Document:

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$)

                              
	  	 	  	 	 
      	 	 
      	 	 
      
	 
      	 	 
      	 	 
      	 	 
      	 	 
      
	 
      	 	 
      	 	 
      	 	 
      	 	 
      
	 
      	 	 
      	 	 
      	 	 
      	 	 
      
	 
      	 	 
      	 	 
      	 	 
      	 	 
      

                      

                    

                  

                

              

            

          

        

      

    

    

    
      
        
        

      

      
        16Execution
Copy

     

    REGISTRATION RIGHTS
AGREEMENT

     

    THIS REGISTRATION RIGHTS AGREEMENT
(this “Agreement”) is made
as of this 21st day of May, 2009 by and between China Energy Recovery, Inc., a
Delaware corporation (“Company”) and Hold
And Opt Investments Limited, a Bahamas company (“Holder”).

     

    A.           The
Company has granted certain registration rights to the Holder with respect to
certain shares of Common Stock of the Company that may be issued pursuant to the
conversion into common stock of the interest and principal of a draw down loan
facility, in the principal amount of up to $5,000,000, dated May 21, 2009
(“Loan”), originally issued to the Holder and pursuant to the exercise of a
warrant originally issued May 21, 2009 (“Warrant”) to the
Holder for the purchase initially of up to 1,388,889 shares of Common
Stock.

     

    B.           Unless
otherwise provided in this Agreement, capitalized terms used herein shall have
the respective meanings set forth in Section 11 hereof.

    

    NOW, THEREFORE, in
consideration of the above premises and the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Company and Holder hereby agree as
follows:

     

    1.           Registration.

     

    (a)             Demand Registrations Rights.
The Company, upon written demand (“Initial Demand
Notice”) of the Holder [and if more than one Holder, the written demand
of at least 51% of Registrable Securities (“Majority Holders”)],
agrees to register on three (3) occasions, all or any portion of the Registrable
Securities requested by the Holder or Majority Holders as the case may be in the
Initial Demand Notice.  On such occasion, the Company will file a
Registration Statement or a post-effective amendment to a Registration Statement
covering the Registrable Securities within forty-five (45) days after receipt of
the Initial Demand Notice.  The Initial Demand Notice may be given to
the Company at any time during the period of five years beginning the
original date of this Agreement.  The Company covenants and agrees to
give written notice of its receipt of any Initial Demand Notice by any Holder to
all other registered Holders of the Loan, Warrants and/or the Registrable
Securities within ten days from the date of the Initial Demand
Notice.

     

    (b)             PiggyBack Registration
Rights.  If, at any time there is not an effective Registration
Statement covering the Registrable Securities, and the Company shall determine
to prepare and file with the Commission a Registration Statement relating to an
offering for its own account or the account of others under the Securities Act
of any of its equity securities, other than on Form S-4 or Form S-8 (each as
promulgated under the Securities Act) or their then equivalents, relating to
equity securities to be issued solely in connection with any acquisition of any
entity or business or equity securities issuable in connection with stock option
or other employee benefit plans, then the Company shall send to the
Holders of the Registrable Securities a written notice of such
determination at least twenty (20) days prior to the filing of any such
Registration Statement and shall include in such Registration Statement all the
Registrable Securities for resale and offer on a continuous basis pursuant to
Rule 415

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    (c)             Certain Obligations of the
Holder of Registrable Securities in Respect of Piggyback
Rights.  The Holder agrees that with respect to any
exercise of the piggyback registration rights (i) if, at any time after giving
written notice of its intention to register any securities and prior to the
effective date of the Registration Statement filed in connection with such
registration, the Company determines for any reason not to proceed with such
registration, the Company will be relieved of its obligation to register any
Registrable Securities in connection with such piggyback registration, (ii) in
case of a determination by the Company to delay registration of its securities,
the Company will be permitted to delay the piggyback registration of the
Registrable Securities for the same period as the delay in registering such
other securities, and (iii) if all of the Registrable Securities of the Holder
cannot be so included due to Commission Comments, then the Company may reduce,
in accordance with the provisions of Section 1(d) hereof, the number
of  securities covered by such Registration Statement to the maximum
number which would enable the Company to conduct such offering in accordance
with the provisions of Rule 415.  

     

    (d)             Cutback
Provisions.  In the event all of the Registrable Securities
cannot be included in a Registration Statement under the piggyback registration
right due to Commission Comments or underwriter cutbacks, the Holder agrees that
securities shall be removed from such Registration Statement in the following
order until no further removal is required by Commission Comments or underwriter
cutbacks:

     

      (i)           First,
the Registrable Securities to be issued on conversion of the Loan, shall be
removed pro rata among the Holders on the one hand and any other securities
being registered pursuant to registration rights agreements with the Company for
Common Stock on the other hand; and

     

      (ii)           Second,
the Registrable Securities to be issued on exercise of the Warrants, pro rata
among the Holders on the one hand and any other securities being registered
pursuant to registration rights agreements with the Company for Common Stock on
the other hand after reduction pursuant to the immediately preceding
paragraph.

