SECURITIES ESCROW AGREEMENT

This Escrow Agreement (the “Agreement”), dated as of June 11, 2008, is entered
into by and among China Advanced Construction Materials Group, Inc., a Delaware
corporation (the “Company”), the individual signatories hereto on Schedule A
(each an “Investor” and collectively, the “Investors”), Professional Offshore
Opportunity Fund, Ltd., as representative of the Investors (the “Investor
Representative”), Xianfu Han and Weili He (collectively, the “Stockholders”) and
American Stock Transfer & Trust Company (hereinafter referred to as the “Escrow
Agent”). All capitalized terms used but not defined herein shall have the
meanings assigned them in the Subscription Agreement, between the Company and
each Investor in the Offering.

BACKGROUND

The Company is selling investment units (“Units”), each consisting of (i) one
share of the Company’s Series A Convertible Preferred Stock, par value $.001 per
share, each share of which will be convertible into four (4) shares of the
Company’s Common Stock, par value $.001 per share (the “Common Stock”) and (ii)
a warrant to purchase two (2) shares of Common Stock, par value $.001 per share.
As an inducement to the Investors to enter into the Subscription Agreement, the
Stockholders have agreed to place the Escrow Shares (as defined below) into
escrow for the benefit of the Investors in the event the Company fails to
satisfy the Performance Thresholds (as defined below). Pursuant to the terms of
the Offering, as described in the Company’s Private Placement Memorandum (“PPM”)
dated March 17, 2008, as amended on April 11, 2008, May 21, 2008 and May 28,
2008 and in the Consent to Modification and Amendment Agreement of the PPM dated
as of the date hereof, the Company, the Stockholders and the Investor
Representative have agreed to establish an escrow account (the “Escrow Account”
on the terms and conditions set forth in this Agreement and the Escrow Agent has
agreed to act as escrow agent pursuant to the terms and conditions of this
Agreement.

AGREEMENT

NOW, THEREFORE, in consideration of the mutual promises of the parties and the
terms and conditions hereof, the parties hereby agree as follows:
 
1. Appointment of Investor Representative. The Investors hereby appoint the
Investor Representative to act on their collective behalf with respect to all
matters within the scope of this agreement, and the Investor Representative
hereby accepts such appointment. All decisions of the Investor Representative
with respect to the subject matter of this Agreement shall be binding on the
Investors absent fraud or willful misconduct.
 
2. Appointment of Escrow Agent. The Investor Representative on behalf of the
Investors, the Stockholders and the Company hereby appoint American Stock
Transfer & Trust Company as escrow agent to act in accordance with the terms and
conditions set forth in this Agreement, and the Escrow Agent hereby accepts such
appointment and agrees to establish the Escrow Account on the terms and subject
to the conditions hereinafter set forth.

 
 

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3. Establishment of Escrow. Upon the execution of this Agreement, the
Stockholders shall deliver to the Escrow Agent stock certificates evidencing
3,500,000 shares in the aggregate of the Company’s Common Stock, which shares
shall be transferred into the name of the Escrow Agent (collectively, the
“Escrow Shares”) along with stock powers executed in blank. Notwithstanding the
foregoing transfer, the Stockholders shall have the right to vote the Escrow
Shares until such time as they are eligible for transfer to the Investors
pursuant to the terms of this Agreement. The Company shall take all steps to
assure that the Escrow Shares are transferred on the books and records of the
Company into the name of the Escrow Agent.
 
4. Representations of the Stockholders. The Stockholders hereby represent and
warrant to the Investors and the Investor Representative as follows:
 
4.1 The Escrow Shares are validly issued, fully paid and nonassessable shares of
the Company. The Stockholders are the record and beneficial owners of the Escrow
Shares and have good title to the Escrow Shares, free and clear of all pledges,
liens, claims and encumbrances, except encumbrances created by this Agreement
and the Lock-Up Agreements entered into with the Stockholders, and the Escrow
Agent shall hereafter have good record title to such shares. There are no
restrictions on the ability of the Stockholders to transfer the Escrow Shares to
the Escrow Agent or for the Escrow Agent to transfer the Escrow Shares to the
Investors, except as stated herein. There are no restrictions on the ability of
the Stockholders enter into this Agreement other than transfer restrictions
under applicable federal and state securities laws. Upon any delivery of Escrow
Shares to the Investors hereunder, the Investors will acquire good and valid
title to the Escrow Shares, free and clear of any pledges, liens, claims and
encumbrances.
 
