Execution
Copy

    


    CHINA
ENERGY RECOVERY, INC.

    UNSECURED
PROMISSORY NOTE

    


    Shanghai,
China

    May 21,
2009

    


    $5,000,000
(Maximum Principal Amount)

    


    THIS TERM LOAN NOTE AND AGREEMENT
(“Note”) is entered into as of May 21, 2009, by and among (i) Hold And Opt
Investments Limited, a Bahamas company (“holder”), with offices at Deltec House,
Lyford Cay, P.O. Box N-3229, Nassau, Bahamas, Fax Number: 1242-362-4623
Telephone Number: 1242-302-4100 and Email Address: tis@deltecbank.com, on the
one hand, and, on the other hand, (ii) CER Energy Recovery, Inc., a Delaware
corporation (“Company”), with offices at 7F, No. 267 Quyang Road, Hongkou
district, Shanghai, China 200081, Fax Number: 86-21-6508-2138, Telephone Number:
86-21-5556-0020 and Email Address: wuqinghuan@haie.com, (iii) CER Energy
Recovery (Shanghai) Co., Ltd. (“Borrower”) with offices at 7F, No. 267 Quyang
Road, Hongkou district, Shanghai, China 200081, Fax Number: 86-21-6508-2138,
Telephone Number: 86-21-5556-0020 and Email Address: wuqinghuan@haie.com, and
(iv) CER (Hong Kong) Holdings Limited (“CER Hong Kong”) with offices at Suite
1006, 10th Floor,
Harbour Crystal Centre, 100 Granville Road, Kowloon, Hong Kong, Fax Number:
852-2388-0398, Telephone Number: 852-2388-9997 and Email Address:
wuqinghuan@haie.com, as a collecting and paying agent on behalf of the Borrower
(“Paying Agent”).

    


    WHEREAS, Borrower has requested that
the holder provide term loan financing to Borrower in an amount of up to
$5,000,000 (“Commitment”), which amounts may be drawn from time to time, in
whole or in installments, upon notice, but once repaid shall not be subject to
reborrowing; and

    


    WHEREAS, holder is willing to provide
Borrower such term loan financing, subject to the terms and conditions set forth
herein;

    


    WHEREAS, the Company is willing to
provide that the principal and interest of the Note may be converted into shares
of common stock (“Common Stock”) of the Company as provided herein;

    


    WHEREAS, in connection with this Note,
the holder shall also be issued by the Company a common stock purchase warrant
(“Warrant”) to purchase shares of Common Stock of the Company in the amount of
50% of the principal sum of this Note divided by the Conversion Price (as
defined herein), initially exercisable for five years at the equivalent of the
Conversion Price, pursuant to the terms of a separate agreement;
and

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

       

    

    WHEREAS, in connection with this Note,
the Company is issuing to the holder one hundred (100) shares of Class B
Preferred Stock that provide for voting rights and directorships in the event of
defaults hereunder.

    


    NOW, THEREFORE, in consideration of the
mutual covenants and agreements set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:

    


    1.           Basic Loan
Terms.

     

    1.1             Loan.  Subject
to the terms and conditions of this Note, holder agrees to make the loan to
Borrower, as provided herein, in the principal amount up to or equal to the
Commitment, but no greater than the Commitment.  The loan may be
requested in whole or in installments (“Installment”) at the request of the
Borrower, but the aggregate of the Installments will not exceed the
Commitment.

     

    1.2           Maturity
Date.  The principal amount and any accrued and unpaid interest
will be paid in full on the twenty-four (24) month anniversary (a “Maturity
Date”) of the date each Installment is paid to the Borrower (“Installment
Funding Date”).  For the avoidance of doubt, the Borrower and holder
understand that each Installment will have a separate Maturity Date, provided
however terms such as representations, covenants, prepayment and events of
default will apply to all Installments as if one funding, one Maturity Date and
a single acceleration.

     

    1.3           Interest; Compounding of
Interest. The Borrower will pay interest on the outstanding principal
amount of the loan (computed on the basis of actual days elapsed in a year)
until the principal amount is paid in full, at the rate of nine and one half
percent (9.5%) per annum.  Interest will be paid on each Installment
two times each year, on the six month and 12 month anniversary of the
Installment Funding Date with respect to each Installment (“Interest Payment
Date”), and on each Maturity Date of an Installment and on any prepayment
date.  The interest will be calculated on a quarterly basis and
compounded quarterly for each Installment.  The Borrower shall be
responsible for the payment of all fees, withholding tax and other expenses and
taxes applicable to any payment of interest such that the holder receives the
full amount of the interest due, without any deduction.

     

    1.4           Re-borrowing Not
Permitted. Amounts borrowed pursuant to this Section 1 that are repaid
when due or prepaid may not be re-borrowed.

