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Unassociated Document

     

    THIS
      WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT
      BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
      ACT”) OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
      DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE
      STATE SECURITIES LAWS OR THE ISSUER SHALL HAVE RECEIVED AN OPINION OF COUNSEL
      REASONABLY SATISFACTORY TO THE ISSUER THAT REGISTRATION OF SUCH SECURITIES
      UNDER
      THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES
      LAWS
      IS NOT REQUIRED.

     

    WARRANT
      TO PURCHASE

     

    SHARES
      OF
      COMMON STOCK

     

    OF

     

    CHINA
      NEW
      ENERGY GROUP COMPANY

     

    Expires
      August 20, 2013

     

    No.:
      W-A-08-  Number
      of
      Shares: Up to __________

    Date
      of
      Issuance: August 20, 2008

     

    FOR
      VALUE
      RECEIVED, the undersigned, China New Energy Group Company, a Delaware
      corporation (together with its successors and assigns, the “Issuer”),
      hereby certifies that [_________________] or its registered assigns (the
“Holder”)
      is
      entitled to subscribe for and purchase, during the Term (as hereinafter
      defined), up to [_____________]([________])
      shares
      (subject to adjustment as hereinafter provided) of the duly authorized, validly
      issued, fully paid and non-assessable Common Stock of the Issuer, at an exercise
      price per share equal to the Warrant Price then in effect, subject, however,
      to
      the provisions and upon the terms and conditions hereinafter set forth.
      Capitalized terms used in this Warrant and not otherwise defined herein shall
      have the respective meanings specified in Section 9 hereof.

     

    1. Term.
      The
      term of this Warrant shall commence on August 20, 2008 and shall expire at
      6:00
      p.m., Eastern Time, on August 20, 2013 (such period being the “Term”
and
      such date, the “Termination
      Date”).

     

    2. Method
      of Exercise; Payment; Issuance of New Warrant; Transfer and
      Exchange.

     

    (a) Time
      of Exercise.
      The
      purchase rights represented by this Warrant may be exercised in whole or in
      part
      during the Term for such number of shares of Common Stock set forth
      above.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    (b) Method
      of Exercise.
      The
      Holder hereof may exercise this Warrant, in whole or in part, by the surrender
      of this Warrant (with the exercise form attached hereto duly executed) at the
      principal office of the Issuer, and by the payment to the Issuer of an amount
      of
      consideration therefor equal to the Warrant Price in effect on the date of
      such
      exercise multiplied by the number of shares of Warrant Stock with respect to
      which this Warrant is then being exercised, payable at such Holder’s election
      (i) by certified or official bank check or by wire transfer to an account
      designated by the Issuer, (ii) by “cashless exercise” in accordance with Section
      2(c), but only when a registration statement under the Securities Act providing
      for the resale of the Warrant Stock is not then in effect, or (iii) by a
      combination of the foregoing methods of payment selected by the Holder of this
      Warrant.

     

    (c) Cashless
      Exercise.
      Notwithstanding any provisions herein to the contrary and commencing one (1)
      year following the Original Issue Date, if (i) the VWAP of one share of Common
      Stock is greater than the Warrant Price (at the date of calculation as set
      forth
      below) and (ii) a registration statement under the Securities Act providing
      for
      the resale of the Warrant Stock is not then in effect by the date such
      registration statement is required to be effective pursuant to the Registration
      Rights Agreement (as defined in the Purchase Agreement) or not effective at
      any
      time during the Effectiveness Period (as defined in the Registration Rights
      Agreement) in accordance with the terms of the Registration Rights Agreement,
      in
      lieu of exercising this Warrant by payment of cash, the Holder may exercise
      this
      Warrant by a cashless exercise and shall receive the number of shares of Common
      Stock equal to an amount (as determined below) by surrender of this Warrant
      at
      the principal office of the Issuer together with the properly endorsed Notice
      of
      Exercise in which event the Issuer shall issue to the Holder a number of shares
      of Common Stock computed using the following formula:

    
      	 	 
	 	
              X
                =
                Y
                (B-A)

            
	 	
              B

            
	 	 	 
	
              Where
                

            	
              X
                =
                

            	
              the
                number of shares of Common Stock to be issued to the
                Holder.

            
	 	 	 
	 	
              Y
                =
                

            	
              the
                number of shares of Common Stock purchasable upon exercise of all
                of the
                Warrant or, if only a portion of the Warrant is being exercised,
                the
                portion of the Warrant being exercised.

            
	 	 	 
	 	
              A
                =
                

            	
              the
                Warrant Price.

            
	 	 	 
	 	
              B
                =
                

            	
              the
                VWAP of one share of Common Stock as of the exercise
                date.

            

    

     

    

    
      
         

      

      
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    (d) Issuance
      of Stock Certificates.
      In the
      event of any exercise of this Warrant in accordance with and subject to the
      terms and conditions hereof, certificates for the shares of Warrant Stock so
      purchased shall be dated the date of such exercise and delivered to the Holder
      hereof within a reasonable time, not exceeding three (3) Trading Days after
      such
      exercise (the “Delivery
      Date”)
      or, at
      the request of the Holder (provided that a registration statement under the
      Securities Act providing for the resale of the Warrant Stock is then in effect
      or that the shares of Warrant Stock are otherwise exempt from registration),
      issued and delivered to the Depository Trust Company (“DTC”)
      account on the Holder’s behalf via the Deposit Withdrawal Agent Commission
      System (“DWAC”)
      within
      a reasonable time, not exceeding three (3) Trading Days after such exercise,
      and
      the Holder hereof shall be deemed for all purposes to be the holder of the
      shares of Warrant Stock so purchased as of the date of such exercise.
      Notwithstanding the foregoing to the contrary, the Issuer or its transfer agent
      shall only be obligated to issue and deliver the shares to the DTC on a holder’s
      behalf via DWAC if such exercise is in connection with a sale or other exemption
      from registration by which the shares may be issued without a restrictive legend
      and the Issuer and its transfer agent are participating in DTC through the
      DWAC
      system. The Holder shall deliver this original Warrant, or an indemnification
      undertaking with respect to such Warrant in the case of its loss, theft or
      destruction, at such time that this Warrant is fully exercised. With respect
      to
      partial exercises of this Warrant, the Issuer shall keep written records for
      the
      Holder of the number of shares of Warrant Stock exercised as of each date of
      exercise.

     

    (e) Compensation
      for Buy-In on Failure to Timely Deliver Certificates Upon
      Exercise.
      In
      addition to any other rights available to the Holder, if the Issuer fails to
      cause its transfer agent to transmit to the Holder a certificate or certificates
      representing the Warrant Stock pursuant to an exercise on or before the Delivery
      Date, and if after such date the Holder is required by its broker to purchase
      (in an open market transaction or otherwise) shares of Common Stock to deliver
      in satisfaction of a sale by the Holder of the Warrant Stock which the Holder
      anticipated receiving upon such exercise (a “Buy-In”),
      then
      the Issuer shall (1) pay in cash to the Holder the amount by which (x) the
      Holder’s total purchase price (including brokerage commissions, if any) for the
      shares of Common Stock so purchased exceeds (y) the amount obtained by
multiplying
      (A) the
      number of shares of Warrant Stock that the Issuer was required to deliver to
      the
      Holder in connection with the exercise at issue and
      (B) the
      price at which the sell order giving rise to such purchase obligation was
      executed, and (2) at the option of the Holder, either reinstate the portion
      of
      the Warrant and equivalent number of shares of Warrant Stock for which such
      exercise was not honored or deliver to the Holder the number of shares of Common
      Stock that would have been issued had the Issuer timely complied with its
      exercise and delivery obligations hereunder. For example, if the Holder
      purchases Common Stock having a total purchase price of $11,000 to cover a
      Buy-In with respect to an attempted exercise of shares of Common Stock with
      an
      aggregate sale price giving rise to such purchase obligation of $10,000, under
      clause (1) of the immediately preceding sentence the Issuer shall be required
      to
      pay the Holder $1,000. The Holder shall provide the Issuer written notice
      indicating the amounts payable to the Holder in respect of the Buy-In, together
      with applicable confirmations and other evidence reasonably requested by the
      Issuer. Nothing herein shall limit a Holder’s right to pursue any other remedies
      available to it hereunder, at law or in equity including, without limitation,
      a
      decree of specific performance and/or injunctive relief with respect to the
      Issuer’s failure to timely deliver certificates representing shares of Common
      Stock upon exercise of this Warrant as required pursuant to the terms
      hereof.

