CHINA ENERGY RECOVERY, INC. UNSECURED PROMISSORY NOTE

$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, 10 ^th 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.

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.

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.

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 (90 ^th ) 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.

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 arra