Document:

SENIOR
LOAN AGREEMENT

    

    SENIOR LOAN AGREEMENT (this
“Agreement”) dated as of July 3, 2009 by and between SmartHeat Inc., a Nevada
corporation with its principal executive offices located at A-1, 10, Street 7
Shenyang Economic and Technological Development Zone Shenyang, China 110027 and
its wholly owned subsidiary Shenyang Taiyu Machinery & Electronic Equipment
Co, Ltd., a company organized under the laws of the Peoples Republic of China
(the “Subsidiary”) (collectively, the “Company”), and Strong Growth Capital,
Ltd, a limited company organized under the laws of the British Virgin Islands
with its principal executive offices located at Bldg, 24 De Castro Street,
Wickhams Cay 1, Road Town, Tortola, British Virgin Islands
("Lender").

    

    WITNESSETH

    

    WHEREAS, Lender has agreed,
subject to the terms and conditions hereof, to loan to the Company the sum of US
$9,000,000 (Nine Million Dollars) (the "Loan"), which shall be senior to any
other debt of the Company.

    

    NOW, THEREFORE, in
consideration of the foregoing premises and other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties hereto
hereby agree as follows:

    

    1.  The
Loan.  Simultaneously with the execution of this Agreement by
the parties hereto, the Lender will loan to the Company the sum of US
$9,000,000. The Loan will be evidenced by a note (the "Senior Note"), dated the
date hereof, in the principal amount of the Loan, and will bear simple interest
at the rate of 10% per annum, payable quarterly commencing on September 30, 2009
and thereafter on the last day of the month which is not a banking holiday
recognized by J.P. Morgan Bank in New York City or a Saturday or Sunday, and the
principal with any accrued and unpaid interest thereon, on the earlier of (i)
six months from the date hereof, (ii) on demand of the Lender at any time
commencing three (3) months from the date hereof, or (iii) upon acceleration due
to a Change of Control, Event of Default or Acceleration Event (as defined
herein). Upon completion of any financing by the Company or its Subsidiary, the
entire outstanding amount of principal and interest, or any part thereof, shall
be due upon demand of the Lender (an “Acceleration Event”).  The
Senior Note will be in the form attached hereto as Exhibit A.

    

    2. Representations and
Warranties of the Company. The Company represents and warrants
that:

    

    (A)  The
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Nevada, and the Company and its Subsidiary are
duly qualified to do business and in good standing in such jurisdictions where
the conduct of their business makes such qualification necessary. The Company
has full power and authority, corporate and otherwise, to enter into and perform
this Agreement and the Senior Note. The Company owns One Hundred Percent (100%)
of the equity of its Subsidiary and none of such equity or the assets of its
Subsidiary are subject to any liens or encumbrances. The Company and its
Subsidiary has no debt or any liens or encumbrances on any of its
assets.

    
      
         

      

      
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    (B)  The
execution, delivery and performance by the Company of this Agreement, and the
making, execution and delivery by the Company of the Senior Note (collectively
with the Agreement referred to herein as the "Transaction Documents") have been
duly authorized by all necessary corporate action and will not violate any
provision of law, court order or decree to which the Company or its Subsidiary
are subject to, or the Company's Articles of Incorporation or Bylaws, as
amended, or result in the breach of, or constitute a default under, or result in
the creation of any lien, charge or encumbrance upon any property or assets of
the Company or its Subsidiary pursuant to any agreement or instrument to which
they are a party. The Transaction Documents are a valid and binding obligation
of the Company, enforceable in accordance with its terms subject to general
principles of equity and bankruptcy and other laws affecting creditors' rights
generally.

    

    (C)  Except
for any applicable requirements of state securities laws (as to which no
representations or warranties are made), no governmental permit, consent,
approval or authorization is required in connection with (i) the execution,
delivery and performance of the Transaction Documents, or (ii) the offer, sale,
issuance and delivery of the Note contemplated hereby by the Company; provided, that, all
representations made to the Company by the Lender in this Agreement and in any
other document or instrument delivered in connection herewith are assumed for
purposes of this representation and warranty to be accurate and
complete.