     

    1.5           Dollar
Loan.  All amounts stated herein are in United
States.

     

    1.6           Use of
Funds.  The proceeds of this Note will be for the construction
of a new plant to be located in China for the production of the products of the
Company on a consolidated basis, including, but not limited to, the purchase of
land for the plant, buildings, equipment and for the facilitating of financing
loans from one or more in-China bank and institutional lenders (together the
“Plant”). The Borrower, either directly or indirectly may cause the funds
obtained under this Note to be lent to another entity that is either an
affiliate or a direct or indirect subsidiary of either the Borrower or the
Company, in which case, for the purposes of this Note, such other entity will
also be deemed to be a “Borrower.”  Such “on lending” arrangement will
not need the consent of the holder.

     

    
      
        
        

      

      
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    1.7           Unsecured
Loan.  The Note and the sums borrowed hereunder are
unsecured.

     

    2.           Borrowing
Procedures.

     

    2.1             Procedure for
Borrowing.  Borrower, either directly or through the Paying
Agent, solely as agent, shall provide a written request to holder to borrow an
Installment under this Note, such written notice to be given not less than ten
(10) business days (which shall be days in Shanghai, China on which commercial
banks are open for regular business, “Business Day”) and no more than thirty
(30) Business Days prior to the planned Installment Funding Date.  The
written notice shall be executed by two officers of Borrower and shall specify
(i) the amount of the intended Installment, (ii) the intended Installment
Funding Date, which date will also be a Business Day, (iii) the account to which
the funds are to be paid (“Designated Account”), (iv) that there is, and will
be, no default under the terms of this Note and the related agreements on the
date of notice and on the Installment Funding Date, and (v) specifying the
purpose of the proceeds in detail, which purpose shall be within the scope of
the use of proceeds set forth herein.  At holder’s election, in lieu
of delivering the written request to borrow, as mentioned above, an officer of
Borrower may communicate such Installment request to holder by telephone not
later than the required time, and in such circumstances, Borrower agrees that
any such telephonic communication will be confirmed in writing in conformity
with the notice provisions above within 24 hours thereof.

     

    2.2           Time Limit on
Requests.  Borrower may only make a request to draw down an
Installment under this Note during the period commencing the date of this Note
and ending on the six month anniversary of the date of this
Note.  This provision may be extended only by a writing signed by all
the parties to this Note.

     

    2.3           Making of
Loan.  Subject to Borrower’s compliance with Section 2.1 and
the facts stated therein and Section 2.2, holder shall make the amount of the
requested Installment of the Commitment available to Borrower on the Installment
Funding Date by promptly transferring immediately available funds to the
Designated Account.

     

    2.4           Notation.  Holder
shall record on its books the principal amount of this Note owing to holder from
time to time, and such records shall, absent manifest error, conclusively be
presumed to be correct and accurate.  In addition, holder is
authorized, at holder’s option, to detail the date and amount of each payment or
prepayment of principal of the Loan in its books and records, including computer
records and/or notation on any grid or attachment to this Note.

     

    3.           Prepayment.

     

    3.1           Optional Prepayment by the
Borrower. The Borrower may prepay the outstanding principal of this Note,
in whole or in part (for any one or multiple Installments or portions thereof),
at any time and from time to time, without premium or penalty.  Each
prepayment shall be accompanied by payment of the accrued interest on the
principal being repaid through the date of prepayment.  Any prepayment
will be applied to the earliest Installment outstanding, until repaid in full,
plus the accrued interest or interest outstanding.

     

    
      
        
        

      

      
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    3.2           Notice of Prepayment by
Borrower.  If at any time the Borrower desires to prepay this
Note under Section 3.1, it shall give written notice to the holder, either
directly or through the Paying Agent, of the principal amount being prepaid, the
Installment(s) (or portions thereof) being repaid, the interest due to the date
of prepayment, and the intended date of prepayment, which notice shall be sent
not less than ninety (90) Business Days prior to the intended date of
prepayment.  The holder has the right to convert the principal and
interest of this Note into Common Stock until payment is received in good
funds.

     

    3.3           Optional Prepayment Request
by the Holder in Connection with Financing. After the first anniversary
of the first Installment Funding Date, the holder may request that the then
principal outstanding under this Note, regardless of the length of time
outstanding or Installment, be prepaid, without premium or penalty, together
with any accrued interest on the amount to be prepaid, upon the closing after
such first anniversary by the Company or any Company subsidiary, affiliate or
controlled (whether by contract or ownership) company or entity (together the
“Consolidated Company”) of any debt and/or equity (including derivatives
thereof) financing for capital raising purposes, except for debt financings to
the Consolidated Company from bank or institutional lenders licensed to operate
in China, whether in a single transaction or series of related
transactions.  The amount that may be requested to be repaid by holder
(and if more than one holder, the holders in the aggregate) may be no more than
50% of the amount of the financing received by the Consolidated
Company.  If the prepayment amount is less than all the principal and
interest due, that amount to be repaid will be applied to the principal and
interest due on the earliest Installments outstanding.

