10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2008
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-33304

Converted Organics Inc.

(Exact Name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 20-4075963
(I.R.S. Employer
Identification No.)

7A Commercial Wharf West, Boston, MA 02110

(Address of Principal Executive Offices and Zip Code)

(617) 624-0111

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Converted Organics Inc. Common Stock — $0.0001 Par Value Class B Warrants to purchase one share of Common Stock	NASDAQ Capital Market and the Boston Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:
None

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o     No þ

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  Yes o     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was $14,775,861.

Documents Incorporated by Reference:

Portions of the registrant’s definitive proxy statement to be filed subsequent to the date hereof in connection with the registrant’s 2009 annual meeting are incorporated by reference into Part III of this Report.

Table of Contents

PART I			1
	ITEM 1.	BUSINESS	2
	ITEM 1A.	RISK FACTORS	14
	ITEM 1B.	UNRESOLVED STAFF COMMENTS	21
	ITEM 2.	PROPERTIES	21
	ITEM 3.	LEGAL PROCEEDINGS	22
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	22
PART II			23
	ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	23
	ITEM 6.	SELECTED FINANCIAL DATA	24
	ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24
	ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	34
	ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA	37
	ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	67
	ITEM 9A.	CONTROLS AND PROCEDURES	67
	ITEM 9B.	OTHER INFORMATION	68
PART III			68
	ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	68
	ITEM 11.	EXECUTIVE COMPENSATION	68
	ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	68
	ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	69
	ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	69
PART IV			70
	ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	70
		SIGNATURES	72
EX-4.13 EX-4.13 Form of First Amendment to the Secured Convertible Debenture dated January 24, 2008
EX-4.14 Debenture dated January 24, 2008
EX-4.15 Form of Second Amendment to the Secured Convertible Debenture dated January 24, 2008
EX-10.13 New Jersey Economic Development Authority $17,500,000 Solid Waste Facilities Revenue Bonds
EX-23.1 Consent of CCR LLP
EX-31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
EX-31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
EX-32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
EX-32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906

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PART I

Forward-Looking Statements

We make forward-looking statements in this report that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. In some cases, you may identify forward-looking statements by words such as “may,” “should,” “plan,” “intend,” “potential,” “continue,” “believe,” “expect,” “predict,” “anticipate” and “estimate,” the negative of these words or other comparable words. These statements are only predictions. You should not place undue reliance on these forward-looking statements. The forward-looking statements are qualified by their terms and/or important factors, many of which are outside our control and involve a number of risks, uncertainties and other factors that could cause actual results and events to differ materially from the statements made. Such factors include, among other things, those described elsewhere in this report and the following:

•  Development of our business is dependent on our ability to obtain additional debt and equity financing which may not be available on acceptable terms.

•  We have received a going concern opinion from our auditors. Our ability to raise additional funds or enter in contracts with normal credit terms may be hindered while we are operating under this opinion.

•  If we are unable to manage our transition to an operating company effectively, our operating results will be adversely affected.

•  Our plan to develop relationships with strategic partners and vendors may not be successful.

•  Our future success is dependent on our existing key employees, and hiring and assimilating new key employees, and our inability to attract or retain key personnel in the future would materially harm our business and results of operations.

•  We license technology from a third party, and our failure to perform under the terms of the license could result in material adverse consequences.

•  Our Woodbridge and Gonzales sites may have unknown environmental problems that could be expensive and time consuming to correct.

•  We may not be able to manufacture our products in commercial quantities or sell them at competitive prices in the markets in which we wish to sell the products.

•  We may be unable to establish marketing and sales capabilities necessary to commercialize and gain market acceptance for our products.

•  Pressure by our customers to reduce prices and agree to long-term supply arrangements may adversely affect our net sales and profit margins.

•  Defects in our products or failures in quality control could impair our ability to sell our products or could result in product liability claims, litigation and other significant events with substantial additional costs.

•  Energy and fuel cost variations could adversely affect operating results and expenses.

•  We may not be able to obtain sufficient organic material.

•  Our agreements with our bond investors may hinder our ability to operate our business by imposing restrictive loan covenants, which may prohibit us from paying dividends or taking other actions to manage or expand our business.

•  The mandatory redemption of our bonds as a result of breaches of the terms of such funds due to our current financial condition could have a material adverse effect on our liquidity and cash reserves.

•  The communities where our facilities may be located may be averse to hosting waste handling and manufacturing facilities.

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•  Our facilities will require certain permits to operate, which we may not be able to obtain or obtain on a timely basis.

•  If we are unable to come to agreements with our construction vendors, the vendors may attempt to take actions against us or the Woodbridge facility, which could result in interruptions to the operations of the Woodbridge facility.

•  Changes in environmental regulations or violations of such regulations could result in increased expense and could have a material negative effect on our financial performance.

•  Our strategic plan for the development and construction of operating facilities in Rhode Island and Massachusetts requires additional debt and/or equity financing and working capital during the construction period.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, including those events and factors detailed in our filings with the Securities and Exchange Commission, not all of which are known to us. Neither we nor any other person assumes responsibility for the accuracy or completeness of these statements. We will update this report only to the extent required under applicable securities laws. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements.

For further information about these risks, uncertainties and factors, please review the disclosure included in this report under the caption “Business — Risk Factors.”

ITEM 1.   BUSINESS

Overview

During 2008, Converted Organics Inc. transitioned from a development stage company (first reported revenues were in February 2008) to a fully operational company that operates processing facilities that use food waste as raw material to manufacture all-natural soil amendment products combining nutritional and disease suppression characteristics. In addition to our sales in the agribusiness market, we sell and distribute our products in the turf management and retail markets. We currently operate two facilities:

•  Woodbridge facility.  A facility in Woodbridge, New Jersey that we have equipped as our first internally constructed organic waste conversion facility (the “Woodbridge facility”). Operations at the Woodbridge facility began in late June of 2008 and we are processing solid waste and are producing both liquid and dry fertilizer and soil enhancement products.

•  Gonzales facility.  A facility in Gonzales, California that we acquired in January 2008, which is operational and began to generate revenue for us in February 2008 (the “Gonzales facility”).

We were incorporated under the laws of the state of Delaware in January 2006. In February 2006, we merged with our predecessor organizations, Mining Organics Management, LLC (“MOM”) and Mining Organics Harlem River Rail Yard, LLC (“HRRY”), in transactions accounted for as a recapitalization. These predecessor organizations provided initial technical and organizational research that led to the foundation of the current business plan.

On February 16, 2007, we successfully completed an initial public offering of stock and successfully completed a bond offering with the New Jersey Economic Development Authority. The net proceeds of the stock offering of $8.9 million, together with the net proceeds of the bond offering of $16.5 million, were used to develop and construct the Woodbridge facility, fund our marketing and administrative expenses during the construction period and fund specific principal and interest reserves as specified in the bond offering. Of the total net proceeds of the stock and bond offerings of $25.4 million, $14.6 million was used towards the construction of the Woodbridge facility and the remaining $10.8 million was used for items detailed above.

On January 24, 2008, we acquired the assets, including the intellectual property, of Waste Recovery Industries, LLC (“WRI”). This acquisition makes us the exclusive owner of the proprietary technology and process known as

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the High Temperature Liquid Composting (“HTLC”) system, which processes various biodegradable waste products into liquid and solid organic-based fertilizer and feed products.

Also on January 24, 2008, we acquired the net assets of United Organic Products, LLC (“UOP”), which was under common ownership with WRI. With this acquisition, we acquired a leading liquid fertilizer product line, as well as the Gonzales facility, which is a production facility that services a West Coast agribusiness customer base through established distribution channels.

Our Revenue Sources

Our revenue comes from two sources: “tip” fees and product sales. Waste haulers pay the tip fees to us for accepting food waste generated by food distributors such as grocery stores, produce docks, fish markets and food processors, and by hospitality venues such as hotels, restaurants, convention centers and airports. Revenue also comes from the customers who purchase our products. Our products possess a combination of nutritional, disease suppression and soil amendment characteristics. The products are sold in both dry and liquid form and will be stable with an extended shelf life compared to other organic fertilizers. Among other uses, the liquid product is expected to be used to mitigate powdery mildew, a leaf fungus that restricts the flow of water and nutrients to the plant. These products can be used either on a stand-alone basis or in combination with more traditional petrochemical-based fertilizers and crop protection products. Based on growth trial performance, increased environmental awareness, trends in consumer food preferences and company-sponsored research, we believe our products will have demand in the agribusiness, turf management and retail markets. We also expect to benefit from increased regulatory focus on organic waste processing and on environmentally friendly growing practices.

Our Woodbridge Facility

We obtained a 10-year lease and exercised an additional 10-year option to renew for approximately 60,000 square feet at a site in a portion of an industrial building in Woodbridge, New Jersey that was modified and equipped as our first internally constructed organic waste conversion facility. Operations began in late June of 2008 at the Woodbridge facility and we are processing solid waste and are producing both liquid and dry fertilizer and soil enhancement products. Construction is still in process on certain aspects of the facility, mainly relating to installation of automated control systems and we are not currently producing to full capacity. At full capacity, the Woodbridge facility is expected to process approximately 78,000 tons of organic food waste and produce approximately 9,900 tons of dry product and approximately 10,000 tons of liquid product annually. We are in the process of completing additional upgrades to the Woodbridge facility, which are expected to be completed by June 2009, and which we believe will allow us to increase capacity at the facility to approximately 70% of full capacity. We estimate that the product can be sold in the range of $400 to $700 per ton based on the market to which it is sold. Therefore the potential monthly sales from this facility, at the 70% capacity ranges from approximately $700,000 to $1,100,000. Converted Organics of Woodbridge, LLC, a New Jersey limited liability company and our wholly owned subsidiary, was formed for the purpose of owning, constructing and operating the Woodbridge facility.

During the first ten weeks of 2009, we generated revenue from the Woodbridge facility in the form of tip fees of approximately $50,000 and product sales of approximately $126,000. For this facility to be cash flow positive, we estimate that sales would need to be in a range of $450,000 to $550,000 per month. Any cash flow generated by exceeding these sales would be used to fund operations at the corporate level and to pay down the payables related to construction activity at this facility.

As of December 31, 2008, we have incurred approximately $4.2 million in additional unanticipated construction costs and design changes for the Woodbridge facility. In addition, we committed an additional $1.5 million for the upgrades to the Woodbridge facility discussed above. We currently estimate that we will be able to fund approximately $500,000 of the foregoing upgrade costs. To finance the additional $5.2 million in upgrades, design changes and construction costs, we will need to enter into agreements with the various construction vendors as we do not currently have the funds available to pay these amounts, which are listed as accounts payable in our December 31, 2008 balance sheet. If we are unable to come to agreements with our construction vendors, the

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vendors may attempt to take actions against us or the Woodbridge facility, which could result in interruptions to the operations of the Woodbridge facility.

Our Woodbridge facility receives raw material from the New York-Northern New Jersey metropolitan area. It is located near the confluence of two major highways in northern New Jersey, providing efficient access for the delivery of feedstock from throughout this geographic area. This facility has been approved for inclusion in the Middlesex County and New Jersey State Solid Waste Management Plans.

We have agreements with eleven waste-hauling companies to provide food waste to the Woodbridge facility, which we feel will give us an adequate supply to operate the plant at full capacity.

Our conversion process has been approved for inclusion in the Middlesex County and New Jersey State Solid Waste Management Plan. We have been granted our Class C recycling permit, which is the primary environmental permit for this project. The remaining required permits are primarily those associated with the construction and operation of any manufacturing business.

The Woodbridge facility uses significant amounts of electricity, natural gas and steam. We use the services of an energy management firm to purchase natural gas and electricity, and water will be provided by the Town of Woodbridge. Wastewater will be discharged by permit into the local sewage system.

Our Gonzales Facility

On January 24, 2008, we acquired the Gonzales facility and formed Converted Organics of California, LLC a California limited liability company and wholly-owned subsidiary of the Company, for the purpose of owning, upgrading and operating the Gonzales facility. We generated revenue during 2008 of approximately $1,525,000, with a negative operating margin. We plan to improve this operating margin by channeling sales into the profitable turf and retail markets, by generating tip fees from receiving additional quantities of food waste and by reducing the amount of raw material and freight costs currently associated with the production process. In addition, we have plans to add capacity to the Gonzales plant, whereby the plant will produce approximately three times its current production and will be capable of producing both liquid and solid products. We have completed certain aspects of the planned upgrades which allow us to receive solid food waste for processing but have delayed the upgrades which would allow us to produce dry product. The remaining upgrades have been delayed due to cash flow constraints. We estimate that the sales level required to obtain break even cash flow at the Gonzales facility is in the range of $150,000 to $200,000 per month for 2009. We further estimate that the plant under its current configuration could generate monthly sales in the range of $350,000 to $400,000. If sales increase above the break even level, we expect the additional cash flow from the Gonzales facility will be used to offset operating expenses at the corporate level.

On January 24, 2008, we entered into a 10-year lease for land in Gonzales, California, where our Gonzales facility is located. The land is leased from Valley Land Holdings, LLC (“VLH”), a California LLC whose sole member is a former officer and director of our Company. The lease provides for a monthly rent of $9,000. The lease is also renewable for three 5-year terms after the expiration of the initial 10-year term. In addition, we own the Gonzales facility and the operating equipment used in the facility. VLH had been determined to be a variable interest entity of UOP in prior years as UOP was the primary beneficiary of that variable interest entity. We determined that VLH is a variable interest entity of the Company subsequent to the acquisition. VLH’s assets and liabilities consist primarily of land and a mortgage note payable on the land. Its operations consist of rental income on the land from us and related operating expenses. As such, VLH has been consolidated with our consolidated financial statements. All intercompany balances and activity have been eliminated.

We are currently seeking building permits on our Gonzales facility. If these permits are not obtained it will not affect our ability to produce product and achieve the above sales.

Pro Forma Financial Information

Introduction

The following unaudited pro forma consolidated financial information gives effect to our acquisition of the assets of UOP and WRI and should be read in conjunction with the historical consolidated financial statements of

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Converted Organics Inc., and the audited financial statements of United Organic Products, LLC, Waste Recovery Industries, LLC and Valley Land Holdings, LLC for the years ended December 31, 2007 and 2006. These financial statements can be found in our Form 10-KSB/A for year ended December 31, 2007. The unaudited pro forma consolidated statement of operations for the year ended December 31, 2008 gives effect to the acquisitions and the related financing as if they had occurred on January 1, 2008.

The unaudited pro forma consolidated financial statement includes all material pro forma adjustments necessary for their preparation, as required by Article 11 of Regulation S-X and, accordingly, do not assume any benefits from cost savings or synergies of operations of the combined Company.

The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. The unaudited pro forma consolidated financial statement does not purport to represent what our results of operations would actually have been had these transactions in fact occurred as of the date indicated above or to project our results of operations for the period indicated or for any other period.

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CONVERTED ORGANICS INC.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

for the Year Ended December 31, 2008

	Historical
	Converted
	Organics
	Inc. and			Pro forma						Pro forma
	subsidiaries			Adjustments			Reference			Consolidated
Revenues	$	1,547,981		$	—			(1	)	$	1,547,981
Cost of good sold		1,981,084			20,288			(1	)		2,001,372
Gross loss		(433,103	)		(20,288	)					(453,391	)
Costs and expenses		9,948,630			33,091			(1	)		9,981,721
Loss from operations		(10,381,733	)		(53,379	)					(10,435,112	)
Other income/(expenses)		(5,797,365	)		(37,000	)		(2	)		(5,834,365	)
Loss before provision for income taxes		(16,179,098	)		(90,379	)					(16,269,477	)
Provision for income taxes		—			—						—
Net loss	$	(16,179,098	)	$	(90,379	)				$	(16,269,477	)
Net loss per share, basic and diluted	$	(2.70	)							$	(2.72	)
Weighted average common shares outstanding		5,985,017									5,985,017

See accompanying notes.

CONVERTED ORGANICS INC.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENT

The following numbered notes are referenced on the Unaudited Pro Forma Consolidated Statement of Operations.

(1) Represents costs incurred by UOP and WRI during the period January 1, 2008 through the date of acquisition. No revenues were generated, and approximately $53,000 of costs and expenses were incurred.

(2) Represents interest expense associated with the convertible debt issued through the private financing, the convertible note to the former owner of UOP and the short-term note to the former owner of WRI, for the 24-day period prior to the acquisition.

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Future Expansion of Business

In addition to our Gonzales and Woodbridge facilities, our strategic plan calls for the development and construction of facilities in Rhode Island and Massachusetts. We currently are planning to operate these new facilities using the technology that we acquired in our acquisition of WRI. We anticipate that we will be able to use much of the engineering and design work used in our Gonzales facility. Any plans to further expand our Gonzales facility, or to construct any future facilities is dependent on our ability to raise additional financing.

In each of our contemplated locations, we have:

•  Engaged a local businessperson well acquainted with the community to assist us in the permitting process and development of support from community groups;

•  Participated in numerous meetings with state, county and local regulatory bodies as well as environmental and economic development authorities; and

•  Identified potential facility sites.

If we are able to build new facilities, we anticipate we will achieve economies of scale in marketing and selling our fertilizer products as the cost of these activities is spread over a larger volume of product. If our overall volume of production increases, we also believe we may be able to more effectively approach larger agribusiness customers who may require larger quantities of fertilizer to efficiently utilize their distribution systems.

To date, we have undertaken the following activities in the following markets to prepare to develop additional facilities:

•  The Rhode Island Industrial Facilities Corporation gave initial approval to our Revenue Bond Financing Application for up to $15 million for the construction of our proposed Rhode Island facility. In addition, the Rhode Island Resource Recovery Corporation gave us final approval to lease nine acres of land in the newly created Lakeside Commerce Industrial Park in Johnston, RI. We previously filed an application with the Rhode Island Department of Environmental Management for the operation of a Putrescible Waste Recycling Center at that site. We have established a Converted Organics of Rhode Island, LLC of which we are 92.5% owners. The minority share is owned by a local business man who has assisted us with the process of developing a Rhode Island facility.

•  In Massachusetts, we have performed initial development work in connection with construction of three manufacturing facilities to serve the eastern Massachusetts market. Our proposals to develop these facilies is currently under review by the property owners. The Massachusetts Strategic Envirotechnology Partnership Program has completed a favorable review of our technology.

Conversion Process

The process used in the Woodbridge facility to convert food waste into our solid and liquid fertilizer products is based on technology called “Enhanced Autothermal Thermophilic Aerobic Digestion” (“EATAD”). The EATAD process was developed by International Bio-Recovery Corporation (“IBRC”), a British Columbia company that possesses technology in the form of know-how integral to the process and that has licensed to us their technology for organic waste applications in the metropolitan New York and Northern New Jersey area. In simplified terms, EATAD means that once the prepared foodstock is heated to a certain temperature, it self-generates additional heat (autothermal), rising to very high, pathogen-destroying temperature levels (thermophilic). Bacteria added to the feedstock use vast amounts of oxygen (aerobic) to convert the food waste (digestion) to a rich blend of nutrients and single cell proteins. Foodstock preparation, digestion temperature, rate of oxygen addition, acidity and inoculation of the microbial regime are carefully controlled to produce products that are highly consistent from batch to batch.

The products we manufacture using our process are:

•  A stand-alone fertilizer with plant nutrition, disease suppression and soil enhancements (amendment) benefits. The solid and liquid forms have a nutrient composition of approximately 3% nitrogen, 2% phosphorous and 1% potassium (3-2-1 NPK); or

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•  A blend to be added to conventional fertilizers and various soil enhancements to improve the soil as required by the end users.

The efficacy of our products has been demonstrated both in university laboratories and multi-year growth trials funded by us and by IBRC. These field trials have been conducted on more than a dozen crops including potatoes, tomatoes, squash, blueberries, grapes, cotton and turf grass. The results of these trials are available to shareholders at no charge by contacting us at 7A Commercial Wharf West, Boston, Massachusetts 02110. While these studies have not been published, peer-reviewed or otherwise subject to third-party scrutiny, we believe the trials and other data show our solid and liquid products produced using the EATAD process have several valuable attributes:

•  Plant nutrition.  Historically, growers have focused on the nitrogen (N), phosphorous (P) and potassium (K) content of fertilizers. As agronomists have gained a better understanding of the importance of soil culture, they have turned their attention to humic and fulvic acids, phytohormones and other micronutrients and growth regulators not present in petrochemical-based fertilizers. Our products have NPK content of approximately 3-2-1 and will be rich in micronutrients. Both products can be modified or fortified to meet specific user requirements.

•  Disease suppression.  Based on field trials using product produced by the licensed technology, we believe our products combine nutrition with disease suppression characteristics to eliminate or significantly reduce the need for fungicides and other crop protection products. The products’ disease suppression properties have been observed under controlled laboratory conditions and in documented field trials. We also have other field reports that have shown the liquid concentrate to be effective in reducing the severity of powdery mildew on grapes, reducing verticillium pressure on tomatoes and reducing scab in potatoes.

•  Soil amendment.  As a result of its slow-release nature, our dry fertilizer product increases the organic content of soil, improving granularity and water retention and thus reducing NPK leaching and run-off.

•  Pathogen-free.  Due to high processing temperatures, our products are virtually pathogen-free and have extended shelf life.

We plan to apply to the U.S. Department of Agriculture (the “USDA”) and various state agencies to have our products produced by the EATAD process to be labeled as an organic fertilizer or separately as an organic fungicide. We expect organic labeling, if obtained, to have a significant positive impact on pricing. We believe our products are positioned for the commercial market as a fertilizer supplement or as a material to be blended into traditional nutrition and disease suppression applications.

We use the HTLC system at our Gonzales facility to process various biodegradable waste products into liquid organic-based fertilizer and feed products. The HTLC technology used in our Gonzales facility can be used in all of our future operating plants. We have adopted the HTLC technology for certain aspects at the Woodbridge facility even though that facility and any future facility in the New York City metropolitan area is licensed to use the EATAD technology, and as such we will be required to pay royalties on those facilities to the owners of the EATAD technologies. As exclusive owner of the HTLC technology, we expect to achieve the same or better operating results as we would with the licensed EATAD technology at a lower operating cost. Pursuant to the terms of the acquisition of the assets of WRI, we pay a fee for each ton of additional capacity added to our current or planned expansion. We anticipate that over time this fee will be less than the royalty expense paid for use of the licensed EATAD technology. In addition, we believe the product produced by the HTCL technology will be equal to or better in terms of quality when compared to the EATAD technology.

IBRC License

Pursuant to a know-how license agreement dated July 15, 2003, as amended, IBRC granted us an exclusive license for a term of 40 years to use its proprietary EATAD technology for the design, construction and operation of facilities within a 31.25 mile radius from City Hall in New York City for the conversion of organic waste into solid and liquid organic material. The license permits us to use the technology at our Woodbridge facility site; restricts the ability of IBRC and an affiliated company, Shearator Corporation, to grant another know-how or patent license related to the EATAD technology within the exclusive area; and restricts our ability to advertise or contract for a

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supply of organic waste originating outside the same exclusive area. The licensed know-how relates to machinery and apparatus used in the EATAD process.

We are obligated to pay IBRC an aggregate royalty equal to 9% of the gross revenues from the sale of product produced by the Woodbridge facility. We currently estimate to begin paying royalties in the first quarter of 2009, as product shipments from Woodbridge commenced at that time. We are also obligated to purchase IBRC’s patented macerators and shearators, as specified by or supplied by IBRC or Shearator Corporation for use at the Woodbridge facility.

In addition, we paid a non-refundable deposit of $139,978 to IBRC in 2007 on a second plant licensing agreement, which is included in non-current deposits on our consolidated balance sheets at December 31, 2008 and 2007. We also agreed to pay IBRC approximately $338,000 in twelve monthly installments for market research, growth trails and other services. For the year ended December 31, 2008 and 2007, we had paid approximately $22,000 and $276,000, respectively, of this amount which has been included in research and development in our consolidated statements of operations. We are currently negotiating the remainder of the payments with IBRC.

Also, pursuant to the license agreement, we have granted a proposed cooperative called Genica, which has yet to be formed and of which IBRC will be a member, a right of first refusal to market all of our products in accordance with the terms and upon payment to us of the price listed on our then current price list. If we propose to sell end products to a third party for a price lower or otherwise on terms more favorable than such published price and terms, Genica also has a right of first refusal to market such products on the terms and upon payment to us of the price proposed to the third party. The license agreement does not specify the duration of such rights.

Marketing and Sales

Target Markets

According to the U.S. Fertilizer Institute, U.S. fertilizer demand is 58 million tons per year, with agribusiness consuming the majority of product and the professional turf and retail segments consuming the remainder. The concern of farmers, gardeners and landscapers about nutrient runoffs, soil health and other long-term effects of conventional chemical fertilizers has increased demand for organic fertilizer. We have identified three target markets for our products:

•  Agribusiness:  conventional farms, organic farms, horticulture, hydroponics and aquaculture;

•  Turf management:  professional lawn care & landscaping, golf courses, sod farms, commercial, government & institutional facilities; and

•  Retail sales:  home improvement outlets, garden supply stores, nurseries, Internet sales and shopping networks.

Agribusiness:  There are two primary business drivers influencing commercial agriculture. First, commercial farmers are focused on improving the economic yield of their land: maximizing the value derived from crop output (quantity and quality). Second, commercial farmers are focused on reducing the use of chemical products, while also meeting the demand for cost-effective, environmentally responsible alternatives. We believe this change in focus is the result of:

•  Consumer demand for safer, higher quality food;

•  The restriction on use of registered chemical products. Several U.S. government authorities, including the Environmental Protection Agency, the Food and Drug Administration, and the USDA regulate the use of fertilizers. There are more than 14 separate regulations governing the use of fertilizers;

•  Environmental concerns and the demand for sustainable technologies;

•  Demand for more food for the growing world population; and

•  The cost effectiveness and efficacy of non-chemical based products to growers.

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Consumer demand for organic food products increased throughout the 1990s to date at approximately 20% or more per annum. In the wake of USDA’s implementation of national organic standards in October 2002, the organic food industry has continued to grow. According to the Organic Trade Association, United States’ sales of organic food and beverages have grown from $1 billion in 1990 to approximately $20 billion in 2007 and are expected to grow at an average of 18% per year through 2010. Furthermore, the Organic Trade Association reports that organic foods represented approximately 2.8% of total food and beverage sales in 2006, growing 26% in 2006, one of the fastest growing categories. According to the Nutrition Business Journal, consumer demand is driving organic sector expansion, particularly for fruit, vegetables and dairy products. This demand, in turn, is driving commercial farmers to shift more of their acreage from conventional practices, which predominantly use synthetic fertilizers, to organic practices, which require the use of certified organic fertilizers or other natural organic materials to facilitate crop growth. The USDA’s National Agricultural Statistics Service reports that the number of certified organic farm acres has grown from 0.9 million in 1992 to 4.1 million in 2005, a compound annual growth rate of 12% per year.

Farmers are facing pressures to change from conventional production practices to more environmentally friendly practices. U.S. agricultural producers are turning to certified organic farming methods as a potential way to lower production costs, decrease reliance on nonrenewable resources such as chemical fertilizers, increase market share with an “organically grown” label and capture premium prices, thereby boosting farm income.

Turf management:  We believe that the more than sixteen thousand golf courses in the U.S. will continue to reduce their use of chemicals and chemical-based fertilizers to limit potentially harmful effects, such as chemical fertilizer runoff. The United States Golf Association (“USGA”) provides guidelines for effective environmental course management. These guidelines include using nutrient products and practices that reduce the potential for contamination of ground and surface water. Strategies include using slow-release fertilizers and selected organic products and the application of nutrients through irrigation systems. Further, the USGA advises that the selection of chemical control strategies should be utilized only when other strategies are inadequate. We believe that our all-natural, slow-release fertilizer products will be well received in this market.

Retail sales:  The Freedonia Group’s report on Lawn & Garden Consumables indicates that the U.S. market for packaged lawn & garden consumables is $7.5 billion and is expected to grow 4.5% per year to $9.3 billion in 2012. Fertilizers are the largest product category, generating $2.85 billion, or 38%, of total lawn and garden consumables sales. Fertilizers, mulch and growing media will lead gains, especially rubber mulch, colored mulch and premium soils. Organic formulations are expected to experience more favorable growth than conventional formulations across all product segments, due to increased consumer concern with regard to how synthetic chemical fertilizers and pesticides on lawns and gardens may affect human/pet health and the environment.

Product Sales and Distribution

Our license with IBRC restricts the sale of products from our Woodbridge facility to the Eastern Seaboard states, including Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut, New York, New Jersey, Pennsylvania, Delaware, Maryland, Virginia, District of Columbia, North Carolina, South Carolina, Georgia and Florida. Our Gonzales facility and future plants will not be subject to these territory restraints as they will operate using the HTLC technology that we acquired from WRI.

We plan to sell and distribute our products through our sales organization that will target large purchasers of fertilizer products for distribution in our target geographic and product markets. We have determined that our product will not only be sold to the organic fertilizer market but to the much larger conventional fertilizer markets as our product’s disease suppression characteristics make us attractive to those markets. Key activities of the sales organization include introduction of the Company and our products and the development of relationships with targeted clients. In addition, we have signed distribution agreements with six distributors to sell our products to numerous outlets in all of our target markets. Furthermore, we’ve had preliminary discussions with manufacturer’s representatives to explore sales of our products in appropriate retail outlets. In order to develop a consistent sales and distribution strategy, we have hired a seasoned professional to serve as Vice President of Marketing and have hired five in house salespeople to assist with product pull-through into all of our targeted markets. In addition, with our acquisition of UOP, we have retained the services of employees who are currently selling product into the agribusiness market.

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Environmental Impact of Our Business Model

Organic food waste, the raw material of our manufacturing process, comes from a variety of sources. Prior to preparation, food must be grown or raised, harvested, packaged, shipped, unpacked, sorted, selected and repackaged before it finds its way into markets, restaurants or home kitchens. Currently, this process creates a large amount of food waste, particularly in densely populated metropolitan areas such as New York City, Northern New Jersey, and Eastern Massachusetts. Traditionally, the majority of food waste is disposed of in either landfills or incinerators that do not produce a product from this recyclable resource. We use a demonstrated technology that is environmentally benign to convert waste into valuable all-natural soil amendment products.

Food waste comprises 15% to 20% of the nation’s waste stream. Disposing of or recycling food waste should be simple, since organic materials grow and decompose readily in nature. However, the large volumes of food wastes generated in urban areas combined with a lack of available land for traditional recycling methods, such as composting, make disposal of food wastes increasingly expensive and difficult. Landfill capacity is a significant concern, particularly in densely populated areas. In addition, landfills may create negative environmental effects including liquid wastes migrating into groundwater, landfill gas, consumption of open space, and air pollution associated with trucking waste to more remote sites. The alternative of incineration may produce toxic air pollutants and climate-changing gases, as well as ash containing heavy metals. Incineration also fails to recover the useful materials from organic wastes that can be recycled. Traditional composting is a slow process that uses large tracts of land, may generate offensive odors, and may attract vermin. In addition, composting usually creates an inconsistent product with lower economic value than the fertilizer products we will produce.

Our process occurs in enclosed “digesters” housed within a building that will use effective emissions control equipment, which we believe will result in minimal amounts of dust and noise. By turning food waste into a fertilizer product using an environmentally benign process, we anticipate that we will be able to reduce the total amount of solid waste that goes to landfills and incinerators, which may in turn reduce the release of greenhouse gases such as methane and carbon dioxide.

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The following table summarizes some of the advantages of our process compared with currently available methods employed to dispose of organic food waste:

Comparison of Methods for Managing Food Waste

Method	Environmental Impacts	Products
Landfilling	Loss of land	Landfill gas (minimal energy generation at some landfills)
	Groundwater threat Methane gas Air pollution from trucks Useful materials not recycled Undesirable land use
Incineration	Air pollution	Electricity (only at some facilities)
	Toxic emissions Useful materials not recycled Disposal of ash still required
Composting	Groundwater threat	Low value compost
	Odor Vermin Slow — takes weeks Substantial land required
Converted Organics	No air pollution or solid waste No harmful by-products Removal of waste from waste stream Consumption of electricity and natural gas Discharge of treated wastewater into sewage system	Natural fertilizer

Environmental regulators and other governmental authorities in our target markets have also focused more recently on the potential benefits of recycling increased amounts of food waste. For example, the New Jersey Department of Environmental Protection (the “NJDEP”) estimates nearly 1.5 million tons, or just over 15% of the state’s total waste stream, is food waste, but in 2003, only 221,000 tons were recycled. The 2005 NJDEP Statewide Solid Waste Management Plan focuses particularly on the “food waste” recycling stream as one of the most effective ways to create significant increases in recycling tonnages and rates. In New York, state and local environmental agencies are taking measures to encourage the diversion of organics from landfills and are actively seeking processes consistent with health and safety codes. The goal is to further reduce the amount of waste going to landfills and other traditional disposal facilities, particularly waste that is hauled great distances, especially in densely populated areas in the Northeast. In 2005, the Rhode Island Resource Recovery Corporation (“RIRRC”) began an examination of the bulk food waste processing technology of our technology licensor to determine whether using our licensed technology would be economically feasible, cost-effective, practicable, and an appropriate application in Rhode Island. The RIRRC completed its review and included the technology in their 2006 Solid Waster Master Plan. In Massachusetts, the State Solid Waste Master Plan has also identified a need for increased organics-processing capacity within the state and has called for a streamlined regulatory approval path.

Competition

We operate in a very competitive environment in our business’s three dimensions — organic wastestream feedstock, technology and end products — each of which is quickly evolving. We believe we will be able to compete effectively because of the abundance of the supply of food waste in our geographic markets, the pricing of our tip fees and the quality of our products and technology.

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Organic Wastestream.  Competition for the organic waste stream feedstock includes landfills, incinerators and traditional composting operations. Organic waste streams are generally categorized as pre- and post-consumer food waste, lawn and garden waste, and bio-solids, including sewage sludge or the by-product of wastewater treatment. Some states, including New Jersey, have begun to regulate the manner in which food waste may be composted. New Jersey has created specific requirements for treatment in tanks, and we believe our Woodbridge facility is the first approved in-vessel processing facility in the state. In Massachusetts, state regulators are considering a ban on the disposal of organic materials at landfills and incinerators once sufficient organic processing capacity exists within the state, which if adopted would provide a competitive advantage for organic processes such as our process.

Technology.  There are a variety of technologies used to treat organic wastes including composting, digestion, hydrolysis and thermal processing. Companies using these technologies may compete with us for organic material.

Composting is a natural process of decomposition that can be enhanced by mounding the waste into windrows to retain heat, thereby accelerating decomposition. Large-scale compost facilities require significant amounts of land for operations that may not be readily available or that may be only available at significant cost in major metropolitan areas. Given the difficulties in controlling the process or the consistent ability to achieve germ-killing temperatures, the resulting compost is often inconsistent and generally would command a lower market price than our product.

Digestion may be either aerobic, like the EATAD process, or anaerobic. Anaerobic digestion is, in simple terms, mechanized in-vessel composting. In addition to compost, most anaerobic digestion systems are designed to capture the methane generated. While methane has value as a source of energy, it is generally limited to on-site use, as it is not readily transported.

Hydrolysis is an energy-intensive chemical process that produces a by product, most commonly ethanol. Thermal technologies extract the Btu content of the waste to generate electricity. Food waste, which is typically 75%-90% water, is generally not a preferred feedstock. Absent technological breakthroughs, neither hydrolysis nor thermal technologies are expected to be accepted for organic food waste processing on a large-scale in the near term.

End Products.  The organic fertilizer business is relatively new, highly fragmented, under-capitalized and growing rapidly. We are not aware of any dominant producers or products currently in the market. There are a number of single input, protein-based products, such as fish, bone and cottonseed meal, that can be used alone or mixed with chemical additives to create highly formulated fertilizer blends that target specific soil and crop needs. In this sense they are similar to our products but have odor, stability and shelf life or seasonality problems.

Most of the 58 million tons of fertilizer consumed annually in North America is mined or derived from petroleum. These petroleum-based products generally have higher nutrient content (NPK) and cost less than organic fertilizers. However, as agronomists better understand how soil, root and stem/leaf systems interact, we believe the importance of micronutrients is becoming more highly valued. Petrochemical additives have been shown to deaden the soil, which ironically contributes to higher nutritional requirements. Traditional petrochemical fertilizers are highly soluble and readily leach from the soil. Slow release products that are coated or specially processed command a premium. However, the economic value offered by petrochemicals, especially for field crops including corn, wheat, hay and soybeans, will not be supplanted in the foreseeable future.

Despite a large number of new products in the end market, we believe that our products have a unique set of characteristics. We believe positioning and branding the combination of nutrition and disease suppression characteristics will differentiate our products from other organic fertilizer products to develop market demand, while maintaining or increasing pricing. In view of the barriers to entry created by the supply of organic waste, regulatory controls and the cost of constructing facilities, we do not foresee a dominant manufacturer or product emerging in the near-term.

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Government Regulation

Our end products may be regulated or controlled by state, county and local governments as well as various agencies of the Federal government, including the Food and Drug Administration and the Department of Agriculture.

In addition to the regulations governing the sale of our end products, our facilities will be subject to extensive regulation. We will need certain permits to operate solid waste or recycling facilities as well as permits for our sewage connection, water supply, land use, air emission, and wastewater discharge. The specific permit and approval requirements are set by the state and the various local jurisdictions, including but not limited to city, town, county, and township and state agencies having control over the specific properties.

For our Woodbridge facility, we have obtained various permits and approvals to operate a recycling center and a manufacturing facility, including among others: a Class C recycling permit; land use and site plan approval; an air quality permit; a discharge permit; treatment works approval and a storm water runoff permit; building construction permits; a soil conservation district permit and our certificate of occupancy.

Environmental regulations will also govern the operation of our facilities. Our future facilities will most likely be located in urban industrial areas where contamination may be present. Regulatory agencies may require us to remediate environmental conditions at our locations.

We have contracted with a company to explore our ability to create carbon credits as a result of our manufacturing process and our diverting food waste from landfills. As of the filing of this report we have not determined the value, if any, of the potential carbon credits associated with our business.

Employees

As of March 27, 2009, we had 39 full-time employees, 16 of whom were in sales, management and administration and 9 of whom were employed in our Gonzales facility and 14 who were employed in our Woodbridge facility. Once the Woodbridge facility reaches its initial design capacity of 250 tons per day, we expect to have another 14 full-time employees at that location, working in the areas of general plant management, equipment operation, quality control, maintenance, laborers, and administrative support. We are also planning for additional employees in the sales, marketing, finance, technology and administrative areas of the Company.

ITEM 1A.   RISK FACTORS

You should carefully consider the risks, uncertainties and other factors described below because they could materially and adversely affect our business, financial condition, operating results and prospects and could negatively affect the market price of our securities. Also, you should be aware that the risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we do not yet know of, or that we currently think are immaterial, may also impair our business operations. You should also refer to the other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes.

We could fail to remain a going concern. We will need to raise additional capital to fund our operations through the near term, and we do not have any commitments for that capital.

There exists substantial doubt regarding our ability to continue as a going concern. Our independent registered public accounting firm has modified their report for our fiscal year ended December 31, 2008 with respect to our ability to continue as a going concern. Our consolidated financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. If we became unable to continue as a going concern, we would have to liquidate our assets and we might receive significantly less than the values at which they are carried on our consolidated financial statements. The inclusion of a going concern modification in our independent registered public accounting firm’s audit opinion for the year ended December 31, 2008 may materially and adversely affect our stock price and our ability to raise new capital.

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As reflected in our financial statements, as of December 31, 2008, we incurred a net loss of approximately $16.2 million, had an accumulated deficit of $26.6 million, and had a working capital deficiency. We will need additional capital and/or increased sales to execute our business strategy, and if we are unsuccessful in either raising additional capital or achieving desired sales levels we will be unable to fully execute our business strategy on a timely basis, if at all. If we raise additional capital through the issuance of debt securities, the debt securities may be secured and any interest payments would reduce the amount of cash available to operate and grow our business. If we raise additional capital through the issuance of equity securities, such issuances will likely cause dilution to our stockholders, particularly if we are required to do so during periods when our common stock is trading at historically low price levels.

Additionally, we do not know whether any financing, if obtained, will be adequate to meet our capital needs and to support our growth. If adequate capital cannot be obtained on satisfactory terms, we may curtail or delay the implementation of updates to our facilities or delay the expansion of our sales and marketing capabilities, any of which could cause our business to fail.

We will need to obtain additional debt and equity financing to complete subsequent stages of our business plan.