    
      
         

      

      
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    (f) Transferability
      of Warrant.
      Subject
      to Section 2(h) hereof, this Warrant may be transferred by a Holder, in whole
      or
      in part, without the consent of the Issuer. If transferred pursuant to this
      paragraph, this Warrant may be transferred on the books of the Issuer by the
      Holder hereof in person or by duly authorized attorney, upon surrender of this
      Warrant at the principal office of the Issuer, properly endorsed (by the Holder
      executing an assignment in the form attached hereto) and upon payment of any
      necessary transfer tax or other governmental charge imposed upon such transfer.
      This Warrant is exchangeable at the principal office of the Issuer for Warrants
      to purchase the same aggregate number of shares of Warrant Stock, each new
      Warrant to represent the right to purchase such number of shares of Warrant
      Stock as the Holder hereof shall designate at the time of such exchange. All
      Warrants issued on transfers or exchanges shall be dated the Original Issue
      Date
      and shall be identical with this Warrant except as to the number of shares
      of
      Warrant Stock issuable pursuant thereto.

     

    (g) Continuing
      Rights of Holder.
      The
      Issuer will, at the time of or at any time after each exercise of this Warrant,
      upon the request of the Holder hereof, acknowledge in writing the extent, if
      any, of its continuing obligation to afford to such Holder all rights to which
      such Holder shall continue to be entitled after such exercise in accordance
      with
      the terms of this Warrant, provided that if any such Holder shall fail to make
      any such request, the failure shall not affect the continuing obligation of
      the
      Issuer to afford such rights to such Holder.

     

    (h) Compliance
      with Securities Laws.

     

    (i) The
      Holder of this Warrant, by acceptance hereof, acknowledges that this Warrant
      and
      the shares of Warrant Stock to be issued upon exercise hereof are being acquired
      solely for the Holder’s own account and not as a nominee for any other party,
      and for investment, and that the Holder will not offer, sell or otherwise
      dispose of this Warrant or any shares of Warrant Stock to be issued upon
      exercise hereof except pursuant to an effective registration statement, or
      an
      exemption from registration, under the Securities Act and any applicable state
      securities laws.

     

    (ii) Except
      as
      provided in paragraph (iii) below, this Warrant and all certificates
      representing shares of Warrant Stock issued upon exercise hereof shall be
      stamped or imprinted with a legend in substantially the following
      form:

     

    THIS
      WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT
      BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
      ACT”) OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
      DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE
      STATE SECURITIES LAWS OR THE ISSUER SHALL HAVE RECEIVED AN OPINION OF COUNSEL
      REASONABLY SATISFACTORY TO THE ISSUER THAT REGISTRATION OF SUCH SECURITIES
      UNDER
      THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES
      LAWS
      IS NOT REQUIRED.

    
      
         

      

      
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    (iii) The
      Issuer agrees to reissue this Warrant or certificates representing any of the
      Warrant Stock, without the legend set forth above if at such time, prior to
      making any transfer of any such securities, the Holder shall give written notice
      to the Issuer describing the manner and terms of such transfer. Such proposed
      transfer will not be effected until: (a) either (i) the Issuer has received
      an
      opinion of counsel reasonably satisfactory to the Issuer, to the effect that
      the
      registration of such securities under the Securities Act is not required in
      connection with such proposed transfer, (ii) a registration statement under
      the
      Securities Act covering such proposed disposition has been filed by the Issuer
      with the Securities and Exchange Commission and has become effective under
      the
      Securities Act, (iii) the Issuer has received other evidence reasonably
      satisfactory to the Issuer that such registration and qualification under the
      Securities Act and state securities laws are not required, or (iv) the Holder
      provides the Issuer with reasonable assurances that such security can be sold
      pursuant to Rule 144 under the Securities Act; and (b) either (i) the Issuer
      has
      received an opinion of counsel reasonably satisfactory to the Issuer, to the
      effect that registration or qualification under the securities or “blue sky”
laws of any state is not required in connection with such proposed disposition,
      or (ii) compliance with applicable state securities or “blue sky” laws has been
      effected or a valid exemption exists with respect thereto. The Issuer will
      respond to any such notice from a holder within three (3) Trading Days. In
      the
      case of any proposed transfer under this Section 2(h), the Issuer will use
      reasonable efforts to comply with any such applicable state securities or “blue
      sky” laws, but shall in no event be required, (x) to qualify to do business in
      any state where it is not then qualified, (y) to take any action that would
      subject it to tax or to the general service of process in any state where it
      is
      not then subject, or (z) to comply with state securities or “blue sky” laws of
      any state for which registration by coordination is unavailable to the Issuer.
      The restrictions on transfer contained in this Section 2(h) shall be in addition
      to, and not by way of limitation of, any other restrictions on transfer
      contained in any other section of this Warrant. Whenever a certificate
      representing the Warrant Stock is required to be issued to the Holder without
      a
      legend, in lieu of delivering physical certificates representing the Warrant
      Stock, the Issuer shall cause its transfer agent to electronically transmit
      the
      Warrant Stock to the Holder by crediting the account of the Holder or Holder’s
      Prime Broker with DTC through its DWAC system (to the extent not inconsistent
      with any provisions of this Warrant or the Purchase Agreement).

     

    3. Stock
      Fully Paid; Reservation and Listing of Shares; Covenants.

     

    (a) Stock
      Fully Paid.
      The
      Issuer represents, warrants, covenants and agrees that all shares of Warrant
      Stock which may be issued upon the exercise of this Warrant or otherwise
      hereunder will, when issued in accordance with the terms of this Warrant, be
      duly authorized, validly issued, fully paid and non-assessable and free from
      all
      taxes, liens and charges created by or through the Issuer. The Issuer further
      covenants and agrees that during the period within which this Warrant may be
      exercised, the Issuer will at all times have authorized and reserved for the
      purpose of the issuance upon exercise of this Warrant a number of authorized
      but
      unissued shares of Common Stock equal to at least one hundred percent (100%)
      of
      the number of shares of Common Stock issuable upon exercise of this Warrant
      without regard to any limitations on exercise.

    
      
         

      

      
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    (b) Reservation.
      If any
      shares of Common Stock required to be reserved for issuance upon exercise of
      this Warrant or as otherwise provided hereunder require registration or
      qualification with any Governmental Authority under any federal or state law
      before such shares may be so issued, the Issuer will in good faith use its
      best
      efforts as expeditiously as possible at its expense to cause such shares to
      be
      duly registered or qualified. If the Issuer shall list any shares of Common
      Stock on any securities exchange or market it will, at its expense, list
      thereon, and maintain and increase when necessary such listing, of, all shares
      of Warrant Stock from time to time issued upon exercise of this Warrant or
      as
      otherwise provided hereunder (provided that such Warrant Stock has been
      registered pursuant to a registration statement under the Securities Act then
      in
      effect), and, to the extent permissible under the applicable securities exchange
      rules, all unissued shares of Warrant Stock which are at any time issuable
      hereunder, so long as any shares of Common Stock shall be so listed. The Issuer
      will also so list on each securities exchange or market, and will maintain
      such
      listing of, any other securities which the Holder of this Warrant shall be
      entitled to receive upon the exercise of this Warrant if at the time any
      securities of the same class shall be listed on such securities exchange or
      market by the Issuer.

     

    (c) Covenants.
      The
      Issuer shall not by any action including, without limitation, amending the
      Certificate of Incorporation or the by-laws of the Issuer, or through any
      reorganization, transfer of assets, consolidation, merger, dissolution, issue
      or
      sale of securities or any other action, avoid or seek to avoid the observance
      or
      performance of any of the terms of this Warrant, but will at all times in good
      faith assist in the carrying out of all such terms and in the taking of all
      such
      actions as may be necessary or appropriate to protect the rights of the Holder
      hereof against dilution (to the extent specifically provided herein) or
      impairment. Without limiting the generality of the foregoing, the Issuer will
      (i) not permit the par value, if any, of its Common Stock to exceed the then
      effective Warrant Price, (ii) not amend or modify any provision of the
      Certificate of Incorporation or by-laws of the Issuer in any manner that would
      adversely affect the rights of the Holders of the Warrants, (iii) take all
      such
      action as may be reasonably necessary in order that the Issuer may validly
      and
      legally issue fully paid and nonassessable shares of Common Stock, free and
      clear of any liens, claims, encumbrances and restrictions (other than as
      provided herein) upon the exercise of this Warrant, and (iv) use its best
      efforts to obtain all such authorizations, exemptions or consents from any
      public regulatory body having jurisdiction thereof as may be reasonably
      necessary to enable the Issuer to perform its obligations under this
      Warrant.