     

    3.4           Prepayment Demand by the
Holder on Certain Events. The Holder may demand that all the then
principal outstanding under this Note, regardless of the length of time
outstanding or Installment, be immediately repaid in full or in part, without
premium or penalty, together with any accrued and unpaid interest, (i) upon the
sale by the Consolidated Company of the Plant (whether as an asset, license,
lease or equity transaction or similar arrangement whereby the title, operations
or control of the Plant is transferred) to any person or entity that is not a
controlled entity, affiliate or subsidiary of the Consolidated Company, (ii)
abandonment of the building, commissioning or operation of the Plant by the
Consolidated Company, (iii) sale of all or substantially all of the assets of
the Consolidated Company, (iv) a change of control of the Company, where the
change of control represents a 50% or greater change of the direct and/or
beneficial ownership of the voting stock for any reason or by any means, in a
single or series of related transactions, (v) any merger, combination or
continuation of the Company where the Company is not the surviving entity or
there is a change of control, or (vi)  if Mr. Qinghuan Wu, the current
Chief Executive Officer and Chairman of the Board of the Company, does not hold
those positions (for any reason, whether because of resignation, retirement or
change of duties or otherwise) at any time during the period that any of the
principal or interest of this Note is outstanding or due and
payable.

     

    
      
        
        

      

      
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    3.5           Notice of Demand for
Repayment by Holder.  If at any time the holder requests
repayment of this Note pursuant to Section 3.3 and 3.4, it shall give written
notice to the Borrower and to the Paying Agent, of the amount to be repaid and
the date to be paid, together with other payment instructions.  The
repayment under Section 3.3 will be due not earlier than the ninetieth (90)
Business Day after the date of the notice of prepayment demand is given by the
holder.  The repayment under Section 3.4 will be due immediately or at
the discretion of the holder as otherwise stated in the notice. The amount being
repaid will include all the accrued interest on the amount being repaid through
the date of payment.  Any demand for repayment will not require the
Borrower to pay any premium or penalty. Once the notice of demand for repayment
is given by the holder, then the holder shall no longer have the right to
convert the principal of this Note, except if there is an Event of Default (as
defined herein) at the time of or after the giving of notice.

     

    4.           Conversion of
Notes.

     

    4.1             Conversion and Conversion
Rate. Subject to the terms of this Note and upon compliance with the
provisions of this Section 4, at the sole discretion of holder, the holder shall
have the right but not the obligation to convert all or part of the then
outstanding principal balance and accrued interest outstanding under this Note
into a number of shares of Common Stock of the Company, $.001 par value (“Common
Stock”), equal to the amount being converted divided by the conversion
rate.  The initial conversion rate shall be $1.80 (“Conversion
Rate”).  The holder shall effect conversions by delivering to the
Company notice of conversion specifying therein the amount of principal and
interest accrued under this Note to be converted and the date on which such
conversion shall be effected (such date, the “Conversion Date”) and the amount
of shares of Common Stock to be issued.  The notice of conversion may
be delivered only up to the ninetieth (90th) day
before the Maturity Date of a particular Installment as to principal and
interest due for that Installment; provided that if there is an
Event of Default continuing or an Event of Default occurs after the giving of
notice, then conversion may be made by holder at any time.  If no
notice of conversion is delivered as specified herein and except for the
provisions for conversion in the Event of Default, then the holder will be
deemed to have elected not to convert the outstanding amount for such
Installment and will be paid cash for the outstanding obligations with respect
to that Installment.  In the Event of Default, the holder has the
right to convert the outstanding obligations due under this Note into shares of
Common Stock, upon five (5) business days advance notice to the Company by the
holder at the Default Conversion Rate (as defined herein).

     

    4.2             Reservation of Shares
Issuable Upon Conversion. The Company shall take all action necessary to
at all times have authorized, and reserved for the purpose of issuance, the sum
of (i) the number of shares of Common Stock issuable upon conversion of the
principal and interest of the Notes.  The Company covenants that all
shares of Common Stock that shall be so issuable shall, upon issue, be duly
authorized, validly issued, fully paid and non-assessable.

     

    4.3           Fractional
Shares.  The Company shall not be required to issue fractions
of shares upon the conversion hereof or to distribute certificates that evidence
fractional shares nor shall the Company be required to make any cash payments in
lieu of fractional shares.  In lieu of issuance any fractional shares
or payment therefore, the Company will round up to the nearest whole
share

     

    4.4           Registration
Rights.  The shares of Common Stock into which this Note are
convertible have the registration rights set forth in a separate registration
rights agreement between the Company and the holder (“Registration Rights
Agreement”) of even date herewith, and such terms are incorporated
herein.

     

    
      
        
        

      

      
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    5.           Adjustments to Conversion
Rate.

     

    5.1           Stock Dividends and Stock
Splits.  If the Company, at any time while this Note is
outstanding: (i) pays a stock dividend or otherwise makes a distribution or
distributions to all its stockholders equally which are payable in shares of
Common Stock on shares of Common Stock or any Common Stock equivalents (which,
for avoidance of doubt, shall not include any shares of Common Stock issued by
the Company upon conversion of the Note), (ii) subdivides outstanding shares of
Common Stock into a larger number of shares, (iii) combines (including by way of
a reverse stock split) outstanding shares of Common Stock into a smaller number
of shares or (iv) issues, in the event of a reclassification of shares of the
Common Stock, any shares of capital stock of the Company, then the Conversion
Rate shall be multiplied by a fraction of which the numerator shall be the
number of shares of Common Stock (excluding any treasury shares of the Company)
outstanding immediately before such event and of which the denominator shall be
the number of shares of Common Stock outstanding immediately after such
event.  Any adjustment made pursuant to this Section 5.1 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.