We require significant additional financing to finalize upgrades to our Woodbridge facility, to satisfy construction vendor payables, and to operate our business. In March 2009, we entered into an agreement with an investor to purchase $1,500,000 of convertible term notes, subject to shareholder approval. The issuance and sale of shares of our common stock to the investor would likely have a dilutive effect on a stockholder’s percentage voting power in us. As the convertible note is convertible at prices below the then market price of our common stock, if we were to issue additional shares upon conversion of the convertible note, the dilution caused by such issuances could lead to a decrease in the market price of our common stock. In addition, since the conversion prices will be below the market price of our common stock, even if conversions do not take place, the existence of the conversion rights could lead to a decrease in the market price of our common stock.

We may issue additional securities in the future with rights, terms and preferences designated by our Board of Directors, without a vote of stockholders, which could adversely affect stockholder rights. Additional financing will likely cause dilution to our stockholders and could involve the issuance of securities with rights senior to the outstanding shares. There is no assurance that such funds will be sufficient, that the financing will be available on terms acceptable to us and at such times as required, or that we will be able to obtain the additional financing required, if any, for the continued operation and growth of our business. Any inability to raise necessary capital will have a material adverse effect on our ability to meet our projections, deadlines and goals and will have a material adverse effect on our revenues and net income.

Constructing and equipping our Woodbridge facility has taken longer and cost more than we expected, which has resulted in significant amounts being owed to construction vendors for which we do not have the cash resources to satisfy.

Our Woodbridge facility became operational in June 2008. We incurred approximately $5.7 million in additional unanticipated construction costs and design changes in constructing the Woodbridge facility. We are in the process of completing additional upgrades to the Woodbridge facility, which are expected to be completed by June 2009, and which we believe will allow us to increase capacity at the facility to approximately 70% of full capacity.

Of the $5.7 million in upgrades, design changes and construction costs discussed above, we currently estimate that we will be able to fund approximately $500,000 in costs. In order to finance the additional $5.2 million in upgrades, design changes and construction costs, we will need to enter into agreements with the various construction vendors as we do not currently have the funds available to pay these amounts, which are listed as accounts payable in our December 31, 2008 balance sheet. If we are unable to come to agreements with our construction vendors, the vendors may attempt to take actions against us or the Woodbridge facility, which could result in interruptions to the operations of the Woodbridge facility, which would adversely effect our business results.

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We have limited operating history, and our prospects are difficult to evaluate.

We have not operated any facility other than our Gonzales facility, which we purchased in January 2008, and our Woodbridge facility, which became operational in June 2008. Our activities to date have been primarily limited to developing our business, and consequently there is limited historical financial information related to operations available upon which you may base your evaluation of our business and prospects. The revenue and income potential of our business is unproven. If we are unable to develop our business, we will not achieve our goals and could suffer economic loss or collapse, which may have a material negative effect on our financial performance.

We expect to incur significant losses for some time, and we may never operate profitably.

For the period from January 1, 2007 through December 31, 2008, we incurred an accumulated net loss of approximately $20,263,000. Despite generating revenue from our Gonzales facility beginning in February 2008, we will continue to incur significant losses. There is no assurance that we will be successful in our efforts to operate organic waste conversion facilities.

If we are unable to manage our transition to an operating company effectively, our operating results will be adversely affected.

Failure to manage effectively our transition to an operating company will harm our business. To date, substantially all of our activities and resources have been directed at developing our business plan, arranging financing, licensing technology, obtaining permits and approvals, securing a lease for our Woodbridge facility and options for additional facilities, and purchasing our Gonzales facility. The transition to a converter of waste and manufacturer and vendor of fertilizer products requires effective planning and management. In addition, future expansion will be expensive and will likely strain our management and other resources. We may not be able to easily transfer our skills to operating a facility or otherwise effectively manage our transition to an operating company.

Our plan to develop relationships with strategic partners and vendors may not be successful.

As part of our business strategy, we will need to develop short- and long-term relationships with strategic partners and vendors to conduct growth trials and other research and development activities, to assess technology, to engage in marketing activities, and to enter into waste collection, real estate development and construction agreements. For these efforts to succeed, we must identify partners and vendors whose competencies complement ours. We must also enter into agreements with them on attractive terms and integrate and coordinate their resources and capabilities with our own. If we are unsuccessful in our collaborative efforts, our ability to develop and market products could be severely limited or delayed.

We may be unable to effectively implement new transaction accounting, operational and financial systems.

To manage our operations, we will be required to implement complex transaction accounting, operational and financial systems, procedures and controls, and to retain personnel experienced in the use of these systems. Deficiencies in the design and operation of our systems, procedures and controls, including internal controls, could adversely affect our ability to record, process, summarize and report material financial information. Our planned systems, procedures and controls may be inadequate to support our future operations.

We are exposed to risks from legislation requiring companies to evaluate internal control over financial reporting.

Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) requires our management to begin to report on the operating effectiveness of our internal control over financial reporting for the year ended December 31, 2008. CCR LLP, our independent registered public accounting firm, will be required to attest to the effectiveness of our internal control over financial reporting beginning with the year ending December 31, 2009. We must continue an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. We expect that this program will require us to incur expenses and to devote resources to Section 404 compliance on an ongoing annual basis.

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It is difficult for us to predict how long it will take to complete management’s assessment of the effectiveness of our internal control over financial reporting each year and to remediate any deficiencies in our internal control over financial reporting, if any. As a result, we may not be able to complete the assessment process on a timely basis each year. In the event that our Chief Executive Officer, Chief Financial Officer or independent registered public accounting firm determines that our internal control over financial reporting is not effective as defined under Section 404, we cannot predict how regulators will react or how the market prices of our securities will be affected.

Our future success is dependent on our existing key employees, and hiring and assimilating new key employees, and our inability to attract or retain key personnel in the future would materially harm our business and results of operations.

Our success depends on the continuing efforts and abilities of our current management team. In addition, our future success will depend, in part, on our ability to attract and retain highly skilled employees, including management, technical and sales personnel. The loss of services of any of our key personnel, the inability to attract or retain key personnel in the future, or delays in hiring required personnel could materially harm our business and results of operations. We may be unable to identify and attract highly qualified employees in the future. In addition, we may not be able to successfully assimilate these employees or hire qualified personnel to replace them.

We have little or no experience in the organic waste or fertilizer industries, which increases the risk of our inability to build and operate our facilities.

We are currently, and are likely for some time to continue to be, dependent upon our present management team. Most of these individuals are experienced in business generally, and in governing and operating a public company. However, our present management team does not have experience organizing the construction, equipping and start up of an organic waste conversion facility. In addition, none of our directors has any experience in the organic waste or fertilizer products industries. As a result, we may not develop our business successfully.

We license certain technology from a third party, and our failure to perform under the terms of the license could result in material adverse consequences.

We use certain licensed technology and patented pieces of process equipment in our Woodbridge facility that have been obtained from IBRC. The license contains various performance criteria, and if we fail to perform under the terms of the license, the license may be terminated by the licensor, and we will have to modify our process and employ other equipment that may not be available on a timely basis or at all. If we are unable to use different technology and equipment, we may not be able to operate the Woodbridge facility successfully. If the license agreement is terminated or held invalid for any reason, or if it is determined that IBRC has improperly licensed its process to us, the occurrence of such event will adversely affect our Woodbridge operations and revenues therefrom.

The EATAD technology we will use to operate our Woodbridge facility is unproven at the scale we intend to operate.

While IBRC has operated a facility in British Columbia using the EATAD process, its plant is smaller than our planned Woodbridge facility. IBRC developed the initial drawings for our Woodbridge facility, but neither IBRC nor we have operated a plant of the proposed size.

Our Woodbridge and Gonzales facility sites may have unknown environmental problems that could be expensive and time consuming to correct.

There can be no assurance that we will not encounter hazardous environmental conditions at the Woodbridge and Gonzales facility sites or any additional future facility sites that may delay the construction of our future organic waste conversion facilities. Upon encountering a hazardous environmental condition, our contractor may suspend work in the affected area. If we receive notice of a hazardous environmental condition, we may be required to correct the condition prior to continuing construction. The presence of a hazardous environmental condition will likely delay construction of the particular facility and may require significant expenditures to correct the

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environmental condition. If we encounter any hazardous environmental conditions during construction that require time or money to correct, such event could delay our ability to generate revenue.

We may not be able to successfully operate our Woodbridge facility.

Our Woodbridge facility is the first commercial facility of its kind in the United States and may not function as anticipated. In addition, the control of the manufacturing process will require operators with extensive training and experience which may be difficult to attain.

Our lack of business diversification may have a material negative effect on our financial performance.

We have two products to sell to customers to generate revenue: dry and liquid soil amendment products. We do not expect to have any other products. Although we also expect to receive “tip” fees, our lack of business diversification could have a material adverse effect on our operations.

We may not be able to manufacture products from our facilities in commercial quantities or sell them at competitive prices.

To date, we have not produced any products other than from our Gonzales facility since February 2008 and from our Woodbridge facility since June 2008. We may not be able to manufacture products from our facilities in commercial quantities or sell them at prices competitive with other similar products.

We may be unable to establish marketing and sales capabilities necessary to commercialize and gain market acceptance for our potential products.

We currently have limited resources to expand our sales and marketing capabilities. We will need to either hire sales personnel with expertise in the markets we intend to address or contract with others to provide sales support. Co-promotion or other marketing arrangements to commercialize our planned products could significantly limit the revenues we derive from our products, and these parties may fail to commercialize these products successfully. Our planned products address different markets and can be offered through multiple sales channels. Addressing each market effectively will require sales and marketing resources tailored to the particular market and to the sales channels that we choose to employ, and we may not be able to develop such specialized marketing resources.

Pressure by our customers to reduce prices and agree to long-term supply arrangements may adversely affect our net sales and profit margins.

Our current and potential customers, especially large agricultural companies, are often under budgetary pressure and are very price sensitive. Our customers may negotiate supply arrangements with us well in advance of delivery dates, thereby requiring us to commit to product prices before we can accurately determine our final costs. If this happens, we may have to reduce our conversion costs and obtain higher volume orders to offset lower average sales prices. If we are unable to offset lower sales prices by reducing our costs, our gross profit margins will decline, which could have a material negative effect on our financial performance.

The fertilizer industry is highly competitive, which may adversely affect our ability to generate and grow sales.

Chemical fertilizers are manufactured by many companies and are plentiful and relatively inexpensive. In addition, the number of fertilizer products registered as “organic” with the Organic Materials Review Institute increased by approximately 50% from 2002 to 2005. If we fail to keep up with changes affecting the markets that we intend to serve, we will become less competitive, adversely affecting our financial performance.

Defects in our products or failures in quality control could impair our ability to sell our products or could result in product liability claims, litigation and other significant events with substantial additional costs.

Detection of any significant defects in our products or failure in our quality control procedures may result in, among other things, delay in time-to-market, loss of sales and market acceptance of our products, diversion of

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development resources, and injury to our reputation. The costs we may incur in correcting any product defects may be substantial. Additionally, errors, defects or other performance problems could result in financial or other damages to our customers, which could result in litigation. Product liability litigation, even if we prevail, would be time consuming and costly to defend. We presently maintain product liability insurance, however it may not be adequate to cover claims.

Energy and fuel cost variations could adversely affect operating results and expenses.

Energy costs, particularly electricity and natural gas, are expected to constitute a substantial portion of our operating expenses. The price and supply of energy and natural gas are unpredictable and fluctuate based on events outside our control, including demand for oil and gas, weather, actions by OPEC and other oil and gas producers, and conflict in oil-producing countries. Price escalations in the cost of electricity or reductions in the supply of natural gas could increase operating expenses and negatively affect our results of operations. We may not be able to pass through all or part of the increased energy and fuel costs to our customers.

We may not be able to obtain sufficient organic material.

Competing disposal outlets for organic food waste and increased demand for applications such as biofuels may develop and adversely affect our business. To fully utilize the tip floor and to manufacture our products, we are dependent on a stable supply of organic food waste. Insufficient food waste feedstock will adversely affect our efficiency and may cause us to increase our tip fee discount from prevailing rates, likely resulting in reduced revenues and net income.

Our license agreement with IBRC restricts the territory into which we may sell our products and grants a cooperative a right of first refusal to purchase our products.

We have entered into a license agreement with IBRC which among other terms contains a restriction on our right to sell our planned products outside a territory defined generally as the Eastern Seaboard of the United States. The license agreement also grants a proposed cooperative of which IBRC is a member a right of first refusal to purchase the products sold from our Woodbridge facility under certain circumstances. While we believe that the territory specified in the license agreement is broad enough to absorb the amount of product we plan to produce and that the right of first refusal will not impair our ability to sell our products, these restrictions may have a material adverse effect on the volume and price of our product sales. We may in addition become completely dependent on a third party for the sale of our products.

Successful infringement claims by third parties could result in substantial damages, lost product sales and the loss of important proprietary rights.

We may have to defend ourselves against patent and other infringement claims asserted by third parties regarding the technology we have licensed, resulting in diversion of management focus and additional expenses for the defense of claims. In addition, as a result of a patent infringement suit, we may be forced to stop or delay developing, manufacturing or selling potential products that are claimed to infringe a patent covering a third party’s intellectual property unless that party grants us rights to use its intellectual property. We may be unable to obtain these rights on terms acceptable to us, if at all. If we cannot obtain all necessary licenses on commercially reasonable terms, we may be unable to continue selling such products. Even if we are able to obtain rights to a third party’s patented intellectual property, these rights may be non-exclusive, and therefore our competitors may obtain access to the same intellectual property. Ultimately, we may be unable to commercialize our potential products or may have to cease some or all of our business operations as a result of patent infringement claims, which could severely harm our business.

Our license agreement with IBRC imposes obligations on us related to infringement actions that may become burdensome or result in termination of our license agreement.

If our use of the licensed technology is alleged to infringe the intellectual property of a third party, we may become obligated to defend such infringement action. Although IBRC has agreed to bear the costs of such defense,

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if the licensed technology is found by a court to be infringing, IBRC may terminate the license agreement, which may prevent us from continuing to operate our conversion facility. In such an event, we may become obligated to find alternative technology or to pay a royalty to a party other than IBRC to continue to operate.

If a third party is allegedly infringing on any of the licensed technology, then either we or IBRC may attempt to enforce the IBRC intellectual property rights. In general, our possession of rights to use the know-how related to the licensed technology will not be sufficient to prevent others from employing similar technology that we believe is infringing. Any such enforcement action against alleged infringers, whether by us or by IBRC, may be required to be maintained at our expense under the terms of the license agreement. The costs of such an enforcement action may be prohibitive, reduce our net income, if any, or prevent us from continuing operations.

Our HTLC technology imposes obligations on us related to infringement actions that may become burdensome.

If our use of our HTLC technology is alleged to infringe the intellectual property of a third party, we may become obligated to defend such infringement action. In such an event, we may become obligated to find alternative technology or to pay a royalty to a third party to continue to operate.

If a third party is allegedly infringing any of our HTLC technology, then we may attempt to enforce our intellectual property rights. In general, our possession of rights to use the know-how related to our HTLC technology will not be sufficient to prevent others from employing similar technology that we believe is infringing. Any such enforcement action against alleged infringers may be required at our expense. The costs of such an enforcement action may be prohibitive, reduce our net income, if any, or prevent us from continuing operations.

Development of our business is dependent on our ability to obtain additional debt financing which may not be available on acceptable terms.

We may need to obtain significant debt financing in order to develop new manufacturing facilities. Each facility will likely be individually financed and require considerable debt. While we believe state government-sponsored debt programs will be available to finance our requirements, market rate or non-government sponsored debt could also be used. However, public or private debt may not be available at all or on terms acceptable to us for the development of future facilities.

Our agreements with our bond investors may hinder our ability to operate our business by imposing restrictive loan covenants, which may prohibit us from paying dividends or taking other actions to manage or expand our business.

The terms of the bond guaranty executed by the Company on behalf of Converted Organics of Woodbridge LLC, prohibit the Company from repaying debt and other obligations that funded the Company’s working capital until certain ratios of EBITDA to debt service are met.

Mandatory redemption of our bonds could have a material adverse effect on our liquidity and cash resources.

The bonds issued are subject to mandatory redemption by us if the Woodbridge facility is condemned, we cease to operate the facility, the bonds become taxable, a change in control of the company occurs and under certain other circumstances. Depending upon the circumstances, such an event could require a payment to our bondholders ranging between 100% and 110% of the principal amount of the bonds outstanding, plus interest. If we are unable to obtain additional financing from other sources, the requirement that we pay cash in connection with such mandatory redemption will have a material adverse effect on our liquidity and cash resources, and may impair our ability to continue to operate.

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The communities where our facilities may be located may be averse to hosting waste handling and manufacturing facilities.

Local residents and authorities in communities where our facilities may be located may be concerned about odor, vermin, noise, increased truck traffic, air pollution, decreased property values, and public health risks associated with operating a manufacturing facility in their area. These constituencies may oppose our permitting applications or raise other issues regarding our proposed facilities.

Our facilities will require certain permits to operate, which we may not be able to obtain or obtain on a timely basis.

For our Woodbridge facility, we obtained various permits and approvals to operate a recycling center and a manufacturing facility, including among others a Class C recycling permit, land use and site plan approval, an air quality permit, a water discharge permit, a storm water runoff permit, and building construction permits. We may not be able to secure all the necessary permits for future facilities on a timely basis or at all, which may prevent us from operating the facility according to our business plan.

For our facilities, we may need certain permits to operate solid waste or recycling facilities as well as permits for our sewage connection, water supply, land use, air emission, and wastewater discharge. The specific permit and approval requirements are set by the state and the various local jurisdictions, including but not limited to city, town, county, township and state agencies having control over the specific properties. Lack of permits to construct, operate or maintain our facilities will severely and adversely affect our business.

Changes in environmental regulations or violations of such regulations could result in increased expense and could have a material negative effect on our financial performance.

We are subject to extensive air, water and other environmental regulations and will need to obtain a number of environmental permits to construct and operate our planned facilities. If for any reason any of these permits are not granted, construction costs for our organic waste conversion facilities may increase, or the facilities may not be constructed at all. Additionally, any changes in environmental laws and regulations, both at the federal and state level, could require us to invest or spend considerable resources in order to comply with future environmental regulations. The expense of compliance could be significant enough to reduce our net income and have a material negative effect on our financial performance.

Our strategic plan for development and construction of operating facilities in Rhode Island and Massachusetts requires additional debt and/or equity financing and working capital during the construction periods.

Our strategic plan calls for us to develop and build future operating facilities. These facilities will require us to raise additional fund for the development and construction of these facilities and for working capital during the construction process. There is no guarantee that we will be able to raise those funds.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2.   PROPERTIES

We entered a 10-year lease on June 2, 2006 and subsequently in February 2007 exercised an option to renew for an additional 10 years on property located in an industrial area of Woodbridge, New Jersey, on which our Woodbridge facility is located. The lease covers 60,000 square feet of a 300,000 square foot building. The rent is $32,500 per month for the first 5 years. In year 6, the rent increases by 5% and will increase 2% per year in years 7 through 10. On January 18, 2007, the Company executed a lease amendment to compensate the landlord for costs incurred in connection with a buildout of the leased space. During years 2 through 10, we will pay an additional $45,402 per month under the amendment, for total rent expense of $77,902 per month. In year 11, the rent will increase by 5% and will increase an additional 2% per year in years 12 through 15. The rent will increase 5% in year

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16 and thereafter, will increase 2% per year through the remainder of the term. We are responsible for payment of common area maintenance fees and taxes based upon our percentage of use relative to the whole facility and for our separately metered utilities. The additional rent associated with the buildout of the facility is approximately $4.6 million and will be repaid as discussed above. This buildout allowance represents additional financing to the Company and is not included in the estimated costs of $14.6 million to initially complete the Woodbridge facility or the additional $5.7 million in upgrades, design changes and unanticipated construction costs.

On January 24, 2008, we entered into a 10-year lease for land in Gonzales, California, where our Gonzales facility is located. The land is leased from VLH, a California LLC whose sole member is a former officer and director of the Company. The lease provides for a monthly rent of $9,000. The lease is renewable for three 5-year terms after the expiration of the initial 10-year term. In addition, we own the Gonzales facility and the operating equipment used in the facility. VLH has been determined to be a variable interest entity of our Company and, as such, has been consolidated as part of our consolidated financial statements. All inter-Company balances and transactions have been eliminated in consolidation. VLH’s assets and liabilities consist primarily of land and a mortgage note payable on the land. Its operations consist of rental income on the land from us and related operating expenses.

We currently lease, on a month-to-month basis, approximately 2,500 square feet of office space for our headquarters in Boston, Massachusetts. We pay rent of $2,800 per month for this space. We may terminate the office lease at any time upon 30 days advance written notice.

We have signed a lease for a parcel of land in Rhode Island for construction of our next operating facility. We pay rent of $9,167 per month and the lease term is for 20 years.

ITEM 3.   LEGAL PROCEEDINGS

On December 11, 2008, we received notice that a complaint had been filed in a putative class action lawsuit on behalf of 59 persons or entities that purchased units pursuant to a financing terms agreement dated April 11, 2006 (“FTA”), captioned Gerald S. Leeseberg, et al. v. Converted Organics, Inc., filed in the U.S. District Court for the District of Delaware. The lawsuit alleges breach of contract, conversion, unjust enrichment, and breach of the implied covenant of good faith in connection with the alleged failure to register certain securities issued in the FTA, and the redemption of our Class A warrants in November 2008. The lawsuit seeks damages related to the failure to register certain securities, including alleged late fee payments, of approximately $5.25 million, and unspecified damages related to the redemption of the Class A warrants. In February 2009, we filed a Motion for Partial Dismissal of Complaint. It is uncertain when the Court will rule on this motion. We plan to vigorously defend this matter and are unable to estimate any contingent losses that may or may not be incurred as a result of this litigation and its eventual disposition. Accordingly, no contingent loss has been recorded related to this matter.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2008.

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PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock has been listed on the Nasdaq Capital Market under the symbol “COIN” since March 16, 2007. Prior to March 16, 2007, there was no public market for our common stock. The following table sets forth the range of high and low sales prices per share as reported on Nasdaq for the periods indicated.

2008	High		Low
First Quarter	$	14.17	$	3.52
Second Quarter	$	10.37	$	4.50
Third Quarter	$	7.83	$	2.99
Fourth Quarter	$	6.46	$	2.00

2007	High		Low
First Quarter	$	2.86	$	2.31
Second Quarter	$	2.72	$	2.02
Third Quarter	$	2.83	$	1.86
Fourth Quarter	$	4.39	$	2.05

Holders

As of March 23, 2009, there were approximately 33 holders of record of the Company’s common stock.

Dividends

Beginning with the first quarter of 2007, at the end of each calendar quarter holders of record of our common stock received a 5% common stock dividend until the Woodbridge facility commenced commercial operations on June 30, 2008. We did not issue fractional shares as a part of the dividend program nor did we issue shares with respect to the calendar quarter in which we commenced commercial operations. We also issued a special 15% common stock dividend, payable on December 1, 2008 for all holders of record of our common stock on November 17, 2008. During 2008, we issued 1,232,552 shares as stock dividends.

We have not declared or paid any cash dividends and do not intend to pay any cash dividends in the foreseeable future. We intend to retain any future earnings for use in the operation and expansion of our business. The terms of our New Jersey bond issue restrict our ability to pay cash dividends. Any future decision to pay cash dividends on common stock will be at the discretion of our Board of Directors and will depend upon, in addition to the terms of the New Jersey bond financing, as well as any future bond or bank financings, our financial condition, results of operation, capital requirements and other factors our Board of Directors may deem relevant.

Recent Sales of Unregistered Securities

During the fourth quarter of 2008, we issued 45,480 shares of common stock for consulting services. This transaction was exempt from the registration requirements of the Securities Act of 1933, as amended (the “1933 Act”), pursuant to Section 4(2) and Regulation D under the 1933 Act, as the recipient is an “accredited investor” as defined in the 1933 Act.

Use of Proceeds from Registered Securities

See the discussion below under “Management’s Discussion and Analysis or Plan of Operation — Construction and Start-up Period.”

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Purchase of Equity Securities by the Small Business Issuer and Affiliated Purchasers

None.

ITEM 6.   SELECTED FINANCIAL DATA

As a smaller reporting company, we are not required to provide information typically disclosed under this section.

ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion of our plan of operation should be read in conjunction with the consolidated financial statements and related notes to the consolidated financial statements included elsewhere in this report. This discussion contains forward-looking statements that relate to future events or our future financial performance. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include, among others, those listed under “Risk Factors” and those included elsewhere in this document.

Background Introduction

Our independent registered public accountants have issued a going concern opinion on our financial statements as of December 31, 2008. As shown in the accompanying consolidated financial statements, the Company has incurred a net loss of approximately $16.2 million during the year ended December 31, 2008, has a working capital deficiency as of December 31, 2008 and an accumulated deficit of approximately $26.6 million. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our operating structure is composed of our parent company, Converted Organics Inc., two wholly-owned operating subsidiaries and a 92.5% owned non-operating subsidiary. The first operating subsidiary is Converted Organics of Woodbridge, LLC, which includes the operation of our Woodbridge, New Jersey facility. The second operating subsidiary is Converted Organics of California, LLC, which includes the operating activity of our Gonzales, California facility. The 92.5% owned subsidiary is Converted Organics of Rhode Island, LLC which currently has no operating activity. We transitioned from a development stage company (first reported revenues were in February 2008) to a fully operational company that constructs and operates processing facilities that will use food waste as raw material to manufacture all-natural soil amendment products combining nutritional and disease suppression characteristics. In addition to our current sales in the agribusiness and retail markets, we plan to sell and distribute our products in the turf management market. We have hired experienced sales and marketing personnel in these markets and have begun to introduce the product to the marketplace

Woodbridge Facility

We obtained a long-term lease for a site in a portion of an industrial building in Woodbridge, New Jersey that the landlord has modified and that we have equipped as our first internally constructed organic waste conversion facility. We currently have limited operation at that facility and in the first two months of 2009 have begun to record tip fee and product sales revenue. Also, we are currently producing both liquid and dry product at that facility. At full capacity, the Woodbridge facility is expected to process approximately 78,000 tons of organic food waste and produce approximately 9,900 tons of dry product and approximately 10,000 tons of liquid concentrate annually. We are in the process of completing additional upgrades to the Woodbridge facility, which are expected to be completed by June 2009, and which we believe will allow us to increase capacity at the facility to approximately 70% of full capacity. During the first ten weeks of 2009 we generated revenue from this facility in the form of tip fees of approximately $50,000 and product sales of approximately $126,000. In order for this facility to be cash flow positive, we estimate that sales would need to be in a range of $450,000 to $550,000 per month. We estimate that the product can be sold in the range of $400 to $700 per ton based on the market to which it is sold. Therefore the

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potential monthly sales from this facility, at 70% capacity ranges from approximately $700,000 to $1,100,000. Cash flow generated by exceeding that sales number would be used to fund operations at the corporate level and to pay down the payables related to construction activity at this facility.

WRI Acquisition

On January 24, 2008, we acquired the net assets, including the intellectual property, of Waste Recovery Industries, LLC. This acquisition makes us the exclusive owner of the proprietary technology and process known as the High Temperature Liquid Composting (“HTLC”) system, which processes various biodegradable waste products into liquid and solid organic-based fertilizer and feed products. The purchase price of $500,000 was paid with a 7% short-term note that matured and was paid on May 1, 2008. Interest on that note is payable monthly. In addition, the purchase price provides for a technology fee payment of $5,500 per ton of waste-processing capacity that is added to plants that were not planned at the time of this acquisition and that use this new technology. The per-ton fee is not payable on the Woodbridge facility, the facility that is being planned in Rhode Island, or the Gonzales facility acquired in the acquisition or the currently planned addition thereto, except to the extent that capacity (in excess of the currently planned addition) is added to the Gonzales facility in the future. Also, the purchase agreement provides that if we decide to exercise our right, obtained in the WRI acquisition, to enter into a joint venture with Pacific Seafood Inc. for the development of a fish waste-processing product (the “Eureka product”), we will pay 50% of our net profits earned from this Eureka product to the seller of WRI. Combined payments of both the $5,500 per ton technology fee and the profits paid from the Eureka product, if any, is capped at $7.0 million with no minimum payment required. In April, 2008 we entered into an agreement with Pacific Seafoods Inc. whereby we will pay Pacific Seafoods Inc. 50% of the net profits from the Eureka product. As of the filing date of this report no profits have been earned from the Eureka product. It is our intention to expense the payments, if any, that are paid on either the profits from the Eureka product or the $5,500 per ton technology fee.

UOP Acquisition; Gonzales Facility

On January 24, 2008, we acquired the net assets of United Organic Products, LLC (“UOP”), which was under common ownership with WRI. With this acquisition, we acquired a leading liquid fertilizer product line, as well as the Gonzales facility, which is a state-of-the-art production facility that services a strong West Coast agribusiness customer base through established distribution channels. This facility is operational and began to generate revenues for us in February 2008. The purchase price of $2,500,000 was paid in cash of $1,500,000 and notes payable of $1,000,000. The note matures on February 1, 2011, has an interest rate of 7% per annum, is payable monthly in arrears, and is convertible into our common stock six months after the acquisition date for a price equal to the average closing price of the stock on NASDAQ for the five days preceding conversion.

The Gonzales facility generated revenue during 2008 of approximately $1,525,000, with a negative operating margin. We plan to improve this operating margin by channeling sales into the turf and retail markets, which we believe to be more profitable, by generating tip fees from receiving additional quantities of food waste and by reducing the amount of raw material and freight costs currently associated with the production process. In addition, we have plans to add capacity to the Gonzales plant, whereby the plant will produce approximately three times its current production and will be capable of producing both liquid and solid products. We have completed certain aspects of the planned upgrades which allow us to receive solid food waste for processing but have delayed the upgrades which would allow us to produce dry product. The remaining upgrades have been delayed due to cash flow constraints.

In order for the Gonzales facility to begin to generate cash flow from operations, it would need to generate sales levels of $150,000 to $200,000 per month for 2009. We estimate that the plant under its current configuration could generate monthly sales in the range of $350,000 to $400,000. If sales increase above that level, we expect the additional cash flow from the Gonzales facility will be used to offset operating expenses at the corporate level. Based on 2009 sales as of the date of this report, we will need to increase sales volumes to achieve breakeven sales levels, and as such we have added additional sales personnel. There is no assurance that we will be successful in increasing sales volumes.

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Recent Financing Activities

January 2008 and March 2009 Financings

On January 24, 2008, we entered into private financing with three investors for a total amount of $4,500,000 (the “2008 Financing”). We used the proceeds to fund the acquisition of assets described above, to fund further development activities and to provide working capital. The 2008 Financing was offered at an original issue discount of 10%. The investors were issued convertible debentures in the amount of $4,500,000, with interest accruing at 10% per annum and with the principal balance to be paid by January 24, 2009, which has been extended to July 24, 2009. In addition, we issued to the investors an aggregate of 750,000 Class A Warrants and 750,000 Class B Warrants which may be exercised at $8.25 and $11.00 per warrant share, respectively. A placement fee of $225,000 was paid out of the proceeds of this loan. The investors have the option, at any time on or before the extended maturity date (July 24, 2009) to convert the outstanding principal of the convertible debentures into shares of our common stock at the rate per share equal to 70% of the average of the three lowest closing prices of common stock during the 20-day trading period immediately prior to a notice of conversion. As of the filing of this report, the investors have converted approximately 2,113,786 shares reducing the principal debt amount by approximately $1,593,334.

In connection with the 2008 Financing, we entered into a Security Agreement with the investors whereby we granted the investors a security interest in Converted Organics of California, LLC and any and all assets that are acquired by the use of funds from the 2008 Financing. In addition, we granted the investors a security interest in Converted Organics of Woodbridge, LLC and all assets subordinate only to the current lien held by the holder of the bonds issued in connection with the Woodbridge facility of approximately $17,500,000.

On March 6, 2009, we entered into an agreement with an investor to purchase a series of convertible term notes of up to $1,500,000 with a 10% original issue discount. The investor placed funds into escrow on March 10, 2009 to acquire $500,000 in principal amount of the convertible notes to be released upon receiving stockholder approval, and will acquire four additional $250,000 increments in principal amount of the note with the first increment occurring on the 30th day after receiving stockholder approval, and the remaining three increments occurring monthly, thereafter.

The convertible notes will be convertible at an initial rate of 85% of the closing bid price of our common stock for the trading day immediately preceding any conversion (the “Conversion Price”); provided that if we issue securities in an equity financing transaction at a lower price than the Conversion Price, the Conversion Price will be reduced to such lower price; provided further that if we default on the convertible notes, the Conversion Price will be the lowest of the above prices or 70% of the average of the three lowest market prices of our common stock during the 20-day trading period immediately prior to any conversion.

The series of convertible notes all, collectively, mature one year from the date the first $500,000 increment of funding is released to us after the initial approval of the transaction by our stockholders. During the period leading up to the maturity date, the 10% interest payable on the series of convertible notes will become owed in its entirety on the day of funding (assuming each convertible note was outstanding for a period of one year) and added to the principal amount of the convertible note. If an event of default has occurred, all the convertible notes then outstanding will automatically become immediately due and payable, and the interest rate will increase to 18% per annum during the pendency of the event of default.

As additional consideration for the financing, we will issue the investor an aggregate of 1,713,307 Class B warrants in pro rata increments upon the issuance of each increment of the convertible notes. The Class B warrants are exercisable at $11.00 per warrant share.

On March 6, 2009, we also entered into an agreement with the holders of our $17.5 million New Jersey Economic Development Authority Bonds to release $2.0 million for capital expenditures on its New Jersey facility and to defer interest payments on the bonds thru July 30, 2009. These funds had been held in a reserve for bond principal and interest payments along with a reserve for lease payments. As consideration for the release of the reserve funds, we issued the bond holders 2,284,409 Class B warrants. The Class B warrants are exercisable at $11.00 per warrant share.

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Development Period

We are no longer a development-stage company. Since the formation of one of our predecessors on May 2, 2003 through December 31, 2008, we and our predecessor organizations spent approximately $3.1 million of seed capital, $1.8 million of bridge loan proceeds, $25.4 million of proceeds from our public offering and the issuance on New Jersey Economic Development Bonds, $4.5 million from the issuance of convertible debentures and $11.3 million from the exercise of our Class A Warrants to accomplish the following:

•  acquire the IBRC technology license;

•  develop engineering plans;

•  identify appropriate sites for development;

•  enter into a lease for the site for our Woodbridge facility;

•  prepare certain environmental permit applications;

•  contract for third-party evaluation and validation of the technology;

•  contract for two third-party studies analyzing the pricing and market demand for our products;

•  pursue various environmental permits and licenses;

•  negotiate a long-term supply contract for source-separated organic waste;

•  garner public/community support;

•  develop markets for our products by meeting with distributors of organic products, wholesalers, and prior users of similar products;

•  sponsor growth and efficacy trials for products produced by the licensor;

•  issue our securities;

•  substantially complete construction on our Woodbridge facility;

•  make interest payments on our New Jersey Economic Development Bonds

•  acquire the assets of UOP and WRI;

•  perform initial upgrades to our Gonzales facility; and

•  fund administrative, sales, marketing, operations and development expenses.

These activities have been funded through a combination of contributions of capital by our founders, private sales of interests in our predecessor companies, and borrowings. Weston Solutions, Inc. contributed approximately $2.3 million in cash; ECAP, LLC, a boutique investment firm, of which William A. Gildea, a former director of the Company, is the managing member, contributed $300,000 in cash; and the balance came from borrowings of $250,000 in 2004 and again in 2005 from individual lenders at annual interest rates of 12% and 15%, respectively. Additional funding for the above activities came from proceeds of Bridge Loans of $1.8 million which were received in 2006 and subsequently repaid in 2007, and approximately $25.4 million of funding from our initial public offering of stock and the issuance of New Jersey Economic Development Bonds, both of which closed on February 16, 2007, along with a $4.5 million private financing agreement which closed on January 24, 2008 and various exercises of Class A Warrants which occurred during 2008 amounting to $11.3 million in cash receipts.

Construction and Start-up Period

We commenced plant operations at our Woodbridge facility in June 2008. We are processing liquid and solid waste and we are producing both liquid and solid fertilizer and soil enhancement products. Construction is still in process on certain aspects of the facility, mostly the installation of process control systems, and as of the filing of this report we are generating both tip fee and product sales revenue and although the plant is operating at less than full capacity, we expect the plant to be operating at 70% of full capacity by June 2009. We had budgeted

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approximately $14.6 million for the design, building, and testing of our facility, including related non-recurring engineering costs. The capital outlay of $14.6 million came from the $25.4 million raised by our initial public offering of stock and the issuance of New Jersey Economic Development Bonds, both of which closed on February 16, 2007 and does not include $4.6 million of lease financing provided by the New Jersey landlord.

The total cost of the plant is expected to exceed the estimate of $14.6 million by approximately $2.2 million (which does not include $4.6 million of lease financing). Also, we have purchased additional equipment, which will allow us to produce additional product, which is in high demand by the retail market. The estimated cost of this additional equipment is approximately $1.5 million. We have decided to incorporate the HTLC technology acquired from WRI into the Woodbridge facility. We estimate that these costs could be approximately $2.0 million, bringing the total plant cost to $20.3 million, not including lease financing. Installation of the HTLC technology and additional equipment was dependent on our ability to raise additional capital. When this did not occur, we began to seek extended payment terms with the construction vendors. (As of the filing date of this report, we have not negotiated revised payment terms with a majority of our construction vendors. This is further discussed in the liquidity and capital resources section). The purpose of adding the HTLC technology to the Woodbridge facility is two fold: first, we believe it will significantly lower operating costs, most notably utility costs as the need to evaporate significant amounts of liquid byproduct would no longer be necessary, and two, the non evaporated liquid by product can be used in the production process and sold as additional product.

Full-scale Operations

Full capacity at the Woodbridge facility would provide capacity of approximately 250 tons per day. As discussed above, we are in the process of completing additional upgrades to the Woodbridge facility, which are expected to be completed by June 2009, and which we believe will allow us to increase capacity at the facility to approximately 70% of full capacity. We have two revenue streams: (i) tip fees that in our potential markets range from $40 to $80 per ton, and (ii) product sales. Tip fees are paid to us to receive the organic waste stream from the waste hauler; the hauler pays us, instead of a landfill, to take the waste. If the haulers source separate and pay in advance, they will be charged tip fees that are up to 20% below market. As of the filing of this report we are accepting solid waste for processing, we are recording tip fee revenue, we are producing both solid and liquid product and we are recording solid and liquid product sales revenue.

Operations at the Gonzales facility began in February 2008, with the production of approximately 25 tons per day of liquid fertilizer. This output is presently being sold into the California agricultural market. Revenue for 2008 was approximately $1,525,000 from this facility and we have completed certain upgrades to the plant which allow us to accept solid food waste for processing. We have not completed the upgrades that allow us to produce a solid fertilizer product as we have delayed those enhancements due to cash flow restrictions.

Future Development

Subject to the availability of development capital for which we have no current commitments, we intend to commence development and construction of other facilities while completing construction of our Woodbridge facility. Assuming needed capital is available, the timing of our next facility is dependent on many factors, including locating property suited for our use, negotiating favorable terms for lease or purchase, obtaining regulatory approvals, and procuring raw material at favorable prices.

We anticipate that our next facility will be located in Rhode Island. We have signed a ground lease with the Rhode Island Resource Recovery Corporation for a proposed facility in Johnston, Rhode Island. Other locations in Massachusetts, as well as other states, will be considered as determined by management.

In each contemplated market, we have started development activity to secure a facility location. We have also held preliminary discussions with state and local regulatory officials and raw material suppliers. We believe that this preliminary development work will allow us to develop and operate a third facility in the next 18 months subject to the availability of debt financing for which we have no current commitments. We believe we will be able to use much of the engineering and design work done for our Woodbridge facility for subsequent facilities, thus reducing both the time and costs associated with these activities. We expect to form a separate subsidiary for each facility to facilitate necessary bond financing and manage risk.

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Trends and Uncertainties Affecting our Operations

We will be subject to a number of factors that may affect our operations and financial performance. These factors include, but are not limited to, the available supply and price of organic food waste, the market for liquid and solid organic fertilizer, increasing energy costs, the unpredictable cost of compliance with environmental and other government regulation, and the time and cost of obtaining USDA, state or other product labeling designations. Demand for organic fertilizer and the resulting prices customers are willing to pay also may not be as high as our market studies suggest. In addition, supply of organic fertilizer products from the use of other technologies or other competitors may adversely affect our selling prices and consequently our overall profitability. Furthermore our plan calls for raising additional debt and/or equity financing to construct additional operating facilities. Currently there has been a slow down in lending in both the equity and bond markets which may hinder our ability to raise the required funds.