    

    (D)  The
Company has made available to the Lender through the EDGAR system, true and
complete copies of the Company’s most recent Annual Report on Form 10 for the
fiscal year ended December 31, 2008 (the “10-K”), and all other reports
filed by the Company pursuant to the 1934 Act since the filing of the 10-K and
prior to the date hereof (collectively, the “SEC Filings”). The SEC Filings are
the only filings required of the Company pursuant to the 1934 Act for such
period. The Company and its Subsidiary are engaged in all material respects only
in the business described in the SEC Filings and the SEC Filings contain a
complete and accurate description in all material respects of the business of
the Company and its Subsidiaries, taken as a whole.

    

    (E) The
SEC Filings complied as to form and content in all material respects with the
requirements of the 1934 Act and did not contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements made therein, in the light of the circumstances under which they were
made, not misleading.

    

    (F) The
net proceeds of the Senior Note hereunder shall be used by the Company for
working capital.

    
      
         

      

      
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    (G) Since
March 31, 2009, except as identified and described in the SEC Filings, there has
not been:

    

    (i) any
change in the financial condition of the Company that could reasonably be
expected to have a material adverse effect (“Material Adverse Effect”) on
(i) the assets, liabilities, results of operations, condition (financial or
otherwise), business, or prospects of the Company and its Subsidiary taken as a
whole, or (ii) the ability of the Company to perform its obligations under
the Transaction Documents, individually or in the aggregate; or

    

    (ii) any
other event or condition of any character that has had or could reasonably be
expected to have a Material Adverse Effect.

    

    3.  Representations and
Warranties by the Lender. As an inducement to the Company to enter
into this Agreement and issue the Note, Lender represents and warrants, as
follows:

    

    (A)
Lender is a validly existing corporation, limited partnership or limited
liability company and has all requisite corporate, partnership or limited
liability company power and authority to enter into the Transaction
Documents.

    

    (B)  The
execution, delivery and performance by Lender of the Transaction Documents to
which Lender is a party have been duly authorized and will each constitute the
valid and legally binding obligation of Lender, enforceable against Lender in
accordance with their respective terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of general
applicability, relating to or affecting creditors’ rights
generally.

    

    (C)  Lender
acknowledges that he has been advised that the Note has not been registered
under the provisions of the Act.

    

    (D)  Lender
acknowledges reviewed and received copies of all SEC Filings. Lender
specifically disclaims receipt of any other information and material, whether
oral or in writing, from the Company or anyone acting for or on behalf of the
Company, and reliance upon any such unauthorized oral or written information and
material is specifically disclaimed.

    

    4. Covenants.

    

    (A) The Company shall cause its
Subsidiary to guaranty its obligations under this Agreement and the Senior Note
pursuant to the relevant laws of the Peoples Republic of China.

    

    (B) Upon an Event of Default (as
defined in the Senior Note) or a change of control of the Company, which shall
be solely determined by the Lender (a “Change of Control”),  the
entire outstanding principal amount of the Senior Note, and interest due
thereon, shall become immediately due and payable.

    
      
         

      

      
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    5.  Negative
Covenants.

    

    Without
the prior written consent of the Lender, from the date hereof until the date the
Senior Note is repaid in full, the Company and its Subsidiary shall be
prohibited from

    

    (A) Effecting or entering into an
agreement or to affect any subsequent financing which shall be senior to the
Senior Notes, or any other financing;

    

    (B) Selling, leasing, or otherwise
disposing of their respective assets;

    

    (C) Dissolving, liquidating, or
winding up their respective businesses;

    

    (D)  Conducting their respective
businesses other than in their ordinary and usual course;

    

    (E) Paying any dividend or make
any other distributions of cash or property;

    

    (F) Merging or consolidating with
another entity;

    

    (G) Issuing any shares of Company
capital stock or Company debt securities.