     

    5.2           Reorganization,
Reclassification, Consolidation, Merger, Sale; Company Not
Survivor.  If any capital reorganization, reclassification of
the capital stock of the Company, combination, continuation, consolidation or
merger of the Company with another corporation in which the Company is not the
survivor, or sale, transfer or other disposition (i.e. license, lease or
contractual arrangement) of all or substantially all of the assets to another
corporation shall be effected by the Company, then, as a condition of such
reorganization, reclassification, combination, continuation, consolidation,
merger, sale, transfer or other disposition, lawful and adequate provision shall
be made whereby the holder shall thereafter have the right to purchase and
receive upon the basis and upon the terms and conditions herein specified and in
lieu of the shares of Common Stock immediately theretofore issuable upon
conversion of the Note, such shares of stock, securities or assets as would have
been issuable or payable with respect to or in exchange for a number of shares
of Common Stock equal to the number of shares of Common Stock immediately
theretofore issuable upon conversion of the Note, had such reorganization,
reclassification, combination, continuation, consolidation, merger, sale,
transfer or other disposition not taken place, and in any such case appropriate
provision shall be made with respect to the rights and interests of holder to
the end that the provisions hereof (including, without limitation, provision for
adjustment of the Conversion Rate) shall thereafter be applicable, as nearly
equivalent as may be practicable in relation to any shares of stock, securities
or assets thereafter deliverable upon the exercise hereof.  The
Company shall not effect any such combination, continuation, consolidation,
merger, sale, transfer or other disposition unless prior to or simultaneously
with the consummation thereof the successor corporation (if other than the
Company) resulting from such combination, continuation, consolidation or merger,
or the corporation purchasing or otherwise acquiring such assets or other
appropriate corporation or entity shall assume the obligation to deliver to the
holder, at the last address of the holder appearing on the books of the
Borrower, such shares of stock, securities or assets as, in accordance with the
foregoing provisions, the holder may be entitled to purchase, and the other
obligations under this Note.  The provisions of this paragraph 3.2
shall similarly apply to successive reorganizations, reclassifications,
combinations, continuations, consolidations, mergers, sales, transfers or other
dispositions.

     

    
      
        
        

      

      
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    5.3           Conversion Rate in the Event
of Default.  Upon and only upon the Event of Default as
stipulated in 6.1 hereunder and during the continuance thereof, the Conversion
Rate will be changed such that the outstanding amounts due under this Note may
be converted by the holder, in his sole discretion, in whole or in part, at a
rate (“Default Conversion Rate”) equal to the net asset value per share as set
forth in the latest available financial statements prior to the date of
conversion, whether or not such financial statements are read, reviewed or
audited, which were prepared in accordance with United States GAAP, consistently
applied (or International Accounting Standards if adopted by the Company prior
to an Event of Default), so long as such financial statements reflect in good
faith the net asset value of a share of Common Stock on the date of
conversion.  In the event that the net asset value per share on the
date of conversion is not readily available or reasonably reflects the net asset
value per share, then the holder and the then management or trustee,
administrator or equivalent, will negotiate in good faith an amount that will be
agreed upon as the net asset value per share contemporaneous with the conversion
of this Note, which shall be the Default Conversion Rate.

     

    5.4           Calculations.  All
calculations under this Section 5 shall be made to the nearest cent or the
nearest 1/100th of a share, as the case may be, provided however, that the
Company shall not be required to issue fractions of shares pursuant
hereto.

     

    6.           Events of
Default.  If any of the following events (“Events of Default”)
shall occur:

     

    6.1           if
the Borrower shall default in the payment of any part of the principal of or
interest on this Note when due and payable, whether at maturity or at a date
fixed for payment, prepayment or repayment whether by declaration or otherwise,
and such default shall not have been remedied on or before written notice
thereof shall have been given to the Borrower by the holder, which notice may
not be given earlier than the fifth (5) day after the due or payment date,
provided however, if the demand for repayment is made pursuant to Section 3.4
there shall be no grace period or requirement of further notice; or

     

    6.2           if
the Company, Borrower or Paying Agent shall default in the performance of or
compliance with any term contained herein applicable to it under this Note, the
Warrant and the Registration Rights Agreement, and such default shall not have
been remedied within 30 days after written notice thereof shall have been given
to the Company, Borrower or Paying Agent, as the case may be, by the holder;
or

     