     

    (e)             Effectiveness. Each
Registration Statement, including the demand, piggy back or Follow-up
Registration Statement, required hereunder shall contain a plan of distribution,
approved by the Holders (which may be modified to respond to comments, if any,
received by the Commission).  The Company shall cause any Registration
Statement filed under this Section 1, including the demand, piggy back and
Follow-up Registration Statement, to be declared effective under the Securities
Act as promptly as possible after the filing thereof and shall keep such
Registration Statement continuously effective under the Securities Act until the
earlier of (i) two years after its Effective Date (provided, however, the two
year period shall be extended for any Grace Period, as set forth herein), (ii)
such time as all of the Registrable Securities covered by such Registration
Statement have been publicly sold, or (iii) such time as all of the Registrable
Securities covered by such Registration Statement may be sold pursuant to Rule
144  without regard to both the volume limitations for sales as
provided in Rule 144 and the limitations for such sales provided in Rule 144(i),
as determined by the counsel to the Company pursuant to a written opinion letter
to such effect, addressed and acceptable to the Company's transfer agent and the
affected Holder ("Effectiveness
Period”). By 5:00 p.m. (New York City time) on the business day
immediately following the Effective Date of a Registration Statement, the
Company shall file with the Commission in accordance with Rule 424 under the
Securities Act the final Prospectus to be used in connection with sales pursuant
to such Registration Statement (whether or not such filing is technically
required under such Rule).

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    (f)             Termination of Registration
Rights.  The registration rights afforded to the Holder under
this Section 1 shall terminate on the earliest date when all Registrable
Securities either: (i) have been publicly sold pursuant to a Registration
Statement, (ii) have been covered by an effective Registration Statement which
has been effective for an aggregate period of twenty-four (24) months (whether
or not consecutive), provided, however, the time period shall be calculated so
as to exclude any Grace Period, or (iii) may be sold pursuant to Rule 144
without regard to both the volume limitations for sales as provided in Rule 144
and the limitations for such sales provided in Rule 144(i), as determined by the
counsel to the Company pursuant to a written opinion letter to such effect,
addressed and acceptable to the Company's transfer agent and the affected
Holder.

     

    2.           Registration
Procedures. Whenever any Registrable Securities are to be registered
pursuant to this Agreement, the Company shall use its commercially reasonable
efforts to effect the registration and sale of such Registrable Securities in
accordance with the intended method of disposition thereof, and pursuant thereto
the Company shall have the following obligations:

     

    (a)             The
Company shall prepare and file with the Commission a Registration Statement with
respect to such Registrable Securities and use its commercially reasonable
efforts to cause such Registration Statement to become effective promptly after
filing.

     

    (b)             The
Company shall prepare and file with the Commission such amendments (including
post-effective amendments) and supplements to a Registration Statement and the
Prospectus used in connection with such Registration Statement, which Prospectus
is to be filed pursuant to Rule 424 promulgated under the Securities Act, as may
be necessary to keep such Registration Statement effective at all times during
the Effectiveness Period, and, during such period, comply with the provisions of
the Securities Act with respect to the disposition of all Registrable Securities
of the Company covered by such Registration Statement until such time as all of
such Registrable Securities shall have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof as set forth in
such Registration Statement.  In the case of amendments and
supplements to a Registration Statement which are required to be filed pursuant
to this Agreement by reason of the Company filing a report on Form 10-QSB, Form
10-KSB or any analogous report under the Securities Exchange Act, the Company
shall have incorporated such report by reference into such Registration
Statement, if applicable, or shall file such amendments or supplements with the
Commission on the same day on which the Securities Exchange Act report is filed
which created the requirement for the Company to amend or supplement such
Registration Statement.

     

    (c)             The
Company shall furnish to each seller of Registrable Securities in any
Registration Statement, without charge,  (i) promptly after the same
is prepared and filed with the Commission at least one copy of such Registration
Statement and any amendment(s) thereto, including financial statements and
schedules, all documents incorporated therein by reference, if requested by such
seller, all exhibits and each preliminary Prospectus, (ii) upon the
effectiveness of any Registration Statement, ten (10) copies of the Prospectus
included in such Registration Statement and all amendments and supplements
thereto (or such other number of copies as such seller may reasonably request)
and (iii) such other documents, including copies of any preliminary or final
Prospectus, as such seller may reasonably request from time to time in order to
facilitate the disposition of the Registrable Securities owned by such
seller.

     

    (d)             The
Company shall use its commercially reasonable efforts to (i) register and
qualify, unless an exemption from registration and qualification applies, the
resale by any seller of the Registrable Securities covered by a Registration
Statement under such other securities or "blue sky" laws of all applicable
jurisdictions in the United States, (ii) prepare and file in those
jurisdictions, such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof during the Effectiveness Period, (iii) take
such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Effectiveness Period, and (iv)
take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (x) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 2(d), (y) subject itself
to general taxation in any such jurisdiction, or (z) file a general consent to
service of process in any such jurisdiction.

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

     

    (e)             The
Company shall use its commercially reasonable efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration Statement,
or the suspension of the qualification of any of Registrable Securities for sale
in any jurisdiction and, if such an order or suspension is issued, to obtain the
withdrawal of such order or suspension at the earliest possible moment and to
notify the Holder of any Registrable Securities being sold of the issuance of
such order and the resolution thereof or its receipt of actual notice of the
initiation or threat of any proceeding for such purpose.