4.2 The performance of this Agreement and compliance with the provisions hereof
will not violate any provision of any applicable law and will not conflict with
or result in any breach of any of the terms, conditions or provisions of, or
constitute a default under, or result in the creation or imposition of any lien,
charge or encumbrance upon, any of the properties or assets of the Stockholders
pursuant to the terms of the certificate of incorporation or by-laws of the
Company or any indenture, mortgage, deed of trust or other agreement or
instrument binding upon the Stockholders or affecting the Escrow Shares. No
notice to, filing with, or authorization, registration, consent or approval of
any governmental authority or other person is necessary for the execution,
delivery or performance of this Agreement or the consummation of the
transactions contemplated hereby by the Stockholders.
 
5. Disbursement of Escrow Shares.
 
5.1 For purposes of this Agreement, “Net Income” means net income as defined
under United States generally accepted accounting principles (“GAAP”),
consistently applied, for the Company, except that there shall be assumed each
year that there are dividends payable on each share of outstanding Series A
Preferred Stock at the annual rate of nine percent (9%) (which amount of
dividends, to the extent paid by the Company, shall be added back (if and to the
extent previously subtracted in the calculation of Net Income in accordance with
GAAP) to Net Income prior to determining if the Performance Thresholds (defined
below) have been satisfied) and that, other than in the fiscal year (“FY08”)
ending June 30, 2008 for which Net Income shall be calculated on a pre-tax
basis, the Company’s income is subject to tax at an assumed twenty-five percent
(25%) rate, and provided, however, that the Company’s Net Income shall be
increased by any non-cash charges incurred as a result of the Offering (due to
non-cash amortization on warrants and loss from change in fair value of the
Warrants charged to the Company’s results of operation, if any, and if and to
the extent previously subtracted in the calculation of Net Income in accordance
with GAAP). The Company’s Net Income for FY08 and fiscal year (“FY09”) ending
June 30, 2009 shall also be increased by any cash and non-cash charges related
to the share exchange agreement dated April 29, 2008, by and among the Company,
Xin Ao Construction Materials, Inc., a company incorporated under the laws of
the British Virgin Islands (“BVI-ACM”), and each of the shareholders of BVI-ACM,
and this Offering, including but not limited to the following: attorney’s fees,
professional fees, consulting fees, edgar filing fees, auditing fees and any
liquidated damages pursuant to Section 7.1 of the Subscription Agreements.

 
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5.2 The Company has established the following financial performance thresholds
(collectively, the “Performance Thresholds”): (i) $5,200,000 of Net Income
(calculated on a pre-tax basis solely with respect to FY08) for FY08 (the “FY08
Threshold”), (ii) $9,000,000 of Net Income for FY09 (the “FY09 Threshold”) and
(iii) Net Income equal to or greater than the Company’s Net Income for the
fiscal year ending June 30, 2009, for the fiscal year (“FY10”) ending June 30,
2010 (the “FY10 Threshold”). The Company will provide the Investor
Representative with its audited financial statements for FY08, FY09 and FY10,
prepared in accordance with US GAAP, consistently applied with its financial
statements for the fiscal year ending June 30, 2007, on or before September 30,
2008, September 30, 2009 and September 30, 2010, respectively (the “Due Date”),
along with a certification from the Company’s Chief Financial Officer
calculating Net Income for such year as provided above, and a letter from the
Company’s auditors confirming the accuracy of the CFO’s calculation, so as to
allow the Investor Representative the opportunity to evaluate whether the
Performance Threshold has been attained each year.
 
5.3 If the Company’s Net Income (as calculated pursuant to Section 5.1 above)
for any one of FY08, FY09 or FY10 is less than 100% of the applicable
Performance Threshold, respectively, then the Performance Threshold will be
deemed not to have been achieved and all of the Escrow Shares shall be forfeited
by the Shareholders and delivered by the Escrow Agent to the Investors (pro rata
based on the number of Units purchased by each Investor in the Offering as shown
on Exhibit A). The Investor Representative shall provide written instructions to
the Escrow Agent, with copies to the Company and the Stockholders, instructing
the Escrow Agent to deliver to the Investors, at the addresses set forth on
Exhibit A, within ten (10) business days following delivery of the Investor
Representative’s notice pursuant to this Section 5.3, certificates registered in
the name of each Investor, subject to Section 5.6 below and provided that the
Escrow Agent has received such certificates from the Company’s transfer agent,
evidencing the Investor’s pro rata portion of the Escrow Shares, and the Escrow
Agent shall make such delivery to the Investors if no objection is received from
the Stockholders.
 
