SECURITY AGREEMENT

SECURITY AGREEMENT

SECURITY AGREEMENT, dated as of September 14, 2009 (this “ Agreement ”), between CONVERTED ORGANICS, INC., a Delaware corporation (the “ Company ), and IROQUOIS MASTER FUND LTD. (the “ Lender ”).

WHEREAS, the Company and the Lender are parties to that certain Subscription Agreement dated the date hereof (the “ Subscription Agreement ”);

WHEREAS, it is intended hereby that all obligations of the Company to the Lender under the Transaction Documents (as defined in the Subscription Agreement) and other agreements to which the Company and Lender are from time to time party, be secured by the personal property assets of the Company herein described;

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:

1.  Definitions .

(a) Capitalized terms used herein without definition (by cross-reference or otherwise) shall have the meanings provided for such terms (by cross-reference or otherwise) in the Subscription Agreement.

(b) The following capitalized terms, when used herein, shall have the meanings provided for such terms in Article 9 of the NYUCC (as hereafter defined): Accession, Account, Cash Proceeds, Certificate of Title, Chattel Paper, Commercial Tort Claim, Commodity Account, Commodity Contract, Commodity Intermediary, Deposit Account, Document, Electronic Chattel Paper, Equipment, Farm Products, General Intangible, Goods, Health-Care-Insurance Receivable, Instrument, Inventory, Investment Property, Letter-of-Credit Right, Non-Cash Proceeds, Payment Intangible, Proceeds, Promissory Note, Software, Supporting Secured Obligations, and Tangible Chattel Paper. Such terms (and those in the following clauses of this Section 1) shall include in the singular number the plural and in the plural number the singular. Nothing contained in this subsection (b) or otherwise in this Agreement shall be construed to mean that uncapitalized terms used herein which are defined in the UCC or the NYUCC shall not have the meanings ascribed to such terms in such statutes.

(c) The following capitalized terms, when used herein and not defined in Article 9 of the NYUCC, shall have the meanings provided therefor elsewhere in the NYUCC: Certificated Security, Letter of Credit, Securities Intermediary and Uncertificated Security.

(d) As used herein, the following capitalized terms shall have the following meanings:

“ Event of Default ” means any of the following: (i) any failure by the Company to pay, when due, any amount payable by it under any Transaction Document, (ii) any other material breach by the Company of any provision of any Transaction Document which if permitted to be cured is not cured within 30 days, (iii) any representation or warranty made by the Company in any Transaction Document, or otherwise in writing in connection with any such document, or in any certificate or statement furnished pursuant to or in connection with any such document, shall be breached or shall prove to be untrue in any material respect on the date as of which made; (iv) the occurrence of an Insolvency Event with respect to the Company; or (v) any other Event of Default (as defined in the terms and conditions of any relevant Transaction Document).

“ Government Authority ” shall mean any nation or government, any state or political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

“ Insolvency Event ” means the occurrence of any of the following with respect to the Company or another Person: any bankruptcy, insolvency or other proceeding for the relief of financially distressed debtors shall be commenced with respect to such Person, or a receiver, liquidator, custodian or trustee shall be appointed for such Person or a substantial part of its assets, and, if any of the same shall occur involuntarily as to such Person, it shall not be dismissed, stayed or discharged within 60 days; or if any order for relief shall be entered against such Person under Title 11 of the United States Code entitled “Bankruptcy”; or such Person shall take any action to effect, or which indicates its acquiescence in, any of the foregoing; in each of the foregoing situations, whether under the laws of the United States or the analogous laws of any foreign jurisdiction.

“ Loan Agreement ” means each agreement (if, as and when executed by the Company and the Lender) pursuant to or in connection with which any financial accommodation is extended by the Lender to or on behalf of the Company, including, without limitation, the Note.

“ NYUCC ” means the Uniform Commercial Code of the State of New York (as currently in effect and as the same may from time to time hereafter be amended).

“ Patents ” means (i) all United States or other patents which the Company may from time to time possess or be otherwise entitled to use, and all licenses of United States or other patents which the Company may from time to time possess or be otherwise entitled to use (including without limitation the patents described in Section 8(f) hereof), (ii) all re-issues, divisions, continuations, renewals, extensions and continuations-in-part thereof, (iii) the right to sue for past, present and future infringements of the foregoing, and (iv) all rights corresponding to all of the foregoing throughout the world.

“ Payment Default ” means the failure by the Company to make any payment required to be made by it pursuant to any Transaction Document to which it is a party at the time when same is due (after giving effect to any applicable cure period).

