     

    ARTICLE
I.

    DEFINITIONS

     

    1.1           Definitions.  In
addition to the terms defined elsewhere in this Agreement: (a) capitalized terms
that are not otherwise defined herein have the meanings given to such terms in
the Debentures (as defined herein), and (b) the following terms have the
meanings set forth in this Section 1.1:

     

    “Action” shall have
the meaning ascribed to such term in Section 3.1(j).

     

    “Affiliate” means any
Person that, directly or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with a Person, as such terms are
used in and construed under Rule 405 under the Securities Act.  With
respect to a Purchaser, any investment fund or managed account that is managed
on a discretionary basis by the same investment manager as such Purchaser will
be deemed to be an Affiliate of such Purchaser.

     

    “Business Day” means
any day except Saturday, Sunday, any day which is a federal legal holiday in the
United States or any day on which banking institutions in the State of New York
are authorized or required by law or other governmental action to
close.


    
      
         


      

      
        
        

        
          

        

      

      
         


      

    

     

    “Class A Warrants”
means the Common Stock warrants to purchase an aggregate of 1.2 million shares
of the Company with an exercise price of U.S. $0.01 per share and substantially
in the form of Exhibit
A hereto.

     

    “Class B Warrants”
means the Common Stock warrants to purchase an aggregate of 1.5 million shares
of the Company with an exercise price of U.S. $3.20 per share and substantially
in the form of Exhibit
B hereto.

     

    “Class C Warrants”
means the Common Stock warrants to purchase an aggregate of 2.1 million shares
of the Company with an exercise price of U.S. $3.45 per share and substantially
in the form of Exhibit
C hereto.

     

    “Closing” means the
closing of the purchase and sale of the Securities pursuant to Section
2.1.

     

    “Closing Date” means
the Trading Day when all of the Transaction Documents have been executed and
delivered by the applicable parties thereto, and all conditions precedent to (i)
the Purchasers’ obligations to pay the Subscription Amount and (ii) the
Company’s obligations to deliver the Securities have been satisfied or
waived.

     

    “Commission” means the
Securities and Exchange Commission.

     

    “Common Stock” means
the common stock of the Company, par value $.001 per share, and any other class
of securities into which such securities may hereafter be reclassified or
changed into.

     

    “Common Stock
Equivalents” means any securities of the Company or the Subsidiaries
which would entitle the holder thereof to acquire at any time Common Stock,
including, without limitation, any debt, preferred stock, rights, options,
warrants or other instrument that is at any time convertible into or exercisable
or exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock.

     

    “Company Counsel”
means Crone Rozynko LLP, with offices located at 101 Montgomery Street, Suite
1950, San Francisco, California, 94105.

     

    “Corporate Authorization
Documents” means (i) the resolutions of the Board of Directors of the
Company, in form and substance satisfactory to the
Purchasers,  authorizing the transactions contemplated herein,
including, without limitation, the issuance of the Debentures and the Warrants
and the execution and delivery of the remaining Transaction Documents (ii) a
certificate of the Secretary of the Company in usual and customary form
attesting to the copies of the certificate of incorporation and bylaws of the
Company attached thereto.


    
      
        
           

        

         


      

      
        2

        
          

        

      

      
         


      

    


     “Debentures” means the
8% Secured Debentures due, subject to the terms therein, four (4) years from
their date of issuance, issued by the Company to the Purchasers hereunder, in
the form of Exhibit
D attached hereto.

     

    “Disclosure Schedules”
shall have the meaning ascribed to such term in Section 3.1.

     

    “Effective Date” means
the date that the initial Registration Statement filed by the Company pursuant
to the Registration Rights Agreement is first declared effective by the
Commission.

     

    “EGS” means Ellenoff,
Grossman & Schole LLP with their address at 370 Lexington Avenue, 19th Floor
New York, New York 10017.

     

    “Escrow Agent” shall
mean Wells Fargo Bank, National Association, 707 Wilshire Blvd, 17th floor,
Los Angeles, Ca  90017.

     

    “Escrow Agreement”
shall mean the escrow agreement entered into prior to the date hereof, by and
among the Company, the Purchasers and the Escrow Agent pursuant to which the
Purchasers shall deposit Subscription Amounts with the Escrow Agent to be
applied to the transactions contemplated hereunder.

     

    “Evaluation Date”
shall have the meaning ascribed to such term in Section 3.1(r).

     

    “Exchange Act” means
the Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.

    


    “Exempt Issuance”
means the issuance of (a) shares of Common Stock or options to employees,
officers or directors of the Company pursuant to any stock or option plan duly
adopted for such purpose by a majority of the non-employee members of the Board
of Directors of the Company or a majority of the members of a committee of
non-employee directors established by the Board of Directors, provided, however,
in no event shall the number of shares reserved under any such plan or issued
under such plan or issued to employees, officers, directors or officers of the
Company exceed a number of shares equal to 5% of the issued and outstanding
shares of Common Stock of the Company on the date hereof or; (b) securities upon
the exercise or exchange of or conversion of any Securities issued hereunder
and/or other securities exercisable or exchangeable for or convertible into
shares of Common Stock issued and outstanding on the date of this Agreement,
provided that such securities have not been amended since the date of this
Agreement to increase the number of such securities or to decrease the exercise,
exchange or conversion price of such securities.

     

    “Fundamental
Transaction” means any of the following actions or agreements by the
Company or any Subsidiary: (i) a merger or consolidation in which the Company is
not the surviving entity or the shareholders (or owners of registered capital or
other form of ownership) of the Company or its Subsidiary are not the
controlling shareholders after such
transaction (ii) a sale of all or substantially all of the assets of the Company
or any Subsidiary, as the case may be, or (iii) the sale of any of the legal and
benefical ownership of any Subsidiary.


    
      
        
           

        

         


      

      
        3

        
          

        

      

      
         


      

    

     

    “Funding
Post Closing Conditions” means the post closing conditions set forth in Sections
4.6, 4.17 and 4.18(a), 4.18(b) and 4.18(d) hereof and as otherwise defined in
Section 2.3 hereof.

     

    “GAAP” shall have the
meaning ascribed to such term in Section 3.1(h).

     

    “Indebtedness” shall
have the meaning ascribed to such term in Section 3.1(aa).

     

    “Individual Pledgor”
means Mr. Wang Hong Jun with his address at 171 Qingnan Dajie Zhanjian Road,
Song Yuan Jilin People’s Republic of China and who is the legal and beneficial
owner of an aggregate of 6,732,000 shares of Common Stock of the
Company.

     

    “Intellectual Property
Rights” shall have the meaning ascribed to such term in Section
3.1(o).

     

    “Legend Removal Date”
shall have the meaning ascribed to such term in Section 4.1(c).

     

    “Liens” means a lien,
charge, security interest, encumbrance, right of first refusal, preemptive right
or other restriction.

     

    “Material Adverse
Effect” shall have the meaning assigned to such term in Section
3.1(b).

     

    “Material Oil Drilling
Agreements” means any of the following: (i) Qian-112 Oilfield Cooperative
Development Contract effective as of May 28, 2002 by and between PetroChina Oil
and Gas Company Limited Jilin Oil Field Branch Company and Song Yuan City Yu
Qiao Oil and Gas Development Company Limited, and (ii) He301 Oilfield
Cooperative Development Contract effective as of May 28, 2003 by and between
PetroChina Oil and Gas Company Limited Jilin Oil Field Branch Company and Chang
Ling Long De Oil and Gas Development Limited.

     

    “Material Permits”
shall have the meaning ascribed to such term in Section 3.1(m).

     

    “Maximum Rate” shall
have the meaning ascribed to such term in Section 6.17.

     

    “Onshore Pledge
Agreement” means the agreement between the Company and the Purchasers
providing for the pledge by the Company of its legal and beneficial ownership of
66% of the registered capital of Song Yuan upon the terms set forth therein,
which Onshore Pledge Agreement shall be in the form annexed hereto as Exhibit
E.


    
      
        
           

        

         


      

      
        4

        
          

        

      

      
         


      

    


    “Option Agreement”
means the agreement between the Company and the Purchasers granting the
Purchasers to acquire an additional 24% of the registered capital of Song Yuan
upon the terms set forth therein, which Option Agreement shall be in the form
annexed hereto as Exhibit
F.

     

     “Person” means an
individual or corporation, partnership, trust, incorporated or unincorporated
association, joint venture, limited liability company, joint stock company,
government (or an agency or subdivision thereof) or other entity of any
kind.

     

    “Personal Pledge
Agreement” means the pledge agreement entered into by and between the
Individual Pledgor and the Purchasers whereby the Individual
Pledgor  pledges all of the 6,732,000 shares of Common Stock of the
Company legally and beneficially owned by him (directly and through any
affiliates) as additional collateral security for the repayment of the
Debentures, which Personal Pledge Agreement shall be in the form of Exhibit
G.

     

    “Pre-Notice” shall
have the meaning ascribed to such term in Section 4.13.

     

    “PRC” means the
People’s Republic of China.

     

    “Proceeding” means an
action, claim, suit, investigation or proceeding (including, without limitation,
an informal investigation or partial proceeding, such as a deposition), whether
commenced or threatened.

     

    “Purchaser Party”
shall have the meaning ascribed to such term in Section 4.11.

     

    “Registration Rights
Agreement” means the Registration Rights Agreement, dated the date
hereof, among the Company and the Purchasers, in the form of Exhibit H attached
hereto.

     

    “Registration
Statement” means a registration statement meeting the requirements set
forth in the Registration Rights Agreement and covering the resale of the
Underlying Shares by each Purchaser as provided for in the Registration Rights
Agreement.

     

    “Required Approvals”
shall have the meaning ascribed to such term in Section 3.1(e).

     

     “Rule 144” means Rule
144 promulgated by the Commission pursuant to the Securities Act, as such Rule
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission having substantially the same effect as such
Rule.

     

    “SEC Reports” shall
have the meaning ascribed to such term in Section 3.1(h).

     

    “Securities” means the
Debentures, Warrants and the Underlying Shares.


    
      
        
           

        

         


      

      
        5

        
          

        

      

      
         


      

    


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

     

    “Security Agreement”
means the Security Agreement, dated the date hereof, among the Company and the
Purchasers, in the form of Exhibit I attached
hereto.

    


    “Security Documents”
shall mean the Security Agreement, the Personal Pledge Agreement, the Onshore
Pledge Agreement and any other documents and filing required thereunder in order
to grant the Purchasers a first priority security interest in the assets of the
Company as provided in the Security Agreement, including all UCC-1 filing
receipts.

     

    “Short Sales” means
all “short sales” as defined in Rule 200 of Regulation SHO under the Exchange
Act (but shall not be deemed to include the location and/or reservation of
borrowable shares of Common Stock). 

     

    “Song Yuan” means Song
Yuan North East Petroleum Technical Service Co. Ltd. a company existing under
the laws of the PRC as a contractual Sino Foreign joint venture, of which the
Company owns 90% of the registered capital.

     

     “Subscription Amount”
means, as to each Purchaser, the aggregate amount to be paid for Debentures and
Warrants purchased hereunder as specified below such Purchaser’s name on the
signature page of this Agreement and next to the heading “Subscription Amount,”
in United States dollars and in immediately available funds.

     

    “Subsequent Financing”
shall have the meaning ascribed to such term in Section 4.13.

     

    “Subsequent Financing
Notice” shall have the meaning ascribed to such term in Section
4.13.

     

    “Subsidiary” means any
subsidiary of the Company as set forth on Schedule 3.1(a) and
shall, where applicable, include any direct or indirect subsidiary of the
Company formed or acquired after the date hereof.

     

     “Subsidiary Note”
means the 8% Note issued by the Company’s subsidiary Song Yuan to the Company in
the principal amount of U.S. $15,000,000.

     

    “Trading Day” means a
day on which the New York Stock Exchange is open for trading.

     

    “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 Nasdaq
Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the
New York Stock Exchange or the OTC Bulletin Board.

     

     “Transaction
Documents” means this Agreement, the Debentures, the Warrants, the
Registration Rights Agreement, the Security Agreement, the Onshore Share Pledge
Agreement,
the Option Agreement, the Escrow Agreement, the Personal Pledge Agreement and
all exhibits and schedules thereto and hereto and any other documents or
agreements executed in connection with the transactions contemplated
hereunder.


    
      
        
           

        

         


      

      
        6

        
          

        

      

      
         


      

    

     

    “Transfer Agent” means
Interest Transfer Company, Inc. with a mailing address of 1981 East Murray
Holladay Road, Suite 100, Salt Lake City, UT 84117 and a facsimile number of
(801) 277-3147 and any successor transfer agent of the Company.

     

    “Underlying Shares”
means the shares of Common Stock issued and issuable upon exercise of the
Warrants

     

     “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 Trading Market on which the Common Stock is then listed
or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m.
New York City time to 4:02 p.m. New York City time); (b)  if the OTC
Bulletin Board is not a Trading Market, the volume weighted average price of the
Common Stock for such date (or the nearest preceding date) on the OTC Bulletin
Board; (c) if the Common Stock is not then listed or quoted on the OTC Bulletin
Board and if prices for the Common Stock are then reported in the “Pink Sheets”
published by Pink Sheets, LLC (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 (d) in all other cases, the fair market value
of a share of Common Stock as determined by an independent appraiser selected in
good faith by the Purchasers of a majority in interest of the Securities then
outstanding and reasonably acceptable to the Company, the fees and expenses of
which shall be paid by the Company.