5.4 If the Escrow Shares remain in the Escrow Account after the Investor
Representative has had the opportunity to evaluate whether or not the Company
has attained the FY10 Performance Threshold, then all of the Escrow Shares
remaining in the Escrow Account shall be delivered to the Stockholders, in
proportion to the amount contributed by each, and the Investor Representative
shall provide written instructions to the Escrow Agent instructing the Escrow
Agent to deliver the Escrow Shares to the Stockholders within ten (10) business
days following delivery of the financial statements for FY10 to the Investor
Representative.

 
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5.5 In the event that any Escrow Shares are to be delivered to the Investors
pursuant to this Section 5, the Company shall use best efforts to promptly cause
the Escrow Shares to be delivered to the Investors, including causing its
transfer agent promptly to issue the certificates in the names of the Investors
and causing its securities counsel to provide any written instruction required
by its transfer agent or the Escrow Agent in a timely manner so that the
issuances and delivery contemplated above can be achieved within ten (10)
business days following delivery of the applicable financial statements to the
Investor Representative and so that the Escrow Shares can be delivered without
restrictive legend so long as six (6) months have passed since the date of this
Agreement.
 
5.6 Notwithstanding anything to the contrary herein, those Investors that became
holders of Preferred Stock pursuant to the Offering shall be entitled to their
pro rata portion of the Escrow Shares at the time of any distribution of Escrow
Shares, regardless of whether they have subsequently transferred their Preferred
Stock; provided, however, if an Investor has entered into a written agreement
evidencing such Investor’s transfer and assignment of all its rights and
obligations under this Agreement, and has provided written notice to the Company
and the Escrow Agent of such transfer in accordance with Section 14 below (a
“Notice of Transfer”), then in the event that any Escrow Shares are to be
delivered to the Investors in accordance with this Section 5, the Company shall
direct its transfer agent to issue the certificates in the names of the
transferee(s) and the Escrow Shares shall be delivered by the Escrow Agent to
the transferee(s) as set forth in the Investor’s Notice of Transfer.
 
6. Investment Intent; Limited Transferability of Escrow Shares.
 
6.1 By accepting the Escrow Shares, each Investor represents to the Company that
it understands that the Escrow Shares have not been registered for sale under
Federal or state securities laws and are being delivered to the Investor
pursuant to one or more exemptions from the registration requirements of such
securities laws. Each Investor understands that it must bear the economic risk
of its investment the Escrow Shares and hold such securities for an indefinite
period of time, as such securities have not been registered under Federal or
state securities laws and therefore cannot be sold unless subsequently
registered under such laws, unless an exemption from such registration is
available. Each Investor further represents to the Company, by accepting the
Escrow Shares, that it has full power and authority to accept the Escrow Shares
and make the representations set forth herein.
 
6.2 Each Investor, by its acceptance of the Escrow Shares, represents to the
Company that it is acquiring the Escrow Shares for its own account for
investment and not with a view to, or for sale in connection with, any
distribution thereof in violation of the Securities Act of 1933, as amended (the
“Act”). Each Investor agrees, by acceptance of the Escrow Shares, that such
shares will not be sold or otherwise transferred unless (i) a registration
statement with respect to such transfer is effective under the Act and any
applicable state securities laws or (ii) such sale or transfer is made pursuant
to one or more exemptions from the Act.

 
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6.3 Each Investor, by its acceptance of the Escrow Shares, acknowledges that the
Escrow Shares may not be sold, transferred, assigned or hypothecated by the
Investor except in compliance with the provisions of the Act and the applicable
state securities “blue sky” laws, and is so transferable only upon the books of
the Company which it shall cause to be maintained for such purpose.
 
7. Duration. This Agreement shall terminate on the distribution of all the
Escrow Shares in accordance with Section 5 above.
 
8. Interpleader. Should any controversy arise among the parties hereto with
respect to this Agreement or with respect to the right to receive the Escrow
Shares, the Escrow Agent shall have the right to consult counsel and/or to
institute an appropriate interpleader action to determine the rights of the
parties. The Escrow Agent is also hereby authorized to institute an appropriate
interpleader action upon receipt of a written letter of direction executed by
the parties so directing Escrow Agent. If the Escrow Agent is directed to
institute an appropriate interpleader action, it shall institute such action not
prior to thirty (30) days after receipt of such letter of direction and not
later than sixty (60) days after such date. Any interpleader action instituted
in accordance with this Section 8 shall be filed in any court of competent
jurisdiction in New York, New York, and the Escrow Shares in dispute shall be
deposited with the court and in such event Escrow Agent shall be relieved of and
discharged from any and all obligations and liabilities under and pursuant to
this Agreement with respect to the Escrow Shares.
 