     

    (f)             The
Company shall notify the Holder in writing of the happening of any event, as
promptly as practicable after becoming aware of such event, as a result of which
the Prospectus included in a Registration Statement, as then in effect, includes
an untrue statement of a material fact or omission to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading
(provided that in no event shall such notice contain any material, nonpublic
information), and, subject to Section 2(p), promptly prepare a supplement or
amendment to such Registration Statement to correct such untrue statement or
omission, and deliver ten (10) copies of such supplement or amendment to the
Holder (or such other number of copies as the Holder may reasonably
request).

     

    (g)             The
Company shall promptly notify the Holder in writing (i) when a Prospectus or any
Prospectus supplement or post-effective amendment has been filed, and when a
Registration Statement or any post-effective amendment has become effective
(notification of such effectiveness shall be delivered to the Holder by
facsimile on the same day of such effectiveness and by overnight mail), (ii) of
any request by the Commission for amendments or supplements to a Registration
Statement or related Prospectus or related information, and (iii) of the
Company's reasonable determination that a post-effective amendment to a
Registration Statement would be appropriate.

     

    (h)             If
the Holder is required under applicable securities laws to be described in a
Registration Statement as an underwriter, at the reasonable request of such
Holder, the Company shall furnish to such Holder, on the date of the
effectiveness of such Registration Statement and thereafter from time to time on
such dates as the Holder may reasonably request (i) a letter, dated such date,
from the Company's independent certified public accountants in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the Holder, and
(ii) an opinion, dated as of such date, of counsel representing the Company for
purposes of such Registration Statement, in form, scope and substance as is
customarily given in an underwritten public offering, addressed to the
Holder.

    
      
         

      

      
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    (i)             If
the Holder is required under applicable securities laws to be described in a
Registration Statement as an underwriter, then at the request of such Holder in
connection with such Holder's due diligence requirements, the Company shall make
available for inspection by (i) the Holder, (ii) the Holder’s legal counsel, and
(iii) one firm of accountants or other agents retained by the Holder
(collectively, the "Inspectors"), all
pertinent financial and other records, and pertinent corporate documents and
properties of the Company (collectively, the "Records"), as shall
be reasonably deemed necessary by each Inspector, and cause the Company's
officers, directors and employees to supply all information which any Inspector
may reasonably request; provided, however, that each Inspector shall agree to
hold in strict confidence and shall not make any disclosure (except to the
Holder) or use of any Record or other information which the Company determines
in good faith to be confidential, and of which determination the Inspectors are
so notified, unless (a) the disclosure of such Records is necessary to avoid or
correct a misstatement or omission in any Registration Statement or is otherwise
required under the Securities Act, (b) the release of such Records is ordered
pursuant to a final, non-appealable subpoena or order from a court or government
body of competent jurisdiction, or (c) the information in such Records has been
made generally available to the public other than by disclosure in violation of
this or any other agreement of which the Inspector has
knowledge.  Each Holder agrees that it shall, upon learning that
disclosure of such Records is sought in or by a court or governmental body of
competent jurisdiction or through other means, give prompt notice to the Company
and allow the Company, at its expense, to undertake appropriate action to
prevent disclosure of, or to obtain a protective order for, the Records deemed
confidential.  Nothing herein (or in any other confidentiality
agreement between the Company and the Holder) shall be deemed to limit the
Holder's ability to sell Registrable Securities in a manner which is otherwise
consistent with applicable laws and regulations.

     

    (j)             The
Company shall hold in confidence and not make any disclosure of information
concerning the Holder provided to the Company unless (i) disclosure of such
information is necessary to comply with federal or state securities laws, (ii)
the disclosure of such information is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (iii) the release of
such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement.  The Company agrees that it shall, upon learning that
disclosure of such information concerning the Holder is sought in or by a court
or governmental body of competent jurisdiction or through other means, give
prompt written notice to the Holder and allow the Holder, at the Holder’s
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, such information.

     

    (k)            The
Company shall use its reasonable commercial efforts either to (i) cause all of
the Registrable Securities covered by a Registration Statement to be listed on
each securities exchange on which securities of the same class or series issued
by the Company are then listed, if any, if the listing of such Registrable
Securities is then permitted under the rules of such exchange, or (ii) secure
designation and quotation of all of the Registrable Securities covered by a
Registration Statement on The NASDAQ Global Market, The NASDAQ Capital Market or
the American Stock Exchange, or (iii) if, despite the Company's best efforts to
satisfy, the preceding clauses (i) and (ii) the Company is unsuccessful in
satisfying the preceding clauses (i) and (ii), to secure the inclusion for
quotation on the Over-the-Counter Bulletin Board for such Registrable Securities
and, without limiting the generality of the foregoing, to use its best efforts
to arrange for at least two market makers to register with the Financial
Industry Regulatory Authority, Inc. (“FINRA") as such with respect to such
Registrable Securities.  The Company shall pay all fees and expenses
in connection with satisfying its obligation under this Section
2(k).