     

    (d) Loss,
      Theft, Destruction of Warrants.
      Upon
      receipt of evidence satisfactory to the Issuer of the ownership of and the
      loss,
      theft, destruction or mutilation of any Warrant and, in the case of any such
      loss, theft or destruction, upon receipt of indemnity or security satisfactory
      to the Issuer or, in the case of any such mutilation, upon surrender and
      cancellation of such Warrant, the Issuer will make and deliver, in lieu of
      such
      lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor and
      representing the right to purchase the same number of shares of Common
      Stock.

     

    (e) Payment
      of Taxes.
      The
      Issuer will pay any documentary stamp taxes attributable to the initial issuance
      of the Warrant Stock issuable upon exercise of this Warrant; provided,
      however,
      that
      the Issuer shall not be required to pay any tax or taxes which may be payable
      in
      respect of any transfer involved in the issuance or delivery of any certificates
      representing Warrant Stock in a name other than that of the Holder in respect
      to
      which such shares are issued.

    
      
         

      

      
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    4. Adjustment
      of Warrant Price.
      The
      price at which such shares of Warrant Stock may be purchased upon exercise
      of
      this Warrant shall be subject to adjustment from time to time as set forth
      in
      this Section 4. The Issuer shall give the Holder notice of any event described
      below which requires an adjustment pursuant to this Section 4 in accordance
      with
      the notice provisions set forth in Section 5.

     

    (a) Recapitalization,
      Reorganization, Reclassification, Consolidation, Merger or Sale.

     

    (i) In
      case
      the Issuer after the Original Issue Date shall do any of the following (each,
      a
“Triggering
      Event”):
      (a)
      consolidate or merge with or into any other Person and the Issuer shall not
      be
      the continuing or surviving corporation of such consolidation or merger, or
      (b)
      permit any other Person to consolidate with or merge into the Issuer and the
      Issuer shall be the continuing or surviving Person but, in connection with
      such
      consolidation or merger, any Capital Stock of the Issuer shall be changed into
      or exchanged for Securities of any other Person or cash or any other property,
      or (c) transfer all or substantially all of its properties or assets to any
      other Person, or (d) effect a capital reorganization or reclassification of
      its
      Capital Stock, then, and in the case of each such Triggering Event, proper
      provision shall be made to the Warrant Price and the number of shares of Warrant
      Stock that may be purchased upon exercise of this Warrant so that, upon the
      basis and the terms and in the manner provided in this Warrant, the Holder
      of
      this Warrant shall be entitled upon the exercise hereof at any time after the
      consummation of such Triggering Event, to the extent this Warrant is not
      exercised prior to such Triggering Event, to receive at the Warrant Price in
      effect at the time immediately prior to the consummation of such Triggering
      Event, in lieu of the Common Stock issuable upon such exercise of this Warrant
      prior to such Triggering Event, the Securities, cash and property to which
      such
      Holder would have been entitled upon the consummation of such Triggering Event
      if such Holder had exercised the rights represented by this Warrant immediately
      prior thereto (including the right of a shareholder to elect the type of
      consideration it will receive upon a Triggering Event), subject to adjustments
      (subsequent to such corporate action) as nearly equivalent as possible to the
      adjustments provided for elsewhere in this Section 4. Immediately upon the
      occurrence of a Triggering Event, the Issuer shall notify the Holder in writing
      of such Triggering Event and provide the calculations in determining the number
      of shares of Warrant Stock issuable upon exercise of the new warrant and the
      adjusted Warrant Price. Upon the Holder’s request, the continuing or surviving
      corporation as a result of such Triggering Event shall issue to the Holder
      a new
      warrant of like tenor evidencing the right to purchase the adjusted number
      of
      shares of Warrant Stock and the adjusted Warrant Price pursuant to the terms
      and
      provisions of this Section 4(a)(i). Notwithstanding the foregoing to the
      contrary, this Section 4(a)(i) shall only apply if the surviving entity pursuant
      to any such Triggering Event is a company that has a class of equity securities
      registered pursuant to the Securities Exchange Act of 1934, as amended (the
      “Exchange
      Act”),
      and
      its common stock is listed or quoted on a national securities exchange, national
      automated quotation system or the OTC Bulletin Board. In the event that the
      surviving entity pursuant to any such Triggering Event is not a public company
      that is registered pursuant to the Exchange Act or its common stock is not
      listed or quoted on a national securities exchange, national automated quotation
      system or the OTC Bulletin Board, then the Holder shall have the right to demand
      that the Issuer pay to the Holder an amount in cash equal to the value of this
      Warrant calculated in accordance with the Black-Scholes
      formula.

    
      
         

      

      
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    (ii) In
      the
      event that the Holder has elected not to exercise this Warrant prior to the
      consummation of a Triggering Event and has also elected not to receive an amount
      in cash equal to the value of this Warrant calculated in accordance with the
      Black-Scholes formula pursuant to the provisions of Section 4(a)(i) above,
      so
      long as the surviving entity pursuant to any Triggering Event is a company
      that
      has a class of equity securities registered pursuant to the Exchange Act and
      its
      common stock is listed or quoted on a national securities exchange, national
      automated quotation system or the OTC Bulletin Board, the surviving entity
      and/or each Person (other than the Issuer) which may be required to deliver
      any
      Securities, cash or property upon the exercise of this Warrant as provided
      herein shall assume, by written instrument delivered to, and reasonably
      satisfactory to, the Holder of this Warrant, (A) the obligations of the Issuer
      under this Warrant (and if the Issuer shall survive the consummation of such
      Triggering Event, such assumption shall be in addition to, and shall not release
      the Issuer from, any continuing obligations of the Issuer under this Warrant)
      and (B) the obligation to deliver to such Holder such Securities, cash or
      property as, in accordance with the foregoing provisions of this subsection
      (a),
      such Holder shall be entitled to receive, and the surviving entity and/or each
      such Person shall have similarly delivered to such Holder an opinion of counsel
      for the surviving entity and/or each such Person, which counsel shall be
      reasonably satisfactory to such Holder, or in the alternative, a written
      acknowledgement executed by the Chief Executive Officer or Chief Financial
      Officer of the Issuer, stating that this Warrant shall thereafter continue
      in
      full force and effect and the terms hereof (including, without limitation,
      all
      of the provisions of this subsection (a)) shall be applicable to the Securities,
      cash or property which the surviving entity and/or each such Person may be
      required to deliver upon any exercise of this Warrant or the exercise of any
      rights pursuant hereto.

     

    (b) Stock
      Dividends, Subdivisions and Combinations.
      If at
      any time the Issuer shall:

     

    (i) make
      or
      issue or set a record date for the holders of the Common Stock for the purpose
      of entitling them to receive a dividend payable in, or other distribution of,
      shares of Common Stock,

     

    (ii) subdivide
      its outstanding shares of Common Stock into a larger number of shares of Common
      Stock, or

     

    (iii) combine
      its outstanding shares of Common Stock into a smaller number of shares of Common
      Stock,

     

    then
      (1)
      the number of shares of Common Stock for which this Warrant is exercisable
      immediately after the occurrence of any such event shall be adjusted to equal
      the number of shares of Common Stock which a record holder of the same number
      of
      shares of Common Stock for which this Warrant is exercisable immediately prior
      to the occurrence of such event would own or be entitled to receive after the
      happening of such event, and (2) the Warrant Price then in effect shall be
      adjusted to equal (A) the Warrant Price then in effect multiplied by the number
      of shares of Common Stock for which this Warrant is exercisable immediately
      prior to the adjustment divided by (B) the number of shares of Common Stock
      for
      which this Warrant is exercisable immediately after such
      adjustment.