     

    “Warrants” means any
of the Class A Warrants, Class B Warrants and Class C Warrants.

     

     

    ARTICLE
II.

    PURCHASE
AND SALE

     

    2.1           Closing.

     

    (a)           On
the Closing Date, upon the terms and subject to the conditions set forth herein,
substantially concurrent with the execution and delivery of this Agreement by
the parties hereto, the Company agrees to sell, and the Purchasers, severally
and not jointly, agree to purchase, in the aggregate, up to $15,000,000 in
principal amount of the Debentures and the Class A Warrants, Class B Warrants
and the Class C Warrants.  Each Purchaser shall deliver to the
Company, via wire transfer or a certified check, immediately available funds
equal to its Subscription Amount to the account as specified in the Escrow
Agreement and the Company shall deliver to each Purchaser its respective
Debenture and the respective Warrants, as determined pursuant to Section 2.2(a),
and the Company and each Purchaser shall deliver the other items set forth in
Section 2.2 deliverable at the Closing.  Upon satisfaction of the
conditions set forth in Sections 2.2 and 2.3, the Closing shall occur at the
offices of EGS or such other location or via email and facsimile as the parties
shall mutually agree.

     


    
      
        
           

        

         


      

      
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    (b)           Allocation of Purchase
Price. The Company and its independent auditors shall confirm the amount
of the aggregate purchase price of $15,000,000 allocated by the Company to each
of the Debenture and the Warrants and shall provide the Purchasers with such
determination. The allocation shall be made in accordance with United States
GAAP.

     

    2.2            Deliveries.

     

    (a)           On
the Closing Date, the Company shall deliver or cause to be delivered to each
Purchaser the following:

     

    
      	
               
      

            	
              (i)

            	
              this
      Agreement duly executed by the
Company;

            


    

    
      
        
           

          
            	
                     
      

                  	
                    (ii)

                  	
                    
                      a
      legal opinion of Company Counsel, in substantially the form ofExhibit J
      attached hereto;

                    

                  


          

          
            
               

              
                	
                         
      

                      	
                        (iii) 

                      	
                        
                          a
      Debenture with a principal amount equal to such Purchaser’sSubscription
      Amount, registered in the name of such Purchaser andthe corresponding
      Warrants;

                        

                      


              

              
                
                   

                  
                    	
                             
      

                          	
                            
                              (iv)

                            

                          	
                            
                              the
      Security Agreement, duly executed by the Company along with
      all of the Security Documents duly executed by the parties thereto;

                            

                          


                  

                  
                    
                       

                      
                        	
                                 
      

                              	
                                (v)

                              	
                                
                                  the
      Registration Rights Agreement duly executed by the
      Company;

                                

                              


                      

                      
                        
                           

                          
                            	
                                     
      

                                  	
                                    (vi) 

                                  	
                                    
                                      the
      Onshore Share Pledge Agreement duly executed by
      theCompany;

                                    

                                  


                          

                          
                            
                               

                              
                                	
                                         
      

                                      	
                                        (vii)

                                      	
                                        
                                          the
      Escrow Agreement;

                                        

                                      


                              

                              
                                
                                   

                                  
                                    	
                                             
      

                                          	
                                            (vii) 

                                          	
                                            
                                              the
      Corporate Authorization Documents and a true and correctexecuted copy of
      the Subsidiary Note;

                                            

                                          


                                  

                                  
                                    
                                       

                                      
                                        	
                                                 
      

                                              	
                                                (viii) 

                                              	
                                                the
      Warrants; and

                                              


                                      

                                       

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

      
        	
                 
      

              	
                (ix) 

              	
                the
      Option Agreement;

              


      

       

    

    (b)           On
the Closing Date, each Purchaser shall deliver or cause to be delivered to the
Company the following:

     

    
      	
               
      

            	
              (i)

            	
              this
      Agreement duly executed by such
Purchaser;

            



      
        
          
             

          

           


        

        
          8

          
            

          

        

        
           


        

      

    

     

    
      	
               
      

            	
              (ii)

            	
              such
      Purchaser’s Subscription Amount by wire transfer to the Escrow
      account as specified in writing by the Company and Escrow
      Agent;

            	
            	
            


    

    
       

      
        	
                 
      

              	
                (iii) 

              	the Security Agreement. Onshore Share Pledge Agreement
      andOption  Agreement duly executed by such
  Purchaser;


      

      
        
           

          
            	
                     

                  	
                    (iv)

                  	the Registration Rights Agreement duly executed by
      suchPurchaser; and


          

          
            
               

              
                	
                         
      

                      	
                        (v) 

                      	the Escrow Agreement duly executed by such
      Purchaser.


              

              
                 

              

            

          

        

      

    

    (c)           On
the Closing Date, the Individual Pledgor shall deliver the PersonalPledge
Agreement, the certificate(s) for the shares subject to the Personal
PledgeAgreement and at least one undated stock power signature medallion
guaranteed.

    


    


    2.3           Closing Conditions and
Release of Funds from Escrow.

     

    (a)         
The obligations of the Company hereunder in connection with the Closing are
subject to the following conditions being met:

    
      
         

        
          	
                   
      

                	
                  (i) 

                	
                  the
      accuracy in all material respects on the Closing Date of
      therepresentations and warranties of the Purchasers contained
      herein;

                


        

        
          
             

            
              	
                       
      

                    	
                      (ii) 

                    	
                      all
      obligations, covenants and agreements of each Purchaserrequired to be
      performed at or prior to the Closing Date shall havebeen performed;
      and

                    


            

            
              
                 

                
                  	
                           
      

                        	
                          (iii)

                        	the delivery by each Purchaser of the items set forth in
      Section2.2(b) of this Agreement.


                

                 

              

            

          

        

      

    

    (b)           The
respective obligations of the Purchasers hereunder in connection with the
Closing are subject to the following conditions being met:

    
      
         

        
          	
                   
      

                	
                  (i)

                	the accuracy in all material respects when made and on
      the ClosingDate of the representations and warranties of the
      Companycontained herein;


        

        
          
             

            
              	
                       
      

                    	
                      (ii)

                    	all obligations, covenants and agreements of the Company
      requiredto be performed at or prior to the Closing Date shall have
      beenperformed;


            

            
              
                 

                
                  	
                           
      

                        	
                          (iii) 

                        	the delivery by the Company of the items set forth in
      Section2.2(a) of this Agreement;


                

                
                  
                     

                    
                      	
                               
      

                            	
                              (iv)

                            	there shall have been no Material Adverse Effect with
      respect to the
      Company since the date hereof;
and


                    

                  

                

              

            

          

        

      

    


    
      
        
           

        

         


      

      
        9

        
          

        

      

      
         


      

    

     

    
      
        
          	
                   
      

                	
                  (v)

                	from the date hereof to the Closing Date, trading in the
      CommonStock shall not have been suspended by the Commission or
      theCompany’s principal Trading Market (except for any suspension of
      trading of limited duration agreed to by the Company, which suspension
      shall be terminated prior to the Closing), and, at any time prior to the
      Closing Date, trading in securities generally as reported by Bloomberg
      L.P. shall not have been suspended or limited, or minimum prices shall not
      have been established on securities whose trades are reported by such
      service, or on any Trading Market, nor shall a banking moratorium have
      been declared either by the United States or New York State authorities
      nor shall there have occurred any material outbreak or escalation of
      hostilities or other national or international calamity of such magnitude
      in its effect on, or any material adverse change in, any financial market
      which, in each case, in the reasonable judgment of each Purchaser, makes
      it impracticable or inadvisable to purchase the Securities at the
      Closing.


        

         

      

    

    (c)           Prior
to the release of funds, the parties shall execute a written notice to the
Escrow Agent with respect to the release of any funds from Escrow, and no funds
shall be released without a joint written instruction.  The
Subscription Funds shall be released from the escrow as follows:

    


    (i)           Upon
closing, the sum of $1,750,000 shall be released to the Company, of which
$510,000 shall be utilized by the Company to pay its capital contribution to
Song Yuan as provide in Section 4.5 hereof

    


    (ii)           Upon
satisfaction by the Company, to the satisfaction of the
Purchasers,  of (A) the covenant contained in Section 3.3 (f) hereof
and (B) the post closing conditions set forth in Sections 4.6, 4.17 and 4.18(a),
4.18(b) and 4.18(d) hereof (sometimes collectively referred to as the “Funding
Post Closing Conditions”), all remaining funds in escrow shall be released from
escrow.

    


    


     

    ARTICLE
III.

    REPRESENTATIONS
AND WARRANTIES

     

    3.1           Representations and
Warranties of the Company.  For purposes of this Article III,
the term the “Company” shall be deemed to include the Company and each
Subsidiary.  Except as set forth in the Company’s SEC Reports and the
Disclosure Schedules which Disclosure Schedules shall be deemed a part hereof
and shall qualify any representation or otherwise made herein to the extent of
the disclosure contained in the corresponding section of the Disclosure Schedules,
the Company hereby makes the following representations and warranties to each
Purchaser:


    
      
        
           

        

         


      

      
        10

        
          

        

      

      
         


      

    

     

    (a)  Subsidiaries.  All
of the direct and indirect Subsidiaries of the Company are set forth on Schedule
3.1(a).  The Company owns, directly or indirectly, all of the
capital stock or other equity interests of each Subsidiary free and clear of any
Liens, and all of the issued and outstanding shares of capital stock of each
Subsidiary are validly issued and are fully paid, non-assessable and free of
preemptive and similar rights to subscribe for or purchase
securities.

     

    (b)  Organization and
Qualification.  The Company and each of the Subsidiaries is an
entity duly incorporated or otherwise organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or organization
(as applicable), with the requisite power and authority to own and use its
properties and assets and to carry on its business as currently
conducted.  Neither the Company nor any Subsidiary is in violation or
default of any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter
documents.  Each of the Company and the Subsidiaries is duly qualified
to conduct business and is in good standing as a foreign corporation or other
entity in each jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary, except where the
failure to be so qualified or in good standing, as the case may be, could not
have or reasonably be expected to result in (i) a material adverse effect on the
legality, validity or enforceability of any Transaction Document, (ii) a
material adverse effect on the results of operations, assets, business,
prospects or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, or (iii) a material adverse effect on the
Company’s ability to perform in any material respect on a timely basis its
obligations under any Transaction Document (any of (i), (ii) or (iii), a “Material Adverse
Effect”) and no Proceeding has been instituted in any such jurisdiction
revoking, limiting or curtailing or seeking to revoke, limit or curtail such
power and authority or qualification.

     

    (c)  Authorization;
Enforcement.  The Company has the requisite corporate power and
authority to enter into and to consummate the transactions contemplated by each
of the Transaction Documents and otherwise to carry out its obligations
hereunder and thereunder.  The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of the Company and no further action is required by
the Company, its board of directors or its stockholders in connection therewith
other than in connection with the Required Approvals.  Each
Transaction Document has been (or upon delivery will have been) duly executed by
the Company and, when delivered in accordance with the terms hereof and thereof,
will constitute the valid and binding obligation of the Company enforceable
against the Company in accordance with its terms except (i) as limited by
general equitable principles and applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors’ rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief or other
equitable remedies and (iii) insofar as indemnification and contribution
provisions may be limited by applicable law.


    
      
        
           

        

         


      

      
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    (d)  No
Conflicts.  The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
other transactions contemplated hereby and thereby do not and will not: (i)
conflict with or violate any provision of the Company’s or any Subsidiary’s
certificate or articles of incorporation, bylaws or other organizational or
charter documents, 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, result
in the creation of any Lien upon any of the properties or assets of the Company
or any Subsidiary, 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 a Company
or Subsidiary debt or otherwise) or other understanding to which the Company or
any Subsidiary is a party or by which any property or asset of the Company or
any Subsidiary is bound or affected, or (iii) subject to the Required Approvals,
conflict with or result in a violation of any law, rule, regulation, order,
judgment, injunction, decree or other restriction of any court or governmental
authority to which the Company or a Subsidiary is subject (including federal and
state securities laws and regulations), or by which any property or asset of the
Company or a Subsidiary is bound or affected; except in the case of each of
clauses (ii) and (iii), such as could not have or reasonably be expected to
result in a Material Adverse Effect.

     

    (e)  Filings, Consents and
Approvals.  The Company is not required to obtain any consent,
waiver, authorization or order of, give any notice to, or make any filing or
registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, other than
(i) filings required pursuant to Section 4.6, (ii) the filing with the
Commission of the Registration Statement, (iii)  filings with the
proper authorities in the PRC as set forth on Schedule 3.1(e) hereto (iv)
(collectively, the “Required
Approvals”).

