SECURITY AGREEMENT

THIS SECURITY AGREEMENT (this “Agreement”) is dated as of February 11, 2009, and is entered into by and between ThermoEnergy Corporation, a Delaware corporation having its principal place of business in Little Rock, Arkansas (“Thermo”) and Thermo’s subsidiary CASTion Corporation, a Massachusetts corporation having its principal place of business in Worcester, Massachusetts (“CASTion” and, together with Thermo, “Debtor”), and The Quercus Trust (“Secured Party”).  Capitalized terms not otherwise defined herein are used as defined in the New York Uniform Commercial Code on the date of this Agreement.

WHEREAS, the Debtor is borrowing Two Hundred Fifty Thousand Dollars ($250,000.00) from Secured Party pursuant to that certain Promissory Note of even date herewith in favor of Secured Party (the “Note”);

WHEREAS, it is a condition precedent to Secured Party’s making any payments to Debtor under the Note that the Debtor execute and deliver to the Secured Party a security agreement in substantially the form hereof; and

WHEREAS, the Debtor wishes to grant a security interest in favor of the Secured Party as herein provided.

NOW, THEREFORE, in consideration of the promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

SECTION 1.   Grant of Security .  As consideration for Secured Party’s loan to Debtor pursuant to the Note, Debtor hereby grants to Secured Party a security interest in all intellectual property rights of Debtor, including without limitation all rights under and pursuant to that certain License Agreement between Debtor and Alexander G. Fassbender dated October 1, 2003, as amended by that certain letter agreement between Debtor and Alexander G. Fassbender dated December 17, 2007 (the “Fassbender License”) and any and all proceeds from the transfer, assignment or other permitted disposition thereof (the “Collateral”).  Notwithstanding the foregoing, the Collateral shall not include any and all rights related to the patents and licenses described on Exhibit A hereto and related intellectual property used in connection therewith, including, without limitation, the intellectual property rights used in or relating to the Debtor’s “TEPS” business (collectively, the “Excluded Assets”),.

SECTION 2.   Security for Obligations .  This Agreement secures and the Collateral is collateral security for the prompt payment or performance in full (including, without limitation, amounts that would become due but for the filing of a petition in bankruptcy), of all amounts when due under the Note, as well as Debtor’s performance and observance of all covenants contained herein and in the Note and the Fassbender License (the “Obligations”).

SECTION 3.   Further Assurances .  Debtor hereby authorizes Secured Party to execute any and all financing statements necessary to carry out this Agreement.  Debtor further agrees that from time to time, at the expense of Debtor, Debtor will promptly execute and deliver all further instruments and documents, and take all further action that Secured Party may reasonably request, in order to perfect, protect and maintain or establish the priority of any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral.

(a)           Thermo is and will continue to be a corporation existing and in good standing under the laws of the State of Delaware.

(b)           CASTion is and will continue to be a corporation existing and in good standing under the laws of the Commonwealth of Massachusetts.

(c)           Debtor is duly empowered and authorized to enter into, and grant security interests in, its property, and perform its obligations under this Agreement and all other instruments and transactions contemplated hereby or relating hereto.  The execution, delivery and performance by Debtor of this Agreement and all other instruments and contemplated transactions do not and will not violate any law or any provision of nor be grounds for acceleration under any agreement, indenture, note or instrument which is binding upon Debtor, including without limitation, Debtor’s Certificate of Incorporation, Articles of Organization, By-Laws or any other loan or security agreements.

(d)           Assuming the due filing of financing statements in proper form with the proper public officials, the security interest granted to Secured Party pursuant to this Agreement is a valid, perfected first-priority security interest in the that portion of the Collateral in which a security interest may be perfected under the Uniform Commercial Code.

(e)           Debtor shall not hereafter transfer, assign or otherwise dispose of the Collateral without Secured Party’s prior written consent.  Debtor shall not create, permit or suffer to exist, and shall take such other action as is necessary to remove, any claim to or interest in the Collateral, and the security interest granted hereby, and shall defend the right, title and interest of Secured Party in and to the Collateral against all claims and demands of all persons and entities at any time claiming the same or any interest therein.

(f)           Subject to any limitation stated therein or in connection therewith, all information furnished by Debtor concerning the Collateral or otherwise in connection with the Obligations, is or shall be at the time the same is furnished, accurate, correct and complete in all material respects.

(g)           All representations, warranties and covenants of Debtor contained in this Agreement and any other agreement with Secured Party shall be true and correct at the time of the effective date of each such agreement and shall be deemed continuing and shall remain true, correct and in full force and effect until payment and satisfaction in full of all of the Obligations.

(g)           Debtor shall not pledge, encumber, hypothecate, or grant a security interest in the Excluded Assets to any person or entity unless it first makes arrangements reasonably acceptable to Secured Party to pledge to Secured Party the proceeds of such transfer as additional Collateral hereunder.

(h)           The Company’s rights