     

    (l)             The
Company shall cooperate with each Holder who holds Registrable Securities being
offered and, to the extent applicable, facilitate the timely preparation and
delivery of certificates (not bearing any restrictive legend) representing the
Registrable Securities to be offered pursuant to a Registration Statement and
enable such certificates to be in such denominations or amounts, as the case may
be, as the Holder may reasonably request and registered in such names as the
Holder may request.

     

    (m)           If
requested by the Holder, the Company shall (i) as soon as practicable
incorporate in a Prospectus supplement or post-effective amendment such
information as the Holder reasonably requests to be included therein relating to
the sale and distribution of Registrable Securities, including, without
limitation, information with respect to the number of Registrable Securities
being offered or sold, the purchase price being paid therefor and any other
terms of the offering of the Registrable Securities to be sold in such offering;
(ii) as soon as practicable make all required filings of such Prospectus
supplement or post-effective amendment after being notified of the matters to be
incorporated in such Prospectus supplement or post-effective amendment; and
(iii) as soon as practicable, supplement or make amendments to any Registration
Statement if reasonably requested by the Holder holding any Registrable
Securities.

    
      
         

      

      
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    (n)             The
Company shall use its commercially reasonable efforts to cause the Registrable
Securities covered by a Registration Statement to be registered with or approved
by such other governmental agencies or authorities as may be necessary to
consummate the disposition of such Registrable Securities.

     

    (o)             The
Company shall otherwise use its commercially reasonable efforts to comply with
all applicable rules and regulations of the Commission in connection with any
registration hereunder.

     

    (p)             Notwithstanding
anything to the contrary herein, at any time after the Effective Date of a
Registration Statement, the Company may delay the disclosure of material,
non-public information concerning the Company the disclosure of which at the
time is not, in the good faith opinion of the Board of Directors of the Company
and its counsel, in the best interest of the Company and, in the opinion of
counsel to the Company, otherwise required (a "Grace Period");
provided, that the Company shall promptly (i) notify the Holder in writing of
the existence of material, non-public information giving rise to a Grace Period
(provided that in each notice the Company will not disclose the content of such
material, non-public information to the Holder) and the date on which the Grace
Period will begin, and (ii) notify the Holder in writing of the date on which
the Grace Period ends; and, provided further, that no Grace Period shall exceed
sixty (60) consecutive days and during any three hundred sixty five (365) day
period such Grace Periods shall not exceed an aggregate of one hundred twenty
(120) days and the first day of any Grace Period must be at least two (2)
trading days after the last day of any prior Grace Period (each, an "Allowable Grace
Period").  For purposes of determining the length of a Grace
Period above, the Grace Period shall begin on and include the date the Holder
receives the notice referred to in clause (i) and shall end on and include the
later of the date the Holder receives the notice referred to in clause (ii) and
the date referred to in such notice.  The provisions of Section 2(e)
hereof shall not be applicable during the period of any Allowable Grace
Period.  Upon expiration of the Grace Period, the Company shall again
be bound by Section 2(f) with respect to the information giving rise thereto
unless such material, non-public information is no longer
applicable.  Notwithstanding anything to the contrary, the Company
shall cause its transfer agent to deliver unlegended shares of Common Stock to a
transferee of the Holder in connection with any sale of Registrable Securities
with respect to which the Holder has entered into a contract for sale, and
delivered a copy of the Prospectus included as part of the applicable
Registration Statement (unless an exemption from such Prospectus delivery
requirements exists), prior to the Holder’s receipt of the notice of a Grace
Period and for which the Holder has not yet settled.

     

    3.           Obligations of the
Holders.

     

    (a)             At
least five (5) business days prior to the first anticipated filing date of a
Registration Statement, the Company shall notify the Holders in writing of the
information the Company requires from each Holder if the Holder’s Registrable
Securities are to be included in such Registration Statement.  It
shall be a condition precedent to the obligations of the Company to complete the
registration pursuant to this Agreement with respect to the Registrable
Securities of the Holder that the Holder shall furnish to the Company such
information regarding itself, the Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as shall
be reasonably required to effect the effectiveness of the registration of such
Registrable Securities and shall execute such documents in connection with such
registration as the Company may reasonably request.

    
      
         

      

      
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    (b)             The
Holder, by the Holder’s acceptance of the Registrable Securities, agrees to
cooperate with the Company as reasonably requested by the Company in connection
with the preparation and filing of any Registration Statement hereunder, unless
the Holder has notified the Company in writing of the Holder's election to
exclude all of the Holder’s Registrable Securities from such Registration
Statement.

     

    (c)             The
Holder agrees that, upon receipt of any notice from the Company of the happening
of any event of the kind described in Sections 2(e) or 2(f), the Holder will
immediately discontinue disposition of Registrable Securities pursuant to any
Registration Statement(s) covering such Registrable Securities until the
Holder’s receipt of the copies of the supplemented or amended Prospectus
contemplated by Sections 2(e) or 2(f) or receipt of notice that no supplement or
amendment is required.  Notwithstanding anything to the contrary, the
Company shall cause its transfer agent to deliver unlegended shares of Common
Stock to a transferee of the Holder in connection with any sale of Registrable
Securities with respect to which the Holder has entered into a contract for sale
prior to the Holder’s receipt of a notice from the Company of the happening of
any event of the kind described in Sections 2(e) or 2(f) and for which the
Holder has not yet settled.