    6.3           if
any of the Consolidated Company shall make an assignment for the benefit of
creditors, or shall admit in writing its inability to pay its debts as they
become due, or shall file a voluntary petition in bankruptcy, or shall be
adjudicated a bankrupt or insolvent, or shall file any petition or answer
seeking for itself any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future statute,
law or regulation, or shall file any answer admitting or not contesting the
material allegations of a petition filed against any of the Consolidated Company
in any such proceeding, or shall seek or consent to or acquiesce in the
appointment of any trustee, receiver or liquidator of any of the Consolidated
Company or of all or any substantial part of the properties of any of the
Consolidated Company, or any of the Consolidated Company shall take any
corporate action looking to the dissolution or liquidation of any Consolidated
Company; or

     

    
      
        
        

      

      
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    6.4           if,
within 30 days after the commencement of an action against any of the
Consolidated Company seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future statute, law or regulation, such action shall not have been dismissed or
all orders or proceedings thereunder affecting the operations or the business of
any of the Consolidated Company stayed, or if the stay of any such order or
proceeding shall thereafter be set aside, or if, within 30 days after the
appointment without the consent or acquiescence of any of the Consolidated
Company or any trustee, receiver or liquidator of any of the Consolidated
Company or of all or any substantial part of the properties of any of the
Consolidated Company, such appointment shall not have been vacated;

     

    6.5           if
any of the Consolidated Company is enjoined, restrained, or in any way prevented
by court or regulatory agency order from continuing to conduct all or any
material part of its business affairs;

     

    6.6           any
provision of this Note shall at any time for any reason be declared to be null
and void, or the validity or enforceability thereof shall be contested by any of
the Consolidated Company, or a proceeding shall be commenced by any of the
Consolidated  Company, or by any governmental authority having
jurisdiction over  any of the Consolidated Company, seeking to
establish the invalidity or unenforceability thereof, or any of the Consolidated
Company shall deny that it has any liability or obligation purported to be
created thereunder;

     

    then
(unless all defaults shall have theretofore been remedied) this Note shall
forthwith mature and become due and payable together with interest accrued
thereon, without presentment, demand, protest or notice, all of which are hereby
waived.

    


    In case any one or more Events of
Default shall occur and be continuing, the holder of the Note may proceed to
protect and enforce its rights by an action at law, suit in equity or other
appropriate proceeding, whether for the specific performance of any agreement
contained herein, or for an injunction against a violation of any of the terms
hereof, or in aid of the exercise of any power granted hereby or by
law.  No course of dealing and no delay on the part of the holder of
this Note in exercising any right, power or remedy shall operate as a waiver
thereof or otherwise prejudice such holder's rights, powers and
remedies.  No right, power or remedy conferred hereby upon any holder
hereof shall be exclusive of any other right, power or remedy referred to herein
or now or hereafter available at law, in equity, by statute or
otherwise.

    


    6.7           Control Preferred
Stock.  In and only in the Event of Default as stipulated in
6.1 herein at which time the outstanding amounts due under this Note shall equal
or exceed $1,000,000 in the aggregate, the holder will be permitted to exercise
the rights set forth in the Class B Preferred Stock, which will include 100
shares of such class and will have been issued to the holder as a condition to
the making of this loan.  Such shares will be transferable, in whole
or in part, with all or a portion of this Note in the discretion of the
holder.

     

    
      
        
        

      

      
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    7.           Representations of the
Holder.

     

    7.1           Access.  The
holder of this Note has conducted its own independent review and analysis of the
business, operations, technology, assets, liabilities, results of operations,
financial condition and prospects of the Consolidated Company, and acknowledges
that the Consolidated Company has provided the holder of this Note access to the
personnel, properties, premises and books and records of the Consolidated
Company for this purpose, and the holder of this Note has had an opportunity to
ask questions of and receive responses from management of the Consolidated
Company.

     

    7.2           Investment
Intent.  The holder of this Note is making the loan evidenced
by this Note and acquiring the Warrant solely for the purpose of investment and
not with a view to, or for resale in connection with, any distribution thereof
in violation of the Securities Act of 1933, as amended.

     

    7.3           Accredited
Investor.  The holder of this Note has the financial ability to
bear the economic risk of such holder’s investment, has adequate means for
providing for such holder’s current needs and personal contingencies and has no
need for liquidity with respect to such holder’s investment in the Consolidated
Company.  The holder of this Note has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of the prospective investment.  If other than an individual, the
holder of this Note also represents (A) it has not been organized for the
purpose of acquiring the Note or (B) it is an entity in which each of the equity
owners is an accredited investor as defined in Rule 501(a) promulgated under the
Securities Act of 1933, as amended.  If the holder of this Note is an
individual, such holder represents he or she is an accredited investor as
defined in such Rule 501(a).