“ Person ” shall mean and include an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, a not-for-profit corporation or other not-for-profit entity, a trust, an unincorporated association, a joint venture or other entity or a Government Authority.

“ Secured Obligations ” means all of the indebtedness, obligations and liabilities of the Company to the Lender, whether direct or indirect, joint or several, absolute or contingent, due or to become due, now existing or hereafter arising, pursuant to one or more of the Transaction Documents.

“ State ” means the State of New York.

“ Trademarks ” means (i) all United States or other trademarks which the Company may from time to time possess or be otherwise entitled to use, together with the goodwill of the business connected with the use of, and symbolized by, such trademarks (together with the trademarks described in Section 8(f) hereof), (ii) all re-issues, divisions, continuations, renewals, extensions and continuations-in-part thereof, (iii) the right to sue for past, present and future infringements of the foregoing, and (iv) all rights corresponding to all of the foregoing throughout the world (excluding intent-to-use United States applications prior to their conversion into use-based applications).

(e) Unless otherwise specified, each reference in this Agreement or in any other Transaction Document to a Transaction Document shall mean such Transaction Document as the same may from time to time be amended, restated, replaced, supplemented or otherwise modified from time to time with the consent of the Lender.

(f) As used in this Agreement, the terms “including,” “including without limitation” and “such as” (and like terms) are illustrative and not limitative. No difference shall be imputed to the use in some places herein of “including” and in others of “including without limitation.” Phrases such as “hereof” and “herein” refer to the entire Agreement and not just the section or other portion in which said reference appears.

2.  Grant of Security Interest .

(a) The Company hereby grants to the Lender, to secure the payment and performance in full of all of the Secured Obligations, a security interest in and so pledges and assigns to the Lender all the Company’s interest in Converted Organics of California LLC, a California limited liability company, and any and all assets that are acquired by the use of the funds from the Subscription Agreement. In addition, the Company grants the Lender a security interest in the Company’s interest in Converted Organics of Woodbridge, LLC, a New Jersey limited liability company, and all of its assets subordinate only to the current lien held by the holder of the current debt issued in connection with the initial plant of approximately $17,500,000, wherever located, whether now owned or hereafter acquired or arising, and all Proceeds and products thereof; all personal and fixture property of every kind and nature including without limitation all Goods (including Inventory, Equipment and any Accessions thereto), Instruments (including Promissory Notes), Documents, Accounts, Chattel Paper (whether Tangible Chattel Paper or Electronic Chattel Paper), Deposit Accounts, Letter-of-Credit Rights (whether or not the Letter of Credit is evidenced by a writing), Commercial Tort Claims, Investment Property, Subsidiaries (as defined in the Subscription Agreement) whether now existing or existing in the future, Supporting Secured Obligations, any other contract rights or rights to the payment of money, insurance claims and proceeds, tort claims, and all General Intangibles (including all Payment Intangibles and all Proceeds of the foregoing) (all of the same listed in this Section 2 being hereinafter called, the “ Collateral ”). The Lender acknowledges that the attachment of its security interest in any Commercial Tort Claim as original collateral is subject to the Company’s compliance with Section 4(g).

(b) Lender at all times shall have a perfected security interest in the Collateral. Company represents that, other than the security interests described on Schedule 2, if any, it has and will continue to have full title to the Collateral free from any liens, leases, encumbrances, judgments or other claims. The Lender’s security interest in the Collateral constitutes and will continue to constitute a first, prior and indefeasible security interest in favor of Lender, subject only to the security interests described on Schedule 2, if any, and as set forth in Section 2(a) hereof Company will do all acts and things, and will execute and file all instruments (including, but not limited to, security agreements, financing statements, continuation statements, etc.) reasonably requested by Lender to establish, maintain and continue the perfected security interest of Lender in the perfected Collateral, and will promptly on demand, pay all costs and expenses of filing and recording, including the costs of any searches reasonably deemed necessary by Lender from time to time to establish and determine the validity and the continuing priority of the security interest of Lender, and also pay all other claims and charges that, in the opinion of Lender are reasonably likely to materially prejudice, imperil or otherwise affect the Collateral or Lender’s security interests therein.

3.  Authorization to File Financing Statements . The Company hereby irrevocably authorizes the Lender at any time and from time to time to file in any Uniform Commercial Code jurisdiction any initial Financing Statements and amendments thereto that (a) indicate the Collateral (i) as all assets of the Company or words of similar effect, regardless of whether any particular asset included in the Collateral falls within the scope of Article 9 of the NYUCC, or (ii) as being of an equal or lesser scope or with greater detail, and (b) contain any other information required by part 5 of Article 9 of the NYUCC for the sufficiency or filing office acceptance of any Financing Statement or amendment, including (i) whether the Company is an organization, the type of organization and any organization identification number issued to the Company and, (ii) in the case of a Financing Statement filed as a fixture filing or indicating Collateral as as-extracted collateral or timber to be cut, a sufficient description of real property to which the Collateral relates. The Company agrees to furnish any such information to the Lender promptly upon request.