    

    6.  Loan
Delivery.

    

    At the
request of the Company, Lender shall deposit a total of $3,242,606.15, less any
applicable wire or transfer fees, to an account designated by Company located in
the Peoples Republic of China or, if such amount is deposited in RMB, it shall
be deposited at an exchange rate fixed at UD$1 = RMB
6.83.  $5,757,393.85, less any applicable wire or transfer expenses
shall be deposited in escrow at the account of The Newman Law Firm IOLA Account,
in escrow for the benefit of the Company.  Upon confirmation in
writing by the Company of receipt of the funds deposited in China and upon
receipt of the funds in the U.S. account, The Newman Law Firm shall confirm
receipt of the funds to Lender in writing and all funds held in the Newman Law
Firm IOLA account shall be promptly released to the Company as directed by the
Company in writing.

    

    7.  Miscellaneous.

    

    (A) (i)
The Company agrees to indemnify and hold harmless the Lender and its affiliates
and their respective directors, officers, employees and agents (each a “Lender
Indemnitee”) from and against any and all losses, claims, damages, liabilities
and expenses (including without limitation reasonable attorney fees and
disbursements and other expenses incurred in connection with investigating,
preparing or defending any action, claim or proceeding, pending or threatened
and the costs of enforcement thereof) (collectively, “Losses”) to which any such
Lender Indemnitee may become subject as a result of any breach of
representation, warranty, covenant or agreement made by or to be performed on
the part of the Company under the Transaction Documents, and will reimburse any
such Lender Indemnitee for all such amounts as they are incurred by such Lender
Indemnitee.

    
      
         

      

      
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    (ii) The
Lender agrees to indemnify and hold harmless the Company and its affiliates and
their respective directors, officers, employees and agents (each a “Company
Indemnitee”) from and against any and all Losses to which any such Company
Indemnitee may become subject as a result of any breach of representation,
warranty, covenant or agreement made by or to be performed on the part of the
Lender under the Transaction Documents, and will reimburse any such Company
Indemnitee for all such amounts as they are incurred by such Company
Indemnitee.

    

    (B) This
Agreement may not be assigned by a party hereto without the prior written
consent of the Company or the Lender, as applicable, provided, however,
that  Lender may assign its rights and delegate its duties hereunder
in whole or in part to an affiliate. The provisions of this Agreement shall
inure to the benefit of and be binding upon the respective permitted successors
and assigns of the parties. Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.

    

    (C) This
Agreement may be executed in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument. This Agreement may also be executed via facsimile, which shall be
deemed an original.

     

    (D) The
titles and subtitles used in this Agreement are used for convenience only and
are not to be considered in construing or interpreting this
Agreement.

    

    (E)
Unless otherwise provided, any notice required or permitted under this Agreement
shall be given in writing and shall be deemed effectively given as hereinafter
described (i) if given by personal delivery, then such notice shall be
deemed given upon such delivery, (ii) if given by mail, then such notice
shall be deemed given upon the  receipt of such notice by the recipient and
(iii) if given by an internationally recognized overnight air courier, then
such notice shall be deemed given two Business Days after delivery to such
carrier. All notices shall be addressed to the party to be notified at the
address as follows, or at such other address as such party may designate by ten
days advance written notice to the other party:

    

    If to the
Company:

    A-1, 10,
Street 7

    Shenyang
Economic and Technological Development Zone

    Shenyang,
China 110027

    
      
         

      

      
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    With a
copy to (which copy shall constitute notice):

    The
Newman Law Firm, PLLC

    14 Wall
Street, 20th
Floor

    New York,
NY 10005

    Attention:
Robert Newman

    

    If to the
Lender.

    Akara
Bldg, 24 De Castro Street,

    Wickhams
Cay 1, Road Town,

    Tortola,
British Virgin Islands 

     

    (F) Amendments and
Waivers. Any term of this Agreement may be amended and the observance of
any term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the Lender.

    

    (G) Severability. Any
provision of this Agreement that is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof but shall be interpreted as if it were written so as to be
enforceable to the maximum extent permitted by applicable law, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. To the extent
permitted by applicable law, the parties hereby waive any provision of law which
renders any provision hereof prohibited or unenforceable in any
respect.

