SECURITY AGREEMENT

Exhibit 10.3

Execution Copy

SECURITY AGREEMENT

Dated April 21, 2008

From

TURBOSONIC TECHNOLOGIES, INC.,

as Grantor

to

CANADIAN IMPERIAL BANK OF COMMERCE,

as Lender

TABLE OF CONTENTS

i

Schedules

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SECURITY AGREEMENT

SECURITY AGREEMENT (this “ Agreement ”) dated April 21, 2008 made by Turbosonic Technologies, Inc., a Delaware corporation (the “ Grantor ”), in favor of Canadian Imperial Bank of Commerce (the “ Lender ”).

PRELIMINARY STATEMENTS

(1)

A Subsidiary of the Grantor, Turbosonic Inc. has entered into a Banking Agreement dated January 14, 2008 (said agreement including all schedules attached thereto, as amended, amended and restated, supplemented or otherwise modified from time to time, being the “ Banking Agreement ”; terms defined therein and not otherwise defined herein shall have the meanings specified therein) with the Lender.

(2)

In order to induce the Lender to enter into the Banking Agreement, the Grantor has agreed to (a) enter into a Guaranty dated as of the date hereof (as amended, amended and restated, supplemented or otherwise modified from time to time, the “ Guaranty ”) in favor of the Lender and (b) grant a continuing security interest in and to the Collateral (as hereinafter defined) to the Lender to secure the Obligations (as such term is defined in the Guaranty) of the Grantor under the Guaranty.

(3)

It is a condition precedent to the issuance of the Credits and letters of credit by the Lender (the “ Letters of Credit ”), that the Grantor shall have granted the security interest and made the pledge contemplated by this Agreement.

(4)

The Lender has agreed to accept the pledge and the grant of a security interest under this Agreement as security for the Secured Obligations (as defined below) secured thereby.

(5)

The Grantor will derive substantial direct and indirect benefit from the transactions contemplated by the Banking Agreement.

(6)

Unless otherwise defined in this Agreement or the Banking Agreement, terms defined in Article 8 or 9 of the UCC (as defined below) are used in this Agreement as such terms are defined in such Article 8 or 9.  “ UCC ” means the Uniform Commercial Code as in effect, from time to time, in the State of New York; provided that, if perfection or the effect of perfection or non-perfection or the priority of any security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, “UCC” means the Uniform Commercial Code as in effect from time to time in such other jurisdiction for purposes of the provisions hereof relating to such perfection, effect of perfection or non-perfection or priority.

NOW, THEREFORE, in consideration of the premises and in order to induce the Lender to issue the Credits and the Letters of Credit, the Grantor hereby agrees with the Lender as follows:

SECTION 1.

Grant of Security .  The Grantor, in order to secure the Secured Obligations (as defined below), hereby grants and pledges to the Lender a lien on and security interest in, its right, title and interest in and to the following, in each case, as to each type of property described below, whether now owned or hereafter acquired by the Grantor, wherever located, and whether now or hereafter existing or arising (collectively, the “ Collateral ”):

(a)

all accounts, chattel paper (including, without limitation, tangible chattel paper and electronic chattel paper), instruments (including, without limitation, promissory notes), general intangibles (including, without limitation, payment intangibles), and other obligations of any kind, whether or not arising out of or in connection with the sale or lease of goods or the rendering of services and whether or not earned by performance, and all rights now or hereafter existing in and to all supporting obligations and in and to all security agreements, mortgages, Liens, leases, letters of credit and other contracts securing or otherwise relating to the foregoing property (any and all of such accounts, chattel paper, instruments, general intangibles and other obligations, to the extent not referred to in clause (b) or (c) below, being the “ Receivables ”, and any and all such supporting obligations, security agreements, mortgages, Liens, leases, letters of credit and other contracts being the “ Related Contracts ”);

(b)

all intercompany notes and all certificates or instruments evidencing such intercompany notes; and

(c)

all documents, letter of credit rights (whether or not the letter of credit is evidenced by a writing), money and books and records;

(d)

all goods, of any nature whatsoever, including but not limited to, all equipment, inventory and fixtures, and any accessions thereto;

(e)

all property and interest in property now or after the date of this Agreement coming into possession, custody or control of the Lender in any way and for any purpose (whether for safekeeping, deposit, custody, pledge, transmission, collection or otherwise);

(f)

all other property and interests in property of the Grantor constituting personal property or fixtures; and

(g)

all proceeds of, products of, collateral for, income, and other payments now or hereafter due and payable with respect to, and supporting obligations relating to, any and all of the Collateral (including, without limitation, proceeds, collateral and supporting obligations that constitute property of the types described in clauses (a) through (f) of this Section 1 and this clause (g)) and, to the extent not otherwise included, all (A) contract rights and rights to the payment of money and payments under insurance (whether or not the Lender is the loss payee thereof), and any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral, (B) tort claims, including, without limitation, all commercial tort claims and (C) cash.