     

    8.           Covenants.

     

    8.1           Reports.  (a)    So
long as this Note remains outstanding, the Company shall have its annual
consolidated financial statements audited by a nationally recognized firm of
independent registered accountants and its interim consolidated financial
statements reviewed by a nationally recognized firm of independent registered
accountants in accordance with Statement on Auditing Standards 101 issued by the
American Institute of Certified Public Accountants (or any similar replacement
standard).  In addition, so long as this Note is outstanding, the
Company shall furnish to the holder of this Note all annual and quarterly
reports on Forms 10-K and 10-Q, respectively, and all current reports on Form
8-K, in each case filed by it with the Securities and Exchange Commission
(“SEC”).  If the Company shall not be subject to the reporting
requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), it shall nevertheless furnish the holder of this
Note with (a) the financial information that would be required to be contained
in a filing on such annual or quarterly report, including a “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
(b) all information that would be required to be contained in filings with the
SEC on Form 8-K.  All such annual reports shall be furnished within
120 days after the end of the fiscal year to which they relate, and all such
quarterly reports shall be furnished within 45 days after the end of the fiscal
quarter to which they relate.  All such current reports shall be
furnished within the time periods specified in the SEC’s rules and regulations
for reporting companies under the Exchange Act.

     

    
      
        
        

      

      
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     (b)           At
the Company’s option, the Company shall either (i) distribute such information
and such reports (as well as the details regarding the conference call described
below) electronically to the holder of this Note, and/or (ii) make available
such information to such holder by posting such information on the Internet
(which may be its own site, IntraLinks or any comparable password protected
online data system which will require a confidentiality acknowledgement or
otherwise, and the Company shall provide such password thereto to the holder of
this Note and make such information readily available to such holder, who agrees
to treat such information as confidential).

    


    8.2           Taxes.  The
Company Group members shall pay prior to delinquency all material taxes,
assessments, and governmental levies except as contested in good faith and by
appropriate proceedings.

     

    8.3           Maintenance of Properties;
Insurance; Compliance with Law.

     

    (a)           The
Company shall, and shall cause each of the other parts of the Consolidated
Company, including without limitation the Borrower, to at all times cause all
properties used or useful in the conduct of their business to be maintained and
kept in good condition, repair and working order (reasonable wear and tear
excepted) and supplied with all necessary equipment, and shall cause to be made
all necessary repairs, renewals, replacements, necessary betterments and
necessary improvements thereto.

    


    (b)           The
Company shall maintain, and shall cause to be maintained for each of the other
part of the Consolidated Company, insurance covering such risks as are usually
and customarily insured against by corporations similarly situated in the
markets where the Company and the other parts of the Consolidated Company
conduct their respective operations, in such amounts as shall be customary for
corporations similarly situated and with such deductibles and by such methods as
shall be customary and reasonably consistent with past practice.

    


    (c)           The
Company shall, and shall cause each of the other part of the Consolidated
Company to, comply with all statutes, laws, ordinances or government rules and
regulations to which they are subject, non compliance with which would
materially adversely affect the business, earnings, properties, assets or
financial condition of the Company taken as a whole.

    


    8.4           Legal
Existence.  The Company and each of the other part of the
Consolidated Company shall do or cause to be done all things necessary to
preserve and keep in full force and effect its legal existence in accordance
with their respective organizational documents (as the same may be amended from
time to time).

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    8.5           Limitations on Mergers,
Consolidations, etc.  (a) The Company and the Borrower shall
not, directly or indirectly, in a single transaction or a series of related
transactions, (i) combine, continue, consolidate or merge with or into another
person, or sell, lease, transfer, convey or otherwise dispose of or assign all
or substantially all of the assets of the Borrower or (ii) adopt a plan of
dissolution or liquidation unless, in either case:

     

    (A)           the
Company and Borrower will be the surviving or continuing person; or

    


    (B)           the
entity formed by or surviving such combination, continuation, consolidation or
merger or to which such sale, lease, conveyance or other disposition shall be
made (or, in the case of a plan of dissolution or liquidation, any person to
which assets are transferred, leased, licensed or conveyed) (collectively, the
“Successor”) is a corporation, limited liability company or limited partnership,
and the Successor expressly assumes, by agreement in form and substance
reasonably satisfactory to the holder, all of the obligations of the Borrower,
Company and Paying Agent under this Note, the Warrant and the Registration
Rights Agreement.

    


    (b)           Upon
any combination, continuation, consolidation, combination or merger of the
Company or Borrower or any transfer, lease, license or conveyance of all or
substantially all of the assets of the Company or Borrower in accordance with
the foregoing, in which the Company or Borrower is not the continuing obligor
under the Note, the surviving entity formed into which the Company or Borrower
is merged, combined, continued or consolidated or the person to which the
conveyance, license, lease or transfer is made will succeed to, and be
substituted for, and may exercise every right and power of, the Company or
Borrower and Paying Agent under the Note, with the same effect as if such
surviving entity had been named therein as the Company or Borrower and Paying
Agent.

    


    (c)           Notwithstanding
the foregoing, any part of the Consolidated Company may consolidate, combine,
continue, or merge with or into or convey, transfer, license or lease, in one
transaction or a series of transactions, all or substantially all of its assets
to any other part of the Consolidated Company.

    


    8.6           NASDAQ
Listing.  The Company shall use its reasonable commercial
efforts to upgrade from the trading of the Common Stock on the Over-the-Counter
Bulletin Board to the listing of the Common Stock on one of the NASDAQ markets
or other United States exchanges, to take place as soon as reasonably
practicable during the period any principal under this Note is
outstanding.

