Document:

EXECUTION
        VERSION

    

     

    SECURITIES
      PURCHASE AGREEMENT

     

    SECURITIES
      PURCHASE AGREEMENT
      (the
“Agreement”),
      dated
      as of February 1, 2008, by and among China Automotive Systems, Inc., a Delaware
      corporation, with headquarters located at No. 1 Henglong Road, Yu Qiao
      Development Zone, Shashi District, Jing Zhou City, Hubei Province, People’s
      Republic of China (the ”Company”),
      and
      the investors listed on the Schedule of Buyers attached hereto (individually,
      a
“Buyer”
and
      collectively, the “Buyers”).
      

     

    WHEREAS:

     

    A. The
      Company and each Buyer is executing and delivering this Agreement in reliance
      upon the exemption from securities registration afforded by Section 4(2) of
      the
      Securities Act of 1933, as amended (the “1933
      Act”),
      and
      Rule 506 of Regulation D (“Regulation D”)
      as
      promulgated by the United States Securities and Exchange Commission (the
“SEC”)
      under
      the 1933 Act.

     

    B. The
      Company has authorized a new series of senior convertible notes of the Company,
      which notes shall be convertible into shares (as converted, the “Note
      Conversion Shares”)
      of the
      Company’s common stock, par value $0.0001 per share (the “Common
      Stock”),
      in
      accordance with the terms of the Notes (as defined below).

     

    C. The
      Company has authorized the issuance of certain warrants of the Company, which
      warrants shall be exercisable for the purchase of shares (as exercised, the
      “Warrant
      Conversion Shares”
and
      together with the Note Conversion Shares, the “Conversion
      Shares”)
      of the
      Common Stock in accordance with the terms of each Warrant (as defined
      below).

     

    D. Each
      Buyer wishes to purchase, and the Company wishes to sell, upon the terms and
      conditions stated in this Agreement, (i) that aggregate principal amount of
      the
      notes, in substantially the forms attached hereto as Exhibits
      A-1
      (the
“Closing
      Note”),
      Exhibit
      A-2
      (the
“Henglong
      Note”)
      and
Exhibit
      A-3
      (the
“Escrow
      Note”
and
      together with the Closing Note and the Henglong Note, collectively, the
“Notes”),
      set
      forth opposite such Buyer’s name in column (3) on the Schedule of Buyers
      attached hereto (which aggregate amount for all Buyers shall be $35,000,000
      (the
“Aggregate
      Principal”))
      and
      (ii) warrants, in substantially the forms attached hereto as Exhibit
      B-1
      (the
“Closing
      Warrant”)
      and
Exhibit
      B-2
      (the
“Escrow
      Warrant”
and,
      together with the Closing Warrant, collectively, the “Warrants”),
      to
      buy up to an aggregate exercise amount of $11,666,666 worth of Common Stock,
      such respective exercise amount set forth opposite such Buyer’s name in column
      (4) on the Schedule of Buyers attached hereto.

     

    E. On
      the
      Closing Date, the parties hereto will execute and deliver a Registration Rights
      Agreement, substantially in the form attached hereto as Exhibit
      C
      (the
“Registration
      Rights Agreement”),
      pursuant to which the Company will agree to provide certain registration rights
      with respect to the Registrable Securities (as defined in the Registration
      Rights Agreement) under the 1933 Act and the rules and regulations promulgated
      thereunder, and applicable state securities laws.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    F. The
      Notes, the Note Conversion Shares, the Warrants and the Warrant Conversion
      Shares, collectively, are referred to herein as the “Securities”.

     

    G. The
      Notes
      will be senior, unsecured obligations of the Company and will rank pari
      passu
      in right
      of payment to all existing and future indebtedness of the Company, other than
      Permitted Senior Indebtedness (as defined in the Notes).

     

    NOW,
      THEREFORE,
      the
      Company and each Buyer hereby agree as follows:

     

    1. PURCHASE
      AND SALE OF THE NOTES AND THE WARRANTS.

     

    (a) Purchase
      of Notes and Warrants.
      Subject
      to the satisfaction (or waiver) of the conditions set forth in Sections
      6
      and
7
      below,
      the Company shall issue and sell to each Buyer, and each Buyer, severally,
      but
      not jointly, agrees to purchase from the Company on the Closing Date (as defined
      below), (i) a principal amount of each Note as is set forth opposite such
      Buyer’s name in column (3) on the Schedule of Buyers, as applicable and (ii)
      Warrants with an exercise amount as is set forth opposite such Buyer’s name in
      column (4) on the Schedule of Buyers, as applicable, (the “Closing”).

     

    (b) Closing.
      The
      date and time of the Closing (the “Closing
      Date”)
      shall
      be 10:00 a.m., Hong Kong time, on February 13, 2008 (or such later date as
      is
      mutually agreed to by the Company and each Buyer) after notification of
      satisfaction (or waiver) of the conditions to the Closing set forth in
Sections
      6
      and
7
      below at
      the offices of the legal representative of the Lead Buyer set forth on the
      Schedule of Buyers. As used herein, “Business
      Day”
means
      any day other than Saturday, Sunday or other day on which commercial banks
      in
      the City of New York are authorized or required by law to remain
      closed.

     

    (c) Purchase
      Price; Escrow.
      The
      aggregate purchase price for the Notes and the Warrants to be purchased by
      each
      such Buyer at the Closing (the “Purchase
      Price”)
      shall
      be the amount set forth opposite each Buyer’s name in column (5) of the Schedule
      of Buyers (such amount, the “Applicable
      Purchase Price”).
      Each
      Buyer shall pay $100,000 for each $100,000 of principal amount of each Note
      and
      pro rata portion of the Warrants to be purchased by such Buyer at the Closing.
      The Purchase Price shall be paid by the Buyers as follows:

     

    (i) Payment
      to Company.
      At the
      Closing, each Buyer shall pay to the Company, by wire transfer of immediately
      available funds, an amount in cash equal to fifty percent (50%) of such Buyer’s
      Applicable Purchase Price (the “Closing
      Amount”).
      Such
      Closing Amount represents the portion of such Buyer’s Applicable Purchase Price
      attributable to the Closing Note and the Henglong Note and the Closing
      Warrant.

     

    (ii) Payment
      to Escrow Agent.
      At the
      Closing, each Buyer shall deposit into an escrow account (the “Escrow
      Account”)
      an
      amount in cash equal to fifty percent (50%) of such Buyer’s Applicable Purchase
      Price (the “Escrow
      Amount”),
      pursuant to an escrow agreement in the form attached hereto as Exhibit
      D
      (the
“Escrow
      Agreement”)
      with
      an escrow agent mutually acceptable to the Lead Buyer and the Company (the
      “Escrow
      Agent”).
      Such
      Escrow Amount represents the portion of such Buyer’s Applicable Purchase Price
      attributable to the Escrow Note and the Escrow Warrant.

     

    
      
         

      

      
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    (iii) Escrow.
      The
      Buyers and the Company shall cause the Escrow Agent (by executing joint written
      instructions, as applicable, pursuant to the Escrow Agreement) to disburse
      the
      Escrow Amount, plus any and all interest earned thereon (such interest, the
      “Escrow
      Interest”)
      from
      the Escrow Account as follows:

     

    (A) At
      any
      time and from time to time prior to April 15, 2008 (the “Determination
      Date”),
      each
      Buyer shall have the option, but not the obligation, to release all (but not
      less than all) of such Buyer’s applicable Escrow Amount, plus any and all Escrow
      Interest thereon to the Company. Upon any such release, such Buyer’s Henglong
      Default Redemption Rights (as defined in each of the Henglong Note and the
      Escrow Note) with respect to the Henglong Note and the Escrow Note shall expire
      pursuant to the terms of the Henglong Note and the Escrow Note, as applicable.
      

     

    (B) In
      the
      event the Escrow Amount has not previously been released and the Henglong
      Transaction (as defined below) is consummated upon terms and conditions
      satisfactory to the Lead Buyer on or prior to the Determination Date, the Escrow
      Amount (plus any and all Escrow Interest thereon) shall be released to the
      Company. Upon any such release, each Buyer’s Henglong Default Redemption Rights
      with respect to the Henglong Note and the Escrow Note shall expire pursuant
      to
      the terms of the Henglong Note and the Escrow Note, as applicable.

     

    (C) In
      the
      event the Henglong Transaction is not consummated upon terms and conditions
      satisfactory to the Lead Buyer on or prior to the Determination Date, each
      Buyer
      shall have the option, but not the obligation, to either (1) release all of
      such
      Buyer’s Escrow Amount (plus any and all Escrow Interest thereon) to the Company
      or (2) exercise such Buyer’s Henglong Default Redemption Rights with respect to
      the Escrow Note held by such Buyer in accordance with Section 8 of the Escrow
      Note; provided,
      however,
      that
      such option shall be exercised by such Buyer on or prior to April 30, 2008.
      In
      the event such option is not exercised by a Buyer on or prior to April 30,
      2008,
      such Buyer shall be deemed to have elected the option set forth in clause (1)
      above and such Buyer’s applicable Escrow Amount (plus any and all Escrow
      Interest thereon) shall be released to the Company. If a Buyer elects (or is
      deemed to elect) the option set forth in clause (1) above, such Buyer’s Henglong
      Default Redemption Rights with respect to the Henglong Note and the Escrow
      Note
      shall expire pursuant to the terms of the Henglong Note and the Escrow Note,
      as
      applicable.

     

    (D) In
      the
      event the Company redeems the Escrow Note held by a Buyer pursuant to Section
      1(c)(iii)(c)(2) above, the Escrow Interest shall be deemed to be credited
      against the accrued interest due and payable by the Company under the Escrow
      Note (the “Escrow
      Note Interest”)
      and
      the Company shall pay to such Buyer the excess amount, if any, of the Escrow
      Note Interest over the Escrow Interest. For avoidance of doubt, if the Escrow
      Interest is greater than the Escrow Note Interest, the Buyer shall be entitled
      to retain the entire amount of the Escrow Interest.

     

    (iv) Henglong
      Transaction.
      As used
      herein, the “Henglong
      Transaction”
shall
      mean the Henglong transaction contemplated by Schedule
      4(o).
      For
      avoidance of doubt, for all purposes of this Agreement (and the Notes and the
      Warrants), the terms and conditions of the Henglong Transaction shall
      conclusively be deemed to be satisfactory to the Lead Buyer, and the Henglong
      Transaction shall conclusively be deemed to have been consummated, if either
      (A)
      the actual Henglong Transaction fully complies with the requirements specified
      in Schedule
      4(o),
      or (B)
      the Lead Buyer waives in writing, in its sole discretion, any noncompliance
      with
      such requirements.

     

    
      
         

      

      
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    (d) Form
      of Payment on Closing Date.
      On the
      Closing Date, (i) each Buyer shall pay its Purchase Price to the Company for
      the
      Notes and Warrants to be issued and sold to such Buyer at the Closing by wire
      transfer of immediately available funds in accordance with the Company’s and the
      Escrow Agent’s written wire instructions and (ii) the Company shall deliver
      to each Buyer the Notes (allocated in the principal amounts as such Buyer shall
      request, subject to the requirement that the Notes shall be in denominations
      of
      $100,000 and integral multiples thereof) and Warrants which such Buyer is then
      purchasing hereunder, duly executed on behalf of the Company and registered
      in
      the name of such Buyer or its designee.

     

    2. BUYERS’
      REPRESENTATIONS AND WARRANTIES. Each
      Buyer, severally and not jointly, represents and warrants with respect to only
      itself that:

     

    (a) No
      Public Sale or Distribution.
      Such
      Buyer is (i) acquiring the Notes and Warrants and (ii) upon conversion of the
      Notes and Warrants will acquire the Conversion Shares issuable upon conversion
      of the Notes and Warrants, for its own account and not with a view towards,
      or
      for resale in connection with, the public sale or distribution thereof, except
      pursuant to sales registered or exempted under the 1933 Act; provided,
      however,
      that by
      making the representations herein, such Buyer does not agree to hold any of
      the
      Securities for any minimum or other specific term and reserves the right to
      dispose of the Securities at any time in accordance with or pursuant to a
      registration statement or an exemption under the 1933 Act. Such Buyer is
      acquiring the Securities hereunder in the ordinary course of its business.
      Such
      Buyer does not presently have any agreement or understanding, directly or
      indirectly, with any Person to distribute any of the Securities.

     

    (b) Accredited
      Investor Status.
      Such
      Buyer is an “accredited investor” as that term is defined in Rule 501(a) of
      Regulation D.

     

    (c) Reliance
      on Exemptions.
      Such
      Buyer understands that the Securities are being offered and sold to it in
      reliance on specific exemptions from the registration requirements of federal
      and state securities laws and that the Company is relying in part upon the
      truth
      and accuracy of, and such Buyer’s compliance with, the representations,
      warranties, agreements, acknowledgments and understandings of such Buyer set
      forth herein in order to determine the availability of such exemptions and
      the
      eligibility of such Buyer to acquire the Securities.

     

    (d) Information.
      Such
      Buyer and its advisors, if any, have been afforded the opportunity to ask
      questions of the Company. Such Buyer understands that its investment in the
      Securities involves a high degree of risk. Such Buyer has sought such
      accounting, legal and tax advice as it has considered necessary to make an
      informed investment decision with respect to its acquisition of the
      Securities.

     

    (e) No
      Governmental Review.
      Such
      Buyer understands that no United States federal or state agency or any other
      government or governmental agency has passed on or made any recommendation
      or
      endorsement of the Securities or the fairness or suitability of the investment
      in the Securities nor have such authorities passed upon or endorsed the merits
      of the offering of the Securities.

     

    
      
         

      

      
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    (f) Transfer
      or Resale.
      Such
      Buyer understands that except as provided in the Registration Rights Agreement:
      (i) the Securities have not been and are not being registered under the 1933
      Act
      or any state securities laws, and may not be offered for sale, sold, assigned
      or
      transferred unless (A) subsequently registered thereunder, (B) such Buyer shall
      have delivered to the Company an opinion of counsel, in a generally acceptable
      form, to the effect that such Securities to be sold, assigned or transferred
      may
      be sold, assigned or transferred pursuant to an exemption from such
      registration, or (C) such Buyer provides the Company with reasonable assurance
      that such Securities can be sold, assigned or transferred pursuant to Rule
      144
      or Rule 144A promulgated under the 1933 Act, as amended, (or a successor rule
      thereto) (collectively, “Rule
      144”);
      (ii)
      any sale of the Securities made in reliance on Rule 144 may be made only in
      accordance with the terms of Rule 144 and further, if Rule 144 is not
      applicable, any resale of the Securities under circumstances in which the seller
      (or the Person (as defined in Section
      3(s))
      through
      whom the sale is made) may be deemed to be an underwriter (as that term is
      defined in the 1933 Act) may require compliance with some other exemption under
      the 1933 Act or the rules and regulations of the SEC thereunder; and (iii)
      neither the Company nor any other Person is under any obligation to register
      the
      Securities under the 1933 Act or any state securities laws or to comply with
      the
      terms and conditions of any exemption thereunder. The Securities may be pledged
      in connection with a bona fide margin account or other loan or financing
      arrangement secured by the Securities and such pledge of Securities shall not
      be
      deemed to be a transfer, sale or assignment of the Securities hereunder, and
      no
      Buyer effecting a pledge of Securities shall be required to provide the Company
      with any notice thereof or otherwise make any delivery to the Company pursuant
      to this Agreement or any other Transaction Document (as defined in Section
      3(b)),
      including, without limitation, this Section
      2(f).

     

    (g) Legends.
      Such
      Buyer understands that the certificates or other instruments representing the
      Notes and the Warrants and the stock certificates representing the Conversion
      Shares, except as set forth below, shall bear any legend as required by the
      “blue sky” laws of any state and a restrictive legend in substantially the
      following form (and a stop-transfer order may be placed against transfer of
      such
      stock certificates):

     

    [NEITHER
      THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR
      THE
      SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] [HAVE
      BEEN][THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN]
      REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
      SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
      OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
      THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
      OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
      UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER
      SAID
      ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
      WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED
      BY THE SECURITIES.

     

    
      
         

      

      
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    The
      legend set forth above shall be removed and the Company shall issue a
      certificate without such legend to the holder of the Securities upon which
      it is
      stamped by electronic delivery at the applicable balance account at DTC (as
      defined below), unless otherwise required by state securities laws, (i) when
      such Securities are registered for resale under the 1933 Act, (ii) in connection
      with a sale, assignment or other transfer, such holder provides the Company
      with
      an opinion of counsel, in a generally acceptable form, to the effect that such
      sale, assignment or transfer of the Securities may be made without registration
      under the applicable requirements of the 1933 Act, or (iii) such holder provides
      the Company with reasonable assurance that the Securities can be sold, assigned
      or transferred pursuant to Rule 144 or Rule 144A. The Buyer expressly agrees
      that any sale by the Buyer of Conversion Shares pursuant to the Registration
      Statement shall be sold in a manner described under the caption “Plan of
      Distribution” in such Registration Statement and the Buyer shall comply with the
      prospectus delivery requirements in connection with such sale, in each case
      in
      compliance with the requirements of the Securities Act and Exchange Act
      applicable to such sale. The Buyer agrees that the Conversion Shares will only
      be sold or transferred while the Registration Statement is effective, unless
      another exemption from registration is available. The Buyer further agrees
      that
      if it sells or transfers the Conversion Shares pursuant to an exemption from
      registration which results in the transferee holding Conversion Shares that
      are
“Restricted Securities” as defined in the 1933 Act rules, in connection with
      such sale or transfer, the Buyer shall request that the Company issue the
      Conversion Shares in the name of the transferee with a legend substantially
      in
      the form set forth above. The Buyer acknowledges that the removal of the
      restrictive legends from certificates representing the Conversion Shares as
      provided in this Section
      2(g)
      is
      predicated upon the Company’s reliance on the Buyer’s compliance with its
      covenants in this Section
      2(g).