    
      
         

      

      
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    (c) Certain
      Other Distributions.
      If at
      any time the Issuer shall make or issue or set a record date for the holders
      of
      the Common Stock for the purpose of entitling them to receive any dividend or
      other distribution of:

     

    (i) cash
      (other than a cash dividend payable out of earnings or earned surplus legally
      available for the payment of dividends under the laws of the jurisdiction of
      incorporation of the Issuer),

     

    (ii) any
      evidences of its indebtedness, any shares of stock of any class or any other
      securities or property of any nature whatsoever (other than cash, Common Stock
      Equivalents or Additional Shares of Common Stock), or

     

    (iii) any
      warrants or other rights to subscribe for or purchase any evidences of its
      indebtedness, any shares of stock of any class or any other securities or
      property of any nature whatsoever (other than cash, Common Stock Equivalents
      or
      Additional Shares of Common Stock),

     

    then
      (1)
      the number of shares of Common Stock for which this Warrant is exercisable
      shall
      be adjusted to equal the product of the number of shares of Common Stock for
      which this Warrant is exercisable immediately prior to such adjustment
      multiplied by a fraction (A) the numerator of which shall be the VWAP of one
      share of Common Stock at the date of taking such record and (B) the denominator
      of which shall be such VWAP of one share of Common Stock minus the amount
      allocable to one share of Common Stock of any such cash so distributable and
      of
      the fair value (as determined in good faith by the Board of Directors of the
      Issuer and supported by an opinion from an investment banking firm mutually
      agreed upon by the Issuer and the Holder) of any and all such evidences of
      indebtedness, shares of stock, other securities or property or warrants or
      other
      subscription or purchase rights so distributable, and (2) the Warrant Price
      then
      in effect shall be adjusted to equal (A) the Warrant Price then in effect
      multiplied by the number of shares of Common Stock for which this Warrant is
      exercisable immediately prior to the adjustment divided by (B) the number of
      shares of Common Stock for which this Warrant is exercisable immediately after
      such adjustment. A reclassification of the Common Stock (other than a change
      in
      par value, or from par value to no par value or from no par value to par value)
      into shares of Common Stock and shares of any other class of stock shall be
      deemed a distribution by the Issuer to the holders of its Common Stock of such
      shares of such other class of stock within the meaning of this Section 4(c)
      and,
      if the outstanding shares of Common Stock shall be changed into a larger or
      smaller number of shares of Common Stock as a part of such reclassification,
      such change shall be deemed a subdivision or combination, as the case may be,
      of
      the outstanding shares of Common Stock within the meaning of Section
      4(b).

     

    (d) Dilutive
      Issuance of Additional Shares of Common Stock.
      In the
      event the Issuer shall issue any Additional Shares of Common Stock (otherwise
      than as provided in the foregoing subsections (a) through (c) of this Section
      4), at a price per share less than the Warrant Price then in effect or without
      consideration, then the Warrant Price upon each such issuance shall be adjusted
      to the price equal to the consideration per share paid for such Additional
      Shares of Common Stock.

    
      
         

      

      
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    (e) Issuance
      of Common Stock Equivalents.
      In the
      event the Issuer shall take a record of the holders of its Common Stock for
      the
      purpose of entitling them to receive a distribution of, or shall in any manner
      (whether directly or by assumption in a merger in which the Issuer is the
      surviving corporation) issue or sell, any Common Stock Equivalents, whether
      or
      not the rights to exchange or convert thereunder are immediately exercisable,
      and the price per share for which Common Stock is issuable upon such conversion
      or exchange shall be less than the Warrant Price in effect immediately prior
      to
      the time of such issue or sale, or if, after any such issuance of Common Stock
      Equivalents, the price per share for which Additional Shares of Common Stock
      may
      be issuable thereafter is amended or adjusted, and such price as so amended
      shall be less than the Warrant Price in effect at the time of such amendment
      or
      adjustment, then the Warrant Price then in effect shall be adjusted as provided
      in Section 4(d). No further adjustments of the number of shares of Common Stock
      for which this Warrant is exercisable and the Warrant Price then in effect
      shall
      be made upon the actual issue of such Common Stock upon conversion or exchange
      of such Common Stock Equivalents.

     

    (f) Superseding
      Adjustment.
      If, at
      any time after any adjustment of the Warrant Price then in effect shall have
      been made pursuant to Section 4(e) as the result of any issuance of Common
      Stock
      Equivalents, and such Common Stock Equivalents, or the right of conversion
      or
      exchange in such Common Stock Equivalents, shall expire, and all of such or
      the
      right of conversion or exchange with respect to all of such Common Stock
      Equivalents shall not have been converted or exercised, then such previous
      adjustment shall be rescinded and annulled and the Warrant Price then in effect
      shall be adjusted to the Warrant Price in effect immediately prior to the
      issuance of such Common Stock Equivalents, subject to any further adjustments
      pursuant to this Section 4.

     

    (g) Other
      Provisions Applicable to Adjustments under this Section.
      The
      following provisions shall be applicable to the making of adjustments of the
      number of shares of Common Stock for which this Warrant is exercisable and
      the
      Warrant Price then in effect provided for in this Section 4:

    
      
         

      

      
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    (i) Computation
      of Consideration.
      To the
      extent that any Additional Shares of Common Stock or any Common Stock
      Equivalents (or any warrants or other rights therefor) shall be issued for
      cash
      consideration, the consideration received by the Issuer therefor shall be the
      amount of the cash received by the Issuer therefor, or, if such Additional
      Shares of Common Stock or Common Stock Equivalents are offered by the Issuer
      for
      subscription, the subscription price, or, if such Additional Shares of Common
      Stock or Common Stock Equivalents are sold to underwriters or dealers for public
      offering without a subscription offering, the initial public offering price
      (in
      any such case subtracting any amounts paid or receivable for accrued interest
      or
      accrued dividends and without taking into account any compensation, discounts
      or
      expenses paid or incurred by the Issuer for and in the underwriting of, or
      otherwise in connection with, the issuance thereof). In connection with any
      merger or consolidation in which the Issuer is the surviving corporation (other
      than any consolidation or merger in which the previously outstanding shares
      of
      Common Stock of the Issuer shall be changed to or exchanged for the stock or
      other securities of another corporation), the amount of consideration therefore
      shall be, deemed to be the fair value, as determined reasonably and in good
      faith by the Board, and acceptable to the Holder, of such portion of the assets
      and business of the nonsurviving corporation as the Board may determine to
      be
      attributable to such shares of Common Stock or Common Stock Equivalents, as
      the
      case may be. The consideration for any Additional Shares of Common Stock
      issuable pursuant to any warrants or other rights to subscribe for or purchase
      the same shall be the consideration received by the Issuer for issuing such
      warrants or other rights plus the additional consideration payable to the Issuer
      upon exercise of such warrants or other rights. The consideration for any
      Additional Shares of Common Stock issuable pursuant to the terms of any Common
      Stock Equivalents shall be the consideration received by the Issuer for issuing
      warrants or other rights to subscribe for or purchase such Common Stock
      Equivalents, plus the consideration paid or payable to the Issuer in respect
      of
      the subscription for or purchase of such Common Stock Equivalents, plus the
      additional consideration, if any, payable to the Issuer upon the exercise of
      the
      right of conversion or exchange in such Common Stock Equivalents. In the event
      of any consolidation or merger of the Issuer in which the Issuer is not the
      surviving corporation or in which the previously outstanding shares of Common
      Stock of the Issuer shall be changed into or exchanged for the stock or other
      securities of another corporation, or in the event of any sale of all or
      substantially all of the assets of the Issuer for stock or other securities
      of
      any corporation, the Issuer shall be deemed to have issued a number of shares
      of
      its Common Stock for stock or securities or other property of the other
      corporation computed on the basis of the actual exchange ratio on which the
      transaction was predicated, and for a consideration equal to the fair market
      value on the date of such transaction of all such stock or securities or other
      property of the other corporation. In the event any consideration received
      by
      the Issuer for any securities consists of property other than cash, the fair
      market value thereof at the time of issuance or as otherwise applicable shall
      be
      as determined in good faith by the Board. In the event Common Stock is issued
      with other shares or securities or other assets of the Issuer for consideration
      which covers both, the consideration computed as provided in this Section
      4(g)(i) shall be allocated among such securities and assets as determined in
      good faith by the Board.

