Abstract: A heat recovery system includes a heat exchanger surrounding a flue pipe from a furnace for preheating water. The heat exchanger includes a sleeve surrounding the flue pipe to define an annular space and form a water jacket in direct contact with the flue pipe. Several water storage tanks are connected in series and mounted around the sleeve to absorb heat from the water jacket. The outer water tanks are connected to one end of the water jacket at the downstream end of the flue pipe so that water is carried sequentially through each of the water tanks and through the water jacket surrounding the flue pipe. Typically, the water jacket includes a plurality of baffles to define a tortuous path through the water jacket. A conduit for supplying water to the outer water tanks can be wrapped around the downstream end of the flue pipe in a spiral manner to preheat the water prior to feeding to the water tanks.