     

    8.7           Consent to Future
Financings.   The holder will have the right to approve
the entry into any debt or equity financing by the Consolidated Company, except
for (i) equity financings by the Company for raising capital, (ii) debt
financings to the Consolidated Company from bank or institutional lenders
licensed to operate in China, and (iii) debt or equity financings to the
Consolidated Company where the principal, interest and any other amount due and
payable under this Note will be paid immediately from the proceeds of such
financing, without any requirement of notice of demand from the
holder.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    8.8           Right of First
Refusal.  The holder will have the right of first refusal, to
provide any debt or equity financing to be undertaken by the Consolidated
Company that is for capital raising purposes by the Consolidated Company, on the
same terms as bona fide offered by any lender or investor during the period
while any of the principal or interest of this Note is outstanding, due or owing
hereunder.  If the holder fails to accept in writing any bona fide
third party proposal within thirty (30) business days after receipt of a written
notice from the Consolidated Company containing such proposal, then the holder
shall have no claim or right with respect to any such financing contained in any
such notice.  If, thereafter, such proposal is modified in any
material respect, the Consolidated Company shall adopt the same procedure as
with respect to the original proposed financing.

     

    9.           Miscellaneous.

     

    9.1           Savings
Clause.  In no event shall the interest rate or rates payable
under this Note, plus
any other amounts paid in connection herewith, exceed the highest rate
permissible under the applicable law to this Note that a court of competent
jurisdiction shall, in a final determination, deem applicable.  The
Borrower, in executing and delivering this Note, and the holder of this Note in
accepting it, intend legally to agree upon the rate or rates of interest and
manner of payment stated herein; provided, however, that,
anything contained herein to the contrary notwithstanding, if said rate or rates
of interest or manner of payment exceeds the maximum allowable under applicable
law, then, ipso facto, as of the date of this
Note, the Borrower is and shall be liable only for the payment of such maximum
as allowed by law, and payment received from the Borrower in excess of such
legal maximum, whenever received, shall be applied to reduce the principal
balance of this Note to the extent of such excess.

     

    9.2           Governing Law;
Venue.  This Note shall be governed by and construed in
accordance with the laws of the State of Delaware, United States of
America.

     

    ALL
ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS NOTE SHALL BE TRIED AND
LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE STATE OF DELAWARE;
PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY PROPERTY MAY BE
BROUGHT, AT THE NOTE HOLDER’S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE
SUCH PROPERTY MAY BE FOUND.  THE COMPANY AND HOLDER OF THIS NOTE
WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO
ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT
ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 9.2.

     

    9.3           Remedies
Cumulative.  The rights and remedies of the holder of the Note
shall be cumulative.  The holder of the Note shall have all other
rights and remedies not inconsistent herewith as provided under the Uniform
Commercial Code, by law, or in equity.  No exercise by the holder of
the Note of one right or remedy shall be deemed an election, and no waiver by
the holder of the Note of any Event of Default shall be deemed a continuing
waiver.  No delay by the holder of the Note shall constitute a waiver,
election, or acquiescence by it.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    9.4           Amendment.  This
Note and its terms may be changed, waived or amended only by the written consent
of the Company, Borrower, Paying Agent and the holder of the Note.

     

    9.5           Severability.   In
case any provision contained herein (or part thereof) shall for any reason be
held to be invalid, illegal, or unenforceable in any respect, such invalidity,
illegality, or other unenforceability shall not affect any other provision (or
the remaining part of the affected provision) hereof, but this Note shall be
construed as if such invalid, illegal, or unenforceable provision (or part
thereof) had never been contained herein, but only to the extent that such
provision is invalid, illegal, or unenforceable.

     

    9.6           Assignment.  The
holder of this Note may assign it or any ratable part of this Note to one or
more assignees (each an “Assignee”) and the other rights and obligations of such
holder hereunder, provided, that the Company
consents to such assignment in writing.  Notwithstanding the
foregoing, the holder may assign this Note or any part thereof and all or part
of its rights and/or obligations hereunder, and the Warrants, Registration
Rights Agreement and Class B Preferred Stock to any affiliate of the holder,
whether such affiliate is wholly or partially owned or controlled by the holder
or a parent or subsidiary of the holder, without consent of the Company,
Borrower or Paying Agent.  In the event of a permitted assignment, the
Company, Borrower and Paying Agent may continue to deal solely and directly with
the holder of this Note in connection with the interest so assigned to an
Assignee until (i) written notice of such assignment, together with payment
instructions, addresses, and related information with respect to the Assignee,
have been given to the Company, Borrower and Paying Agent by the holder and the
Assignee, and (ii) the holder and its Assignee have delivered to the Company,
Borrower and Paying Agent a document reflecting such assignment and, in the case
of an assignment requiring consent, acceptance of the assignment reasonably
acceptable to the Company, Borrower and Paying Agent.