     

    (h) Validity;
      Enforcement.
      This
      Agreement and the Registration Rights Agreement to which such Buyer is a party
      have been duly and validly authorized, executed and delivered on behalf of
      such
      Buyer and shall constitute the legal, valid and binding obligations of such
      Buyer enforceable against such Buyer in accordance with their respective terms,
      except as such enforceability may be limited by general principles of equity
      or
      to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
      and other similar laws relating to, or affecting generally, the enforcement
      of
      applicable creditors’ rights and remedies.

     

    (i) No
      Conflicts.
      The
      execution, delivery and performance by such Buyer of this Agreement and the
      Registration Rights Agreement to which such Buyer is a party and the
      consummation by such Buyer of the transactions contemplated hereby and thereby
      will not (i) result in a violation of the organizational documents of such
      Buyer
      or (ii) conflict with, or constitute a material breach or default (or an event
      which with notice or lapse of time or both would become a material breach or
      default) under, or give to others any rights of termination, amendment,
      acceleration or cancellation of, any agreement, indenture or instrument to
      which
      such Buyer is a party, or (iii) result in a material violation of any law,
      rule,
      regulation, order, judgment or decree (including federal and state securities
      laws) applicable to such Buyer.

     

    
      
         

      

      
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    (j) Residency.
      Such
      Buyer is a resident of that jurisdiction specified below its address on the
      Schedule of Buyers.

     

    3. REPRESENTATIONS
      AND WARRANTIES OF THE COMPANY.

     

    The
      Company hereby represents and warrants to each of the Buyers as of the date
      hereof and as of the Closing Date as follows. 

     

    (a) Organization
      and Qualification.
      Each of
      the Company and its “Subsidiaries”
(which
      for purposes of this Agreement means any entity in which the Company, directly
      or indirectly, owns any of the capital stock or holds an equity or similar
      interest) are entities duly organized and validly existing in good standing
      under the laws of the jurisdiction in which they are formed, and have the
      requisite power and authorization to own their properties and to carry on their
      business as now being conducted. Each of the Company and its Subsidiaries is
      duly qualified as a foreign entity to do business and is in good standing in
      every jurisdiction in which its ownership of property or the nature of the
      business conducted by it makes such qualification necessary, except to the
      extent that the failure to be so qualified or be in good standing would not
      have
      a Material Adverse Effect. As used in this Agreement, “Material
      Adverse Effect”
means
      any material adverse effect on the business, properties, assets, operations,
      results of operations, condition (financial or otherwise) or prospects of the
      Company and its Subsidiaries, taken as a whole, or on the transactions
      contemplated hereby and the other Transaction Documents or by the agreements
      and
      instruments to be entered into in connection herewith or therewith, or on the
      authority or ability of the Company to perform its obligations under the
      Transaction Documents. The Company has no Subsidiaries except as set forth
      on
Schedule
      3(a).

     

    (b) Authorization;
      Enforcement; Validity.
      The
      Company has the requisite corporate power and authority to enter into and
      perform its obligations under this Agreement, the Notes, the Warrants, the
      Registration Rights Agreement, the Irrevocable Transfer Agent Instructions
      (as
      defined in Section
      5(b))
      and
      each of the other agreements entered into by the parties hereto in connection
      with the transactions contemplated by this Agreement (collectively, the
“Transaction
      Documents”)
      and
      under any applicable laws, including without limitation, the rules and
      regulations of the Principal Market (as defined below) and to issue the
      Securities in accordance with the terms hereof and thereof. The execution and
      delivery of the Transaction Documents by the Company and the consummation by
      the
      Company of the transactions contemplated hereby and thereby, including, without
      limitation, the issuance of the Notes and the Warrants and the reservation
      for
      issuance and the issuance of the Conversion Shares issuable
      upon conversion of the Notes and exercise of the Warrants have been duly
      authorized by the Company’s Board of Directors and (other than the filing with
      the SEC of one or more Registration Statements in accordance with the
      requirements of the Registration Rights Agreement) no further filing, consent,
      or authorization is required by the Company, its Board of Directors or its
      stockholders. This Agreement has been, and the other Transaction Documents
      will
      be, duly executed and delivered by the Company, and constitute the legal, valid
      and binding obligations of the Company, enforceable against the Company in
      accordance with their respective terms, except as such enforceability may be
      limited by general principles of equity or applicable bankruptcy, insolvency,
      reorganization, moratorium, liquidation or similar laws relating to, or
      affecting generally, the enforcement of applicable creditors’ rights and
      remedies.

     

    
      
         

      

      
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    (c) Issuance
      of Securities.
      The
      issuance of each of the Notes and the Warrants is duly authorized and is free
      from all taxes, liens and charges with respect to the issue thereof. As of
      the
      Closing, the Company shall have reserved for the issuance of the shares of
      Common Stock issuable upon conversion of the Notes and the Warrants (without
      taking into account any limitations on the conversion of the Notes or the
      Warrants set forth in the Notes and the Warrants) from its duly authorized
      capital stock not less than 120% of the maximum number of shares of Common
      Stock
      issuable upon conversion of the Notes and the Warrants (without taking into
      account any limitations on the conversion of the Notes or the Warrants set
      forth
      in the Notes or the Warrants). Upon conversion or payment in accordance with
      the
      Notes, the Conversion Shares will be validly issued, fully paid and
      nonassessable and free from all preemptive or similar rights, taxes, liens
      and
      charges with respect to the issue thereof, with the holders being entitled
      to
      all rights accorded to a holder of Common Stock. The offer and issuance by
      the
      Company of the Securities is exempt from registration under the 1933
      Act.

     

    (d) No
      Conflicts.
      The
      execution, delivery and performance of the Transaction Documents by the Company
      and the consummation by the Company of the transactions contemplated hereby
      and
      thereby (including, without limitation, the issuance of the Notes and the
      Warrants and reservation for issuance and issuance of the Conversion Shares)
      will not (i) result in a violation of any certificate of incorporation,
      certificate of formation, any certificate of designations or other constituent
      documents of the Company or any of its Subsidiaries, any capital stock of the
      Company or any of its Subsidiaries or the bylaws of the Company or any of its
      Subsidiaries or (ii) conflict with, or constitute a default (or an event which
      with notice or lapse of time or both would become a default) in any respect
      under, or give to others any rights of termination, amendment, acceleration
      or
      cancellation of, any contract, agreement, indenture or instrument to which
      the
      Company or any of its Subsidiaries is a party, or (iii) result in a violation
      of
      any law, rule, regulation, order, judgment or decree (including foreign, federal
      and state securities laws and regulations and the rules and regulations of
      The
      NASDAQ Capital Market (the “Principal
      Market”))
      applicable to the Company or any of its Subsidiaries or by which any property
      or
      asset of the Company or any of its Subsidiaries is bound or
      affected.

     

    (e) Consents.
      Neither
      the Company nor any of its Subsidiaries is required to obtain any consent,
      authorization or order of, or make any filing or registration with, any court,
      governmental agency or any regulatory or self-regulatory agency or any other
      Person, including without limitation, the Principal Market, in order for it
      to
      execute, deliver or perform any of its obligations under or contemplated by
      the
      Transaction Documents, in each case in accordance with the terms hereof or
      thereof. All consents, authorizations, orders, filings and registrations which
      the Company is required to obtain pursuant to the preceding sentence have been
      obtained or effected on or prior to the Closing Date, and the Company and its
      Subsidiaries are unaware of any facts or circumstances which might prevent
      the
      Company from obtaining or effecting any of the registration, application or
      filings pursuant to the preceding sentence. The Company is not and, after giving
      effect to the transactions contemplated hereby, will not be in violation of
      the
      listing requirements of the Principal Market and has no knowledge of any facts
      which would reasonably lead to delisting or suspension of the Common Stock
      in
      the foreseeable future.

     

    (f) Acknowledgment
      Regarding Buyer’s Purchase of Securities.
      The
      Company acknowledges and agrees that each Buyer is acting solely in the capacity
      of arm’s length purchaser with respect to the Transaction Documents and the
      transactions contemplated hereby and thereby and that, immediately prior to
      the
      transactions contemplated by the Transaction Documents, no Buyer is or, after
      giving effect to the transactions contemplated hereby, will be (i) an officer
      or
      director of the Company, (ii) an “affiliate” of the Company or any of its
      Subsidiaries (as defined in Rule 144) or (iii) to the knowledge of the Company,
      a “beneficial owner” of more than 10% of the shares of Common Stock (as defined
      for purposes of Rule 13d-3 of the Securities Exchange Act of 1934, as amended
      (the “1934
      Act”)).
      The
      Company further acknowledges that no Buyer is acting as a financial advisor
      or
      fiduciary of the Company or any of its Subsidiaries (or in any similar capacity)
      with respect to the Transaction Documents and the transactions contemplated
      hereby and thereby, and any advice given by a Buyer or any of its
      representatives or agents in connection with the Transaction Documents and
      the
      transactions contemplated hereby and thereby is merely incidental to such
      Buyer’s purchase of the Securities. The Company further represents to each Buyer
      that the Company’s decision to enter into the Transaction Documents has been
      based solely on the independent evaluation by the Company and its
      representatives.

     

    
      
         

      

      
        8

        
          

        

      

      
         

      

    

     

    (g) No
      General Solicitation; Placement Agent’s Fees.
      Neither
      the Company, nor any of its Subsidiaries or affiliates, nor any Person acting
      on
      its or their behalf, has engaged in any form of general solicitation or general
      advertising (within the meaning of Regulation D) in connection with the offer
      or
      sale of the Securities. The Company shall be responsible for the payment of
      any
      placement agent’s fees, financial advisory fees, or brokers’ commissions (other
      than for persons engaged by any Buyer or its investment advisor) relating to
      or
      arising out of the transactions contemplated hereby. The Company shall pay,
      and
      hold each Buyer harmless against, any liability, loss or expense (including,
      without limitation, attorney’s fees and out-of-pocket expenses) arising in
      connection with any such claim. The Company has not engaged any placement agent
      or other agent in connection with the sale of the Securities.

     

    (h) No
      Integrated Offering.
      None of
      the Company, its Subsidiaries, any of their affiliates, and any Person acting
      on
      their behalf has, directly or indirectly, made, or will prior to Closing make,
      any offers or sales of any security or solicited, or will prior to Closing
      solicit, any offers to buy any security, under circumstances that would require
      registration of any of the Securities under the 1933 Act or cause this offering
      of the Securities to be integrated with prior offerings by the Company for
      purposes of the 1933 Act or any applicable stockholder approval provisions,
      including, without limitation, under the rules and regulations of any exchange
      or automated quotation system on which any of the securities of the Company
      are
      listed or designated. None of the Company, its Subsidiaries, their affiliates
      and any Person acting on their behalf will take any action or steps referred
      to
      in the preceding sentence that would require registration of any of the
      Securities under the 1933 Act or cause the offering of the Securities to be
      integrated with other offerings, including, for the avoidance of doubt, the
      Follow-on Offering.

     

    (i) Dilutive
      Effect.
      The
      Company understands and acknowledges that the number of Conversion Shares
      issuable upon conversion of the Notes and exercise of the Warrants will increase
      in certain circumstances. The Company further acknowledges that its obligation
      to issue Conversion Shares upon conversion of the Notes or the exercise of
      Warrants in accordance with this Agreement and each Note is absolute and
      unconditional regardless of the dilutive effect that such issuance may have
      on
      the ownership interests of other stockholders of the Company.

     

    
      
         

      

      
        9

        
          

        

      

      
         

      

    

     

    (j) Application
      of Takeover Protections; Rights Agreement.
      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 Certificate of Incorporation
      or the laws of the jurisdiction of its formation which is or could become
      applicable to any Buyer as a result of the transactions contemplated by this
      Agreement, including, without limitation, the Company’s issuance of the
      Securities and any Buyer’s ownership of the Securities. The Company has not
      adopted a stockholder rights plan or similar arrangement relating to
      accumulations of beneficial ownership of Common Stock or a change in control
      of
      the Company.

     

    (k) SEC
      Documents; Financial Statements.
      Except
      as disclosed in Schedule
      3(k),
      during
      the two (2) years prior to the date hereof, the Company has filed all reports,
      schedules, forms, statements and other documents required to be filed by it
      with
      the SEC pursuant to the reporting requirements of the 1934 Act (all of the
      foregoing filed prior to the date hereof and all exhibits included therein
      and
      financial statements, notes and schedules thereto and documents incorporated
      by
      reference therein being hereinafter referred to as the “SEC
      Documents”).
      The
      Company has delivered to the Buyers or their respective representatives true,
      correct and complete copies of the SEC Documents not available on the EDGAR
      system. As of their respective dates, the SEC Documents complied in all material
      respects with the requirements of the 1934 Act and the rules and regulations
      of
      the SEC promulgated thereunder applicable to the SEC Documents, and none of
      the
      SEC Documents, at the time they were filed with the SEC, 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. As of
      their respective dates, the financial statements of the Company included in
      the
      SEC Documents complied as to form in all material respects with applicable
      accounting requirements and the published rules and regulations of the SEC
      with
      respect thereto. Such financial statements have been prepared in accordance
      with
      generally accepted accounting principles, consistently applied, during the
      periods involved (except (i) as may be otherwise indicated in such financial
      statements or the notes thereto, or (ii) in the case of unaudited interim
      statements, to the extent they may exclude footnotes or may be condensed or
      summary statements) and fairly present in all material respects the financial
      position of the Company as of the dates thereof and the results of its
      operations and cash flows for the periods then ended (subject, in the case
      of
      unaudited statements, to normal year-end audit adjustments). No other
      information provided by or on behalf of the Company to the Buyers which is
      not
      included in the SEC Documents, including, without limitation, information
      referred to in Section
      2(d)
      of this
      Agreement, contains any untrue statement of a material fact or omits to state
      any material fact necessary in order to make the statements therein, in the
      light of the circumstance under which they are or were made, not
      misleading.

     

    (l) Absence
      of Certain Changes.
      Except
      as disclosed in Schedule
      3(l),
      since
      September 30, 2007, there has been no material adverse change and no material
      adverse development in the business, properties, operations, condition
      (financial or otherwise), results of operations or prospectus of the Company
      or
      its Subsidiaries. Except as disclosed in Schedule
      3(l),
      since
      September 30, 2007, the Company has not (i) declared or paid any dividends,
      (ii)
      sold any assets, individually or in the aggregate, in excess of $1,000,000
      outside of the ordinary course of business or (iii) had capital expenditures,
      individually or in the aggregate, in excess of $3,000,000. Neither the Company
      nor any of its Subsidiaries has taken any steps to seek protection pursuant
      to
      any bankruptcy law nor does the Company have any knowledge or reason to believe
      that its creditors intend to initiate involuntary bankruptcy proceedings or
      any
      actual knowledge of any fact which would reasonably lead a creditor to do so.
      The Company is not as of the date hereof, and after giving effect to the
      transactions contemplated hereby to occur at the Closing, will not be Insolvent
      (as defined below). For purposes of this Section
      3(l),
      “Insolvent”
means,
      with respect to any Person (as defined in Section
      3(s),
      (i) the
      present fair saleable value of such Person’s assets is less than the amount
      required to pay such Person’s total Indebtedness (as defined in Section
      3(s)),
      (ii)
      such Person is unable to pay its debts and liabilities, subordinated, contingent
      or otherwise, as such debts and liabilities become absolute and matured, (iii)
      the Company intends to incur or believes that it will incur debts that would
      be
      beyond its ability to pay as such debts mature or (iv) such Person has
      unreasonably small capital with which to conduct the business in which it is
      engaged as such business is now conducted and is proposed to be
      conducted.

     

    
      
         

      

      
        10

        
          

        

      

      
         

      

    

     

    (m) Reserved.

     

    (n) Conduct
      of Business; Regulatory Permits.
      Neither
      the Company nor its Subsidiaries is in violation of any term of or in default
      under any certificate of designations of any outstanding series of preferred
      stock of the Company, its Certificate of Incorporation or Bylaws or their
      organizational charter or certificate of incorporation or bylaws, respectively.
      Neither the Company nor any of its Subsidiaries is in violation of any judgment,
      decree or order or any statute, ordinance, rule or regulation applicable to
      the
      Company or its Subsidiaries, and neither the Company nor any of its Subsidiaries
      will conduct its business in violation of any of the foregoing, except for
      possible violations which would not, individually or in the aggregate, have
      a
      Material Adverse Effect. Without limiting the generality of the foregoing,
      the
      Company is not in violation of any of the rules, regulations or requirements
      of
      the Principal Market and has no knowledge of any facts or circumstances which
      would reasonably lead to delisting or suspension of the Common Stock by the
      Principal Market in the foreseeable future. During the two (2) years prior
      to
      the date hereof, the Common Stock has been designated for quotation on the
      Principal Market. During the two (2) years prior to the date hereof, (i) trading
      in the Common Stock has not been suspended by the SEC or the Principal Market
      and (ii) the Company has received no communication, written or oral, from the
      SEC or the Principal Market regarding the suspension or delisting of the Common
      Stock from the Principal Market. The Company and its Subsidiaries possess all
      certificates, authorizations and permits issued by the appropriate regulatory
      authorities necessary to conduct their respective businesses, except where
      the
      failure to possess such certificates, authorizations or permits would not have,
      individually or in the aggregate, a Material Adverse Effect, and neither the
      Company nor any such Subsidiary has received any notice of proceedings relating
      to the revocation or modification of any such certificate, authorization or
      permit.