Liquidity and Capital Resources

At December 31, 2008, we had total current assets of approximately $7.2 million consisting primarily of cash, restricted cash, and prepaid assets, and had current liabilities of approximately $9.5 million, consisting primarily of accounts payable, accrued expenses and notes payable leaving us with negative working capital of approximately $2.3 million. Non-current assets totaled $27.6 million and consisted primarily of restricted cash, construction in process and property and equipment. Non-current liabilities consist primarily of notes payable of $597,000 and bonds payable of $17,500,000 at December 31, 2008. We have an accumulated deficit at December 31, 2008 of approximately $26.6 million. Owners’ equity at December 31, 2008 was approximately $5.0 million. For 2008, we generated revenues from operations of approximately $1.5 million. Prior to 2008, the Company had no revenues.

We issued 1,800,000 Class A warrants as part of our initial public offering. We also issued an additional 293,629 Class A warrants and 375,000 Class A warrants as part of the February 16, 2007 and January 24, 2008 financings, respectively. The exercise price of each Class A warrant was $8.25 per share. In the first nine months of 2008, 756,000 of the Class A warrants were voluntarily exercised, providing us with approximately $6.1 million in cash. The remaining Class A warrants (1,029,609 from the initial public offering, 293,629 from the February 2007 financing, and 375,000 from the January 2008 financing) were redeemable at our option, at a redemption price of $0.25 per warrant. On September 16, 2008, we notified warrant holders that we were calling the Class A warrants for redemption, and unless the warrants were exercised prior to the redemption date, we would redeem them for $0.25 per warrant. We subsequently extended the redemption date to November 14, 2008. In connection with the redemption, we received proceeds of approximately $5.5 million upon the exercise of approximately 673,000 Class A warrants. The remaining Class A Warrants (approximately 1.0 million) were redeemed by us for $0.25 each and will no longer be exercisable into shares of common stock. The exercise of warrants under the Class A redemption call is now complete and will not generate any additional proceeds. Of the approximately, $11.3 million raised in 2008 from the exercise and redemption of the Class A Warrants, approximately $3.3 million remains as of December 31, 2008 and the remainder was used to finance operations, pay interest on debt, retire $300,000 of short term notes, finance sales and marketing efforts and pay some of the construction costs, upgrades and design changes at the Woodbridge facility.

We also issued 1,800,000 Class B warrants as part of our initial public offering, and 293,629 Class B warrants and 375,000 Class B warrants as part of the February 16, 2007 and January 24, 2008 financings, respectively, all of which have the same expiration date as the Class A warrants, which is February 16, 2012. The Class B warrants are not redeemable by the Company and, as such, we can provide no assurance that they will ever be exercised. The exercise price of the Class B Warrants is $11.00 per share, however, when the cumulative effect of the stock dividends is taken into consideration the exercise price is $7.48, or for each Class B warrant exercised at $11.00 we will issue 1.47 shares of common stock.

On March 6, 2009, we entered into an agreement with an investor to purchase a series of convertible term notes of up to $1,500,000 with a 10% original issue discount. The investor placed funds into escrow on March 10, 2009 to acquire $500,000 in principal amount of the convertible notes to be released upon receiving stockholder approval, and will acquire four additional $250,000 increments in principal amount of the note with the first increment occurring on the 30th day after receiving stockholder approval, and the remaining three increments monthly

29

thereafter. Assuming we receive stockholder approval for the transaction, the series of convertible notes will provide us with $1,350,000 in gross proceeds. As additional consideration for the financing, we will issue the investor an aggregate of 1,713,307 Class B warrants in pro rata increments upon the issuance of each increment of the convertible notes.

On March 6, 2009, we also entered into an agreement with the holders of our $17.5 million of New Jersey Economic Development Authority Bonds to release $2.0 million for capital expenditures on its New Jersey facility and to defer interest payments on the bonds thru July 30, 2009. As consideration for the release of the reserve funds, we issued the bond holders 2,284,409 Class B warrants.

Our current liabilities are greater than our current assets by approximately $2.2 million, of which $4.3 million of current liabilities is composed of the convertible debentures from the 2008 Financing which have a due date of July 24, 2009 and are convertible into shares of our common stock. As of March 27, 2009, approximately $1,593,000 in principal amount of the debentures has been converted into shares of common stock. We also have trade accounts payable of approximately $3.6 million of which approximately $2.8 million relates to construction at the Woodbridge facility. We expect this $2.8 million to increase to approximately $5.7 million by March 31, 2009. We will need to enter into agreements with the various construction vendors as we do not currently have the funds available to pay these amounts. If we are unable to come to agreements with our construction vendors, the vendors may attempt to take actions against us or the Woodbridge facility, which could result in interruptions to the operations of the Woodbridge facility, which would adversely effect our business results.

We currently have manufacturing capabilities in our Woodbridge and Gonzales facilities as a means to generate revenues, although neither facility is currently generating positive cash flow from operations. If the remaining $3.6 million of convertible debentures from our 2008 Financing is converted into shares of our common stock, we believe the release of the $2.0 million of escrowed funds by the holders of the NJEDA bonds, along with the cash from estimated sales from the Woodbridge and Gonzales facilities of at least $750,000 will provide us enough working capital until the upgrades to the Woodbridge facility is complete and until we hold a shareholder vote to allow an investor to purchase $1,500,000 of convertible term notes assuming we receive such approval and achieve the $750,000 sales level by May 31, 2009; provided that we are able to come to agreements with our construction vendors allowing us to delay payments to such vendors. If we obtain shareholder approval for the purchase of the convertible term notes but do not achieve the required sales level from Woodbridge and Gonzales we will need to seek additional sources of working capital. Currently we estimate that the monthly breakeven sales for the Gonzales and Woodbridge facilities is in the range of $600,000 to $750,000 and in addition our current cash requirement at the corporate level is in a range of $250,000 to $300,000 giving us a total monthly cash requirement in the range of $850,000 to $1,050,000. We plan to produce, at Gonzales and Woodbridge, sufficient product to generate sales in the range of $1,050,000 to $1,550,000. Cash for use as working capital at the corporate level would not be available from operations until we achieved such monthly breakeven sales levels. If shareholder approval is received for the issuance of the convertible notes we would have to achieve breakeven sales levels by July 31, 2009 or the proceeds of the notes would not be provide sufficient working capital for us to operate and if shareholder approval is not obtained and we do not achieve breakeven sales level we would not have sufficient working capital to operate past May 31, 2009. Based on 2009 sales as of the date of this report, we will need increase sales volumes to achieve such break even sales levels, and there is no assurance that we will be successfully in increasing sales volumes.

During this period of limited cash availability we plan to lower costs in the administrative areas of the company and to concentrate on production in both Woodbridge and Gonzales. In addition we will also have to curtail certain production and sales costs until sales orders begin to increase to the desired levels most notably we will have to limit the production of product to two variations of liquid and dry product and the desired sales level will have to be derived from those products.

We do not have any commitments for additional equity or debt funding, and, there is no assurance that capital in any form would be available to us, and if available, on terms and conditions that are acceptable. Moreover, we are not permitted to borrow any future funds unless we obtain the consent of the bondholders of the New Jersey Economic Development Bond. We have obtained such consent for prior financing, but there is no guarantee that we can obtain such consent in the future.

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Critical Accounting Policies and Estimates

Our plan of operation is based in part upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including the recoverability of tangible and intangible assets, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of expenses during the periods covered. A summary of accounting policies that have been applied to the historical financial statements can be found in the notes to the consolidated financial statements.

We evaluate our estimates on an on-going basis. The most significant estimates relate to intangible assets, deferred financing and issuance costs, and the fair value of financial instruments. We base our estimates on historical Company and industry experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which, form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from those estimates.

The following is a brief discussion of our critical accounting policies and methods, and the judgments and estimates used by us in their application:

Revenue Recognition

In accordance with Staff Accounting Bulletin 104, “Revenue Recognition in Financial Statements,” (“SAB 104”) revenue is recognized when each of the following criteria is met:

Persuasive evidence of a sales arrangement exists;

Delivery of the product has occurred;

The sales price is fixed or determinable, and:

Collectability is reasonably assured.

In those cases where all four criteria are not met, the Company defers recognition of revenue until the period these criteria are satisfied. Revenue is generally recognized upon shipment.

Share-Based Compensation

We account for equity instruments exchanged for services in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment.” Under the provisions of SFAS No. 123R, share-based compensation issued to employees is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting period of the grant). Share-based compensation issued to non-employees is measured at grant date, based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more readily measurable, and is recognized as an expense over the requisite service period. Stock options granted in 2008 were calculated at the date of grant using a Black-Scholes pricing model with the following assumptions: risk-free interest rate of 3.52%; no dividend yield; expected volatility factor of 52.3%; and an expected term of five years. The fair value for the 10,000 immediately vesting stock options granted in 2007 was estimated at the date of grant using a Black-Scholes pricing model with the following assumptions; risk-free interest rate of 4.9%; no dividend yield; expected volatility factor of 16.9%; and an expected term of five years. Estimates and judgments used in the preparation of our financial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, such as the results of our operations and other economic conditions. Accordingly, our estimates and judgments may prove to be incorrect and actual results may differ, perhaps significantly, from these estimates under different estimates, assumptions or conditions.

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Other Long-Lived Assets

We account for our long-lived assets (excluding goodwill) in accordance with SFAS No. 144, “Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of,” which requires that long-lived assets and certain intangible assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, such as technological changes or significantly increased competition. If undiscounted expected future cash flows are less than the carrying value of the assets, an impairment loss is to be recognized based on the fair value of the assets, calculated using a discounted cash flow model. There is inherent subjectivity and judgments involved in cash flow analyses such as estimating revenue and cost growth rates, residual or terminal values and discount rates, which can have a significant impact on the amount of any impairment.

Other long-lived assets, such as identifiable intangible assets, are amortized over their estimated useful lives. These assets are reviewed for impairment whenever events or circumstances provide evidence that suggests that the carrying amount of the assets may not be recoverable, with impairment being based upon an evaluation of the identifiable undiscounted cash flows. If impaired, the resulting charge reflects the excess of the assets’ carrying cost over its fair value. As described above, there is inherent subjectivity involved in estimating future cash flows, which can have a significant impact on the amount of any impairment. Also, if market conditions become less favorable, future cash flows (the key variable in assessing the impairment of these assets) may decrease and as a result we may be required to recognize impairment charges in the future. Estimates and judgments used in the preparation of our financial statements are, by their nature, uncertain and unpredictable, and depend upon, among other things, many factors outside of our control, such as the results of our operations and other economic conditions. Accordingly, our estimates and judgments may prove to be incorrect and actual results may differ, perhaps significantly, from these estimates under different estimates, assumptions or conditions.

Capitalization of Interest Costs

We have capitalized interest costs, net of certain interest income, in accordance with Statement of Financial Accounting Standards No. 62, “Capitalization of Interest Cost Involving Certain Tax-Exempt Borrowings and Certain Gifts and Grants,” related to its New Jersey Economic Development Authority Bonds in the amount of $1,077,689 and $403,573 as of December 31, 2008 and December 31, 2007, respectively. Capitalized interest costs during the construction phase are included in construction in progress on the consolidated balance sheets.

Construction-in-Progress

Construction-in-progress includes amounts incurred for construction costs, equipment purchases and capitalized interest costs for items still under construction related to the construction of the Company’s Woodbridge facility.

Restricted Cash

As of December 31, 2008, we had remaining approximately $2,608,000 of restricted cash as required by our bond agreement. This cash was raised by the Company in its initial public offering and bond financing, both of which closed on February 16, 2007, and is set aside in three separate accounts consisting of $34,000 for the construction of the Woodbridge facility, $8,000 for the working capital requirements of the Woodbridge subsidiary while the facility is under construction and $2,028,000 in reserve for bond principal and interest payments along with a reserve for lease payments. In March 2009, the bondholder released $2,000,000 of these restricted funds for the Company to use and therefore we have classified cash as a current asset on our balance sheet as of December 31, 2008. The Company has classified this restricted cash as non-current to the extent that such funds are to be used to acquire non-current assets or are to be used to service non-current liabilities. Third party trustee approval is required for disbursement of all restricted funds.

Fair Value of Financial Instruments

Statement of Financial Accounting Standards (SFAS) No. 107, “Fair Value of Financial Instruments,” requires disclosure of the fair value of financial instruments for which the determination of fair value is practicable.

32

SFAS No. 107 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amount of the Company’s financial instruments consisting of cash, accounts payable, and accrued expenses approximate their fair value because of the short maturity of those instruments. The fair value of the Company’s term notes payable and New Jersey Economic Development Authority bond were estimated by discounting the future cash flows using current rates offered by lenders for similar borrowings with similar credit ratings. The fair value of the term notes payable and the New Jersey Economic Development Authority bonds approximate their carrying value. The Company’s financial instruments are held for other than trading purposes.

Results of Operations

For the period from inception (May 3, 2003) until December 31, 2007, we were a development stage company with no revenues. We began to earn revenues from our Gonzales and Woodbridge facilities during 2008, and production has begun at our Woodbridge facility and therefore we are no longer reporting as a development stage company.

During the year ended December, 2008, we had sales of approximately $1.5 million compared to $0 for the same period in 2007. During 2008 we had cost of goods sold of approximately $2 million, leaving a negative gross margin of approximately $433,000 compared to $0 cost of goods sold and $0 gross margin for the same period in 2007. The sales and negative gross margins were derived primarily from both our Gonzales and Woodbridge facilities. The negative gross margin was generated in the third and fourth quarters and is further explained below. We expect the gross margin to improve in the future as we increase production and expand our sales efforts into more profitable markets. Of the $433,000 negative gross margin in the year ended December 31, 2008, approximately $275,000 was generated at our Gonzales facility due to lower than expected sales volume and higher than anticipated production and transportation costs, and approximately $158,000 in negative gross margin was generated at our Woodbridge facility due to low sales volume and the start-up nature of the facility.

We incurred operating expenses of approximately $10.3 million and $3.7 million for the year ended December 31, 2008 and 2007, respectively. The principal components of the $6.6 million increase in operating expenses is an increase in general and administrative expenses of $6.3 million (due mainly to an increase in general and administrative expenses of $1.4 million for additional personnel and other costs associated with the start-up of the New Jersey facility, $829,000 in additional expenses associated with the California facility, $500,000 in additional personnel at the corporate offices, $290,000 in expense related to the issuance of stock for remuneration for services rendered, $200,000 in professional fees relating to private placement financing, $150,000 relating to recognition of liquidated damages associated with the private placement financing, an additional $200,000 in amortization of intangible assets acquired from UOP and WRI and $2.3 million recognized as compensation expense upon the issuance of employee stock options as calculated using the Black-Scholes pricing model), offset by a $350,000 reduction in research and development costs.

Interest expense for the years ended December 31, 2008 and 2007 was $5.8 and $1.2 million, respectively. The increase is due to the interest payments on the convertible debentures issued in the 2008 Financing described herein; amortization of the original issue discount on the convertible debentures issued in the 2008 Financing; and amortization of the discount related to the beneficial conversion feature of the convertible debentures issued in the 2008 Financing and other convertible debt. Interest income was $290,000 in the year ended December 31, 2008 and $824,000 for the same period in 2007. The decrease is due to our declining balances in restricted cash.

Amortization of other intangible assets expense was $399,000 for the year ended December 31, 2008 and $62,000 during the same period in 2007. The increase is due to amortization of costs associated with the convertible debentures issued in the 2008 Financing, which are being amortized over the life of the loan.

For the year ended December 31, 2008, net loss was $16.2 million compared to $4.1 million for the same period in 2007. The increase in net loss primarily represents the effects of the increase in our operating costs and interest expense, as discussed above.

As of December 31, 2008, we had current assets of approximately $7.2 million compared to $3.2 million as of December 31, 2007. Our total assets were approximately $32.6 million as of December 31, 2008 compared to

33

approximately $22.2 million as of December 31, 2007. The majority of the increase in both current and total assets from December 31, 2007 to December 31, 2008 is due to receipt of approximately $11.3 million in cash from the voluntary exercise of our Class A warrants and $3.0 million in net assets acquired with our acquisitions of UOP and WRI.

As of December 31, 2008, we had current liabilities of approximately $9.5 million compared to $2.5 million at December 31, 2007. This significant increase is due largely to the convertible debentures issued in the 2008 Financing, net of discounts of $230,000 and loans issued in association with our acquisitions of UOP and WRI and an increase in accounts payable to construction related vendors. In addition, we had long-term liabilities of approximately $18.1 million as of December 31, 2008 as compared to $17.6 million at December 31, 2007. This increase is primarily due to the issuance of long term notes payable in association with our acquisition of UOP and WRI.

For the twelve months ended December 31, 2008 we had negative cash flow from operating activity of approximately $7.3 million, comprising primarily loss from operations offset by certain non-cash items such as depreciation, amortization of deferred financing fees and amortization of discounts on private financing, $2.3 million in expense associated with the grant of stock options and an increase in accounts payable and accrued expenses. We also had negative cash flow from investing activities of $4.7 million, primarily related to the purchase of UOP assets and construction at the New Jersey facility, offset by the release of restricted cash set aside for that purpose. The negative cash flow from both operating and investing activities was offset by approximately $15 million in positive cash flow from financing activities comprising approximately $11.3 million from the exercise of warrants, and $3.7 million from the proceeds of the January 2008 private financing.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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CONVERTED ORGANICS INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		36
Consolidated Balance Sheets at December 31, 2008 and 2007		37
Consolidated Statements of Operations for the years ended December 31, 2008 and 2007		38
Consolidated Statements of Changes in Owners’ Equity (Deficit) for the years ended December 31, 2008 and 2007		39
Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007		40
Notes to Consolidated Financial Statements		41

35

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of Converted Organics Inc.

We have audited the accompanying consolidated balance sheets of Converted Organics Inc. (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in owners’ equity (deficit) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Converted Organics Inc. as of December 31, 2008 and 2007, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company has incurred a net loss of approximately $16.2 million during the year ended December 31, 2008, has a working capital deficiency as of December 31, 2008 and an accumulated deficit of approximately $26.6 million. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are described in Note 2. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/  CCR LLP

Glastonbury, Connecticut

March 27, 2009

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Item 8.   Financial Statements

CONVERTED ORGANICS INC.

CONSOLIDATED BALANCE SHEETS

	December 31,			December 31,
	2008			2007
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	3,357,940		$	287,867
Restricted cash		2,547,557			2,590,053
Accounts receivable, net		313,650			—
Inventories		289,730			—
Prepaid rent		389,930			190,600
Other prepaid expenses		73,937			40,282
Deposits		141,423			—
Other receivables		94,250			55,450
Deferred financing and issuance costs, net		22,042			—
Total current assets		7,230,459			3,164,252
Deposits		912,054			554,978
Restricted cash		60,563			12,006,359
Property and equipment, net		19,725,146			—
Construction-in-progress		974,900			4,947,067
Capitalized bond costs, net		862,010			909,679
Intangible assets, net		2,852,876			585,750
Deferred financing and issuance costs, net		—			8,642
Total assets	$	32,618,008		$	22,176,727
LIABILITIES AND OWNERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES
Term notes payable — current	$	89,170		$	375,000
Accounts payable		3,583,030			898,270
Accrued compensation — officers, directors and consultants		430,748			397,781
Accrued legal and other expenses		164,620			199,261
Accrued interest		601,166			630,890
Convertible notes payable, net of unamortized discount		4,602,660			—
Mortgage payable, current		3,006			—
Total current liabilities		9,474,400			2,501,202
Term note payable, net of current portion		—			89,170
Mortgage payable, net of current portion		245,160			—
Convertible note payable, net of current portion		351,516			—
Bonds payable		17,500,000			17,500,000
Total liabilities		27,571,076			20,090,372
COMMITMENTS AND CONTINGENCIES		—
OWNERS’ EQUITY (DEFICIT)
Preferred stock, $.0001 par value, authorized 10,000,000 shares; no shares issued and outstanding		—			—
Common stock, $.0001 par value, authorized 40,000,000 shares; 7,431,436 and 4,229,898 shares issued and outstanding at December 31, 2008 and December 31, 2007		743			423
Additional paid-in capital		31,031,647			12,460,357
Member’s equity		619,657			—
Accumulated deficit		(26,605,115	)		(10,374,425	)
Total owners’ equity		5,046,932			2,086,355
Total liabilities and owners’ equity	$	32,618,008		$	22,176,727

The accompanying notes are an integral part of these consolidated financial statements.

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CONVERTED ORGANICS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended
	December 31,			December 31,
	2008			2007
Revenues	$	1,547,981		$	—
Cost of goods sold		1,981,084			—
Gross loss		(433,103	)		—
Operating expenses
General and administrative expenses		9,309,976			3,009,678
Research and development		375,267			648,664
Amortization of license and intangible assets		263,387			16,500
Loss from operations		(10,381,733	)		(3,674,842	)
Other income/(expenses)
Interest income		290,125			824,466
Other income		146,677			—
Amortization of capitalized costs		(399,269	)		(62,429	)
Interest expense		(5,834,898	)		(1,171,207	)
		(5,797,365	)		(409,170	)
Loss before provision for income taxes		(16,179,098	)		(4,084,012	)
Provision for income taxes		—			—
Net loss		(16,179,098	)		(4,084,012	)
Net loss per share, basic and diluted	$	(2.70	)		(0.87	)
Weighted average common shares outstanding		5,985,017			4,716,378

The accompanying notes are an integral part of these consolidated financial statements.

38

CONVERTED ORGANICS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN OWNERS’ EQUITY (DEFICIT)

Years Ended December 31, 2008 and 2007

	Common Stock												Total
	Shares Issued				Additional								Owners’
	and				Paid-in			Member’s		Accumulated			Equity
	Outstanding		Amount		Capital			Equity		Deficit			(Deficit)
Balance, December 31, 2006		1,333,333	$	133	$	4,113,385		$	—	$	(6,290,413	)	$	(2,176,895	)
Issuance of common stock and warrants in connection with the Company’s initial public offering, net of issuance costs of $1,736,715		1,800,000		180		8,163,105			—		—			8,163,285
Common stock and warrants issued in connection with bridge units		293,629		29		(29	)		—		—			—
Common stock issued in connection with extension of bridge financing		55,640		6		178,042			—		—			178,048
Issuance of stock options		—		—		5,929			—		—			5,929
Stock dividends		747,296		75		(75	)		—		—			—
Net loss		—		—		—			—		(4,084,012	)		(4,084,012	)
Balance, December 31, 2007		4,229,898		423		12,460,357			—		(10,374,425	)		2,086,355
Consolidation of variable interest entity		—		—		—			23,965		—			23,965
Common stock issued upon exercise of warrants		1,780,506		178		11,435,476			—		—			11,435,654
Common stock issued upon exercise of options		143,000		14		536,236			—		—			536,250
Common stock issued for services rendered		45,480		5		212,614			—		—			212,619
Warrants issued in connection with financings, net of cancellations		—		—		1,113,750			—		—			1,113,750
Beneficial conversion features on convertible notes		—		—		2,943,386			—		—			2,943,386
Stock dividends		1,232,552		123		(123	)		—		—			—
Issuance of stock options		—		—		2,329,951			—		—			2,329,951
Member’s contributions		—		—		—			544,100		—			544,100
Net income (loss)		—		—		—			51,592		(16,230,690	)		(16,179,098	)
Balance, December 31, 2008		7,431,436	$	743	$	31,031,647		$	619,657	$	(26,605,115	)	$	5,046,932

The accompanying notes are an integral part of these consolidated financial statements.

39

CONVERTED ORGANICS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended
	December 31,			December 31,
	2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(16,179,098	)	$	(4,084,012	)
Adjustments to reconcile net loss to net cash used in operating activities:
Consolidation of variable interest entity		6,164			—
Amortization of intangible asset — license		16,500			16,500
Amortization of other intangible assets		246,887			—
Amortization of capitalized bond costs		47,669			43,696
Amortization of deferred financing fees		331,600			18,733
Depreciation and amortization of property and equipment		411,843			—
Amortization of beneficial conversion features		2,712,009			—
Amortization of discounts on private financing		1,563,750			—
Stock option compensation expense		2,329,951			5,929
Stock issued for services rendered		212,619			—
Forgiveness of debt and accrued interest		(146,677	)		—
Loss on sale of fixed asset		176			—
Stock issued for extension of bridge financing		—			178,048
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable		(284,948	)		—
Inventories		(278,616	)		—
Prepaid expenses and other current assets		(242,983	)		(144,329	)
Other assets		(38,800	)		—
Deposits		(507,500	)		(350,000	)
Increase (decrease) in:
Accounts payable and other accrued expenses		2,425,206			71,191
Accrued compensation — officers, directors and consultants		32,967			97,781
Accrued interest		(8,048	)		488,271
Other		25,000			—
Net cash used in operating activities		(7,324,329	)		(3,658,192	)
CASH FLOWS FROM INVESTING ACTIVITIES
Release of restricted cash		11,988,292			6,050,199
Cash paid for acquisitions		(1,500,000	)		—
Purchase of property and equipment		(14,233,823	)		—
Proceeds from sale of fixed assets		24,000			—
Capitalized interest		(72,438	)		(403,572	)
Construction costs		(902,462	)		(4,543,495	)
Restrictions of cash		—			(20,646,611	)
Deposit on license		—			(139,978	)
Net cash used in investing activities		(4,696,431	)		(19,683,457	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from exercise of warrants		11,435,654			—
Proceeds from private financing, net of original issue discount		3,715,000			—
Net proceeds from exercise of options		536,250			—
Member’s contributions		544,100			—
Payments made for deferred issuance costs		—			(42,916	)
Payments made on mortgage payable		(6,124	)		—
Repayment of term notes issued for acquisition		(814,447	)		—
Net proceeds from bond financing		—			16,546,625
Net proceeds from initial public offering of stock		—			8,859,784
Proceeds from term notes		—			89,170
Repayment of term notes		(250,000	)		(125,000	)
Repayment of demand notes		(69,600	)		(250,000	)
Repayment of bridge loan		—			(1,515,000	)
Net cash provided by financing activities		15,090,833			23,562,663
NET INCREASE IN CASH		3,070,073			221,014
CASH AND CASH EQUIVALENTS, beginning of period		287,867			66,853
CASH AND CASH EQUIVALENTS, end of period	$	3,357,940		$	287,867
Supplemental cash flow information:
Cash paid during the period for:
Interest	$	5,864,622		$	908,456
Non-cash financing activities:
Financing costs paid from proceeds of private financing	$	335,000		$	—
Issuance costs paid from proceeds of initial public offering		—			1,040,216
Issuance costs paid from proceeds of bond financing		—			953,375
Beneficial conversion discount on convertible notes		2,943,386			—
Warrants issued in connection with financing		1,113,750			—

The accompanying notes are an integral part of these consolidated financial statements.

40

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — NATURE OF OPERATIONS

Converted Organics Inc. (the “Company”) uses food and other waste as a raw material to manufacture, sell and distribute all-natural soil amendment products combining disease suppression and nutrition characteristics. The Company transitioned from a development stage company to an operating company in the second quarter of 2008 as operations commenced and the Company has approximately $1.5 million in revenue for the year ended December 31, 2008. The Company’s revenues come from two sources: tip fees and product sales. Waste haulers pay the Company “tip” fees for accepting food waste generated by food distributors such as grocery stores, produce docks and fish markets, food processors, and hospitality venues such as hotels, restaurants, convention centers and airports. Revenue also comes from the sale of the Company’s fertilizer products. The Company’s products possess a combination of nutritional, disease suppression and soil amendment characteristics.

Converted Organics of California, LLC, (“California”) a California limited liability company and wholly-owned subsidiary of the Company, was formed when the Company acquired the assets of United Organics Products, LLC. The California plant is located in Gonzales, California, in the Salinas Valley. California produces approximately 25 tons of organic fertilizer per day, and sells primarily to the California agricultural market. The California facility employs a proprietary method called High Temperature Liquid Composting (“HTLC”). The facility is currently being upgraded to expand its capacity and to enable it to accept larger amounts of food waste from waste haulers, thereby increasing tip fee revenue.

The Company’s second facility, located in Woodbridge, New Jersey (“Woodbridge”), is designed to service the New York-Northern New Jersey metropolitan area. The Company constructed this facility and it became partially operational in the second quarter of 2008. Converted Organics of Woodbridge, LLC, a New Jersey limited liability company and wholly owned subsidiary of the Company, was formed for the purpose of owning, constructing and operating the Woodbridge, New Jersey facility.

Converted Organics of Rhode Island, LLC (“Rhode Island), a Rhode Island limited liability company and subsidiary of the Company, was formed for the purpose of developing a facility at the Rhode Island central landfill.

NOTE 2 — MANAGEMENT’S PLAN OF OPERATION

The Company currently has manufacturing capabilities in its Woodbridge and Gonzales facilities as a means to generate revenues and cash, although neither facility is currently generating positive cash flow from operations. If the remaining $3.6 million of convertible debentures from the Company’s 2008 Financing is converted into shares of common stock, the Company believes the release of $2.0 million of escrowed funds by the holders of the NJEDA bonds (Note 18), along with the cash from estimated sales from the Woodbridge and Gonzales facilities will provide enough working capital until the upgrades to the Woodbridge facility are complete and until the Company holds a shareholder vote to allow an investor (Note 18) to purchase $1,500,000 of convertible term notes assuming they receive such approval and achieve the $750,000 sales level by May 31, 2009; and provided that the Company is able to come to agreements with its construction vendors allowing them to delay payments to such vendors. If the Company obtains shareholder approval for the purchase of the convertible term notes but does not achieve the required sales level from Woodbridge and Gonzales, the Company will need to seek additional sources of working capital. Currently the Company estimates that the monthly breakeven sales for the Gonzales and Woodbridge facilities is in the range of $600,000 to $750,000 and in addition current cash requirement at the corporate level is in a range of $250,000 to $300,000 per month for a total monthly cash requirement in the range of $850,000 to $1,050,000. The Company plans to produce, at Gonzales and Woodbridge, sufficient product to generate sales in the range of $1,050,000 to $1,550,000. Cash for use as working capital at the corporate level would not be available from operations until the Company achieved such monthly breakeven sales levels. If shareholder approval is received for the issuance of the convertible notes the Company would have to achieve breakeven sales levels by July 31, 2009 or the proceeds of the notes would not provide sufficient working capital for operations and if shareholder approval is not obtained and breakeven sales levels are not achieved, the Company will not have sufficient working capital to operate past May 31, 2009. Based on 2009 sales as of the date of this report, the

41

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 2 — MANAGEMENT’S PLAN OF OPERATION — Continued

Company will need to increase sales volumes to achieve such break even sales levels, and there is no assurance that such efforts will be successful.

During this period of limited cash availability the company plans to lower costs in the administrative areas and to concentrate on production in both Woodbridge and Gonzales. In addition they will also have to curtail certain production and sales costs until sales orders begin to increase to the desired levels; most notably, the Company will have to limit the production of product to two variations of liquid and dry product and the desired sales level will have to be derived from those products.

The Company does not have any commitments for additional equity or debt funding and there is no assurance that capital in any form would be available and, if available, on terms and conditions that are acceptable. Moreover, the Company is not permitted to borrow any future funds unless they obtain the consent of the bondholders of the New Jersey Economic Development Bond. The Company has obtained such consent for prior financing, but there is no guarantee that they can obtain such consent in the future.

NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The accompanying consolidated financial statements include the transactions and balances of Converted Organics Inc. and its subsidiaries, Converted Organics of Woodbridge, LLC, Converted Organics of California, LLC, and Converted Organics of Rhode Island, LLC. The transactions and balances of Valley Land Holdings, LLC, a variable interest entity, have also been consolidated therein. All intercompany transactions and balances have been eliminated in consolidation.

DEVELOPMENT STAGE COMPANY

Until the second quarter of 2008, the Company was a development stage company as defined by Statement of Financial Accounting Standards (SFAS) No. 7, “Accounting and Reporting by Development Stage Enterprises”, as it had no principal operations or significant revenue. During the second quarter of 2008, the Company’s California facility was operating near capacity and recognized revenue from the sale of its product. Also during the second quarter of 2008, the tip floor of the New Jersey facility commenced operations and began to accept food waste on a limited basis. During the second half of 2008, operations have increased at both facilities, and the Company is no longer a development stage company.

VARIABLE INTEREST ENTITY

The consolidated financial statements include Valley Land Holdings, LLC (“VLH”), as VLH has been deemed to be a variable interest entity of the Company as it is the primary beneficiary of that variable interest entity following the acquisition of the net assets of United Organic Products, LLC (Note 4). VLH’s assets and liabilities consist primarily of cash, land and a mortgage note payable on the land on which the California facility is located. Its operations consist of rental income on the land from the Company and related operating expenses. VLH’s activities support the operations of the California facility and do not have sufficient equity at risk to remain viable without the support of the Company.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. Actual results could differ from those estimates.

42

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES — Continued

CASH AND CASH EQUIVALENTS

The Company considers financial instruments with an original maturity date of three months or less from the date of purchase to be cash equivalents. The Company had cash equivalents of $534,800 and $0 at December 31, 2008 and December 31, 2007, respectively, consisting of certificates of deposit. These certificates of deposit are held by VLH.

RESTRICTED CASH

As of December 31, 2008 and 2007, the Company had remaining approximately $2,608,000 and $14,596,000, respectively, of cash which is restricted under its bond agreement (Note 11). This cash was raised by the Company in its initial public offering and bond financing on February 16, 2007 and is set aside in three separate accounts at December 31, 2008 and 2007, consisting of $34,000 and $10,032,000, respectively, for the construction of the Woodbridge operating facility; $8,000 and $1,541,000, respectively, for the working capital requirements of the Woodbridge subsidiary while the facility is under construction; and $2,566,000 and $3,023,000, respectively, in reserve for bond principal and interest payments along with a reserve for lease payments. The Company has classified this restricted cash as non-current to the extent that such funds are to be used to acquire non-current assets or are to be used to service non-current liabilities. Third party trustee approval is required for disbursement of all restricted funds. Subsequent to December 31, 2008, $2,000,000 of the restricted cash was made available to the Company for use other than its restricted purpose (Note 18).

ACCOUNTS RECEIVABLE

Accounts receivable represents balances due from customers, net of applicable reserves for doubtful accounts. In determining the need for an allowance, objective evidence that a single receivable is uncollectible, as well as historical collection patterns for accounts receivable are considered at each balance sheet date. At December 31, 2008, an allowance for doubtful accounts of $16,000 has been established against certain receivables that management has identified as uncollectible. A charge of $16,000 is reflected in the consolidated statements of operations for the year ended December 31, 2008. There was no allowance for doubtful accounts deemed necessary at December 31, 2007.

INVENTORIES

Inventories are valued at the lower of cost or market, with cost determined by the first in, first out method. Inventory consists primarily of raw materials, packaging materials and finished goods, which consist of soil amendment products. Inventory balances are presented net of applicable reserves. There were no inventory reserves at December 31, 2008 and December 31, 2007.

PREPAID RENT

The Company has recorded prepaid rent on its consolidated balance sheets which represents the difference between actual lease rental payments made as of December 31, 2008 and 2007 and the straight line rent expense recorded in the Company’s consolidated statements of operations for the years then ended relating to the Company’s facilities in Woodbridge, New Jersey and Gonzales, California.

DEPOSITS

The Company has made deposits totaling $415,000 for its Woodbridge facility in accordance with the terms of that lease and has made a deposit of $139,986 for a license at its planned Rhode Island facility. The Gonzales facility has deposits on equipment of $346,668. The Company has various security deposits relating to operating leases of $10,400. These amounts are recorded as noncurrent assets on the Company’s consolidated balance sheets. The

43

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES — Continued

Company also has made deposits on packaging materials ordered for product to be manufactured in its New Jersey facility of $141,423, which is recorded as a current asset on the Company’s consolidated balance sheets.

CONSTRUCTION-IN-PROGRESS

Construction-in-progress on the consolidated balance sheets includes amounts incurred for construction costs, equipment purchases and capitalized interest costs related to the construction of the Company’s Woodbridge, New Jersey facility, and expansion of its Gonzales, California plant that have not yet been placed in service.

INTANGIBLE ASSETS — LICENSE AND OTHER INTANGIBLES

The Company accounts for its intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that intangible assets with finite lives, such as the Company’s license, be capitalized and amortized over their respective estimated lives and reviewed for impairment whenever events or other changes in circumstances indicate that the carrying amount may not be recoverable.

LONG-LIVED ASSETS

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such reviews are based on a comparison of the asset’s undiscounted cash flows to the recorded carrying value of the asset. If the asset’s recorded carrying value exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset, the asset is written down to its estimated fair value. Impairment charges, if any, are recorded in the period in which the impairment is determined. No impairment charges were deemed necessary during the years ended December 31, 2008 and 2007.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed on the straight-line basis over the estimated useful lives of 7 to 20 years.

DEFERRED FINANCING AND ISSUANCE COSTS

In connection with the private financing arrangement of January 24, 2008, the Company incurred legal and placement fees of $345,000, $10,000 of which was paid in the year ended December 31, 2007, and $335,000 of which was paid from the proceeds of the loan. These fees are being amortized over one year. Amortization expense totaled $322,958 during the year ended December 31, 2008 related to these costs.

CAPITALIZED BOND COSTS

In connection with its $17.5 million bond financing on February 16, 2007, the Company has capitalized bond issuance costs of $953,375 and is amortizing these costs over the life of the bond. Amortization expense of $47,669 and $43,696 was recorded during the years ended December 31, 2008 and 2007, respectively, related to these bond issuance costs.

REVENUE RECOGNITION

In accordance with Staff Accounting Bulletin 104, “Revenue Recognition in Financial Statements,” (“SAB 104”) revenue is recognized when each of the following criteria is met:

•  Persuasive evidence of a sales arrangement exists;

•  Delivery of the product has occurred;

44

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES — Continued

•  The sales price is fixed or determinable, and:

•  Collectability is reasonably assured.

In those cases where all four criteria are not met, the Company defers recognition of revenue until the period these criteria are satisfied. Revenue is generally recognized upon shipment.

SHARE BASED COMPENSATION

The Company accounts for share based compensation in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment.” Under the provisions of SFAS No. 123(R), share-based compensation issued to employees is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period (generally the vesting period of the grant). Share-based compensation issued to non-employees is measured at the grant date, based on the fair value of the equity instruments issued and is recognized as an expense over the requisite service period.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs include the costs of engineering, design, feasibility studies, outside services, personnel and other costs incurred in development of the Company’s manufacturing facilities. All such costs are charged to expense as incurred.

INCOME TAXES

Deferred income taxes are computed in accordance with SFAS No. 109, “Accounting for Income Taxes” and reflect the net tax effects of temporary differences between the financial reporting carrying amounts of assets and liabilities for financial reporting and income tax purposes. The Company establishes a valuation allowance if it believes that it is more likely than not that some or all of the deferred tax assets will not be realized (see Note 14).

The Company is subject to U.S. federal income tax as well as income tax of certain state jurisdictions. The Company has not been audited by the I.R.S. or any states in connection with income taxes. The periods from inception through 2008 remain open to examination by the I.R.S. and state authorities.

On January 1, 2007, the Company adopted the provisions of FASB interpretation No. 48, “Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109” (“FIN No. 48”). The Interpretation contains a two step approach to recognizing and measuring uncertain tax positions accounted for in accordance with FASB Statement No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of the available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation process, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. The adoption of FIN No. 48 did not have any material impact on the Company’s consolidated financial statements.

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense. Penalties, if incurred, are recognized as a component of income tax expense.

FAIR VALUE MEASUREMENTS

The Company has partially implemented SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”) for financial assets and financial liabilities. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, expands disclosure about fair value measurements and is effective for fiscal years beginning after November 15, 2007, except as it relates to nonrecurring fair value measurements of nonfinancial assets and liabilities. This standard only applies when other standards require or permit the fair value measurement of assets and liabilities. It

45

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES — Continued

does not increase the use of fair value measurement. The Company has determined that none of its financial assets or liabilities are measured at fair value on a recurring basis therefore the disclosures required by SFAS No. 157 do not currently apply. With regard to nonfinancial assets and liabilities which are not recognized or disclosed at fair value in the Company’s financial statements on a recurring basis (at least annually), the standard is effective for fiscal years beginning after November 15, 2008. The major categories of assets and liabilities that have not been measured and disclosed using SFAS No. 157 fair value guidance are property and equipment in certain circumstances and goodwill.