     

    (f)  Issuance of the
Securities.  The Securities are duly authorized and, when
issued and paid for in accordance with the applicable Transaction Documents,
will be duly and validly issued, fully paid and nonassessable, free and clear of
all Liens imposed by the Company other than restrictions on transfer provided
for in the Transaction Documents.  The Underlying Shares, when issued
in accordance with the terms of the Transaction Documents, will be validly
issued, fully paid and nonassessable, free and clear of all Liens imposed by the
Company other than restrictions on transfer provided for in the Transaction
Documents.  The Company has reserved from its duly authorized capital
stock a number of shares of Common Stock for issuance of the Underlying Shares
at least equal to the Required Minimum on the date hereof.

     

    (g)  Capitalization.  The
capitalization of the Company is as set forth on Schedule 3.1(g),
which Schedule
3.1(g) shall also include the number of shares of Common Stock owned
beneficially, and of record, by Affiliates of the Company as of the date
hereof.


    
      
        
           

        

         


      

      
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    The
Company has not issued any capital stock since its most recently filed periodic
report under the Exchange Act, other than pursuant to the exercise of employee
stock options under the Company’s stock option plans, the issuance of shares of
Common Stock to employees pursuant to the Company’s employee stock purchase
plans and pursuant to the conversion or exercise of Common Stock Equivalents
outstanding as of the date of the most recently filed periodic report under the
Exchange Act.  No Person has any right of first refusal, preemptive
right, right of participation, or any similar right to participate in the
transactions contemplated by the Transaction Documents.  Except as a
result of the purchase and sale of the Securities, there are no outstanding
options, warrants, scrip rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities, rights or obligations
convertible into or exercisable or exchangeable for, or giving any Person any
right to subscribe for or acquire, any shares of Common Stock, or contracts,
commitments, understandings or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common Stock or
Common Stock Equivalents. The issuance and sale of the Securities will not
obligate the Company to issue shares of Common Stock or other securities to any
Person (other than the Purchasers) and will not result in a right of any holder
of Company securities to adjust the exercise, conversion, exchange or reset
price under any of such securities. All of the outstanding shares of capital
stock of the Company are validly issued, fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws, and none of
such outstanding shares was issued in violation of any preemptive rights or
similar rights to subscribe for or purchase securities.  No further
approval or authorization of any stockholder, the Board of Directors of the
Company or others is required for the issuance and sale of the
Securities.  There are no stockholders agreements, voting agreements
or other similar agreements with respect to the Company’s capital stock to which
the Company is a party or, to the knowledge of the Company, between or among any
of the Company’s stockholders.

     

    (h)  SEC Reports; Financial
Statements.  The Company has filed all reports, schedules,
forms, statements and other documents required to be filed by the Company under
the Securities Act and the Exchange Act, including pursuant to Section 13(a) or
15(d) thereof, for the two years preceding the date hereof (or such shorter
period as the Company was required by law or regulation to file such material)
(the foregoing materials, including the exhibits thereto and documents
incorporated by reference therein, being collectively referred to herein as the
“SEC Reports”)
on a timely basis or has received a valid extension of such time of filing and
has filed any such SEC Reports prior to the expiration of any such
extension.  As of their respective dates, the SEC Reports complied in
all material respects with the requirements of the Securities Act and the
Exchange Act, as applicable, and none of the SEC Reports, when filed, contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.  The financial statements of the Company included in the
SEC Reports comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto as in effect at the time of filing.  Such financial statements
have been prepared in accordance with United States generally accepted
accounting principles applied on a consistent
basis during the periods involved (“GAAP”), except as may
be otherwise specified in such financial statements or the notes thereto and
except that unaudited financial statements may not contain all footnotes
required by GAAP, and fairly present in all material respects the financial
position of the Company and its consolidated Subsidiaries as of and for the
dates thereof and the results of operations and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal, immaterial,
year-end audit adjustments.


    
      
        
           

        

         


      

      
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    (i)  Material
Changes.  Since the date of the latest unaudited financial
statements included within the SEC Reports, except as specifically disclosed in
a subsequent SEC Report filed prior to the date hereof, (i) there has been no
event, occurrence or development that has had or that could reasonably be
expected to result in a Material Adverse Effect, (ii) the Company has not
incurred any liabilities (contingent or otherwise) other than (A) trade payables
and accrued expenses incurred in the ordinary course of business consistent with
past practice and (B) liabilities not required to be reflected in the Company’s
financial statements pursuant to GAAP or disclosed in filings made with the
Commission, (iii) the Company has not altered its method of accounting, (iv) the
Company has not declared or made any dividend or distribution of cash or other
property to its stockholders or purchased, redeemed or made any agreements to
purchase or redeem any shares of its capital stock and (v) the Company has not
issued any equity securities to any officer, director or Affiliate, except
pursuant to existing Company stock option plans. The Company does not have
pending before the Commission any request for confidential treatment of
information.  Except for the issuance of the Securities contemplated
by this Agreement or as set forth on Schedule 3.1(i), no
event, liability or development has occurred or exists with respect to the
Company or its Subsidiaries or their respective business, properties, operations
or financial condition, that would be required to be disclosed by the Company
under applicable securities laws at the time this representation is made or
deemed made that has not been publicly disclosed at least one Trading Day prior
to the date that this representation is made.

     

    (j)  Litigation.  Other
than as disclosed on Schedule 3.1(l) there is no action, suit, inquiry, notice
of violation, proceeding or investigation pending or, to the knowledge of the
Company, threatened against or affecting the Company, any Subsidiary or any of
their respective properties before or by any court, arbitrator, governmental or
administrative agency or regulatory authority (federal, state, county, local or
foreign) (collectively, an “Action”) which (i)
adversely affects or challenges the legality, validity or enforceability of any
of the Transaction Documents or the Securities or (ii) could, if there were an
unfavorable decision, have or reasonably be expected to result in a Material
Adverse Effect.  Neither the Company nor any Subsidiary, nor any
director or officer thereof, is or has been the subject of any Action involving
a claim of violation of or liability under federal or state securities laws or a
claim of breach of fiduciary duty.  There has not been, and to the
knowledge of the Company, there is not pending or contemplated, any
investigation by the Commission involving the Company or any current or former
director or officer of the Company.  The Commission has not issued any
stop order or other order suspending the effectiveness of any registration
statement filed by the Company or any Subsidiary under the Exchange Act or the
Securities Act.


    
      
        
           

        

         


      

      
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    (k)  Labor
Relations.  No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company which could reasonably be expected to result in a Material Adverse
Effect.  None of the Company’s or its Subsidiaries’ employees is a
member of a union that relates to such employee’s relationship with the Company
or such Subsidiary, and neither the Company nor any of its Subsidiaries is a
party to a collective bargaining agreement, and the Company and its Subsidiaries
believe that their relationships with their employees are good.  No
executive officer, to the knowledge of the Company, is, or is now expected to
be, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement or
non-competition agreement, or any other contract or agreement or any restrictive
covenant in favor of any third party, and the continued employment of each such
executive officer does not subject the Company or any of its Subsidiaries to any
liability with respect to any of the foregoing matters.  The Company
and its Subsidiaries are in compliance with all U.S. federal, state, local and
foreign laws and regulations relating to employment and employment practices,
terms and conditions of employment and wages and hours, except where the failure
to be in compliance could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.

     

    (l)  Compliance.  Neither
the Company nor any Subsidiary (i) is in default under or in violation of (and
no event has occurred that has not been waived that, with notice or lapse of
time or both, would result in a default by the Company or any Subsidiary under),
nor has the Company or any Subsidiary received notice of a claim that it is in
default under or that it is in violation of, any indenture, loan or credit
agreement or any other agreement or instrument (including, without limitation,
the Material Oil Drilling Contracts)  to which it is a party or by
which it or any of its properties is bound (whether or not such default or
violation has been waived), (ii) is in violation of any order of any court,
arbitrator or governmental body, or (iii) is or has been in violation of any
statute, rule or regulation of any governmental authority, including without
limitation all foreign, federal, state and local laws applicable to its business
and all such laws that affect the environment, except in each case as could not
have or reasonably be expected to result in a Material Adverse
Effect.

     

    (m)  Regulatory
Permits.  The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits could not reasonably be expected to result in a Material
Adverse Effect (“Material Permits”),
and neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any Material Permit.
Schedule 3.1(m) sets forth a complete list of all permits and licenses and
regulatory approvals required by the subsidiaries to operate their respective
business in the PRC, each of which has been obtained and has not been revoked or
amended.  The Company and its Subsidiaries have paid all fees for
permits and licenses required to be paid by them in the PRC in connection with
the operation of their respective businesses.


    
      
        
           

        

         


      

      
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    (n)   Title to
Assets.  The Company and the Subsidiaries have good and
marketable title in fee simple to all real property owned by them and good and
marketable title in all personal property owned by them that is material to the
business of the Company and the Subsidiaries, in each case free and clear of all
Liens, except for Liens as do not materially affect the value of such property
and do not materially interfere with the use made and proposed to be made of
such property by the Company and the Subsidiaries and Liens for the payment of
PRC, federal, state or other taxes, the payment of which is neither delinquent
nor subject to penalties.  Any real property and facilities held under
lease by the Company and the Subsidiaries are held by them under valid,
subsisting and enforceable leases with which the Company and the Subsidiaries
are in compliance in all respects.

     

    (o)  Patents and
Trademarks.  The Company and the Subsidiaries have, or have
rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, trade secrets, inventions, copyrights,
licenses and other intellectual property rights and similar rights necessary or
material for use in connection with their respective businesses as described in
the SEC Reports and which the failure to so have could have a Material Adverse
Effect (collectively, the “Intellectual Property
Rights”).  Neither the Company nor any Subsidiary has received
a notice (written or otherwise) that any of the Intellectual Property Rights
used by the Company or any Subsidiary violates or infringes upon the rights of
any Person. To the knowledge of the Company, all such Intellectual Property
Rights are enforceable and there is no existing infringement by another Person
of any of the Intellectual Property Rights.  The Company and its
Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their intellectual properties, except where
failure to do so could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.

     

    (p)  Insurance.  The
Company and the Subsidiaries have no insurance against losses and risks
including, but not limited to, directors and officers insurance
coverage.  Neither the Company nor any Subsidiary has any reason to
believe that it will not be able to obtain such coverage
from  insurers as may be necessary to continue its
business.  The Company shall apply to obtain directors and officers
insurance within 90 days of the Closing and  maintain it for so long
as any principal or interest on the Debentures remain unpaid.

     

    (q)  Transactions with Affiliates
and Employees.  Except as set forth in the SEC Reports, none of
the officers or directors of the Company and, to the knowledge of the Company,
none of the employees of the Company is presently a party to any transaction
with the Company or any Subsidiary (other than for services as employees,
officers and directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
entity in which any officer, director, or any such employee has a substantial
interest or is an officer, director, trustee or partner, in each case in excess
of $60,000 other than for (i) payment of salary or consulting fees for services
rendered, (ii) reimbursement for expenses incurred on behalf of the Company and
(iii) other employee benefits, including stock option agreements under any stock
option plan of the Company.


    
      
        
           

        

         


      

      
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    (r)  Sarbanes-Oxley; Internal
Accounting Controls.  The Company is in material compliance
with all provisions of the Sarbanes-Oxley Act of 2002 which are applicable to it
as of the Closing Date.  The Company and the Subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with GAAP and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management’s general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The Company has established disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and
designed such disclosure controls and procedures to ensure that information
required to be disclosed by the Company in the reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Commission’s rules and forms.  The
Company’s certifying officers have evaluated the effectiveness of the Company’s
disclosure controls and procedures as of the end of the period covered by the
Company’s most recently filed periodic report under the Exchange Act (such date,
the “Evaluation
Date”).  The Company presented in its most recently filed
periodic report under the Exchange Act the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures based
on their evaluations as of the Evaluation Date.  Since the Evaluation
Date, there have been no changes in the Company’s internal control over
financial reporting (as such term is defined in the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.

     

    (s)  Certain
Fees.  Other than as described on Schedule 3.1(s) no brokerage
or finder’s fees or commissions are or will be payable by the Company to any
broker, financial advisor or consultant, finder, placement agent, investment
banker, bank or other Person with respect to the transactions contemplated by
the Transaction Documents.  The Purchasers shall have no obligation
with respect to any fees or with respect to any claims made by or on behalf of
other Persons for fees of a type contemplated in this Section that may be due in
connection with the transactions contemplated by the Transaction
Documents.

     

    (t)  Private
Placement.  Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.4, no registration under
the Securities Act is required for the offer and sale of the Securities by the
Company to the Purchasers as contemplated hereby. The issuance and sale of the
Securities hereunder does not contravene the rules and regulations of the
Trading Market.


    
      
        
           

        

         


      

      
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    (u)  Investment Company.
The Company is not, and is not an Affiliate of, and immediately after receipt of
payment for the Securities, will not be or be an Affiliate of, an “investment
company” within the meaning of the Investment Company Act of 1940, as
amended.  The Company shall conduct its business in a manner so that
it will not become subject to the Investment Company Act of 1940, as
amended.

     

    (v)  Registration
Rights.  Other than each of the Purchasers, no Person has any
right to cause the Company to effect the registration under the Securities Act
of any securities of the Company.