     

    (d)             The
Holder covenants and agrees that it will comply with the Prospectus delivery
requirements of the Securities Act as applicable to it or an exemption therefrom
in connection with sales of Registrable Securities pursuant to a Registration
Statement.

     

    4.           Registration
Expenses.  All expenses incident to the Company’s performance
of or compliance with this Agreement, including without limitation all
registration and filing fees, fees and expenses of compliance with securities or
blue sky laws, printing expenses, messenger and delivery expenses, fees and
disbursements of custodians, and fees and disbursements of counsel for the
Company and all independent certified public accountants, underwriters
(excluding discounts, commissions and placement agent fees) and other Persons
retained by the Company (all such expenses being herein called “Registration
Expenses”), shall be borne by the Company.  Further, the
Company shall pay its internal expenses (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit or quarterly review, the
expense of any liability insurance and the expenses and fees for listing the
securities to be registered on each securities exchange on which similar
securities issued by the Company are then listed.

     

    5.           Indemnification.

     

    In the
event any Registrable Securities are included in a Registration Statement under
this Agreement:

    
      
         

      

      
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    (a)           To
the fullest extent permitted by law, the Company will, and hereby does,
indemnify, hold harmless and defend the Holder, the directors, officers,
members, partners, employees, agents, representatives of, and each Person, if
any, who controls the Holder within the meaning of the Securities Act or the
Securities Exchange Act (each, an "Indemnified Person"),
against any losses, claims, damages, liabilities, judgments, fines, penalties,
charges, costs, reasonable attorneys' fees, amounts paid in settlement or
expenses, joint or several, (collectively, "Claims") incurred in
investigating, preparing or defending any action, claim, suit, inquiry,
proceeding, investigation or appeal taken from the foregoing by or before any
court or governmental, administrative or other regulatory agency, body or the
Commission, whether pending or threatened, whether or not an indemnified party
is or may be a party thereto ("Indemnified
Damages"), to which any of them may become subject insofar as such Claims
(or actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon:  (i) any untrue statement or alleged
untrue statement of a material fact in a Registration Statement or any
post-effective amendment thereto or in any filing made in connection with the
qualification of the offering under the securities or other "blue sky" laws of
any jurisdiction in which Registrable Securities are offered ("Blue Sky Filing"), or
the omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, (ii) any
untrue statement or alleged untrue statement of a material fact contained in any
preliminary Prospectus if used prior to the effective date of such Registration
Statement, or contained in the final Prospectus (as amended or supplemented, if
the Company files any amendment thereof or supplement thereto with the
Commission) or the omission or alleged omission to state therein any material
fact necessary to make the statements made therein, in the light of the
circumstances under which the statements therein were made, not misleading,
(iii) any violation or alleged violation by the Company of the Securities Act or
the Securities Exchange Act, any other law, including, without limitation, any
state securities law, or any rule or regulation thereunder relating to the offer
or sale of the Registrable Securities pursuant to a Registration Statement or
(iv) any violation of this Agreement (the matters in the foregoing clauses (i)
through (iv) being, collectively, "Violations").  Subject
to Section 5(c), the Company shall reimburse the Indemnified Persons, promptly
as such expenses are incurred and are due and payable, for any legal fees or
other reasonable expenses incurred by them in connection with investigating or
defending any such Claim.  Notwithstanding anything to the contrary
contained herein, the indemnification agreement contained in this Section
5(a):  (i) shall not apply to a Claim by an Indemnified Person arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by such Indemnified Person
for such Indemnified Person expressly for use in connection with the preparation
of the Registration Statement or any such amendment thereof or supplement
thereto, if such Prospectus was timely made available by the Company pursuant to
Section 2(c) and (ii) shall not be available to the extent such Claim is based
on a failure of the Holder to deliver or to cause to be delivered the Prospectus
made available by the Company, including a corrected Prospectus, if such
Prospectus or corrected Prospectus was timely made available by the Company
pursuant to Section 2(c); and (iv) shall not apply to amounts paid in settlement
of any Claim if such settlement is effected without the prior written consent of
the Company, which consent shall not be unreasonably withheld or
delayed.  Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Indemnified Person
and shall survive the transfer of the Registrable Securities by the Holder
pursuant to Section 9.

     

    (b)           In
connection with any Registration Statement in which the Holder is participating,
each Holder, severally and not jointly, agrees to indemnify, hold harmless and
defend, to the same extent and in the same manner as is set forth in Section
5(a), the Company, each of its directors, each of its officers who signs the
Registration Statement and each Person, if any, who controls the Company within
the meaning of the Securities Act or the Securities Exchange Act (each, an
"Indemnified
Party"), against any Claim or Indemnified Damages to which any of them
may become subject, under the Securities Act or the Securities Exchange Act or
otherwise, insofar as such Claim or Indemnified Damages arise out of or are
based upon any Violation, in each case to the extent, and only to the extent,
that such Violation occurs in reliance upon and in conformity with written
information furnished to the Company by the Holder expressly for use in
connection with such Registration Statement; and, subject to Section 5(c), the
Holder will reimburse any legal or other expenses reasonably incurred by an
Indemnified Party in connection with investigating or defending any such Claim;
provided, however, that the indemnity agreement contained in this Section 5(b)
and the agreement with respect to contribution contained in Section 6 shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of the Holder, which consent shall not be
unreasonably withheld or delayed; provided, further, however, that the Holder
shall be liable under this Section 5(b) for only that amount of a Claim or
Indemnified Damages as does not exceed the net proceeds to the Holder as a
result of the sale of Registrable Securities pursuant to such Registration
Statement.  Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Party
and shall survive the transfer of the Registrable Securities by the Holder
pursuant to Section 9.