    

    (H) Entire Agreement.
This Agreement, including the Exhibits and the Disclosure Schedules, and the
other Transaction Documents constitute the entire agreement among the parties
hereof with respect to the subject matter hereof and thereof and supersede all
prior agreements and understandings, both oral and written, between the parties
with respect to the subject matter hereof and thereof.

    

    (I) Further Assurances.
The parties shall execute and deliver all such further instruments and documents
and take all such other actions as may reasonably be required to carry out the
transactions contemplated hereby and to evidence the fulfillment of the
agreements herein contained.

    
      
         

      

      
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    (J) Governing Law; Consent to
Jurisdiction; Waiver of Jury Trial. This Agreement shall be governed by,
and construed in accordance with, the internal laws of the State of New York
without regard to the choice of law principles thereof. Each of the parties
hereto irrevocably submits to the exclusive jurisdiction of the courts of the
State of New York located in New York County and the United States District
Court for the Southern District of New York for the purpose of any suit, action,
proceeding or judgment relating to or arising out of this Agreement and the
transactions contemplated hereby. Service of process in connection with any such
suit, action or proceeding may be served on each party hereto anywhere in the
world by the same methods as are specified for the giving of notices under this
Agreement. Each of the parties hereto irrevocably consents to the jurisdiction
of any such court in any such suit, action or proceeding and to the laying of
venue in such court. Each party hereto irrevocably waives any objection to the
laying of venue of any such suit, action or proceeding brought in such courts
and irrevocably waives any claim that any such suit, action or proceeding
brought in any such court has been brought in an inconvenient forum.  EACH OF THE PARTIES
HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY LITIGATION WITH
RESPECT TO THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS BEEN CONSULTED
SPECIFICALLY AS TO THIS WAIVER.

    

    [Signature
Page Follows]

    
      
         

      

      
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      IN WITNESS WHEREOF, the
parties hereto have executed this agreement as of the date first above
written

      
 

    

    
      
        
          	
                  SMARTHEAT
      INC.

                
	 
      	 
      
	
                  By:

                	
                  /s/James Wang

                
	 
      	
                        
                    Name:
      James Wang

                  

                
	 
      	
                        
                    Title:
      President & Chief Executive Officer

                  

                
	 
      	 
      
	
                  SHENYANG
      TAIYU MACHINERY &

                
	
                  ELECTRONIC
      EQUIPMENT CO, LTD.

                
	 
      	 
      
	
                  By:

                	
                  /s/James Wang

                
	 
      	
                        
                    Name:
      James Wang

                  

                
	 
      	
                        
                    Title:
      President and Chief Executive Officer

                  

                
	 
      	 
      
	
                  STRONG
      GROWTH CAPITAL, LTD

                
	 
      	 
      
	
                  By:

                	
                  /s/ Venlaw Consultants Co.
    Inc.

                
	 
      	
                  Authorized

                
	 
      	
                  Signatory:  Corporate
      Directors

                

        

      

    

     

    
      
         

      

      
        8SMARTHEAT
INC.

    SHENYANG
TAIYU MACHINERY & ELECTRONIC CO, LTD

    

    10%
Senior Promissory Note

    

    
      	
              Issuance
      Date: July 3, 2009

            	
              New
      York, NY

            
	
              Principal
      Amount: U.S. $ 9,000,000.00

            	 
      

    

    

    For value received, SMARTHEAT INC., a Nevada corporation, and Taiyu Machinery & Electronic
Equipment Co, Ltd..,
a company organized under
the Peoples Republic of China  (jointly and severally, the
“ Maker”), hereby promises to pay to the order
of Strong Growth Capital,
Ltd, a British Virgin Islands company with an address of Akara Bldg, 24 De Castro Street,
Wickhams Cay 1, Road Town, Tortola, British Virgin Islands (together with its successors,
representatives, and permitted assigns, the “Holder”), in accordance with the terms
hereinafter provided and subject to the terms and
conditions of the Senior Loan Agreement by and between the Maker and the
Holder, dated
the even date hereof (the “Senior Note Agreement”), the principal amount of NINE MILLION U.S. DOLLARS AND ZERO
CENTS (U.S.$9,000,000.00), together with interest
thereon.