ACCOUNTING STANDARDS NOT YET ADOPTED

In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”), which permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected would be reported in earnings. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company has not elected to measure any financial assets or liabilities at fair value, and therefore, the consolidated financial statements were not affected by adoption of SFAS No. 159.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The objective of this Statement is to improve the relevance, comparability and transparency of the financial information that a reporting entity provides in its consolidated financial statements. The Company anticipates that the adoption of SFAS No. 160 will not have a significant impact on the consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS No. 141R), which changes how business acquisitions are accounted for. SFAS No. 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets and tax benefits. SFAS No. 141R is effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after December 31, 2008. The Company is currently evaluating the future impacts and disclosures of this standard.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (SFAS No. 161). SFAS No. 161 requires enhanced disclosures about an entity’s derivative instruments and hedging activities with a view toward improving the transparency of financial reporting and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS No. 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company anticipates that the adoption of SFAS No. 161 will not have a significant impact on the consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position (FSP) No. FAS 142-3, Determination of the Useful Life of Intangible Assets. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142). The objective of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R and other accounting principles generally accepted in the United States of America. This FSP applies to all intangible assets, whether acquired in a business combination or otherwise; and

46

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES — Continued

shall be effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. The Company is currently evaluating this new FSP and anticipates that it will not have a significant impact on the consolidated financial statements.

EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share (“EPS”) is computed by dividing the net income (loss) attributable to the common stockholders (the numerator) by the weighted average number of shares of common stock outstanding (the denominator) during the reporting periods. Diluted income (loss) per share is computed by increasing the denominator by the weighted average number of additional shares that could have been outstanding from securities convertible into common stock, such as stock options and warrants (using the “treasury stock” method), and convertible preferred stock and debt (using the “if-converted” method), unless their effect on net income (loss) per share is antidilutive. Under the “if-converted” method, convertible instruments are assumed to have been converted as of the beginning of the period or when issued, if later. The effect of computing the Company’s diluted income (loss) per share is antidilutive and, as such, basic and diluted earnings (loss) per share are the same for each of the years ended December 31, 2008 and 2007.

PROFIT SHARING PLAN

In November 2007, the Company instituted a 401(k) plan for its employees. The plan allows for employees to have a pretax deduction of up to 15% of pay set aside for retirement. The plan also allows for a Company match and profit sharing contribution. As of December 31, 2008 and 2007, the Company has not provided a match of employee contributions nor did the Company contribute a profit sharing amount to the plan.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current year presentation.

SEGMENT REPORTING

The Company has no reportable segments as defined by SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information.”

NOTE 4 — ACQUISITIONS

On January 24, 2008, the Company acquired the assets, including the intellectual property, of Waste Recovery Industries, LLC of Paso Robles, CA. This acquisition allows the Company to be the exclusive owner of the proprietary technology and process known as the High Temperature Liquid Composting system, which processes various biodegradable waste products into liquid and solid organic-based fertilizer and feed products. The purchase price of $500,000 was paid with a 7% short term note that matured on May 1, 2008 and was repaid on that date. Interest on that note was payable monthly. In addition, the purchase price provides for future contingent payments of $5,500 per ton of capacity, when and if additional tons of waste-processing capacity are added to the Company’s existing current or planned capacity, using the acquired technology.

In addition, Waste Recovery Industries, LLC had begun discussion with a third party (prior to the Company acquiring it) to explore the possibility of building a facility to convert fish waste into organic fertilizer using the HTLC technology. The Company has completed those negotiations and has entered into an agreement with Pacific Choice Seafoods whereby the Company will be required to pay 50% of the Company’s profits (as defined) to the former owner, that are earned from the facility. The contingent profit-sharing payments under this agreement will be accounted for as expenses of the appropriate period, in accordance with EITF 95-8, “Accounting for Contingent

47

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 4 — ACQUISITIONS — Continued)

Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination.” If the Company becomes obligated to make certain technology payments under its purchase agreement with WRI, the Company estimated that no such payments will be payable in the twelve months following the acquisition. Payments, if any, after that will be expensed as incurred. The maximum payment due under these arrangements is $7,000,000, with no minimum.

On January 24, 2008, the Company formed Converted Organics of California, LLC, a wholly-owned subsidiary of Converted Organics Inc. who acquired the net assets of United Organic Products, LLC of Gonzales, CA (“UOP”). With this acquisition, the Company acquired a liquid fertilizer product line, as well as a production facility that services a West Coast agribusiness customer base through established distribution channels. This facility is operational and began to generate revenues for the Company immediately upon acquisition. The purchase price of $2,500,000 was paid in cash of $1,500,000 and a note payable of $1,000,000. This note matures on February 1, 2011, has an interest rate of 7%, payable monthly in arrears and is convertible to common stock six months after the acquisition date for a price equal to the five-day average closing price of the stock on Nasdaq for the five days preceding conversion.

The acquisitions have been accounted for in the first quarter of 2008 using the purchase method of accounting in accordance with SFAS No. 141, “Business Combinations”. Accordingly, the net assets have been recorded at their estimated fair values, and operating results have been included in the Company’s consolidated financial statements from the date of acquisition.

The allocation of the purchase price based on the appraisal is as follows:

Inventories	$	11,114
Accounts receivable		28,702
Technological know-how		271,812
Trade name		228,188
Existing customer relationships		2,030,513
Building		111,584
Equipment and machinery		543,000
Assumption of liabilities		(224,913	)
Total allocation of purchase price	$	3,000,000

The assets acquired from UOP were valued separately from the assets acquired from WRI. The sum of the amounts assigned to assets acquired and liabilities assumed did exceed the cost of the acquired assets. The excess was allocated as a pro rata reduction of the amounts that otherwise would have been assigned to all of the acquired noncurrent assets, including intangibles.

The unaudited supplemental pro forma information discloses the results of operations for the current year and for the preceding year as though the business combination had been completed as of the beginning of the year reported on.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 4 — ACQUISITIONS — Continued)

The pro forma condensed consolidated financial information is based upon available information and certain assumptions that the Company believes are reasonable. The unaudited supplemental pro forma information does not purport to represent what the Company’s financial condition or results of operations would actually have been had these transactions in fact occurred as of the dates indicated above or to project the Company’s results of operations for the period indicated or for any other period.

	Twelve months ending December 31,
	2008			2007
Revenues (in thousands)	$	1,548		$	1,423
Net loss (in thousands)		16,269			(4,889	)
Net loss per share — basic and diluted		(2.72	)		(1.04	)
Current assets (in thousands)		7,230			5,410
Total assets (in thousands)		32,618			28,278
Current liabilities (in thousands)		(9,474	)		(7,570	)
Total liabilities (in thousands)		(27,571	)		(25,070	)
Total equity (deficit) (in thousands)		5,047			3,208

NOTE 5 — FAIR VALUE OF FINANCIAL INSTRUMENTS

CONCENTRATIONS OF CREDIT RISK

The Company’s financial instruments that are exposed to a concentration of credit risk are cash, including restricted cash, and accounts receivable. Currently, the Company maintains its cash accounts with balances in excess of the federally insured limits. The Company mitigates this risk by selecting high quality financial institutions to hold such cash deposits. At December 31, 2008 and 2007, the Company’s cash balances on deposit exceeded federal depository insurance limits by approximately $5,812,000 and $14,500,000.

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make such payments, additional allowances may be required. An increase in allowances for customer non-payment would increase the Company’s expenses during the period in which such allowances are made. Based upon the Company’s knowledge at December 31, 2008 and 2007, a reserve for doubtful accounts was recorded of approximately $16,000 and $0, respectively.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards (SFAS) No. 107, “Fair Value of Financial Instruments”, requires disclosure of the fair value of financial instruments for which the determination of fair value is practicable. SFAS No. 107 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amount of the Company’s financial instruments consisting of cash, accounts receivable, inventories, accounts payable, and accrued expenses approximate their fair value because of the short maturity of those instruments. The fair value of the Company’s convertible notes payable, term notes payable and New Jersey Economic Development Authority Bonds were estimated by discounting the future cash flows using current rates offered by lenders for similar borrowings with similar credit ratings. The fair value of the company’s convertible notes payable is estimated to approximate its carrying value. The fair value of the term notes payable and the New Jersey Economic Development Authority bonds approximate their carrying value. The Company’s financial instruments are held for other than trading purposes.

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CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 5 — FAIR VALUE OF FINANCIAL INSTRUMENTS — Continued

SFAS No. 157, “Fair Value Measurements” (SFAS No. 157), defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as of the measurement date. The standard specifies a hierarchy of valuation techniques based upon whether the inputs to those valuation techniques reflect assumptions other market participants would use based upon market data obtained from independent sources (also referred to as observable inputs). In accordance with SFAS No. 157, the following summarizes the fair value hierarchy:

•  Level 1 — Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;

•  Level 2 — Quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets and liabilities in active markets or financial instruments for which significant observable inputs are available, either directly or indirectly such as interest rates and yield curves that are observable at commonly quoted intervals; and

•  Level 3 — prices or valuations that require inputs that are unobservable.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The Company’s financial assets and liabilities that are reported at fair value in the accompanying consolidated balance sheets as of December 31, 2008 were as follows:

							Balance at
							December 31,
Assets	Level 1		Level 2		Level 3		2008
Certificate of deposit	$	—	$	534,821		—	$	534,821

The Company does not have any fair value measurements using quoted prices in active markets (Level 1) or significant unobservable inputs (Level 3) as of December 31, 2008.

NOTE 6 — INVENTORIES

The Company’s inventories consisted of the following at December 31:

	2008		2007
Finished goods	$	214,053	$	—
Raw materials		18,785		—
Packaging materials		56,892		—
Total inventories	$	289,730	$	—

NOTE 7 — CONSTRUCTION-IN-PROGRESS

The Company is currently constructing an operating facility in Woodbridge, New Jersey. The funds for construction of this plant came from the issuance of New Jersey Economic Development Bonds on February 16, 2007 and a condition of this bond offering was that the Company place in trust approximately $14 million to be used for plant construction and associated equipment purchases. As of December 31, 2007, the Company has incurred approximately $4.9 million in plant construction costs, equipment purchases and capitalized interest costs. The Company has recorded those costs as construction-in-progress on its consolidated balance sheets as of December 31,

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CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 7 — CONSTRUCTION-IN-PROGRESS — Continued

2007. At the end of the second quarter of 2008, portions of the Woodbridge facility became operational and certain fixed assets were placed in service commencing June 30, 2008. During the remainder of 2008, approximately $19 million in assets were transferred from Construction-in-Progress to Leasehold Improvements and Machinery and equipment accounts and depreciation commenced on those assets placed in service.

NOTE 8 — PROPERTY AND EQUIPMENT

The Company’s property and equipment at December 31 consisted of the following:

	2008			2007
Land and improvements	$	357,692		$	—
Building and improvements		5,754,163			—
Machinery and equipment		13,968,134			—
Vehicles		42,570			—
Office equipment and furniture		7,837			—
		20,130,396			—
Less: Accumulated depreciation and amortization		(405,250	)		—
Property and equipment, net	$	19,725,146		$	—

Depreciation and amortization of property and equipment totaled $411,843 and $0 for the years ended December 31, 2008 and 2007, respectively.

NOTE 9 — DEFERRED AND CAPITALIZED COSTS

DEFERRED FINANCING AND OFFERING COSTS

In connection with its initial public offering (IPO) on February 16, 2007, the Company incurred issuance costs totaling $1,736,715. The Company had previously capitalized issuance costs, consisting of underwriting, legal and accounting fees and printing costs cumulatively totaling $696,499 in anticipation of its initial public offering. The Company also incurred additional issuance costs of $1,040,216 that was paid from the proceeds of the initial public offering. The total issuance costs of $1,736,715 have been netted against the $9.9 million of gross proceeds of the IPO in the statements of changes in owners’ equity (deficit).

In connection with its repayment of the bridge notes, the Company paid to the bridge lender a Letter of Credit fee of $27,375. The fee has been recorded as a deferred financing fee to be amortized over the term of the Letter of Credit. The Letter of Credit was nullified by the Company’s borrowing of funds from a private investor in January, 2008. Amortization of these deferred financing fees totaled $8,642 and $18,733 for the years ended December 31, 2008 and 2007, respectively.

In connection with its private financing in January of 2008, the Company incurred fees of $345,000 which were capitalized and which are being amortized over the one year term of the loan. Amortization expense associated with these fees of $322,958 was recorded during the year ended December 31, 2008.

CAPITALIZED BOND COSTS

In connection with its $17.5 million bond financing on February 16, 2007, the Company has capitalized bond issuance costs of $953,375 and is amortizing those costs over the life of the bond. Amortization of capitalized bond issuance costs totaled $47,669 and $43,696 for the years ended December 31, 2008 and 2007, respectively.

51

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 10 — INTANGIBLE ASSETS

Pursuant to a license agreement with an effective date of July 15, 2003 and amended effective February 9, 2006, by and between the Company and International Bio-Recovery Corporation (“IBRC”), the Company entered into an exclusive license to use IBRC’s Enhanced Autogenous Thermophylic Aerobic Digestion process (EATAD) technology for the design, construction and operation of facilities for the conversion of food waste into solid and liquid organic material. The license is recorded at its acquisition cost of $660,000 less accumulated amortization of $90,750 and $74,250 as of December 31, 2008 and 2007, respectively. Amortization is provided using the straight-line method over the life of the license. Amortization expense for the years ended December 31, 2008 and 2007 was $16,500 and $16,500, respectively. The Company expects the license’s annual amortization expense to be $16,500 until fully amortized at the end of the 40 year license period.

The Company is obligated to pay IBRC an aggregate royalty equal to nine percent of the gross revenues from the sale of product produced by the Woodbridge facility. The Company will begin to pay royalties during the first quarter of 2009, as product sales commenced during that quarter. The Company is also obligated to purchase IBRC’s patented macerators and shearators as specified by or supplied by IBRC or Shearator Corporation for use at the Woodbridge facility.

In addition, the Company paid a non-refundable deposit of $139,978 to IBRC in 2007 on a second plant licensing agreement, which is included in non-current deposits on the Company’s consolidated balance sheets at December 31, 2008 and 2007. The Company also agreed to pay IBRC approximately $338,000 in twelve monthly installments for market research, growth trails and other services. For the year ended December 31, 2008 and 2007, the Company had paid approximately $22,000 and $276,000, respectively, of this amount which has been included in research and development in the Company’s consolidated statements of operations. The Company is currently negotiating the remainder of the payments with IBRC.

The Company identified certain intangible assets as a part of its valuation performed pursuant to SFAS No. 141, “Business Combinations.” The following intangible assets were identified and values and estimated useful lives were assigned as follows:

	Assigned		Estimated
	value		useful life
Existing customer relationships	$	2,030,513		8 years
Technological know-how		271,812		8 years
Trade name		228,188		Indefinite
Intangibles acquired	$	2,530,513

The consolidated statements of operations include amortization expense of $246,887 related to these intangible assets for the year ending December 31, 2008. Accumulated amortization at December 31, 2008 was $246,887.

NOTE 11 — DEBT

TERM NOTES PAYABLE

The Company had three term notes payable: (1) $250,000 unsecured term note dated August 27, 2004, due December 31, 2008, with interest at 12%, (2) $125,000 unsecured term note dated September 6, 2005, due December 31, 2008, with interest at 15%, and (3) $89,170 unsecured term note dated May 2, 2007 with a maturity of May 2, 2009 and interest at 12%. On all notes, interest accrues without payment until maturity. The agreement on the term loan dated August 27, 2004 required accrued interest of $89,170 to be paid immediately in order to refinance and extend the maturity. As the Company was precluded under the terms of the agreement with the bondholders of the New Jersey Economic Development Authority Bonds from paying the accrued interest available

52

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 11 — DEBT — Continued

funds, the Company borrowed funds to repay this accrued interest by entering into the May 2, 2007 term loan in the amount of $89,170 with its CEO, Edward J. Gildea. This note is unsecured and subordinate to the bonds, and has a two-year term. This interest rate is equal to or less than interest paid on the Company’s other term loans. The Company obtained the necessary bondholder consents to enter into this agreement.

During December 2008, the balance of the term note dated August 27, 2004, plus accrued interest of $47,500 was paid with funds raised through exercise of warrants related to our common stock. The Company also negotiated the forgiveness of the balance of the unsecured term note dated September 6, 2005, plus accrued interest. Total principal and interest forgiven was $146,677, and this amount is recorded as other income on the consolidated statements of operations for the year ended December 31, 2008.

As of December 31, 2008, the total of unpaid accrued interest on the remaining note is $17,834. Accrued interest on all notes as of December 31, 2007 was $47,500.

A schedule of outstanding principal amounts of the term notes as of December 31, 2008 and 2007 is as follows:

	2008		2007
Term note dated August 27, 2004	$	—	$	250,000
Term note dated September 6, 2005		—		125,000
Term note dated May 2, 2007		89,170		89,170
		89,170		464,170
Less: current portion		89,170		(375,000	)
	$	—	$	89,170

BRIDGE LOANS PAYABLE

On March 2, 2006, the Company completed a $500,000 bridge loan (“Bridge Loan”) from lenders (“Bridge Noteholders”) to help meet the Company’s working capital needs. The bridge loan accrued interest at an annual rate of 8%, which was payable in arrears quarterly, and was originally due and payable on the earlier of October 16, 2006 or the completion of a public offering of equity securities (“Qualified Public Offering”). The bridge loan was refinanced with an extended maturity date of February 19, 2007 or the completion of a Qualified Public Offering. The placement agent for the bridge loan received a commission equal to 5% of the gross proceeds. The Company received the $500,000 bridge loan net of the commission to the placement agent of $25,000. The Company classified this cost as a deferred financing cost.

In April, May and June 2006, the Company received additional proceeds totaling $1,015,000 (net of a $50,750 commission to the placement agent) from a series of promissory notes executed with the Bridge Noteholders (“Bridge Financing”).

In connection with the Bridge Financing, the Company issued bridge notes (“Bridge Notes”) and securities of the Company (“Bridge Equity Units”) to the Bridge Noteholders, stating that if a Qualified Public Offering occurred before October 16, 2006 (extended to February 19, 2007), the Bridge Noteholders would be entitled to receive Bridge Equity Units consisting of securities identical in form to the securities being offered in the Qualified Public Offering. Each Bridge Noteholder would be entitled to receive Bridge Equity Units equal to the principal of the Bridge Noteholder’s bridge loan divided by the initial public offering price of the securities comprising the Bridge Equity Units.

The Bridge Loans and the Bridge Equity Units were allocated for accounting purposes based on the relative fair values at the time of issuance of (i) the Bridge Loans without the Bridge Equity Units and (ii) the Bridge Equity Units themselves. The fair value of the Bridge Loans and the Bridge Equity Units was computed at $1,515,000 each.

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CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 11 — DEBT — Continued

The $1,515,000 fair value was determined since the Company obtained $1,515,000 in Bridge Financing from Bridge Noteholders. At the closing of a public offering on or before February 19, 2007 bridge lenders would be entitled to receive units identical to the units being offered in the Company’s initial public offering. Each bridge lender would be entitled to receive that number of units equal to the principal of the lender’s note divided by the initial public offering price. Stated differently, upon closing of an initial public offering on or before February 19, 2007, the Company would be obligated to issue to the bridge lenders a number of units commensurate with a market value of $1,515,000. Since they were of equal value, the $1,515,000 was allocated 50% to the Bridge Loans and 50% to the Bridge Equity Units. The Bridge Equity Units of $757,500 were accounted for as paid-in capital. The Bridge Loans of $1,515,000 were recorded on the balance sheet net of the $757,500 discount on the Bridge Loans. The discount for the Bridge Equity Units ($757,500) was amortized into interest expense over the original life of the Bridge Loans. For the year ended December 31, 2007, the Company recorded $757,500 in interest expense related to the amortization of this discount.

On February 16, 2007 the Company completed its initial public offering and issued 293,629 Bridge Equity Units to the Bridge Noteholders. In addition, the Company and the Bridge Noteholders, agreed under the terms of a concurrent bond offering at the time of the initial public offering, not to repay the principal or accrued interest on the Bridge Notes at that time.

The Company had $1,515,000 of outstanding Bridge Loans that accrued interest at a rate of 18%, and under the terms of the loans, were to be repaid on the earlier of February 19, 2007 or the date of the Company’s initial public offering. Due to certain covenants relating to the offering of bonds on February 16, 2007, which prohibited the Company from repaying these bridge loans, the Company entered into an agreement whereby it could repay the Bridge Loans if the Bridge Noteholders agreed to obtain a letter of credit in favor of the Company. The Company reached agreements with the Bridge Noteholders and the demand note lender to repay the entire principal and accrued interest on these debts. The principal of the Bridge Loans of $1,515,000 plus accrued interest of approximately $160,000, along with principal of the demand note of $150,000 plus accrued interest of approximately $7,000, was repaid by the Company on May 23, 2007 from unrestricted cash. In addition, for the various term extensions granted by the Bridge Noteholders, the Company issued approximately 56,000 shares of common stock, which represents 10% of the principal and interest repaid, divided by the five-day average share price prior to repayment of the debt. The consolidated statements of operations for the year ended December 31, 2007 includes interest expense of $178,048 related to the issuance of this stock.

In order for the repayment of bridge and demand loans to comply with the terms of the covenants of the bondholders of the New Jersey Economic Development Authority Bonds, the Bridge Noteholders obtained a letter of credit in favor of the Company for $1,825,000. This letter of credit was due to expire on April 7, 2008, and allows for a one-time draw down during the thirty days prior to expiration. Subsequent to December 31, 2007 and prior to the expiration date of the letter of credit (April 7, 2008), in conjunction with the private financing described below, the letter of credit agreement was terminated with no cost to the Company.

BOND FINANCING

On February 16, 2007, concurrent with its initial public offering, the Company’s wholly-owned subsidiary, Converted Organics of Woodbridge, LLC, (the “Subsidiary”) completed the sale of $17,500,000 of New Jersey Economic Development Authority Bonds. Direct financing costs related to this issuance totaled $953,375, which have been capitalized and are being amortized over the term of the bonds. The bonds carry a stated interest rate of 8% and mature on August 1, 2027. The bonds are secured by a leasehold mortgage and a first lien on the equipment of the Subsidiary. In addition, the Subsidiary has agreed to, among other things, establish a fifteen month capitalized interest reserve and to comply with certain financial statement ratios. The Company has provided a guarantee to the bondholders on behalf of its wholly-owned Subsidiary for the entire bond offering.

54

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 11 — DEBT — Continued

The New Jersey Economic Development Bonds have certain covenants, which among other things, preclude the Company from making any dividends, payments or other cash distributions until such time as (i) the Company has achieved, over the course of a full fiscal year, a maximum annual debt service coverage ratio greater than 1.50, and (ii) at least $1,200,000 is on deposit with the Trustee in the operations and maintenance reserve fund and is available to satisfy ongoing maintenance, repair and replacement costs associated with the project facilities. In addition, the Company is precluded from borrowing additional funds under any debt agreements, without the consent of the bondholders. During 2007, the Company received consent from the bondholder prior to borrowing additional funds for a two year term note. During 2008, the Company again received consent from the bondholder prior to borrowing additional funds in a private investment. Under the terms of the bond agreement, the lender has the right, upon 30 days written notice, to demand full payment of all outstanding principal and interest amounts owed under the agreement if specific covenants are not met. As of December 31, 2008 and 2007, the Company is in compliance with these covenants of the bond agreement.

PRIVATE FINANCING

On January 24, 2008, the Company entered into a private financing with three investors (the “Investors”) for a total amount of $4,500,000 (the “Financing”). The Financing was offered at an original issue discount of 10%. The Company used the proceeds to fund the acquisitions described above, to fund further development activities and to provide working capital. As consideration for the Financing, the Investors received a note issued by the Company in the amount of $4,500,000 with interest accruing at 10% per annum to be paid monthly and the principal balance to be paid in full one year from the closing date (the “Note”). In addition, the Company issued to the Investors 750,000 Class A Warrants and 750,000 Class B Warrants, which may be exercised at $8.25 and $11.00 per warrant share, respectively (the “Warrants”). The Company further agreed not to call any Warrants until a registration statement registering all of the Warrants is declared effective. A placement fee of $225,000 was paid from the proceeds of this loan.

In connection with the Financing, the Company had agreed that within 75 days of the closing date, the Company would have a shareholder vote to seek approval to issue a convertible debenture with an interest rate of 10% per annum which would be convertible into common stock pursuant to terms of the debenture agreement, or such other price as permitted by the debenture (the “Convertible Debenture”). Upon shareholder approval, the Note was replaced by this Convertible Debenture and one half of each of the Class A Warrants and of the Class B Warrants issued were returned to the Company. Under the conversion option, the Investors shall have the option, at any time on or before the maturity date (January 24, 2009), to convert the outstanding principal of this Convertible Debenture into fully-paid and non assessable shares of common stock at the conversion price equal to the lowest of (i) the fixed conversion price of $6.00 per share, (ii) the lowest fixed conversion price (the lowest price, conversion price or exercise price set by the Company in any equity financing transaction, convertible security, or derivative instrument issued after January 24, 2008), or (iii) the default conversion price (if and so long as there exists an event of default, then 70% of the average of the three lowest closing prices of common stock during the twenty day trading period immediately prior to the notice of conversion). The Company held a special shareholders’ meeting on April 3, 2008 to vote on this matter, at which time it was approved.

In connection with the financing, the Company entered into a Security Agreement with the Investors whereby the Company granted the Investors a security interest in Converted Organics of California, LLC and any and all assets that are acquired by the use of the funds from the Financing. In addition, the Company granted the Investors a security interest in Converted Organics of Woodbridge, LLC and all assets subordinate only to the current lien held by the holder of the bonds issued in connection with the Woodbridge facility of approximately $17,500,000.

In connection with this borrowing, the Company issued 1.5 million warrants to purchase common stock, which were deemed to have a fair value of $5,497,500. The Company recorded the relative fair value of the warrants to the underlying notes of $2,227,500 in accordance with Accounting Principles Board (“APB”) Opinion No. 14,

55

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 11 — DEBT — Continued

“Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” as additional paid-in capital and established a discount on the debt. The discount was being amortized over the life of the note (12 months). On April 17, 2008, the Investors returned to the Company 750,000 warrants that had been held in escrow. This reduced the value assigned to the warrants and, accordingly, the value assigned to the debt discount attributable to the warrants by $1,113,750. In addition, the remaining original issue discount of approximately $366,000 was recognized as expense on April 7, 2008.

On April 7, 2008, the shareholders of the Company approved the issuance of additional shares so that convertible notes could be issued to the noteholders to replace the original notes dated January 24, 2008. The Company is required to recognize a discount for the intrinsic value of the beneficial conversion feature of the notes which is to be recognized as interest expense through the redemption date of the notes, which is January 24, 2009. That amount was calculated to be $3,675,000, and recognition was limited to $2,936,250 in accordance with EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” as the debt discount is limited to the proceeds allocated to the convertible instrument of $4,500,000. That discount is being amortized over the life of the loan. During the year ending December 31, 2008, the Company recognized interest expense of $2,705,759 related to this discount.

On January 24, 2009 the Company entered into an amendment on its $4.5 million convertibles debentures which became due on January 24, 2009. The lenders extended the due date of these notes until July 24, 2009 and began to convert these notes into shares of the Company’s common stock using the default conversion rate. The Company and the lenders further agreed that no interest would be charged during the six-month extension and that it is the lenders’ intention to convert the loan into shares sufficient to pay off the balance of the debt.

On March 6, 2009, the Company entered into an agreement with the holders of its $17.5 million of New Jersey Economic Development Authority Bonds to release $2.0 million for capital expenditures and lease payments on its New Jersey facility and to defer interest payments on the bonds thru July 30, 2009. These funds had been held in a reserve for bond principal and interest payments along with a reserve for lease payments. As consideration for the release of the reserve funds, the Company issued the bond holders 2,284,409 Class B warrants. The Class B warrants are exercisable at $11.00 per warrant share.

REGISTRATION RIGHTS AGREEMENT

In connection with the January 24, 2008 private financing, the Company entered into a registration rights agreement with the Investors which called for the Company to register the securities within certain time periods. The Company had 10 days from shareholder approval, with an additional 7 day extension, to register the shares issuable under the Convertible Debenture and 90 days from the filing of a registration statement (filed on February 13, 2008) for the Warrants and the underlying shares to be declared effective by the SEC. The Company has filed the registration statement relative to the Convertible Debenture as of the filing date of this report and the registration statement filed for the Warrants has been declared effective. However, the registration statement filed for the convertible debt and the date the warrant registration statement was declared effective by the SEC did not occur within the timelines agreed to in the registration rights agreement. The registration rights agreement calls for $90,000 per month in liquidated damages, payable in cash, if the Company doesn’t file the registration statement for the Convertible Debenture and liquidated damages equal to the average closing price of 375,000 Class A warrants and 375,000 Class B warrants for each 30 day period, commencing May 13, 2008, and multiplying that average by 2% for each 30 day period that the registration statement is not declared effective.

Therefore, on April 24, 2008, the Company began to incur liquidated damages in connection with the Convertible Debenture of $90,000 per month and as of May 13, 2008 the Company began to incur liquidated damage obligations in connection with the Warrants according to the formula described above. The maximum amount of liquidated damages relative to the Warrant Registration Statement and the Convertible Debenture is

56

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 11 — DEBT — Continued

equal to 10% of the face amount of the Convertible Debenture or $450,000 (10% of $4,500,000). The Company paid a total of approximately $158,000 in liquidated damages related to the Convertible Debentures, which are recorded as interest expense on the consolidated statements of operations for year ended December 31, 2008. On June 7, 2008 the warrant registration statement was declared effective. At this time, the Company is not subject to further liquidated damages.

CONVERTIBLE NOTE PAYABLE

On January 24, 2008, in conjunction with the purchase of the net assets of UOP, the Company issued a note payable to the former sole member in the amount of $1,000,000. The note bears interest of 7% and matures on February 1, 2011; monthly principal and interest payments are $30,877. Interest expense of $57,850 has been recorded in the year ending December 31, 2008 related to this note. The note is convertible by the holder six months after issuance. The Company is required to recognize a discount related to the intrinsic value of the beneficial conversion feature of the note as interest expense through the stated redemption date of the note. That amount was calculated to be $7,136, and has been recorded as a component of additional paid-in capital.

MORTGAGE NOTE PAYABLE

The Company has a mortgage note payable on the land upon which the California facility resides. The note, in the original amount of $250,000, bears interest at 6.75%. Monthly payments of principal and interest of $1,638 are due based on an amortization of twenty years. The note matures in May, 2013.

FIVE-YEAR MATURITY OF DEBT

Principal due during the next five years on all the Company’s long-term and current debt is as follows:

2009	$	4,925,328
2010		329,721
2011		28,450
2012		3,679
2013		234,826
Thereafter		17,500,000
Subtotal		23,022,004
Less: discount		(230,492	)
Total	$	22,791,512

NOTE 12 — CAPITALIZED INTEREST COSTS

The Company has capitalized interest costs, net of certain interest income, in accordance with Statement of Financial Accounting Standards No. 62, “Capitalization of Interest Cost Involving Certain Tax-Exempt Borrowings and Certain Gifts and Grants”, related to its New Jersey Economic Development Authority Bonds in the amount of $1,317,438 and $403,572 as of December 31, 2008 and December 31, 2007, respectively. Capitalized interest costs are included in construction in progress initially on the consolidated balance sheets. As assets are placed in service, the capitalized interest is allocated among the cost basis of the assets ratably. During the year ending December 31, 2008, capitalized interest of $1,245,000 was allocated to assets placed in service and is being depreciated with the related assets.

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CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 13 — OWNERS’ EQUITY (DEFICIT)

AUTHORIZED SHARES

At its April 3, 2008 special meeting of shareholders, the shareholders approved a resolution to decrease the number of common shares that the Company is authorized to issue from 75,000,000 to 40,000,000, and the number of preferred shares that the Company is authorized to issue from 25,000,000 to 10,000,000. The Company did this to realize saving on certain taxes that are based on the number of shares authorized, and the Company believes that 40,000,000 shares of common stock would be sufficient to meet its future needs.

STOCK ISSUANCES

The Company is authorized to issue 40,000,000 shares of $0.0001 par value common stock. Of the authorized shares, 733,333 of the authorized shares were issued to the founders of the Company (“founders’ shares”) on January 13, 2006. The Company did not receive any consideration for the founders’ shares. Because the Company had a negative estimated value on January 13, 2006, the Company recognized compensation expense at par value totaling $73 in connection with the issuance of the founders’ shares as par value represents the statutory minimum share value in the state of Delaware.

On February 21, 2006, the Company merged with Mining Organics Management LLC (“MOM”) and Mining Organics Harlem River Rail Yard LLC (“HRRY”). At that time, MOM was a fifty-percent owner of HRRY. The mergers were accounted for as a recapitalization of the Company. As a result of the recapitalization, 600,000 shares were issued to the members of HRRY.

On February 16, 2007 the Company successfully completed an initial public offering of 1,800,000 common shares and 3,600,000 warrants for a total offering of $9,900,000, before issuance costs. The Company’s initial public offering is presented net of issuance costs and expenses of $1,736,715 in the statements of changes in owners’ equity (deficit). The warrants consist of 1,800,000 redeemable Class A warrants and 1,800,000 non-redeemable Class B warrants, each warrant to purchase one share of common stock. The common stock and warrants traded as one unit until March 13, 2007 when they began to trade separately.

On February 16, 2007, as part of its initial public offering and under the original terms of the bridge loan agreement (Note 11), the Company issued 293,629 Bridge Equity Units to the Bridge Noteholders. On May 23, 2007, as consideration for extensions of the Bridge Loans, the Company issued 55,640 shares of common stock to the Bridge Noteholders, which represents 10% of the principal and interest repaid, divided by the five-day average share price prior to repayment of the debt. The statement of operations reflects an expense of $178,048 related to the issuance of these shares.

On February 16, 2007, as part of its initial public offering, the Company agreed to pay a 5% quarterly stock dividend, commencing March 31, 2007, and every full quarter thereafter until the Woodbridge, New Jersey facility is operational. As of December 31, 2007, the Company has declared four such quarterly dividends amounting to 747,296 shares. As of December 31, 2008, the Company has declared one additional quarterly dividend in the amount of 263,239 shares.

On October 1, 2008, the Company issued 45,480 shares of its common stock to a consultant as remuneration for services rendered. The related services were substantially complete when the stock was issued. The Company recognized $212,619 of expense related to the fair value of this issuance.

On October 22, 2008, the Company declared a stock dividend of 15% payable to shareholders of record as of November 17, 2008. This dividend resulted in the issuance of 969,318 shares of common stock.

58

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 13 — OWNERS’ EQUITY (DEFICIT) — Continued

WARRANTS

On February 16, 2007, in connection with the Company’s public offering, the Company sold 1,800,000 equity units consisting of one share of common stock, one Class A warrant and one Class B warrant. On March 13, 2007, the Class A and Class B warrants began to trade as separate securities. The Class A warrants are exercisable for one share of common stock, plus accumulated stock dividends, for $8.25. The Class A warrants expire on February 16, 2012 and, if certain conditions are met, the Company may redeem these warrants at a price of $0.25 per warrant prior to the expiration date. The Class B warrants are exercisable for one share of common stock, plus accumulated stock dividends, for $11.00. The Class B warrants expire on February 16, 2012 and there is no provision for the Company to redeem these warrants prior to the expiration date.

On January 24, 2008, in conjunction with the private financing arrangement of the Company described in Note 10, the Company issued 750,000 Class A and 750,000 Class B Warrants to the Investors. Such warrants are exercisable for one share of the Company’s common stock, adjusted for dividends, at $8.25 and $11.00, respectively. Once the Company’s registration statement related to the underlying shares was declared effective, one-half of the warrants were returned to the Company by the Investors, as described in Note 11.

WARRANT EXERCISE

The Company has received net proceeds of approximately $11,344,000 as a result of the exercise of approximately 1,381,000 Class A (which includes the warrant redemption discussed below) warrants and 600 Class B warrants in the year ended December 31, 2008. The Company issued approximately 1,781,000 shares of common stock in connection with the exercise of these warrants due to the cumulative effect of the Company’s stock dividends.

WARRANT REDEMPTION

On September 16, 2008, the Company announced the redemption of its outstanding Class A Warrants. The redemption date was set for October 17, 2008, and was subsequently extended a total of 31 days voluntarily by the Company to November 17, 2008. Any outstanding Class A warrants that had not been exercised before that date expired and are redeemable by the Company for $0.25 per warrant.

Until the redemption date, the Class A warrants were convertible into common stock at an exercise price of $8.25. Each warrant exercised at this price received 1.276 shares of common stock. Prior to the notification of redemption, approximately 756,000 Class A warrants had been exercised. After the redemption, an additional 683,000 warrants were exercised. In total, from both the exercise and redemption of warrants, the Company received proceeds of approximately $11,344,000. The Company is obligated to remit to its transfer agent funds sufficient to compensate warrant holders for the remaining warrants, which may be redeemed for $.25 each for an indefinite period. This amount of $284,237 was subtracted from the cash received for exercise of the warrants, representing the amount necessary to redeem the remaining warrants.

59

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 13 — OWNERS’ EQUITY (DEFICIT) — Continued

Class A warrant activity for the year ended December 31, 2008 and 2007 is as follows:

						Weighted
				Exercise		Average		Weighted Average
				Price per		Exercise		Remaining
	Warrants			Warrant		Price		Life (Years)
Outstanding at December 31, 2006		—		$	—
Issued:
February 16, 2007, in conjunction with initial public offering		1,800,000			8.25		8.25
February 16, 2007, in conjunction With bridge loans		293,629			8.25		8.25
February 16, 2007, in conjunction with underwriter units		180,000			8.25		8.25
Expired		—			—
Exercised		—			—
Outstanding at December 31, 2007		2,273,629			8.25		8.25		4.2
Issued:
January 24, 2008, in conjunction with private financing		750,000			8.25		8.25
Returned to the Company upon shareholder approval of exchange of term note for convertible note		(375,000	)	$	8.25
Exercised		(1,380,768	)	$	8.25
Expired		(1,267,861	)	$	8.25
Outstanding at December 31, 2008		—		$	—				—

The fair value of Class A warrants totaled $2,387,310 at December 31, 2007 based on quoted market prices on that date. As of December 31, 2008, the Class A warrants have been removed from market trading.

60

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 13 — OWNERS’ EQUITY (DEFICIT) — Continued

Class B warrant activity for the years ended December 31, 2008 and 2007 is as follows:

						Weighted		Weighted Average
				Exercise		Average		Remaining
				Price per		Exercise		Life
	Warrants			Warrant		Price		(Years)
Outstanding at December 31, 2006		—		$	0
Issued:
February 16, 2007, in conjunction with initial public offering		1,800,000			11.00		11.00
February 16, 2007, in conjunction with bridge loans		293,629			11.00		11.00
February 16, 2007, in conjunction with underwriter shares		180,000			11.00		11.00
Expired		—			0
Exercised		—			0
Outstanding at December 31, 2007		2,273,629			11.00		11.00		4.2
Issued:
January 24, 2008, in conjunction with private financing		750,000			11.00		11.00
Returned to the Company upon shareholder approval of exchange of term note for convertible note		(375,000	)		11.00		11.00
Exercised		600			11.00		11.00
Outstanding at December 31, 2008		2,648,029		$	11.00		11.00		3.2

The fair value of Class B warrants totaled $3,442,438 and $3,410,444 at December 31, 2008 and 2007, respectively, based on quoted market prices on that date.

STOCK OPTION PLAN

In June 2006, the Company’s Board of Directors and stockholders approved the 2006 Stock Option Plan (the “Option Plan”). The Option Plan authorizes the grant and issuance of options and other equity compensation to employees, officers and consultants. A total of 666,667 shares of common stock are reserved for issuance under the Option Plan. The Option Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”). Subject to the provisions of the Option Plan, the Committee determines who will receive the options, the number of options granted, the manner of exercise and the exercise price of the options. The term of incentive stock options granted under the Option Plan may not exceed ten years, or five years for options granted to an optionee owning more than 10% of the Company’s voting stock. The exercise price of an incentive stock option granted under the Option Plan must be equal to or greater than the fair market value of the shares of the Company’s common stock on the date the option is granted. The exercise price of a non-qualified option granted under the Option Plan must be equal to or greater than 85% of the fair market value of the shares of the Company’s common stock on the date the option is granted. An incentive stock option granted to an optionee owning more than 10% of the Company’s voting stock must have an exercise price equal to or greater than 110% of the fair market value of the Company’s common stock on the date the option is granted. Stock options issued under the option plan vest immediately upon date of grant.