    
      
         

      

      
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    (c)           Promptly
after receipt by an Indemnified Person or Indemnified Party under this Section 5
of notice of the commencement of any action or proceeding (including any
governmental action or proceeding) involving a Claim, such Indemnified Person or
Indemnified Party shall, if a Claim in respect thereof is to be made against any
indemnifying party under this Section 5, deliver to the indemnifying party a
written notice of the commencement thereof, and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying party and the Indemnified Person or the Indemnified Party, as the
case may be; provided, however, that an Indemnified Person or Indemnified Party
shall have the right to retain its own counsel with the fees and expenses of not
more than one counsel for such Indemnified Person or Indemnified Party to be
paid by the indemnifying party, if, in the reasonable opinion of counsel
retained by the indemnifying party, the representation by such counsel of the
Indemnified Person or Indemnified Party and the indemnifying party would be
inappropriate due to actual or potential differing interests between such
Indemnified Person or Indemnified Party and any other party represented by such
counsel in such proceeding.  The Indemnified Party or Indemnified
Person shall cooperate fully with the indemnifying party in connection with any
negotiation or defense of any such action or Claim by the indemnifying party and
shall furnish to the indemnifying party all information reasonably available to
the Indemnified Party or Indemnified Person which relates to such action or
Claim.  The indemnifying party shall keep the Indemnified Party or
Indemnified Person reasonably apprised at all times as to the status of the
defense or any settlement negotiations with respect thereto.  No
indemnifying party shall be liable for any settlement of any action, claim or
proceeding effected without its prior written consent, provided, however, that
the indemnifying party shall not unreasonably withhold, delay or condition its
consent.  No indemnifying party shall, without the prior written
consent of the Indemnified Party or Indemnified Person, consent to entry of any
judgment or enter into any settlement or other compromise which does not include
as an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party or Indemnified Person of a release from all liability in
respect to such Claim or litigation, and such settlement shall not include any
admission as to fault on the part of the Indemnified Party.  Following
indemnification as provided for hereunder, the indemnifying party shall be
subrogated to all rights of the Indemnified Party or Indemnified Person with
respect to all third parties, firms or corporations relating to the matter for
which indemnification has been made.  The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action shall not relieve such indemnifying party of any liability to
the Indemnified Person or Indemnified Party under this Section 5, except to the
extent that the indemnifying party is prejudiced in its ability to defend such
action.

     

    (d)           The
indemnification required by this Section 5 shall be made by periodic payments of
the amount thereof during the course of the investigation or defense, as and
when bills are received or Indemnified Damages are incurred.

     

    (e)           The
indemnity agreements contained herein shall be in addition to  (i) any
cause of action or similar right of the Indemnified Party or Indemnified Person
against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.

     

    6.           Contribution.  To
the extent any indemnification by an indemnifying party is prohibited or limited
by law, the indemnifying party agrees to make the maximum contribution with
respect to any amounts for which it would otherwise be liable under Section 5 to
the fullest extent permitted by law; provided, however, that:  (i) no
Person involved in the sale of Registrable Securities which Person is guilty of
fraudulent misrepresentation (within the meaning of Section 10(f) of the
Securities Act) in connection with such sale shall be entitled to contribution
from any Person involved in such sale of Registrable Securities who was not
guilty of fraudulent misrepresentation; and (ii) contribution by any seller of
Registrable Securities shall be limited in amount to the net amount of proceeds
received by such seller from the sale of such Registrable Securities pursuant to
such Registration Statement

     

    
      
         

      

      
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    7.           Participation in
Underwritten Registrations. No Person may participate in any registration
hereunder which is underwritten or sold through a placement agent unless such
Person (i) agrees to sell such Person’s securities on the basis provided in any
underwriting or placement agency arrangements approved by the Company, and (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting or placement agency agreements and other documents required under
the terms of such underwriting or placement agency arrangements.

     

    8.           Reports under Securities
Exchange Act.  With a view to making available to the Holder
the benefits of Rule 144 promulgated under the Securities Act or any other
similar rule or regulation of the Commission that may at any time permit the
Holder to sell securities of the Company to the public without registration, the
Company agrees, for so long as the Holders or their transferees own Registrable
Securities, to:

     

    (a)           make
and keep public information available, as those terms are understood and defined
in Rule 144;

     

    (b)           not
to take any actions to terminate its status as a reporting company under the
Securities Exchange Act or to terminate its obligations to file periodic reports
under the Securities Exchange Act;

     

    (c)           file
with the Commission in a timely manner all reports and other documents required
of the Company under the Securities Act and the Securities Exchange Act to
maintain its status as reporting company under the Securities Exchange Act;
and

     

    (d)           furnish
to the Holder so long as the Holder owns Registrable Securities, promptly upon
request, (i) a written statement by the Company, if true, that it has complied
with the reporting requirements of Rule 144, the Securities Act and the
Securities Exchange Act, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested to
permit the Holder to sell such securities pursuant to Rule 144 without
registration.