     

    (w)  Listing and Maintenance
Requirements.  The Company’s Common Stock is registered
pursuant to Section 12(b) or 12(g) of the Exchange Act, and the Company has
taken no action designed to, or which to its knowledge is likely to have the
effect of, terminating the registration of the Common Stock under the Exchange
Act nor has the Company received any notification that the Commission is
contemplating terminating such registration.  The Company has not, in
the twelve (12) months preceding the date hereof, received notice from any
Trading Market on which the Common Stock is or has been listed or quoted to the
effect that the Company is not in compliance with the listing or maintenance
requirements of such Trading Market. The Company is, and has no reason to
believe that it will not in the foreseeable future continue to be, in compliance
with all such listing and maintenance requirements. The Company shall file any
and all application with the Nasdaq Stock Market or the American Stock Exchange
to obtain a listing for its Common Stock within 12 months of the date of the
Closing and, assuming the Common Stock is accepted for listing, shall use its
best efforts to maintain such listing for so long as the Debentures remain
unpaid.

     

    (x)  Application of Takeover
Protections.  The Company and its board of directors have taken
all necessary action, if any, in order to render inapplicable any control share
acquisition, business combination, poison pill (including any distribution under
a rights agreement) or other similar anti-takeover provision under the Company’s
certificate of incorporation (or similar charter documents) or the laws of its
state of incorporation that is or could become applicable to the Purchasers as a
result of the Purchasers and the Company fulfilling their obligations or
exercising their rights under the Transaction Documents, including without
limitation as a result of the Company’s issuance of the Securities and the
Purchasers’ ownership of the Securities.

     

    (y)  Disclosure.  Except
with respect to the material terms and conditions of the transactions
contemplated by the Transaction Documents, the Company confirms that neither it
nor any other Person acting on its behalf has provided any of the Purchasers or
their agents or counsel with any information that it believes constitutes or
might constitute material, nonpublic information.  The Company
understands and confirms that the Purchasers will rely on the foregoing
representation in effecting transactions in securities of the
Company.  All disclosure furnished by or on behalf of the Company to
the Purchasers regarding the Company, its business and the transactions
contemplated hereby, including the Disclosure Schedules to this Agreement, is
true and correct and does not contain any untrue statement of a material fact or
omit to state any material fact necessary
in order to make the statements made therein, in light of the circumstances
under which they were made, not misleading.   The press releases
disseminated by the Company during the twelve months preceding the date of this
Agreement taken as a whole do not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made and when made, not misleading.  The Company
acknowledges and agrees that no Purchaser makes or has made any representations
or warranties with respect to the transactions contemplated hereby other than
those specifically set forth in Section 3.4 hereof.


    
      
        
           

        

         


      

      
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    (z)  No Integrated
Offering. Assuming the accuracy of the Purchasers’ representations and
warranties set forth in Section 3.4, neither the Company, nor any of its
Affiliates, nor any Person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would cause this offering of the
Securities to be integrated with prior offerings by the Company for purposes of
(i) the Securities Act which would require the registration of any such
securities under the Securities Act, or (ii) any applicable shareholder approval
provisions of any Trading Market on which any of the securities of the Company
are listed or designated.

     

    (aa)  Tax
Status.  Except for matters that would not, individually or in
the aggregate, have or reasonably be expected to result in a Material Adverse
Effect, the Company and each Subsidiary has filed all necessary federal, state
and foreign income and franchise tax returns (including, without limitation, all
PRC tax returns and filings) and has paid or accrued all taxes shown as due
thereon, has paid all PRC taxes and the Company has no knowledge of a tax
deficiency which has been asserted or threatened against the Company or any
Subsidiary.  The Company warrants that the transactions contemplated
by the Transaction Documents including the Option Agreement will not subject the
Company or its subsidiaries to U.S. taxation or require the Company to deem
income in any material amount from its subsidiaries to be subject to U.S.
taxation.

     

    (bb)  No General
Solicitation. Neither the Company nor any person acting on behalf of the
Company has offered or sold any of the Securities by any form of general
solicitation or general advertising.  The Company has offered the
Securities for sale only to the Purchasers and certain other “accredited
investors” within the meaning of Rule 501 under the Securities Act.

     

    (cc)  Foreign Corrupt
Practices.  Neither the Company, nor to the knowledge of the
Company, any agent or other person acting on behalf of the Company, has (i)
directly or indirectly, used any funds for unlawful contributions, gifts,
entertainment or other unlawful expenses related to foreign or domestic
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to any foreign or domestic political
parties or campaigns from corporate funds, (iii) failed to disclose fully any
contribution made by the Company (or made by any person acting on its behalf of
which the Company is aware) which is  in violation of law, or (iv)
violated in any material respect any provision of the Foreign Corrupt Practices
Act of 1977, as amended.

     

    
      
        
           

        

         


      

      
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    (dd) Accountants.  The
Company’s accounting firm is set forth on Schedule 3.1(ee) of
the Disclosure Schedule.  To the knowledge and belief of the Company,
such accounting firm (i) is a registered public accounting firm as required by
the Exchange Act and (ii) shall express its opinion with respect to the
financial statements to be included in the Company’s Annual Report on Form 10-K
for the year ending December 31, 2007.

     

    (ee)  Seniority.  As
of the Closing Date, no Indebtedness or other claim against the Company is
senior to the Debentures or the Subsidiary Note in right of payment, whether
with respect to interest or upon liquidation or dissolution, or otherwise, other
than indebtedness secured by purchase money security interests (which is senior
only as to underlying assets covered thereby) and capital lease obligations
(which is senior only as to the property covered thereby).

     

    (ff)  No Disagreements with
Accountants and Lawyers.  There are no disagreements of any
kind presently existing, or reasonably anticipated by the Company to arise,
between the Company and the accountants and lawyers formerly or presently
employed by the Company and the Company is current with respect to any fees owed
to its accountants and lawyers which could affect the Company’s ability to
perform any of its obligations under any of the Transaction
Documents.

     

    (gg)  Acknowledgment Regarding
Purchasers’ Purchase of Securities.  The Company acknowledges
and agrees that each of the Purchasers is acting solely in the capacity of an
arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated thereby.  The Company further acknowledges
that no Purchaser is acting as a financial advisor or fiduciary of the Company
(or in any similar capacity) with respect to the Transaction Documents and the
transactions contemplated thereby and any advice given by any Purchaser or any
of their respective representatives or agents in connection with the Transaction
Documents and the transactions contemplated thereby is merely incidental to the
Purchasers’ purchase of the Securities.  The Company further
represents to each Purchaser that the Company’s decision to enter into this
Agreement and the other Transaction Documents has been based solely on the
independent evaluation of the transactions contemplated hereby by the Company
and its representatives.

     

    (hh)  Regulation M
Compliance.  The Company has not, and to its knowledge no one
acting on its behalf has, (i) taken, directly or indirectly, any action designed
to cause or to result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or paid any compensation for
soliciting purchases of, any of the securities of the Company or (iii) paid or
agreed to pay to any Person any compensation for soliciting another to purchase
any other securities of the Company.

     

    (ii)  Environmental Law
Compliance

     

    (i)           The
Company and each of its Subsidiaries has at all times complied with all
environmental legislation in force, relevant or applicable to each company,
where in the PRC or elsewhere (the “Environmental Legislation”) and there is
nothing in, on, or under the Property upon which the presence, existence or
condition of which constitutes a breach of such Environmental Legislation nor is
there or has there been any manufacturing, storage, generation, servicing,
treatment, disposal or other process carried on at the Property in such a way as
to amount to a breach of the same.


    
      
        
           

        

         


      

      
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    (ii)           No
complaints have been received from any third party (includingany employee of any
of the Company and/or its subsidiaries or governmental, regulatory,supervisory
oradministrative body) with regard to any breach of the Environmental
Legislation in connection with the Property and the development and construction
thereon and, after due and careful enquiry, the Vendor is not aware of any
events, circumstances or matters which may lead to such complaint.

    


    (iii)           No
toxic industrial waste or toxic substance (as defined in
anyEnvironmental  Legislation) or any other similar substance
(howsoever termed) has beensplit, released, discharged or disposed in the soil
or water in, under, around or upon the Property.

    


    For purposes of this clause, the term
“Property” shall mean any and all locations in which the Company and/or each of
its subsidiaries carry on their respective business operations.

    


    


    (jj)  The Company and each
Subsidiary is in compliance with the terms and conditions of all of its
contracts and leases and other agreements with PetroChina Limited and its
Affiliates, and is not aware of any dispute or disagreement with PetroChina
Limited or its Affiliates regarding such contracts or leases. The Company is not
aware of, and has not received any notice of (whether written or oral) or any
disputes, defaults or claims under the Material Oil Drilling
Contracts

     

    (kk)           Internal
Controls.  The Company maintains a system of internalaccounting
controls sufficient to provide reasonable assurance that (i) transactions
areexecuted in accordance with management’s general or specific authorization,
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management’s general or
specific authorization and (iv) the recorded accountability for assets is
compared with the existing assets at quarterly intervals and appropriate action
is taken with respect to any material differences.


    
      
        
           

        

         


      

      
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    (ll)           Solvency and Adequate
Capital.  All Indebtedness represented by theDebentures is
being incurred for proper purposes and in good faith.  Based on
thefinancial condition of the Company as of the Closing Date without giving
effect to the receipt by the Company of the proceeds from the sale of the
Securities hereunder, (i) the fair saleable value of the Company’s assets
exceeds the amount that will be required to be paid on or in respect of the
Company’ existing debts and other liabilities (including contingent liabilities)
as they mature; (ii) the present fair saleable value of theassets of the Company
is greater than the amount that will be required to pay theprobable liabilities
of the Company on their respective debt as they become absolute and mature, and
(iii) the Company are able to realize upon their assets and pay their debt and
other liabilities (including contingent obligations) as they mature; (iv) the
Company’s assets do not constitute unreasonably small capital to carry on their
respective businesses as now conducted and as proposed to be conducted including
their respective capital needs taking into account the particular capital
requirements of the business conducted by the Company, and projected capital
requirements and capital availability thereof; and (v) the current cash flow of
each of the Company, together with the proceeds the Company would receive, were
it to liquidate all of its assets, after taking into account all anticipated
uses of the cash, would be sufficient to pay all amounts on or in respect of its
liabilities when such amounts are required to be paid.  None of the
Company intends to incur debts beyond its ability to pay such debts as they
mature (taking into account the timing and amounts of cash to be payable on or
in respect of its debt).  The Company has no knowledge of any facts or
circumstances which lead it to believe that it or any other Company will file
for reorganization or liquidation under the bankruptcy or reorganization laws of
any jurisdiction within one year from the Closing Date.  Schedule
3.1(ll) sets forth as of the date hereof all outstanding secured and unsecured
Indebtedness of the Company or any Subsidiary or for which the Company or any
Subsidiary has commitments. For the purposes of this Agreement, “Indebtedness”
shall mean (a) any liabilities for borrowed money or amounts owed in excess of
US$50,000 (other than trade accounts payable incurred in the ordinary course of
business), (b) all guaranties (including liens granted over the property of any
Subsidiary of the Company as security for Indebtedness of any Person that is not
affiliate with the Company), endorsements and other contingent obligations in
respect of Indebtedness of others, whether or not the same are or should be
reflected in the Company’s consolidated balance sheet (or the notes thereto),
except guaranties by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business; and (c)
the present value of any lease payments in excess of US$50,000 due under leases
required to be capitalized in accordance with GAAP. The Company is not and is
not reasonably likely to be, in default with respect to any Indebtedness and no
waiver of default is currently in effect.  The Company has agreed or
consented to cause or permit in the future (upon the happening of a contingency
or otherwise) any of its property, whether now owned or hereafter acquired, to
be subject to a Lien (other than pursuant to the Security
Documents).  The Company is not a party to, or otherwise subject to
any provision contained in, any instrument evidencing Indebtedness of any of the
Company, any agreement relating thereto or any other agreement (including, but
not limited to, its Charter Document) which limits the amount of, or otherwise
imposes restrictions on the incurring of, Indebtedness of the Company on a
consolidated basis.

     

    (mm)    No Sale to the
U.S.  The Company is not, nor any person that directly, or
indirectly through one or more intermediaries, controls or is controlled by, or
is under common control with, the Company  (each such person, an
“Affiliate”),
or any person acting on its or their behalf has, directly or indirectly, made
offers or sales of any security, or solicited offers to buy, sell or offer to
sell or otherwise negotiate in respect of, in
the United States or to any United States citizen or resident, any security
which is or would be integrated with the sale of the Securities in a manner or
under circumstances that would require the registration of the Securities under
the Act.


    
      
        
           

        

         


      

      
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    (nn)           No Directed Selling
Efforts.  The Company has not, nor has any of theirrespective
Affiliates, or any person acting on its or their behalf (other than the
Purchaser,its Affiliates or persons acting on its behalf, as to whom the Company
make no representation) has engaged in any directed selling efforts (within the
meaning of Regulation S) with respect to the Securities; and each of the
Company, its Subsidiaries, their respective Affiliates and each person acting on
its or their behalf has complied with the offering restrictions requirement of
Regulation S.