     

    All
payments under or pursuant to this Note shall be made in United States Dollars
in immediately available funds to the Holder at the address of the Holder first
set forth above or at such other place as the Holder may designate from time to
time in writing to the Maker or by wire transfer of funds to the Holder’s
account, as requested by the Holder.  The outstanding principal
balance of this Note, together with all accrued and unpaid interest, shall be
due and payable in full on January 4, 2010 (the “Maturity Date”) or at such
earlier time as provided herein.

    

    ARTICLE
I

    PAYMENT

    

    Section
1.1       Interest.  Beginning on
the date of this Note (the “Issuance Date”), the outstanding principal balance
of this Note shall bear interest at a rate per annum equal to ten percent (10%),
payable in U.S. dollars, payable quarterly commencing on September 30, 2009 and
thereafter on the last day of the month in each quarter (“Interest Payment
Date”).  Interest shall be computed on the basis of a 365-day year,
simple interest, and shall accrue commencing on the Issuance
Date.  Furthermore, upon the occurrence of an Event of Default (as
defined in Section 2.1 hereof), the Maker will pay interest to the Holder,
payable on demand, on the outstanding principal balance of and unpaid interest
on the Note from the date of the Event of Default until such Event of Default is
cured at the rate of the lesser of sixteen percent (16%) and the maximum
applicable legal rate per annum. This Note shall hold a senior position to any
other debt of the Maker.

     

    Section
1.2       Payment of Principal;
Prepayment.   The Principal Amount hereof shall be paid in full
on the earliest of (i) the Maturity Date, (ii) the due date of any mandatory
prepayment as set forth herein (such prepayment pursuant to this clause (ii) to
be in part if sufficient funds are not available for application pursuant to
Section 1.5 hereof), or (iii) upon acceleration of this Note in accordance with
the terms hereof. Any amount of principal repaid hereunder may not be
reborrowed.  The Maker may prepay all or any portion of the principal
amount of this Note without premium or penalty.

     

    Section
1.3       Payment on Non-Business
Days.  Whenever any payment to be made shall be due on a Saturday,
Sunday or a holiday recognized by the branch offices J.P. Morgan Bank located in
New York City, NY, such payment may be due on the next succeeding business
day.

     

    Section
1.4       Use of Proceeds.  The
Maker shall use the proceeds of this Note only for general working
capital.

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

    

    Section
1.5       Mandatory
Prepayment.  Notwithstanding anything to the contrary contained
herein, upon the earliest to occur of (i) 90 days from the date hereof, (ii)
Maker’s receipt of any financing from any source in any amount, (iii) any change
of control, as solely determined by the Holder, of the Maker, (iv) any material
change of the Maker’s business and financial position, as solely determined by
the Holder, (v) any change to the shareholdings of any person under a 3 year
share lockup agreement entered by certain insiders of the Maker, whose shares
are currently in escrow custody with law firm Buchanan, Ingersoll & Rooney
or (vi) departure of any members of management of the Maker including those who
may or may not hold shares of the Makers’s common stock, as solely determined by
the Holder. In each case the entire outstanding principal amount of this Note,
and all interest due thereon shall become payable upon demand of the
Holder. 

    

    ARTICLE
II

    EVENTS OF
DEFAULT;  REMEDIES

    

    Section
2.1       Events of
Default.  Unless waived in writing by the Holder, the occurrence of
any of the following events shall be an “Event of Default ” under this
Note:

    

    (a)           any
default in the payment of (1) the principal amount hereunder when due, or (2)
interest on this Note when the same shall become due and payable (whether on the
Maturity Date, Interest Payment Date, the date of any mandatory prepayment, by
acceleration or otherwise); or

     

    (b)           the
Maker shall fail to observe or perform any other covenant or agreement contained
in this Note or the Senior Loan Agreement; or