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Notwithstanding anything to the contrary contained herein, the security interests granted under this Agreement shall not extend to any permit, lease, license, contract or other instrument of the Grantor if the grant of a security interest in such permit, lease, license, contract or other instrument in the manner contemplated by this Agreement, under the terms thereof or under applicable law, is expressly prohibited and would result in the termination, breach, revocation or voidness  thereof or give the other parties thereto the right to terminate, revoke, void, accelerate or otherwise alter the Grantor’s rights, titles and interests thereunder (including upon the giving of notice or the lapse of time or both); provided that any such limitation on the security interests granted hereunder shall only apply to the extent that any such prohibition would not be rendered ineffective pursuant to the UCC or any other applicable law or principles of equity.

SECTION 2.

Security for Obligations .  This Agreement secures the payment and performance in full when due, whether at demand, stated maturity, by acceleration or otherwise of all the Obligations of the Grantor under the Guaranty (the “ Secured Obligations ”), whether now existing or arising after the date of this Agreement.

SECTION 3.

Grantor Remain Liable .  Anything herein to the contrary notwithstanding, (a) the Grantor shall remain liable under the contracts and agreements included in the Grantor’s Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by the Lender of any of the rights hereunder shall not release the Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral and (c) the Lender shall not have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement or the Guaranty, nor shall the Lender be obligated to perform any of the obligations or duties of the Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder or thereunder.

SECTION 4.

Delivery and Control of Intercompany Notes .  All certificates or instruments representing or evidencing intercompany notes shall be delivered to and held by or on behalf of the Lender pursuant to this Agreement and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to the Lender.  If an Event of Default shall have occurred and be continuing, the Lender shall have the right, at any time after the occurrence and during the continuance of such Event of Default, in its reasonable discretion and without notice to the Grantor other than as required by law, to transfer to or to register in the name of the Lender or any of its nominees any or all of the intercompany notes.  In addition, the Lender shall have the right at any time, after the occurrence and during the continuance of an Event of Default, to exchange certificates or instruments representing or evidencing intercompany notes for certificates or instruments of smaller or larger denominations.

SECTION 5.

Maintaining Letter-of-Credit Rights .  Prior to the Termination Date, the Grantor will maintain all letter-of-credit rights assigned to the Lender so that the Lender has control of the letter-of-credit rights in the manner specified in Section 9-107 of the UCC.

SECTION 6.

Representations and Warranties .  The Grantor represents and warrants, and in the case of clauses (l) and (m), covenants as follows:

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(a)

The Grantor is duly organized and validly existing under the laws of the jurisdiction of its incorporation or formation and is a “registered organization” within the meaning of the Uniform Commercial Code, as in effect in such jurisdiction.  The Grantor is not organized under the laws of any other state, and is qualified to do business and in good standing in all states and other jurisdictions in which the failure to be so qualified and in good standing would have a Material Adverse Effect or a material adverse effect on the ability of the Grantor to enforce the collection of Receivables due from customers residing in such locations.

(b)

This Agreement has been duly authenticated and delivered by the Grantor and constitutes its legal, valid and binding obligation enforceable in accordance with its terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally and by general principles of equity (whether enforcement is sought by proceedings in equity or at law) (such limitations, the “ Bankruptcy Exceptions ”).  

(c)

The Grantor’s exact legal name, as defined in Section 9-503(a) of the UCC, is correctly set forth in Schedule I hereto.  The Grantor is located (within the meaning of Section 9-307 of the UCC) in the state or jurisdiction set forth on Schedule I hereto.  The Grantor has its chief executive office and the office in which it maintains the original copies of each Related Contract to which the Grantor is a party and originals of all chattel paper that evidence Receivables, in the state or jurisdiction set forth in Schedule I hereto.  The information set forth in Schedule I hereto with respect to the Grantor is true and accurate in all material respects.  In the five years prior to the date hereof, the Grantor has not previously changed its name, location, chief executive office, place where it maintains its agreements, type of organization, jurisdiction of organization or organizational identification number from those set forth in Schedule I hereto except as disclosed in Schedule II hereto.