     

    (oo)           Sovereign
Immunity.  Under the laws of their respective jurisdiction of
incorporation and the PRC, neither the Company nor any Subsidiary , is, nor
are  any of their respective properties, assets or
revenues,  entitled to any right of immunity on the grounds of
sovereignty from any legal action, suit or proceeding, from set-off or
counterclaim, from the jurisdiction of any court, from service of process, from
attachment prior to or in aid of execution of judgment, or from other legal
process or proceeding for the giving of any relief or for the enforcement of any
judgment.

     

    (pp)           PFIC.  The
Company is not nor intends to become a “passive foreigninvestment company” (a
“PFIC”)
within the meaning of Section 1297 of the InternalRevenue Code.

     

    (qq)           Money Laundering
Laws.  The operations of the Company are and havebeen conducted
at all times in compliance with the money laundering statutes ofapplicable
jurisdictions, the rules and regulations thereunder and any related or similar
rules, regulations or guidelines, issued, administered or enforced by any
applicable governmental agency (collectively, the “Money
Laundering Laws”) and no action, suit or proceeding by or before any
court or governmental agency, authority or body or any arbitrator involving any
of the Company with respect to the Money Laundering Laws is pending or, to the
best knowledge of the Company, threatened.

     

    3.2           Other Representations and
Warranties Relating to the PRC by the Company.

     

    (a)           The
constitutional documents and certificates and related material contracts of the
Company and the Company’s subsidiaries have been established under the laws of
the PRC for purposes of this Section 3.2 (sometimes referred to as a “PRC
Company”) and are valid and have been duly approved or registered (as
applicable) by competent PRC Governmental Authorities.

     

    (b)           All
material consents, approvals, authorizations or licenses requisite under PRC law
for the due and proper establishment and operation of each PRC Company have been
duly obtained from the relevant PRC Governmental Authorities and are in full
force and effect.


    
      
        
           

        

         


      

      
        23

        
          

        

      

      
         


      

    


    (c)           All
filings and registrations with the PRC Governmental Authorities required in
respect of each of the PRC the Company and their respective operations
including, without limitation, the registrations with the Ministry of Commerce,
the State Administration of Industry and Commerce, the State Administration for
Foreign Exchange, tax bureau and customs authorities have been duly completed in
accordance with the relevant PRC rules and regulations.

     

    (d)           The
Company has complied with all relevant PRC laws and regulations regarding the
contribution and payment of its registered share capital, the payment schedule
of which has been approved by the relevant PRC Government
Authorities.  There are no outstanding rights of, or commitments made
by, the Company to sell any equity interest in any PRC Company, or by any of the
other PRC Company’ shareholders to sell any equity interest in such other PRC
the Company. To the extent that any controlling shareholder of the Company or
any Subsidiary is subject to or under the jurisdiction of Circular 75 issued by
the PRC State Administration of Foreign Exchange on October 21, 2005, including
any amendment, implementing rules, or official interpretation thereof or any
replacement, successor or alternative legislation having the same subject matter
thereof (collectively “Circular
75”), each of the Company and its Subsidiaries and any controlling
shareholder represents and warrants  to the Purchaser that it shall
fully complied in all respects with Circular 75 and any related requirement of
law, including without limitation, the completion of any applicable foreign
exchange registration, settlement or remittance requirement therein within 90
days of the Closing.

     

    (e)           The
Company is not in receipt of any letter or notice from any relevant PRC
Governmental Authority notifying it of revocation of any licenses or
qualifications issued to it or any subsidy granted to it by any PRC Governmental
Authority for non-compliance with the terms thereof or with applicable PRC laws,
or the need for compliance or remedial actions in respect of the activities
carried out by the Company.

     

    (f)           The
Company has conducted its business activities within the permitted scope of
business or has otherwise operated its business in compliance with all relevant
legal requirements and with all requisite licenses and approvals granted by
competent PRC Governmental Authorities.

     

    (g)           As
to licenses, approvals and government grants and concessions requisite or useful
for the conduct of any part of the PRC, the Company’s business which are subject
to periodic renewal, the Company has no knowledge of any grounds on which such
requisite renewals will not be granted by the relevant PRC Governmental
Authorities.

     

    (h)           With
regard to employment and staff or labor, each of the Company has complied with
all applicable PRC laws and regulations in all material respects, including
without limitation, laws and regulations pertaining to welfare funds, social
benefits, medical benefits, insurance, retirement benefits, pensions or the
like.


    
      
        
           

        

         


      

      
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    (i)           All
of the Material Oil Drilling Agreements have been duly authorized by the Company
and any Subsidiary party thereto, and such agreements constitute the valid and
binding obligations of the Company or the Subsidiary, as the case may be,
enforceable against the Company or the Subsidiary in accordance with its terms
except (i) as limited by general equitable principles and applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors’ rights generally, (ii) as limited by laws
relating to the availability of specific performance, injunctive relief or other
equitable remedies and (iii) insofar as indemnification and contribution
provisions may be limited by applicable law.

     

    3.3                         
 Covenants of the
Company

     

    (a)           Prior
to making any public disclosure or filings as may be required byapplicable law
with respect to this Agreement and the transactions contemplated hereby,to
provide the Purchaser and its counsel with the reasonable opportunity to review
and comment on such public disclosure documents and consider in good faith any
comments received from the Purchaser or its counsel.

     

    (b)           The
Company will use its reasonable efforts not to become, and cause itsSubsidiaries
not to become, a PFIC.  If the Company determines that it or any of
itsSubsidiaries has become a PFIC, the Company will promptly notify the
Purchaser and provide all information requested by the Purchaser that is
necessary for the Purchaser to make a qualified electing fund (QEF) election
under Section 1295 of the Internal Revenue Code.

     

    (c)           The
Company shall not, directly or indirectly, use the proceeds of the saleof the
Debentures, or lend, contribute or otherwise make available such proceeds to
anySubsidiary, joint venture or other Person for the purposes of financing the
activities of any Person currently subject to any U.S. sanctions administered by
OFAC.

     

    (d)           The  Company
shall conduct its operations at all times in compliance withthe Money Laundering
Laws of applicable jurisdictions, the rules and regulationsthereunder and any
related or similar rules, regulations or guidelines, issued administered or
enforced by any applicable Governmental Authorities.

     

    (e)           The
Company agrees that it will not register any transfer of the Securitiesthat is
not (i) made in accordance with the provisions of Regulation S under the Act,
(ii)made pursuant to registration under the Act, or (iii) made pursuant to an
available exemption under the Act.

     

    (f)           The
Company shall, as soon as reasonably practicable, use its reasonablebest efforts
to (i) obtain approvals from, and complete filing procedures with,
relevantGovernmental Authorities in order to create valid and enforceable
security interests over all of the equity interests of Song Yuan North East
Petroleum Technical Service Co., Ltd.  pursuant to the Onshore Share
Pledge Agreement, and (ii) procure a Person who is reasonably acceptable to
Purchaser as sponsor to act on behalf of the Company in making the foregoing
filings and completing such procedures which sponsor shall act at the
instruction of the Collateral Agent. If the PRC Governmental Authorities require
anyamendments, modifications or changes to the Onshore Share Pledge
Agreements as acondition to their approval of such agreements, then the Company
shall use its best efforts to effect such amendments, modifications or changes
to such agreements, as the case may be, to obtain such approvals from the
relevant Governmental Authorities


    
      
        
           

        

         


      

      
        25

        
          

        

      

      
         


      

    

     

    (g)           The
Company shall use its best efforts to assist the Purchaser to timely filethe UCC
Financing Statement under Article 9 of the UCC of Nevada with the Secretaryof
the State of the State of Nevada (and such other states as may be requested by
Purchasers) with respect to the pledge of equity interests of the Company, which
initial filing shall be completed no later than five (5) days from the date of
the Closing.

     

    3.4           Representations and
Warranties of the Purchasers.  Each Purchaser, for itself and
for no other Purchaser hereby, represents and warrants as of the date hereof and
as of the Closing Date to the Company as follows:

     

    (a)           Organization;
Authority.  Such Purchaser is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization with full right, corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the Transaction
Documents and otherwise to carry out its obligations hereunder and thereunder.
The execution and delivery of the Transaction Documents and performance by such
Purchaser of the transactions contemplated by the Transaction Documents have
been duly authorized by all necessary corporate or similar action on the part of
such Purchaser.  Each Transaction Document to which it is a party has
been duly executed by such Purchaser, and when delivered by such Purchaser in
accordance with the terms hereof, will constitute the valid and legally binding
obligation of such Purchaser, enforceable against it in accordance with its
terms, except (i) as limited by general equitable principles and applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors’ rights generally, (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief or other equitable remedies and (iii) insofar as indemnification and
contribution provisions may be limited by applicable law.

     

    (b)           Own
Account.  Such Purchaser understands that the Securities are
“restricted securities” and have not been registered under the Securities Act or
any applicable state securities law and is acquiring the Securities as principal
for its own account and not with a view to or for distributing or reselling such
Securities or any part thereof in violation of the Securities Act or any
applicable state securities law, has no present intention of distributing any of
such Securities in violation of the Securities Act or any applicable state
securities law and has no direct or indirect arrangement or understandings with
any other persons to distribute or regarding the distribution of such Securities
(this representation and warranty not limiting such Purchaser’s right to sell
the Securities pursuant to the Registration Statement or otherwise in compliance
with applicable federal and state securities laws) in violation of the
Securities Act or any applicable state securities law.  Such Purchaser
is acquiring the Securities hereunder in the ordinary course of its
business.


    
      
        
           

        

         


      

      
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    (c)           Purchaser
Status.  At the time such Purchaser was offered the Securities,
it was, and at the date hereof it is, and on each date on which it exercises any
Warrants or converts any Debentures it will be either: (i) an “accredited
investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under
the Securities Act or (ii) a “qualified institutional buyer” as defined in Rule
144A(a) under the Securities Act.  Such Purchaser is not required to
be registered as a broker-dealer under Section 15 of the Exchange
Act.

     

    (d)           Experience of Such
Purchaser.  Such Purchaser, either alone or together with its
representatives, has such knowledge, sophistication and experience in business
and financial matters so as to be capable of evaluating the merits and risks of
the prospective investment in the Securities, and has so evaluated the merits
and risks of such investment.  Such Purchaser is able to bear the
economic risk of an investment in the Securities and, at the present time, is
able to afford a complete loss of such investment.

     

    (e)           General
Solicitation.  Such Purchaser is not purchasing the Securities
as a result of any advertisement, article, notice or other communication
regarding the Securities published in any newspaper, magazine or similar media
or broadcast over television or radio or presented at any seminar or any other
general solicitation or general advertisement.

     

    (f)           Short Sales and
Confidentiality Prior To The Date Hereof.  Other than
consummating the transactions contemplated hereunder, such Purchaser has not
directly or indirectly, nor has any Person acting on behalf of or pursuant to
any understanding with such Purchaser, executed any purchases or sales,
including Short Sales, of the securities of the Company during the period
commencing from the time that such Purchaser first received a term sheet
(written or oral) from the Company or any other Person representing the Company
setting forth the material terms of the transactions contemplated hereunder
until the date hereof (“Discussion
Time”).  Notwithstanding the foregoing, in the case of a
Purchaser that is a multi-managed investment vehicle whereby separate portfolio
managers manage separate portions of such Purchaser's assets and the portfolio
managers have no direct knowledge of the investment decisions made by the
portfolio managers managing other portions of such Purchaser's assets, the
representation set forth above shall only apply with respect to the portion of
assets managed by the portfolio manager that made the investment decision to
purchase the Securities covered by this Agreement.  Other than to
other Persons party to this Agreement, such Purchaser has maintained the
confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this
transaction).

     

    (g)           Status Of
Purchasers. The Purchaser
is not a “U.S. Person” (as defined inRule 902 of Regulation S under the Act) and
it understands that no action has been orwill be taken in any jurisdiction by
the Company that would permit a public offering of the Securities in any country
or jurisdiction where action for that purpose is required. It is not acquiring
the Securities for the account or benefit of any U.S. persons except in
accordance with exemption from registration requirements of the Act below or in
a transaction not subject thereto.


    
      
        
           

        

         


      

      
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    (h)           Investment
Intent.  The Purchaser is not acquiring the Securities with
aview to any distribution thereof that would violate the Act or the securities
laws of anystate of the United States or any other applicable
jurisdiction.

     

    (i)           Resale
Restrictions.  The Purchaser (A) agrees that it will not offer,
sell orotherwise transfer any of the Securities nor, unless in compliance with
the Act or asallowed underRegulation S, engage in hedging transactions involving
such securities, on or prior to (x) the date which is 40 days (in the case of
the Debentures) or six months (in the case of the Warrants and the Warrant
Shares) after the later of the date of the commencement of the offering and the
date of original issuance (or of any predecessor of any Security proposed to be
transferred by the Purchaser) and (y) such later date, if any, as may be
required by applicable law, except (a) to the Company, (b) pursuant to a
registration statement that has been declared effective under the Act, (c), (d)
pursuant to offers and sales to Persons who are not “U.S. Persons” (within the
meaning of Regulation S) that occur outside the United States within the meaning
of Regulation S or (e) pursuant o any other available exemption from the
registration requirements of the Act, and (B) agrees that it will giveto each
person to whom such Security is transferred a notice substantially to the effect
of  this paragraph.  The Purchaser acknowledges that the
Securities are “restricted securities” as defined in Rule 144 under the Act and
subject to resale restrictions during the period set forth in Regulation
S.