     

    (ii) When
      Adjustments to Be Made.
      The
      adjustments required by this Section 4 shall be made whenever and as often
      as
      any specified event requiring an adjustment shall occur, except that any
      adjustment of the number of shares of Common Stock for which this Warrant is
      exercisable that would otherwise be required may be postponed (except in the
      case of a subdivision or combination of shares of the Common Stock, as provided
      for in Section 4(b)) up to, but not beyond the date of exercise if such
      adjustment either by itself or with other adjustments not previously made adds
      or subtracts less than one percent (1%) of the shares of Common Stock for which
      this Warrant is exercisable immediately prior to the making of such adjustment.
      Any adjustment representing a change of less than such minimum amount (except
      as
      aforesaid) which is postponed shall be carried forward and made as soon as
      such
      adjustment, together with other adjustments required by this Section 4 and
      not
      previously made, would result in a minimum adjustment or on the date of
      exercise. For the purpose of any adjustment, any specified event shall be deemed
      to have occurred at the close of business on the date of its
      occurrence.

    
      
         

      

      
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    (iii) Fractional
      Interests.
      In
      computing adjustments under this Section 4, fractional interests in Common
      Stock
      shall be taken into account to the nearest one one-hundredth (1/100th) of a
      share.

     

    (iv) When
      Adjustment Not Required.
      If the
      Issuer shall take a record of the holders of its Common Stock for the purpose
      of
      entitling them to receive a dividend or distribution or subscription or purchase
      rights and shall, thereafter and before the distribution to stockholders
      thereof, legally abandon its plan to pay or deliver such dividend, distribution,
      subscription or purchase rights, then thereafter no adjustment shall be required
      by reason of the taking of such record and any such adjustment previously made
      in respect thereof shall be rescinded and annulled.

     

    (h) Form
      of Warrant after Adjustments.
      The
      form of this Warrant need not be changed because of any adjustments in the
      Warrant Price or the number and kind of Securities purchasable upon the exercise
      of this Warrant.

     

    5. Notice
      of Adjustments.
      Whenever the Warrant Price or Warrant Share Number shall be adjusted pursuant
      to
      Section 4 hereof (for purposes of this Section 5, each an “adjustment”),
      the
      Issuer shall cause its Chief Financial Officer to prepare and execute a
      certificate setting forth, in reasonable detail, the event requiring the
      adjustment, the amount of the adjustment, the method by which such adjustment
      was calculated (including a description of the basis on which the Board made
      any
      determination hereunder), and the Warrant Price and Warrant Share Number after
      giving effect to such adjustment, and shall cause copies of such certificate
      to
      be delivered to the Holder of this Warrant promptly after each adjustment.
      Any
      dispute between the Issuer and the Holder of this Warrant with respect to the
      matters set forth in such certificate may at the option of the Holder of this
      Warrant be submitted to a national or regional accounting firm reasonably
      acceptable to the Issuer and the Holder (the “Independent
      Appraiser”),
      provided
      that the
      Issuer shall have ten (10) days after receipt of notice from such Holder of
      its
      selection of such firm to object thereto, in which case such Holder shall select
      another such firm and the Issuer shall have no such right of objection. The
      Independent Appraiser selected by the Holder of this Warrant as provided in
      the
      preceding sentence shall be instructed to deliver a written opinion as to such
      matters to the Issuer and such Holder within thirty (30) days after submission
      to it of such dispute. Such opinion shall be final and binding on the parties
      hereto. The reasonable expenses of the Independent Appraiser in making such
      determination shall be paid by the Issuer, in the event the Holder's calculation
      was correct, or by the Holder, in the event the Issuer’s calculation was
      correct, or equally by the Issuer and the Holder in the event that neither
      the
      Issuer's or the Holder's calculation was correct.

     

    6. Fractional
      Shares.
      No
      fractional shares of Warrant Stock will be issued in connection with any
      exercise hereof, but in lieu of such fractional shares, the Issuer shall round
      the number of shares to be issued upon exercise up to the nearest whole number
      of shares.

    
      
         

      

      
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    7. Ownership
      Cap and Exercise Restriction.
      Notwithstanding anything to the contrary set forth in this Warrant, at no time
      may a Holder of this Warrant exercise this Warrant if the number of shares
      of
      Common Stock to be issued pursuant to such exercise would exceed, when
      aggregated with all other shares of Common Stock owned by such Holder at such
      time, the number of shares of Common Stock which would result in such Holder
      beneficially owning (as determined in accordance with Section 13(d) of the
      Exchange Act and the rules thereunder) in excess of 4.9% of the then issued
      and
      outstanding shares of Common Stock; provided,
      however,
      that
      upon a holder of this Warrant providing the Issuer with sixty-one (61) days
      notice (pursuant to Section 13 hereof) (the “Waiver
      Notice”)
      that
      such Holder would like to waive this Section 7 with regard to any or all shares
      of Common Stock issuable upon exercise of this Warrant, this Section 7 will
      be
      of no force or effect with regard to all or a portion of the Warrant referenced
      in the Waiver Notice; provided,
      further,
      that
      this provision shall be of no further force or effect during the sixty-one
      (61)
      days immediately preceding the expiration of the term of this
      Warrant.

     

    8. Registration
      Rights.
      The
      Holder of this Warrant is entitled to the benefit of certain registration rights
      with respect to the shares of Warrant Stock issuable upon the exercise of this
      Warrant pursuant to the Registration Rights Agreement (as defined in the
      Purchase Agreement) and the registration rights with respect to the shares
      of
      Warrant Stock issuable upon the exercise of this Warrant by any subsequent
      Holder may only be assigned in accordance with the terms and provisions of
      the
      Registrations Rights Agreement.

     

    9. Definitions.
      For the
      purposes of this Warrant, the following terms have the following
      meanings:

     

    “Additional
      Shares of Common Stock”
means
      all shares of Common Stock issued by the Issuer after the Original Issue Date,
      and all shares of Other Common, if any, issued by the Issuer after the Original
      Issue Date, except for Exempt Issuances. 

     

    “Board”
shall
      mean the Board of Directors of the Issuer.

     

    “Capital
      Stock”
means
      and includes (i) any and all shares, interests, participations or other
      equivalents of or interests in (however designated) corporate stock, including,
      without limitation, shares of preferred or preference stock, (ii) all
      partnership interests (whether general or limited) in any Person which is a
      partnership, (iii) all membership interests or limited liability company
      interests in any limited liability company, and (iv) all equity or ownership
      interests in any Person of any other type.

     

    “Certificate
      of Incorporation”
means
      the Certificate of Incorporation of the Issuer as in effect on the Original
      Issue Date, and as hereafter from time to time amended, modified, supplemented
      or restated in accordance with the terms hereof and thereof and pursuant to
      applicable law.

     

    “Common
      Stock”
means
      the Common Stock, $0.001 par value per share, of the Issuer and any other
      Capital Stock into which such stock may hereafter be changed.

     

    “Common
      Stock Equivalent”
means
      any Convertible Security or warrant, option or other right to subscribe for
      or
      purchase any Additional Shares of Common Stock or any Convertible
      Security.

     

    “Convertible
      Securities”
means
      evidences of Indebtedness, shares of Capital Stock or other Securities which
      are
      or may be at any time convertible into or exchangeable for Additional Shares
      of
      Common Stock. The term “Convertible Security” means one of the Convertible
      Securities.