61

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 13 — OWNERS’ EQUITY (DEFICIT) — Continued

At a Special Meeting of Shareholders on April 3, 2008, the shareholders approved an amendment to the 2006 Stock Option Plan to include an “evergreen” provision pursuant to which on January 1st of each year, commencing in 2009, the number of shares authorized for issuance under the 2006 Stock Option Plan shall automatically be increased to an amount equal to 20% of the shares of the common stock outstanding on the last day of the prior fiscal year. The Shareholders also approved an amendment to the Plan to increase the number of options available under the plan from 666,667 to 1,666,667. On June 27, 2008, an additional 736,735 options were granted, and vested on that date. Taking into account all options issued, the Company has 276,932 options available to grant under the plan.

The options granted on June 27, 2008 have an exercise price of $5.02 and expire ten years from the grant date. The exercise price was based on the closing price of the stock on the date of grant. The fair value of the options was estimated using a Black-Scholes pricing model with the following assumptions: risk-free interest rate of 3.52%; no dividend yield; volatility factor of 52.3%; and an expected term of 5 years. The resulting expense of approximately $2.3 million is included in general and administrative expenses in the consolidated statements of operations for the year ended December 31, 2008.

During the year ended December 31, 2007, in accordance with the director compensation policy of the Committee, an additional 10,000 options were granted to a Director upon his appointment to the Board. The options vested on the grant date, have an exercise price of $3.75 per share and expire five years from the grant date. The fair value for the 10,000 immediately vesting stock options granted in 2007 was estimated at the date of grant using a Black-Scholes pricing model with the following assumptions: risk-free interest rate of 4.9%; no dividend yield; expected volatility factor of 16.9%; and an expected term of five years. The Company’s stock option compensation expense totaling $5,929 has been included in general and administrative expenses in the consolidated statements of operations for the year ended December 31, 2007.

Stock option activity for the period January 1, 2007 through December 31, 2008 is as follows:

						Weighted
						Average		Average
	Stock			Price per		Exercise		Remaining
	Options			Share		Price		Life (Years)
Outstanding and exercisable at December 31, 2006		643,000		$	3.75	$	3.75
Granted		10,000			3.75		3.75
Expired		—
Exercised		—
Outstanding and exercisable at December 31, 2007		653,000			3.75		3.75		4.2
Granted		736,735			5.02
Expired		—
Exercised		(143,000	)		3.75
Outstanding and exercisable at December 31, 2008		1,246,735		$		$	4.50		4.0

The aggregate intrinsic value of options outstanding and exercisable at December 31, 2008 and 2007 is $0 and $946,850, respectively. The aggregate intrinsic value represents the total pretax intrinsic value, based on options with an exercise price less than the Company’s closing stock price of $3.54 and $5.20 as of December 31, 2008 and 2007, respectively, which would have been received by the option holders had those option holders exercised their options as of that date.

As of December 31, 2008 and 2007, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s stock option plan. During the year ended

62

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 13 — OWNERS’ EQUITY (DEFICIT) — Continued

December 31, 2008, the Company has received approximately $536,000 as a result of the exercise of 143,000 options.

NOTE 14 — INCOME TAXES

At December 31, 2008, the Company had accumulated net operating losses of approximately $26,553,000, of which approximately $16,700,000 may be offset against future taxable income, if any, ratably through 2028.

The Company has fully reserved the approximately $7,588,000 tax benefit of these losses with a valuation allowance of the same amount, because the likelihood of realization of the tax benefit cannot be determined to be more likely than not.

There is a minimum current tax provision for the years ended December 31, 2008 and 2007.

The effective tax rate based on the federal and state statutory rates is reconciled to the actual tax rate for the years ended December 31, 2008 and 2007 as follows:

	2008			2007
Statutory federal income tax rate		34	%		34	%
Statutory state income tax rate		6			6
Valuation allowance on net deferred tax assets		(40	)		(40	)
Effective tax rate		—	%		—	%

The components of the net deferred tax asset (liability) at December 31, 2008 and 2007 are as follows:

	2008			2007
Deferred tax assets:
Net operating losses	$	6,148,000		$	2,120,000
Accrued compensation		120,000			120,000
Stock options		1,320,000			400,000
Valuation allowance		(7,588,000	)		(2,640,000	)
	$	—		$	—

The Company’s valuation allowance increased $4,948,000 and $1,140,000 for the years ended December 31, 2008 and 2007, respectively.

The Company has a tax benefit of approximately $1,320,000 related to the grant of common stock to certain key employees and advisors. Pursuant to SFAS No. 123(R), the benefit will be recognized and recorded to APIC when the benefit is realized through the reduction of taxes payable.

The Company complies with the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on an examination by the taxing authorities, based on the technical merits of the position. The Company has determined that the Company has no uncertain tax positions requiring recognition under FIN No. 48.

The Company is subject to U.S. federal income tax as well as income tax of certain state jurisdictions. The Company has not been audited by the U.S. Internal Revenue Service or any states in connection with its income

63

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 14 — INCOME TAXES — Continued

taxes. The periods from January 1, 2005 to December 31, 2008 remain open to examination by the U.S. Internal Revenue Service and state authorities.

The Company recognizes interest accrued related to unrecognized tax benefits and penalties, if incurred, as a component of income tax expense.

NOTE 15 — SEGMENT REPORTING

In June 1997, SFAS 131, “Disclosure about Segments of an Enterprise and Related Information” was issued, which amends the requirements for a public enterprise to report financial and descriptive information about its reportable operating segments. Operating segments, as defined in the pronouncement, are components of an enterprise about which separate financial information is available that is evaluated regularly by the Company in deciding how to allocate resources and in assessing performance. The financial information is required to be reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Company has no reportable segments at December 31, 2008 and 2007.

NOTE 16 — RELATED PARTY TRANSACTIONS

OPERATING LEASE-HEADQUARTERS

The Company is renting the premises under a verbal agreement with ECAP, LLC, a related party. The managing member of ECAP, LLC was a director and is a shareholder of the Company and is also the brother of the Company’s President and CEO. The rental agreement provides for rent and support, as agreed between the Company and ECAP, LLC and for reimbursement of expenses by the Company for office and other expenses. These expenses totaled $5,600 for the period from January 1, 2007 to February 28, 2007.

As of March 1, 2007, the Company began to pay the $2,800 per month rental payment directly to the unrelated landlord for this office space. There is no lease term and rental of the office space is on a month to month basis. Rent expense for the period from March 1, 2007 to December 31, 2007 totaled $28,000 relating to this lease. In the year ending December 31, 2008, the Company incurred $33,600 of expense related to this lease.

SERVICE AGREEMENT

The Company has entered into a services agreement dated May 29, 2003, as modified October 6, 2004, with one of its principal stockholders, Weston Solutions, Inc. (“Weston”). Weston has been engaged to provide engineering and design services in connection with the construction of the Woodbridge organic waste conversion facility. The total amounts incurred by the Company for services provided by Weston were $0 and $116,480 for the years ended December 31, 2008 and 2007, respectively.

LEGAL FEES

During the year ended 2007, the Company incurred legal fees totaling $10,000 to a law firm affiliated with the Company’s President and CEO and partially owned by a brother of the Company’s CEO. These fees of $10,000 were paid in 2008.

ACCRUED COMPENSATION-OFFICERS, DIRECTORS AND CONSULTANTS

As of December 31, 2008 and 2007 the Company has an accrued liability totaling $430,748 and $397,781, respectively, representing accrued compensation to officers, directors and consultants.

64

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 16 — RELATED PARTY TRANSACTIONS — Continued

CONVERTED ORGANICS OF RHODE ISLAND, LLC

Converted Organics of Rhode Island, LLC was formed for the purpose of developing and operating a waste to fertilizer facility in Johnston, Rhode Island. A development consultant who has provided services to the Company is a 10% minority owner of Converted Organics of Rhode Island, LLC. For the years ending December 31, 2008 and 2007, the consultant was paid $60,000 and $60,000, respectively, for services rendered.

PACKAGING VENDOR

The Company has purchased packaging materials from a vendor which is partially owned by an employee of the Company. The Company made purchases of $141,000 from this vendor in the year ending December 31, 2008.

NOTE 17 — COMMITMENTS AND CONTINGENCIES

LEASES

In addition to the Company’s IBRC commitment (Note 10) and operating lease commitment for its headquarters (Note 16), the Company signed a lease during June 2006 for its Woodbridge, New Jersey facility. The lease term is for ten years with an option to renew for an additional ten years. Future minimum lease payments under this lease are as follows:

For years ended December 31,
2009	$	934,820
2010		934,820
2011		946,195
2012		959,097
2013		967,383
2014 and thereafter		7,410,639
	$	12,152,954

For the years ended December 31, 2008 and 2007, the Company has recorded rent expense of $740,351 and $745,633, respectively, in relation to this lease.

In September, 2008, the Company entered into a lease agreement for 9 acres of land at the central landfill in Johnston, RI, with the Rhode Island Resource Recovery Corporation. The Company plans to build its next facility at this location. The lease requires monthly payments of $9,167. Once the facility is operational, the monthly rent will also include a charge of $8 per ton of fertilizer sold from the facility. The term of the lease is twenty years. Future minimum payments under this lease are as follows:

For years ended December 31,
2009	$	110,000
2010		110,000
2011		110,000
2012		110,000
2013		110,000
2014 and thereafter		1,613,334
	$	2,163,334

65

CONVERTED ORGANICS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 17 — COMMITMENTS AND CONTINGENCIES — Continued

The Company recognized $36,667 of expense related to this lease in 2008, which is included in Research & Development on the consolidated statement of operations.

LEGAL PROCEEDINGS

The Company is not currently aware of any pending or threatened legal proceeding to which it is or would be a party, or any proceedings being contemplated by governmental authorities against it, or any of its executive officers or directors relating to the services performed on the Company’s behalf except that the Company received notice that a complaint had been filed in a putative class action lawsuit on behalf of 59 persons or entities that purchased units pursuant to a financing terms agreement dated April 11, 2006 (“FTA”), captioned Gerald S. Leeseberg, et al. v. Converted Organics, Inc., filed in the U.S. District Court for the District of Delaware. The lawsuit alleges breach of contract, conversion, unjust enrichment, and breach of the implied covenant of good faith in connection with the alleged failure to register certain securities issued in the FTA, and the redemption of our Class A warrants in November 2008. The lawsuit seeks damages related to the failure to register certain securities, including alleged late fee payments, of approximately $5.25 million, and unspecified damages related to the redemption of the Class A warrants. In February 2009, the Company filed a Motion for Partial Dismissal of Complaint. It is uncertain when the Court will rule on this motion. The Company plans to vigorously defend itself in this matter and is unable to estimate any contingent losses that may or may not be incurred as a result of this litigation and its eventual disposition. Accordingly, no contingent loss has been recorded by the Company related to this matter.

NOTE 18 — SUBSEQUENT EVENTS

On January 24, 2009, the Company entered into an amendment on its $4.5 million convertibles debentures, which became due on January 24, 2009. The lenders extended the due date of these notes until July 24, 2009 and began to convert these notes into shares of the Company’s common stock using the default conversion rate as described in Note 11. The Company and the lenders further agreed that no interest would be charged during the six-month extension and that it is the lenders’ intention to convert the loan into shares sufficient to pay-off the balance of the debt.

On March 6, 2009, the Company entered into an agreement with the holders of its $17.5 million of New Jersey Economic Development Authority Bonds to release $2.0 million for capital expenditures and lease payments on its New Jersey facility and to defer interest payments on the bonds thru July 30, 2009. These funds had been held in a reserve for bond principal and interest payments along with a reserve for lease payments. As consideration for the release of the reserve funds, the Company issued the bond holders 2,284,409 Class B warrants. The Class B warrants are exercisable at $11.00 per warrant share.

On March 6, 2009, the Company entered into a into an agreement with a private investor under which, upon stockholder approval, will issue a series of 10% convertible notes in an aggregate principal amount of up to $1,500,000 with a 10% original issue discount. The investor placed funds into escrow on March 10, 2009 to acquire $500,000 in principal amount of the convertible notes to be released upon receiving stockholder approval, and will acquire four additional $250,000 increments in principal amount of the note with the first increment occurring on the 30th day after receiving stockholder approval, and the remaining three increments occurring monthly, thereafter.

66

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no disagreements with our accountants on accounting and financial disclosures.

ITEM 9A.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation and under the supervision of its Principal Executive Officer and Principal Financial Officer, reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined by Rule 13a-15(e) of the Exchange Act, as of the end of the fiscal year covered by this report. Based upon their evaluation, the Company’s principal executive and financial officer concluded that, as of the end of such period, our disclosure controls and procedures are effective and sufficient to ensure that we record, process, summarize, and report information required to be disclosed in the reports we file under the Securities Exchange Act of 1934 within the time periods specified by the Securities and Exchange Commission’s rules and regulations.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America and includes policies and procedures that:

•  pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

•  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

•  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2008, based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.

On January 24, 2008, we completed our acquisition of the assets of United Organic Products, LLC and Waste Recovery Industries, LLC. In connection with these acquisitions, we were required by Regulation S-X, Rule 11, to file, no later than April 10, 2008, unaudited pro forma consolidated financial statements of Converted Organics Inc., United Organic Products, LLC and Waste Recovery Industries, LLC. We filed a Form 10-KSB/A containing information relative to the acquisition that we and our advisors deemed sufficient to comply with Regulation S-X, Rule 11. We were subsequently advised by the SEC that the filing was insufficient. We then filed the required financial statements on a Form 8-K/A dated May 8, 2008. We believe that late filing was an isolated event, and that, as of the date of this report, we have sufficient internal and external personnel available to us to conclude that our disclosure controls and procedures are effective. We further note that the late filing described above did not have any effect on the accuracy of our financial statements for the reporting period in question.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

67

Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) or in other factors that occurred during the period of our evaluation or subsequent to the date we carried out our evaluation which have significantly affected, or are reasonably likely to significantly affect, our internal control over financial reporting.

ITEM 9B.   OTHER INFORMATION

None.

PART III

ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Item 10 regarding directors, executive officers, promoters and control persons is incorporated by reference to the information appearing under the caption “Directors and Executive Officers” in the Company’s definitive Proxy Statement relating to its 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of its fiscal year.

ITEM 11.   EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated by reference to the information appearing under the caption “Executive Compensation” in the Company’s definitive Proxy Statement relating to its 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of its fiscal year.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Securities authorized for issuance under equity compensation plans

Our Amended and Restated 2006 Stock Option Plan (“Amended Option Plan”) currently authorizes the grant of up to 1,666,667 shares of common stock (subject to adjustment for stock splits and similar capital changes) in connection with restricted stock awards, incentive stock option grants and non-qualified stock option grants. Employees and, in the case of nonqualified stock options, directors, consultants or any affiliate are eligible to receive grants under our plans. The 2006 Stock Option Plan was approved by our board of directors and by our shareholders on June 15, 2006 and was amended and approved by our board of directors and by our shareholders on April 7, 2008. Under the Amended Option Plan, the option exercise price generally shall be no less than 110% or no less than 100%, depending upon the optionee and the reason for which the option was granted, of the Fair Market Value (defined in the Amended Option Plan) per share on the date of grant. The options immediately vest at the date the options are granted and expire after ten years, except that incentive stock options granted to an optionee that owns stock representing more than 10% of the total combined voting power of all classes of stock of the Company or any parent or subsidiary of the Company expire five years from the date of grant.

68

Equity Compensation Plan Information

					Number of Securities
					Remaining Available
			Weighted-Average		for Future Issuance
	Number of Securities to be		Exercise Price of		Under Equity
	Issued Upon Exercise of		Outstanding		Compensation Plans
	Outstanding Options,		Options, Warrants		(Excluding Securities
Plan Category	Warrants and Rights		and Rights		Reflected in Column (a))
	(a)		(b)		(c)
Equity compensation plans approved by security holders June 15, 2006		653,000	$	3.75		13,667
Equity compensation plans approved by security holders April 7, 2008		736,735	$	5.02		263,265
Equity compensation plans not approved by security holders		—		—		—
Total		1,389,735	$	4.43		276,932

The rest of the information required by Item 12 is incorporated by reference to the information appearing under the caption “Security Ownership” in the Company’s definitive Proxy Statement relating to its 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of its fiscal year.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 is incorporated by reference to the information appearing under the caption “Certain Relationships and Related Transactions” in the Company’s definitive Proxy Statement relating to its 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year.

ITEM 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is incorporated by reference to the information appearing under the caption “Principal Accountant Fees and Services” in the Company’s definitive Proxy Statement relating to its 2009 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of its fiscal year.

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PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Exhibit
Number			Description
	1	.1	Underwriting Agreement between the Registrant and Paulson Investment Company, Inc., dated February 13, 2007 (incorporated by reference to Exhibit 1.1 on Post-Effective Amendment No. 1 to our Registration Statement on Form SB-2 filed February 20, 2007)
	2	.1	Asset Purchase Agreement between the Registrant and United Organic Products, LLC, dated January 21, 2008 (incorporated by reference to Exhibit 2.02 to our current report on Form 8-K filed January 29, 2008)
	2	.2	Asset Purchase Agreement between the Registrant and Waste Recovery Industries, LLC, dated January 21, 2008 (incorporated by reference to Exhibit 2.03 to our current report on Form 8-K filed January 29, 2008)
	3	.1	Registrant’s Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form SB-2 filed June 21, 2006)
	3	.2	Registrant’s Bylaws (incorporated by reference to Exhibit 3.2 to our Registration Statement on Form SB-2 filed June 21, 2006)
	4	.1	Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to our Form SB-2/A filed January 25, 2007)
	4	.2	Form of Class B Warrant (incorporated by reference to Exhibit B to Exhibit 4.5 on Post-Effective Amendment No. 1 to our Registration Statement on Form SB-2 filed February 20, 2007)
	4	.3	Form of Unit Certificate (incorporated by reference to Exhibit 4.4 on Post-Effective Amendment No. 1 to our Registration Statement on Form SB-2 filed February 20, 2007)
	4	.4	Warrant Agreement between the Registrant and Computershare Shareholder Services, Inc. and Computershare Trust Company N.A., dated February 16, 2007 (incorporated by reference to Exhibit 4.5 on Post-Effective Amendment No. 1 to our Registration Statement on Form SB-2 filed February 20, 2007)
	4	.5	Form of Representative’s Purchase Warrant (incorporated by reference to Exhibit 4.6 to our Registration Statement on Form SB-2 filed June 21, 2006)
	4	.6	Registration Rights Agreement between the Registrant and Professional Offshore Opportunity Fund, Ltd., Professional Traders Fund, LLC and High Capital Funding, LLC, dated January 24, 2008 (incorporated by reference to Exhibit 2.06 to our current report on Form 8-K filed January 29, 2008)
	4	.7	Loan and Securities Purchase Agreement between the Registrant and each of Professional Offshore Opportunity Fund, Ltd., Professional Traders Fund, LLC and High Capital Funding, LLC, dated January 24, 2008 (incorporated by reference to Exhibit 2.10 to our current report on Form 8-K filed January 29, 2008)
	4	.8	Secured Convertible Debenture to High Capital Funding, LLC, dated January 24, 2008 (incorporated by reference to Exhibit 2.07 to our current report on Form 8-K filed January 29, 2008)
	4	.9	Secured Convertible Debenture to Professional Offshore Opportunity Fund, LLC, dated January 24, 2008 (incorporated by reference to Exhibit 2.09 to our current report on Form 8-K filed January 29, 2008)
	4	.10	Purchase Agreement dated March 6, 2009 by and among Converted Organics Inc. and Professional Offshore Opportunity Fund, Ltd. (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed March 12, 2009)
	4	.11	Convertible Note dated March 6, 2009 by Converted Organics Inc. payable to Professional Offshore Opportunity Fund, Ltd. (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed March 12, 2009)
	4	.12	Registration Rights Agreement dated March 6, 2009 by and among Converted Organics Inc. and Professional Offshore Opportunity Fund, Ltd. (incorporated by reference to Exhibit 10.1 to our current report on Form 8-K filed March 12, 2009)
	*4	.13	Form of First Amendment to the Secured Convertible Debenture dated January 24, 2008
	*4	.14	Form of Second Amendment to the Secured Convertible Debenture dated January 24, 2008 used for Professional Offshore Opportunity Fund, Ltd.

70

Exhibit
Number			Description
	*4	.15	Form of Second Amendment to the Secured Convertible Debenture dated January 24, 2008 used for High Capital Funding, LLC
	10	.1	Form of Bridge Loan Documents dated March 2, 2006 (incorporated by reference to Exhibit 10.1 to our Registration Statement on Form SB-2 filed June 21, 2006)
	10	.1A	Form of Bridge Loan Documents dated April 11, 2006 (incorporated by reference to Exhibit 10.1A to our Registration Statement on Form SB-2 filed June 21, 2006)
	10	.2	Amended and Restated 2006 Stock Option Plan and Form of Stock Option Agreement (incorporated by reference to Exhibit 10.2 to Annex A of our Definitive Proxy Statement filed March 5, 2008)
	10	.3	Service Agreement between the Registrant and ECAP, LLC, dated March 1, 2006 (incorporated by reference to Exhibit 10.3 to our Registration Statement on Form SB-2 filed June 21, 2006)
	10	.4	Lease Agreement between the Registrant and Recycling Technology Development, LLC, dated June 2, 2006 (incorporated by reference to Exhibit 10.4 to our Registration Statement on Form SB-2 filed June 21, 2006)
	10	.4A	Amendment to the Lease Agreement between the Registrant and Recycling Technology Development dated January 18, 2007 (incorporated by reference to Exhibit 10.4A to our Form SB-2/A filed January 25, 2007)
	10	.5	Employment Agreement between the Registrant and Edward J. Gildea, dated March 2, 2006 (incorporated by reference to Exhibit 10.5 to our Registration Statement on Form SB-2 filed June 21, 2006)
	10	.6	Employment Agreement between the Registrant and John A. Walsdorf, dated March 2, 2006 (incorporated by reference to Exhibit 10.7 to our Registration Statement on Form SB-2 filed June 21, 2006)
	10	.7	Agreement between the Registrant and Weston Solutions, Inc., dated May 29, 2003 and modification dated October 6, 2004 (incorporated by reference to Exhibit 10.9 to our Registration Statement on Form SB-2 filed June 21, 2006)
	10	.8	IBR Plant License Agreement between International Bio Recovery Corporation and Mining Organics Management LLC, dated July 15, 2003 (incorporated by reference to Exhibit 10.10 to our Form SB-2/A filed July 5, 2006)
	10	.9	Revision dated February 9, 2006 to IBR Plant License Agreement dated July 15, 2003 (incorporated by reference to Exhibit 10.11 to our Form SB-2/A filed July 5, 2006)
	10	.10	Security Agreement between the Registrant and Professional Offshore Opportunity Fund, Ltd., Professional Traders Fund, LLC and High Capital Funding, LLC, dated January 24, 2008 (incorporated by reference to Exhibit 2.11 to our current report on Form 8-K filed January 29, 2008)
	10	.11	Secured Convertible Promissory Note in favor of United Organic Products, LLC, dated January 24, 2008 (incorporated by reference to Exhibit 2.04 to our current report on form 8-K filed January 29, 2008)
	10	.12	Secured Promissory Note in favor of Waste Recovery Industries, LLC, dated January 24, 2008 (incorporated by reference to Exhibit 2.05 to our current report on form 8-K filed January 29, 2008)
	*10	.13	New Jersey Economic Development Authority $17,500,000 Solid Waste Facilities Revenue Bonds (Converted Organics of Woodbridge, LLC — 2007 Project), dated February 16, 2007
	*23	.1	Consent of CCR LLP
	*31	.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a)
	*31	.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a)
	*32	.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	*32	.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Filed as an Exhibit herein.

71

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Converted Organics Inc.

By:  /s/  Edward J. Gildea

Name:     Edward J. Gildea

Title:  President, Chief Executive Officer,

Chairman of the Board

Date: March 27, 2009

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By:  /s/  Edward J. Gildea

Name:     Edward J. Gildea

Title:  President, Chief Executive Officer,

Chairman of the Board

Date: March 27, 2009

By:  /s/  David R. Allen

Name:     David R. Allen

Title:  Chief Financial Officer,

Executive Vice President of Administration

Date: March 27, 2009

By:  /s/  Ellen P. O’Neil

Name:     Ellen P. O’Neil

Title:  Chief Accounting Officer

Date: March 27, 2009

By:  /s/  Robert E. Cell

Name:     Robert E. Cell

Title:  Director

Date: March 27, 2009

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By: /s/  John P. DeVillars

Name:     John P. DeVillars

Title:  Director

Date: March 27, 2009

By: /s/  Edward A. Stoltenberg

Name:     Edward A. Stoltenberg

Title:  Director

Date: March 27, 2009

73

EX-4.13

EXHIBIT 4.13

AMENDMENT TO
SECURED CONVERTIBLE DEBENTURE

     This amendment (“Amendment”) to the Secured Convertible Debenture dated January 24, 2008 (“Debenture”) is made as of January 29, 2009 by and between Converted Organics, Inc., a Delaware corporation (“Borrower”) and                      ¹ (“Lender”). Terms not defined herein shall have the meaning as set forth in the Debenture.

RECITALS

     WHEREAS, Borrower has issued Lender the Debenture in principal amount of $                    ² which maturity date was January 24, 2009;

     WHEREAS, Lender has agreed to extend the maturity date of the Debenture until July 24, 2009 and, Borrower has agreed to modify certain terms of the Debenture as set forth herein; and

     WHEREAS, Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Debenture

     NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, for themselves, their successors and assigns, hereby agree as follows:

     1. The “Maturity Date” of the Debenture is hereby extended until July 24, 2009.

     2. During the period from January 24, 2009 until the Maturity Date, the Borrower shall not be required to pay interest on the Debenture.

     3. At any time prior to the Maturity Date, Lender may convert the principal amount of the Debenture into shares of Borrower’s Common Stock at the Default Conversion Price calculated as of the date of any such conversion. On any conversion date, Lender agrees to send to Borrower’s Transfer Agent and to Borrower a calculation of the Default Conversion Price and amount of Debenture principal being converted. If Borrower disputes any amounts in the foregoing notice it shall respond in writing to Lender within one (1) business day. Assuming Borrower is in agreement with the Lender conversion notice, Borrower agrees to deliver the shares subject to the conversion notice within three (3) business days of the conversion date, and agrees that any failure to so deliver the shares shall subject it to the liquidated damage provisions set forth in Section 3(c) of the Debenture.

          Lender acknowledges that unless it sends Borrower a notice in writing stating that it is an “affiliate” of the Borrower as such term is defined in the Securities Act of 1933, as amended (“Act”), in connection with Borrower’s issuance of the shares pursuant to this section, Borrower and its counsel shall be permitted to rely on Lender’s execution of this Amendment as its representation that it is not, and will not become prior to the Maturity Date, an “affiliate” of the Borrower as such term is defined in the Act.

     4. Commencing on the date hereof until the Maturity Date, Lender agrees that it will not sell shares of Borrower Common Stock on any trading day in an amount greater than 12% of the daily volume of the Borrower’s Common Stock for such trading day as reported by the NASDAQ Stock Market; provided that such limitation shall not apply at any time at which the Borrower’s Common Stock is trading at above $3.25 per share.

     5. So long as any principal or interest is due under the Debenture and shall remain unpaid, unless the Lender shall otherwise consent in writing, the Borrower shall not complete any financing arrangement in which Borrower raises greater than $2.0 million; provided that such prohibition shall not be applicable if the principal amount of the Debenture outstanding on the closing of any financing is less than $1,600,000.

1	Form used for Professional Offshore Opportunity Fund, Ltd., Professional Traders Fund, LLC and High Capital Funding, LLC.
2	Form used for Borrower’s portion of $4.5 million issuance.

44

     6. Upon execution of this Amendment, Borrower will issue Lender ___³ shares of restricted Borrower Common Stock.

     7. Lender’s counsel shall issue a Rule 144 opinion letter to the transfer agent for the Lender within two (2) business days of execution of this Agreement regarding the shares underlying the conversion. Borrower agrees that if such opinion is not effective for a period of three (3) business days after a Conversion Date then the Borrower agrees that that any failure to deliver a valid legal opinion shall subject it to the liquidated damage provisions set forth in Section 3(c) of the Debenture.

     8. Lender hereby waives as of January 24, 2009 any and all Events of Default that have occurred prior to the execution of this Amendment.

     9. All other provisions of the Debenture not amended or modified herein shall continue to have their full force and effect.

     10. This Amendment may be changed, waived, discharged or terminated only by a writing signed by the Lender and Borrower.

     11. This Amendment shall be construed and interpreted in accordance with the Sections 13 and 14 of the Debenture.

     12. This Amendment may be executed in two or more counterparts, which when so executed shall constitute one and the same agreement.

     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of January 29, 2009.

Converted Organics Inc.
By:
	Edward J. Gildea, CEO
[Lender Name]
By:
Print Name:

³ Represents the Lender’s pro rata portion of an aggregate of 200,000 restricted shares of Borrower common stock.

45

EX-4.14

EXHIBIT 4.14

AMENDMENT NO. 2 TO
SECURED CONVERTIBLE DEBENTURE

     This amendment no. 2 (“Amendment”) to the Secured Convertible Debenture dated January 24, 2008 (the “Original Debenture”), as previously amended on January 29, 2009 (such prior amendment, the “Prior Amendment” and with the Original Debenture, the “Debenture”) is made as of March 6, 2009 by and between Converted Organics Inc., a Delaware corporation (“Borrower”) and PROFESSIONAL OFFSHORE OPPORTUNITY FUND, LTD. (“Lender”).

RECITALS

     WHEREAS, Borrower has issued Lender the Debenture in principal amount of $3,600,000;

     WHEREAS, Lender has agreed to enter into a new credit facility pursuant to that certain (Securities Purchase Agreement, the “Credit Facility”) and, Borrower has agreed to modify certain terms of the Prior Amendment as set forth herein; and

     WHEREAS, Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Debenture.

     NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, for themselves, their successors and assigns, hereby agree as follows:

     1. Upon the initial funding into escrow of $500,000 pursuant to the terms of the Credit Facility, the Borrower agrees to waive Lender’s compliance obligations with respect to Section 4 of the Prior Amendment.

     2. All other provisions of the Debenture not amended or modified herein shall continue to have their full force and effect.

     3. This Amendment may be changed, waived, discharged or terminated only by a writing signed by the Lender and Borrower.

     4. This Amendment shall be construed and interpreted in accordance with the Sections 13 and 14 of the Original Debenture.

     5. This Amendment may be executed in two or more counterparts, which when so executed shall constitute one and the same agreement.

     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of March _, 2009.

Converted Organics Inc.
By:
	Edward J. Gildea, CEO
PROFESSIONAL OFFSHORE OPPORTUNITY FUND, LTD.
By:
	Howard Berger
	Manager

46

EX-4.15

EXHIBIT 4.15

AMENDMENT NO. 2 TO
SECURED CONVERTIBLE DEBENTURE

     This amendment no. 2 (“Amendment”) to the Secured Convertible Debenture dated January 24, 2008 (the “Original Debenture”), as previously amended on January 29, 2009 (such prior amendment, the “Prior Amendment” and with the Original Debenture, the “Debenture”) is made as of March 17, 2009 by and between Converted Organics Inc., a Delaware corporation (“Borrower”) and HIGH CAPITAL FUNDING, LLC (“Lender”).

RECITALS

     WHEREAS, Borrower has issued Lender the Debenture in principal amount of $500,000;

     WHEREAS, Borrower has agreed to modify certain terms of the Prior Amendment as set forth herein; and

     WHEREAS, Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Debenture.

     NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, for themselves, their successors and assigns, hereby agree as follows:

     1. Upon the execution of this Amendment, the Borrower agrees to waive Lender’s compliance obligations with respect to Section 4 of the Prior Amendment.

     2. All other provisions of the Debenture not amended or modified herein shall continue to have their full force and effect.

     3. This Amendment may be changed, waived, discharged or terminated only by a writing signed by the Lender and Borrower.

     4. This Amendment shall be construed and interpreted in accordance with the Sections 13 and 14 of the Original Debenture.

     5. This Amendment may be executed in two or more counterparts, which when so executed shall constitute one and the same agreement.

     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of March 17, 2009.

Converted Organics Inc.
By:
	Edward J. Gildea, CEO
HIGH CAPITAL FUNDING, LLC
By:
	Frank E. Hart,
	President of Profit Concepts, Ltd., Manager

47

EX-10.13

Exhibit 10.13

MORTGAGE

FROM

CONVERTED ORGANICS OF WOODBRIDGE, LLC

TO THE

NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY

DATED FEBRUARY 16, 2007

Record and Return to:

Rafael Perez, Esquire
COZEN O’CONNOR
One Newark Center, 19^th Floor
Newark, New Jersey 07102-5211

MORTGAGE

     THIS MORTGAGE made as of this 16th day of February, 2007, from CONVERTED ORGANICS OF WOODBRIDGE, LLC, having a mailing address c/o Converted Organics, Inc., 7A Commercial Wharf West, Boston, MA (the “Mortgagor”) to the NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY, a public body corporate and politic constituting an instrumentality of the State of New Jersey, having an office at 36 West State Street, PO Box 990, Trenton, NJ 08625 (the “Mortgagee” or the “Authority”).

     WHEREAS, Mortgagor has entered into a Loan Agreement with the Mortgagee dated as of February 1, 2007 (the “Agreement”), under which Mortgagor has agreed to make payments on its loan from the Authority (the “Loan”) sufficient to pay the principal of, redemption premium, if any, and interest on the Authority’s $17,500,000 Solid Waste Facilities Revenue Bonds (Converted Organics of Woodbridge, LLC — 2007 Project) Series A (the “Bonds”) issued pursuant to a Trust Indenture dated as of February 1, 2007 (the “Indenture”) between the Mortgagee and The Bank of New York, as trustee (the “Trustee”), for the purpose of financing the Project (as defined in the Agreement) located in Woodbridge, County of Middlesex, State of New Jersey (the “Project Municipality”); and

     WHEREAS, Mortgagor is obligated under the Agreement and a Note in the principal sum of $17,500,000 dated February 16, 2007 (as defined in the Agreement) (the “Note”) in lawful money of the United States with interest thereon to be computed from the date thereof at the interest rates provided for in the Agreement and the Note, and this Mortgage shall serve as security for the repayment of the Loan and the Bonds; and

     WHEREAS, the Note and this Mortgage are being assigned by the Mortgagee to the Trustee, in order to secure the repayment of the Bonds (any reference herein to the “Mortgagee” shall be construed to include the Trustee).

     NOW, THEREFORE, to secure the payment of the Loan and to secure the performance by the Mortgagor of all of its other obligations and covenants pursuant to the Agreement, and to assure payment of all other indebtedness, monetary obligations, liabilities and duties of any kind of Mortgagor, direct or indirect, absolute or contingent, joint or several, due or not due, liquidated or unliquidated, arising under the Agreement or this Mortgage, the Mortgagor has given, granted, released, assigned, transferred and set over unto the Mortgagee and by these presents does give, grant, release, assign, transfer, and set over unto the Mortgagee, its successors and assigns forever, the following described property and rights:

     ALL of Mortgagor’s right, title and interest in, to and under a certain Lease Agreement dated June 2, 2006, as amended, between Recycling Technology Development, LLC, as landlord, and Converted Organics, Inc., as tenant (the “Lease Agreement”), pursuant to an Assignment of the Lease Agreement from Converted Organics, Inc. to the Mortgagor dated as of February 1, 2007 (the “Assignment of the Lease Agreement”). A Memorandum of Indenture, a Memorandum of Lease and the Assignment of the Lease Agreement are to be recorded in the Office for the Recorder of Deeds in and for the County of Middlesex, State of New Jersey prior to the recordation of this Mortgage.

     TOGETHER with all of Mortgagor’s right, title and interest in and to the leasehold estate created by the Lease Agreement in and to the parcel of land described therein and as described in Schedule A attached hereto and hereby made a part hereof (the “Real Estate”) (which interest in the Lease Agreement, as amended and assigned, and the leasehold estate and term created thereby are herein separately and collectively referred to as the “Lease”).

     TOGETHER with all of Mortgagor’s right, title and interest in and to all buildings and improvements now or hereafter erected on the Real Estate (the “Improvements”) (which Improvements together with Mortgagor’s interest in the Real Estate as created by the Lease are herein separately and collectively referred to as the “Premises”).

     TOGETHER with all of Mortgagor’s right, title and interest now owned or hereafter acquired in: (i) all renewals, extensions, amendments and modifications of the Lease; and (ii) all credits, deposits, all purchase and other options, privileges and rights of Mortgagor, as tenant under the Lease; and in case Mortgagor acquires, whether by exercise of any present or future option, or by any other manner, the fee title or any other estate, title or interest in the Real Estate or any portion thereof covered by the Lease, this Mortgage shall attach to and cover and be a lien upon the fee title or other estate so acquired, and such fee title or other estate shall, without further assignment, mortgage or conveyance, become and be subject to the lien of and covered by this Mortgage.

     TOGETHER with the appurtenances and all the estate and rights of Mortgagor of, in and to the Premises under and by virtue of the Lease.

     TOGETHER with all and singular the tenements, hereditaments, woods, waters, watercourses, liberties, privileges, rights-of-way, easements, riparian rights and appurtenances thereunto belonging, or in any wise appertaining, and any reversion and remainders, rents, issues and profits thereof.

     TOGETHER with all right, title and interest of the Mortgagor in and to any streets, roads, public places, opened or proposed, adjoining the Premises, and all easements and rights-of-way, public or private, all sidewalks and alleys, now or hereafter used in connection with the Premises or abutting the Premises.

     TOGETHER with all fixtures and articles of personal property now or hereafter attached to or used in connection with, or with the operation of, said Premises (except those fixtures and articles of personal property now or hereafter owned by any tenants of the Premises), as to which this Mortgage constitutes a fixture filing and security agreement under the Uniform Commercial Code of the State of New Jersey (in addition to and not in lieu of any other security agreement between the parties), including, but not limited to, partitions, elevators, steam and hot water boilers, dynamos, kitchen cabinets, incinerators, plants and shrubbery, furnaces, heating, air conditioning, lighting and power plants, coal and oil burning apparatus, pipes, plumbing, radiators, sinks, bath tubs, water closets, refrigerators, gas and electrical fixtures, stoves, ranges, shades, screens, awnings, vacuum cleaning systems, sprinkler systems or other fire prevention or extinguishing apparatus and materials, including additions thereto, replacements thereof and

3

proceeds therefrom, all of which shall be deemed to be and remain and form a part of the realty and are covered by the lien of this Mortgage. Pursuant to N.J.S.A. 12A:9-402(b), this Mortgage shall be filed in the real estate record office in the County of Middlesex and shall be effective as a financing statement filed as a fixture filing from the date of its recording. If the lien of this Mortgage is subject to a conditional bill of sale, chattel mortgage, or other security interest covering any such property, then all the right, title and interest of Mortgagor in and to such property, together with the benefits of any deposits or payments now or hereafter made thereon, are and shall be covered by the lien of this Mortgage. As permitted by the Uniform Commercial Code of the State of New Jersey, the Mortgagor hereby authorizes the Mortgagee to file any financing statements required hereunder without the signature of the Mortgagor.

     TOGETHER with any and all proceeds derived from the sale of all or any portion of the Premises.

     TOGETHER with any and all awards, damages, payments and other compensation, and any and all claims therefor and rights thereto, which may result from taking or injury by virtue of the exercise of the power of eminent domain, or any damage, injury or destruction in any manner caused to the Premises or improvements thereon, or any part thereof; subject, however, to the provisions of the Agreement relating to damage, destruction, taking or condemnation, which provisions are incorporated herein by reference.

     AND ALSO, all the estate, right, title, interest, property, possession, claim and demand whatsoever of the Mortgagor, in law and in equity, of, in and to the same and every part and parcel thereof with the appurtenances.

     All of the foregoing, including the Premises, shall be known herein as the “Mortgaged Property.”

     TO HAVE AND TO HOLD the above granted Mortgaged Property unto the Mortgagee, its successors and assigns, to its and their own proper use, benefit and behoof forever.