     

    (l)           No Directed Selling
Efforts. No form of “directed selling efforts” (asdefined in Rule 902 of
Regulation S under the Act), general solicitation or generaladvertising in
violation of the Act has been or will be used nor will any offers by means of
any directed selling efforts in the United States be made by the Purchaser or
any of its representatives in connection with the offer and sale of any of the
Debentures.

     

    


     

    ARTICLE
IV.

    POST
CLOSING COVENANTS AND OTHER AGREEMENTS OF THE PARTIES

     

    4.1           Transfer
Restrictions.

     

    (a)           The
Securities may only be disposed of in compliance with state and federal
securities laws.  In connection with any transfer of Securities other
than pursuant to an effective registration statement, Regulation S or Rule 144,
to the Company or to an Affiliate of a Purchaser or in connection with a pledge
as contemplated in Section 4.1(c), the Company may require the transferor
thereof to provide to the Company an opinion of counsel selected by the
transferor and reasonably acceptable to the Company, the form and substance of
which opinion shall be reasonably satisfactory to the Company, to the effect
that such transfer does not require registration of such transferred Securities
under the Securities Act.  As a condition of transfer, any such
transferee shall agree in writing to be bound by the terms of this Agreement and
shall have the rights of a Purchaser under this Agreement and the Registration
Rights Agreement.

     

    (b)           The
Purchasers agree to the imprinting, so long as is required by this Section 4.1, of a
legend on any of the Securities in the following form:


    
      
        
           

        

         


      

      
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    THIS
SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
COMPANY.  THIS SECURITY  MAY BE PLEDGED IN CONNECTION WITH A
BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

     

    (c)           The
Company acknowledges and agrees that a Purchaser may from time to time pledge
pursuant to a bona fide margin agreement with a registered broker-dealer or
grant a security interest in some or all of the Securities to a financial
institution that is an “accredited investor” as defined in Rule 501(a) under the
Securities Act and who agrees to be bound by the provisions of this Agreement
and the Registration Rights Agreement and, if required under the terms of such
arrangement, such Purchaser may transfer pledged or secured Securities to the
pledgees or secured parties.  Such a pledge or transfer would not be
subject to approval of the Company and no legal opinion of legal counsel of the
pledgee, secured party or pledgor shall be required in connection
therewith.  Further, no notice shall be required of such
pledge.  At the appropriate Purchaser’s expense, the Company will
execute and deliver such reasonable documentation as a pledgee or secured party
of Securities may reasonably request in connection with a pledge or transfer of
the Securities, including, if the Securities are subject to registration
pursuant to the Registration Rights Agreement, the preparation and filing of any
required prospectus supplement under Rule 424(b)(3) under the Securities Act or
other applicable provision of the Securities Act to appropriately amend the list
of Selling Stockholders thereunder.

     

    (d)         Certificates
evidencing the Underlying Shares shall not contain any legend (including the
legend set forth in Section 4.1(b) hereof): (i) while a registration statement
(including the Registration Statement) covering the resale of such security is
effective under the Securities Act, or (ii) following any sale of such
Underlying Shares pursuant to Rule 144, or (iii) if such Underlying Shares are
eligible for sale under Rule 144 or (iv) if such legend is not required under
applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission). The
Company shall cause its counsel to issue a legal opinion to the Transfer Agent
promptly after the Effective Date if required by the Transfer Agent to effect
the removal of the legend hereunder.  If all or any portion of a
Debenture or Warrant is converted or exercised (as applicable) at a time when
there is an effective registration statement to cover the
resale of the Underlying Shares, or if such Underlying Shares may be sold under
Rule 144 or if such legend is not otherwise required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the staff of the Commission) then such Underlying
Shares shall be issued free of all legends.  The Company agrees that
following the Effective Date or at such time as such legend is no longer
required under this Section 4.1(c), it will, no later than three Trading Days
following the delivery by a Purchaser to the Company or the Transfer Agent of a
certificate representing Underlying Shares, as applicable, issued with a
restrictive legend (such third Trading Day, the “Legend Removal
Date”), deliver or cause to be delivered to such Purchaser a certificate
representing such shares that is free from all restrictive and other
legends.  The Company may not make any notation on its records or give
instructions to the Transfer Agent that enlarge the restrictions on transfer set
forth in this Section.  Certificates for Underlying Shares subject to
legend removal hereunder shall be transmitted by the Transfer Agent to the
Purchaser by crediting the account of the Purchaser’s prime broker with the
Depository Trust Company System as directed by such
Purchaser.


    
      
        
           

        

         


      

      
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    (e)          In
addition to such Purchaser’s other available remedies, the Company shall pay to
a Purchaser, in cash, as partial liquidated damages and not as a penalty, for
each $1,000 of Underlying Shares (based on the VWAP of the Common Stock on the
date such Securities are submitted to the Transfer Agent) delivered for removal
of the restrictive legend and subject to Section 4.1(c), $5.00 per Trading Day
(increasing to $10.00 per Trading Day 45 Trading Days after such damages have
begun to accrue) for each Trading Day after the Legend Removal Date until such
certificate is delivered without a legend.  Nothing herein shall limit
such Purchaser’s right to pursue actual damages for the Company’s failure to
deliver certificates representing any Securities as required by the Transaction
Documents, and such Purchaser shall have the right to pursue all remedies
available to it at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief.

     

    (f)           Each
Purchaser, severally and not jointly with the other Purchasers, agrees that such
Purchaser will sell any Securities pursuant to either the registration
requirements of the Securities Act, including any applicable prospectus delivery
requirements, or an exemption therefrom, and that if Securities are sold
pursuant to a Registration Statement, they will be sold in compliance with the
plan of distribution set forth therein, and acknowledges that the removal of the
restrictive legend from certificates representing Securities as set forth in
this Section 4.1 is predicated upon the Company’s reliance upon this
understanding.

     

    4.2           Acknowledgment of
Dilution.  The Company acknowledges that the issuance of the
Underlying Shares may result in dilution of the outstanding shares of Common
Stock, which dilution may be substantial under certain market
conditions.  The Company further acknowledges that its obligations
under the Transaction Documents, including without limitation its obligation to
issue the Underlying Shares pursuant to the Transaction Documents, are
unconditional and absolute and not subject to any right of set off,
counterclaim, delay or reduction, regardless of the effect of any such dilution
or any claim the Company may have against
any Purchaser and regardless of the dilutive effect that such issuance may have
on the ownership of the other stockholders of the
Company.


    
      
        
           

        

         


      

      
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    4.3           Furnishing of
Information.  So long as the Purchaser owns Securities, the
Company covenants to timely file (or obtain extensions in respect thereof and
file within the applicable grace period) all reports required to be filed by the
Company after the date hereof pursuant to the Exchange Act even if the Company
is not then subject to the reporting requirements of the Exchange
Act.  As long as any Purchaser owns Securities, if the Company is not
required to file reports pursuant to the Exchange Act, it will prepare and
furnish to the Purchasers and make publicly available in accordance with Rule
144(c) such information as is required for the Purchasers to sell the Securities
under Rule 144. The Company further covenants that it will take such further
action as any holder of Securities may reasonably request, to the extent
required from time to time to enable such Person to sell such Securities without
registration under the Securities Act within the requirements of the exemption
provided by Rule 144.

     

    4.4           Integration.  The
Company shall not sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in Section 2 of the Securities
Act) that would be integrated with the offer or sale of the Securities to the
Purchasers in a manner that would require the registration under the Securities
Act of the sale of the Securities to the Purchasers or that would be integrated
with the offer or sale of the Securities for purposes of the rules and
regulations of any Trading Market.

     

    4.5           Capital
Contribution.  Within 10 business days after Closing, the
Company shall make all necessary governmental filings in the PRC to obtain
approval for a capital contribution to Song Yuan North East Petroleum Technical
Service Co., Ltd. in an amount equal to U.S.$ 510,000 so that the total capital
contribution is U.S. $1,121,000 and the Company shall use its best efforts to
obtain such approval as promptly as possible.

     

    4.6           Governmental
Approval.  The Company shall, as soon as reasonably
practicable, and in no event later than a date which is 90 days after the
Closing, use its reasonable best efforts to (i) obtain approvals from, and
complete filing procedures with, relevant Governmental Authorities in order to
create valid and enforceable security interests over all of the equity interests
and registered capital of Song Yuan North East Petroleum Technical Service Co.,
Ltd. pursuant to the Onshore Share Pledge Agreement, and (ii) procure a Person
who is reasonably acceptable to Purchaser as sponsor to act on behalf of the
Company in making the foregoing filings and completing such procedures which
sponsor shall act at the instruction of the Collateral Agent. If the PRC
Governmental Authorities require any amendments, modifications or changes to the
Onshore Share Pledge Agreement as a condition to their approval of such
agreements, or in the event that there are changes, modifications or amendments
to any PRC laws which would render the Onshore Pledge Agreement or any
previously executed agreements or documents invalid or insufficient under PRC
Law, then the Company shall use its best efforts to effect such amendments,
modifications or changes to such agreements or documents, as the case may be, to
obtain such approvals from the relevant Governmental
Authorities.


    
      
        
           

        

         


      

      
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    4.7            Securities Laws Disclosure;
Publicity.  The Company shall, by 8:30 a.m. (New York City
time) on the Trading Day following the date hereof, issue a Current Report on
Form 8-K disclosing the material terms of the transactions contemplated hereby
and attaching the Transaction Documents as exhibits thereto.  The
Company and each Purchaser shall consult with each other in issuing any other
press releases with respect to the transactions contemplated hereby, and neither
the Company nor any Purchaser shall issue any such press release or otherwise
make any such public statement without the prior consent of the Company, with
respect to any press release of any Purchaser, or without the prior consent of
each Purchaser, with respect to any press release of the Company, which consent
shall not unreasonably be withheld or delayed, except if such disclosure is
required by law, in which case the disclosing party shall promptly provide the
other party with prior notice of such public statement or
communication.  Notwithstanding the foregoing, the Company shall not
publicly disclose the name of any Purchaser, or include the name of any
Purchaser in any filing with the Commission or any regulatory agency or Trading
Market, without the prior written consent of such Purchaser, except (i) as
required by federal securities law in connection with (A) any registration
statement contemplated by the Registration Rights Agreement and (B) the filing
of final Transaction Documents (including signature pages thereto) with the
Commission and (ii) to the extent such disclosure is required by law or Trading
Market regulations, in which case the Company shall provide the Purchasers with
prior notice of such disclosure permitted under this clause (ii).

     

    4.8          Shareholder Rights
Plan.  No claim will be made or enforced by the Company or,
with the consent of the Company, any other Person, that any Purchaser is an
“Acquiring Person” under any control share acquisition, business combination,
poison pill (including any distribution under a rights agreement) or similar
anti-takeover plan or arrangement in effect or hereafter adopted by the Company,
or that any Purchaser could be deemed to trigger the provisions of any such plan
or arrangement, by virtue of receiving Securities under the Transaction
Documents or under any other agreement between the Company and the
Purchasers.

     

    4.9           Non-Public
Information.  Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, the
Company covenants and agrees that neither it nor any other Person acting on its
behalf will provide any Purchaser or its agents or counsel with any information
that the Company believes constitutes material non-public information, unless
prior thereto such Purchaser shall have executed a written agreement regarding
the confidentiality and use of such information.  The Company
understands and confirms that each Purchaser shall be relying on the foregoing
covenant in effecting transactions in securities of the Company.

     

    4.10        Use of
Proceeds.  The Company shall use the net proceeds from the sale
of the Securities hereunder for the purposes set forth on Schedule 4.10
attached hereto and shall not use such proceeds for the satisfaction of any
portion of the debt and obligations of the Company or its Subsidiaries (other
than payment of trade payables in the ordinary course of the Company’s business
and prior practices), the redemption of any Common Stock or Common Stock
Equivalents or the settlement of any outstanding litigation.  Schedule
4.10 also includes a list of existing liabilities and payables which the Company
agrees shall not be paid from the net proceeds of the sale of the Securities
without the prior consent of the Purchasers. Prior to any disbursement of funds
by the Company, the Company shall notify the Purchaser of the intended
disbursement of funds, shall provide Purchasers with evidence satisfactory to it
of the amount owed to
the intended recipient and Purchasers shall have the right to approve such
payments, which approval shall not be unreasonably
withheld.