    
      
         

      

      
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    “Exempt
      Issuances”
means
      collectively issuances by the Company of (i) securities issued pursuant to
      a
      bona fide firm underwritten public offering of the Company’s securities;
provided
      such underwritten public offering shall provide gross proceeds to the Company
      of
      not less than $10,000,000 and shall have been approved in advance by the
      Majority Holder,
      (ii)
      securities issued (other than for cash) in connection with a strategic merger,
      acquisition, or consolidation provided that the issuance of such securities
      in
      connection with such strategic merger, acquisition or consolidation has been
      approved in advance by the Majority Holders, (iii) securities issued pursuant
      to
      the conversion or exercise of convertible or exercisable securities issued
      or
      outstanding on or prior to the Closing Date or issued pursuant to the Purchase
      Agreements (so long as the conversion or exercise price in such securities
      are
      not amended to lower such price and/or adversely affect the Holders), (iv)
      securities issued in connection with bona fide strategic license agreements
      or
      other partnering arrangements so long as such issuances are not for the purpose
      of raising capital and provided that the issuance of such securities in
      connection with such bona fide strategic license, agreements or other partnering
      arrangements has been approved in advance by the Majority Holders, (v) Common
      Stock issued or the issuance or grants of options to purchase Common Stock
      pursuant to the Company’s equity incentive plans outstanding as they exist on
      the Closing Date (as defined in the First Purchase Agreement), (vi) the issuance
      or grants of options to purchase Common Stock to employees, officers or
      directors of the Company pursuant to any equity incentive plan duly adopted
      by
      the Board of Directors or a committee thereof established for such purpose
      so
      long as such issuances in the aggregate do not exceed ten percent (10)% of
      the
      issued and outstanding shares of Common Stock as of the Final Closing Date
      (as
      defined in the First Purchase Agreement) and the specified price at which the
      options may be exercised is equal to or greater than the VWAP as of the date
      of
      such grant, and (vii) any warrants, shares of Common Stock or other securities
      issued to a placement agent and its designees for the transactions contemplated
      by the Purchase Agreements.

     

    “Governmental
      Authority”
means
      any governmental, regulatory or self-regulatory entity, department, body,
      official, authority, commission, board, agency or instrumentality, whether
      federal, state or local, and whether domestic or foreign.

     

    “Holders”
mean
      the Persons who shall from time to time own any Warrant. The term “Holder” means
      one of the Holders.

     

    “Independent
      Appraiser”
means
      a
      nationally recognized or major regional investment banking firm or firm of
      independent certified public accountants of recognized standing (which may
      be
      the firm that regularly examines the financial statements of the Issuer) that
      is
      regularly engaged in the business of appraising the Capital Stock or assets
      of
      corporations or other entities as going concerns, and which is not affiliated
      with either the Issuer or the Holder of any Warrant.

     

    “Issuer”
means
      China New Energy Group Company, a Delaware corporation, and its
      successors.

     

    “Majority
      Holders”
means
      at any time the Holders of Warrants exercisable for a majority of the shares
      of
      Warrant Stock issuable under the Warrants at the time
      outstanding.

    
      
         

      

      
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    “Original
      Issue Date”
means
      August 20, 2008.

     

    “OTC
      Bulletin Board”
means
      the over-the-counter electronic bulletin board.

     

    “Other
      Common”
means
      any other Capital Stock of the Issuer of any class which shall be authorized
      at
      any time after the date of this Warrant (other than Common Stock) and which
      shall have the right to participate in the distribution of earnings and assets
      of the Issuer without limitation as to amount.

     

    “Outstanding
      Common Stock”
means,
      at any given time, the aggregate amount of outstanding shares of Common Stock,
      assuming full exercise, conversion or exchange (as applicable) of all options,
      warrants and other Securities which are convertible into or exercisable or
      exchangeable for, and any right to subscribe for, shares of Common Stock that
      are outstanding at such time.

     

    “Person”
means
      an individual, corporation, limited liability company, partnership, joint stock
      company, trust, unincorporated organization, joint venture, Governmental
      Authority or other entity of whatever nature.

     

    “Purchase
      Agreement”
means
      the Series A Convertible Preferred Stock Purchase Agreement dated as of July,
      2008, among the Issuer and the Purchaser, as amended and supplemented from
      time
      to time.

     

    “Purchaser”
means
      the purchaser of the Series A Convertible Preferred Stock and the Warrants
      issued by the Issuer pursuant to the Purchase Agreement.

     

    “Securities”
means
      any debt or equity securities of the Issuer, whether now or hereafter
      authorized, any instrument convertible into or exchangeable for Securities
      or a
      Security, and any option, warrant or other right to purchase or acquire any
      Security. “Security” means one of the Securities.

     

    “Securities
      Act”
means
      the Securities Act of 1933, as amended, or any similar federal statute then
      in
      effect.

    
      
         

      

      
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    “Subsidiary”
means
      any corporation at least 50% of whose outstanding Voting Stock shall at the
      time
      be owned directly or indirectly by the Issuer or by one or more of its
      Subsidiaries, or by the Issuer and one or more of its Subsidiaries.

     

    “Term”
has
      the
      meaning specified in Section 1 hereof.

     

    “Trading
      Day”
means
      (a) a day on which the Common Stock is traded on the OTC Bulletin Board, or
      (b)
      if the Common Stock is not traded on the OTC Bulletin Board, a day on which
      the
      Common Stock is quoted in the over-the-counter market as reported by the
      National Quotation Bureau Incorporated (or any similar organization or agency
      succeeding its functions of reporting prices); provided,
      however,
      that in
      the event that the Common Stock is not listed or quoted as set forth in (a)
      or
      (b) hereof, then Trading Day shall mean any day except Saturday, Sunday and
      any
      day which shall be a legal holiday or a day on which banking institutions in
      the
      State of New York are authorized or required by law or other government action
      to close.

     

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

     

    “Voting
      Stock”
means,
      as applied to the Capital Stock of any corporation, Capital Stock of any class
      or classes (however designated) having ordinary voting power for the election
      of
      a majority of the members of the Board of Directors (or other governing body)
      of
      such corporation, other than Capital Stock having such power only by reason
      of
      the happening of a contingency.

    

     

     

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

     

    “Warrants”
means
      the warrants issued and sold pursuant to the Purchase Agreement, including,
      without limitation, this Warrant, and any other warrants of like tenor issued
      in
      substitution or exchange for any thereof pursuant to the terms of this
      Warrant.

     

    “Warrant
      Price”
      initially means $0.187, as such price may be adjusted from time to time as
      shall
      result from the adjustments specified in this Warrant, including Section 4
      hereto.

     

    “Warrant
      Share Number”
means
      at any time the aggregate number of shares of Warrant Stock which may at such
      time be purchased upon exercise of this Warrant, after giving effect to all
      prior adjustments and increases to such number made or required to be made
      under
      the terms hereof.

    
      
         

      

      
        16

        
          

        

      

      
         

      

    

     

    “Warrant
      Stock”
means
      Common Stock issuable upon exercise of any Warrant or Warrants or otherwise
      issuable pursuant to any Warrant or Warrants.

     

    10. Other
      Notices.
      In case
      at any time:

     

    (a) the
      Issuer shall make any distributions to the holders of Common Stock;
      or

     

    (b) the
      Issuer shall authorize the granting to all holders of its Common Stock of rights
      to subscribe for or purchase any shares of Capital Stock of any class or other
      rights; or

     

    (c) there
      shall be any reclassification of the Capital Stock of the Issuer;
      or

     

    (d) there
      shall be any capital reorganization by the Issuer; or

     

    (e) there
      shall be any (i) consolidation or merger involving the Issuer or (ii) sale,
      transfer or other disposition of all or substantially all of the Issuer’s
      property, assets or business (except a merger or other reorganization in which
      the Issuer shall be the surviving corporation and its shares of Capital Stock
      shall continue to be outstanding and unchanged and except a consolidation,
      merger, sale, transfer or other disposition involving a wholly-owned
      Subsidiary); or

     

    (f) there
      shall be a voluntary or involuntary dissolution, liquidation or winding-up
      of
      the Issuer or any partial liquidation of the Issuer or distribution to holders
      of Common Stock;

     

    then,
      in
      each of such cases, the Issuer shall give written notice to the Holder of the
      date on which (i) the books of the Issuer shall close or a record shall be
      taken
      for such dividend, distribution or subscription rights or (ii) such
      reorganization, reclassification, consolidation, merger, disposition,
      dissolution, liquidation or winding-up, as the case may be, shall take place.
      Such notice also shall specify the date as of which the holders of Common Stock
      of record shall participate in such dividend, distribution or subscription
      rights, or shall be entitled to exchange their certificates for Common Stock
      for
      securities or other property deliverable upon such reorganization,
      reclassification, consolidation, merger, disposition, dissolution, liquidation
      or winding-up, as the case may be. Such notice shall be given at least twenty
      (20) days prior to the action in question and not less than ten (10) days prior
      to the record date or the date on which the Issuer’s transfer books are closed
      in respect thereto. This Warrant entitles the Holder to receive copies of all
      financial and other information distributed or required to be distributed to
      the
      holders of the Common Stock.