4.  Other Actions . To further insure the attachment, perfection and priority of, and the ability of the Lender to enforce the Lender’s security interest in the Collateral, the Company agrees, in each case at the Company’s own expense, at any time when an Event of Default exists and has not been cured under the terms of the Note or the terms hereof, to take the following actions with respect to the Collateral:

(a)  Promissory Notes and Tangible Chattel Paper . If the Company shall at any time hold or acquire any Promissory Notes or Tangible Chattel Paper, the Company shall (unless required otherwise by another Loan Document) forthwith endorse, assign and deliver the same to the Lender, accompanied by such instruments of transfer or assignment duly executed in blank as the Lender may from time to time specify.

(b)  [Reserved] .

(c)  Investment Property . If the Company shall at any time hold or acquire any Certificated Securities, the Company shall forthwith endorse, assign and deliver the same to the Lender, accompanied by such instruments of transfer or assignment duly executed in blank as the Lender may from time to time specify. If any securities now or hereafter acquired by the Company are uncertificated and are issued to the Company or its nominee directly by the issuer thereof, the Company shall immediately notify the Lender thereof and, at the Lender’s request and option, pursuant to an agreement in form and substance satisfactory to the Lender, cause the issuer to agree to comply with instructions from the Lender as to such securities, without further consent of the Company or such nominee. If any securities, whether certificated or uncertificated, or other Investment Property now or hereafter acquired by the Company are held by the Company or its nominee through a Securities Intermediary or Commodity Intermediary, the Company shall immediately notify the Lender thereof and, at the Lender’s request and option, pursuant to an agreement in form and substance satisfactory to the Lender, either (i) cause such Securities Intermediary or (as the case may be) Commodity Intermediary to agree to comply with entitlement orders or other instructions from the Lender to such Securities Intermediary as to such securities or other Investment Property, or (as the case may be) to apply any value distributed on account of any commodity contract as directed by the Lender to such Commodity Intermediary, in each case without further consent of the Company or such nominee, or (ii) in the case of financial assets or other Investment Property held through a Securities Intermediary, arrange for the Lender to become the entitlement holder with respect to such Investment Property, with the Company being permitted, only with the consent of the Lender, to exercise rights to withdraw or otherwise deal with such Investment Property. The Lender agrees with the Company that the Lender shall not give any such entitlement orders or instructions or directions to any such issuer, Securities Intermediary or Commodity Intermediary, and shall not withhold its consent to the exercise of any withdrawal or dealing rights by the Company, unless an Event of Default exists (or would exist after giving effect to any such investment or withdrawal). The provisions of this paragraph shall not apply to any financial assets credited to a securities account for which the Lender is the Securities Intermediary.

(d)  Collateral in the Possession of a Bailee . If any goods are at any time in the possession of a bailee, the Company shall promptly notify the Lender thereof and, if requested by the Lender, shall promptly obtain an acknowledgment from the bailee, in form and substance satisfactory to the Lender, that the bailee holds such Collateral for the benefit of the Lender and shall act upon the instructions of the Lender, without the further consent of the Company.

(e)  Electronic Chattel Paper and Transferable Records . If the Company at any time holds or acquires an interest in any Electronic Chattel Paper 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 Company 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 §9-105 of the NYUCC, of such Electronic Chattel Paper or control under Section 201 of the federal Electronic Signatures in Global and National Commerce Act or, as the case may be, §16 of the Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of such transferable record.

(f)  Letter-of-Credit Rights . If the Company is at any time a beneficiary under a letter of credit now or hereafter issued in favor of the Company, the Company shall promptly notify the Lender thereof and, at the request and option of the Lender at any time when an Event of Default exists, the Company shall, pursuant to an agreement in form and substance satisfactory to the Lender, either (i) arrange for the issuer and any confirmer of such letter of credit to consent to an assignment to the Lender of the proceeds of any drawing under the letter of credit or (ii) arrange for the Lender to become the transferee beneficiary of the letter of credit, with the Lender agreeing, in each case, that the proceeds of any drawing under the letter of credit shall be held as collateral for the Secured Obligations.

(g)  Commercial Tort Claims . If the Company shall at any time hold or acquire a Commercial Tort Claim, the Company shall immediately notify the Lender in a writing signed by the Company of the brief details thereof and grant to the Lender in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance satisfactory to the Lender.