    
      
        
           

        

         


      

      
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    4.11           Indemnification of
Purchasers.  Subject to the provisions of this Section 4.11,
the Company will indemnify and hold each Purchaser and its directors, officers,
shareholders, members, partners, employees and agents (and any other Persons
with a functionally equivalent role of a Person holding such titles
notwithstanding a lack of such title or any other title), each Person who
controls such Purchaser (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act), and the directors, officers, shareholders,
agents, members, partners or employees (and any other Persons with a
functionally equivalent role of a Person holding such titles notwithstanding a
lack of such title or any other title) of such controlling person (each, a
“Purchaser
Party”) harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys’ fees and
costs of investigation that any such Purchaser Party may suffer or incur as a
result of or relating to (a) any breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (b) any action instituted against a Purchaser
in any capacity, or any of them or their respective Affiliates, by any
stockholder of the Company who is not an Affiliate of such Purchaser, with
respect to any of the transactions contemplated by the Transaction Documents
(unless such action is based upon a breach of such Purchaser’s representations,
warranties or covenants under the Transaction Documents or any agreements or
understandings such Purchaser may have with any such stockholder or any
violations by the Purchaser of state or federal securities laws or any conduct
by such Purchaser which constitutes fraud, gross negligence, willful misconduct
or malfeasance).  If any action shall be brought against any Purchaser
Party in respect of which indemnity may be sought pursuant to this Agreement,
such Purchaser Party shall promptly notify the Company in writing, and the
Company shall have the right to assume the defense thereof with counsel of its
own choosing reasonably acceptable to the Purchaser Party.  Any
Purchaser Party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Purchaser Party except to the extent
that (i) the employment thereof has been specifically authorized by the Company
in writing, (ii) the Company has failed after a reasonable period of time to
assume such defense and to employ counsel or (iii) in such action there is, in
the reasonable opinion of such separate counsel, a material conflict on any
material issue between the position of the Company and the position of such
Purchaser Party, in which case the Company shall be responsible for the
reasonable fees and expenses of no more than one such separate
counsel.  The Company will not be liable to any Purchaser Party under
this Agreement (i) for any settlement by a Purchaser Party effected without the
Company’s prior written consent, which shall not be unreasonably withheld or
delayed; or (ii) to the extent, but only to the extent that a loss, claim,
damage or liability is attributable to any Purchaser Party’s breach of any of
the representations, warranties, covenants or agreements made by such Purchaser
Party in this Agreement or in the other Transaction Documents.

     

    4.12           Reservation and Listing of
Securities.


    
      
        
           

        

         


      

      
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    (a)           The
Company shall maintain a reserve from its duly authorized shares of Common Stock
for issuance pursuant to the Transaction Documents in such amount as may be
required to fulfill its obligations in full under the Transaction
Documents.

     

    (b)           If,
on any date, the number of authorized but unissued (and otherwise unreserved)
shares of Common Stock is less than the Required Minimum on such date, then the
Board of Directors of the Company shall use commercially reasonable efforts to
amend the Company’s certificate or articles of incorporation to increase the
number of authorized but unissued shares of Common Stock to at least the
Required Minimum at such time, as soon as possible and in any event not later
than the 75th day after such date.

     

    (c)           The
Company shall, if applicable: (i) in the time and manner required by the
principal Trading Market, prepare and file with such Trading Market an
additional shares listing application covering a number of shares of Common
Stock at least equal to the Required Minimum on the date of such application,
(ii) take all steps necessary to cause such shares of Common Stock to be
approved for listing on such Trading Market as soon as possible thereafter,
(iii) provide to the Purchasers evidence of such listing, and (iv) maintain the
listing of such Common Stock on any date at least equal to the Required Minimum
on such date on such Trading Market or another Trading Market.

     

    (d)           The
Company shall make an application with the Nasdaq Stock Market or the American
Stock Exchange to obtain a listing of its Common Stock promptly following the
Closing Date, and to use its best efforts obtain such listing  within
a date which is 12 months after the Closing Date.

    


    4.13           Participation in Future
Financing.

     

    (a)           From
the date hereof until the date that the Purchases hold in the aggregate an
amount less than 500,000 shares of the Company’s issued and outstanding common
stock pursuant to the Warrants (on an as-exercised basis) upon any issuance by
the Company or any of its Subsidiaries of Common Stock or Common Stock
Equivalents (a “Subsequent
Financing”), each Purchaser shall have the right to participate in up to
an amount of the Subsequent Financing equal to such Purchaser’s pro-rata
percentage of the Company’s total issued and outstanding common stock
on  an as-exercised basis on the same terms, conditions and price
provided for in the Subsequent Financing.

     

    (b)           At
least ten (10) Trading Days prior to the closing of the Subsequent Financing,
the Company shall deliver to each Purchaser a written notice of its intention to
effect a Subsequent Financing (“Pre-Notice”), which
Pre-Notice shall ask such Purchaser if it wants to review the details of such
financing (such additional notice, a “Subsequent Financing
Notice”).  Upon the request of a Purchaser, and only upon a
request by such Purchaser, for a Subsequent Financing Notice, the Company shall
promptly, but no later than 1 Trading Day after such request, deliver a
Subsequent Financing Notice to such Purchaser.  The Subsequent
Financing Notice shall describe in reasonable detail the proposed terms of such
Subsequent Financing, the amount of proceeds intended to be raised thereunder
and the Person or Persons through or with whom such Subsequent Financing is
proposed to be effected and shall include a term sheet or similar document relating
thereto as an attachment.  The Subsequent Financing Notice shall also
include an analysis or description of the effect of such Subsequent Financing
upon the exercise price of the Warrants and the capitalization of the
Company.


    
      
        
           

        

         


      

      
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    (c)           Any
Purchaser desiring to participate in such Subsequent Financing must provide
written notice to the Company by not later than 5:30 p.m. (New York City time)
on the 10th Trading
Day after all of the Purchasers have received the Pre-Notice that the Purchaser
is willing to participate in the Subsequent Financing, the amount of the
Purchaser’s participation, and that the Purchaser has such funds ready, willing,
and available for investment on the terms set forth in the Subsequent Financing
Notice.  If the Company receives no notice from a Purchaser as of such
10th
Trading Day, such Purchaser shall be deemed to have notified the Company that it
does not elect to participate.

     

    (d)           If
by 5:30 p.m. (New York City time) on the 10th Trading
Day after all of the Purchasers have received the Pre-Notice, notifications by
the Purchasers of their willingness to participate in the Subsequent Financing
(or to cause their designees to participate) is, in the aggregate, less than the
total amount of the Subsequent Financing, then the Company may effect the
remaining portion of such Subsequent Financing on the terms and with the Persons
set forth in the Subsequent Financing Notice.

     

    (e)           The
Company must provide the Purchasers with a second Subsequent Financing Notice,
and the Purchasers will again have the right of participation set forth above in
this Section 4.13, if the Subsequent Financing subject to the initial Subsequent
Financing Notice is not consummated for any reason on the terms set forth in
such Subsequent Financing Notice within 60 Trading Days after the date of the
initial Subsequent Financing Notice.

     

    (f)           Notwithstanding
the foregoing, this Section 4.13 shall not apply in respect of an Exempt
Issuance.

     

    4.14           Subsequent Equity
Sales.

     

    (a)           From
the date hereof until 180 days after the Effective Date, neither the Company nor
any Subsidiary shall issue shares of Common Stock or Common Stock Equivalents;
provided, however, the 180 day
period set forth in this Section 4.13 shall be extended for the number of
Trading Days during such period in which (i) trading in the Common Stock is
suspended by any Trading Market, or (ii) following the Effective Date, the
Registration Statement is not effective or the prospectus included in the
Registration Statement may not be used by the Purchasers for the resale of the
Underlying Shares.

     

    (b)           From
and after the Effective Date the Company shall not issue inconnection with an
acquisition transaction (whether in one transaction or a series oftransactions
(and regardless of the structure of any such transaction, including, without
limitation, a purchase of securities of the to be acquired entity, a purchase or
assets or a joint venture) or the purchase) shares of its Common Stock (or
securities convertible into Common
Stock) equal to or in excess of 20% of the shares of Common Stockoutstanding on
the date hereof without the prior written consent of the Purchaser, whichconsent
shall not be unreasonably withheld.


    
      
        
           

        

         


      

      
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    4.15           Equal Treatment of
Purchasers.  No consideration shall be offered or paid to any
Person to amend or consent to a waiver or modification of any provision of any
of the Transaction Documents unless the same consideration is also offered to
all of the parties to the Transaction Documents. Further, the Company shall not
make any payment of principal or interest on the Debentures in amounts which are
disproportionate to the respective principal amounts outstanding on the
Debentures at any applicable time.  For clarification purposes, this
provision constitutes a separate right granted to each Purchaser by the Company
and negotiated separately by each Purchaser, and is intended for the Company to
treat the Purchasers as a class and shall not in any way be construed as the
Purchasers acting in concert or as a group with respect to the purchase,
disposition or voting of Securities or otherwise.

     

    4.16           Short Sales and
Confidentiality After The Date Hereof. Each Purchaser severally and not
jointly with the other Purchasers, covenants that neither it nor any Affiliate
acting on its behalf or pursuant to any understanding with it will execute any
Short Sales during the period commencing at the Discussion Time and ending at
the time that the transactions contemplated by this Agreement are first publicly
announced as described in Section 4.7.  Each Purchaser, severally and not
jointly with the other Purchasers, covenants that until such time as the
transactions contemplated by this Agreement are publicly disclosed by the
Company as described in Section 4.7, such Purchaser will maintain the
confidentiality of the existence and terms of this transaction and the
information included in the Disclosure Schedules.  Each Purchaser
understands and acknowledges, and agrees, severally and not jointly with any
other Purchaser, to act in a manner that will not violate the positions of the
Commission as set forth in Item 65, Section A, of the Manual of Publicly
Available Telephone Interpretations, dated July 1997, compiled by the Office of
Chief Counsel, Division of Corporation Finance. Notwithstanding the foregoing,
no Purchaser makes any representation, warranty or covenant hereby that it will
not engage in Short Sales in the securities of the Company after the time that
the transactions contemplated by this Agreement are first publicly announced as
described in Section 4.7.  Notwithstanding the foregoing, in the case of a
Purchaser that is a multi-managed investment vehicle whereby separate portfolio
managers manage separate portions of such Purchaser’s assets and the portfolio
managers have no direct knowledge of the investment decisions made by the
portfolio managers managing other portions of such Purchaser’s assets, the
covenant set forth above shall only apply with respect to the portion of assets
managed by the portfolio manager that made the investment decision to purchase
the Securities covered by this Agreement.

     

    4.17           Amendment to Profit Sharing
Arrangements.  The Company shall obtain, within 30 days of
Closing, a written agreement with Ju Guizhi, in form and substance acceptable to
the Purchasers, whereby the parties agree that the profit sharing arrangement
between Ju Guizhi and the Company is amended to reflect that the Company is
entitled to 90% of the profits of the Company.

     

    
      
        
           

        

         


      

      
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    4.18      
  Cancellation of Trust
Agreements.

     

    (a)  Within 30 days of the
Closing, the Company shall enter into a written agreement with each of (i) Ai
Chang Shan to release an amount of the registered capital of Changling Long De
Oil and Gas Development Co., Ltd. (“Long De”) held in trust by Ai Chang Shan for
the benefit of Song Yuan Technical, equal to 10% of all outstanding registered
capital of Long De, from such trust and transfer ownership of such registered
capital to Song Yuan Technical and (ii) Sun Peng to release all of the
registered capital of Long De held by Sun Peng for the benefit of Song Yuan
Technical, equal to 10% of all outstanding registered capital of Long De, from
such trust and transfer ownership of such registered capital to Song Yuan
Technical.

    


    (b)  Within 30 days of the
Closing, the Company shall enter into a written agreement with Meng Xiang Yun to
release all registered capital of Song Yuan City Yu Qiao Oil and Gas Exploration
Limited Corp. (“Yu Qiao”) held by Meng Xiang Yun in trust for the benefit of
Song Yuan Technical, equal to 20% of all outstanding registered capital of Yu
Qiao, from such trust and transfer ownership of such registered capital to Song
Yuan Technical.

    


    (c)  Within 90 days of the
Closing, the Company shall enter into a written agreement with Wang Bing Wu to
transfer ownership of all of the registered capital of Yu Qiao held by Wang Bing
Wu in trust for the benefit of Song Yuan Technical, equal to 10% of all
outstanding registered capital of Yu Qiao, to Wang Hong Jun to continue to hold
in trust for the benefit of Song Yuan Technical.

    


    (d)  The Company shall make
all appropriate applications with the proper authorities in the PRC to register
the ownership transfer and termination of trust contemplated in Sections 4.18(a) and
4.18(b) within
45 days of the Closing.

    


    (e)  The Company shall make all
appropriate applications with the proper authorities in the PRC to register the
ownership transfer contemplated in Section 4.18(c)
within 90 days of the Closing.

    


    4.19        
Right to Appoint
Nominee to Board of Directors. Effective at Closing, the Purchasers shall
have the right (but not the obligation), for so long as at least any of the
principal amount of Debenture remains unpaid,  to have a nominee,
reasonably acceptable to the Company, serve on the Board of Directors of the
Company, which nominee shall serve as an independent director.  The
Board of Directors shall consist of not more than five (5) persons. Further, the
Purchasers shall have the right, but not the obligation to approve the
independent members of the Board if Directors.

     

    4.20      
  Prior
Approval of Fundamental Transactions. Prior to entering into any
agreement, term sheet or letter of intent with respect to a Fundamental
Transaction, the Company and any Subsidiary which is the subject of such
proposed Fundamental Transaction, shall obtain the prior written approval of the
Purchaser holding at least 66% of the principal amount of Debentures then
outstanding.


