The performance of a shape-memory effect heat engine employing heat recovery has been modeled taking into account heat transfer to the working element and non-ideal material behavior. Calculations of the energy flux to and from the working element show that a substantial fraction of the sensible heating requirements can be recovered by heat transfer between the heating and cooling stages. The increase in efficiency due to heat recovery and the resulting power output are shown to be a function of stress and rate of temperature change of the heat-transfer fluid. Working element-fluid heat transfer and hysteresis behavior of the shape-memory working element are found to limit the efficiency improvement associated with heat recovery.