(h)  Other Actions as to any and all Collateral . The Company further agrees to take any other action reasonably requested by the Lender to insure the attachment, perfection and first priority of, and the ability of the Lender to enforce, the Lender’s security interest in any and all of the Collateral including, without limitation, (1) executing, delivering and, where appropriate, filing Financing Statements and amendments relating thereto under the Uniform Commercial Code, to the extent, if any, that the Company’s signature thereon is required therefor, (2) causing the Lender’s name to be noted as secured party on any certificate of title for a titled good if such notation is a condition to attachment, perfection or priority of, or ability of the Lender to enforce, the Lender’s security interest in such Collateral, (3) complying with any provision of any statute, regulation or treaty of the United States or any foreign jurisdiction to any Collateral if compliance with such provision is a condition to attachment, perfection or priority of (or comparable concepts under the laws of the United States or any foreign jurisdiction), or ability of the Lender to enforce, the Lender’s security interest in such Collateral, (4) making such filings in the United States Copyright Office and the United States Patent and Trademark Office as the Lender shall request to register, file or otherwise confirm Lender’s security interest in intellectual property, or rights therein, held by the Company, (5) obtaining governmental and other third party consents and approvals, including without limitation any consent of any licensor, lessor or other person obligated on Collateral, (6) obtaining waivers from mortgagees and landlords in form and substance satisfactory to the Lender and (7) taking all actions required by any earlier versions of the Uniform Commercial Code or by other law, as applicable in any relevant Uniform Commercial Code jurisdiction, or by other law as applicable in any foreign jurisdiction.

5.  Conflicts; Other Jurisdictions . In the case of any direct conflict between the provisions of this Agreement and any other Transaction Document, whether governed by the laws of the United States, any state therein or any other jurisdiction, those provisions shall control which afford to the Secured Party the greater rights, security and indemnification. Without limiting the generality of the foregoing, the parties hereto acknowledge that the inclusion of supplemental rights or remedies in favor of the Secured Party with respect to any Collateral in any such Transaction Document shall not be deemed a conflict with this Agreement.

6.  Representations and Warranties . The Company hereby makes the following representations and warranties to the Lender, which representations and warranties shall survive the execution, delivery and performance of this Agreement and the other Transaction Documents:

(a) All of the representations and warranties made by the Company in any of the Transaction Documents are incorporated herein by this reference.

(b) The Company is the owner of, or has other rights in, the Collateral, free from any adverse lien, security interest or other encumbrance, except for the security interest created by this Agreement and other liens permitted by the Transaction Documents or listed on Schedule 6(b) attached hereto.

(c) None of the account debtors or other persons materially obligated on any of the Collateral is a governmental authority subject to the Federal Assignment of Claims Act or like federal, state or local statute or rule in respect of such Collateral.

(d) To the Company’s knowledge, the Company holds no Commercial Tort Claim.

(e) The Company has at all times operated its business in compliance with all applicable material provisions of the federal Fair Labor Standards Act, as amended, and with all applicable provisions of federal, state and local statutes and ordinances dealing with the control, shipment, storage or disposal of hazardous materials or substances, except where the failure to do so would not be expected to have a Material Adverse Effect.

(f) On the date hereof, excluding such securities of the Subsidiaries, the Company does not hold or have any interest in (directly or through a nominee or through a Securities Intermediary or Commodity Intermediary) any Investment Property (whether Certificated Securities, Uncertificated Securities or otherwise).

(g) On the date hereof:

(i) the Company does not hold or otherwise have any material interest in any Electronic Chattel Paper or any such transferable record.

(ii) the Company is not a beneficiary under a letter of credit issued in favor of the Company.

(iii) the Company possesses no rights in any material or significant copyrights, regardless of whether same have been registered with the United States Copyright Office or not.

7. [Reserved].

8.  Special Provisions Concerning Trademarks and Patents .

(a) The Company (either itself or through licensees) will, for each Patent, not do any act, or omit to do any act, whereby any Patent which is material to the conduct of the Company’s business may become abandoned or dedicated.

(b) The Company shall notify the Lender immediately if it knows or has reason to know that any application or registration relating to any Patent or Trademark which is material to the conduct of the Company’s business may become abandoned or dedicated, or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office or any court) regarding the Company’s ownership of any Patent or Trademark which is material to the Company’s business, its right to register the same, or to keep and maintain the same.

(c) In no event shall the Company, either itself or through any agent, employee, licensee or designee, file an application for the registration of any Patent or Trademark with the United States Patent and Trademark Office or any similar office or agency in any other country or any political subdivisio