     

    (o) Foreign
      Corrupt Practices; Sanction Related Measures.
      Neither
      the Company, nor any of its Subsidiaries, nor, any director, officer, agent,
      employee or other Person acting on behalf of the Company or any of its
      Subsidiaries has, in the course of its actions for, or on behalf of, the Company
      or any of its Subsidiaries (i) used any corporate funds for any unlawful
      contribution, gift, entertainment or other unlawful expenses relating to
      political activity; (ii) made any direct or indirect unlawful payment to any
      foreign or domestic government official or employee from corporate funds; (iii)
      violated or is in violation of any provision of the U.S. Foreign Corrupt
      Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate,
      payoff, influence payment, kickback or other unlawful payment to any foreign
      or
      domestic government official or employee. Neither the Company nor any of its
      Subsidiaries or controlled affiliates does business with the government of,
      or
      with any person located in any country in a manner that violates in any material
      respect any of the economic sanctions programs or similar sanctions-related
      measures of the United States as administered by the United States Treasury
      Department’s Office of Foreign Assets Control; and the net proceeds from the
      offering contemplated by this Agreement will not be used to fund any operations
      in, finance any investments in or make any payments to any country, or to make
      any payments to any person, in a manner that violates any of the economic
      sanctions of the United States administered by the United States Treasury
      Department’s Office of Foreign Assets Control;

     

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

     

    (p) Sarbanes-Oxley
      Act.
      The
      Company is in compliance with any and all applicable requirements of the
      Sarbanes-Oxley Act of 2002 that are effective as of the date hereof, and any
      and
      all applicable rules and regulations promulgated by the SEC thereunder that
      are
      effective as of the date hereof.

     

    (q) Transactions
      With Affiliates.
      Except
      as disclosed in the SEC Documents or set forth on Schedule
      3(q),
      and
      except for transactions after September 30, 2007 which were entered into in
      the
      ordinary course of business, were consistent with past practice and necessary
      or
      desirable for the prudent operation of the business of the Company or its
      Subsidiaries, and involved fair consideration and terms no less favorable to
      the
      Company or its Subsidiaries than would be obtainable in a comparable
      arms'-length transaction with an unaffiliated Person, none
      of
      the officers, directors or employees (“Related
      Parties”)
      of the
      Company is presently a party to any material transaction with the Company or
      any
      of its Subsidiaries (other than for ordinary course services as employees,
      officers or directors), including any material 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 such officer, director or employee or, to the knowledge of the
      Company or any of its Subsidiaries, any corporation, partnership, trust or
      other
      entity in which any such Related Party has a substantial interest or is an
      officer, director, trustee or partner. Schedule
      3(q)
      sets
      forth all accounts receivable or other amounts due to the Company or any
      Subsidiary from any Related Party in excess of $100,000 with a payment date
      after March 31, 2008. 

     

    (r) Equity
      Capitalization.
      As of
      the date hereof, the authorized capital stock of the Company consists of (i)
      80,000,000 shares of Common Stock, of which as of the date hereof, 23,959,702
      are issued and outstanding, 2,177,500 shares are reserved for issuance pursuant
      to the Company’s stock option and purchase plans and 1,034,529 shares are
      reserved for issuance pursuant to securities (other than the aforementioned
      options, and the Notes or the Warrants) exercisable or exchangeable for, or
      convertible into, shares of Common Stock and (ii) 20,000,000 shares of preferred
      stock, par value $0.0001 per share, of which as of the date hereof, none are
      issued and outstanding. All of such outstanding shares have been, or upon
      issuance will be, validly issued and are fully paid and nonassessable. Except
      as
      disclosed elsewhere in this Agreement or the Schedules hereto, in the SEC
      Documents or in Schedule
      3(r):
      (i)
      none of the Company’s capital stock is subject to preemptive rights or any other
      similar rights or any liens or encumbrances suffered or permitted by the
      Company; (ii) there are no outstanding options, warrants, scrip, rights to
      subscribe to, calls or commitments of any character whatsoever relating to,
      or
      securities or rights convertible into, or exercisable or exchangeable for,
      any
      capital stock of the Company or any of its Subsidiaries, or contracts,
      commitments, understandings or arrangements by which the Company or any of
      its
      Subsidiaries is or may become bound to issue additional capital stock of the
      Company or any of its Subsidiaries or options, warrants, scrip, rights to
      subscribe to, calls or commitments of any character whatsoever relating to,
      or
      securities or rights convertible into, or exercisable or exchangeable for,
      any
      capital stock of the Company or any of its Subsidiaries; (iii) there are no
      outstanding debt securities, notes, credit agreements, credit facilities or
      other agreements, documents or instruments evidencing Indebtedness of the
      Company or any of its Subsidiaries or by which the Company or any of its
      Subsidiaries is or may become bound; (iv) there are no financing statements
      securing obligations in any material amounts, either singly or in the aggregate,
      filed in connection with the Company or any of its Subsidiaries; (v) there
      are
      no agreements or arrangements under which the Company or any of its Subsidiaries
      is obligated to register the sale of any of their securities under the 1933
      Act
      (except pursuant to the Registration Rights Agreement); (vi) there are no
      outstanding securities or instruments of the Company or any of its Subsidiaries
      which contain any redemption or similar provisions, and there are no contracts,
      commitments, understandings or arrangements by which the Company or any of
      its
      Subsidiaries is or may become bound to redeem a security of the Company or
      any
      of its Subsidiaries; (vii) there are no securities or instruments containing
      anti-dilution or similar provisions that will be triggered by the issuance
      of
      the Securities; (viii) the Company does not have any stock appreciation rights
      or “phantom stock” plans or agreements or any similar plan or agreement; and
      (ix) the Company and its Subsidiaries have no liabilities or obligations
      required to be disclosed in the SEC Documents but not so disclosed in the SEC
      Documents, other than those incurred in the ordinary course of the Company’s or
      its Subsidiaries’ respective businesses and which, individually or in the
      aggregate, do not or would not have a Material Adverse Effect. The Company
      has
      furnished to the Buyers true, correct and complete copies of the Company’s
      Certificate of Incorporation, as amended and as in effect on the date hereof
      (the “Certificate
      of Incorporation”),
      and
      the Company’s Bylaws, as amended and as in effect on the date hereof (the
“Bylaws”),
      and
      the terms of all securities convertible into, or exercisable or exchangeable
      for, shares of Common Stock and the material rights of the holders thereof
      in
      respect thereto.

     

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

     

    (s) Indebtedness
      and Other Contracts.
      Except
      as disclosed in the SEC Documents or in Schedule
      3(s),
      neither
      the Company nor any of its Subsidiaries (i) has any outstanding Indebtedness
      (as
      defined below) in excess of $2,000,000, (ii) is a party to any contract,
      agreement or instrument entered into outside the ordinary course of its
      business, the violation of which, or default under which, by the other
      party(ies) to such contract, agreement or instrument would reasonably be
      expected to result in a Material Adverse Effect, (iii) is in violation of any
      term of or in default under any contract, agreement or instrument relating
      to
      any Indebtedness, except where such violations and defaults would not result,
      individually or in the aggregate, in a Material Adverse Effect, or (iv) is
      a
      party to any contract, agreement or instrument relating to any Indebtedness,
      the
      performance of which, in the judgment of the Company’s officers, has or is
      expected to have a Material Adverse Effect. Schedule
      3(s)
      provides
      a detailed description of the material terms of any such outstanding
      Indebtedness. For purposes of this Agreement: (x) “Indebtedness”
of
      any
      Person means, without duplication (A) all indebtedness for borrowed money,
      (B)
      all obligations issued, undertaken or assumed as the deferred purchase price
      of
      property or services, including (without limitation) “capital leases” in
      accordance with generally accepted accounting principles (other than trade
      payables entered into in the ordinary course of business and notes payable
      in
      respect of trade payables entered into in the ordinary course of business),
      (C)
      all reimbursement or payment obligations with respect to letters of credit,
      surety bonds and other similar instruments (provided, for avoidance of doubt,
      that the Company’s support (prior to any actual payment by the Company to its
      banks) of its banks’ guaranty of the trade payables does not constitute
      Indebtedness), (D) all obligations evidenced by notes, bonds, debentures or
      similar instruments, including obligations so evidenced incurred in connection
      with the acquisition of property, assets or businesses, (E) all indebtedness
      created or arising under any conditional sale or other title retention
      agreement, or incurred as financing, in either case with respect to any property
      or assets acquired with the proceeds of such indebtedness (even though the
      rights and remedies of the seller or bank under such agreement in the event
      of
      default are limited to repossession or sale of such property), (F) all monetary
      obligations under any leasing or similar arrangement which, in connection with
      generally accepted accounting principles, consistently applied for the periods
      covered thereby, is classified as a capital lease, (G) all indebtedness referred
      to in clauses (A) through (F) above secured by (or for which the holder of
      such
      Indebtedness has an existing right, contingent or otherwise, to be secured
      by)
      any mortgage, lien, pledge, charge, security interest or other encumbrance
      upon
      or in any property or assets (including accounts and contract rights) owned
      by
      any Person, even though the Person which owns such assets or property has not
      assumed or become liable for the payment of such indebtedness, and (H) all
      Contingent Obligations in respect of indebtedness or obligations of others
      of
      the kinds referred to in clauses (A) through (G) above; (y) “Contingent
      Obligation”
means,
      as to any Person, any direct or indirect liability, contingent or otherwise,
      of
      that Person with respect to any indebtedness, lease, dividend or other
      obligation of another Person if the primary purpose or intent of the Person
      incurring such liability, or the primary effect thereof, is to provide assurance
      to the obligee of such liability that such liability will be paid or discharged,
      or that any agreements relating thereto will be complied with, or that the
      holders of such liability will be protected (in whole or in part) against loss
      with respect thereto; and (z) “Person”
means
      an individual, a limited liability company, a partnership, a joint venture,
      a
      corporation, a trust, an unincorporated organization and a government or any
      department or agency thereof.

     

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

     

    (t) Absence
      of Litigation.
      There
      is no action, suit, proceeding, inquiry or investigation before or by the
      Principal Market, any court, public board, government agency, self-regulatory
      organization or body pending or, to the knowledge of the Company, threatened
      against or affecting the Company or any of its Subsidiaries, the Common Stock
      or
      any of the Company’s Subsidiaries or any of the Company’s or its Subsidiaries’
officers or directors in their capacities as such, except as set forth in
Schedule
      3(t)
      or that
      could not reasonably be expected to result in a claim or cause a loss to the
      Company or any of its Subsidiaries in excess of $25,000.

     

    (u) Insurance.
      The
      Company and each of its Subsidiaries are insured by insurers of recognized
      financial responsibility against such losses and risks and in such amounts
      as
      management of the Company believes to be prudent and customary in the businesses
      in which the Company and its Subsidiaries are engaged. Neither the Company
      nor
      any such Subsidiary has been refused any insurance coverage sought or applied
      for and neither the Company nor any such Subsidiary has any reason to believe
      that it will not be able to renew its existing insurance coverage as and when
      such coverage expires or to obtain similar coverage from similar insurers as
      may
      be necessary to continue its business at a cost that would not have a Material
      Adverse Effect.

     

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

     

    (v) Employee
      Relations.

     

    (i) The
      Company and its Subsidiaries believe that their relations with their employees
      are good. No executive officer of the Company or any of its Subsidiaries (as
      defined in Rule 501(f) of the 1933 Act) has notified the Company or any such
      Subsidiary that such officer intends to leave the Company or any such Subsidiary
      or otherwise terminate such officer’s employment with the Company or any such
      Subsidiary. No executive officer of the Company or any of its Subsidiaries, 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, non-competition agreement, or any other
      contract or agreement or any restrictive covenant, 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.

     

    (ii) The
      Company and its Subsidiaries are in compliance with all federal, state, local
      and foreign laws and regulations respecting labor, employment and employment
      practices and benefits, terms and conditions of employment and wages and hours,
      except where failure to be in compliance would not, either individually or
      in
      the aggregate, reasonably be expected to result in a Material Adverse
      Effect.

     

    (w) Title.
      The
      Company and its Subsidiaries have good and marketable title in fee simple to
      all
      real property and good and valid title to all personal property owned by them
      which is material to the business of the Company and its Subsidiaries, in each
      case free and clear of all liens, encumbrances and defects except such as do
      not
      materially affect the value of such property and do not interfere with the
      use
      made and proposed to be made of such property by the Company and any of its
      Subsidiaries. Any real property and facilities held under lease by the Company
      and any of its Subsidiaries are held by them under valid, subsisting and
      enforceable leases with such exceptions as are not material and do not interfere
      with the use made and proposed to be made of such property and buildings by
      the
      Company and its Subsidiaries.

     

    (x) Intellectual
      Property.
      

     

    (i) For
      purposes of this Section
      3(x),
      the
      following definitions shall apply.

     

    (1) “Intellectual
      Property”
means
      any and all statutory or common law worldwide industrial and intellectual
      property rights and all rights associated therewith, including all patents
      and
      applications therefor and all reissues, divisions, renewals, extensions,
      provisionals, continuations and continuations-in-part thereof, all inventions
      (whether patentable or not), invention disclosures, improvements, trade secrets,
      proprietary information, know how, technology, technical data, proprietary
      processes and formulae, algorithms, specifications, customer lists and supplier
      lists, all industrial designs and any registrations and applications therefor,
      all trademarks, trade names, trade dress, logos, and service names and marks
      (in
      each case whether or not registered) and registrations and applications
      therefore and the right to file applications for the registration thereof,
      Internet domain names, Internet and World Wide Web URLs or addresses, all
      copyrights (whether or not registered), registrations and applications therefor
      and the right to file applications for registration thereof, and all other
      rights corresponding thereto, all computer software, including all source code,
      object code, firmware, development tools, files, records, documentation, screen
      displays, layouts, and data, test methodologies, emulation and simulation tools
      and reports, all databases and data collections and all rights therein, all
      publicity and privacy rights, and all moral and economic rights of authors
      and
      inventors, however denominated, and any similar or equivalent rights to any
      of
      the foregoing, arising under the laws of the United States of America, any
      state
      thereof, or any other country or province, and all tangible embodiments of
      the
      foregoing (in whatever form).

     

    
      
         

      

      
        15

        
          

        

      

      
         

      

    

     

    (2) “Company
      IP Rights”
means
      any and all Intellectual Property used in the conduct of the business of the
      Company as currently conducted or as currently proposed to be conducted by
      the
      Company or its Subsidiaries, including, without limitation, Intellectual
      Property currently under development by or for the Company or its Subsidiaries
      (whether or not in collaboration with another Person).

     

    (3) “Company-Owned
      IP Rights”
means
      Company IP Rights that are owned or are purportedly owned by or exclusively
      licensed to the Company or its Subsidiaries, including, but not limited to,
      Company Registered Intellectual Property.

     

    (4) “Company
      Registered Intellectual Property”
means
      all United States, international and foreign: (A) patents and patent
      applications (including provisional applications all reissues, divisions,
      renewals, extensions, continuations and continuations-in-part thereof); (B)
      registered trademarks and service marks, applications to register trademarks
      and
      service marks, intent-to-use applications, and other registrations and
      applications related to trademarks or service marks; and (C) registered
      copyrights and applications for copyright registration.

     

    (ii) The
      Company IP Rights are sufficient for the conduct of the business of the Company
      and its Subsidiaries as currently conducted and as currently proposed to be
      conducted by the Company or its Subsidiaries.

     

    (iii) Reserved.

     

    (iv) Neither
      the execution and delivery or effectiveness of this Agreement nor the
      performance of the Company’s obligations under this Agreement will cause the (A)
      forfeiture or termination of, or give rise to a right of forfeiture or
      termination of any Company-Owned IP Right, or impair the right of the Company
      or
      its Subsidiaries to use, possess, sell or license any Company-Owned IP Right
      or
      portion thereof or (B) breach of any contract governing any Company IP Rights
      (the “Company
      IP Rights Agreements”)
      and
      the consummation of the transactions contemplated by this Agreement will not
      result in the modification, cancellation, termination, suspension of, or
      acceleration of any payments with respect to the Company IP Rights Agreements,
      or give any Person other than the Company or its Subsidiaries that is party
      to
      any Company IP Rights Agreement the right to do any of the
      foregoing.

     

    (v) Schedule
      3(x)(v)
      lists
      all Company Registered Intellectual Property. Except as shown on Schedule
      3(x)(v),
      all
      registration, maintenance and renewal fees currently due in connection with
      such
      Company Registered Intellectual Property have been paid and all documents,
      recordations and certificates in connection with such Company Registered
      Intellectual Property currently required to be filed have been filed with the
      relevant jurisdiction or authority. 

     

    
      
         

      

      
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    (vi) None
      of
      the Company IP Rights Agreements grants any third party exclusive rights to
      or
      under any Company IP Rights. Neither the Company nor any of its Subsidiaries
      has
      brought any action, suit or proceeding for infringement or misappropriation
      of
      any Intellectual Property or breach of any Company IP Rights
      Agreement.

     

    (vii) Neither
      the Company nor any of its Subsidiaries has been sued in any suit, action or
      proceeding (or received any written notice or, to the knowledge of the Company
      or any of its Subsidiaries, threat) which involves a claim of infringement
      or
      misappropriation of any Intellectual Property right of any third party or which
      contests the validity, ownership or right of the Company or any of its
      Subsidiaries to exercise any Intellectual Property Right and the Company and
      its
      Subsidiaries are unaware of any facts or circumstances which might give rise
      to
      any of the foregoing actions or proceedings.

     

    (viii) The
      Company and its Subsidiaries have taken all commercially reasonable steps to
      protect and preserve the confidentiality of all confidential or nonpublic
      information included in the Company IP Rights (“Confidential
      Information”).
      All
      use, disclosure or appropriation of Confidential Information owned by the
      Company or any of its Subsidiaries to a third party has been pursuant to the
      terms of a written contract between the Company or any of its Subsidiaries
      and
      such third party. All use, disclosure or appropriation of Confidential
      Information by the Company or any of its Subsidiaries not owned by the Company
      has been pursuant to the terms of a written agreement between the Company or
      any
      of its Subsidiaries and the owner of such Confidential Information, or is
      otherwise lawful.