    
      
         

      

      
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    11. Amendment
      and Waiver.
      Any
      term, covenant, agreement or condition in this Warrant may be amended, or
      compliance therewith may be waived (either generally or in a particular instance
      and either retroactively or prospectively), by a written instrument or written
      instruments executed by the Issuer and the Majority Holders; provided,
      however,
      that no
      such amendment or waiver shall reduce the Warrant Share Number, increase the
      Warrant Price, shorten the period during which this Warrant may be exercised
      or
      modify any provision of this Section 11 without the consent of the Holder of
      this Warrant. No consideration shall be offered or paid to any person to amend
      or consent to a waiver or modification of any provision of this Warrant unless
      the same consideration is also offered to all holders of the
      Warrants.

     

    12. Governing
      Law; Jurisdiction.
      This
      Warrant shall be governed by and construed in accordance with the internal
      laws
      of the State of New York, without giving effect to any of the conflicts of
      law
      principles which would result in the application of the substantive law of
      another jurisdiction. This Warrant shall not be interpreted or construed with
      any presumption against the party causing this Warrant to be drafted. The Issuer
      and the Holder agree that venue for any dispute arising under this Warrant
      will
      lie exclusively in the state or federal courts located in New York County,
      New
      York, and the parties irrevocably waive any right to raise forum non conveniens
      or any other argument that New York is not the proper venue. The Issuer and
      the
      Holder irrevocably consent to personal jurisdiction in the state and federal
      courts of the state of New York. The Issuer and the Holder consent to process
      being served in any such suit, action or proceeding by mailing a copy thereof
      to
      such party at the address in effect for notices to it under this Warrant and
      agree that such service shall constitute good and sufficient service of process
      and notice thereof. Nothing in this Section 12 shall affect or limit any right
      to serve process in any other manner permitted by law. The Issuer and the Holder
      hereby agree that the prevailing party in any suit, action or proceeding arising
      out of or relating to this Warrant or the Purchase Agreement, shall be entitled
      to reimbursement for reasonable legal fees from the non-prevailing party. The
      parties hereby waive all rights to a trial by jury.

     

    13. Notices.
      Any
      notice, demand, request, waiver or other communication required or permitted
      to
      be given hereunder shall be in writing and shall be effective (a) immediately
      upon hand delivery, telecopy or facsimile at the address or number designated
      below (if delivered on a business day during normal business hours where such
      notice is to be received), or the first business day following such delivery
      (if
      delivered other than on a business day during normal business hours where such
      notice is to be received) or (b) on the second business day following the date
      of mailing by express courier service, fully prepaid, addressed to such address,
      or upon actual receipt of such mailing, whichever shall first occur. The
      addresses for such communications shall be:

    
      
         

      

      
        18

        
          

        

      

      
         

      

    

     

    

    
      	
              If
                to the Issuer: 

               

            	
              China
                New Energy Group Company

              c/o
                Tianjin Sing Ocean Public Utility Development Co., Ltd.

              17th
                Floor, HongJi Building, JinWei Road

              HeBei
                District, Tianjin, China

              People’s
                Republic of China

              Attention:
                Jia Ji Shang

              Tel:
                 (86
                22) 2804 8651

              Fax:
                 (86
                22) 2804 8657

              Email: jameswang@etlg.net

            
	 	 
	
              with
                copies (which copies

              shall
                not constitute notice)

              to:

            	
              Thelen
                Reid Brown Raysman & Steiner LLP

              701
                Eighth Street, NW |
                Washington, DC  20001-3721  

              Attention:
                Louis A. Bevilacqua, Esq.

              Tel.
                No.: (202) 508 - 4281

              Fax
                No.: (202) 654 - 1804

              Email:
                lbevilacqua@thelen.com

            
	 	 
	
              If
                to any Holder:

            	
              At
                the address of such Holder set forth on Exhibit A to this Agreement,
                with
                copies to Holder’s counsel as set forth on Exhibit A or as specified in
                writing by such Holder with copies to:

            
	 	 
	
              with
                copies (which copies

              shall
                not constitute notice)

              to:

            	
              Guzov
                Ofsink, LLC

              600
                Madison Avenue, 14th Floor

              New
                York, New York 10022

              Attention:
                Darren Ofsink

              Tel.
                No.: (212) 371-8008

              Fax
                No.: (212) 688-7273

            

    

     

    Any
      party
      hereto may from time to time change its address for notices by giving at least
      ten (10) days written notice of such changed address to the other party
      hereto.

     

    14. Warrant
      Agent.
      The
      Issuer may, by written notice to the Holder of this Warrant, appoint an agent
      having an office in New York, New York for the purpose of issuing shares of
      Warrant Stock on the exercise of this Warrant pursuant to subsection (b) of
      Section 2 hereof, exchanging this Warrant pursuant to subsection (d) of Section
      2 hereof or replacing this Warrant pursuant to subsection (d) of Section 3
      hereof, or any of the foregoing, and thereafter any such issuance, exchange
      or
      replacement, as the case may be, shall be made at such office by such
      agent.

     

    15. Remedies.
      The
      Issuer stipulates that the remedies at law of the Holder of this Warrant in
      the
      event of any default or threatened default by the Issuer in the performance
      of
      or compliance with any of the terms of this Warrant are not and will not be
      adequate and that, to the fullest extent permitted by law, such terms may be
      specifically enforced by a decree for the specific performance of any agreement
      contained herein or by an injunction against a violation of any of the terms
      hereof or otherwise.

     

    16. Successors
      and Assigns.
      This
      Warrant and the rights evidenced hereby shall inure to the benefit of and be
      binding upon the successors and assigns of the Issuer, the Holder hereof and
      (to
      the extent provided herein) the Holders of Warrant Stock issued pursuant hereto,
      and shall be enforceable by any such Holder or Holder of Warrant
      Stock.

     

    17. Modification
      and Severability.
      If, in
      any action before any court or agency legally empowered to enforce any provision
      contained herein, any provision hereof is found to be unenforceable, then such
      provision shall be deemed modified to the extent necessary to make it
      enforceable by such court or agency. If any such provision is not enforceable
      as
      set forth in the preceding sentence, the unenforceability of such provision
      shall not affect the other provisions of this Warrant, but this Warrant shall
      be
      construed as if such unenforceable provision had never been contained
      herein.

     

    18. Headings.
      The
      headings of the Sections of this Warrant are for convenience of reference only
      and shall not, for any purpose, be deemed a part of this Warrant.

     

    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK]

    
      
         

      

      
        19

        
          

        

      

      
         

      

    

     

    IN
      WITNESS WHEREOF, the Issuer has executed this Warrant as of the day and year
      first above written.

     

    
      	 	 	 
	 	CHINA
              NEW ENERGY
              GROUP COMPANY
	 
 	 
 	 
 
	 	By:  	 
	 	
              
Name:
              Jia Ji Shang
	 	
              Title:
                Chairman and CEO

            

    

     

     

     

     

     

     

    

     

    

     

    

     

    

    
      
         

      

      
        20

        
          

        

      

      
         

      

    

     

    EXERCISE
      FORM

     

    SERIES
      A
      WARRANT

     

    CHINA
      NEW
      ENERGY GROUP COMPANY

     

    The
      undersigned _______________, pursuant to the provisions of the within Warrant,
      hereby elects to purchase _____ shares of Common Stock of
      ________________________________ covered by the within Warrant.

     

    Dated:
      _________________                  Signature                                          

     

     

     

    Address                                           
      

                                              

     

     

     

     

    Number
      of
      shares of Common Stock beneficially owned or deemed beneficially owned by the
      Holder on the date of Exercise: _________________________

     

    The
      undersigned intends that payment of the Warrant Price shall be made as (check
      one):

     

    Cash
      Exercise_______

     

    Cashless
      Exercise_______

     

    If
      the
      Holder has elected a Cash Exercise, the Holder shall pay the sum of $________
      by
      certified or official bank check (or via wire transfer) to the Issuer in
      accordance with the terms of the Warrant.

     

    If
      the
      Holder has elected a Cashless Exercise, a certificate shall be issued to the
      Holder for the number of shares equal to the whole number portion of the product
      of the calculation set forth below, which is ___________. The Company shall
      pay
      a cash adjustment in respect of the fractional portion of the product of the
      calculation set forth below in an amount equal to the product of the fractional
      portion of such product and the VWAP of one share of Common Stock on the date
      of
      exercise, which product is ____________.