    
      
         

      

      
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    9.           Assignment of Registration
Rights.  The rights under this Agreement shall be automatically
assignable by the Holder to any transferee of all or any portion of the Holder’s
Registrable Securities if:  (i) the Holder agrees in writing with the
transferee or assignee to assign such rights, and a copy of such agreement is
furnished to the Company within a reasonable time after such assignment; (ii)
the Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of (a) the name and address of such transferee or
assignee, and (b) the securities with respect to which such registration rights
are being transferred or assigned; (iii) immediately following such transfer or
assignment the further disposition of such securities by the transferee or
assignee is restricted under the Securities Act and applicable state securities
laws; and (iv) at or before the time the Company receives the written notice
contemplated by clause (ii) of this sentence the transferee or assignee agrees
in writing with the Company to be bound by all of the provisions contained
herein.

     

    10.           Amendment of Registration
Rights.  Provisions of this Agreement may be amended and the
observance thereof may be waived (either generally or in a particular instance
and either retroactively or prospectively), only with the written consent of the
Company and each Holder.

     

    11.           Definitions.

     

     (a)             “Commission” means the
Securities and Exchange Commission.

     

     (b)             “Commission Comments”
means written comments pertaining solely to Rule 415 which are received by the
Company from the Commission, and a copy of which shall have been provided by the
Company to the Holder, to a filed Registration Statement which limit the amount
of shares which may be included therein to a number of shares which is less than
such amount sought to be included thereon as filed with the
Commission.

     

     (c)             “Commission Guidance”
means (i) any publicly-available written or oral guidance, comments,
requirements or requests of the Commission staff, and (ii) the Securities
Act.

     

    

     (d)             “Common Stock” means
the common stock, $0.001 par value per share, of the Company.

     

     (e)             “Effective Date”
means, as to a Registration Statement, the date on which such Registration
Statement is first declared effective by the Commission.

     

     (f)             “Person” means an
individual, a partnership, a limited liability company, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization and a governmental entity or any department, agency or political
subdivision thereof.

     

     (g)             "Prospectus" means the
prospectus included in the Registration Statement (including, without
limitation, a prospectus that includes any information previously omitted from a
prospectus filed as part of an effective Registration Statement in reliance upon
Rule 430A promulgated under the Securities Act), as amended or supplemented
by any prospectus supplement, with respect to the terms of the offering of any
portion of the Registrable Securities covered by the Registration Statement, and
all other amendments and supplements to the Prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus

     

     (h)             “Registrable
Securities” means (i) the shares issuable upon conversion of the Loan and
upon exercise of the Warrant and held by the Holder(s) or its assignees, and
(ii) any other shares of Common Stock or any other securities issued or issuable
with respect to the securities referred to in clause (i) by way of a stock
dividend or stock split or in connection with an exchange or combination of
shares, recapitalization, merger, consolidation or other
reorganization.

    
      
         

      

      
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     (i)             "Registration
Statement" means any registration statement (including, without
limitation, the demand, piggy back and the Follow-up Registration Statement)
required to be filed hereunder (which, at the Company’s option, may be an
existing registration statement of the Company previously filed with the
Commission, but not declared effective), including (in each case) the
Prospectus, amendments and supplements to the Registration Statement or
Prospectus, including pre- and post-effective amendments, all exhibits thereto,
and all material incorporated by reference or deemed to be incorporated by
reference in the Registration Statement.

     

     (j)             “Rule 144” means Rule
144 promulgated by the Commission pursuant to the Securities Act, as such Rule
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission that may at any time permit the Holder to sell
securities of the Company to the public without
registration.   

     

     (k)             "Rule 415" means Rule
415 promulgated by the Commission pursuant to the Securities Act, as such Rule
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission having substantially the same effect as such
Rule. 

     

     (l)             “Rule 424" means Rule
424 promulgated by the Commission pursuant to the Securities Act, as such Rule
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission having substantially the same effect as such
Rule.

     

     (m)           “Securities Act” means
the Securities Act of 1933, as amended from time to time.

     

     (n)            “Securities Exchange
Act” means the Securities Exchange Act of 1934, as amended from time to
time.

     

    12.           Miscellaneous.

     

     (a)            A
Person is deemed to be a Holder of Registrable Securities whenever such Person
owns or is deemed to own of record such Registrable Securities.  If
the Company receives conflicting instructions, notices or elections from two or
more Persons with respect to the same Registrable Securities, the Company shall
act upon the basis of instructions, notice or election received from the such
record owner of such Registrable Securities.

     

     (b)            Any
notices, consents, waivers or other communications required or permitted to be
given under the terms of this Agreement must be in writing and will be deemed to
have been delivered:  (i) upon receipt, when delivered personally;
(ii) upon receipt, when sent by facsimile (provided confirmation of transmission
is mechanically or electronically generated and kept on file by the sending
party); or (iii) one business day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same.  The addresses and facsimile numbers for such
communications shall be:

     

     If
to the Company:

    

     China
Energy Recovery, Inc.