     

    9.7           Headings.  Headings
and numbers have been set forth herein for convenience only.  Unless
the contrary is compelled by the context, everything contained in each Section
applies equally to this entire Note.

     

    9.8           Notices.  All
notices sent pursuant to this Note to the holder shall be sent by a government
mail system, postage pre-paid, certified and return receipt requested and may
also be by facsimile or e-mail to the address stated herein or is subsequently
changed by the holder in a notice to the Company, Borrower and Paying Agent,
provided there is some evidence of the sending and receipt of such facsimile or
email notice.  All notices sent pursuant to this Note to the Company,
Borrower and Paying Agent shall be sent by a government mail system, postage
pre-paid, certified and return receipt requested at the corporate addresses of
the Company, Borrower and Paying Agent, as stated herein, or is subsequently
changed by the Company, Borrower and Paying Agent in a notice to the holder,
provided there is some evidence of the sending and receipt of such facsimile or
email notice.

    


    [signature on next page]

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

       

    

    IN WITNESS WHEREOF, the Borrower has
caused this Note to be signed in its name as of the date above
written.

     

    
      
        
          
            
              
                
                  
                    
                      
                        
                          
                            
                              
                                
                                  
                                    
                                      
                                        
                                          
                                            
                                              
                                                
                                                  
                                                    
                                                      
                                                        
                                                          	 
      	 
      	
                                                                  CER
      ENERGY RECOVERY, INC

                                                                
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	
                                                                  By:

                                                                	 	 
      
	 
      	 
      	
                                                                  Name:
      Qinghuan Wu

                                                                
	 
      	 
      	
                                                                  Title:  Chief
      Executive Officer

                                                                
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	
                                                                  CER
      ENERGY RECOVERY (SHANGHAI) CO., LTD.

                                                                
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	
                                                                  By:

                                                                	 	 
      
	 
      	 
      	
                                                                  Name:
      Qinghuan Wu

                                                                
	 
      	 
      	
                                                                  Title:
      Chief Executive Officer

                                                                
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	
                                                                  CER
      (HONG KONG HOLDINGS LIMITED)

                                                                
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	
                                                                  By:

                                                                	 	 
      
	 
      	 
      	
                                                                  Name:
      Qinghuan Wu

                                                                
	 
      	 
      	
                                                                  Title:
      Chief Executive
Officer

                                                                


                                                        

                                                      

                                                    

                                                  

                                                

                                              

                                            

                                          

                                        

                                         

                                         

                                      

                                    

                                  

                                

                              

                            

                          

                        

                      

                    

                  

                

              

            

          

        

      

    

    
      
        
          
            	
                    AGREED
      AND ACCEPTED BY:

                  	 
      	 
      
	 
      	 
      	 
      
	
                    HOLD
      AND OPT INVESTMENTS LIMITED

                  	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	
                    By:

                  	 	 
      	 
      	 
      
	
                    Name:
      Timothy Fraser-Smith

                  	 
      	 
      
	
                    Title:   Authorized
      Signatory

                  	 
      	 
      


          

        

      

    

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

     

    ANNEX A

    


    NOTICE OF CONVERSION

    


    The undersigned hereby elects to convert
such currently outstanding principal and accrued interest as set forth below
under the Unsecured
Convertible Note due
May 21, 2011 of which China Energy Recovery, Inc., a Delaware corporation (the “Company”) is a party, into shares of common stock (the
“Common
Stock”), of the Company according to the
conditions hereof, as of the date written below.  If shares of Common
Stock are to be issued in the name of a person other than the 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.

    


    The undersigned agrees to comply with
the prospectus delivery requirements under the applicable securities laws in
connection with any transfer of the aforesaid shares of Common
Stock.

    


    Conversion
calculations:

    


    Date to Effect Conversion:
_____________________________

    


    Principal Amount of Note
to be Converted:
________________

    


    Number of shares of Common Stock
to be issued:
___________

    


    


    


    Signature:
__________________________________________

    


    Print Name:
_________________________________________

    


    Address for Delivery of Common
Stock

    Certificates:
_________________________________________

    


    Or

    


    DWAC Instructions:

    


    Broker No:
____________________________________

    Account No:
___________________________________

    


    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

     

    ANNEX
B

    


    SCHEDULE
OF DRAWDOWNS

    


    
      
        
          
            
              
                
                  
                    
                      
                        	
                                Loan Request

                                Date

                              	 	
                                Date Loan

                                Amount Sent

                              	 	
                                Prepayment

                                Notice Date

                              	 	
                                Date Loan

                                Amount Prepaid

                              	 	
                                Amount (US$)

                              
	  	 	  	 	 
      	 	 
      	 	 
      
	 
      	 	 
      	 	 
      	 	 
      	 	 
      
	 
      	 	 
      	 	 
      	 	 
      	 	 
      
	 
      	 	 
      	 	 
      	 	 
      	 	 
      
	 
      	 	 
      	 	 
      	 	 
      	 	 
      


                      

                    

                  

                

              

            

          

        

      

    

    


    
      
        
        

      

      
        16