      

    (c)           any
material representation or warranty made by the Maker herein or in the Senior
Note Agreement shall prove to have been false or incorrect or inaccurate or
breached in a material respect on the date as of which made; or

     

    (d)           the
Maker shall (i) apply for or consent to the appointment of, or the taking of
possession by, a receiver, custodian, trustee or liquidator of itself or of all
or a substantial part of its property or assets, (ii) make a general assignment
for the benefit of its creditors, (iii) commence a voluntary case under the
United States Bankruptcy Code (as now or hereafter in effect) or under the
comparable laws of any jurisdiction (foreign or domestic), (iv) file a petition
seeking to take advantage of any bankruptcy, insolvency, moratorium,
reorganization or other similar law affecting the enforcement of creditors’
rights generally, (v) acquiesce in writing to any petition filed against it in
an involuntary case under United States Bankruptcy Code (as now or hereafter in
effect) or under the comparable laws of any jurisdiction (foreign or domestic),
(vi) issue a notice of bankruptcy or winding down of its operations or issue a
press release regarding same, or (vii) take any action under the laws of any
jurisdiction (foreign or domestic) analogous to any of the foregoing;
or

      

    (e)           a
proceeding or case shall be commenced in respect of the Maker, without its
application or consent, in any court of competent jurisdiction, seeking (i) the
liquidation, reorganization, moratorium, dissolution, winding up, or composition
or readjustment of its debts, (ii) the appointment of a trustee, receiver,
custodian, liquidator or the like of it or of all or any substantial part of its
assets in connection with the liquidation or dissolution of the Maker, or (iii)
similar relief in respect of it under any law providing for the relief of
debtors, and such proceeding or case described in clause (i), (ii) or (iii)
shall continue undismissed, or unstayed and in effect, for a period of thirty
(30) days or any order for relief shall be entered in an involuntary case under
United States Bankruptcy Code (as now or hereafter in effect) or under the
comparable laws of any jurisdiction (foreign or domestic) against the Maker or
action under the laws of any jurisdiction (foreign or domestic) analogous to any
of the foregoing shall be taken with respect to the Maker and shall continue
undismissed, or unstayed and in effect for a period of thirty (30)
days.

    
      
         

      

      
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    Section
2.2       Remedies Upon An Event of
Default.  If an Event of Default shall have occurred and shall be
continuing, the Holder of this Note may, at any time, at its option, declare the
entire unpaid principal balance of this Note, together with all interest accrued
hereon, due and payable, and thereupon, the same shall be accelerated and so due
and payable, without presentment, demand, protest, or notice, all of which are
hereby expressly unconditionally and irrevocably waived by the
Maker.    The remedies provided in this Note shall be
cumulative and in addition to all other remedies available under this Note, at
law or in equity (including, without limitation, a decree of
specific performance and/or other injunctive relief), no remedy contained
herein shall be deemed a waiver of compliance with the provisions giving rise to
such remedy and nothing herein shall limit the Holder’s right to pursue
actual damages for any failure by the Maker to comply with the terms of this
Note.

    

    ARTICLE
III

    MISCELLANEOUS

    

    Section
3.1        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) upon hand
delivery, at the address set forth on the signature page hereto (in the case of
the Maker) or above (in the case of the Holder) (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),  (b) on the second business day following the date of
mailing by an internationally recognized overnight courier service, fully
prepaid, addressed to such address, or upon actual receipt of such mailing,
whichever shall first occur or (c) by email, telefax or other electronic means
to the email address and telfax number listed below.  Copies of such
notice shall be delivered by any of the foregoing means to Robert Newman, Esq.,
The Newman Law Firm, PLLC, 14 Wall Street, New York, NY 10005, Fax (212)
202-6055, and such delivery shall constitute effective notice to the Maker
hereunder. 

    

    Section
3.2        Governing Law; Drafting;
Representation.  This Note 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 Note
shall not be interpreted or construed with any presumption against the party
causing this Note to be drafted.  