     7F,
No 267 Quyang Road

     Hongkou
district

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

    

    Shanghai,
China 200081

    Attention:  Chief
Executive Officer

     

    and

    

    If to any
Holder, at the address for the Holder on the records of the
Company,

    

    or to
such other address and/or facsimile number and/or to the attention of such other
Person as the recipient party has specified by written notice given to each
other party five (5) days prior to the effectiveness of such
change.  Written confirmation of receipt (A) given by the recipient of
such notice, consent, waiver or other communication, (B) mechanically or
electronically generated by the sender's facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) provided by a courier or overnight courier service shall be
rebuttable evidence of personal service, receipt by facsimile or receipt from a
nationally recognized overnight delivery service in accordance with clause (i),
(ii) or (iii) above, respectively.

     

    (c)             Failure
of any party to exercise any right or remedy under this Agreement or otherwise,
or delay by a party in exercising such right or remedy, shall not operate as a
waiver thereof.

     

    (d)             All
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of
Delaware, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Delaware or other jurisdictions) that
would cause the application of the laws of any jurisdictions other than the
State of Delaware.  Each party hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in the State of
Delaware, for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein, and
hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, that such suit, action or proceeding is brought in an
inconvenient forum or that the venue of such suit, action or proceeding is
improper.  Each party hereby irrevocably waives personal service of
process and consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address for such
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof.  Nothing
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law.  If any provision of this Agreement
shall be invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other
jurisdiction.  EACH
PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREBY.

     

    (e)             This
Agreement and the instruments referenced herein and therein constitute the
entire agreement among the parties hereto with respect to the subject matter
hereof and thereof.  There are no restrictions, promises, warranties
or undertakings, other than those set forth or referred to herein and
therein.  This Agreement and the instruments referenced herein and
therein supersede all prior agreements and understandings among the parties
hereto with respect to the subject matter hereof and thereof.

     

    (f)             Subject
to the requirements of Section 9, this Agreement shall inure to the benefit of
and be binding upon the permitted successors and assigns of each of the parties
hereto.

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

     

    (g)             The
headings in this Agreement are for convenience of reference only and shall not
limit or otherwise affect the meaning hereof.

     

    (h)             This
Agreement may be executed in identical counterparts, each of which shall be
deemed an original but all of which shall constitute one and the same
agreement.  This Agreement, once executed by a party, may be delivered
to the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.  This
Agreement may also be executed by electronic signature of such
Person.

     

    (i)           
  Each party shall do and perform, or cause to be done and performed,
all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as any other party may
reasonably request in order to carry out the intent and accomplish the purposes
of this Agreement and the consummation of the transactions contemplated
hereby.

     

    (j)          
   All consents and other determinations required to be made by
the Holder pursuant to this Agreement shall be made, unless otherwise specified
in this Agreement, by the Holder.

     

    (k)             The
language used in this Agreement will be deemed to be the language chosen by the
parties to express their mutual intent and no rules of strict construction will
be applied against any party.

     

    (l)    
         This Agreement is intended
for the benefit of, and shall be binding upon, the parties hereto and their
respective successors and permitted assigns, and is not for the benefit of, nor
may any provision hereof be enforced by, any other Person.

     

    (m)            The
obligations of each Holder hereunder are several and not joint with the
obligations of any other Holder, and no provision of this Agreement is intended
to confer any obligations on a Holder vis-à-vis any other
Holder.  Nothing contained herein, and no action taken by any Holder
pursuant hereto, shall be deemed to constitute the Holder as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Holder are in any way acting in concert or as a group with
respect to such obligations or the transactions contemplated
herein.

     

    (n)             Currency.  As
used herein, "Dollar", "US Dollar" and "$" each mean the lawful money of the
United States.

     

    [signature
pages follow immediately]

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

    IN WITNESS WHEREOF, the
parties have executed this Registration Rights Agreement as of the date first
written above.

     

    
      
        
          
            
              
                	
                        COMPANY:

                      
	 
      
	
                        CHINA
      ENERGY RECOVERY, INC.

                      
	 
      	 
      
	
                        By:

                      	 
      
	 
      	
                        Name:
      Qinghuan Wu

                      
	 
      	
                        Title:
      Chief Executive Officer

                      
	
                         
      

                      
	
                        HOLDER:

                      
	 
      
	
                        HOLD
      AND OPT INVESTMENTS LIMITED

                      
	 
      
	
                        By:

                      	 
      
	 
      	
                        Timothy
      Fraser-Smith, Authorized Signatory

                      
	 
      
	
                        Address
      for Notices to Holder:

                      
	 
      
	
                        Hold
      And Opt Investments Limited

                      
	
                        Deltec
      House, Lyford Cay

                      
	
                        P.O.
      Box N-3229

                      
	
                        Nassau,
      Bahamas

                      
	
                        Tel:
      1242-302-4100

                      
	
                        Fax
      1242-362-4623

                      
	
                        Tis@deltecbank.com

                      

              

            

          

        

      

    

    
      
         

      

      
        15

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