     

    (ix) The
      Company and its Subsidiaries has complied with all applicable laws and
      regulations and their respective internal and public privacy policies relating
      to the use, collection, storage, disclosure and transfer of any personally
      identifiable information collected by the Company, its Subsidiaries or by third
      parties having authorized access to the records of the Company and its
      Subsidiaries. The execution, delivery and performance of this Agreement will
      comply with all applicable laws and regulations relating to privacy and with
      the
      Company’s privacy policies. Neither the Company nor any of its Subsidiaries has
      received a complaint regarding the Company’s or its Subsidiaries’ collection,
      use or disclosure of personally identifiable information.

     

    (y) Environmental
      Laws.
      The
      Company and its Subsidiaries (i) are in compliance with any and all
      Environmental Laws (as hereinafter defined), (ii) have received all permits,
      licenses or other approvals required of them under applicable Environmental
      Laws
      to conduct their respective businesses and (iii) are in compliance with all
      terms and conditions of any such permit, license or approval where, in each
      of
      the foregoing clauses (i), (ii) and (iii), the failure to so comply could be
      reasonably expected to have, individually or in the aggregate, a Material
      Adverse Effect. The term “Environmental
      Laws”
means
      all federal, state, local or foreign laws relating to pollution or protection
      of
      human health or the environment (including, without limitation, ambient air,
      surface water, groundwater, land surface or subsurface strata), including,
      without limitation, laws relating to emissions, discharges, releases or
      threatened releases of chemicals, pollutants, contaminants, or toxic or
      hazardous substances or wastes (collectively, “Hazardous
      Materials”) into
      the
      environment, or otherwise relating to the manufacture, processing, distribution,
      use, treatment, storage, disposal, transport or handling of Hazardous Materials,
      as well as all authorizations, codes, decrees, demands or demand letters,
      injunctions, judgments, licenses, notices or notice letters, orders, permits,
      plans or regulations issued, entered, promulgated or approved
      thereunder.

     

    
      
         

      

      
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    (z) Subsidiary
      Rights.
      Except
      as set forth in Schedule
      3(z),
      the
      Company or one of its Subsidiaries has the unrestricted right to vote, and
      (subject to limitations imposed by applicable law) to receive dividends and
      distributions on, all capital securities of its Subsidiaries as owned by the
      Company or such Subsidiary.

     

    (aa) Investment
      Company Status.
      The
      Company is not, and upon consummation of the sale of the Securities will not
      be,
      an “investment company,” a company controlled by an “investment company” or an
“affiliated person” of, or “promoter” or “principal underwriter” for, an
“investment company” as such terms are defined in the Investment Company Act of
      1940, as amended.

     

    (bb) Tax
      Status.
      The
      Company and each of its Subsidiaries (i) has made or filed all foreign, federal
      and state income and all other tax returns, reports and declarations required
      by
      any jurisdiction to which it is subject, (ii) has paid all taxes and other
      governmental assessments and charges that are material in amount, shown or
      determined to be due on such returns, reports and declarations, except those
      being contested in good faith and (iii) has set aside on its books provision
      reasonably adequate for the payment of all taxes for current tax periods ending
      subsequent to the periods to which such returns, reports or declarations apply.
      There are no unpaid taxes in any material amount claimed to be due by the taxing
      authority of any jurisdiction, and the officers of the Company know of no basis
      for any such claim. The Company is not a Passive Foreign Investment Company
      (“PFIC”)
      within
      the meaning of Section 1297 of the Code and does not expect to become a PFIC
      in
      the future.

     

    (cc) Internal
      Accounting and Disclosure Controls.
      The
      Company and each of its 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 generally accepted accounting principles and
      to
      maintain asset and liability accountability, (iii) access to assets or
      incurrence of liabilities is permitted only in accordance with management’s
      general or specific authorization and (iv) the recorded accountability for
      assets and liabilities is compared with the existing assets and liabilities
      at
      reasonable intervals and appropriate action is taken with respect to any
      difference. The Company maintains disclosure controls and procedures (as such
      term is defined in Rule 13a-14 under the 1934 Act) that are effective in
      ensuring that information required to be disclosed by the Company in the reports
      that it files or submits under the 1934 Act is recorded, processed, summarized
      and reported, within the time periods specified in the rules and forms of the
      SEC, including, without limitation, controls and procedures designed in to
      ensure that information required to be disclosed by the Company in the reports
      that it files or submits under the 1934 Act is accumulated and communicated
      to
      the Company’s management, including its principal executive officer or officers
      and its principal financial officer or officers, as appropriate, to allow timely
      decisions regarding required disclosure. During the twelve (12) months prior
      to
      the date hereof neither the Company nor any of its Subsidiaries have received
      any notice or correspondence from any accountant relating to any material
      weakness in any part of the system of internal accounting controls of the
      Company or any of its Subsidiaries

     

    
      
         

      

      
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    (dd) Off
      Balance Sheet Arrangements.
      There
      is no transaction, arrangement, or other relationship between the Company or
      any
      of its Subsidiaries and an unconsolidated or other off balance sheet entity
      that
      is required to be disclosed by the Company in its 1934 Act filings and is not
      so
      disclosed or that otherwise would be reasonably likely to have a Material
      Adverse Effect. 

     

    (ee) Ranking
      of Notes.
      Except
      as set forth on Schedule
      3(ee),
      no
      Indebtedness of the Company is senior to the Notes in right of payment, whether
      with respect to payment of redemptions, interest, damages or upon liquidation
      or
      dissolution or otherwise (other than with respect to purchase money security
      interests on personal property of the Company or any of its Subsidiaries (e.g.,
      equipment) in excess of $25,000 individually).

     

    (ff) Form
      S-1 or S-3 Eligibility.
      The
      Company is eligible to register the Conversion Shares for resale by the Buyers
      using Form S-1 or Form S-3 promulgated under the 1933 Act.

     

    (gg) Transfer
      Taxes.
      On the
      Closing Date, all stock transfer or other taxes (other than income or similar
      taxes) which are required to be paid in connection with the sale and transfer
      of
      the Securities to be sold to each Buyer hereunder will be, or will have been,
      fully paid or provided for by the Company, and all laws imposing such taxes
      will
      be or will have been complied with.

     

    (hh) Manipulation
      of Price.
      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, or (iii) paid or agreed to pay to any person any compensation for
      soliciting another to purchase any other securities of the Company.

     

    (ii) Acknowledgement
      Regarding Buyers’ Trading Activity.
      It is
      understood and acknowledged by the Company that except as set forth in this
      paragraph (i) none of the Buyers have been asked to agree, nor has any Buyer
      agreed, to desist from purchasing or selling, long and/or short, securities
      of
      the Company, or “derivative” securities based on securities issued by the
      Company or to hold the Securities for any specified term; (ii) any Buyer, and
      counter parties in “derivative” transactions to which any such Buyer is a party,
      directly or indirectly, presently may have a “short” position in the Common
      Stock, and (iii) each Buyer shall not be deemed to have any affiliation with
      or
      control over any arm’s length counter-party in any “derivative” transaction. The
      Company further understands and acknowledges that one or more Buyers may engage
      in hedging and/or trading activities at various times during the period that
      the
      Securities are outstanding, including, without limitation, during the periods
      that the value of the Conversion Shares are being determined and such hedging
      and/or trading activities, if any, can reduce the value of the existing
      stockholders’ equity interest in the Company both at and after the time the
      hedging and/or trading activities are being conducted. The Company acknowledges
      that such aforementioned hedging and/or trading activities do not constitute
      a
      breach of this Agreement, the Notes, the Warrants or any of the documents
      executed in connection herewith. Notwithstanding the foregoing, nothing in
      this
Section
      3(ii)
      shall be
      deemed to allow or excuse any violation of the Buyers’ covenant in Section
      4(q)
      below.

     

    
      
         

      

      
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    (jj) U.S.
      Real Property Holding Corporation.
      The
      Company is not, has never been, nor while any Securities are outstanding, will
      ever become, a U.S. real property holding corporation within the meaning of
      Section 897 of the Internal Revenue Code of 1986, as amended, and the Company
      shall so certify upon Buyer’s request.

     

    (kk) Bank
      Holding Company Act.
      Neither
      the Company nor any of its Subsidiaries is subject to the Bank Holding Company
      Act of 1956, as amended (the “BHCA”)
      and to
      regulation by the Board of Governors of the Federal Reserve System (the
“Federal
      Reserve”).
      Neither the Company nor any of its Subsidiaries or affiliates owns or controls,
      directly or indirectly, five percent (5%) or more of the outstanding shares
      of
      any class of voting securities or twenty-five (25%) or more of the total equity
      of a bank or any equity that is subject to the BHCA and to regulation by the
      Federal Reserve. Neither the Company nor any of its Subsidiaries or affiliates
      exercises a controlling influence over the management or policies of a bank
      or
      any entity that is subject to the BHCA and to regulation by the Federal Reserve.
      

     

    (ll) Disclosure.
      All
      disclosure provided to the Buyers regarding the Company, or any of its
      Subsidiaries, their business and the transactions contemplated hereby, including
      the Schedules to this Agreement, furnished by or on behalf of the Company 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 the light of the circumstances under which they were made, not
      misleading. Each press release issued by the Company or any of its Subsidiaries
      during the twelve (12) months preceding the date of this Agreement did not
      at
      the time of release 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 the light of the circumstances under which
      they
      were made, not misleading. No event or circumstance has occurred or information
      is known by any of the Company’s officers to exist with respect to the Company
      or any of its Subsidiaries or its or their business, properties, prospects,
      operations or financial conditions, which, under applicable law, rule or
      regulation, is legally required to have been publicly disclosed or announced
      by
      the Company but which has not been so publicly announced or disclosed.

     

    4. COVENANTS.

     

    (a) Best
      Efforts.
      Each
      party shall use its reasonable best efforts timely to satisfy each of the
      conditions to be satisfied by it as provided in Sections
      6
      and
7
      of this
      Agreement. The Company shall use its commercially reasonable efforts to
      consummate the Henglong Transaction on or prior to the Determination
      Date.

     

    (b) Form
      D
      and Blue Sky.
      The
      Company agrees to file a Form D with respect to the Securities as required
      under
      Regulation D and to provide a copy thereof to each Buyer promptly after such
      filing. The Company shall, on or before the Closing Date, take such action
      as
      the Company shall reasonably determine is necessary in order to obtain an
      exemption for or to qualify the Securities for sale to the Buyers at the Closing
      pursuant to this Agreement under applicable securities or “Blue Sky” laws of the
      states of the United States (or to obtain an exemption from such qualification),
      and shall provide evidence of any such action so taken to the Buyers on or
      prior
      to the Closing Date. The Company shall make all filings and reports relating
      to
      the offer and sale of the Securities required under applicable securities or
      “Blue Sky” laws of the states of the United States following the Closing Date.

     

    
      
         

      

      
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    (c) Reporting
      Status.
      Until
      the date on which the Investors (as defined in the Registration Rights
      Agreement) shall have sold all the Conversion Shares and none of the Notes
      or
      Warrants is outstanding (the “Reporting
      Period”),
      the
      Company shall timely file all reports required to be filed with the SEC pursuant
      to the 1934 Act, and the Company shall not terminate its status as an issuer
      required to file reports under the 1934 Act even if the 1934 Act or the rules
      and regulations thereunder would permit such termination.

     

    (d) Use
      of
      Proceeds.
      The
      Company will use the proceeds from the sale of the Notes and Warrants for
      general corporate and for working capital purposes (including possible future
      acquisitions) and does not currently intend to use such proceeds for (i) the
      repayment of any outstanding Indebtedness of the Company or any of its
      Subsidiaries, (ii) the redemption or repurchase of any of its or its
      Subsidiaries’ equity securities (other than the Henglong Transaction) or (iii)
      the settlement of any claims, actions or proceedings currently pending against
      the Company or any of its Subsidiaries. 

     

    (e) Financial
      Information.
      The
      Company agrees to send the following to each Investor (as defined in the
      Registration Rights Agreement) during the Reporting Period (i) unless the
      following are filed with the SEC through EDGAR and are available to the public
      through the EDGAR system, within one (1) Business Day after the filing thereof
      with the SEC, a copy of its Annual Reports and Quarterly Reports on Form 10-K,
      10-Q, any interim reports or any consolidated balance sheets, income statements,
      stockholders’ equity statements and/or cash flow statements for any period other
      than annual, any Current Reports on Form 8-K and any registration statements
      (other than on Form S-8) or amendments filed pursuant to the 1933 Act, (ii)
      on
      the same day as the release thereof, facsimile or e-mailed copies of all press
      releases issued by the Company or any of its Subsidiaries, and (iii) copies
      of
      any notices and other information made available or given to the stockholders
      of
      the Company generally, contemporaneously with the making available or giving
      thereof to the stockholders. 

     

    (f) Listing.
      The
      Company shall promptly file the additional listing application and secure the
      listing of all of the Registrable Securities (as defined in the Registration
      Rights Agreement) upon each national securities exchange and automated quotation
      system, if any, upon which the Common Stock is then listed (subject to official
      notice of issuance) and shall maintain such listing of all Registrable
      Securities from time to time issuable under the terms of the Transaction
      Documents. The Company shall maintain the Common Stock’s authorization for
      quotation on the Principal Market. Other than the properly authorized
      acquisition of the Company by an unaffiliated Person, neither the Company nor
      any of its Subsidiaries shall take any action which would be reasonably expected
      to result in the delisting or suspension of the Common Stock on the Principal
      Market. The Company shall pay all fees and expenses in connection with
      satisfying its obligations under this Section
      4(f).

     

    
      
         

      

      
        21

        
          

        

      

      
         

      

    

     

    (g) Fees.
      Each
      party to this Agreement shall bear its own expenses in connection with the
      sale
      of the Securities to the Buyers.

     

    (h) Pledge
      of Securities.
      The
      Company acknowledges and agrees that the Securities may be pledged by an
      Investor in connection with a bona fide margin agreement or other loan or
      financing arrangement that is secured by the Securities. The pledge of
      Securities shall not be deemed to be a transfer, sale or assignment of the
      Securities hereunder, and no Investor effecting a pledge of Securities shall
      be
      required to provide the Company with any notice thereof or otherwise make any
      delivery to the Company pursuant to this Agreement or any other Transaction
      Document, including, without limitation, Section
      2(f)
      hereof;
provided
      that an
      Investor and its pledgee shall be required to comply with the provisions of
      Section
      2(f)
      hereof
      in order to effect a sale, transfer or assignment of Securities to such pledgee.
      The Company hereby agrees to execute and deliver such documentation as a pledgee
      of the Securities may reasonably request in connection with a pledge of the
      Securities to such pledgee by an Investor or such other documentation as may
      be
      reasonably requested by any Buyer effecting a pledge of securities in connection
      with a bona fide margin account or other loan or financing agreement as
      contemplated under Section
      2(f)
      or any
      financial agent of such Buyer.

     

    (i) Disclosure
      of Transactions and Other Material Information.
      On or
      before the first Business Day following the Closing Date or a Termination Event,
      the Company shall issue a press release and file a Current Report on Form 8-K
      describing the terms of the transactions contemplated by the Transaction
      Documents, including without limitation the terms of the Closing or a
      Termination Event, as applicable, in the form required by the 1934 Act (the
      “8-K
      Filing”).
      From
      and after the filing of the 8-K Filing with the SEC, no Buyer shall be in
      possession of any material, nonpublic information received from the Company,
      any
      of its Subsidiaries or any of their respective officers, directors, employees
      or
      agents, that is not disclosed in the 8-K Filing. The Company shall not, and
      shall cause each of its Subsidiaries and its and each of their respective
      officers, directors, employees and agents, not to, provide any Buyer with any
      material, nonpublic information regarding the Company or any of its Subsidiaries
      from and after the filing of the 8-K Filing with the SEC without the express
      written consent of such Buyer. If a Buyer has, or believes it has, received
      any
      such material, nonpublic information regarding the Company or any of its
      Subsidiaries, it shall provide the Company with written notice thereof. The
      Company shall, within two (2) Trading Days (as defined in the Notes) of receipt
      of such notice, make public disclosure of such material, nonpublic information.
      In the event of a breach of the foregoing covenant by the Company, any of its
      Subsidiaries, or any of its or their respective officers, directors, employees
      and agents, in addition to any other remedy provided herein or in the
      Transaction Documents, a Buyer shall have the right to make a public disclosure,
      in the form of a press release, public advertisement or otherwise, of such
      material, nonpublic information without the prior approval by the Company,
      its
      Subsidiaries, or any of its or their respective officers, directors, employees
      or agents. No Buyer shall have any liability to the Company, its Subsidiaries,
      or any of its or their respective officers, directors, employees, stockholders
      or agents for any such disclosure. Subject to the foregoing, neither the
      Company, its Subsidiaries nor any Buyer shall issue any press releases or any
      other public statements with respect to the transactions contemplated hereby;
      provided,
      however,
      that
      the Company shall be entitled, without the prior approval of any Buyer, to
      make
      any press release or other public disclosure with respect to such transactions
      (i) in substantial conformity with the 8-K Filing and contemporaneously
      therewith and (ii) as is required by applicable law and regulations
      (provided
      that in
      the case of clause (i) each Buyer shall be consulted by the Company in
      connection with any such press release or other public disclosure prior to
      its
      release). Without the prior written consent of any applicable Buyer, neither
      the
      Company nor any of its Subsidiaries or affiliates shall disclose the name of
      such Buyer in any filing, announcement, release or otherwise.