     PROVIDED THAT if the Mortgagor shall well and truly pay or there shall otherwise be paid to the Mortgagee the indebtedness secured hereby at the time and in the manner provided in the Agreement and this Mortgage and shall well and truly abide by and comply with each and every covenant and condition set forth herein and in the Agreement, then these presents and the lien and interest hereby transferred and assigned shall cease, terminate and be void. The Mortgagee hereby covenants to release the Mortgaged Property and renounce any other rights granted to it herein, and to execute at the request of the Mortgagor, a “Release of Mortgage” and any other instrument to that effect deemed necessary or desirable, upon payment and performance being made on the indebtedness and covenants secured hereby.

     I. THE MORTGAGOR REPRESENTS, WARRANTS, COVENANTS AND AGREES WITH MORTGAGEE AS FOLLOWS:

     Section 1. That all words and terms not defined herein shall have the respective meanings and be construed herein as provided in the Agreement.

4

     Section 2. That the Mortgagor will pay the Loan and reimburse the Authority any advances, payments or expenses made or incurred by the Authority at the time and in the manner provided for in the Agreement and in this Mortgage.

     Section 3. That the Mortgagor hereby covenants to the Mortgagee that no owner of the Premises shall be entitled to any credit against payments due hereunder by reason of the payment of any taxes or assessments levied thereon.

     Section 4. (a) That the Mortgagor possesses good and marketable title to the Mortgaged Property unencumbered, except by Permitted Encumbrances (as set forth in the Agreement), and that Mortgagor is the owner and holder of the Lease and of the leasehold estate created thereby, that Mortgagor is the owner of any Improvements now erected on the Real Estate and that Mortgagor will be the owner of Improvements hereafter erected on the Real Estate.

          (b) That the Lease is a valid and subsisting lease of the real property demised thereby for the terms therein set forth, is in full force and effect in accordance with the terms thereof and has not been modified, and there are no existing defaults by the landlords or tenants thereunder.

          (c) That, except for any financing lease of landlord, fee title to the Real Estate is free and clear of all liens, charges and encumbrances on a parity with or prior to the Lease, and that the Mortgaged Property is free and clear of all liens, charges and encumbrances on a parity with or prior to the lien of this Mortgage;

          (d) That the Mortgagor has the right and lawful authority to mortgage the Lease and the Improvements in the manner and form herein set forth.

          (e) That the Mortgagor shall make, execute, acknowledge and deliver in due form of law all such further or other instruments or assurances as may at any time hereafter be desired or required by Mortgagee for more fully and effectually granting, assigning, transferring and settling over to Mortgagee the Lease and the Improvements to be hereafter erected on the Real Estate hereby mortgaged, or intended so to be, unto Mortgagee for the purpose aforesaid, and unto all and every person or persons, corporation or corporations deriving any estate, right, title or interest therein under this Mortgage or under the power of sale herein contained or permitted by law, and Mortgagor will pay all costs of recording or filing any such statements or documents in such public offices as Mortgagee may require.

          (f) Mortgagor shall warrant and defend the Lease and the Improvements now or hereafter erected on the Real Estate in favor of Mortgagee, against Mortgagor and all persons whatsoever making any claim thereto.

     Section 5. That the Mortgaged Property shall be kept insured against loss or damage by fire and such other hazards as Mortgagee may specify, for the benefit of the Mortgagee, all in accordance with the provisions of the Agreement.

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     Section 6. That any buildings, structures and other improvements erected and to be erected upon the Premises, including fixtures and equipment shall be kept in good and substantial repair and shall not be removed, demolished or materially altered without the prior express written consent of the Mortgagee, which consent shall not be unreasonably withheld or delayed. The Mortgagor shall not do, and shall not permit to be done, any act which may in any way impair or weaken the security under this Mortgage.

     Section 7. That the Mortgagor represents to the Mortgagee that it has no knowledge of any offsets, counterclaims or defenses to the principal indebtedness secured hereby, or to any part thereof, or the interest thereon, either at law or in equity. The Mortgagor will, within three (3) days upon request in person or within ten (10) days upon request by mail, furnish a duly acknowledged written statement in form reasonably satisfactory to the Mortgagee stating either that the Mortgagor knows of no offsets or defenses existing against such indebtedness, or if such offsets or defenses are alleged to exist, the nature and extent thereof, and in either case, such statement shall set forth the amount due hereunder.

     Section 8. That the Mortgagor will not remove or suffer to be removed from the Premises or the improvements thereon any fixtures as defined by the law in New Jersey (unless such fixtures have been replaced with similar fixtures of equal or greater utility and value), presently or in the future to be incorporated into, installed in, annexed or affixed to the Premises or the improvements; nor will the Mortgagor execute or cause to be executed, any security interest upon any such fixtures, additions to, substitutions or replacements thereof or upon any fixtures in the future to be installed in, annexed or affixed to the Premises, without the prior express written consent of the Mortgagee.

     Section 9. That the Mortgagor will perform and abide by the terms and covenants herein and the terms and covenants in the Agreement which are made a part hereof as though set forth herein at length.

     Section 10. That the acceptance by the Mortgagee of any payments hereunder, after default, or the failure of the Mortgagee, in any one or more instances to insist upon strict performance by Mortgagor of the Loan or by the Mortgagor of any terms and covenants of this Mortgage or to exercise any option or election herein conferred, shall not be deemed to be a waiver or relinquishment for the future of any such terms, covenants, elections or options.

     Section 11. That all the covenants hereof shall be construed in accordance with the laws of the State of New Jersey.

     Section 12. That the terms of this Mortgage may not be changed orally but only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought.

     Section 13. The date of this Mortgage shall be for identification purposes only and shall not be construed to imply that this Mortgage was executed on any date other than the respective dates of the acknowledgments of the parties hereto. This Mortgage shall become effective upon its delivery.

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     Section 14. The Mortgagor shall prepare and timely file all Federal, state and local tax returns required to be filed by it and promptly pay and discharge or cause to be promptly paid and discharged all taxes, assessments, municipal or governmental rates, charges, impositions, liens and water and sewer rents or any part thereof, heretofore or hereafter imposed upon it or in respect of any of its property and assets before the same shall become in default, as well as all lawful claims which, if unpaid, might become a lien or charge upon such property and assets or any part thereof. The Mortgagor shall submit to the Mortgagee receipted bills showing payment of all taxes, assessments, governmental charges or levies and lawful claims which, if unpaid, would become a lien or claim on the Premises, as same shall be paid.

     Section 15. During the term of the Agreement, in the event of the passage after the date of this Mortgage of any law of the State of New Jersey, or any other governmental entity, changing in any way the laws now in force for the taxation of mortgages, or debts secured thereby, for state or local purposes, or the manner of the operation of any such taxes, so as to affect the interest of the Mortgagee, then and in such event, the Mortgagor shall bear and pay the full amount of such taxes, provided that if for any reason payment by the Mortgagor of any such new or additional taxes would be unlawful or if the payment thereof would constitute usury or render the Loan or indebtedness secured hereby wholly or partially usurious under any of the terms or provisions of the obligation secured hereunder, or this Mortgage, or otherwise, the Mortgagee may, at the Mortgagee’s option, declare the whole sum secured by this Mortgage, with interest thereon, to be immediately due and payable, or the Mortgagee may, at the Mortgagee’s option, pay that amount or portion of such taxes as renders the Loan or indebtedness secured hereby unlawful or usurious, in which event the Mortgagor shall concurrently therewith pay the remaining lawful and nonusurious portion or balance of said taxes.

     Section 16. The Mortgagor agrees to comply with all laws, rules, regulations and ordinances made or promulgated by lawful authority and now or hereafter applicable to the Mortgaged Property within such time as may be required by law.

     Section 17. That if any action or proceeding be commenced to which action or proceeding the holder of this Mortgage is made a party, or in which it becomes necessary to defend or uphold the lien of this Mortgage, the expense of any litigation to prosecute or defend the rights and lien created by this Mortgage (including reasonable attorney’s fees), shall be paid by the Mortgagor, and any such sum and the interest thereon shall be a lien on the Mortgaged Property, prior to any right, or title to, interest in or claim upon the Mortgaged Property attaching or accruing subsequent to the lien of this Mortgage, and shall be deemed to be secured by this Mortgage. In any action or proceeding to foreclose this Mortgage, or to recover or collect the debt secured hereby, the provisions of law respecting the recovery of costs, disbursements and allowance shall prevail unaffected by this covenant.

     Section 18. That upon default by the Mortgagor, the Mortgagee may, at its option, remedy such default; that all payments made by the Mortgagee to remedy a default by the Mortgagor (including reasonable attorneys’ fees) and the total of any payment or payments due from the Mortgagor to the Mortgagee and in default, together with interest thereon at the rate equal to the rate of interest set forth in the Agreement (such interest to be calculated from the

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date of such advancement to the date of payment thereof by Mortgagor), shall be added to the debt secured by this Mortgage until paid. Any such sums and the interest thereon shall be a lien on the Premises prior to any other lien attaching to or accruing subsequent to the lien of this Mortgage, except the Mortgage from the Mortgagor to the Trustee and the County of Middlesec.

     Section 19. (i) Definitions. As used in this Section 19, the following terms shall have the following meanings:

          (a) Clean-Up: Removal, abatement and/or remediation of, or other response to, Environmental Conditions as required or directed by applicable governmental agencies with jurisdiction therefore and/or as required by and in compliance with Environmental Laws.

          (b) Environmental Conditions: Any environmental contamination or pollution or threatened contamination or pollution of, or the Release or threatened Release of Hazardous Substances into, surface soils, subsurface soils, sewage systems, surface water, groundwater, land or air. For purposes of the notice provision of Section 6.03(b)(iv), Environmental Conditions shall be those which require remediation by the applicable regulatory authority.

          (c) Environmental Documents: (I) Any and all documents received or submitted by the Mortgagor from the United States Environmental Protection Agency (“USEPA”), the New Jersey Department of Environmental Projection (“NJDEP”) or any other state, county or municipal environmental or health agency concerning environmental matters relating to the Mortgaged Property or the Mortgagor’s operations upon the Mortgaged Property; and (II) any and all reviews, audits, reports, or other analyses concerning Environmental Conditions, including but not limited to the presence or absence of Hazardous Substances, on, at, under or emanating from the Mortgaged Property, that have been prepared by or on behalf of the Mortgagor or are otherwise in the Mortgagor’s possession, custody or control; provided however that no such documents shall be required to be submitted or made available by the Mortgagor in compliance with the provisions of this Mortgage which will result in any loss of attorney-client privilege. However, to the extent that appropriate measures can and have been taken to preserve the attorney-client privilege by disclosure to the Mortgagee, the Mortgagor shall be required to submit or make available such documents. It shall not be an Event of Default hereunder so long as the issue of attorney-client privilege is being contested between the parties.

          (d) Environmental Laws: Any and all federal, state and local laws, statutes, codes, ordinances, regulations or rules (including, but not limited to, consent decrees and judicial or administrative orders or decrees or other legal requirements of any kind issued in connection with the Mortgaged Property), relating to pollution or contamination of the environment, presently in effect or hereafter amended, modified or adopted from time-to-time during the Mortgage term, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) as amended by the Superfund Amendments and Reauthorization Act of 1986 (“SARA”) (42 U.S.C. Section 9601-9675); the Resource Conservation and Recovery Act of 1976, as amended (“RCRA”) (42 U.S.C. Section 6901, et seq.); the Clean Water Act, as amended (33 U.S.C. Section 1251, et seq.); the Clean Air Act, as amended (42 U.S.C. Section 7401, et seq.); the Federal Insecticide, Fungicide and Rodenticide

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Act, as amended (“FIFRA”) (7 U.S.C. Section 136, et seq.); The Hazardous Materials Transportation Act, as amended (49 U.S.C. Section 1801, et seq.); the Toxic Substances Control Act (15 U.S.C. 2601, et seq.); the New Jersey Spill Compensation and Control Act, as amended (the “Spill Act”) (N.J.S.A. 58:10-23.11 et seq.); the New Jersey Environmental Cleanup Responsibility Act (“ECRA”) (N.J.S.A. 13:1K-6, et seq.) as amended by the Industrial Site Recovery Act, P.L. 1993, Ch. 139 (“IRSA”); the New Jersey Solid Waste Management Act, as amended (N.J.S.A. 13:1E-1, et seq.); the New Jersey Underground Storage Tank Act, as amended, (N.J.S.A. 58:10A-21, et seq.); the New Jersey Water Pollution Control Act, as amended (N.J.S.A. 58:10A-1, et seq.); the New Jersey Air Pollution Control Act (N.J.S.A. 26:2C-1 et seq.); the Safe Drinking Water Act (33 U.S.C. 1251, et seq.); the New Jersey Worker and Community Right to Know Act (N.J.S.A. 34:5A-1, et seq.); and the New Jersey Toxic Catastrophe Prevention Act (N.J.S.A. 13:1-19, et seq.); and the rules and regulations promulgated thereunder.

          (e) Hazardous Substances: (I) Any “Hazardous Substance”, “Hazardous Waste”, “Pollutant” or “Contaminant” as defined under any Environmental Laws, as such laws are presently in effect or hereinafter amended, and the regulations promulgated thereunder; (II) petroleum and petroleum-containing products as the terms “petroleum” is defined in Section 9000(8) of the RCRA; and (III) urea-formaldehyde, polychlorinated biphenyls (PCBs), asbestos and asbestos-containing materials and nuclear fuel and nuclear wastes. Notwithstanding the foregoing, for purposes of this Section 19, Hazardous Substances shall not include construction materials, office equipment, other office furnishings, cleaning solutions and other similar materials that are or contain de minimis quantities of Hazardous Substances provided that the use, handling and storage of any such materials on the Mortgaged Property is incidental to and reasonably necessary for the construction, operation or maintenance of the Mortgaged Property and provided that any such use, handling, storage and disposal of such materials as in compliance with all applicable laws and regulations, including all applicable Environmental Laws.

          (f) Placement Agent: Ferris, Baker Watts, Incorporated.

          (g) Regulatory Actions: Any claim, demand, action or proceeding brought or instigated by any governmental authority under any Environmental Law, including, without limitation, civil, criminal and/or administrative proceedings, whether directing or requiring any action or compelling compliance with Environmental Laws or seeking costs, damages, penalties, expenses or injunctive relief.

          (h) Release: The spilling, leaking, disposing, discharging, emitting, depositing, injecting, leaching or escaping, whether intentional or unintentional, of any Hazardous Substance.

          (i) Third-Party Claims: Claims of third parties (other than Regulatory Actions) alleging damages arising from personal injury, property damage or damage to natural resources arising from or relating in any way to Environmental Conditions on, at, under or emanating from the Mortgaged Property.

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     (ii) Representations and Warranties. The Mortgagor represents and warrants to the best of its knowledge after due inquiry as of the date hereof that:

          (a) No part of the Mortgaged Property was ever used, nor is it being used now, as a landfill, dump or other disposal or treatment area for Hazardous Substances or as a gasoline service station or a facility with its primary operations involving the selling, dispensing, storing, transferring or handling of petroleum and/or petroleum products; and

          (b) There are not now nor have there ever been located on the Mortgaged Property any underground storage tanks, above-ground storage tanks or any other vessels used or intended for the treatment, storage or disposal of Hazardous Substances; and

          (c) There has not been nor is there now occurring any Release or threatened Release of any Hazardous Substance on, at, under or emanating from the Mortgaged Property; and

          (d) The Mortgagor’s use, handling and storage, if any, of Hazardous Substances on the Mortgaged Property and Mortgagor’s disposal, if any, at any location of Hazardous Substances generated on or from the Mortgaged Property have been in material compliance with all applicable Environmental Laws; and

          (e) The Mortgaged Property and the use and operation thereof are currently, and at all times during the Mortgagor’s occupancy, operation or control of the Mortgaged Property have been, in material compliance with all applicable Environmental Laws; and

          (f) No Third-Party Claims or Regulatory Actions (I) have been asserted in writing or assessed against the Mortgagor or the Mortgaged Property, (II) are pending against the Mortgagor or the Mortgaged Property or, (III) to the best of the Mortgagor’s knowledge, have been threatened in writing against the Mortgagor or the Mortgaged Property; and

          (g) The Mortgaged Property is not listed in the USEPA’s National Priorities List (“NPL”) of Superfund Sites or the CERCLIS list of sites maintained by the USEPA. The Mortgagor has not transported any Hazardous Substances generated at the Mortgaged Property to any location nor has Mortgagor arranged for the transportation of any Hazardous Substances generated at the Mortgaged Property to any location which is listed on the NPL under CERCLA or on the CERCLIS list of sites; and

          (h) The Mortgagor has made available to the Placement Agent and the Mortgagee all Environmental Documents requested by them; and

          (i) None of the real property owned and/or occupied by the Mortgagor including, but not limited to, the Mortgaged Property, has been or is now being used as a “Major Facility” as such term is defined in N.J.S.A. 58:10-23.11b(1). The Mortgagor will not use the Mortgaged Property in the future as a “Major Facility”; and

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          (j) There are no liens against the Mortgaged Property arising under any Environmental Law or based upon a Regulatory Action and/or Third-Party Claim; and further, no lien has been attached to any revenues or any real or personal property owned by the Mortgagor including, but not limited to, the Mortgaged Property, as a result of the Administrator of the New Jersey Spill Compensation Fund expending monies from said fund pursuant to N.J.S.A. 58:10-23.11g, or to pay for “Cleanup and Removal Costs” as such term is defined in N.J.S.A. 58:10-23.11b(d), arising from an intentional or unintentional action or omission of the Mortgagor; and

          (k) ECRA and IRSA did not apply to the Mortgagor’s purchase of the Mortgaged Property.

     (iii) Covenants.

          (a) The Mortgagor will not permit or conduct on the Mortgaged Property the generation, treatment, manufacture, use, storage or disposal of any Hazardous Substance, except in material compliance with all applicable Environmental Laws. In addition, the Mortgagor will not permit the Mortgaged Property to be used for any of the purposes set forth in subsections (ii)(a) and (i) hereof.

          (b) The Mortgagor will promptly notify the Mortgagee in writing of any existing, pending or threatened (I) investigation, inquiry, claim or action by any governmental authority against the Mortgagor or the Mortgaged Property in connection with any Environmental Laws; (II) Third-Party Claims against the Mortgagor or the Mortgaged Property; (III) Regulatory Actions against the Mortgagor or the Mortgaged Property; and (IV) any existing, pending or threatened Environmental Conditions at, on, under or emanating from the Mortgaged Property.

          (c) In the event that any investigation or Clean-Up of any Environmental Conditions on, at, under or emanating from the Mortgaged Property is required to be undertaken by the Mortgagor by any governmental agency or under any applicable Environmental Laws as a result of or relating to any of the following, then the Mortgagor shall complete or cause to be completed in compliance with all applicable Environmental Laws, and at its own expense, such investigation and/or Clean-up: (I) any Release or threatened Release of any Hazardous Substance on, at, under or emanating from the Mortgaged Property; (II) any injury to human health or safety or the environment by reason of Environmental Conditions on, at, under or emanating from the Mortgaged Property; or (III) any violation, or alleged violation, of any applicable Environmental Law.

          (d) After the date of execution of this Mortgage, the Mortgagor shall upon request make available to the Mortgagee, so long as the Bonds are outstanding and the Mortgagee has any interest in the Mortgaged Property, complete copies of any and all Environmental Documents.

          (e) In the event that there shall be filed a lien against the Mortgaged Property by the NJDEP, pursuant to and in accordance with the provisions of the Spill Act (specifically,

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N.J.S.A. 58:10-23.11f(f)), as a result of the Administrator of the New Jersey Spill Compensation Fund having expended monies from said fund pursuant to N.J.S.A. 58:10-23.11g, or to pay for “Cleanup and Removal Costs,” as such term is defined in N.J.S.A. 58:10-23.11b(d), arising from an intentional or unintentional action or omission of the Mortgagor, resulting in the releasing, spilling, pumping, pouring, emitting, emptying or dumping of “Hazardous Substances,” as such term is defined in N.J.S.A. 58:10-23.11b(k), into waters of the State of New Jersey or onto lands from which it might flow or drain into said waters, then the Mortgagor shall, within sixty (60) days from the date that the Mortgagor is given notice that the lien has been placed against the Mortgaged Property (or within such shorter period of time in the event that the State of New Jersey has commenced steps to cause the Mortgaged Property to be sold pursuant to the lien), either (I) pay the claim and remove the lien from the Mortgaged Property, or (II) furnish to the NJDEP either (A) a bond satisfactory to the NJDEP in the amount of the claim out of which the lien arises, (B) a cash deposit in the amount of the claim out of which the lien arises, or (C) other security reasonably satisfactory to the NJDEP in an amount sufficient to discharge the claim out of which the lien arises.

          (f) The Mortgagor shall use its best efforts to assure material compliance with all Environmental Laws by all lessees, tenants, subtenants, occupants, licensees, operators, managers and users of the Mortgaged Property.

     (iv) Indemnities.

          (a) The Mortgagor agrees to, and does hereby, indemnify, defend and hold harmless the Mortgagee, its directors, officers, employees and agents and all Bondholders (all being included in the word “Mortgagee” for the purposes of this subsection (iv)) from and against any and all claims, causes of action, damages, demands, fines, liabilities, losses, penalties, settlements, expenses and costs, however defined and of whatever kind or nature, known or unknown, (including, but not limited to, reasonable attorneys’ consultants’ and engineering fees and disbursements and sampling, monitoring or remediation costs) (“Losses”) which may be asserted against, imposed upon, suffered or incurred by, the Mortgagee, arising out of in any way related to or due to (I) any Release at the Mortgaged Property or any Environmental Conditions on, at, under, or emanating from the Mortgaged Property, (II) any injury to human health, safety or the environment (including wrongful death, personal injury, property damage or damage to natural resources) by reason of Environmental Conditions on, at, under or emanating from the Mortgaged Property; (III) any violation, or alleged violation, of any Environmental Law; (IV) any material misrepresentation by the Mortgagor in this Mortgage and/or the Loan Agreement or in any other documents or materials furnished by the Mortgagor to the Mortgagee and/or its representatives in connection with the issuance of the Bonds; (V) any breach of any of Mortgagor’s representations, warranties or covenants set forth in subsections (ii) and (iii) of this Section 19; (VI) any Regulatory Action or Third-Party Claim arising from or relating to any Release or any Environmental Conditions on, at, under or emanating from the Mortgaged Property, except to the extent such Regulatory Action or Third-Party Claim arises from or relates to the acts or omissions of the Mortgagee or its successors or assigns including any transferee of the title of the Mortgagee or any subsequent purchaser at a foreclosure or, after a foreclosure of the Mortgaged Property, any third-party unrelated to or unaffiliated with the Mortgagor; or (VII) any lien imposed upon the Mortgaged Property in favor of any governmental

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entity as a result of (A) the presence or disposal of a Hazardous Substance on the Mortgaged Property, (B) a Release or threatened Release at or affecting the Mortgaged Property, or (C) any other Environmental Conditions on, at, under or affecting the Mortgaged Property, except to the extent such liens arise solely from or relate to the acts or omissions of the Mortgagee or its successors or assigns including any transferee of the title of the Mortgagee or any subsequent purchaser at a foreclosure, or, after a foreclosure of the Mortgaged Property any third-party unrelated to and unaffiliated with the Mortgagor. The duty of the Mortgagor to indemnify, defend and hold harmless the Mortgagee includes, but is not limited to, Regulatory Actions, Third-Party Claims or any other proceedings or actions commenced by any person (including, but not limited to, any federal, state or local governmental agency or entity) before any court or administrative agency.

          (b) In any event a Clean-up is required by any governmental agency or under any applicable Environmental Laws, Mortgagor shall promptly take all necessary measures to complete the Clean-up in accordance with all applicable Environmental Laws. If the initiation or the conduct of all or any portion of such Clean-up is delayed by Mortgagor or Mortgagor fails to conduct such Clean-up on the basis of Mortgagor’s good faith objection to the nature, extent or scope of any Clean-up required by any governmental agency, Mortgagor shall promptly provide Mortgagee with written notice of such objection (which notice shall include a detailed explanation of the basis for such objection) and, upon the request of Mortgagee, shall meet with Mortgagee at a mutually agreeable time and location to discuss the matter and attempt to reach a resolution concerning the conduct of any such Clean-up. In the event such an agreement cannot be reached within a period of forty-five (45) days following Mortgagee’s receipt of any such notice, the Mortgagee shall have the right to notify the Mortgagor that it is in default of this Mortgage and the Mortgagee shall have all rights available to it under Article III of this Mortgage.

     (v) General.

          (a) The representations, warranties, covenants and indemnities contained in this Section 19 shall survive the execution and delivery of this Mortgage, the discharge of the Bonds and any foreclosure of this Mortgage and any acquisition of title to the Mortgaged Property by the Mortgagee and they shall be deemed continuing representations, warranties and indemnities for the benefit of the Mortgagee and any successors and assigns of the Mortgagee and the Bondholders.

          (b) The Mortgagor and its successors and assigns, hereby forfeit and forever waive, release and agree not to make or bring, any claim for indemnification, contribution, reimbursement or direct payment against the Mortgagee or its successors or assigns arising out of any of the matters described in subsection (iv) hereof except to the extent such claim arises or results from the acts or omissions of the Mortgagee, and any successors (but not assigns), after the Closing of the Mortgage transaction or after any foreclosure of this Mortgage pursuant to Article III hereof, which acts or omissions result in a new Release at the Mortgaged Property or the aggravation of an existing Environmental Condition at the Mortgaged Property.

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          (c) The Mortgagee’s rights and remedies against the Mortgagor under this Section 19 shall be in addition to and not in lieu of all other rights and remedies of the Mortgagee under this Mortgage, the Loan Agreement, at law or in equity.

     (vi) Inspections and Investigations.

          (a) During the term of this Mortgage, Mortgagee and its designated representatives, including any environmental consultant retained by Mortgagee, shall have the right upon prior written notice to Mortgagor to enter upon and to conduct a noninvasive inspection of the Mortgaged Property and to review all Environmental Documents in the possession, custody or control of the Mortgagor relating or referring to the Mortgaged Property or the operations conducted thereon (the “Inspection”). The Mortgagee’s right to conduct such Inspections shall include, without limitation, a right of reasonable access to all portions of the Mortgaged Property and surrounding land and waters. The Mortgagor shall cooperate fully with respect to such Inspection. Mortgagee shall discuss with Mortgagor the results of any such Inspection and shall consult with Mortgagor concerning any deficiencies revealed as a result of such Inspection. Mortgagee shall bear its own costs and expenses incurred to conduct such Inspections unless such Inspection is conducted in response to Mortgagee’s receipt of any notice provided by Mortgagor to Mortgagee pursuant to subsection (iii)(b) of this Section 19. In such event, the cost and expense of such Inspection shall be borne by Mortgagor.

          (b) The Mortgagee, at any time after commencing foreclosure proceeding pursuant to its foreclosure rights under this Mortgage or in connection with any negotiations for a deed in lieu of foreclosure agreement between the Mortgagor and the Mortgagee and after the occurrence of any Event of Default under this Mortgage or with respect to the Bonds, or under the Loan Agreement, may itself, or by its employees, agents, contractors or representatives, enter upon the Mortgaged Property for the purposes of conducting any invasive soil and groundwater sampling and investigations or such other investigations, examinations, or analyses (hereafter referred to as “Investigation”) as the Mortgagee may reasonably desire. The Mortgagee shall provide the Mortgagor with reasonable notice before entering the Mortgaged Property to conduct any such Investigation, and the Mortgagor shall cooperate fully in such Investigation.

          (c) The Mortgagee and its employees, agents, contractors, consultants and/or representative shall conduct any such Investigation in a manner which does not unreasonably interfere with the Mortgagor’s use of and operations on the Mortgaged Property. In the event that this Mortgage is foreclosed, the Mortgagor shall deliver the Mortgaged Property to the Mortgagee in compliance with all applicable Environmental Laws.

          (d) In conducting any Inspection or Investigation pursuant to this subsection (vi), Mortgagee shall use its best efforts not to cause or suffer a violation of any applicable Environmental Laws at the Mortgaged Property or to cause any new Release at the Mortgaged Property or the aggravation of an existing Environmental Condition at the Mortgaged Property. In the event the Mortgagee, and any successors (but not assigns), causes any such violation, new Release or aggravated Environmental Condition as a result of its conduct of such Inspection or Investigation at the Mortgaged Property, the Mortgagee, and any successors (but not assigns), shall remedy such violation, new Release or aggravated Environmental Condition and shall

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indemnify, defend and hold harmless Mortgagor from and against any Regulatory Action or Third-Party Claim arising directly from and solely as a result of any such violation, new Release or aggravated Environmental Condition. The Mortgagee, and any successors (but not assigns), shall also indemnify, defend and hold harmless Mortgagor from and against any personal injury or property damage claims or actions arising directly from and solely as a result of the Mortgagee’s, and any successors’ (but not assigns), entry upon the Mortgaged Property to conduct any Inspection or Investigation pursuant to this subsection (vi).

     Section 20. (a) Mortgagor shall pay or cause to be paid when due and payable pursuant to the provisions of the Lease all rent, supplemental rent, additional rent and other payments required to be paid by the tenant under the Lease. Without limiting the generality of the foregoing, Mortgagor covenants that it shall diligently perform and observe, not later than the times specified in the Lease or herein (whichever instrument shall provide for the earlier performance or observance), all of the terms, covenants and conditions of the Lease required to be performed and observed by the tenant thereunder so that Mortgagor’s rights as tenant under the Lease shall remain unimpaired. Mortgagor shall promptly notify Mortgagee in writing of any default by the landlord or Mortgagor in the performance or observance of any of the terms, covenants or conditions to be performed or observed by either such party under the Lease, and shall promptly after payment send to Mortgagee all receipts for all payments required under the Lease.

          (b) Mortgagor shall not modify, amend, release, cancel, surrender or terminate the Lease without the prior written consent of Mortgagee, the entire interest of Mortgagor as tenant under the Lease having been mortgaged and assigned to Mortgagee so that no such modification, amendment, release, cancellation, surrender or termination shall be of any force or effect whatsoever unless Mortgagee shall have given its prior written consent thereto.

          (c) Mortgagor further covenants and agrees that there shall be no merger of the Mortgaged Property with the fee estate of the owner or owners of the Real Estate, by reason of the fact that the Mortgaged Property or any part thereof may be held by or for the account of any person or persons who shall be the owner or owners of such fee estate, unless and until all persons at the time having an interest in the fee estate and all persons, including Mortgagee, at the time having an interest in the Mortgaged Property shall join in a written instrument effecting such merger and shall duly record such instrument in the public record.

          (d) No release or forbearance of any of Mortgagor’s obligations under the Lease, pursuant to the terms of the Lease or otherwise, shall release Mortgagor from any of its obligations under this Mortgage, including Mortgagor’s obligations with respect to the payment of rents as provided for in the Lease and the performance of all of the terms, provisions, covenants, conditions and agreements contained in the Lease to be kept, performed and complied with by the tenant therein.

          (e) Mortgagor shall at all times fully perform and comply with all agreements, covenants, terms and conditions imposed upon or assumed by Mortgagor as tenant under the Lease and, if Mortgagor shall fail so to do, Mortgagee may (but shall not be obligated to) take any action Mortgagee deems necessary or desirable to prevent or to cure any default or breach of

15

condition by Mortgagor in the performance of or compliance with any of Mortgagor’s covenants or obligations under the Lease. Upon receipt by Mortgagee from the landlord (which term shall mean, as used herein, the landlord named in the Lease as landlord or any successor in title to such landlord) under the Lease of any written notice of default or breach of condition by Mortgagor, Mortgagee may rely thereon and take any action to cure such default even though the existence of such default or the nature thereof may be questioned or denied by Mortgagor or by any party on behalf of Mortgagor or by any other party to such agreements. Mortgagor hereby expressly grants to Mortgagee and agrees that Mortgagee shall have the absolute and immediate right to enter in and upon the Mortgaged Property or any part thereof to such extent and as often as Mortgagee, in its sole discretion, deems necessary or desirable in order to prevent or to cure any default in the covenants of Mortgagor under this Mortgage.

          (f) The occurrence of any event which, with the giving of notice or the lapse of time, would constitute a default or breach of condition under the Lease or which would entitle the landlord under the Lease to deprive Mortgagor of the estate or interest vested in Mortgagor by the Lease shall, for the purposes of this Mortgage, be treated as a default in or breach of condition under the Lease.

          (g) Mortgagor shall not exercise any election available to Mortgagor under the Lease with respect to the application of proceeds of insurance and condemnation without first having obtained the prior written consent thereof by Mortgagee.

          (h) If this Mortgage is still of public record on the date which is thirty (30) days prior to the last date on which the tenant under the Lease has a right to extend the term of the Lease and Mortgagor has not given Mortgagee written evidence of Mortgagor’s proper exercise of such extension option, Mortgagee may (but shall not be obligated to) at any time thereafter exercise such extension option on behalf of Mortgagor, and Mortgagor hereby grants Mortgagee a power of attorney to exercise such extension option, which power of attorney is irrevocable and coupled with an interest.

          (i) The lien of this Mortgage, securing payment of the Note and the Agreement and performance of the obligations under this Mortgage, shall not merge, and shall always remain a separate and distinct mortgage lien, notwithstanding the fact that such mortgage lien may from time to time be held by the same party that holds the tenant’s interest in the Lease or by any entity controlled by, controlling or under common control with such party; provided, however, that the holder of this Mortgage may at any time, by a suitable instrument, duly executed by Mortgagee and filed of public record, elect to effect a merger of such liens upon the Mortgaged Property. If at any time Mortgagee shall acquire all or any part of the fee estate in the Real Estate, such acquisition shall not cause a merger with Mortgagee’s interest as holder of this Mortgage; provided, however, that Mortgagee may at any time, by suitable instrument duly executed by Mortgagee and filed of public record, elect to effect a merger of such interests in the Mortgaged Property.

          (j) In the event of the bankruptcy or insolvency of the landlord under the Lease, if the landlord in bankruptcy shall elect to reject the Lease, pursuant to Section 365 of the Bankruptcy Code or any other similar or successor provision, Mortgagor shall timely exercise its

16

option to remain in possession for the balance of the term of the Lease. Mortgagor hereby authorizes Mortgagee, to the extent permitted by law, to make such election on behalf of Mortgagor and grants to Mortgagee an irrevocable power of attorney, coupled with an interest, to make such election on behalf of Mortgagor.

          (k) Nothing contained in this Section is intended to limit or impair any rights which may be granted to Mortgagee under the terms of the Lease.

     II. THE MORTGAGOR SHALL BE IN DEFAULT OF THIS MORTGAGE UPON THE OCCURRENCE OF ANY OF THE FOLLOWING EVENTS:

     Section 1. The occurrence of any Event of Default under the Agreement or the Lease.

     Section 2. In the event the Mortgaged Property shall be encumbered by a subsequent encumbrance, other than Permitted Encumbrances (as defined in the Agreement), or any change in the ownership of the Premises.

     Section 3. In the event that the Mortgagor shall have encumbered, mortgaged or given a security interest in any fixture or fixtures, or shall have, without the consent of the Mortgagee, removed or replaced any fixtures.

     Section 4. In the event of default as to, or in the event that proceedings be instituted for foreclosure or collection of, any mortgage, judgment, or lien affecting the Premises.

     Section 5. In the event that the Mortgagor shall be unable to retain an insurance company authorized to do business in the State of New Jersey to insure the Premises in the form of policy approved by the Mortgagee for a sum equal to the full amount of the Loan.

     Section 6. The Mortgagor shall have caused or permitted a security interest, perfected or otherwise, other than the security interest specifically provided for or permitted hereunder, to be created in any of the Mortgaged Property, or shall have failed to take any action requested by the Mortgagee to perfect or protect the security interest provided for herein.

     III. SHOULD ANY DEFAULT BE MADE BY THE MORTGAGOR, THE MORTGAGEE MAY TAKE ANY OR ALL OF THE FOLLOWING ACTIONS, AT THE SAME OR AT DIFFERENT TIMES:

     Section 1. Declare the entire amount of unpaid principal and accrued interest and other money due under this Mortgage, the Agreement and the Note immediately due and payable.

     Section 2. Enter upon, and take possession of, the Mortgaged Property, and to lease and let the said Mortgaged Property, and to receive all the rents, issues and profits thereof which are overdue, due or to become due, and to apply the same, after payment of all necessary charges and expenses, on account of the amounts hereby secured and the holder of this Mortgage is given and granted full power and authority to do any act or thing in connection with the management and operation of the Premises. This remedy becomes effective either with or without any action

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brought to foreclose this Mortgage and without applying at any time for a receiver of such rents. Should said rents or any part thereof be assigned without the consent of the holder of this Mortgage, then the Note shall, at the option of the holder hereof, become due and payable immediately, anything herein contained to the contrary notwithstanding.

     Section 3. Institute an action of mortgage foreclosure, or take other action as the law may allow, at law or in equity, for the enforcement of this Mortgage, and proceed thereon to final judgment and execution of the entire unpaid balance of the Loan, including costs of suit, interest and reasonable attorney’s fees. In case of any sale of the Mortgaged Property by virtue of judicial proceedings, the Mortgaged Property may be sold in one parcel and as an entirety or in such parcels, manner or order as the Mortgagee, in its sole discretion, may elect. The failure to make any tenants parties defendant to a foreclosure proceeding and to foreclose their rights will not be asserted by the Mortgagor as a defense in any proceeding instituted by the Mortgagee to collect the obligations secured hereby or any deficiency remaining unpaid after the foreclosure sale of the Premises.

     Section 4. Appoint a receiver of the rents, issues and profits of the Mortgaged Property without the necessity of proving either the depreciation or the inadequacy of the value of the security or the insolvency of the Mortgagor or any person who may be legally or equitably liable to pay moneys secured hereby and the Mortgagor and each such person waive such proof and consent to the appointment of a receiver.

     Section 5. If the Mortgagor or any subsequent owner is occupying the Premises or any part thereof, it is hereby agreed that the said occupants shall pay such reasonable rental monthly in advance as the Mortgagee shall demand for the Premises or the part so occupied, and for the use of the Mortgaged Property covered by this Mortgage or any chattel mortgage.

     Section 6. Apply on account of the unpaid indebtedness and the interest thereon or on account of any arrearages of interest thereon, or on account of any balance due to the Mortgagee after a foreclosure sale of the Mortgaged Property whether or not a deficiency action shall have been instituted, any unexpended moneys still retained by the Mortgagee that were paid by the Mortgagor to the Mortgagee for the payment of, or as security for the payment of taxes, assessments, municipal or governmental rates, charges, impositions, liens, water or sewer rents, or insurance premiums, if any, or in order to secure the performance of some act by the Mortgagor.

     Section 7. (i) Except as set forth in subsection (iv)(b) hereof, if the Mortgagor fails to initiate and diligently pursue to completion any Clean-Up required of the Mortgagor by any governmental agency or under any applicable Environmental Laws and such failure continues for thirty (30) days after the Mortgagee provides the Mortgagor written notice thereof (provided, however, that if such Clean-Up requires work to be done, actions to be taken or conditions to be remedied which by their nature cannot be fully done, taken or remedied, as the case may be, within such thirty (30) day period, then no such failure shall be deemed to have occurred with respect to any such work, action or remediation within such thirty (30) day period and thereafter diligently and continuously prosecutes same to completion), the Mortgagee may, in its sole discretion, either (1) declare a default under this Mortgage and the Agreement; or (2) cause the

18

Clean-Up of any Hazardous Substance or other Environmental Conditions on, at, under or emanating from the Mortgaged Property, or both; or (3) pay on behalf of the Mortgagor any Losses imposed on the Mortgagor as a result of any Regulatory Actions; or (4) make any other payment or perform any other reasonable act which will prevent a lien in favor of any federal, state or local governmental authority from attaching to the Mortgaged Property; or (5) pay, on behalf of the Mortgagor, any Losses imposed on the Mortgagor as a result of any Third-Party Claims or any one or more of the foregoing. The costs of such Clean-Up and/or exercise of any of the remedies hereinabove set forth by the Mortgagee shall be added to the indebtedness under the Loan Agreement (whether or not any court or governmental agency has ordered the Clean-Up), and said costs shall become due and payable, with interest thereon, at the highest interest borne by the Bonds. After the occurrence of a default hereunder, the Mortgagor shall give the Mortgagee and its employees, agents, contractors and representatives, access to the Mortgaged Property to conduct any Clean-Up or any of the other remedies set forth above that the Mortgagee, in its sole discretion, deems appropriate, however, the Mortgagee has no affirmative obligation to conduct any such Clean-Up or remedies, and this Mortgage and the Loan Agreement shall not be construed as creating any such obligation or liability on the part of the Mortgagee to conduct such Clean-Up or remedies.

