INVESTMENT MANAGEMENT TRUST AGREEMENT -------------------------------------

 

                      INVESTMENT MANAGEMENT TRUST AGREEMENT

                      -------------------------------------

 

      This Agreement is made as of  _____________,  2005 by and between  Chardan

China  Acquisition  Corp. III (the "Company") and  Continental  Stock Transfer &

Trust Company ("Trustee").

 

      WHEREAS, the Company's registration statement on Form S-1, No. 333-_______

("Registration  Statement"),  for its  initial  public  offering  of  securities

("IPO") has been declared  effective as of the date hereof by the Securities and

Exchange Commission ("Effective Date"); and

 

      WHEREAS, EarlyBirdCapital, Inc. ("EBC") is acting as the representative of

the underwriters in the IPO; and

 

      WHEREAS,  as described in the  Registration  Statement,  and in accordance

with the  Company's  Certificate  of  Incorporation,  $20,640,000  of the  gross

proceeds of the IPO  ($23,736,000 if the underwriters  over-allotment  option is

exercised in full) will be delivered to the Trustee to be deposited  and held in

a trust  account for the benefit of the Company and the holders of the Company's

common  stock,  par value  $.0001  per share,  issued in the IPO as  hereinafter

provided  and in the event the Units are  registered  in  Colorado,  pursuant to

Section  11-51-302(6) of the Colorado Revised  Statutes.  A copy of the Colorado

Statute is attached hereto and made a part hereof (the amount to be delivered to

the Trustee will be referred to herein as the "Property";  the  stockholders for

whose  benefit the Trustee  shall hold the  Property  will be referred to as the

"Public  Stockholders,"  and the Public  Stockholders  and the  Company  will be

referred to together as the "Beneficiaries"); and

 

      WHEREAS,  the Company and the Trustee  desire to enter into this Agreement

to set forth the terms and  conditions  pursuant to which the Trustee shall hold

the Property;

 

      IT IS AGREED:

 

1. Agreements and Covenants of Trustee.  The Trustee hereby agrees and covenants

to:

 

            (a) Hold the Property in trust for the  Beneficiaries  in accordance

with the terms of this Agreement, including the terms of Section 11-51-302(6) of

the  Colorado   Statute,   in  a  segregated  trust  account  ("Trust  Account")

established by the Trustee at a branch of JPMorgan Chase NY Bank selected by the

Trustee;

 

            (b) Manage,  supervise and administer  the Trust Account  subject to

the terms and conditions set forth herein;

 

            (c) In a timely  manner,  upon the  instruction  of the Company,  to

invest and reinvest the Property in any  "Government  Security." As used herein,

Government Security means any Treasury Bill issued by the United States,  having

a maturity of one hundred and eighty days or less;

 

            (d) Collect and receive,  when due, all principal and income arising

from the Property,  which shall become part of the  "Property,"  as such term is

used herein;

 

 

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            (e) Notify the  Company of all  communications  received  by it with

respect to any Property requiring action by the Company;

 

            (f)  Supply  any  necessary  information  or  documents  as  may  be

requested by the Company in connection with the Company's preparation of the tax

returns for the Trust Account;

 

            (g)  Participate  in  any  plan  or  proceeding  for  protecting  or

enforcing  any  right or  interest  arising  from the  Property  if, as and when

instructed by the Company to do so;

 

            (h) Render to the  Company and to EBC,  and to such other  person as

the Company may instruct,  monthly  written  statements of the activities of and

amounts in the Trust Account  reflecting all receipts and  disbursements  of the

Trust Account; and

 

            (i) Commence  liquidation of the Trust Account only after receipt of

and only in accordance with the terms of a letter ("Termination  Letter"),  in a

form  substantially  similar  to that  attached  hereto as  either  Exhibit A or

Exhibit B, signed on behalf of the Company by its  President  or Chairman of the

Board and Secretary or Assistant Secretary,  and complete the liquidation of the

Trust Account and  distribute the Property in the Trust Account only as directed

in the Termination Letter and the other documents referred to therein.

 

2.  Agreements  and  Covenants of the  Company.  The Company  hereby  agrees and

covenants to:

 

      (a) Give all instructions to the Trustee  hereunder in writing,  signed by

the  Company's  President  or Chairman of the Board.  In  addition,  except with

respect to its duties under paragraph 1(i) above,  the Trustee shall be entitled

to rely on,  and shall be  protected  in relying  on,  any verbal or  telephonic

advice or instruction  which it in good faith believes to be given by any one of

the persons  authorized  above to give written  instructions,  provided that the

Company shall promptly confirm such instructions in writing;

 

      (b) Hold the Trustee  harmless and indemnify the Trustee from and against,

any and all expenses,  including  reasonable counsel fees and disbursements,  or

loss  suffered  by the  Trustee in  connection  with any  action,  suit or other

proceeding  brought  against the Trustee  involving any claim,  or in connection

with any claim or  demand  which in any way  arises  out of or  relates  to this

Agreement,  the services of the Trustee hereunder, or the Property or any income

earned from investment of the Property, except for expenses and losses resulting

from the Trustee's gross  negligence or willful  misconduct.  Promptly after the

receipt by the Trustee of notice of demand or claim or the  commencement  of any

action,  suit or  proceeding,  pursuant  to which the  Trustee  intends  to seek

indemnification under this paragraph,  it shall notify the Company in writing of

such claim  (hereinafter  referred to as the "Indemnified  Claim").  The Trustee

shall have the right to conduct and manage the defense against such  Indemnified

Claim,  provided,  that the Trustee shall obtain the consent of the Company with

respect to the selection of counsel,  which  consent  shall not be  unreasonably

withheld.  The Trustee may not agree to settle any Indemnified Claim without the

prior written consent of the Company. The Company may participate in such action

with its own counsel; and

 

 

                                       2

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      (c) Pay the Trustee an initial  acceptance fee of $1,000 and an annual fee

of $3,000 (it being expressly  understood that the Property shall not be used to

pay such fee). The Company shall pay the Trustee the initial  acceptance fee and

first  year's  fee  at  the  consummation  of  the  IPO  and  thereafter  on the

anniversary  of the Effective  Date. The Trustee shall refund to the Company the

fee (on a pro rata basis) with  respect to any period after the  liquidation  of

the Trust  Fund.  The  Company  shall not be  responsible  for any other fees or

charges of the Trustee  except as may be provided in  paragraph  2(b) hereof (it

being  expressly  understood  that the  Property  shall  not be used to make any

payments to the Trustee under such paragraph).

 

3.  Limitations  of  Liability.  The  Trustee  shall have no  responsibility  or

liability to:

 

      (a) Take any action with respect to the  Property,  other than as directed

in  paragraph  1 hereof and the  Trustee  shall have no  liability  to any party

except  for  liability  arising  out of its  own  gross  negligence  or  willful

misconduct;

 

      (b)  Institute  any  proceeding  for the  collection  of any principal and

income  arising from, or  institute,  appear in or defend any  proceeding of any

kind with  respect  to,  any of the  Property  unless  and  until it shall  have

received instructions from the Company given as provided herein to do so and the

Company  shall have  advanced or  guaranteed  to it funds  sufficient to pay any

expenses incident thereto;

 

      (c) Change the investment of any Property,  other than in compliance  with

paragraph 1(c);

 

      (d) Refund any depreciation in principal of any Property;

 

      (e) Assume that the  authority of any person  designated by the Company to

give instructions hereunder shall not be continuing unless provided otherwise in

such  designation,  or  unless  the  Company  shall  have  delivered  a  written

revocation of such authority to the Trustee;

 

      (f) The other  parties  hereto or to anyone  else 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,