     

    
      
         

      

      
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    (j) Restriction
      on Redemption and Cash Dividends.
      So long
      as at least ten percent (10%) of the Aggregate Principal of the Notes are
      outstanding, the Company shall not, directly or indirectly, redeem, or declare
      or pay any cash dividend or distribution on, the Common Stock without the prior
      express written consent of the holders of Notes representing not less than
      a
      majority of the aggregate principal amount of the then outstanding
      Notes.

     

    (k) Additional
      Notes; Variable Securities; Dilutive Issuances.
      So long
      as at least ten percent (10%) of the Aggregate Principal of the Notes are
      outstanding, the Company will not issue any Notes other than to the Buyers
      as
      contemplated hereby. The Company shall not issue any other securities that
      would
      cause a breach or default under the Notes. For so long as any Notes remain
      outstanding, the Company shall not, in any manner, issue or sell any rights,
      warrants or options to subscribe for or purchase Common Stock or directly or
      indirectly convertible into or exchangeable or exercisable for Common Stock
      at a
      price which varies or may vary with the market price of the Common Stock,
      including by way of one or more reset(s) to any fixed price unless the
      conversion, exchange or exercise price of any such security cannot be less
      than
      the then applicable Conversion Price (as defined in the Notes) with respect
      to
      the Note Conversion Shares. For so long as any Notes remain outstanding, the
      Company shall not, in any manner, enter into or affect any Dilutive Issuance
      (as
      defined in the Notes) if the effect of such Dilutive Issuance is to cause the
      Company to be required to issue upon conversion of any Note any shares of Common
      Stock in excess of that number of shares of Common Stock which the Company
      may
      issue upon conversion of the Notes without breaching the Company’s obligations
      under the rules or regulations of the Principal Market (as defined in the
      Registration Rights Agreement).

     

    (l) Corporate
      Existence.
      So long
      as any Buyer beneficially owns any Securities, the Company shall not be party
      to
      any Fundamental Transaction (as defined in the Notes) unless the Company is
      in
      compliance with the applicable provisions governing Fundamental Transactions
      set
      forth in the Notes.

     

    (m) Reservation
      of Shares.
      So long
      as any Buyer owns any Securities, the Company shall take all action
      necessary
      to have
      reserved from its duly authorized capital stock not less than 120% of the
      maximum number of shares of Common Stock issuable upon conversion of the Notes
      (without taking into account any limitations on the conversion of the Notes
      set
      forth in the Notes) issued at the Closing. 

     

    (n) Conduct
      of Business.
      The
      business of the Company and its Subsidiaries shall not be conducted in violation
      of any law, ordinance or regulation of any governmental entity, except where
      such violations would not result, either individually or in the aggregate,
      in a
      Material Adverse Effect.

     

    
      
         

      

      
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    (o) Additional
      Issuances of Securities.

     

    (i) For
      purposes of this Section
      4(o),
      the
      following definitions shall apply. 

     

    (1) “Approved
      Stock Plan”
means
      any employee benefit plan which has been or is hereafter approved by the Board
      of Directors of the Company, pursuant to which the Company’s securities may be
      issued to any employee, officer or director or other service provider for
      services provided to the Company. 

     

    (2) “Closing
      Bid Price”
a
      means, for any security as of any date, the last closing bid price and last
      closing trade price, respectively, for such security on the Principal Market,
      as
      reported by Bloomberg, or, if the Principal Market begins to operate on an
      extended hours basis and does not designate the closing bid price or the closing
      trade price, as the case may be, then the last bid price or last trade price,
      respectively, of such security prior to 4:00:00 p.m., New York Time, as reported
      by Bloomberg, or, if the Principal Market is not the principal securities
      exchange or trading market for such security, the last closing bid price or
      last
      trade price, respectively, of such security on the principal securities exchange
      or trading market where such security is listed or traded as reported by
      Bloomberg, or if the foregoing do not apply, the last closing bid price or
      last
      trade price, respectively, of such security in the over-the-counter market
      on
      the electronic bulletin board for such security as reported by Bloomberg, or,
      if
      no closing bid price or last trade price, respectively, is reported for such
      security by Bloomberg, the average of the bid prices, or the ask prices,
      respectively, of any market makers for such security as reported in the “pink
      sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If
      the Closing Bid Price or the Closing Sale Price cannot be calculated for a
      security on a particular date on any of the foregoing bases, the Closing Bid
      Price or the Closing Sale Price, as the case may be, of such security on such
      date shall be the fair market value as mutually determined by the Company and
      the Holder. All such determinations to be appropriately adjusted for any stock
      dividend, stock split, stock combination, reclassification or similar
      transaction during the applicable calculation period.

     

    (3) “Common
      Stock Equivalents”
means,
      collectively, Options and Convertible Securities. 

     

    (4) “Convertible
      Securities”
means
      any stock or securities (other than Options) convertible into or exercisable
      or
      exchangeable for Common Stock. 

     

    (5) “Excluded
      Securities”
means:
      (i) as a stock dividend to holders of Common Stock or upon any subdivision
      or
      combination of shares of Common Stock; (ii) in connection with any Approved
      Stock Plan; (iii) any securities issued to the seller as consideration for
      the
      acquisition of another entity by the Company by merger or share exchange
      (whereby the Company owns no less than 51% of the voting power of the surviving
      entity) or purchase of substantially all of such entity’s stock or assets; (iv)
      any securities issued in connection with a license, strategic partnership,
      joint
      venture or other similar agreement, provided
      that the
      purpose of such arrangement is not primarily the raising of capital; (v) upon
      exercise of warrants issued as a part of the issuance of straight debt
      securities (with no equity or equity-linked feature) issued to a financial
      institution or lender in connection with a bank loan, credit, lease, or other
      debt transaction with such financial institution or lender (where warrant
      coverage is not greater than 5% of the Loan Amount); or (vi) upon conversion
      of
      any Options or Convertible Securities which are outstanding on the day
      immediately preceding the Closing Date, provided
      that the
      terms of such Options or Convertible Securities are not amended, modified or
      changed on or after the Closing Date. 

     

    
      
         

      

      
        24

        
          

        

      

      
         

      

    

     

    (6) “Options”
means
      any rights, warrants or options to subscribe for or purchase Common Stock or
      Convertible Securities. 

     

    (7) “Trading
      Day”
means
      any day on which the Common Stock is traded on the Nasdaq Capital Market, or,
      if
      the Nasdaq Capital Market is not the principal trading market for the Common
      Stock, then on the principal securities exchange or securities market on which
      the Common Stock is then traded; provided
      that
“Trading Day” shall not include any day on which the Common Stock is scheduled
      to trade on such exchange or market for less than 4.5 hours or any day that
      the
      Common Stock is suspended from trading during the final hour of trading on
      such
      exchange or market (or if such exchange or market does not designate in advance
      the closing time of trading on such exchange or market, then during the hour
      ending at 4:00 p.m., New York City Time). 

     

    (ii) Except
      for the permitted issuances set forth on Schedule
      4(o),
      from
      the date hereof until the date that is ninety (90) days after the Closing Date
      (the “Trigger
      Date”),
      the
      Company will not, directly or indirectly, offer, sell, grant any option to
      purchase, or otherwise dispose of (or announce any offer, sale, grant or any
      option to purchase or other disposition of) any of its or its Subsidiaries’
equity or equity equivalent securities, including without limitation any debt,
      preferred stock or other instrument or security that is, at any time during
      its
      life and under any circumstances, convertible into or exchangeable or
      exercisable for shares of Common Stock or Common Stock Equivalents (any such
      offer, sale, grant, disposition or announcement other than such permitted
      issuances being referred to as a “Subsequent
      Placement”).
      For
      avoidance of doubt, the Henglong Transaction described on Schedule
      4(o)
      shall
      also be considered a carve-out to all applicable representations and warranties
      of the Company hereunder.

     

    (iii) From
      the
      Closing Date until the third anniversary of the Closing Date, the Company will
      not, directly or indirectly, effect any Subsequent Placement unless the Company
      shall have first complied with this Section
      4(o)(iii). 

     

    (1) The
      Company shall deliver to each Buyer an irrevocable written notice (the
“Offer
      Notice”)
      of any
      proposed or intended issuance or sale or exchange for which a term sheet has
      been signed or an equivalent understanding has been reached (the “Offer”)
      of the
      securities being offered (the “Offered
      Securities”)
      in a
      Subsequent Placement, which Offer Notice shall (w) identify and describe the
      Offered Securities, (x) describe the price and other terms upon which they
      are
      to be issued, sold or exchanged, and the number or amount of the Offered
      Securities to be issued, sold or exchanged, (y) identify the persons or entities
      (if known) to which or with which the Offered Securities are to be offered,
      issued, sold or exchanged and (z) offer to issue and sell to or exchange with
      such Buyers 30% of the Offered Securities, allocated among such Buyers (a)
      based
      on such Buyer’s pro rata portion of Notes purchased hereunder (the “Basic
      Amount”),
      and
      (b) with respect to each Buyer that elects to purchase its Basic Amount, any
      additional portion of the Offered Securities attributable to the Basic Amounts
      of other Buyers as such Buyer shall indicate it will purchase or acquire from
      any amount which may become available as a result of other Buyers subscribing
      for less than their Basic Amounts (the “Undersubscription
      Amount”). 

     

    
      
         

      

      
        25

        
          

        

      

      
         

      

    

     

    (2) To
      accept
      an Offer, in whole or in part, such Buyer must deliver a written notice to
      the
      Company prior to the end of the fifteenth (15th)
      Business Day after such Buyer’s receipt of the Offer Notice (the “Offer
      Period”),
      setting forth the portion of such Buyer’s Basic Amount that such Buyer elects to
      purchase and, if such Buyer shall elect to purchase all of its Basic Amount,
      the
      Undersubscription Amount, if any, that such Buyer elects to purchase (in either
      case, the “Notice
      of Acceptance”).
      If
      the Basic Amounts subscribed for by all eligible Buyers are less than the total
      of all of the Basic Amounts, then each Buyer who has set forth an
      Undersubscription Amount in its Notice of Acceptance shall be entitled to
      purchase, in addition to the Basic Amounts subscribed for, the Undersubscription
      Amount it has subscribed for; provided,
      however,
      that if
      the Undersubscription Amounts subscribed for exceed the difference between
      the
      total of all the Basic Amounts and the Basic Amounts subscribed for (the
“Available
      Undersubscription Amount”),
      each
      Buyer who has subscribed for any Undersubscription Amount shall be entitled
      to
      purchase only that portion of the Available Undersubscription Amount as the
      Basic Amount of such Buyer bears to the total Basic Amounts of all eligible
      Buyers that have subscribed for Undersubscription Amounts, subject to rounding
      by the Company to the extent its deems reasonably necessary. 

     

    (3) The
      Company shall have thirty (30) business days from the expiration of the Offer
      Period above to offer, issue, sell or exchange all or any part of such Offered
      Securities as to which a Notice of Acceptance has not been given by the eligible
      Buyers
      (the
“Refused
      Securities”),
      but
      only to the offerees described in the Offer Notice (if so described therein)
      and
      only upon terms and conditions (including, without limitation, unit prices
      and
      interest rates) that are not more favorable to the acquiring person or persons
      or less favorable to the Company than those set forth in the Offer
      Notice. 

     

    (4) In
      the
      event the Company shall propose to sell less than all the Refused Securities
      (any such sale to be in the manner and on the terms specified in Section
      4(o)(iii)(3)
      above),
      then each Buyer may, at its sole option and in its sole discretion but only
      within 5 business days after receiving notice of the Company’s reduction, reduce
      the number or amount of the Offered Securities specified in its Notice of
      Acceptance to an amount that shall be not less than the number or amount of
      the
      Offered Securities that such Buyer
      elected
      to purchase pursuant to Section
      4(o)(iii)(2)
      above
      multiplied by a fraction, (i) the numerator of which shall be the number or
      amount of Offered Securities the Company actually proposes to issue, sell or
      exchange (including Offered Securities to be issued or sold to Buyers
      pursuant to Section
      4(o)(iii)(3)
      above
      prior to such reduction) and (ii) the denominator of which shall be the original
      amount of the Offered Securities. In the event that any Buyer
      so
      elects to reduce the number or amount of Offered Securities specified in its
      Notice of Acceptance, the Company may not issue, sell or exchange more than
      the
      reduced number or amount of the Offered Securities unless and until such
      securities have again been offered to the Buyers in accordance with Section
      4(o)(iii)(1)
      above.

     

    (5) Upon
      the
      closing of the issuance, sale or exchange of all or less than all of the Refused
      Securities, the Buyers
      shall
      promptly acquire from the Company, and the Company shall issue to the
Buyers,
      the
      number or amount of Offered Securities specified in the Notices of Acceptance,
      as reduced pursuant to Section
      4(o)(iii)(4)
      above if
      the Buyers
      have so
      elected, upon the terms and conditions specified in the Offer. Notwithstanding
      anything to the contrary contained in this Agreement, even if the Company does
      not consummate the closing of the issuance, sale or exchange of all or less
      than
      all of the Refused Securities within thirty (30) business days of the expiration
      of the Offer Period, the Company shall issue to the Buyers
      the
      number or amount of Offered Securities specified in the Notices of Acceptance,
      as reduced pursuant to Section
      4(o)(iii)(4)
      above if
      the Buyers
      have so
      elected, upon the terms and conditions specified in the Offer. The purchase
      by
      the Buyers
      of any
      Offered Securities shall be on substantially the same terms, conditions and
      documentation as applicable to the issuance, sale or exchange of the Refused
      Securities, but if there has been no such issuance, sale or exchange of Refused
      Securities then the purchase by the Buyers shall be subject in all cases to
      the
      preparation, execution and delivery by the Company and the Buyers
      of a
      purchase agreement relating to such Offered Securities reasonably satisfactory
      in form and substance to the Buyers
      and
      their respective counsel. 

     

    
      
         

      

      
        26

        
          

        

      

      
         

      

    

     

    (6) Any
      Offered Securities not acquired by the Buyers
      or
      other persons in accordance with Section
      4(o)(iii)(3)
      above
      may not be issued, sold or exchanged until they are again offered to the
      eligible Buyers
      under
      the procedures specified in this Agreement. 

     

    (iv) The
      restrictions contained in Sections
      4(o)(ii)
      and
4(o)(iii)
      above
      shall not apply in connection with the issuance of any Excluded Securities.
      

     

    (v) Notwithstanding
      anything to the contrary contained in this Section
      4(o),
      in
      connection with any Subsequent Placement involving a public primary offering,
      the Company shall deliver the Offer Notice to the Buyers
      on the
      later of (i) five (5) business days prior to the proposed pricing of the
      Subsequent Placement or (ii) the commencement of marketing of the Subsequent
      Placement, but in no event less than one (1) business day prior to the proposed
      pricing date of the Subsequent Placement, and the Offer Notice shall only be
      required to provide the reasonably anticipated transaction terms (but not
      pricing) and description of the Offered Securities. 

     

    (p) Stockholder
      Approval.
      If,
      pursuant to the terms of the Notes, the Buyers reasonably believe that
      conversion of the Notes could violate rules of the Principal Market absent
      shareholder approval, upon the request of the Required Lenders (as defined
      in
      the Notes), the Company shall provide each stockholder entitled to vote at
      a
      special or annual meeting of stockholders of the Company (the “Stockholder
      Meeting”),
      a
      proxy statement, substantially in the form which has been previously reviewed
      by
      the Buyers, soliciting each such stockholder’s affirmative vote at the
      Stockholder Meeting for approval of resolutions (the “Resolutions”)
      providing for the Company’s ability to issue share of Common Stock in connection
      with the conversion of the Securities in excess of the limitations imposed
      by
      the Principal Market absent stockholder approval (such affirmative approval
      being referred to herein as the “Stockholder
      Approval”
and
      the
      date such approval is obtained, the “Stockholder
      Approval Date”),
      and
      the Company shall cause the Board of Directors of the Company to recommend
      to
      its stockholders that they approve the Resolutions and use its best efforts
      to
      solicit the stockholders’ approval of the Resolutions. If, despite the Company’s
      reasonable best efforts the Stockholder Approval is not promptly obtained,
      the
      Company shall cause an additional Stockholder Meeting to be held each six month
      period thereafter until such Stockholder Approval is obtained.

     

    
      
         

      

      
        27

        
          

        

      

      
         

      

    

     

    (q) No
      New
      Shorting During Reset Measurement Period.
      The
      Buyers agree not to directly or indirectly open or create or increase a short
      or
      put equivalent position (or do anything which would reasonably be expected
      to
      induce a counterparty to open or create or increase a short or put equivalent
      position) in any securities of the Company during or within the 25 Trading
      Days
      before the 6-, 12-, 18-, 24-, 30-, 36-, 42-, 48-, 54-, or 60-month anniversary
      of the Closing if any Notes remain outstanding during such 25-Trading-Day
      period. Notwithstanding the foregoing, this covenant shall apply only to the
      Buyer designated as the “Lead
      Buyer”
on
      the
      Schedule of Buyers attached hereto and not any other parts of the Lead Buyer’s
      organization not otherwise controlled by Lead Buyer.

     

    5. REGISTER;
      TRANSFER AGENT INSTRUCTIONS.

     

    (a) Register.
      The
      Company shall maintain at its principal executive offices (or such other office
      or agency of the Company as it may designate by notice to each holder of
      Securities), a register for the Notes and the Warrants in which the Company
      shall record the name and address of the Person in whose name the Notes and
      the
      Warrants have been issued (including the name and address of each transferee),
      the principal amount of Notes and the exercise amount of the Warrants held
      by
      such Person and the number of Conversion Shares issuable upon conversion of
      the
      Notes and the Warrants. The Company shall keep the register open and available
      at all times during business hours for inspection of any Buyer or its legal
      representatives.