     

    X
      =
Y
      (B-
      A) 

    B

     

    Where:

     

    The
      number of shares of Common Stock to be issued to the Holder
      __________________(“X”).

     

    The
      number of shares of Common Stock purchasable upon exercise of all of the Warrant
      or, if only a portion of the Warrant is being exercised, the portion of the
      Warrant being exercised ___________________________ (“Y”).

     

    The
      Warrant Price ______________ (“A”).

     

    The
      VWAP
      of one share of Common Stock _______________________ (“B”).

    
      
         

      

      
        21

        
          

        

      

      
         

      

    

     

    ASSIGNMENT

     

    FOR
      VALUE
      RECEIVED, _________________ hereby sells, assigns and transfers unto
      __________________ the within Warrant and all rights evidenced thereby and
      does
      irrevocably constitute and appoint _____________, attorney, to transfer the
      said
      Warrant on the books of the within named corporation.

     

    Dated:
      _________________                    Signature                                          

     

     

     

    Address                                          

                                              

     

     

     

     

    PARTIAL
      ASSIGNMENT

     

    FOR
      VALUE
      RECEIVED, _________________ hereby sells, assigns and transfers unto
      __________________ the right to purchase _________ shares of Warrant Stock
      evidenced by the within Warrant together with all rights therein, and does
      irrevocably constitute and appoint ___________________, attorney, to transfer
      that part of the said Warrant on the books of the within named
      corporation.

     

    Dated:
      _________________                    Signature                                          

     

     

     

    Address                                          

                                              

     

     

     

     

    FOR
      USE
      BY THE ISSUER ONLY:

     

    This
      Warrant No. W-___ canceled (or transferred or exchanged) this _____ day of
      ___________, _____, shares of Common Stock issued therefor in the name of
      _______________, Warrant No. W-_____ issued for ____ shares of Common Stock
      in
      the name of _______________.

     

    

      
        
           

        

        
          22CHINA
        NEW ENERGY GROUP COMPANY

      CERTIFICATE
        OF DESIGNATIONS OF PREFERENCES, 

      RIGHTS
        AND LIMITATIONS

      OF

      SERIES
        A CONVERTIBLE PREFERRED STOCK

      

      The
        undersigned, Jiaji Shang,
        does
        hereby certify that:

       

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

       

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

       

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

       

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

       

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

       

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

       

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

      

      TERMS
        OF PREFERRED STOCK 

      

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

      

      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

       

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

       

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

       

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

      

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

      

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

      

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

      

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

      

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

      

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

       

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

      

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

       

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

       

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

       

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

       

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

       

      
        
           

        

        
          2

          
            

          

        

        
           

        

      

       

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

       

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

       

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

       

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

       

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

       

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

       

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

       

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

       

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

       

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

       

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

       

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

       

      
        
           

        

        
          3

          
            

          

        

        
           

        

      

       

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

       

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

       

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

      

      Section
        3.
        Dividends
        and Other Distributions.
        

      

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

       

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

       

      
        
           

        

        
          4

          
            

          

        

        
           

        

      

       

      Section
        4.
         Voting
        Rights.
        

       

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

       

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

       

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

       

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

       

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

       

      
        
           

        

        
          5

          
            

          

        

        
           

        

      

       

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

       

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

       

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

       

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

       

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

       

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

       

      
        
           

        

        
          6

          
            

          

        

        
           

        

      

       

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

      

      Section
        6.
        Conversion.

      

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

       

      
        
           

        

        
          7

          
            

          

        

        
           

        

      

       

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

       

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

       

      (d) Mandatory
        Conversion.
        

       

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

       

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

       

      
        
           

        

        
          8

          
            

          

        

        
           

        

      

       

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

       

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

       

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

       

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

       

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

       

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

       

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

       

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

       

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

       

      
        
           

        

        
          9

          
            

          

        

        
           

        

      

       

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

       

      (f) Mechanics
        of Conversion

       

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

       

      
        
           

        

        
          10

          
            

          

        

        
           

        

      

       

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

       

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

       

      
        
           

        

        
          11

          
            

          

        

        
           

        

      

       

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

       

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

       

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

       

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

       

      Section
        7.
         Certain
        Adjustments.

       

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

       

      
        
           

        

        
          12

          
            

          

        

        
           

        

      

       

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

       

      (c) Price
        Adjustment Upon Dilutive Issuances.
        

       

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

       

      
        
           

        

        
          13

          
            

          

        

        
           

        

      

       

      ii. Notwithstanding
        anything to the contrary set forth in Section 7(c)(i), no adjustment shall
        be
        made to the Conversion Price and/or the Conversion Ratio with regard to (i)
        securities issued pursuant to a bona fide firm underwritten public offering
        of
        the Company’s securities provided such underwritten public offering shall
        provide gross proceeds to the Company of not less than $20,000,000 and shall
        have been approved in advance by the Majority Holders, (ii) securities issued
        (other than for cash) in connection with a strategic merger, acquisition,
        or
        consolidation provided that the issuance of such securities in connection
        with
        such strategic merger, acquisition or consolidation has been approved in
        advance
        by the Majority Holders, (iii) securities issued pursuant to the conversion
        or
        exercise of convertible or exercisable securities issued or outstanding on
        or
        prior to the Closing Date or issued pursuant to the Purchase Agreements (so
        long
        as the conversion or exercise price in such securities are not amended to
        lower
        such price and/or adversely affect the Holders), (iv) securities issued in
        connection with bona fide strategic license agreements or other partnering
        arrangements so long as such issuances are not for the purpose of raising
        capital and provided that the issuance of such securities in connection with
        such bona fide strategic license, agreements or other partnering arrangements
        has been approved in advance by the Majority Holders, (v) Common Stock issued
        or
        the issuance or grants of options to purchase Common Stock pursuant to the
        Company’s equity incentive plans outstanding as they exist on the Closing Date
        (as defined in the First Purchase Agreement), (vi) the issuance or grants
        of
        options to purchase Common Stock to employees, officers or directors of the
        Company pursuant to any equity incentive plan duly adopted by the Board of
        Directors or a committee thereof established for such purpose so long as
        such
        issuances in the aggregate do not exceed ten percent (10)% of the issued
        and
        outstanding shares of Common Stock as of the Final Closing Date (as defined
        in
        the First Purchase Agreement) and the specified price at which the options
        may
        be exercised is equal to or greater than the VWAP as of the date of such
        grant,
        and (vii) any warrants, shares of Common Stock or other securities issued
        to a
        placement agent and its designees for the transactions contemplated by the
        Purchase Agreements (each an “Exempt
        Issuance”).

       

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

       

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

       

      
        
           

        

        
          14

          
            

          

        

        
           

        

      

       

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

       

      (g) Notice
        to Holders.

       

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

       

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

       

      
        
           

        

        
          15

          
            

          

        

        
           

        

      

       

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

       

      Section
        8.
         Miscellaneous.
        

      

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

       

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

       

      
        
           

        

        
          16

          
            

          

        

        
           

        

      

       

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

       

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

       

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

      

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

       

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

       

      
        	
                /s/
                  Jiaji Shang

              	 
	
                Name:
                  Jiaji Shang

              
	
                Title:
                  Chief Executive Officer

                and
                  Chairman of the Board of

                Directors

              

      

      
        
           

        

        
          17

          
            

          

        

        
           

        

      

      

      ANNEX
        A

      

      NOTICE
        OF CONVERSION

      

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

      OF
        SERIES
        A PREFERRED STOCK)

      

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

      Conversion
        calculations:

      

      Date
        to
        Effect Conversion:

      ________________________________________

      

      Number
        of
        shares of Common Stock owned prior to Conversion:

      _______________

      

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

      ________________

      

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

      ____________________

      

      Number
        of
        shares of Common Stock to be Issued:

      ___________________________

      

      Certificate
        Number of Series A Preferred Stock attached

      hereto:
        _________________

      

      Number
        of
        Shares of Series A Preferred Stock represented by attached

      certificate:
        _________

      

      Number
        of
        shares of Series A Preferred Stock subsequent to

      Conversion:
        ________________

      

      
        	 	
                [HOLDER]

              
	 	 	 
	 	
                By:

              	 	 
	 	 	
                Name:

              
	 	 	
                Title:

              

      

      

      
        
           

        

        
          18

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