     (ii) In connection with any Clean-Up conducted by Mortgagee pursuant to subsection (i) above, Mortgagee shall have the sole and exclusive right to: (1) select, hire and supervise the work of all persons, including environmental consultants and contractors engaged in any work required to conduct such Clean-Up (2) prepare and submit all data, test reports, recommendations, proposals or other documents to the NJDEP; and (3) conduct all negotiations with the NJDEP in connection with such Clean-Up, including without limitation, the sole and exclusive right to formulate, negotiate, secure NJDEP approval of and implement any cleanup plan or other remediation activities required by the NJDEP. The foregoing notwithstanding, Mortgagee shall provide Mortgagor with copies of all: (a) correspondence between the NJDEP and Mortgagees or its representatives with respect to such Clean-Up; (b) field and laboratory data generated in connection with such Clean-Up; and (c) reports, summaries, proposals and recommendations or other documents submitted by Mortgagee to the NJDEP in connection with such Cleanup within fifteen (15) days after submitting the same to the NJDEP. In addition, Mortgagee shall provide Mortgagor for its review and comment, draft copies of all documents Mortgagee intends to submit to the NJDEP in connection with such Clean-Up not less than ten (10) business days prior to submitting the same to the NJDEP. Mortgagee shall provide Mortgagor with at least five (5) business days’ notice of any meetings with or inspections by the NJDEP in connection with such Clean-Up and Mortgagor shall have the right to attend any such meetings or inspections.

     (iii) In conducting any Clean-Up pursuant to subsection (i) above, Mortgagee shall use its best efforts not to cause or suffer a violation of any applicable Environmental Laws at the Mortgaged Property or to cause any new Release at the Mortgaged Property or the aggravation of an existing Environmental Condition at the Mortgaged Property. In the event the Mortgagee, and any successors (but not assigns), causes any such violation, new Release or aggravated Environmental Condition as a result of its conduct of such Clean-Up at the Mortgaged Property, the Mortgagee, and any successors (but not assigns), shall remedy such violation, new Release or aggravated Environmental Condition. In the event the Mortgagee and any successors (but not

19

assigns), causes, any such violation, new Release or aggravated Environmental Condition as a result of its conduct of such Clean-Up at the Mortgaged Property, the Mortgagee, and any successors (but not assigns), shall remedy such violation, new Release or aggravated Environmental Condition and shall indemnify, defend and had harmless Mortgagor form and against any Regulatory Action or Third-Party Claim arising directly from and solely as a result of any such violation, new Release or aggravated Environmental Condition. The Mortgagee, and any successors (but not assigns), shall also indemnify, defend and hold harmless Mortgagor from and against any personal injury or property damage claims or actions arising directly from and solely as a result of the Mortgagee’s and any successors’ (but not assigns), entry upon the Mortgaged Property to conduct such Clean-Up pursuant to subsection (i) above.

     (iv) Any partial exercise by the Mortgagee of the remedies set forth in subsection (i) above, or any partial undertaking on the part of the mortgagee to cure the failure of the Mortgagor to comply with any Environmental Laws, shall not obligate the Mortgagee to complete the actions taken or require the Mortgagee to expend further sums to cure such noncompliance, except to the extent that Mortgagee’s partial exercise of such remedies prevents the Mortgagor from completing such remedies in accordance with the requirements of applicable Environmental Laws or governmental agencies with jurisdiction. In that event, the Mortgagee shall complete such remedies in accordance with and subject to the provision of subsection (i) above. The Mortgagee’s exercise of the remedies et forth in subsection (i) above, in whole or in part, shall not operate to place upon the Mortgagee any responsibility for the operation, control, care, management or repair of the Mortgaged Property or make the Mortgagee or be construed to deem the Mortgagee to be, an “owner” or “operator” of the Mortgaged Property within the meaning of or under any Environmental Laws. The Mortgagee, by making any such payment or incurring any such costs, shall be subrogated to any rights of the Mortgagor to seek reimbursement from any third parties, including, without limitation a predecessor-in-interest to the Mortgagor’s title to the Mortgaged Property, who may be a “responsible party” or otherwise liable for any or all of such payments or costs under any Environmental Laws, common law, equity or contract.

     IV. MISCELLANEOUS

     Section 1. The rights and remedies herein expressed to be vested in or conferred upon the Mortgagee shall be cumulative and shall be in addition to and not in substitution for or in derogation of the rights and remedies conferred by any applicable law. The failure, at any one or more times, of the Mortgagee to assert the right to declare the principal indebtedness due or the granting of any extension or extensions of time of payment of the Loan either to the Mortgagor or to any other person, or taking of other or additional security for the payment thereof, or releasing any security, or changing any of the terms of the within Mortgage or the Agreement, or other obligation accompanying this Mortgage, or waiver of or failure to exercise any right under any covenant or stipulation herein contained shall not in any way affect this Mortgage nor the rights of the Mortgagee hereunder nor operate as a release from any personal liability upon the Loan or obligation accompanying this Mortgage, nor upon any covenant or stipulation therein contained, nor under any agreement assuming the payment of said Loan or obligation.

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     Section 2. All notices to be given hereunder shall be given by certified mail directed to the Mortgagor or to the Mortgagee at the respective addresses shown at the head of this Mortgage, or to such other address as either party may notify the other.

     Section 3. All of the terms, covenants, provisions and conditions herein contained shall be for the benefit of, apply to, and bind the heirs, executors, administrators, successors and assigns of the Mortgagor and the Mortgagee, and are intended and shall be held to be real covenants running with the land, and the term “Mortgagor” shall also include any and all subsequent owners and successors in title of the Premises.

     Section 4. When such interpretation is appropriate, any word denoting gender used herein shall include all persons, natural or artificial, and words used in the singular shall include the plural.

     Section 5. This Mortgage is the Mortgage referred to in the Agreement and is subject to all the terms and provisions of said Agreement. Should any provision of the Agreement be inconsistent or contrary to the provisions of this Mortgage, the provisions of the Agreement shall control. The Agreement is hereby incorporated by reference as though fully set forth herein and made a part hereof, and is on file for inspection at the offices of the Mortgagee.

     THE MORTGAGOR HEREBY DECLARES THAT THE MORTGAGOR HAS READ THIS MORTGAGE, HAS RECEIVED A COMPLETELY FILLED IN COPY OF IT WITHOUT CHARGE AND HAS SIGNED THIS MORTGAGE AS OF THE DATE CONTAINED IN THE ACKNOWLEDGMENT HEREOF.

[The remainder of this page intentionally left blank]

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     IN WITNESS WHEREOF, the Mortgagor has caused these presents to be signed by its proper officer the day and year contained in the acknowledgment hereof.

WITNESS:	CONVERTED ORGANICS OF WOODBRIDGE, LLC
	By:
Name: Thomas Buchanan		Name: Edward Gildea
Title: Chief Financial Officer		Title: Chief Executive Officer

[Signature Page to Leasehold Mortgage]

ACKNOWLEDGMENT

STATE OF NEW JERSEY	:
	:	SS.:
COUNTY OF	:

     BE IT REMEMBERED, that on this ___day of ___, 2007, before me, the subscriber, an Attorney-at-Law of the State of New Jersey, personally appeared Edward Gildea, the Chief Executive Officer of Converted Organics of Woodbridge, LLC, who, I am satisfied is the person who executed the foregoing Instrument and who thereupon acknowledged that he signed and delivered said Instrument as his voluntary act and deed.

SCHEDULE A

All that certain lot, parcel or tract of land, situate and lying in the Township of Woodbridge, County of Middlesex, State of New Jersey, and being more particularly described as follows:

BEING those certain premises depicted on “Property Site Plan/Plan of the Building and Leased Premises” attached as Exhibit A to the Agreement of Lease between Recycling Technology Development, LLC as Landlord and Converted Organics Inc. as Tenant dated June 2, 2006 and First Amendment to Agreement of Lease dated January 18, 2007 .

FOR INFORMATIONAL PURPOSES ONLY: Also known as part of Lot 1 in Block 51 on the Township of Woodbridge Tax Map.

NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY

to

THE BANK OF NEW YORK,

as Trustee

TRUST INDENTURE

DATED: AS OF FEBRUARY 1, 2007

Securing $17,500,000 Aggregate Principal Amount of
Solid Waste Facilities Revenue Bonds
(Converted Organics of Woodbridge, LLC — 2007 Project)

Table of Contents

	Page
ARTICLE I DEFINITIONS		4
Section 101. Terms Defined in Recitals		4
Section 102. Certain Funds		4
Section 103. Additional Definitions		4
ARTICLE II THE BONDS		12
Section 201. Form and Terms of Bonds and Additional Bonds		12
Section 202. Execution		13
Section 203. Authentication		13
Section 204. Registration, Transfer and Exchange		13
Section 205. Mutilated, Destroyed, Lost or Stolen Bonds		14
Section 206. Payments of Principal, Redemption Price and Interest; Persons Entitled Thereto		15
Section 207. Temporary Bonds		16
Section 208. Cancellation and Destruction of Surrendered Bonds		16
Section 209. Acts of Bondholders; Evidence of Ownership		16
Section 210. Book-Entry Only System for Bonds		17
Section 211. Restrictions on Transfer of Bonds; Bond Legend		19
ARTICLE III ISSUE OF BONDS		20
Section 301. Issue of Bonds		20
Section 302. Issue of Additional Bonds		21
ARTICLE IV 2007 PROJECT FUND; PROJECT FUNDS		23
Section 401. 2007 Project Fund		23
Section 402. Project Funds		24
ARTICLE V REVENUES OF THE AUTHORITY, RECEIPTS AND REVENUES OF THE BORROWER AND THE APPLICATION THEREOF TO FUNDS		26
Section 501. Payments, etc., to be Sufficient		26
Section 502. Revenue Fund; Application Thereof		26
Section 503. Debt Service Fund		26
Section 504. Debt Service Reserve Fund		27
Section 505. Redemption Fund		28
Section 506. Rebate Fund		28
Section 507. Procedure When Funds Are Sufficient to Pay All Bonds		29
Section 508. Moneys to Be Held for All Bondholders, With Certain Exceptions		29
Section 509. Additional Accounts and Subaccounts		30
Section 510. Fees, Charges and Expenses		30
Section 511. Lease Reserve Fund		30
Section 512. Operations and Maintenance Expense Reserve Fund		30
ARTICLE VI SECURITY FOR AND INVESTMENT OR DEPOSIT OF FUNDS		31
Section 601. Deposits		31
Section 602. Investments		31
Section 603. Valuation		31
ARTICLE VII REDEMPTION OF BONDS		32
Section 701. Bonds Subject to Redemption		32
Section 702. Selection of Bonds for Redemption		34
Section 703. Notice of Redemption		34
ARTICLE VIII COVENANTS OF AUTHORITY		36
Section 801. Payment of Principal of and Interest on Bonds		36
Section 802. Corporate Existence; Compliance with Laws		36
Section 803. Enforcement of Agreement; Prohibition Against Amendments of Agreement; Notice of Default		36
Section 804. Further Assurances		37

i

	Page
Section 805. Filing and Recording		37
Section 806. Non-Presentment of Bonds; Escheats		37
Section 807. Indemnification		38
ARTICLE IX EVENTS OF DEFAULT AND REMEDIES		39
Section 901. Events of Default		39
Section 902. Notice of Default; Opportunity to Cure Such Default		39
Section 903. Acceleration; Cure		39
Section 904. Powers of Trustee		40
Section 905. Powers of Bondholders		41
Section 906. Limitations on Bondholders		41
Section 907. Remedies Not Exclusive		42
Section 908. Delay or Omission of Trustee		42
Section 909. Application of Moneys		42
Section 910. Severability of Remedies		42
Section 911. Borrower’s Right of Possession and Use of its Property		42
Section 912. Notice of Default		43
Section 913. Remedies Herein Additional to Remedies in Agreement		43
Section 914. Trustee May Enforce Rights Without Possession of Bonds		43
ARTICLE X THE TRUSTEE		44
Section 1001. Acceptance of Trust		44
Section 1002. Rights and Powers During Default		46
Section 1003. Right to Rely Upon Documents		46
Section 1004. Right to Own and Deal in Bonds		46
Section 1005. Interest Upon Moneys Received		46
Section 1006. Construction of Provisions of Indenture		46
Section 1007. Co-Trustee		46
Section 1008. Resignation by Trustee		46
Section 1009. Removal of Trustee		47
Section 1010. Appointment of Temporary Successor Trustee		47
Section 1011. Qualifications of Successor Trustee		47
Section 1012. Court Appointment of Successor Trustee		48
Section 1013. Acceptance and Transfer of Trust		48
Section 1014. Successor Trustee by Merger		48
Section 1015. Trustee’s Right to Make Advances		48
Section 1016. Intervention by Trustee		48
Section 1017. Fees, Charges and Expenses of Trustee		49
ARTICLE XI AMENDMENTS AND SUPPLEMENTS		50
Section 1101. Amendments and Supplements Without Bondholders’ Consent		50
Section 1102. Amendments With Bondholders’ Consent		50
Section 1103. Trustee Authorized to Join in Amendments and Supplements; Reliance on Counsel		50
Section 1104. Amendments to the Loan Agreement or the other Loan Documents Without Consent of Bondholders		50
Section 1105. Amendments to the Loan Agreement or the other Loan Documents with Consent of Bondholders		51
Section 1106. Conditions to Supplements and Amendments		51
ARTICLE XII DEFEASANCE		52
Section 1201. Defeasance		52
ARTICLE XIII MISCELLANEOUS PROVISIONS		53
Section 1301. Limitations on Recourse		53
Section 1302. No Rights Conferred on Others		53
Section 1303. Illegal, etc. Provisions Disregarded		53
Section 1304. Authority Not Responsible for Insurance, Taxes, Execution of Indenture or Application of Moneys Applied in Accordance with this Indenture		53
Section 1305. Authority May Rely on Certificates		54
Section 1306. Notices to Trustee and Authority		54

ii

	Page
Section 1307. Controlling Law		54
Section 1308. Successors and Assigns		55
Section 1309. Headings for Convenience Only		55
Section 1310. Counterparts		55
EXHIBIT A FORM OF THE BOND		A-1
EXHIBIT B CERTAIN TERMS OF BONDS		B-1

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TRUST INDENTURE

     THIS TRUST INDENTURE made and entered into as of the 1st day of February, 2007 by and between the NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY, a public instrumentality body corporate and politic organized and existing under the laws of the State of New Jersey (the “Authority”), and The Bank of New York, a banking corporation organized and existing under the laws of the State of New York with trust powers in the State of New Jersey, being qualified to accept and administer the trusts hereby created, as trustee (the “Trustee”):

W I T N E S S E T H:

     WHEREAS, the New Jersey Economic Development Authority Act, constituting Chapter 80 of the Pamphlet Laws of 1974 of the State of New Jersey, approved on August 7, 1974, as amended and supplemented (the “Act”), declares it to be in the public interest and to be the policy of the State of New Jersey (the “State”) to foster and promote the economy of the State, increase opportunities for gainful employment and improve living conditions, assist in the economic development or redevelopment of political subdivisions within the State, and otherwise contribute to the prosperity, health and general welfare of the State and its inhabitants by inducing manufacturing, industrial, commercial, recreational, retail, service and other employment promoting enterprises by making available financial assistance, to locate, remain or expand within the State; and

     WHEREAS, the Authority, to accomplish the purposes of the Act, is empowered to extend credit to such employment promoting enterprises in the name of the Authority, on such terms and conditions and such manner as it may deem proper for such consideration and upon such terms and conditions as the Authority may determine to be reasonable; and

     WHEREAS, Converted Organics of Woodbridge, LLC (the “Borrower”) has applied to the Authority for financial assistance in the aggregate principal amount of $17,500,000, the proceeds to be used by the Borrower to finance the Project (as defined in the Loan Agreement described below) in the Township of Woodbridge, County of Middlesex, New Jersey (the “Project”) through the issuance of the Authority’s Bonds (defined below); and

     WHEREAS, the Authority at a meeting thereof duly convened and held on January 9, 2007, adopted a resolution which authorized Bonds to be issued as Solid Waste Facilities Revenue Bonds (Converted Organics of Woodbridge, LLC — 2007 Project) Series A in the principal amount $17,500,000 (the “Bonds”), in order to finance the Project pursuant to a Loan Agreement by and between the Authority and the Borrower dated as of February 1, 2007 (the “Loan Agreement”); and

     WHEREAS, the Authority by the aforesaid resolution of January 9, 2007 has duly authorized the execution and delivery of this Indenture and the issuance thereunder of the Bonds (as hereinafter defined) upon and subject to the terms and conditions hereinafter set forth; and

     WHEREAS, all acts and things have been done and performed, which are necessary to make the Bonds when executed and issued by the Authority, authenticated by the Trustee and delivered, the valid and binding legal obligations of the Authority in accordance with their terms

and to make this Indenture a valid and binding loan agreement for the security of the Bonds authenticated and delivered under this Indenture;

     NOW, THEREFORE, THIS INDENTURE WITNESSETH: that, to provide for the payment of principal or Redemption Price (as the case may be) and interest in respect of all Bonds issued and outstanding under this Indenture, the rights of the Bondholders (as hereinafter defined) and the performance of the covenants contained in said Bonds and herein, and the payment of all other amounts due under this Indenture, the Authority has caused the Borrower to deliver to the Trustee, in addition to the Loan Agreement, a Note in the principal amount of $17,500,000 (the “Series 2007 Note”), which is secured by a Leasehold Mortgage from the Borrower to the Authority, an Assignment of Leases and Other Loan Agreements and the Guaranty Agreement (each as defined in the Loan Agreement), and all Additional Bonds, if any, issued hereunder, and does hereby sell, assign, transfer, set over and pledge unto The Bank of New York, as Trustee, its successors in trust and its assigns forever, all the right, title and interest of the Authority in and to, and remedies under, the Series 2007 Note, the Leasehold Mortgage, the Assignment of Leases and Other Agreements, the Guaranty Agreement and the Loan Agreement (except for the Reserved Rights of the Authority under the Loan Agreement) as the same relate to the Bonds issued under the Indenture, and all the right, title and interest of the Authority in and to the Revenues and the Funds (collectively, the “Trust Estate”);

     TO HAVE AND TO HOLD all and singular said right, title and interest of the Authority; granted, bargained, sold, assigned, transferred, conveyed, mortgaged, pledged, alienist, remised, released, confirmed and set over by the Authority as aforesaid or intended so to be, unto the said Trustee, its successors and assigns, forever.

     IN TRUST, NEVERTHELESS, under and subject to the terms and conditions hereinafter set forth, for the benefit, protection and security of the Holders of any and all of the Bonds, all of which regardless of the time or times of their issuance or maturity, shall be of equal rank within their respective series, without preference, priority or distinction of any of the Bonds over any other thereof, except as otherwise provided in or pursuant to this Indenture and for securing the observance and performance of all the conditions, covenants, promises, stipulations, loan agreements and terms and provisions of this Indenture and the uses and purposes herein expressed and declared.

     PROVIDED, HOWEVER, that notwithstanding the foregoing, the Authority retains pursuant to Section 504 of the Loan Agreement (but without prejudice to the assignment of such right, title and interest to the Trustee as hereinabove provided including, without limitation, the ability of the Trustee to exercise fully and independently its rights with respect thereto) equally but severally with the Trustee such right, title and interest arising from the Reserved Rights as set forth in the Loan Agreement, to receive indemnity against claims and payment of its fees and expenses, to receive notices, information and reports, to give consents and approvals and to enforce covenants of the Borrower in furtherance of the Act and to cause the Extraordinary Mandatory Redemption of the Bonds as set forth in Section 701(d) of this Indenture.

     PROVIDED FURTHER, HOWEVER, that if, after the right, title and interest of the Trustee in and to the Trust Estate pledged and assigned to it under this Indenture shall have ceased, terminated and become void in accordance with Section 1201 hereof, the principal of,

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redemption premium, if any, and interest on the Bonds and any other obligations arising hereunder shall have been paid to the Bondholders or shall have been paid to the Borrower pursuant to Section 1201 hereof, and all amounts due to the Authority and the Trustee hereunder, under the Loan Agreement, the Series 2007 Note, the Assignment of Leases and Other Loan Agreements and the Leasehold Mortgage have been paid in full, then this Indenture and all covenants, loan agreements and other obligations of the Authority hereunder shall cease, terminate and be void, and thereupon the Trustee shall cancel and discharge this Indenture and execute and deliver to the Authority and the Borrower such instruments in writing as shall be required to evidence the discharge hereof; otherwise, this Indenture shall be and remain in full force and effect.

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ARTICLE I
DEFINITIONS

     Section 101. Terms Defined in Recitals. The following terms shall have the meanings set forth in the recitals hereto:

Act	State
Borrower	Trustee
Loan Agreement	Trust Estate
Project

     Section 102. Certain Funds. All references herein to the “Redemption Fund”, the “Project Fund”, the “Debt Service Fund”, the “Debt Service Reserve Fund” and the “Revenue Fund” shall mean the funds so designated which are established pursuant to Article IV and V hereof.

     Section 103. Additional Definitions. The following additional terms shall have the meanings specified below:

     “Act” means the New Jersey Economic Development Authority Act, constituting Chapter 80 of the Pamphlet Laws of 1974 of the State of New Jersey, approved on August 7, 1974, as amended and supplemented.

     “Articles” and “Sections” mentioned by number are the respective Articles and Sections of this Indenture so numbered.

     “Authentication Date” means the date of authentication of any Bond by the Trustee.

     “Authority” means the New Jersey Economic Development Authority, a public body corporate and politic constituting an instrumentality of the State, exercising public and essential governmental functions and its successors or assigns.

     “Authorized Denominations” means Bonds in a minimum principal amount of $100,000 and any integral multiple of $5,000 in excess of $100,000.

     “Authorized Officer” means: (i) in the case of the Authority, the Chief Executive Officer, the Chief Operating Officer, any Director of the Authority or any individual or individuals duly authorized by the by-laws of the Authority or any resolution of the Authority to execute contracts on behalf of the Authority; (ii) in the case of the Borrower, any individual or individuals duly authorized in writing by the Borrower to act on its behalf; and (iii) in the case of the Trustee, the president, any vice-president, any assistant vice president, any corporate trust officer, any trust officer or any assistant trust officer of the Trustee, and when used with reference to any act or document also means any other person authorized to perform any act or sign any document by or pursuant to a resolution of the Board of Directors of the Trustee.

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     “Bond” or “Bonds” means the aggregate $17,500,000 Solid Waste Facilities Revenue Bonds (Converted Organics of Woodbridge, LLC — 2007 Project) Series A and any Additional Bonds authenticated and delivered under and pursuant to this Indenture.

     “Bond Counsel” means Cozen O’Connor, or any other attorney or firm of attorneys of nationally recognized standing on the subject of municipal bonds appointed by the Authority or the Borrower and acceptable to the Trustee.

     “Bond Proceeds Account” means the account so designated and established pursuant to Section 401 hereof.

     “Bond Redemption Fund” or “Redemption Fund” means the fund so designated and established pursuant to Section 506 hereof.

     “Bondholder” or the term “Holder” or any similar term, when used with reference to a Bond or Bonds, means any person who shall be the registered owner of any Outstanding Bond or Bonds, respectively.

     “Borrower” means Converted Organics of Woodbridge, LLC, a limited liability company organized under the laws of the State, and its successors or assigns.

     “Borrower’s Completion Certificate” means the certificate described in Section 304 of the Loan Agreement, executed by the Borrower in form attached as Exhibit B to the Loan Agreement.

     “Borrower Representative” means the President, General Manager or any other person or persons at the time designated to act on behalf of the Borrower, either generally or with respect to the execution of any particular document or other specific matter, as set forth in the bylaws of the Borrower or a certified resolution of its governing body, copies of which shall be on file with the Authority and the Trustee.

     “Business Day” means any day upon which the Trustee is not authorized or required by law or executive order to remain closed and on which the New York Stock Exchange remains open.

     “Capitalized Interest Account” means the account so designated and established pursuant to Section 401 hereof.

     “Certified Resolution” means a copy of one or more resolutions or amending resolutions certified by the Secretary or Assistant Secretary of the Authority to have been duly adopted by the Authority and to be in effect on the date of such certification.

     “Contractor’s Completion Certificate” means the certificate or certificates provided for in the Loan Agreement, executed by the Contractor and any Subcontractors, upon substantial completion of construction of the Project Facilities, in form and substance acceptable to the Authority, wherein the Contractor or Subcontractor certifies as to such matters as the Authority shall require, including, without limitation, that the Contractor or Subcontractor has made every effort to satisfy the minority employment goals established in the Affirmative Action Program

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and that the Contractor or Subcontractor has submitted all certificates, reports, and records required by the Authority.

     “Cost” or “Costs” means: (a) when used with respect to new construction, all costs which are allocable thereto and properly capitalized (or, with a proper election, could be properly capitalized) under generally accepted accounting principles and any other costs (whether or not properly capitalized) which are incidental thereto and reasonably necessary or desirable in connection therewith (or with the financing thereof); and (b) when used with respect to the refinancing of Indebtedness (as defined in the Loan Agreement), all costs which are allocable to the retirement of the Indebtedness to be refinanced (whether at or prior to maturity) and all costs incidental to and reasonably necessary or desirable in connection with the incurrence of any Indebtedness for the purpose of the refinancing.

     “Costs of Issuance Account” means the account so designated and established pursuant to Section 401 hereof.

     “Counsel” means an attorney at law or law firm (who may be counsel for the Trustee, the Authority or the Borrower) designated by the party offering an opinion as its counsel and not unsatisfactory to the Trustee.

     “Dated Date” means February 16, 2007.

     “Debt Service Fund” means the fund so designated and established pursuant to Section 503 hereof.

     “Debt Service Reserve Fund” means the fund so designated and established pursuant to Section 504 hereof.

     “Determination of Taxability” means a determination that the interest on the Bonds is includable in gross income of the holder or the beneficial owner thereof for purposes of federal income taxation, which determination shall be deemed to have occurred upon the receipt by the Trustee of a written notice from a current or former holder of a Bond or from the Borrower of (a) the issuance of a published or private ruling or a technical advice memorandum by the Internal Revenue Service in which the Borrower has participated or has been given the opportunity to participate, and which ruling or memorandum the Borrower, in its discretion, does not contest or from which no further right of judicial review or appeal exists, or (b) a final determination from which no further right of appeal exists of any court of competent jurisdiction in the United States in a proceeding in which the Borrower has participated or has been a party, or has been given the opportunity to participate or be a party, in the case of either (a) or (b), to the effect that, as a result of a failure by the Borrower to observe the provisions of its tax covenants in the Loan Agreement, or in any tax certificate delivered by the Borrower in connection with the issuance the Bonds, the interest payable on such Bonds is included in the gross income of the holders thereof for federal income tax purposes, other than a person who is a “substantial user” of either Project or a “related person” of such substantial user within the meaning of the Code; provided, however, that no such Determination of Taxability shall be considered to exist unless (i) the registered owner or former registered owner of the Bond involved in such proceeding or action (a) gives the Borrower and the Trustee prompt notice of the commencement thereof and (b) (if

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the Borrower agrees to pay all expenses in connection therewith) offers the Borrower the opportunity to control unconditionally the defense thereof and (ii) either (a) the Borrower does not agree within 30 days of receipt of such offer to pay such expenses and liabilities and to control such defense or (b) the Borrower shall exhaust or choose not to exhaust all available proceedings for the contest, review, appeal or rehearing of such decree, judgment or action which the Borrower determines to be appropriate. No Determination of Taxability described above will result from the inclusion of interest on any Bond in the computation of minimum or indirect taxes or if the events which would otherwise give rise to a Determination of Taxability are the result of a change in the Code or regulations under the Code adopted and becoming effective after the date of issuance of such Bonds.

     “Equity Account” means the account so designated and established pursuant to Section 401(d) hereof.

     “Event of Default” means any of the events described in Section 901 hereof.

     “Extraordinary Mandatory Redemption” means any redemption made pursuant to Section 701(d) hereof.

     “Extraordinary Optional Redemption” means any redemption made pursuant to Section 701(e) hereof.

     “Favorable Opinion” means an opinion of Bond Counsel acceptable to the Trustee addressed to the Authority and the Trustee to the effect that: (i) the action proposed to be taken is authorized or permitted by the Act and this Indenture and complies with their respective terms; and (ii) such action will not adversely affect (A) the exemption of interest on the Bonds from New Jersey personal income tax and corporate net income tax, (B) the exemption of the Bonds from New Jersey gross income taxes, and (C) the validity of the Bonds.

     “Fiscal Year” means the annual accounting year of the Borrower, which currently begins on January 1 of each fiscal year.

     “Funds” means the Revenue Fund, Bond Redemption Fund, Debt Service Reserve Fund, Debt Service Fund and the Project Fund.

     “Government Obligations “ means (i) direct obligations of, or obligations the timely payment of the principal of and interest on which is guaranteed by, the United States of America, (ii) evidences of ownership of a proportionate interest in specified direct obligations of, or specified obligations the timely payment of the principal of and the interest on which are unconditionally and fully guaranteed by, the United States of America, which obligations are held by a bank or trust company organized and existing under the laws of the United States of America or any state thereof in the capacity of custodian and (iii) obligations which are issued by any state or political subdivision thereof or any agency or instrumentality of such a state or political subdivision and which are fully secured as to principal and interest by obligations described in clause (i) or (ii) above.

     “Indenture” means this Trust Indenture dated as of February 1, 2007, as amended or supplemented at the time in question.

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     “Independent” means (a) in the case of an individual, one who is not a member of the governing body of the Authority or the Borrower or an officer or employee of the Authority or the Borrower, and (b) in the case of a partnership, corporation or association, one which does not have a partner, director, officer, member or substantial stockholder who is a member of the governing body of the Authority or the Borrower or an officer or employee of the Authority or the Borrower; provided, however, that the fact that a Person is retained regularly by or transacts business with the Authority or the Borrower shall not make such Person an employee within the meaning of this definition.

     “Investment Obligations” means, to the extent permitted by law (i) Government Obligations or obligations of the Federal National Mortgage Association, Export Import Bank, Farmers Home Administration, General Services Administration, U.S. Maritime Administration, Small Business Administration, U.S. Department of Housing & Urban Development (PHA’s) or Federal Housing Administration; (ii) bonds, notes or other evidences of indebtedness rated at the time of purchase “AAA” by Standard & Poor’s Ratings Group or “Aaa” by Moody’s Investors Service issued by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation with remaining maturities not exceeding three years; (iii) U.S. dollar denominated deposit accounts and banker’s acceptances with domestic commercial banks which have a rating on their short term certificates of deposit on the date of purchase of “A 1” or “A 1+” by Standard & Poor’s or “P 1” by Moody’s and maturing no more than 360 days after the date of purchase. (Ratings on holding companies are not considered as the rating of the bank); (iv) commercial paper which is rated at the time of purchase in the single highest classification, “A 1+” by Standard & Poor’s or “P 1” by Moody’s Investors Service and which matures not more than 270 days after the date of purchase; (v) investments in a money market fund rated “AAAm” or “AAAm G” or better by Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc., including any fund from which the Trustee or its affiliates may receive advisor compensation; (vi) certificates of deposit and time deposits of any bank organized under the laws of the United States or any state thereof which has a combined capital, surplus and undivided profits of at least $25,000,000, including the Trustee and, to the extent then permitted by law for the Trustee, any other investments of its trust funds provided that any such certificates and investments are fully collateralized by obligations mentioned in clauses (i) and (ii) hereof; (vii) repurchase Loan Agreements collateralized by Government Obligations having a market value at the time of purchase equal to 102% of the amount of such repurchase agreement; or (viii) Pre refunded Municipal Obligations defined as follows: Any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state which are not callable at the option of the obligor prior to maturity or as to which irrevocable instructions have been given by the obligor to call on the date specified in the notice; and (A) which are rated, based on the escrow established for such pre refunding, in the highest rating category of Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc. or any successors thereto; or (B) (1) which are fully secured as to principal and interest and redemption premium, if any, by a fund consisting only of cash or obligations described in paragraph (i) above, which fund may be applied only to the payment of such principal of and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate, and (2) which fund is sufficient, as verified by a nationally recognized independent certified public accountant, to pay principal of and interest and redemption premium, if any, on the bonds or other obligations described in this paragraph on the maturity date or dates thereof or

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on the redemption date or dates specified in the irrevocable instructions referred to above, as appropriate.

     “Investor Representation Letter” means that letter required to be signed by a proposed transferee or purchaser of the Bonds pursuant to Section 211 hereof.

     “Lease” means that Agreement of Lease dated as of June 2, 2007 by and between Recycling Technology Development, LLC and the Borrower (as assignee of Converted Organics, Inc.), as amended.

     “Leasehold Mortgage” shall mean the mortgage relating to the Project Facilities, dated February 16, 2007, executed by the Borrower, as mortgagor, and given to the Authority, as mortgagee.

     “Lease Reserve Fund” means the fund so designated and established pursuant to Section 511 hereof.

     “Loan Agreement” means the Loan Agreement dated as of February 1, 2007 between the Authority and the Borrower.

     “Mandatory Redemption” means any redemption made pursuant to Section 701(a) hereof.

     “Optional Redemption” means any redemption made pursuant to Section 701(b) hereof.

     “Outstanding” means, with respect to the Bonds, all Bonds authenticated and delivered under this Indenture as of the time in question, except:

(a)	All Bonds theretofore cancelled or required to be cancelled under Section 208 hereof.
(b)	Bonds for the payment or redemption of which provision has been made in accordance with Article XII hereof; provided that, if such Bonds are being redeemed, the required notice of redemption shall have been given or provision satisfactory to the Trustee shall have been made therefor, and that if such Bonds are being purchased, there shall be a firm commitment for the purchase and sale thereof; and
(c)	Bonds in substitution for which other Bonds have been authenticated and delivered pursuant to Article II hereof.

     “Paying Agent” means The Bank of New York, and its successor or successors of any other corporation or association which may at any time be substituted in its place pursuant to this Indenture.

     “Payment Date” means the (i) Principal Installment Date for the payment of the principal of the Bonds, the dates established for the payment of principal on any Additional Bonds, or any February 1 or August 1 for the payment of interest on the Bonds and (ii) the Redemption Date set

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by the Trustee for the payment of the principal or redemption premium, if any, of or interest on the Bonds upon redemption prior to the scheduled payment dates.

     “Person” means an individual, a corporation, a partnership, a limited liability company an association, a joint stock company, a trust, any unincorporated organization, a governmental body or a political subdivision, a municipality, a municipal authority or any other group or organization of individuals.

     “Principal Installment Date” means any August 1st on which the principal of any Bonds shall mature.

     “Project” shall have the meaning given in the recitals hereto.

     “Project Facilities” means the structures, buildings, improvements, equipment and fixtures financed by or acquired with the proceeds of the Bonds as reflected on Exhibit A to the Loan Agreement, as amended from time to time.

     “Project Fund” means the 2007 Project Fund and any other Project Fund established pursuant to Section 402 hereof.

     “Proper Charges” means: (i) costs of issuance of the Bonds, attorneys’ fees, printing costs, agent’s fees and similar expenses paid in connection with the Project Facilities; (ii) an expenditure for the Project Facilities, paid and incurred after May 12, 2006 for the acquisition or improvement of land or the acquisition, construction, reconstruction or improvement of property of a character subject to the allowance for depreciation under the Code; or (iii) any costs of issuance, preliminary expenditures or de minimis expenditures described in Treas. Regs. § 1.150-2(f).

     “Property” means any and all right, title and interest of the Borrower in and to any and all property whether real or personal, tangible or intangible and wherever situated.

     “Purchaser” means Ferris, Baker Watts, Richmond, Virginia, and its successors and assigns.

     “Rating Agency” means Moody’s Investors Service or Standard & Poor’s Ratings Group or any other successor organization providing securities rating services.

     “Redemption Date” means the date established for the payment of the Redemption Price of the Bonds whether as a result of a redemption event set forth in Article VII hereof, upon acceleration of the Bonds upon the occurrence of an Event of Default or the redemption in part of any Bonds on the Interest Payment Date.

     “Redemption Price” means the principal amount of any Bond to be redeemed pursuant hereto, plus the applicable premium, if any, payable upon redemption.

     “Registrar” means The Bank of New York and its successors and assigns.

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     “Reserve Fund Requirement” means an amount equal to the lesser of ten percent (10%) of the proceeds of the Bonds or one hundred percent (100%) of the maximum annual debt service on the Bonds; provided, however, that the Reserve Fund Requirement shall not be less than $1,750,000.

     “Requisition” means the form of requisition required by Section 303 of the Loan Agreement as a condition precedent to the disbursement of moneys from the Project Fund, in the form attached to the Loan Agreement as Exhibit C.

     “Revenues” means (i) all amounts received as payments under the Series 2007 Note, (ii) investment income in respect of any money held by the Trustee, and (iii) any other amounts paid by the Borrower to the Trustee pursuant to the Loan Agreement (except for amounts payable under Sections 712, 718, 806 and 904 of the Loan Agreement).

     “Revenue Fund” means the fund so designated and established pursuant to Section 502 hereof.

     “Series 2007 Note” means the Note dated February 16, 2007 evidencing the Loan and which is made a part of the Record of Proceedings.

     “Special Mandatory Redemption” shall mean any redemption made pursuant to Section 701(c) hereof and pursuant to the requirements of each series of Bonds.

     “Supplemental Indenture” or “indenture supplemental hereto” means any indenture amending or supplementing this Indenture which may be entered into in accordance with the provisions of this Indenture.

     “Transfer Agent” means The Bank of New York and its successors and assigns.

     “Trust Estate” has the meaning set forth in the granting clause within the preambles hereto. and

     “Trustee” means The Bank of New York, a banking corporation organized and existing under the laws of the State of New York with trust powers in the State, being qualified to accept and administer the trusts hereby created, and its successors in the trust hereunder.

     The words “hereof”, “herein”, “hereto”, “hereby” and “hereunder” (except in the form of Bonds) refer to this entire Indenture.

     Terms not otherwise defined herein shall have the meanings provided in the Loan Agreement.

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ARTICLE II
THE BONDS

     Section 201. Form and Terms of Bonds and Additional Bonds.

(a)	The Bonds shall be issued in substantially such form as may be approved by the Authority and the Borrower and set forth in Exhibit A hereto, as the same may be supplemented to include the form of any Additional Bonds.
(b)	The Bonds shall be issued initially in a book-entry only system with The Depository Trust Company, New York, New York (“DTC”), acting as securities depository for the Bonds in the manner described in Section 210 hereof. The ownership of one fully registered Bond in the aggregate principal amount of each maturity of Bonds will be initially registered in the name of Cede & Co., as nominee for DTC.
(c)	The Authority, with the prior approval of the Borrower, shall determine the terms of each series of Bonds, including, without limitation thereto, the following: (i) the aggregate principal amount of such Bonds; (ii) the Authorized Denominations of such Bonds; (iii) the date of such Bonds; (iv) the maturity date or dates of such Bonds and the principal amount of Bonds within each maturity; (v) the redemption provisions for such Bonds; and (vi) the rate or rates of interest on such Bonds and the dates on which such interest is required to be paid. To the extent that all such terms are not otherwise set forth herein or in the Bonds, they shall be set forth in Exhibit B hereto, as the same may be supplemented to include the terms of any Additional Bonds.
(d)	The Bonds shall be numbered consecutively, beginning with the letter “R”, followed by the letter of the series designation of the Bonds and followed by the number. Temporary Bonds shall include the designation “(T).”
(e)	When the Bonds are issued, transferred and delivered in accordance with the provisions of this Indenture, the Bonds will have been duly authorized, executed, issued and delivered and will constitute the valid special, limited obligation of the Authority payable solely from the revenues and other monies derived by the Authority from the Loan Agreement, and nothing in the Bonds or this Indenture shall be construed as assigning or pledging therefore any other funds or assets of the Authority. THE STATE IS NOT OBLIGATED TO PAY, AND NEITHER THE FAITH AND CREDIT NOR TAXING POWER OF THE STATE IS PLEDGED TO THE PAYMENT OF, THE PRINCIPAL OR REDEMPTION PRICE, IF ANY, OF OR INTEREST ON THE BONDS. THE BONDS ARE A SPECIAL, LIMITED OBLIGATION OF THE AUTHORITY, PAYABLE SOLELY OUT OF THE REVENUES OR OTHER RECEIPTS, FUNDS OR MONEYS OF THE AUTHORITY PLEDGED UNDER THE INDENTURE AND FROM ANY AMOUNTS OTHERWISE AVAILABLE UNDER THE INDENTURE FOR THE

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PAYMENT OF THE BONDS. THE BONDS DO NOT NOW AND SHALL NEVER CONSTITUTE A CHARGE AGAINST THE GENERAL CREDIT OF THE AUTHORITY. THE AUTHORITY HAS NO TAXING POWER.