9. Exculpation and Indemnification of Escrow Agent.
 
9.1 The Escrow Agent is not a party to, and is not bound by or charged with
notice of any agreement out of which this escrow may arise. The Escrow Agent
acts under this Agreement as a depositary only and is not responsible or liable
in any manner whatsoever for the sufficiency, correctness, genuineness or
validity of the subject matter of the escrow, or any part thereof, or for the
form or execution of any notice given by any other party hereunder, or for the
identity or authority of any person executing any such notice. The Escrow Agent
will have no duties or responsibilities other than those expressly set forth
herein. The Escrow Agent will be under no liability to anyone by reason of any
failure on the part of any party hereto (other than the Escrow Agent) or any
maker, endorser or other signatory of any document to perform such person’s or
entity’s obligations hereunder or under any such document. Except for this
Agreement and instructions to the Escrow Agent pursuant to the terms of this
Agreement, the Escrow Agent will not be obligated to recognize any agreement
between or among any or all of the persons or entities referred to herein,
notwithstanding its knowledge thereof.
 
9.2 The Escrow Agent will not be liable for any action taken or omitted by it,
or any action suffered by it to be taken or omitted, in good faith and in the
exercise of its own best judgment, and may rely conclusively on, and will be
protected in acting upon, any order, notice, demand, certificate, or opinion or
advice of counsel (including counsel chosen by the Escrow Agent), statement,
instrument, report or other paper or document (not only as to its due execution
and the validity and effectiveness of its provisions, but also as to the truth
and acceptability of any information therein contained) which is reasonably
believed by Escrow Agent to be genuine and to be signed or presented by the
proper person or persons. The duties and responsibilities of the Escrow Agent
hereunder shall be determined solely by the express provisions of this Agreement
and no other or further duties or responsibilities shall be implied, including,
but not limited to, any obligation under or imposed by any laws of the State of
New York upon fiduciaries.

 
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9.3 The Escrow Agent will be indemnified and held harmless, jointly and
severally, by the Company and the Stockholders from and against any expenses,
including reasonable attorneys’ fees and disbursements, damages or losses
suffered by the Escrow Agent in connection with any claim or demand, which, in
any way, directly or indirectly, arises out of or relates to this Agreement or
the services of Escrow Agent hereunder; except, that if the Escrow Agent is
guilty of willful misconduct, fraud or gross negligence under this Agreement,
then the Escrow Agent will bear all losses, damages and expenses arising as a
result of such willful misconduct, fraud or gross negligence. Promptly after the
receipt by the Escrow Agent of notice of any such demand or claim or the
commencement of any action, suit or proceeding relating to such demand or claim,
the Escrow Agent will notify the other parties hereto in writing. For the
purposes hereof, the terms “expense” and “loss” will include all amounts paid or
payable to satisfy any such claim or demand, or in settlement of any such claim,
demand, action, suit or proceeding settled with the express written consent of
the parties hereto, and all costs and expenses, including, but not limited to,
reasonable attorneys’ fees and disbursements, paid or incurred in investigating
or defending against any such claim, demand, action, suit or proceeding. The
provisions of this Section 9 shall survive the termination of this Agreement.
 
10. Fees and Expenses. The Company will pay the Escrow Agent $_________ for all
services rendered by the Escrow Agent hereunder. In addition, the Company agrees
to reimburse the Escrow Agent for any reasonable expenses incurred in connection
with this Agreement, including, but not limited to, reasonable counsel fees of
one counsel.
 
11. Resignation of Escrow Agent. At any time, upon ten (10) days’ written notice
to the Company, the Escrow Agent may resign and be discharged from its duties as
escrow agent hereunder. As soon as practicable after its resignation, the Escrow
Agent will promptly turn over to a successor escrow agent appointed by the
Company the Escrow Shares held hereunder upon presentation of a document
appointing the new escrow agent and evidencing its acceptance thereof. If, by
the end of the 10-day period following the giving of notice of resignation by
the Escrow Agent, the Company shall have failed to appoint a successor escrow
agent, the Escrow Agent may interplead the Escrow Shares into the registry of
any court having jurisdiction.
 
12. Records. The Escrow Agent shall maintain accurate records of all
transactions hereunder. Promptly after the termination of this Agreement or as
may reasonably be requested by the parties hereto from time to time before such
termination, the Escrow Agent shall provide the parties hereto, as the case may
be, with a complete copy of such records, certified by the Escrow Agent to be a
complete and accurate account of all such transactions. The authorized
representatives of each of the parties hereto shall have access to such books
and records at all reasonable times during normal business hours upon reasonable
notice to the Escrow Agent.
 