     

    (b) Transfer
      Agent Instructions.
      The
      Company shall issue irrevocable instructions to its transfer agent, and any
      subsequent transfer agent, to issue certificates or credit shares to the
      applicable balance accounts at The Depository Trust Company (“DTC”),
      registered in the name of each Buyer or its respective nominee(s), for the
      Conversion Shares upon conversion of the Notes in such amounts as specified
      in
      such amounts as specified from time to time by each Buyer to the Company upon
      conversion of the Notes in the form of Exhibit
      E
      (the
“Irrevocable
      Transfer Agent Instructions”).
      The
      Company warrants that no instruction other than the Irrevocable Transfer Agent
      Instructions referred to in this Section
      5(b),
      and
      stop transfer instructions to give effect to Section
      2(g)
      hereof,
      will be given by the Company to its transfer agent, and that the Securities
      shall otherwise be freely transferable on the books and records of the Company
      as and to the extent provided in this Agreement and the other Transaction
      Documents, subject to applicable law. If a Buyer effects a sale, assignment
      or
      transfer of the Securities in accordance with Section
      2(f),
      the
      Company shall permit the transfer and shall promptly instruct its transfer
      agent
      to issue one or more certificates or credit shares to the applicable balance
      accounts at DTC in such name and in such denominations as specified by such
      Buyer to effect such sale, transfer or assignment. In the event that such sale,
      assignment or transfer involves Conversion Shares sold, assigned or transferred
      pursuant to an effective registration statement or pursuant to Rule 144, the
      transfer agent shall issue such Securities to the Buyer, assignee or transferee,
      as the case may be, without any restrictive legend. The Company acknowledges
      that a breach by it of its obligations hereunder will cause irreparable harm
      to
      a Buyer. Accordingly, the Company acknowledges that the remedy at law for a
      breach of its obligations under this Section
      5(b)
      will be
      inadequate and agrees, in the event of a breach or threatened breach by the
      Company of the provisions of this Section
      5(b),
      that a
      Buyer shall be entitled, in addition to all other available remedies, to an
      order and/or injunction restraining any breach and requiring immediate issuance
      and transfer, without the necessity of showing economic loss and without any
      bond or other security being required.

     

    
      
         

      

      
        28

        
          

        

      

      
         

      

    

     

    6. CLOSING
      CONDITIONS OF THE COMPANY.

     

    The
      obligation of the Company hereunder to issue and sell the Notes and the Warrants
      to each Buyer at the Closing is subject to the satisfaction, at or before the
      Closing Date, of each of the following conditions, provided
      that
      these conditions are for the Company’s sole benefit and may be waived by the
      Company at any time in its sole discretion by providing each Buyer with prior
      written notice thereof:

     

    (i) Such
      Buyer shall have executed each of the Transaction Documents to which it is
      a
      party and delivered the same to the Company.

     

    (ii) Such
      Buyer and each other Buyer shall have delivered to the Company and the Escrow
      Agent, as applicable, the Purchase Price for the Notes and Warrants being
      purchased by such Buyer at the Closing by wire transfer of immediately available
      funds pursuant to the wire instructions provided by the Company and the Escrow
      Agent, as applicable.

     

    (iii) The
      representations and warranties of such Buyer shall be true and correct in all
      material respects as of the date when made and as of the Closing Date as though
      made at that time (except for representations and warranties that speak as
      of a
      specific date), and such Buyer shall have performed, satisfied and complied
      in
      all material respects with the covenants, agreements and conditions required
      by
      this Agreement to be performed, satisfied or complied with by such Buyer at
      or
      prior to the Closing Date.

     

    (iv) Such
      Buyer and each other Buyer and the Escrow Agent shall have duly executed and
      delivered to the Company the Escrow Agreement in the form attached hereto as
      Exhibit
      D.

     

    7. CLOSING
      CONDITIONS OF THE BUYERS.

     

    The
      obligations of each Buyer under this Agreement are subject to the satisfaction,
      at or before the Closing Date, of each of the following conditions, provided
      that
      these conditions are for each Buyer’s sole benefit and may be waived by such
      Buyer at any time in its sole discretion by providing the Company with prior
      written notice thereof:

     

    (i) The
      Company shall have duly executed and delivered to such Buyer (A) each of the
      Transaction Documents, (B) the Notes (in such principal amounts as such Buyer
      shall request being issued to such Buyer at the Closing pursuant to this
      Agreement), (C) the Warrants in such exercise amounts as such Buyer shall
      request being issued to such Buyer at the Closing of this Agreement, and (D)
      each of the Transaction Documents, the Notes and the Warrants shall continue
      to
      be in full force and effect.

     

    (ii) Such
      Buyer shall have received the opinion of (i) Heller Ehrman LLP, the Company’s
      outside counsel and (ii) Hubei Today law firm, the Company’s outside PRC counsel
      (or another mutually acceptable outside PRC counsel), satisfactory to such
      Buyer
      in its discretion, dated as of the Closing Date.

     

    
      
         

      

      
        29

        
          

        

      

      
         

      

    

     

    (iii) The
      Company shall have delivered to such Buyer a copy of the Irrevocable Transfer
      Agent Instructions, in the form of Exhibit E
      attached
      hereto, which instructions shall have been delivered to and acknowledged in
      writing by the Company’s transfer agent.

     

    (iv) The
      Company shall have delivered to such Buyer a certificate evidencing the
      formation and good standing of the Company and each of its Subsidiaries in
      such
      entity’s jurisdiction of formation issued by the Secretary of State (or
      comparable office) of such jurisdiction, as of a date within 15 days prior
      to
      the Closing Date.

     

    (v) The
      Company and the Escrow Agent shall have duly executed and delivered to such
      Buyer the Escrow Agreement in the form attached hereto as Exhibit
      D.

     

    (vi) The
      Company shall have delivered to such Buyer a certified copy of the Certificate
      of Incorporation as certified by the Secretary of State of the State (or
      comparable office of) Delaware as of the date within 15 days prior to the
      Closing Date.

     

    (vii) The
      Company shall have delivered to such Buyer a certificate, executed by the
      Secretary or Chief Financial Officer of the Company and dated as of the Closing
      Date, as to (i) the resolutions consistent with Section
      3(b)
      as
      adopted by the Company’s Board of Directors in a form reasonably acceptable to
      such Buyer, (ii) the Certificate of Incorporation and (iii) the Bylaws, each
      as
      in effect at the Closing, in the form attached hereto as Exhibit F.

     

    (viii) The
      representations and warranties of the Company shall be true and correct in
      all
      material respects as of the date when made and as of the Closing Date as though
      made at that time (except for representations and warranties that speak as
      of a
      specific date) and the Company shall have performed, satisfied and complied
      in
      all material respects with the covenants, agreements and conditions required
      by
      the Transaction Documents to be performed, satisfied or complied with by the
      Company at or prior to the Closing Date. Such Buyer shall have received a
      certificate, executed by the Chief Executive Officer or Chief Financial Officer
      of the Company, dated as of the Closing Date, to the foregoing effect and as
      to
      such other matters as may be reasonably requested by such Buyer in the form
      attached hereto as Exhibit
      G.

     

    (ix) The
      Company shall have delivered to such Buyer a letter from the Company’s transfer
      agent certifying the number of shares of Common Stock outstanding as of a date
      within 15 days prior to the Closing Date.

     

    (x) The
      Common Stock (1) shall be designated for quotation or listed on the Principal
      Market and (2) shall not have been suspended, as of the Closing Date, by the
      SEC
      or the Principal Market from trading on the Principal Market nor shall
      suspension by the SEC or the Principal Market have been threatened, as of the
      Closing Date, either (A) in writing by the SEC or the Principal Market or (B)
      by
      falling below the minimum listing maintenance requirements of the Principal
      Market.

     

    (xi) The
      Company shall have obtained all governmental, regulatory or third party consents
      and approvals, if any, necessary for the sale of the Securities.

     

    
      
         

      

      
        30

        
          

        

      

      
         

      

    

     

    (xii) The
      Company shall have delivered to such Buyer such other usual and customary
      documents, instruments and certificates as such Buyer or its counsel may
      reasonably request.

     

    8. MISCELLANEOUS;
      TERMINATION.

     

    (a) Governing
      Law; Jurisdiction; Jury Trial.
      All
      questions concerning the construction, validity, enforcement and interpretation
      of this Agreement shall be governed by the internal laws of the State of New
      York, without giving effect to any choice of law or conflict of law provision
      or
      rule (whether of the State of New York or any other jurisdictions) that would
      cause the application of the laws of any jurisdictions other than the State
      of
      New York. Each party hereby irrevocably submits to the exclusive jurisdiction
      of
      the state and federal courts sitting in The City of New York, Borough of
      Manhattan, for the adjudication of any dispute hereunder or in connection
      herewith or with any transaction contemplated hereby or discussed herein, and
      hereby irrevocably waives, and agrees not to assert in any suit, action or
      proceeding, any claim that it is not personally subject to the jurisdiction
      of
      any such court, that such suit, action or proceeding is brought in an
      inconvenient forum or that the venue of such suit, action or proceeding is
      improper. 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 to such party at the address for such notices to it
      under
      this Agreement and agrees that such service shall constitute good and sufficient
      service of process and notice thereof. Nothing contained herein shall be deemed
      to limit in any way any right to serve process in any manner permitted by law.
      EACH
      PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
      REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
      CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
      HEREBY. 

     

    (b) Counterparts.
      This
      Agreement may be executed in two or more identical counterparts, all of which
      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;
      provided
      that a
      facsimile signature shall be considered due execution and shall be binding
      upon
      the signatory thereto with the same force and effect as if the signature were
      an
      original, not a facsimile signature.

     

    (c) Headings.
      The
      headings of this Agreement are for convenience of reference and shall not form
      part of, or affect the interpretation of, this Agreement.

     

    (d) Severability.
      If any
      provision of this Agreement shall be invalid or unenforceable in any
      jurisdiction, such invalidity or unenforceability shall not affect the validity
      or enforceability of the remainder of this Agreement in that jurisdiction or
      the
      validity or enforceability of any provision of this Agreement in any other
      jurisdiction.

     

    (e) Entire
      Agreement; Amendments.
      This
      Agreement and the other Transaction Documents supersede all other prior oral
      or
      written agreements between the Buyers, the Company, their affiliates and Persons
      acting on their behalf with respect to the matters discussed herein, and this
      Agreement, the other Transaction Documents and the schedules and instruments
      referenced herein and therein contain the entire understanding of the parties
      with respect to the matters covered herein and therein and, except as
      specifically set forth herein or therein, neither the Company nor any Buyer
      makes any representation, warranty, covenant or undertaking with respect to
      such
      matters. The Company and each Buyer confirms that the non-disclosure agreement
      between the Company and each such Buyer is not superseded. No provision of
      this
      Agreement may be amended other than by an instrument in writing signed by the
      Company and the holders of at least a majority of the aggregate number of
      Registrable Securities issued and issuable hereunder and under the Notes and
      its
      Warrants, and any amendment to this Agreement made in conformity with the
      provisions of this Section
      9(e)
      shall be
      binding on all Buyers and holders of Securities, as applicable. No provision
      hereof may be waived other than by an instrument in writing signed by the party
      against whom enforcement is sought. No such amendment shall be effective to
      the
      extent that it applies to less than all of the holders of the applicable
      Securities then outstanding. 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 also is offered
      to
      all of the parties to the Transaction Documents or holders of Notes and
      Warrants, as the case may be. The Company has not, directly or indirectly,
      made
      any agreements with any Buyers relating to the terms or conditions of the
      transactions contemplated by the Transaction Documents except as set forth
      in
      the Transaction Documents. Without limiting the foregoing, the Company confirms
      that, except as set forth in this Agreement, the Lead Buyer has not made any
      commitment or promise nor has any other obligation to provide any financing
      to
      the Company.

     

    
      
         

      

      
        31

        
          

        

      

      
         

      

    

     

    (f) Notices.
      Any
      notices, consents, waivers or other communications required or permitted to
      be
      given under the terms of this Agreement must be in writing and will be deemed
      to
      have been delivered: (i) upon receipt, when delivered personally; (ii) upon
      receipt, when sent by facsimile (provided confirmation of transmission is
      mechanically or electronically generated and kept on file by the sending party);
      or (iii) one Business Day after deposit with an internationally recognized
      courier service, in each case properly addressed to the party to receive the
      same. The addresses and facsimile numbers for such communications shall
      be:

     

    If
      to the
      Company:

     

    China
      Automotive Systems, Inc.

    No.
      1
      Henglong Road

    Yu
      Giao
      Development Zone

    Shashi
      District, Jing Zhou City

    Hubei
      Province, People’s Republic of China

    Facsimile:
       (86)
      27-5980-8808

    Attention:
       Hanlin
      Chen

     

    
      
         

      

      
        32

        
          

        

      

      
         

      

    

    

    With
      a
      copy to:

     

    Heller
      Ehrman LLP

    4350
      La
      Jolla Village Drive

    Seventh
      Floor 

    San
      Diego, CA 92122

    Facsimile:  (858)
      587-5903

    Attention:  Hayden
      J.
      Trubitt

    

    If
      to the
      Transfer Agent:

    

    Securities
      Transfer Corporation

    2591
      Dallas Parkway #102

    Frisco,
      TX 75034

    Facsimile:
       (469)
      633-0088

    Attention: George
      Johnson

     

    If
      to a
      Buyer, to its address and facsimile number set forth on the Schedule of Buyers,
      with copies to such Buyer’s representatives as set forth on the Schedule of
      Buyers, or to such other address and/or facsimile number and/or to the attention
      of such other Person as the recipient party has specified by written notice
      given to each other party five (5) days prior to the effectiveness of such
      change. Written confirmation of receipt (A) given by the recipient of such
      notice, consent, waiver or other communication, (B) mechanically or
      electronically generated by the sender’s facsimile machine containing the time,
      date, recipient facsimile number and an image of the first page of such
      transmission or (C) provided by an internationally recognized courier service
      shall be rebuttable evidence of personal service, receipt by facsimile or
      receipt from an internationally recognized courier service in accordance with
      clause (i), (ii) or (iii) above, respectively.

     

    (g) Successors
      and Assigns.
      This
      Agreement shall be binding upon and inure to the benefit of the parties and
      their respective successors and assigns, including any purchasers of the Notes
      or Warrants. The Company shall not assign this Agreement or any rights or
      obligations hereunder without the prior written consent of a majority in
      interest of the holders of Registrable Securities issued and issuable hereunder,
      including by way of a Fundamental Transaction (unless the Company is in
      compliance with the applicable provisions governing Fundamental Transactions
      set
      forth in the Notes). A Buyer may assign some or all of its rights hereunder
      to
      any accredited investor with the consent of the Company, such consent not to
      be
      unreasonably withheld or delayed.

     

    (h) No
      Third Party Beneficiaries.
      This
      Agreement is intended for the benefit of the parties hereto and their respective
      permitted successors and assigns, and is not for the benefit of, nor may any
      provision hereof be enforced by, any other Person.

     

    (i) Survival.
      The
      representations and warranties of the Company and the Buyers contained in
Sections
      2
      and
3,
      and the
      agreements and covenants set forth in Sections
      4,
      5
      and
8
      shall
      survive the Closing. Each Buyer shall be responsible only for its own
      representations, warranties, agreements and covenants hereunder.

     

    
      
         

      

      
        33

        
          

        

      

      
         

      

    

     

    (j) Further
      Assurances.
      Each
      party shall do and perform, or cause to be done and performed, all such further
      acts and things, and shall execute and deliver all such other agreements,
      certificates, instruments and documents, as any other party may reasonably
      request in order to carry out the intent and accomplish the purposes of this
      Agreement and the consummation of the transactions contemplated
      hereby.

     

    (k) Indemnification.
      In
      consideration of each Buyer’s execution and delivery of the Transaction
      Documents and acquiring the Securities thereunder and in addition to all of
      the
      Company’s other obligations under the Transaction Documents, the Company shall
      defend, protect, indemnify and hold harmless each Buyer and each other holder
      of
      the Securities and all of their stockholders, partners, members, officers,
      directors, employees and direct or indirect investors and any of the foregoing
      Persons’ agents or other representatives (including, without limitation, those
      retained in connection with the transactions contemplated by this Agreement)
      (collectively, the “Indemnitees”)
      from
      and against any and all actions, causes of action, suits, claims, losses, costs,
      penalties, fees, liabilities and damages, and expenses in connection therewith
      (irrespective of whether any such Indemnitee is a party to the action for which
      indemnification hereunder is sought), and including reasonable attorneys’ fees
      and disbursements (the “Indemnified
      Liabilities”),
      incurred by any Indemnitee as a result of, or arising out of, or relating to
      (i)
      any misrepresentation or breach of any representation or warranty made by the
      Company in the Transaction Documents or any other certificate, instrument or
      document contemplated hereby or thereby, (ii) any breach of any covenant,
      agreement or obligation of the Company contained in the Transaction Documents
      or
      any other certificate, instrument or document contemplated hereby or thereby
      or
      (iii) any cause of action, suit or claim brought or made against such Indemnitee
      by a third party (including for these purposes a derivative action brought
      on
      behalf of the Company) and arising out of or resulting from (1) the execution,
      delivery, performance or enforcement against the Company of the Transaction
      Documents or any other certificate, instrument or document contemplated hereby
      or thereby, (2) any transaction financed or to be financed in whole or in part,
      directly or indirectly, with the proceeds of the issuance of the Securities,
      (3)
      any disclosure made by such Buyer pursuant to Section
      4(i),
      or (4)
      the status of such Buyer or holder of the Securities as an investor in the
      Company pursuant to the transactions contemplated by the Transaction Documents.
      To the extent that the foregoing undertaking by the Company may be unenforceable
      for any reason, the Company shall make the maximum contribution to the payment
      and satisfaction of each of the Indemnified Liabilities that is permissible
      under applicable law. Except as otherwise set forth herein, the mechanics and
      procedures with respect to the rights and obligations under this Section
      9(k)
      shall be
      the same as those set forth in Section
      6
      of the
      Registration Rights Agreement.