     

    Section
3.3        Headings.  Article
and section headings in this Note are included herein for purposes of
convenience of reference only and shall not constitute a part of this Note for
any other purpose.

     

    Section
3.4       Binding Effect;
Amendments.  The obligations of the Maker and the Holder set forth
herein shall be binding upon the successors and assigns of each such
party.  This Note may not be modified or amended in any manner except
in writing executed by the Maker and the Holder.

     

    Section
3.5       Consent to
Jurisdiction.  Each of the Maker and the Holder (i) hereby irrevocably
submits to the exclusive jurisdiction of the United States District Court
sitting in the Southern District of New York and the courts of the State of New
York located in New York county for the purposes of any suit, action or
proceeding arising out of or relating to this Note and (ii) hereby waives,
and agrees not to assert in any such suit, action or proceeding, any claim that
it is not personally subject to the jurisdiction of such court, that the suit,
action or proceeding is brought in an inconvenient forum or that the venue of
the suit, action or proceeding is improper.  Each of the Maker and the
Holder consents 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 hereunder and agrees that such service shall constitute good and sufficient
service of process and notice thereof.  Nothing in this Section shall
affect or limit any right to serve process in any other manner permitted by
law.

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

     

    Section
3.6       Failure or Indulgence Not
Waiver.  No failure or delay on the part of the Holder in the exercise
of any power, right or privilege hereunder shall operate as a waiver thereof,
nor shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or
privilege.

     

    Section
3.7       Maker Waivers; Dispute
Resolution.  Except as otherwise specifically provided herein, the
Maker and all others that may become liable for all or any part of the
obligations evidenced by this Note, hereby waive presentment, demand, notice of
nonpayment, protest and all other demands and notices in connection with the
delivery, acceptance, performance and enforcement of this Note, and do hereby
consent to any number of renewals of extensions of the time or payment hereof
and agree that any such renewals or extensions may be made without notice to any
such persons and without affecting their liability herein and do further consent
to the release of any person liable hereon, all without affecting the liability
of the other persons, firms or Maker liable for the payment of this Note, AND DO
HEREBY WAIVE TRIAL BY JURY.

     

    (a)           No
delay or omission on the part of the Holder in exercising its rights under this
Note, or course of conduct relating hereto, shall operate as a waiver of such
rights or any other right of the Holder, nor shall any waiver by the Holder of
any such right or rights on any one occasion be deemed a waiver of the same
right or rights on any future occasion.

     

    (b)           THE
MAKER ACKNOWLEDGES THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A
COMMERCIAL TRANSACTION, AND TO THE EXTENT ALLOWED BY APPLICABLE LAW, HEREBY
WAIVES ITS RIGHT TO NOTICE AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY
WHICH THE HOLDER OR ITS SUCCESSORS OR ASSIGNS MAY DESIRE TO USE.

    

    IN WITNESS WHEREOF, the Maker
has caused this Note to be duly executed by its duly authorized officer as of
the date first above indicated.

    

    
      
        
          
            
              
                	 
      	
                        SMARTHEAT
      INC.

                      
	 
      	 
      	 
      
	 
      	
                        By:

                      	
                        /s/ James Wang

                      
	 
      	
                        Name: 

                      	
                        James
      Wang

                      
	 
      	
                        Title: 

                      	
                        President
      and Chief Executive Officer

                      
	 
      	 
      	 
      
	 
      	
                        SHENYANG
      TAIYU MACHINERY & ELECTRONIC CO, LTD EQUIPMENT
      CO, LTD..

                      
	 
      	 
      	 
      
	 
      	
                        By:  

                      	
                        /s/James Wang

                      
	 
      	
                        Name:

                      	
                        James
      Wang

                      
	 
      	
                        Title: 

                      	
                        President
      and  Chief Executive Officer

                      
	 
      	 
      	 
      
	 
      	
                        Address
      of Maker:

                         

                        A-1,
      10, Street 7 Shenyang Economic and

                        Technological
      Development Zone Shenyang, China

                        110027

                      

              

            

          

        

      

    

     

    
      
         

      

      
        4

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