13. Registration Rights. If any Escrow Shares are distributed to the Investors
hereunder, but counsel for the Company is unable to opine that the Escrow Shares
may be delivered to the Investors free of restrictive legend, then the Investors
shall have the right to participate in the registration rights granted to them
in connection with their purchase of the Units pursuant to Article VII of the
Subscription Agreement. By executing this Agreement, the Company agrees to
comply with the provisions in Article VII of the Subscription Agreement. The
Company shall also engage Counsel to timely provide the opinion required under
this Section.

 
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14. Notice. All notices, communications and instructions required or desired to
be given under this Agreement must be in writing and shall be deemed to be duly
given if sent by registered or certified mail, return receipt requested, or
overnight courier to the following addresses:
 
If to Escrow Agent:
American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
Attention: Herbert Lemmer

If to the Company or the Stockholders: 

China Advanced Construction Materials Group, Inc.
Yingu Plaza, 9 Beisihuanxi Road, Suite 1708
Haidian District, Beijing 100080
Attention: Xianfu Han, Chief Executive Officer

With a copy to:
Anslow + Jaclin, LLP
195 Route 9 South, Suite 204
Manalapan, NJ 07726
Attention: Richard Anslow, Esq.

If to the Investor Representative: 

Professional Offshore Opportunity Fund, Ltd.
1400 Old Country Road
Suite 206
Westbury, NY 11590
Attention: Howard B. Berger, Manager

or to such other address and to the attention of such other person as any of the
above may have furnished to the other parties in writing and delivered in
accordance with the provisions set forth above.
 
15. Execution in Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument. Facsimile execution and delivery of this
Agreement is legal, valid and binding for all purposes.

 
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16. Assignment and Modification. This Agreement and the rights and obligations
hereunder of any of the parties hereto may not be assigned without the prior
written consent of the other parties hereto. Subject to the foregoing, this
Agreement will be binding upon and inure to the benefit of each of the parties
hereto and their respective successors and permitted assigns. No other person
will acquire or have any rights under, or by virtue of, this Agreement. No
portion of the Escrow Shares shall be subject to interference or control by any
creditor of any party hereto, or be subject to being taken or reached by any
legal or equitable process in satisfaction of any debt or other liability of any
such party hereto prior to the disbursement thereof to such party hereto in
accordance with the provisions of this Agreement. This Agreement may be changed
or modified only in writing signed by all of the parties hereto.
 
17. Applicable Law. This Agreement shall be governed by and construed with the
laws of the State of New York applicable to contracts made and to be performed
therein. Any litigation concerning the subject matter of this Agreement shall be
exclusively prosecuted in the state or federal courts located in New York, New
York, and all parties consent to the excusive jurisdiction and venue of those
courts.
 
18. Headings. The headings contained in this Agreement are for convenience of
reference only and shall not affect the construction of this Agreement.
 
19. Attorneys’ Fees. If any action at law or in equity, including an action for
declaratory relief, is brought to enforce or interpret the provisions of this
Agreement, the prevailing party shall be entitled to recover reasonable
attorneys’ fees from the other party (unless such other party is the Escrow
Agent), which fees may be set by the court in the trial of such action or may be
enforced in a separate action brought for that purpose, and which fees shall be
in addition to any other relief that may be awarded.

[Signature Page Follows]

 
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IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day
and year first above written.
 
AMERICAN STOCK TRANSFER & TRUST COMPANY
       
By:
/s/ Herbert J. Lemmer
   
Name: Herbert J. Lemmer
   
Title: Vice President
       
CHINA ADVANCED CONSTRUCTION MATERIALS GROUP, INC.
       
By:
/s/ Xianfu Han
   
Name: Xianfu Han
   
Title: Chief Executive Officer
       
PROFESSIONAL OFFSHORE OPPORTUNITY FUND, LTD.
       
By:
/s/ Howard Berger
   
Name: Howard Berger
   
Title: Manager
       
STOCKHOLDERS:
         /s/ Xianfu Han    Xianfu Han, in his individual capacity          /s/
Weili He    Weili He, in his individual capacity  

 
 

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Exhibit A
 
Investor Signature Page
 
The undersigned hereby (i) agrees to the annexed Securities Escrow Agreement,
(ii) consents to the appointment of the Investor Representative, and (iii)
states that next to the undersigned’s name below is the number of Units
purchased by the undersigned in _______ 2008 and the dollar amount invested by
the undersigned.
 
Signature: ________________________________
Name: ___________________________________
Entity Name: ______________________________
Number of Units Purchased: __________________
Amount of Investment (in USD): _______________
Tax Id. No.: _______________________________

 
 

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