     

    (l) No
      Strict Construction.
      The
      language used in this Agreement will be deemed to be the language chosen by
      the
      parties to express their mutual intent, and no rules of strict construction
      will
      be applied against any party.

     

    (m) Remedies.
      Each
      Buyer and each holder of the Securities shall have all rights and remedies
      set
      forth in the Transaction Documents and all rights and remedies which such
      holders have been granted at any time under any other agreement or contract
      and
      all of the rights which such holders have under any law. Any Person having
      any
      rights under any provision of this Agreement shall be entitled to enforce such
      rights specifically (without posting a bond or other security), to recover
      damages by reason of any breach of any provision of this Agreement and to
      exercise all other rights granted by law. Furthermore, the Company recognizes
      that in the event that it fails to perform, observe, or discharge any or all
      of
      its obligations under the Transaction Documents, any remedy at law may prove
      to
      be inadequate relief to the Buyers. The Company therefore agrees that the Buyers
      shall be entitled to seek temporary and permanent injunctive relief in any
      such
      case without the necessity of proving actual damages and without posting a
      bond
      or other security.

     

    
      
         

      

      
        34

        
          

        

      

      
         

      

    

     

    (n) Rescission
      and
      Withdrawal Right.
      Notwithstanding anything to the contrary contained in (and without limiting
      any
      similar provisions of) the Transaction Documents, whenever any Buyer 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 Buyer 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.

     

    (o) Payment
      Set Aside.
      To the
      extent that the Company makes a payment or payments to the Buyers hereunder
      or
      pursuant to any of the other Transaction Documents or the Buyers enforce or
      exercise their rights hereunder or 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, foreign, 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.

     

    (p) Independent
      Nature of Buyers’ Obligations and Rights.
      The
      obligations of each Buyer under any Transaction Document are several and not
      joint with the obligations of any other Buyer, and no Buyer shall be responsible
      in any way for the performance of the obligations of any other Buyer under
      any
      Transaction Document. Nothing contained herein or in any other Transaction
      Document, and no action taken by any Buyer pursuant hereto or thereto, shall
      be
      deemed to constitute the Buyers as, and the Company acknowledges that the Buyers
      do not so constitute, a partnership, an association, a joint venture or any
      other kind of entity, or create a presumption that the Buyers are in any way
      acting in concert or as a group, and the Company will not assert any such claim
      with respect to such obligations or the transactions contemplated by the
      Transaction Documents and the Company acknowledges that the Buyers are not
      acting in concert or as a group with respect to such obligations or the
      transactions contemplated by the Transaction Documents. The Company acknowledges
      and each Buyer confirms that it has independently participated in the
      negotiation of the transaction contemplated hereby with the advice of its own
      counsel and advisors. Each Buyer shall be entitled to independently protect
      and
      enforce its rights, including, without limitation, the rights arising out of
      this Agreement or out of any other Transaction Documents, and it shall not
      be
      necessary for any other Buyer to be joined as an additional party in any
      proceeding for such purpose.

     

    
      
         

      

      
        35

        
          

        

      

      
         

      

    

     

    (q) Termination.
      Notwithstanding any other provision in this Agreement to the contrary, in the
      event the Closing does not occur prior to March 31, 2008 (the “Termination
      Date”),
      this
      Agreement may be terminated by the Lead Buyer at any time on or after the
      Termination Date. In the event the Lead Buyer terminates this Agreement pursuant
      to this Section
      8(q),
      this
      Agreement shall be of no further force and effect. 

     

    [SIGNATURE
      PAGES FOLLOW]

     

    
      
         

      

      
        36

        
          

        

      

      
         

      

       

    

    IN
      WITNESS WHEREOF,
      each
      Buyer and the Company have caused their respective signature page to this
      Securities Purchase Agreement to be duly executed as of the date first written
      above.

     

    
      	 	 	 
	 	COMPANY:
	 	 
	 	
              CHINA
                AUTOMOTIVE SYSTEMS, INC.

            
	 
 	 
 	 
 
	
            	By:  	/s/
              Hanlin Chan
	 	
              
Name:
              Hanlin Chan
	 	
              Title:
                Chairman

            

    

     

    [Securities
      Purchase Agreement Signature Page]

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    IN
      WITNESS WHEREOF,
      each
      Buyer and the Company have caused their respective signature page to this
      Securities Purchase Agreement to be duly executed as of the date first written
      above.

     

    
      	 	 	 
	 	
              BUYERS:

            
	 	 
	 	
              LEHMAN
                BROTHERS COMMERCIAL 

              CORPORATION
                ASIA LIMITED

            
	 
 	 
 	 
 
	
            	By:  	/s/
              Steven J. Qian
	 	
              
Name:
              Steven J. Qian
	 	
              Title:
                Senior Vice President

            

    

     

    
      	 	 	 
	 	YA
              GLOBAL
              INVESTMENTS, L.P.
	 	 	 
	 	By:  	/s/ Yorkville
              Advisors, LLC,
	 	 	Investment Manager
	 
 	 
 	 
 
	
            	By:  	/s/
              Mark
              Angelo
	 	
              
Name:
              Mark Angelo
	 	
              Title:
                President and Portfolio
                Manager

            

    

     

    [Securities
      Purchase Agreement Signature Page]

     

    
      
         

      

      
         

        
          

        

      

      
         

      

       

    

    SCHEDULE
      OF BUYERS

     

    
      	
              Buyer

            	 	
              Address
                and

              Facsimile
                Number

            	 	
              Aggregate

              Principal

              Amount
                of

              Notes

            	 	
               

               

              Aggregate
                Warrant Exercise Amount

            	 	
              Purchase
                Price of Notes and Warrants

            	 	
              Legal
                Representative’s Address and Facsimile Number

            
	
              (1)

            	 	
              (2)

            	 	
              (3)

            	 	
              (4)

            	 	
              (5)

            	 	
              (6)

            
	
              Lehman
                Brothers Commercial Corporation Asia Limited

               

              (Lead
                Buyer)

            	 	
              24F,
                Two International Finance Center

              8,
                Finance Street

              Central,
                Hong Kong

              +852-2372-5468

              Attn:
                Steven Qian

              Email:
                steven.qian@lehman.com 

            	 	
              $30,000,000

              to
                be allocated as follows:

              $8,571,429
                for the Closing Note;

              $6,428,571
                for the Henglong Note; and

              $15,000,000
                for the Escrow Note

            	 	
              $10,000,000

              to
                be allocated as follows:

              $5,000,000
                for the Closing Warrants; and

              $5,000,000
                for the Escrow Warrants

            	 	
              $30,000,000

            	 	
              Goodwin
                Procter LLP

              Exchange
                Place

              Boston,
                MA 02109 

              Telephone:
                (617) 570-1000

              Facsimile:
                (617) 525-1231

              Attention:
                Jocelyn M. Arel and

              James
                A. Hutchinson

            
	 	 	 	 	 	 	 	 	 	 	 
	
              YA
                Global Investments, L.P.

            	 	
              c/o
                Yorkville Advisors, LLC

              101
                Hudson Street

              Suite
                3700

              Jersey
                City, NJ 07302

              (201)
                985-8266

              Attn:
                David Gonzalez

              Email:
                dgonzalez@yorkvilleadvisors.com

            	 	
              $5,000,000
                

              to
                be allocated as follows:

              $1,428,571
                for the Closing Note;

              $1,071,429
                for the Henglong Note; and

              $2,500,000
                for the Escrow Note

            	 	
              $1,666,666
                

              to
                be allocated as follows:

              $833,333
                for the Closing Warrants; and

              $833,333
                for the Escrow Warrants

            	 	
              $5,000,000

            	 	
              David
                Gonzalez, Esq.

              101
                Hudson Street

              Suite
                3700

              Jersey
                City, NJ 07302

              Telephone:
                (201) 985-8300

              Facsimile:
                (201) 985-8744

            

    

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    EXHIBITS

     

    
      
        	
                Exhibit
                  A-1

              	 	
                Form
                  of Closing Note

              
	
                Exhibit
                  A-2

              	 	
                Form
                  of Henglong Note

              
	
                Exhibit
                  A-3

              	 	
                Form
                  of Escrow Note

              
	
                Exhibit
                  B-1

              	 	
                Form
                  of Closing Warrant

              
	
                Exhibit
                  B-2

              	 	
                Form
                  of Escrow Warrant

              
	
                Exhibit
                  C

              	 	
                Form
                  of Registration Rights Agreement

              
	
                Exhibit
                  D

              	 	
                Form
                  of Escrow Agreement

              
	
                Exhibit
                  E

              	 	
                Form
                  of Irrevocable Transfer Agent Instructions

              
	
                Exhibit
                  F

              	 	
                Form
                  of Secretary’s Certificate

              
	
                Exhibit
                  G

              	 	
                Form
                  of Officer’s Certificate

              

      

    

     

    SCHEDULES

     

    
      
        	
                Schedule
                  3(a)

              	 	
                Subsidiaries

              
	
                Schedule
                  3(k)

              	 	
                SEC
                  Documents

              
	
                Schedule
                  3(l)

              	 	
                Absence
                  of Certain Changes

              
	
                Schedule
                  3(q)

              	 	
                Transactions
                  with Affiliates

              
	
                Schedule
                  3(r)

              	 	
                Equity
                  Capitalization

              
	
                Schedule
                  3(s)

              	 	
                Indebtedness
                  and Other Contracts

              
	
                Schedule
                  3(t)

              	 	
                Absence
                  of Litigation

              
	
                Schedule
                  3(x)(v)

              	 	
                Company
                  Registered Intellectual Property

              
	
                Schedule
                  3(z)

              	 	
                Subsidiary
                  Rights

              
	
                Schedule
                  3(ee)

              	 	
                Ranking
                  of Notes

              
	
                Schedule
                  4(o)

              	 	
                Permitted
                  Issuances/TransactionsEXECUTION
      VERSION

    ESCROW
      AGREEMENT

     

    THIS
      ESCROW AGREEMENT
      (this
“Agreement”)
      is
      entered into this 15th day of February, 2008, by and among Lehman Brothers
      Commercial Corporation Asia Limited, a Hong Kong company (“LBCCA”),
      YA
      Global Investments, L.P., a Cayman Islands limited partnership (“YAGI”
and,
      together with LBCCA, the “Purchasers”),
      China
      Automotive Systems, Inc., a Delaware corporation (the “Company”),
      and
      U.S. Bank National Association, a national banking association, as escrow agent
      hereunder (the “Escrow
      Agent”).
      Capitalized terms used herein and not otherwise defined shall have the meanings
      assigned to such terms in the Purchase Agreement (as defined
      below).

     

    RECITALS

     

    WHEREAS,
      the
      Purchasers and the Company have entered into that certain Securities Purchase
      Agreement, dated as of February 1, 2008 (the “Purchase
      Agreement”),
      pursuant to which the Purchasers agreed to purchase certain securities of the
      Company; and

     

    WHEREAS,
      pursuant
      to the terms of the Purchase Agreement, an amount equal to $17,500,000 (the
      “Deposit
      Amount”)
      that
      would have otherwise been paid by the Purchasers to the Company in connection
      with the transactions contemplated by the Purchase Agreement is to be paid
      by
      the Purchasers to the Escrow Agent and held in escrow (the “Escrow
      Account”),
      pursuant to the Purchase Agreement.

     

    AGREEMENT

     

    NOW,
      THEREFORE, in
      consideration of the mutual agreements and covenants contained herein and other
      good and valuable consideration, the sufficiency of which are hereby
      acknowledged, the parties hereto agree as follows:

     

    1. Receipt
      of Escrow.
      By its
      signature below, the Escrow Agent acknowledges receipt of funds from the
      Purchasers in an amount equal to the Deposit Amount (together with the
      investment return thereon, the “Escrow Amount”). 

     

    2. Investment
      of Escrow. 

     

    (a) The
      Escrow Amount shall be invested by the Escrow Agent in First American Prime
      Obligation Fund - Class Y, or as otherwise directed by LBCCA and the
      Company.

     

    (b) All
      assets held in the Escrow Account shall be registered in the name of any
      nominees selected by the Escrow Agent under this Agreement. With respect to
      any
      funds received by the Escrow Agent for deposit into the Escrow Account or any
      direction received by the Escrow Agent with respect to investment of any funds
      in the Escrow Account after 10:00 a.m., Eastern Time, the Escrow Agent shall
      not
      be required to invest such funds or to effect such investment instruction until
      the next day upon which banks in New York City are open for business. The Escrow
      Agent shall be entitled to sell or redeem any such investment as necessary
      to
      make any distributions required under this Agreement and shall not be liable
      or
      responsible for any loss resulting from any such sale or
      redemption.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    3. Release
      of Escrow.

     

    (a) On
      or
      prior to April 30, 2008, the Purchasers and the Company shall deliver to the
      Escrow Agent, joint written instructions (“Joint
      Written Instructions”)
      setting forth instructions for the Escrow Agent to release all or a portion
      of
      the Escrow Amount in an amount set forth therein to the Purchasers (pro
      rata
      in
      accordance with their respective Applicable Percentages (as defined below))
      or
      to the Company, as the case may be, as specified in such Joint Written
      Instructions. The “Applicable
      Percentage”
of
      each
      Purchaser is set forth opposite such Purchaser’s name on Annex A
      attached
      hereto. 

     

    (b) The
      Escrow Agent shall release all or portion of the Escrow Amount as expressly
      directed by the Joint Written Instructions.

     

    (c) The
      Purchasers and the Company agree that they will act in good faith to execute
      the
      Joint Written Instructions in accordance with the terms of this Agreement and
      the Purchase Agreement.

     

    (d) Notwithstanding
      the foregoing, the Escrow Agent shall disburse the Escrow Amount (or any portion
      thereof) in accordance with a notice from either the Purchasers or the Company
      of a final, non-appealable order from a court of competent jurisdiction in
      the
      United States, along with a copy of such order, pursuant to which such court
      has
      determined whether and to what extent the Purchasers or the Company, as
      applicable, are entitled to the Escrow Amount (or any portion
      thereof).

     

    4. Duties
      of the Escrow Agent.

     

    (a) Duties
      in General.

     

    (i) The
      Escrow Agent undertakes to perform only such duties as are expressly set forth
      herein (and required by applicable law), which the parties agree are ministerial
      in nature, and no duties shall be implied. If in doubt as to its duties and
      responsibilities hereunder, the Escrow Agent may consult with counsel of its
      choice and shall be protected in any action taken or omitted in connection
      with
      the advice or opinion of such counsel.

     

    (ii) If
      the
      Escrow Agent becomes involved in litigation with respect to this Agreement
      for
      any reason, it is hereby authorized to deposit the Escrow Amount with the clerk
      of such court in which such litigation is pending, or to interplead all
      interested parties in any court of competent jurisdiction and to deposit with
      the clerk of such court the Escrow Amount. Upon the happening of either of
      the
      above, the Escrow Agent shall be fully relieved and discharged of any further
      duties hereunder.

     

    (iii) If,
      at
      any time, (i) there shall exist any dispute among the parties hereto with
      respect to the holding or disposition of any portion of the Escrow Amount or
      any
      other obligations of the Escrow Agent hereunder, (ii) the Escrow Agent is unable
      to determine, to the Escrow Agent’s sole satisfaction, the proper disposition of
      any portion of the Escrow Amount or the Escrow Agent’s proper actions with
      respect to its obligations hereunder, or (iii) the Purchasers and the Company
      have not within fifteen (15) business days of the furnishing by the Escrow
      Agent
      of a notice of resignation pursuant to Section 6, appointed a successor Escrow
      Agent to act hereunder, then the Escrow Agent may, in its sole discretion,
      take
      either or both of the following actions:

     

    (A) suspend
      the performance of any of its obligations under this Agreement until such
      dispute or uncertainty shall be resolved to the sole satisfaction of the Escrow
      Agent or until a successor Escrow Agent shall have been appointed (as the case
      may be); or

     

    
      
        
        

      

      
        -2-

        
          

        

      

      
        
        

      

    

     

    (B) petition
      (by means of an interpleader action or any other appropriate method) any court
      of competent jurisdiction in any state or federal court located in the State
      of
      New York, for instructions with respect to such dispute or uncertainty, and
      to
      the extent required or permitted by law, pay into such court, for holding and
      disposition in accordance with the instructions of such court, the Escrow
      Amount, after deduction and payment to the Escrow Agent of all fees and expenses
      (including court costs and reasonable attorneys’ fees) payable to, actually
      incurred by, or reasonably expected to be incurred by the Escrow Agent in
      connection with the performance of its duties and the exercise of its rights
      hereunder.

     

    The
      Escrow Agent shall have no liability to the Purchasers, the Company, their
      respective shareholders or members or any other person with respect to any
      such
      suspension of performance or disbursement into such court, including, without
      limitation, any liability that may arise, or be alleged to have arisen, out
      of
      or as a result of any delay in the disbursement of funds held in the Escrow
      Account or any delay in or with respect to any other action required or
      requested of the Escrow Agent.

     

    (b) Exculpation.
       