    
      
        
           

        

         


      

      
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     ARTICLE V.

     

    COLLATERAL
AND SECURITY INTERESTS

     

    5.1           Change in PRC Law. If
at any time after the Issue Date of the Debentures there is a change in PRC law
or interpretation in PRC law that permits the encumbrance of any Subsidiary’s
assets or property by a Lien without the approval of any governmental body of
the PRC, then the Company shall cause any such the Subsidiary, and any other
Persons who shall be necessary,   to, concurrently:

     

    (a)           execute
and deliver to the Purchasers a Security Document upon substantially the same
terms granting a Lien upon such assets or Property to the Purchasers of
Debentures, which Lien shall be first priority if such assets or Property is not
then encumbered by any other Lien (other than Liens required by law) or a second
priority Lien if such assets or Property is at that time so
encumbered;

     

    (b)           cause
the Lien to be granted in such Security Document to be duly perfected in any
manner permitted by law; and

     

    (c)           deliver
to the Purchasers an Opinion of Counsel confirming as to such Security Document
the matters set forth as to the Security Documents and Liens thereunder in the
Opinions of Counsel delivered to Purchasers on the Issue Date and, if the
property subject to such Security Document is an interest in real estate, such
local counsel opinions, insurance policies, surveys and other supporting
documents as the Trustee may reasonably request.

     

     

    ARTICLE
VI.

    MISCELLANEOUS

     

    6.1           Termination. 
This Agreement may be terminated by any Purchaser, as to such Purchaser’s
obligations hereunder only and without any effect whatsoever on the obligations
between the Company and the other Purchasers, by written notice to the other
parties, if the Closing has not been consummated on or before February 29, 2008;
provided, however, that such
termination will not affect the right of any party to sue for any breach by the
other party (or parties).

     

    6.2           Fees and
Expenses.  At the Closing, the Company has agreed to reimburse
Lotusbox Investments Limited (“Lotusbox”) the sum of up to $125,000, for its
legal fees and expenses, of which $17,500 has been paid prior to the
Closing.  The Company shall deliver to each Purchaser, prior to the
Closing, a completed and executed copy of the Closing Statement attached hereto
as Annex
A.  Except as expressly set forth in the Transaction Documents
to the contrary, each party shall pay the fees and expenses of its advisers,
counsel, accountants and other experts, if any, and all other expenses incurred
by such party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement. The Company shall pay all transfer agent fees,
stamp taxes and other taxes and duties levied in connection with the delivery of
any Securities to the Purchasers.


    
      
        
           

        

         


      

      
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    6.3           Entire
Agreement.  The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and
schedules.

     

    6.4           Notices.  Any
and all notices or other communications or deliveries required or permitted to
be provided hereunder shall be in writing and shall be deemed given and
effective on the earliest of (a) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number set forth on
the signature pages attached hereto prior to 5:30 p.m. (New York City time) on a
Trading Day, (b) the next Trading Day after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number set
forth on the signature pages attached hereto on a day that is not a Trading Day
or later than 5:30 p.m. (New York City time) on any Trading Day, (c) the second
Trading Day following the date of mailing, if sent by U.S. nationally recognized
overnight courier service, or (d) upon actual receipt by the party to whom such
notice is required to be given.  The address for such notices and
communications shall be as set forth on the signature pages attached
hereto.

     

    6.5           Amendments;
Waivers.  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 Company and the Purchasers of at least 66%
principal amount of debentures still held by Purchasers or, in the case of a
waiver, by the party against whom enforcement of any such waived provision is
sought.  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.

     

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

     

    6.7           Successors and
Assigns.  This Agreement shall be binding upon and inure to the
benefit of the parties 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 Purchaser (other
than by merger).  Any Purchaser may assign any or all of its rights
under this Agreement to any Person to whom such Purchaser assigns or transfers
any Securities, provided that such transferee agrees in writing to be bound,
with respect to the transferred Securities, by the provisions of the Transaction
Documents that apply to the “Purchasers.”

     

    6.8           No Third-Party
Beneficiaries.  This Agreement is intended for the benefit of
the parties hereto and their respective successors and permitted assigns and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person, except as otherwise set forth in Section 4.10.

     

    
      
        
           

        

         


      

      
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    6.9           Governing
Law.  All questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents 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.  Each party agrees that all legal proceedings concerning the
interpretations, enforcement and defense of the transactions contemplated by
this Agreement and any other Transaction Documents (whether brought against a
party hereto or its respective affiliates, directors, officers, shareholders,
employees or agents) shall be commenced exclusively in  the City of
New York, New York and shall be arbitrated in accordance with the rules of the
International Chamber of Commerce before three (3) 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,
banking or 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
hereby irrevocably waives personal service of process and consents to process
being served in any such suit, action or 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 other manner
permitted by law.  Any ruling by the arbitration panel shall be
binding and non appealable.

     

    6.10           Survival.  The
representations and warranties shall survive the Closing and the delivery of the
Securities for the applicable statue of limitations.

     

    6.11           Execution.  This
Agreement may be executed in two or more counterparts, all of which when taken
together shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the
other party, it being understood that both parties need not sign the same
counterpart.  In the event that any signature is delivered by
facsimile transmission or by e-mail delivery of a “.pdf” format data file, such
signature shall create a valid and binding obligation of the party executing (or
on whose behalf such signature is executed) with the same force and effect as if
such facsimile or “.pdf” signature page were an original thereof.

     

    6.12           Severability. 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 parties 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 parties 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.

     

    6.13           Rescission and Withdrawal
Right.  Notwithstanding anything to the contrary contained in
(and without limiting any similar provisions of) any of the other Transaction
Documents, whenever any Purchaser exercises a right, election, demand or option
under a Transaction Document and the Company does not timely perform its related
obligations within the periods therein provided, then such Purchaser may rescind
or withdraw, in its sole discretion from time to time upon written notice to the
Company, any relevant notice, demand or election in whole or in part without
prejudice to its future actions and rights; provided, however, in the case
of
a rescission of a conversion of a Debenture or exercise of a Warrant, the
Purchaser shall be required to return any shares of Common Stock delivered in
connection with any such rescinded conversion or exercise
notice.


    
      
        
           

        

         


      

      
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    6.14           Replacement of
Securities.  If any certificate or instrument evidencing any
Securities is mutilated, lost, stolen or destroyed, the Company shall issue or
cause to be issued in exchange and substitution for and upon cancellation
thereof (in the case of mutilation), or in lieu of and substitution therefor, a
new certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction.  The
applicant for a new certificate or instrument under such circumstances shall
also pay any reasonable third-party costs (including customary indemnity)
associated with the issuance of such replacement Securities.

     

    6.15           Remedies.  In
addition to being entitled to exercise all rights provided herein or granted by
law, including recovery of damages, each of the Purchasers and the Company will
be entitled to specific performance under the Transaction
Documents.  The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations contained in the Transaction Documents and hereby agrees to waive
and not to assert in any action for specific performance of any such obligation
the defense that a remedy at law would be adequate.

     

    6.16           Payment Set Aside. To
the extent that the Company makes a payment or payments to any Purchaser
pursuant to any Transaction Document or a Purchaser enforces or exercises its
rights thereunder, and such payment or payments or the proceeds of such
enforcement or exercise or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside, recovered from, disgorged
by or are required to be refunded, repaid or otherwise restored to the Company,
a trustee, receiver or any other person under any law (including, without
limitation, any bankruptcy law, state or federal law, common law or equitable
cause of action), then to the extent of any such restoration the obligation or
part thereof originally intended to be satisfied shall be revived and continued
in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred.

     

    6.17           Usury.  To
the extent it may lawfully do so, the Company hereby agrees not to insist upon
or plead or in any manner whatsoever claim, and will resist any and all efforts
to be compelled to take the benefit or advantage of, usury laws wherever
enacted, now or at any time hereafter in force, in connection with any claim,
action or proceeding that may be brought by any Purchaser in order to enforce
any right or remedy under any Transaction Document.  Notwithstanding
any provision to the contrary contained in any Transaction Document, it is
expressly agreed and provided that the total liability of the Company under the
Transaction Documents for payments in the nature of interest shall not exceed
the maximum lawful rate authorized under applicable law (the “Maximum Rate”), and,
without limiting the foregoing, in no event shall any rate of interest or
default interest, or both of them, when aggregated with any other sums in the
nature of interest that the Company may be obligated to pay under the
Transaction Documents exceed such Maximum Rate.  It is agreed that if
the maximum contract rate of interest allowed by law and applicable to the
Transaction Documents is increased or decreased by statute or any official
governmental action subsequent to the date hereof, the new maximum
contract rate of interest allowed by law will be the Maximum Rate applicable to
the Transaction Documents from the effective date forward, unless such
application is precluded by applicable law.  If under any
circumstances whatsoever, interest in excess of the Maximum Rate is paid by the
Company to any Purchaser with respect to indebtedness evidenced by the
Transaction Documents, such excess shall be applied by such Purchaser to the
unpaid principal balance of any such indebtedness or be refunded to the Company,
the manner of handling such excess to be at such Purchaser’s
election.


    
      
        
           

        

         


      

      
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    6.18           Independent Nature of
Purchasers’ Obligations and Rights.  The obligations of each
Purchaser under any Transaction Document are several and not joint with the
obligations of any other Purchaser, and no Purchaser shall be responsible in any
way for the performance or non-performance of the obligations of any other
Purchaser under any Transaction Document.  Nothing contained herein or
in any other Transaction Document, and no action taken by any Purchaser pursuant
thereto, shall be deemed to constitute the Purchasers as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Documents.  Each Purchaser shall be entitled to
independently protect and enforce its rights, including without limitation the
rights arising out of this Agreement or out of the other Transaction Documents,
and it shall not be necessary for any other Purchaser to be joined as an
additional party in any proceeding for such purpose.  Each Purchaser
has been represented by its own separate legal counsel in their review and
negotiation of the Transaction Documents.  For reasons of
administrative convenience only, Purchasers and their respective counsel have
chosen to communicate with the Company through EGS.  EGS does not
represent all of the Purchasers but only Lotusbox.  The Company has
elected to provide all Purchasers with the same terms and Transaction Documents
for the convenience of the Company and not because it was required or requested
to do so by the Purchasers.

     

    6.19           Liquidated
Damages.  The Company’s obligations to pay any partial
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
partial liquidated damages and other amounts have been paid notwithstanding the
fact that the instrument or security pursuant to which such partial liquidated
damages or other amounts are due and payable shall have been
canceled.

     

    6.20           Construction. The
parties agree that each of them and/or their respective counsel has reviewed and
had an opportunity to revise the Transaction Documents and, therefore, the
normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation
of the Transaction Documents or any amendments hereto.

     

    


     

    (Signature
Pages Follow)

     


    
      
        
           

        

         


      

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

     

    
      
        	
                CHINA
      NORTH EAST PETROLEUM HOLDINGS, LIMITED

              	 	
                Address for
      Notice:

              
	 	 	 	 
	 	 	 	 
	
                By:
      

              	/s/ Wang
      Hongjun  	 	
                Fax:

              
	 	Name: Wang
      Hongjun	 	 
	 	Title:
      Chairman and President	 	 
	 	 	 	 


      


      With a
copy to (which shall not constitute notice):

       

      Crone
Rozynko LLP

      101
Montgomery Street

      Suite
1950

      San
Francisco, CA 94105

      Fax:
(415) 955-8910

       

       

    

    [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK

    SIGNATURE
PAGE FOR PURCHASER FOLLOWS]

     

     

     

     

     

     

     

    
 

    
      
        
           

        

         


      

      
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    PURCHASER
SIGNATURE PAGES TO SECURITIES PURCHASE AGREEMENT

    


    IN
WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement
to be duly executed by their respective authorized signatories as of the date
first indicated above.

     

     

    Name of
Purchaser:  Lotusbox Investments
Limited

     

    Signature of Authorized Signatory of
Purchaser: /s/
Diana The Hui Ling

     

    Name of
Authorized Signatory: Diana The Hui Ling

     

    Title of
Authorized Signatory: General Counsel, signing authority pursuant to Lotusbox
Investments Limited’s Board of Directors’ Resolutions dated 25 February
2008

    


    Email
Address of Purchaser: c/o suresh.withana@harmonycapitalmanagers.com;
Diana.the@harmonycapital.com.sg

    


    Facsimile
Number of Purchaser: +65 6720 1688

     

    Address
for Notice of Purchaser:  c/o 137, Telok Ayer Street, #04-04/05,
Singapore 068602

    


    Address
for Delivery of Securities for Purchaser (if not same as above):

    


    Mario
Difilippo

    c/o
UBS

    3rd Floor,
1285 Avenue of the Americas

    New York,
NY  10019

    


    With a
copy to the Purchaser’s address as stated above.

    


    


    Subscription
Amount: US$15,000,000

    


    Warrant
Shares: 4,800,000

    


    


    


    


    EIN
Number:  [PROVIDE
THIS UNDER SEPARATE COVER]

    


    [SIGNATURE
PAGES CONTINUE]

     

    44