(d)

The Grantor is the legal and beneficial owner of the Collateral free and clear of any Lien, claim, option or right of others, except for the security interest created under this Agreement or permitted under the Banking Agreement.  No effective financing statement or other instrument similar in effect covering all or any part of such Collateral or listing the Grantor or any trade name of the Grantor as debtor is on file in any recording office, except such as may have been filed in favor of the Lender relating to the Banking Agreement, this Agreement or the Guaranty (collectively, the “ Loan Documents ”) or with respect to Liens of others permitted under the Banking Agreement.

(e)

Except as disclosed on Schedule II hereto, the Grantor conducts no business under any name or trade name other than its exact legal name as set forth in Schedule I hereto.  

(f)

Except for any inventory in transit in the ordinary course of the Grantor’s business, the Grantor has exclusive possession and control of its inventory and equipment.

(g)

This Agreement creates, as of its date, a continuing Lien in the Grantor’s Collateral, securing the payment of the Secured Obligations.

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(h)

There is no action, suit or proceeding pending or, to the Grantor’s knowledge, threatened against or otherwise affecting the Grantor before any court or other governmental authority or before any arbitrator or mediator the result of which, either singly or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

(i)

All filings and other actions (including, without limitation, actions necessary to obtain control of Collateral as provided in Sections 9-104, 9-106 of the UCC) necessary to perfect the security interest in the Collateral created under this Agreement have been duly made or taken and are in full force and effect, and this Agreement creates in favor of the Lender a valid and, together with such filings and other actions, perfected first priority security interest (subject to prior Liens permitted under the Banking Agreement) in the Collateral, securing the payment of the Secured Obligations.

(j)

(i)  The execution, delivery, recordation, filing or performance by the Grantor of this Agreement, (ii) the grant by the Grantor of the Liens pursuant to this Agreement, (iii) the perfection or maintenance of the Liens created under this Agreement (including the first priority, subject to prior Liens permitted under the Banking Agreement, nature thereof), (iv) the exercise by the Lender of its voting or other rights provided for in this Agreement and (v) the exercise by the Lender of its remedies in respect of the Collateral pursuant to this Agreement and the other Loan Documents, will not require any consent, approval, authorization or other order of, or any notice to or filing with, any court, regulatory body, administrative agency or other governmental body (other (x) than such filings required in order to perfect any security interest granted by this Agreement, and (y) any other consent, approval, authorization, order, notice or filing, the failure of which to make or obtain could not reasonably be expected to have a Material Adverse Effect), and will not conflict with or constitute a breach of any of the terms or provisions of, or a default under, the charter, by-laws or similar governing documents of the Grantor or any agreement, indenture or other instrument to which the Grantor is a party or by which the Grantor or any of the Grantor’s respective property is bound, or violate or conflict with any laws, administrative regulations or rulings or court decrees applicable to the Grantor or the Grantor’s respective property, except for any violation, breach, conflict or default that could not reasonably be expected to have a Material Adverse Effect and except that in each of the foregoing cases, any foreclosure or other exercise of remedies by the Lender will require additional approvals and consents that have not been obtained from foreign and domestic regulators and from lenders to, and suppliers, customers or other contractual counterparties of the Grantor, and the failure to obtain such approval or consent could result in a default under, or breach of, agreements or other legal obligations of the Grantor.

(k)

None of the Collateral constitutes, or is the Proceeds of, farm products.

(l)

If any amount payable under or in connection with any of the Collateral shall be evidenced by any “electronic chattel paper” (as defined in the UCC) or any “transferable record,” as that term is defined in Section 201 of the Federal Electronic Signatures in Global and National Commerce Act, or in § 16 of the Uniform Electronic Transactions Act as in effect in any relevant jurisdiction, the Grantor shall promptly notify the Lender thereof and, at the request of the Lender, shall take such action as the Lender may reasonably request to vest in the Lender control under UCC § 9 105 of such Electronic Chattel Paper or control under Section 201 of the Federal