     

    (i) The
      Escrow Agent shall have no liability under and no duty to inquire as to the
      provisions of any agreement other than this Agreement (except as to the
      capitalized terms used herein and defined in the Purchase Agreement). The Escrow
      Agent shall not be liable for any action taken or omitted by it in good faith
      except to the extent that a court of competent jurisdiction determines that
      the
      Escrow Agent’s gross negligence or willful misconduct was the primary cause of
      any loss to the Purchasers or the Company. The Escrow Agent’s sole
      responsibility shall be for the safekeeping and disbursement of the Escrow
      Amount in accordance with the terms of this Agreement. The Escrow Agent may
      rely
      upon any notice, instruction, request or other instrument, not only as to its
      due execution, validity and effectiveness, but also as to the truth and accuracy
      of any information contained therein, which the Escrow Agent shall believe
      to be
      genuine and to have been signed or presented by the person or parties purporting
      to sign the same. In no event shall the Escrow Agent be liable for incidental,
      indirect, special, and consequential or punitive damages (including, without
      limitation, lost profits), even if the Escrow Agent has been advised of the
      likelihood of such loss or damage and regardless of the form of action. The
      Escrow Agent shall not be obligated to take any legal action or commence any
      proceeding in connection with the Escrow Account, any account in which the
      Escrow Amount is deposited, this Agreement or the Purchase Agreement, or to
      appear in, prosecute or defend any such legal action or proceeding. The Escrow
      Agent may consult legal counsel selected by it in the event of any dispute
      or
      question as to the construction of any of the provisions hereof or of any other
      agreement or of its duties hereunder, or relating to any dispute involving
      any
      party hereto, and shall incur no liability and shall be fully protected from
      any
      liability whatsoever in acting in accordance with a written opinion of such
      counsel. Each of the Purchasers (in accordance with their Applicable
      Percentages), on the one hand, and the Company, on the other hand, severally
      and
      not jointly, shall promptly pay, upon demand, one-half of the reasonable fees
      and expenses of any such legal counsel. 

     

    
      
        
        

      

      
        -3-

        
          

        

      

      
        
        

      

    

     

    (ii) The
      Escrow Agent is authorized, in its sole discretion, to comply with orders issued
      or process entered by any court of competent jurisdiction with respect to the
      Escrow Account. If any portion of the Escrow Amount is at any time attached,
      garnished or levied upon under any court order, or in case the payment,
      assignment, transfer, conveyance or delivery of any such property shall be
      stayed or enjoined by any court order, or in case any order, judgment or decree
      shall be made or entered by any court of competent jurisdiction affecting such
      property or any part thereof, then and in any such event, the Escrow Agent
      is
      authorized, in its sole discretion, to rely upon and comply with any such order,
      writ, judgment or decree; and if the Escrow Agent complies with any such order,
      writ, judgment or decree, it shall not be liable to any of the parties hereto
      or
      to any other person or entity by reason of such compliance even though such
      order, writ, judgment or decree may be subsequently reversed, modified,
      annulled, set aside or vacated. 

     

    (c) No
      Additional Duties.
      The
      Escrow Agent shall have no duties except those that are expressly set forth
      herein, and it shall not be bound by any notice of a claim or demand hereunder,
      or any waiver, modification, amendment, termination or rescission of this
      Agreement, unless received by it in writing.

     

    (d) Miscellaneous.
      The
      Escrow Agent may execute any of its powers or responsibilities hereunder and
      exercise any rights hereunder either directly or by or through its agents or
      attorneys. The Escrow Agent shall not be responsible for and shall not be under
      a duty to examine or pass upon the validity, binding effect, execution or
      sufficiency of this Agreement or of any agreement amendatory or supplemental
      hereto.

     

    5. Indemnification
      of the Escrow Agent. 

     

    (a) From
      and
      at all times after the date of this Agreement, each of the Purchasers (in
      accordance with their Applicable Percentages), on the one hand, and the Company,
      on the other hand, severally and not jointly, shall, to the fullest extent
      permitted by law, defend, indemnify and hold harmless the Escrow Agent and
      each
      director, officer, employee, attorney, agent and affiliate of the Escrow Agent
      (collectively, the “Indemnified
      Parties”)
      against one-half of any and all actions, claims (whether or not valid), losses,
      damages, liabilities, costs and expenses of any kind or nature whatsoever
      (including, without limitation, reasonable attorneys’ fees, costs and expenses)
      incurred by or asserted against any of the Indemnified Parties from and after
      the date hereof, whether direct, indirect or consequential, as a result of
      or
      arising from or in any way relating to any claim, demand, suit, action or
      proceeding (including any inquiry or investigation) by any person, including,
      without limitation, the Purchasers or the Company, whether threatened or
      initiated, asserting a claim for any legal or equitable remedy against any
      person under any statute or regulation, including, without limitation, any
      federal or state securities laws, or under any common law or equitable cause
      or
      otherwise, arising from or in connection with the negotiation, preparation,
      execution, performance or failure of performance of this Agreement or any
      transactions contemplated herein, whether or not any such Indemnified Party
      is a
      party to any such action, proceeding, suit or the target of any such inquiry
      or
      investigation; provided,
      however,
      that no
      Indemnified Party shall have the right to be indemnified hereunder for any
      liability finally determined by a court of competent jurisdiction, subject
      to no
      further appeal, to have resulted primarily from the gross negligence or willful
      misconduct of such Indemnified Party. The Indemnified Parties (as a group)
      shall
      have the right to select and employ a single firm of counsel with respect to
      any
      action or claim brought or asserted against them, provided that such counsel
      is
      reasonably acceptable to the Purchasers and the Company, and one-half of the
      reasonable fees of such counsel shall be paid upon demand by each of the
      Purchasers (in accordance with their Applicable Percentages), on the one hand,
      and the Company, on the other hand, severally and not jointly. The obligations
      of the Purchasers and the Company under this Section 5 shall survive any
      termination of this Agreement and the resignation or removal of the Escrow
      Agent.

     

    
      
        
        

      

      
        -4-

        
          

        

      

      
        
        

      

    

     

    (b) The
      parties agree that neither the payment by the Purchasers or the Company of
      any
      claim by the Escrow Agent for indemnification hereunder nor the disbursement
      of
      any amounts to the Escrow Agent from the Escrow in respect of a claim by the
      Escrow Agent for indemnification shall impair, limit, modify, or affect, as
      between the Purchasers or the Company, the respective rights and obligations
      of
      the Purchasers, on the one hand, and the Company, on the other hand, under
      the
      Purchase Agreement.

     

    6. Resignation
      of the Escrow Agent.
      The
      Escrow Agent, and any successor Escrow Agent, may resign at any time as Escrow
      Agent hereunder by giving at least fifteen (15) business days written notice
      to
      the parties. Upon such resignation and the appointment of a successor Escrow
      Agent, the resigning Escrow Agent shall be absolved from any duties as Escrow
      Agent hereunder. Upon their receipt of notice of resignation from the Escrow
      Agent, the Purchasers and the Company shall use their reasonable best efforts
      jointly to designate a successor Escrow Agent. If the parties do not agree
      upon
      a successor Escrow Agent within fifteen (15) business days after the receipt
      by
      the parties of the Escrow Agent’s resignation notice, the Escrow Agent may
      petition any court of competent jurisdiction for the appointment of a successor
      Escrow Agent or other appropriate relief (including, without limitation, an
      interpleader action) and any such resulting appointment shall be binding upon
      all parties hereto. By mutual agreement, the Purchasers and the Company, acting
      together, shall have the right at any time upon not less than ten (10) business
      days written notice to terminate their appointment of the Escrow Agent, or
      any
      successor Escrow Agent, as Escrow Agent hereunder. Notwithstanding anything
      to
      the contrary in the foregoing, the Escrow Agent or any successor Escrow Agent
      shall continue to act as the Escrow Agent until a successor is appointed and
      qualified to act as the Escrow Agent. The resigning Escrow Agent shall transmit
      all records pertaining to the Escrow Account and shall pay the Escrow Amount
      to
      the successor Escrow Agent, after making copies of such records as the resigning
      Escrow Agent deems advisable and after deduction and payment to the resigning
      Escrow Agent of all fees and expenses (including court costs and reasonable
      attorneys’ fees) payable to, actually incurred by, or reasonably expected to be
      incurred by the retiring Escrow Agent in connection with the performance of
      its
      duties and the exercise of its rights hereunder. After any resigning Escrow
      Agent’s resignation or removal, the provisions of this Agreement shall inure to
      its benefit and survive with respect to any actions taken or omitted to be
      taken
      by such resigning Escrow Agent while it was the Escrow Agent under this
      Agreement. Any corporation or association into which the Escrow Agent may be
      merged or converted or with which it may be consolidated, or any corporation
      or
      association to which all or substantially all of the escrow business of the
      Escrow Agent’s corporate trust line of business may be transferred, shall be the
      Escrow Agent under this Agreement without further act.

     

    
      
        
        

      

      
        -5-

        
          

        

      

      
        
        

      

    

     

    7. Taxes.
      

     

    (a) For
      U.S.
      federal (and all relevant state and local) income tax purposes, each party
      hereto agrees to treat the party receiving the Escrow Amount as set forth in
      the
      Joint Written Instructions as the owner of the funds in the Escrow Account
      (including any portion thereof that is invested or reinvested under the terms
      of
      this Agreement) and any interest or other earnings on such funds, which shall
      be
      allocated to such party and so reported, to the extent necessary, to the
      Internal Revenue Service and any other taxing authority.
      

     

    (b) The
      correct Taxpayer Identification Number (“TIN”)
      assigned by the Internal Revenue Service for each Purchaser and the Company
      is
      set forth in Annex
      A.
      Promptly following the execution of this Agreement, each Purchaser and the
      Company shall, to the extent applicable, provide the Escrow Agent with a fully
      executed W-8 or W-9 Internal Revenue Service form. 

     

    8. Notices.
      All
      notices and other communications required or permitted pursuant to this
      Agreement shall be in writing and be deemed to have been duly given and
      delivered: (i) upon receipt, when delivered personally; (ii) upon receipt,
      when
      sent by facsimile (provided confirmation of transmission is mechanically or
      electronically generated and kept on file by the sending party); or (iii) one
      (1) business day after deposit with an internationally recognized courier
      service, in each case properly addressed to the party to receive the same.
      The
      addresses and facsimile numbers for such communications shall be:

     

    If
      to the
      Purchasers:

    

    Lehman
      Brothers Commercial Corporation Asia Limited

    24F,
      Two
      International Finance Center

    8,
      Finance Street

    Central,
      Hong Kong

    Attention:
      Steven Qian

    Facsimile:
      (852) 2372-5468

    

    and

    

    YA
      Global
      Investments, L.P.

    c/o
      Yorkville Advisors, LLC

    101
      Hudson Street, Suite 3700

    Jersey
      City, NJ 07302

    Attention:
      David Gonzalez

    Facsimile:
      (201) 985-8744

     

    
      
        
        

      

      
        -6-

        
          

        

      

      
        
        

      

    

    

    With
      a
      copy to:

    

    Goodwin
      Procter LLP

    901
      New
      York Avenue, N.W.

    Washington,
      DC 20001

    Attention:
      James A. Hutchinson, Esq.

    Facsimile:
      (202) 346-4444

    

    If
      to the
      Company:

    

    China
      Automotive Systems, Inc.

    No.
      1
      Henglong Road

    Yu
      Giao
      Development Zone

    Shashi
      District, Jing Zhou City

    Hubei
      Province, People’s Republic of China

    Attention:
      Hanlin Chen

    Facsimile:
      (86) 27-5980-8808

    

    With
      a
      copy to:

    

    Heller
      Ehrman LLP

    4350
      La
      Jolla Village Drive, 7th
      Floor

    San
      Diego, CA 92122

    Attention:
      Hayden J. Trubitt, Esq.

    Facsimile:
      (858) 587-5903

    

    If
      to the
      Escrow Agent:

     

    U.S.
      Bank
      Corporate Trust Services

    1021
      E.
      Cary Street, Suite 1850

    Richmond,
      VA  23219

    Attention:
      Stephanie E. Haysley

    Facsimile:
       (804) 343-1572

    

    or
      to
      such other address as such party shall specify by written notice to the other
      parties hereto. Any notice sent to the Escrow Agent shall also be sent to the
      other parties to this Agreement.

     

    9. Fees
      and Expenses.
      All
      fees
      and expenses of, and incurred by, the Escrow Agent in connection with the
      performance of its obligations hereunder shall be paid one-half by the Company
      and one-half by the Purchasers (in accordance with their respective Applicable
      Percentages) in accordance with Annex B. In addition, the Escrow Agent shall
      be
      reimbursed for all its reasonable out-of-pocket expenses, including attorney’s
      fees, travel expenses, telephone and facsimile transmission costs, postage
      (including express mail and overnight delivery charges), copying charges and
      the
      like. All of the compensation and reimbursement obligations set forth in this
      Section 9 shall be payable upon demand by the Escrow Agent, after presentation
      of a statement in reasonable detail by the Escrow Agent.

     

    
      
        
        

      

      
        -7-

        
          

        

      

      
        
        

      

    

     

    10. Assignment.
      The
      Purchasers and the Company may assign rights under this Agreement to the same
      extent they are permitted to assign their rights and obligations under the
      Purchase Agreement.

     

    11. Miscellaneous.
      This
      Agreement, and with respect to the Purchasers and the Company, the Purchase
      Agreement, embody the entire agreement and understanding of the parties
      concerning the Escrow Amount, and, in the event of any inconsistency between
      this Agreement and the Purchase Agreement, the Purchase Agreement shall control.
      This Agreement may be amended or waived only by a writing signed by the Company,
      the Purchasers and the Escrow Agent. The headings in this Agreement are intended
      solely for convenience of reference and shall be given no effect in the
      construction or interpretation of this Agreement. This Agreement shall be
      governed by and construed in accordance with the laws of the State of New York.
      This Agreement shall bind and inure to the benefit of the parties hereto and
      their respective successors and permitted assigns. This Agreement may be
      executed in two or more identical counterparts, all of which 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; provided that a
      facsimile signature shall be considered due execution and shall be binding
      upon
      the signatory thereto with the same force and effect as if the signature were
      an
      original, not a facsimile signature.

    

     

    [SIGNATURE
      PAGE FOLLOWS]

     

    
      
        
        

      

      
        -8-

        
          

        

      

      
        
        

      

    

     

    To
      evidence their agreement, the parties have caused this Escrow Agreement to
      be
      executed on the date first written above.

    
      	 	 	 
	PURCHASERS:	LEHMAN
              BROTHERS
              COMMERCIAL CORPORATION ASIA LIMITED
	 
 	 
 	 
 
	
            	By:  	/s/
              Steven
              J. Qian
	 	
              

              Name:
                Steven J. Qian

              Title:  
                Senior Vice President

            
	 	
            

    

    
      	 	 	 
	 	YA
              GLOBAL
              INVESTMENTS, L.P.
	 
 	 
 	 
 
	
            	By:  	/s/
              Yorkville Advisors, LLC,
	 	 	Investment Manager
	 	 	 
	 	 	 
	 	By:  	/s/ Mark
              Angelo
	 	
              

              Name:
                Mark Angelo

              Title:  
                President and Portfolio Manager

            
	 	
            

    

    
      	 	 	 
	COMPANY: 	CHINA
              AUTOMOTIVE
              SYSTEMS, INC.
	 
 	 
 	 
 
	
            	By:  	/s/
              Hanlin
              Chan
	 	
              

              Name:
                Hanlin Chan

              Title:  
                Chairman

            

    

     

     

    [Escrow
      Agreement Signature Page]

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      	 	 	 
	ESCROW
              AGENT: 	US
              BANK NATIONAL ASSOCIATION
	 
 	 
 	 
 
	
            	By:  	/s/
              Stephanie
              E. Haysley
	 	
              

              Name:
                Stephanie E. Haysley

              Title:  
                Vice President

            
	 	
            

    

     

    
       

      [Escrow
        Agreement Signature Page]

       

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    ANNEX
      A

    

    
      	
              Purchaser

            	 	
              TIN

            	 	
              Applicable
                Percentage

            	 
	
              Lehman
                Brothers Commercial Corporation Asia Limited

            	 	 	
              N/A

            	 	 	
              85.7142858

            	
              %

            
	
              YA
                Global Investments, L.P.

            	 	 	
              13-4150836

            	 	 	
              14.2857142

            	
              %

            
	
              Total

            	 	 	 	 	 	
              100.0000000

            	
              %

            

    

     

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    ANNEX
      B

    

    Escrow
      Agent Fees.

    

    
      	
              Acceptance
                Fee:

            	 	$Waived	 
	
              Administration
                Fee:

            	 	$1,250	 
	
              Transactional
                Costs:

            	 	$Waived	 
	
              Out
                of Pocket Expenses:

            	 	$Waived	 

    

     

    The
      Administration Fee is payable upon execution of the escrow documents. In the
      event the escrow is not funded, the Administration Fee and all related expenses,
      including attorneys’ fees, remain due and payable, and if paid, will not be
      refunded. 

    

    The
      fees
      quoted in this schedule apply to services ordinarily rendered in the
      administration of an Escrow Account and are subject to reasonable adjustment
      based on final review of documents, or when the Escrow Agent is called upon
      to
      undertake unusual duties or responsibilities, or as changes in law, procedures,
      or the cost of doing business demand. Services in addition to and not
      contemplated in this Escrow Agreement, including, but not limited to, document
      amendments and revisions, non-standard cash and/or investment transactions,
      calculations, notices and reports, and legal fees, will be billed as
      extraordinary expenses.

    

    Unless
      otherwise indicated, the above fees relate to the establishment of one escrow
      account. Additional sub-accounts governed by the same Escrow Agreement may
      incur
      an additional charge. Transaction costs include charges for wire transfers,
      checks, internal transfers and securities transactions.

    

    To
      help
      the government fight the funding of terrorism and money laundering activities,
      Federal law requires all financial institutions to obtain, verify and record
      information that identifies each person who opens an account. For a
      non-individual person such as a business entity, a charity, a Trust or other
      legal entity Agent will ask for documentation to verify its formation and
      existence as a legal entity. Agent may also ask to see financial statements,
      licenses, identification, and authorization documents from individuals claiming
      authority to represent the entity or other relevant documentation.

     

    Acknowledgement:

     

    
      	LBCCA	 	_________ [initials]	 	_________ [date]	 
	 	 	 	 	 	 
	YAGI 	 	_________ [initials]	 	_________ [date]	 
	 	 	 	 	 	 
	Company	 	_________
              [initials]	 	_________ [date]

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