The Act provides that neither the members of the Authority nor any person executing bonds for the Authority shall be liable personally on said bonds by reason of the issuance thereof.

     Section 202. Execution. Each Bond shall be executed in the name of the Authority by the manual or facsimile signature of the Authority Officer and its corporate seal shall be thereunto affixed, imprinted or otherwise reproduced and attested by the manual or facsimile signature of the Secretary or Assistant Secretary. In case any officer who shall have signed, sealed or attested any of the Bonds shall cease to be such officer of the Authority before the Bonds so signed, sealed or attested shall have been authenticated and delivered by the Trustee, such Bonds may nevertheless be authenticated and delivered as herein provided as if the person who so signed, sealed or attested such Bonds had not ceased to be such officer. Any Bond may be signed, sealed or attested on behalf of the Authority by any person who, at the date of such act, shall hold the proper office, notwithstanding that at the date of such Bond such person may not have held such office.

     Section 203. Authentication. The Bonds shall bear thereon a certificate of authentication, substantially in the form set forth hereinafter in this Indenture, duly executed by the Trustee. Only such Bonds shall be entitled to any right or benefit under this Indenture. No Bond shall be valid or obligatory for any purpose unless such certificate of authentication upon such Bond shall have been duly executed by the Trustee, and such certificate of authentication by the Trustee upon any Bond executed on behalf of the Authority shall be conclusive and the only evidence that the Bond so authenticated has been duly authenticated and delivered under this Indenture and that the Holder thereof is entitled to the benefit of this Indenture.

     Section 204. Registration, Transfer and Exchange.

(a)	The ownership of each Bond shall be recorded in the books of the Authority, which books shall be kept by the Trustee at its principal corporate trust office and shall contain such information as is necessary for the proper discharge of the Trustee’s duties hereunder as Trustee, Registrar, Paying Agent and Transfer Agent.
(b)	Bonds may be transferred or exchanged as follows:

(i) Except as otherwise provided herein, any Bond may be transferred if endorsed for such transfer by the holder thereof and surrendered by such holder or his duly appointed attorney at the principal corporate trust office of the Trustee or at such other location where the Trustee’s principal payment operation exist, whereupon the Trustee shall authenticate and deliver to the transferee a new Bond or Bonds of the same series and maturity and in the same denomination as the Bond surrendered for transfer or in different

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	Authorized Denominations equal in the aggregate to the principal amount of the surrendered Bond.
(ii)	Any Bond or Bonds of a particular series and maturity may be exchanged for one or more Bonds of the same series and maturity and in the same principal amount, but in a different authorized denomination or denominations. Each Bond so to be exchanged shall be surrendered by the holder thereof or his duly appointed attorney at the principal corporate trust office of the Trustee, whereupon a new Bond or Bonds shall be authenticated and delivered to the holder.
(iii)	In the case of any Bond properly surrendered for partial redemption, the Trustee shall authenticate and deliver a new Bond in exchange therefor, such new Bond to be of the same series and maturity and in a denomination equal to the unredeemed principal amount of the surrendered Bond; provided that, at its option, the Trustee may certify the amount and date of partial redemption upon the partial redemption certificate, if any, printed on the surrendered Bond and return such surrendered Bond to the holder in lieu of an exchange.
	Except as provided in subparagraph (iii) above, the Trustee shall not be required to effect any transfer or exchange during the fifteen (15) days immediately preceding the date of mailing of any notice of redemption or at any time following the mailing of any such notice if the Bond to be transferred or exchanged has been called for such redemption. No charge shall be imposed in connection with any transfer or exchange, except for taxes or governmental charges related thereto. Transfers or exchanges shall be valid for any purposes hereunder except as provided above.

     Section 205. Mutilated, Destroyed, Lost or Stolen Bonds.

(a) If any Bond is mutilated, lost, stolen or destroyed, the holder thereof shall be entitled to the issuance of a substitute Bond only as follows:

(i)	in all cases, the Bondholder shall provide indemnity to the Borrower, the Authority and the Trustee against any claims arising out of or otherwise related to the issuance of substitute Bonds pursuant to this Section;
(ii)	in the case of a mutilated Bond the Bondholder shall surrender the Bond to the Trustee for cancellation; and
(iii)	in the case of a lost, stolen or destroyed Bond, the Bondholder shall provide evidence, satisfactory to the Authority and the Trustee, of the ownership and the loss, theft or destruction of the affected Bond.

Upon compliance with the foregoing, a new Bond of like tenor and denomination, executed by the Authority, shall be authenticated by the Trustee and delivered to the Bondholder, all at the expense of the Bondholder to whom the substitute Bond is delivered. Notwithstanding the

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foregoing, the Trustee shall not be required to authenticate and deliver any substitute for a Bond which has been called for redemption or which has matured or is about to mature and, in any such case, the principal or Redemption Price then due or becoming due shall be paid by the Trustee in accordance with the terms of the mutilated, lost, stolen or destroyed Bond without substitution therefor.

(b)

Every substituted Bond issued pursuant to this Section 205 shall constitute an additional contractual obligation of the Authority, whether or not the Bond alleged to have been destroyed, lost or stolen shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Bonds duly issued hereunder.

(c)

All Bonds shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment of mutilated, destroyed, lost or stolen Bonds, and shall preclude any and all other rights or remedies, notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment of negotiable instruments, investments or other securities without their surrender.

     Section 206. Payments of Principal, Redemption Price and Interest; Persons Entitled Thereto.

(a)	The principal or Redemption Price of each Bond shall be payable upon surrender thereof at the principal corporate trust office of the Trustee or at such other location where the Trustee’s principal payment operations exist. Such payments shall be made to the holder of the Bond so surrendered, as shown on the books of the Authority on the date of payment.
(b)	Each Bond shall bear interest and be payable as to interest as follows:

(i)

Each Bond shall bear interest from (A) the date thereof, if authenticated for to the first date on which interest on such Bond is required to be paid, as set forth in Exhibit B (each such date being herein referred to as a “scheduled interest payment date”), (B) from the date of authentication, if authenticated on a scheduled interest payment date to which interest has been paid, or (C) from the last preceding scheduled interest payment date to which interest has been paid (or the date of the Bond if no interest thereon has been paid) in all other cases.

(ii)

Subject to the provisions of subparagraph (iii) below, the interest due on any Bond on any scheduled interest payment date shall be paid by check mailed to the holder of such Bond as shown on the registration books kept by the Trustee as of the close of business on the “regular record date”, which shall be the fifteenth day of the calendar month (or the last preceding Business Day if such date is not a Business Day) immediately preceding the scheduled interest payment date in question.

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(iii) If the available funds under this Indenture are insufficient on any scheduled interest payment date to pay the interest then due, such interest shall continue to accrue interest at the interest Rate on the Bonds but thereupon cease to be payable to the Bondholders shown on the registration books as of the regular record date. If sufficient funds for the payment of such overdue interest thereafter become available, the Trustee shall immediately establish a “special interest payment date” for the payment of the overdue interest and a “special record date” (which shall be a Business Day) for determining the Bondholders entitled to such payments. Notice of each date so established shall be mailed to each Bondholder at least 10 days prior to the special record date, but not more than 30 days prior to the special payment date. The overdue interest shall be paid on the special interest payment date by check or draft mailed to the Bondholders, as shown on the registration books kept by the Trustee as of the close of business on the special record date.

In lieu of receiving interest payments by check or draft as provided above, any holder of at least $500,000 in aggregate principal amount of Bonds of any series shall, upon written request to the Trustee, be entitled to receive interest on such Bonds by wire transfer to a designated account.

     Section 207. Temporary Bonds. Pending preparation of definitive Bonds of any series, or by agreement with the purchasers of all Bonds of any series, the Authority may issue and, upon its request, the Trustee shall authenticate in lieu of definitive Bonds one or more temporary printed or typewritten Bonds, in Authorized Denominations, of substantially the tenor recited above which shall be numbered as provided in 201(d) hereof. At the request of the Authority, the Trustee shall authenticate definitive Bonds in exchange for and upon surrender of an equal principal amount of temporary Bonds. Until so exchanged, temporary Bonds shall have the same rights, remedies and security hereunder as definitive Bonds.

     Section 208. Cancellation and Destruction of Surrendered Bonds. The Trustee shall cancel and destroy: (a) all Bonds surrendered for transfer or exchange, for payment at maturity or for redemption (unless the surrendered Bond is to be partially redeemed and the Trustee elects to return the Bond, certified as to the redemption, to the holder thereof pursuant to subsection 204(b)(iii)); (b) all Bonds purchased by the Trustee with available moneys in Funds established hereunder; and (c) all Bonds purchased by the Borrower and surrendered to the Trustee for cancellation. The Trustee shall deliver to the Authority and the Borrower a certificate of destruction in respect of all Bonds destroyed in accordance with this Section.

     Section 209. Acts of Bondholders; Evidence of Ownership. Any action to be taken by Bondholders may be evidenced by one or more concurrent (or substantially concurrent) written instruments of similar tenor signed or executed by such Bondholders in person or by agent appointed in writing. The fact and date of the execution by any Person of any such instrument may be proved by acknowledgment before a notary public or other officer empowered to take acknowledgments or by an affidavit of a witness to such execution. Any action by the holder of any Bond shall bind all future holders of the same Bond in respect of any thing done or suffered by the Authority, the Borrower or the Trustee in pursuance thereof.

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     Section 210. Book-Entry Only System for Bonds.

(a)	Except as provided below, the registered Holder of all of the Bonds shall be registered in the name of Cede & Co., as nominee of The Depository Trust Company (“DTC”). With respect to the Bonds for which Cede & Co. shall be the registered Holder, payment of interest on such the Bonds shall be made by wire transfer of same day funds to the account of Cede & Co. on the scheduled interest payment dates for the Bonds at the address indicated for Cede & Co. in the registration books of the Authority kept by the Trustee, as Registrar.
(b)	The Bonds shall be initially issued in the form of a separate fully registered bond in the amount of each separate maturity. Upon initial issuance, the ownership of such Bond shall be registered on the registration books of the Authority kept by the Trustee in the name of Cede & Co. With respect to Bonds so registered in the name of Cede & Co., the Authority and the Trustee shall have no responsibility or obligation to any DTC participant, indirect DTC participant, or any beneficial owner of a Bond. Without limiting the immediately preceding sentence, the Authority and the Trustee shall have no responsibility or obligation with respect to (i) the accuracy of the records of DTC, Cede & Co. or any DTC participant or indirect DTC participant with respect to any beneficial ownership interest in a Bond, (ii) the delivery to any DTC participant, indirect DTC participant, beneficial owner or any other person, other than DTC or Cede & Co., of any notice with respect to a Bond, or (iii) the payment to any DTC participant, indirect DTC participant, beneficial owner or any other person, other than DTC or Cede & Co., of any amount with respect to the principal of, premium, if any, or interest on a Bond. The Authority and the Trustee may treat DTC as, and deem DTC to be, the absolute registered Holder of each Bond for the purpose of (i) payment of the principal of and interest on each such Bond, (ii) giving notices with respect to the Bond, (iii) registering transfers with respect to a Bond and (iv) for all other purposes whatsoever. The Trustee shall pay the principal of and interest on the Bonds only to or upon the order of DTC, and all such payments shall be valid and effective to fully satisfy and discharge the Authority’s obligations with respect to such principal and interest to the extent of the sum or sums so paid. No person other than DTC shall receive a Bond evidencing the obligation of the Authority to make payments of principal and interest thereon pursuant to this Indenture. Upon delivery by DTC to the Trustee of written notice to the effect that DTC has determined to substitute a new nominee in place of Cede & Co., and subject to the transfer provisions hereof, the words “Cede & Co.” in this Indenture shall refer to such new nominee of DTC.
(c)	(i) DTC may determine to discontinue providing its services with respect to Bonds at any time by giving written notice to the Authority and discharging its responsibilities with respect thereto under applicable law. Upon receipt of such notice, the Authority shall promptly deliver a copy of same to the Trustee.

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(i) The Authority, (A) in its sole discretion and without the consent of any other person, may discontinue the book-entry services of DTC with respect to the Bonds, in which event certificates for such Bonds are required to be printed and delivered to DTC, and (B) shall terminate the services of DTC with respect to the Bonds upon receipt by the Authority and the Trustee of written notice from DTC to the effect that DTC has received written notice from DTC participants or indirect DTC participants having interests, as shown in the records of DTC, in an aggregate principal amount of not less than fifty percent (50%) of the aggregate principal amount of the then Outstanding Bonds to the effect, that (A) DTC is unable to discharge its responsibilities with respect to such Bonds; or (B) a continuation of the requirement that all of the Outstanding Bonds be registered in the registration books kept by the Trustee in the name of Cede & Co., as nominee of DTC, is not in the best interest of the beneficial owners of the Bonds.

(d)	Upon termination of the services of DTC with respect to all Bonds as set forth above, such Bonds shall no longer be restricted to being registered in the registration books kept by the Trustee in the name of Cede & Co., as nominee of DTC, but may be registered in whatever name or names Bondholders transferring or exchanging such Bonds shall designate, in accordance with the provisions of the Indenture. Upon the determination by any party authorized herein that the Bonds shall no longer be limited to book-entry only form, the Authority shall immediately advise the Trustee in writing of the procedures for transfer of such Bonds from such book-entry only form to a fully registered form.
(e)	Notwithstanding any other provision of this Indenture to the contrary, so long as any Bond is registered in the name of Cede & Co., as nominee of DTC, all payments with respect to the principal of and interest on, and all notices with respect to, such Bond shall be made and given, respectively, to DTC as provided in the DTC Blanket Letter of Representation of the Authority and the Trustee, addressed to DTC.
(f)	In connection with any notice or other communication to be provided to holders of the Bonds of any Series pursuant to the Indenture by the Authority or the Trustee with respect to any consent or other action to be taken by such Bondholders, the Authority or the Trustee, as the case may be, shall establish a record date for such consent or other action and give DTC notice of such record date not less than fifteen (15) calendar days in advance of such record date to the extent possible.
(g)	The Authority and the Trustee hereby signify their approval of the DTC Blanket Letter of Representation of the Authority. Any successor Trustee shall, in its written acceptance of its duties under this Indenture, agree to take any actions necessary from time to time to comply with the requirements of the DTC Blanket Letter of Representation.

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     Section 211. Restrictions on Transfer of Bonds; Bond Legend.

(a)	Notwithstanding any provision herein to the contrary, the Bonds may only be resold in Authorized Denominations upon receipt by the Trustee of an Investor Representation Letter from the proposed transferee or purchaser in the form attached hereto as Exhibit C.
(b)	The following language shall be set forth in bold as a legend on each Bond:
	“THIS BOND IS NOT RATED AND NO APPLICATION IS EXPECTED TO BE MADE TO OBTAIN A RATING THEREON. PURCHASE OF THIS BOND SHOULD BE CONSIDERED ONLY BY INVESTORS WHO (A) CAN BEAR THE ECONOMIC RISK OF SUCH BOND; (B) HAVE KNOWLEDGE AND EXPERIENCE IN BUSINESS AND FINANCIAL MATTERS AS TO BE CAPABLE OF EVALUATING THE RISKS AND MERITS OF SUCH BOND; (C) ARE A NATIONAL BANK, COMMERCIAL BANK, REGISTERED INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE “INVESTMENT COMPANY ACT”), AN ACCREDITED INVESTOR UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), A QUALIFIED INSTITUTIONAL BUYER AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT OR A QUALIFIED PURCHASER AS SUCH TERM IS DEFINED UNDER SECTION 2(A)(5)(A) OF THE INVESTMENT COMPANY ACT; (D) ACKNOWLEDGE THAT SUCH BOND IS HIGH RISK AND SHOULD ONLY BE CONSIDERED FOR PURCHASE AS PART OF A DIVERSIFIED PORTFOLIO OF HIGH YIELD, HIGH RISK SECURITIES; AND (E) HAVE UNDERTAKEN THE RESPONSIBILITY FOR OBTAINING ALL INFORMATION THAT THEY DEEM NECESSARY AND DESIRABLE TO FORM A DECISION TO PURCHASE SUCH BOND. BY PURCHASING SUCH BOND, EACH PURCHASER OF SUCH BONDS AGREES THAT THE AUTHORITY IS NOT RESPONSIBLE FOR ITS DECISION TO PURCHASE SUCH BOND AND ACKNOWLEDGES THAT IT HAS NO RIGHTS OR RECOURSE AGAINST THE AUTHORITY WITH RESPECT TO THE DECISION TO PURCHASE SUCH BOND.”

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ARTICLE III
ISSUE OF BONDS

     Section 301. Issue of Bonds. Upon the execution and delivery of this Indenture, the Authority shall issue the Bonds, and the Trustee shall authenticate and deliver such Bonds to the initial purchasers thereof and apply the net proceeds of the Bonds (“Bond Proceeds”), together with $4,500,000 contributed by the Borrower (“Equity Contribution”), as follows:

(a)	$1,750,000 of Bond Proceeds shall be transferred to the Debt Service Reserve Fund to satisfy the Reserve Fund Requirement;
(b)	$350,000 of Bond Proceeds and $603,374.74 of Equity Contribution shall be transferred to the Cost of the Issuance Account in the Project Fund to pay Costs of Issuance;
(c)	$1,634,411 of Bond Proceeds shall be transferred to the Capitalized Interest Account in the Project Fund to pay interest on the Bonds;
(d)	(i) $13,365,589 of Bond Proceeds and $846,625.26 of Equity Contribution shall be held in the Bond Proceeds Account of the 2007 Project Fund to pay for Costs of the Project;

(ii) $400,000 of Bond Proceeds and $2,855,000 of Equity Contribution shall be held in the Equity Account of the 2007 Project Fund to pay Costs of the Project and certain general and administrative costs, including salaries, accounting and legal fees, and other expenses of the Borrower; and

(e) $195,000 of Equity Contribution shall be transferred to the Lease Reserve Fund to be applied pursuant to Section 511 hereof.

     Prior to authentication and delivery of the Bonds by the Trustee, the Trustee shall also have received the following:

(a)	A copy of the resolution adopted by the Authority authorizing the execution and delivery of the Loan Agreement and this Indenture and the issuance and delivery of the Bonds, duly certified by the Secretary or Assistant Secretary of the Authority, to have been duly adopted by the Authority and to be in full force and effect on the date of such certification;
(b)	An original executed counterpart of the Loan Agreement, the Leasehold Mortgage and this Indenture;
(c)	The original executed Series 2007 Note in the aggregate principal amount of $17,500,000;

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(d)	The opinion of Counsel for the Borrower regarding the enforceability of the Loan Agreement and the opinion of Bond Counsel regarding the enforceability of the Bonds;
(e)	Certificate regarding the insurance required to be maintained as provided for in Section 813 of the Loan Agreement; and
(f)	The Authority’s Certificate to the Trustee setting forth the Authority’s instructions to the Trustee regarding the disposition of the Bond proceeds.

     Section 302. Issue of Additional Bonds. Subject to the terms of the Loan Agreement, the Authority, with the consent of the Bondholders (which consent shall not be unreasonably withheld), may issue one or more series of Additional Bonds from time to time and lend the proceeds thereof to the Borrower pursuant to the Loan Agreement to provide funds for the Cost of undertaking or completing the Project, an addition to the Project or additional facilities on the mortgaged property or the Cost of refunding or refinancing all or a portion of the Outstanding Bonds of any one or more series or of any Indebtedness (as defined in the Loan Agreement) other than Bonds. The Trustee shall authenticate and deliver such Additional Bonds at the request of the Authority, but only upon compliance with the requirements set forth in Section 601 of the Loan Agreement and upon delivery to the Trustee of:

(a)

An opinion or opinions of Counsel to the effect that (i) the Additional Bonds have been duly issued for a permitted purpose under this Section 302, (ii) all consents or approvals required to be obtained from any regulatory body for the issuance of the Additional Bonds have been obtained, (iii) the consent of the Bondholders have been obtained; (iv) the issuance of the Additional Bonds and execution and delivery of related documents will not constitute a material breach or default on the part of the Authority under its charter or the Borrower under its Articles of Incorporation and Bylaws, any applicable laws or regulations, court orders or rulings of regulatory bodies to which the Authority or the Borrower is subject or any agreements to which the Authority or Borrower is a party or to which their respective properties are subject, (v) all documents delivered by the Authority and the Borrower in connection with the issuance of the Additional Bonds have been duly and validly authorized, executed and delivered and such execution and delivery and all other actions taken by the Authority and the Borrower in connection with the issuance of the Additional Bonds have been duly authorized by all necessary corporate actions, and (vi) all conditions precedent to the issuance of the Additional Bonds pursuant to this Indenture have been satisfied.

(b)

Such amendments or supplements to this Indenture and the Loan Agreement and such other financing documents as may be necessary or appropriate in order to (i) provide for the issuance of the Additional Bonds, (ii) provide for the loan of the proceeds of such Additional Bonds to the Borrower under the Loan Agreement and the application of such proceeds to the Costs of any capital additions, or to the Costs of the funding or refinancing in respect of which the Additional Bonds are being issued, and (iii) provide for the Additional Bonds and all other Bonds previously issued and then Outstanding to be equally and ratably secured (except

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	as otherwise permitted herein) by this Indenture, the Leasehold Mortgage, and the Loan Agreement.
(c)	Certified Resolutions of the Authority and the Borrower authorizing (i) the issuance of the Additional Bonds, (ii) the application of the proceeds thereof and (iii) the execution and delivery of the amendments, supplements and additional documents referred to in subsection (b) above and the consummation of the transactions contemplated thereby.
(d)	In the event the Additional Bonds are to issued on a parity with any Bonds Outstanding, the Borrower shall provide for the funding of the Debt Service Reserve Fund in an amount necessary to meet the Reserve Fund Requirement for all Bonds Outstanding and the Additional Bonds and cause an amendment to the Mortgage to increase the amount thereof in accordance with Section 505(c) hereof to include the Additional Bonds.
(e)	The reasonable fees and expenses of the Trustee, including but not limited to legal fees and expenses, in connection with the issuance of the Additional Bonds.

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ARTICLE IV
2007 PROJECT FUND; PROJECT FUNDS

     Section 401. 2007 Project Fund. There is hereby established a 2007 Project Fund in connection with the issuance of the Bonds, into which the Trustee shall deposit the amounts specified in Section 301 hereof.

(a)	There is hereby established a Costs of Issuance Account in the 2007 Project Fund, the moneys in which shall be used to pay costs incurred by the Authority and the Borrower in connection with the issuance of the Bonds. All such payments shall be made in accordance with written Requisitions given to the Trustee by a Borrower Representative, which instructions shall specify the Person to whom the payment is to be made and the nature of the cost to be paid. Any moneys remaining in the Costs of Issuance Account in 2007 Project Fund as of April 1, 2007 shall be transferred to the Project Fund.
(b)	There is hereby established a Capitalized Interest Account in the 2007 Project Fund. Any moneys deposited in the Capitalized Interest Account shall be transferred to the Debt Service Fund and applied to the payment of interest as it becomes due on the Bonds from the date of issuance to the date on which the funds deposited therein have been depleted in full. At the request of the Borrower, the Authority shall direct the Trustee to transfer any remaining balance in the Capitalized Interest Account to the Project Fund.
(c)	There is hereby established a Bond Proceeds Account in the 2007 Project Fund, the moneys in which shall be used to pay Costs of the Project as set forth in Section 402 hereof.
(d)	There is hereby established an Equity Account in the 2007 Project Fund, into which the Borrower shall deposit the amount of $4,500,000 from sources other than proceeds of the Bonds, a portion of which shall be transferred to the other funds and accounts described in, and in accordance with and pursuant to, Section 301 of this Indenture on the date of the initial issuance of the Bonds. The remaining moneys in the Equity Account shall be used to pay Costs of the Project as set forth in Section 402 hereof after moneys in the Bond Proceeds Account for the 2007 Project Fund have first been depleted for payment of Costs of the Project, and are also available to pay certain general and administrative costs, including salaries, accounting and legal fees, and other expenses of the Borrower; provided, that upon receipt of a Borrower’s Completion Certificate, if the Borrower is not in default under the terms of the Loan Agreement, the Trustee may pay any moneys in the Equity Account to or at the direction of the Borrower for any purpose; subject to the limitations and restrictions set forth in Section 703 of the Loan Agreement regarding the making of dividends, payments or other cash distributions to Converted Organics.

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     Section 402. Project Funds. The Trustee shall establish additional Project Funds for the payment of Costs of any additions to be paid from the proceeds of Additional Bonds or from insurance proceeds, condemnation awards (or other similar sums) pursuant to the Loan Agreement. Project Funds shall consist of the amounts required or permitted to be deposited therein pursuant to any provision hereof or of the Loan Agreement. Such additional Project Funds or accounts within a given Project Fund shall be maintained for each series of Additional Bonds.

     Payments first from the Bond Proceeds Account of the 2007 Project Fund and then from the Equity Contribution Account of the 2007 Project Fund, and from any other Project Fund established hereunder, shall be made only in respect of the Costs of the additions (or portion thereof) for which it is established and only upon compliance with the following:

(a)	On or after the date on which any Bond proceeds are deposited into a Project Fund, the Trustee shall pay such Costs for which the Project Fund is established as are authorized by a closing statement delivered at settlement for such Bonds. Any such closing statement shall be signed by an Authorized Officer of the Authority and approved by an authorized officer of the Borrower and shall specify the Person to whom payment is to be made, the obligation on account of which the payment is to be made, and the amount payable with respect thereto.
(b)	Except as provided in subsection (a) above, all payments from any Project Fund shall be made only upon receipt by the Trustee of a completed written Requisition executed by a Borrower Representative.
(c)	Any Requisition relating in whole or in part to payments under Construction Contracts as defined in the Loan Agreement shall be accompanied by a Contractor’s Certificate or Certificates as defined in the Loan Agreement certifying (i) his approval of the Requisition; (ii) that the obligation was properly incurred; (iii) that the amount requisitioned is due and unpaid; (iv) that, insofar as the payment is to be made for work, material, supplies or equipment, the work has been performed and the materials, supplies or equipment have been installed in the Project or have been delivered either at the Project site or at a proper place for fabrication and are covered by the builders’ risk insurance; and (v) that all work, material, supplies and equipment for which payment is to be made are, in the signer’s opinion, in accordance with the plans and specifications or duly approved change orders, all of which shall have been previously filed with the Trustee.
(d)	There shall be retained in the Project Fund an amount equal to ten percent (10%) of each Requisition for purposes of the Affirmative Action Program (a “holdback”); provided, however, if such Requisition if for payment or reimbursement of a payment by the Borrower, which payment itself is or was for only ninety percent (90%) of the payment requested by the Contractor or Subcontractor pursuant to the Construction Contract, then such Requisition may be paid or reimbursed without regard to the aforementioned holdback, but the remaining ten percent (10%), when requisitioned by the Borrower, shall be disbursed upon the holdback conditions hereinafter set forth. Said holdback shall

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	be disbursed from the Project Fund upon compliance with the Affirmative Action and Prevailing Wage provision of the Loan Agreement and (i) the execution and filing of the Contractor’s Completion Certificate, (ii) the execution and filing of the Borrower’s Completion Certificate, (iii) receipt by the Borrower of written notice issued by the Authority’s Office of Affirmative Action that the Contractor has complied with the requirements of the Affirmative Action Program, and (iv) certification to the Trustee by an Authorized Representative of the Borrower of compliance with the conditions stated in clauses (i) through (iii) above.
	Upon written request to the Authority, the Trustee shall furnish the Authority with a record of the Requisitions and disbursements from the Project Fund.
(e)	Any closing statement or Requisition may authorize the reimbursement to the Borrower for advances made in respect of Costs, but only to the extent that such amounts are properly chargeable against the Project Fund. Any such closing statement or requisition (and accompanying Contractor’s Certificate, if appropriate) shall relate to the underlying Cost in respect of which the requested reimbursement or repayment of indebtedness is to be made.
(f)	Upon receipt of a Borrower’s Completion Certificate (as defined in the Loan Agreement), the Borrower shall direct the Trustee to (i) transfer the moneys remaining in the applicable Bond Proceeds Account of the Project Fund to the Bond Redemption Fund, to be applied in Authorized Denominations to redeem Bonds upon the earliest date upon which Bonds may be redeemed at the option of the Authority; and (ii) transfer the moneys remaining in the applicable Equity Account of the Project Fund to the Borrower.

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ARTICLE V
REVENUES OF THE AUTHORITY, RECEIPTS AND
REVENUES OF THE BORROWER AND THE
APPLICATION THEREOF TO FUNDS

     Section 501. Payments, etc., to be Sufficient. Payments under the Loan Agreement shall be set so that the payments to be made by the Borrower thereunder will be sufficient in each Fiscal Year to provide for the payment, when due, of the principal or Redemption Price of and interest on the Bonds and to provide for all other deposits and other payments required to made hereunder.

     Section 502. Revenue Fund; Application Thereof. There is hereby established a Revenue Fund, into which the Trustee shall deposit all payments made pursuant to the Loan Agreement, and any other amounts required or permitted to be deposited therein pursuant to the provisions hereof. On the last Business Day preceding any required payment, or permitted payment as set forth in a Borrower Certificate, from the Debt Service Fund pursuant to Section 503 hereof, an amount equal to such payment shall be transferred from the Revenue Fund to the Debt Service Fund.

     Section 503. Debt Service Fund. There is hereby established a Debt Service Fund, the moneys on deposit within which shall be applied by the Trustee as follows:

(a)	to the payment of interest, when due, on all Outstanding Bonds, including any accrued interest due in connection with purchases or redemptions of Bonds pursuant to this Section 503 or Sections 505 and 701 hereof;
(b)	to the payment, when due, of the principal or Redemption Price of Bonds then payable at maturity or upon Mandatory Redemption (but only upon surrender of such Bonds) subject to reduction by the principal amount of Bonds of the same series and maturity which are either (i) purchased by the Borrower and surrendered to the Trustee for cancellation, provided that, in the case of Bonds subject to Mandatory Redemption, such Bonds shall be surrendered to the Trustee for cancellation at least 15 days prior to the giving of notice of such redemption by the Trustee, or (ii) purchased for cancellation by the Trustee pursuant to subsection (c) below or Section 505 hereof; and
(c)	during the 12 month period preceding each principal maturity or Mandatory Redemption date, the Trustee shall, at the request of the Borrower, purchase Bonds of the series and maturity coming due on such principal maturity or Mandatory Redemption date from funds transferred from the Revenue Fund to the Debt Service Fund for such purpose; provided, however, that no such purchase shall be made unless (i) the purchase price does not exceed 100% of the principal amount of the Bonds so to be purchased (ii) in the case of any purchase of any maturity of Bonds which are subject to Mandatory Redemption, firm commitments for the sale of such Bonds from the holders thereof shall have been accepted at least 15 days prior to the giving of notice of such redemption by the

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Trustee, and (iii) upon the making of any transfer of moneys from the Revenue Fund to the Debt Service Fund in connection with the proposed purchase, there shall be no deficiency in the Revenue Fund, taking into account the amounts then required to be paid or transferred therefrom for other purposes or reserved therein against such payments and transfers.

     Section 504. Debt Service Reserve Fund.

(a)	There is hereby established a Debt Service Reserve Fund into which the Trustee shall initially deposit, pursuant to Section 301(b) hereof, an amount equal to the Reserve Fund Requirement for the Bonds. The Trustee shall make additional deposits in connection with the issuance of Additional Bonds if and to the extent required under subsection (c) below.
(b)	Moneys on deposit in the Debt Service Reserve shall be applied as follows:

(i)	On the date of each required payment from the Debt Service Fund, moneys in the Debt Service Reserve Fund shall be applied to cure any deficiency in the Debt Service Fund with respect to the Bonds and any Additional Bonds secured by the Debt Service Reserve Fund;
(ii)	At the time of valuation, any amount in the Debt Service Reserve Fund in excess of the Reserve Fund Requirement shall be transferred to the Revenue Fund and credited to interest payments in respect of the applicable series of Bonds, except that during the construction period for the acquisition, improvement, renovation or repair of any Capital Addition for which a Project Fund is established, such portion of the excess as may be necessary to cure a deficiency in such Project Fund shall, at the written direction of the Borrower, be transferred thereto; and
(iii)	In each month during the sixth month period preceding the final maturity date of any series of Bonds secured by the Debt Service Reserve Fund, moneys held in the Debt Service Reserve Fund shall be credited against the payment of interest on such series of Bonds and shall be transferred to the Debt Service Fund for the payment of such principal and interest; provided, however, that no such credit shall be given and no such transfer shall be made if and to the extent that, immediately prior to such crediting and transfer, the amount on deposit in the Debt Service Reserve Fund is not at least equal to the Reserve Fund Requirement, less the amounts previously transferred to the Debt Service Fund during such sixth month period pursuant to this subparagraph (iii).

(c) The Reserve Fund Requirement shall be recalculated by Bond Counsel in connection with the issuance of any Additional Bonds; provided that the Authority may, at the request of the Borrower, issue Additional Bonds which are not secured by or otherwise entitled to any payments from the Debt Service Reserve Fund, in which case no such recalculation shall be required and in which

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case such Additional Bonds shall be secured by a lien on the Project which is not on a parity with the Bonds Outstanding which are secured by the Debt Service Reserve Fund. If any recalculation of the Reserve Fund Requirement is made which indicates that excess moneys are on deposit in the Debt Service Reserve Fund, such excess shall be applied as a credit against the next succeeding interest payments on the Bonds; provided that if Additional Bonds are secured by the Debt Service Reserve Fund, then applied pro rata to the next succeeding interest payments on the Bonds so secured. If any recalculation indicates that the amount on deposit in the Debt Service Reserve Fund is less than the Reserve Fund Requirement, an additional deposit to cure such deficiency shall be made on the settlement date for the Additional Bonds.

(d)

The Trustee may establish additional Debt Service Reserve Funds as may be provided in Supplemental Indentures authorizing Additional Bonds to be held as security for Additional Bonds of a series not to be secured by the Debt Service Reserve Fund for the Bonds, as provided in the applicable Supplemental Indenture.

     Section 505. Redemption Fund. There is hereby established a Redemption Fund into which the Trustee shall deposit such amounts as are required or permitted to be deposited therein pursuant to the provisions of the Loan Agreement or this Indenture, including but not limited to, Section 713 of the Loan Agreement. Moneys in the Redemption Fund shall be applied to the Optional or Extraordinary Redemption of Bonds pursuant to Article VII hereof.

     Section 506. Rebate Fund.

(a) A special fund is hereby created and designated as the Rebate Fund. The Borrower shall transfer or cause to be transferred by the Trustee from the Rebate Fund at such times and to such person as required by Section 148 of the Code an amount equal to the Rebate Amount. Amounts in the Rebate Fund shall be exempt from the lien of this Indenture. To the extent such amounts on deposit in the Rebate Fund are not sufficient to meet the Rebate Amount, the amount of the deficiency shall be immediately paid by the Borrower to the Trustee for deposit in the Rebate Fund. Notwithstanding anything contained in this Indenture to the contrary, neither the Authority nor the Trustee shall be responsible or liable for any loss, liability, or expense incurred to the extent incurred as a result of the failure of the borrower to fulfill its obligations with respect to the calculation and payment of the Rebate Amount. The Authority and Trustee shall be entitled to rely conclusively upon the calculations provided by the Borrower. The Trustee, at the direction of the Borrower given in accordance with the Loan Agreement, shall apply or cause to be applied the amounts in the Rebate Fund at the times and in the amounts required by Section 148 of the Code solely for the purpose of paying the United States of America in accordance with Section 148 of the Code.

(b) Moneys held in the Rebate Fund shall be invested and reinvested upon the written direction of the Borrower by the Trustee in Investment Obligations that mature at such times specified in such written direction, which times shall be not later than

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	such times as shall be necessary to provide moneys when needed for the payments to be made from such Rebate Fund and in accordance with the provisions hereof. The interest earned on any moneys or investments in the Rebate Fund shall be retained in such Fund.
(c)	Moneys held in the Rebate Fund shall be held by the Trustee for a period of not less than 75 days following the redemption of final maturity of the Bonds.
(d)	The Trustee agrees to furnish the Borrower and the Authority with notice of the Borrower’s obligation to file its report with the Authority in accordance with the Loan Agreement and to file its rebate calculation and make its rebate payment, if any, to the Internal Revenue Service. Such reminder notice shall be furnished to the Borrower and the Authority at least 90 days prior to each fifth anniversary of the issuance of the Bonds as set forth in the Loan Agreement and within 30 days following the redemption or final payment of the Bonds. The Trustee shall have no further obligation for the computation of the Rebate Amount or the filing or payment thereof.

     Section 507. Procedure When Funds Are Sufficient to Pay All Bonds. If at any time the Trustee receives a Borrower Certificate to the effect that the amounts held by the Trustee in the Funds established under this Article V other than the Rebate Fund are sufficient to pay principal or Redemption Price of and interest on all Bonds then Outstanding to maturity or prior redemption, together with any amounts due the Authority and the Trustee, the Trustee shall so notify the Authority and apply the amounts in the Funds to the payment of the aforesaid obligations and neither the Authority nor the Borrower shall be required to pay over any further revenues unless and until it shall appear that there is a deficiency in the Funds held by the Trustee.

     Section 508. Moneys to Be Held for All Bondholders, With Certain Exceptions. Until applied as herein provided, the moneys and investments held in all Funds and Accounts established hereunder, other than the Rebate Fund, and the proceeds of any remedies exercised under Article IX hereof shall be held in trust for the benefit of the holders of all Outstanding Bonds, except that: (a) on and after the date on which the interest on or principal or Redemption Price of any particular Bond or Bonds is due and payable from the Debt Service Fund or Redemption Fund, the unexpended balance of the amount deposited or reserved in either or both of such Funds for the making of such payments shall, to the extent necessary therefor, be held for the benefit of the Bondholder or Bondholders entitled thereto; (b) any special redemption fund established in connection with the issuance of any Additional Bonds for a refunding shall be held for the benefit of the holders of Bonds being refunded; (c) the rights of any Bondholders with respect to principal or interest payments extended beyond their due dates pursuant to Section 804 hereof shall be subordinate to the rights of Bondholders with respect to payments not so extended; (d) if any Additional Bonds are issued which are not secured by the Debt Service Reserve Fund, the moneys on deposit therein and the income from the investment thereof shall not be available to pay any portion of the principal or Redemption Price of or the interest on such Additional Bonds; and (e) any Debt Service Reserve Fund established for a series of Additional Bonds shall be held as security only for such Additional Bonds, as provided in the applicable Supplemental Indenture.

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     Anything in this Indenture to the contrary notwithstanding, any moneys held by the Trustee in trust for the payment and discharge of any of the Bonds which remain unclaimed after the date when such Bonds have become due and payable, either at their stated maturity dates or by call for earlier redemption, if such moneys were held by the Trustee at such date, or after the date of deposit of such moneys if deposited with the Trustee after the said date when such Bonds became due and payable, shall be applied when and as provided in the Uniform Unclaimed Property Act, N.J.S.A. 46:30B-1 et seq., and the Trustee shall thereupon be released and discharged with respect thereto and the Bondholders shall have such rights as are provided in the Uniform Unclaimed Property Act.

     Section 509. Additional Accounts and Subaccounts. At the written request of the Borrower, Trustee shall establish and maintain additional Funds or accounts within the Funds or subaccounts within the Accounts established hereunder; provided that (a) in each case, the written request of the Borrower shall set forth in reasonable detail the sources of deposits into and disbursements from the Account or Subaccount to be established, (b) in each case, the sources of deposits into and disbursements from the Account Subaccount to be established shall be limited to the sources of deposits permitted or required to be made into and the disbursements permitted or required to be made from the Fund or Account within which it is to be established, and (c) except as otherwise provided in Section 508 hereof in the Supplemental Indenture establishing such Fund, each additional Fund, Account or Subaccount established hereunder shall be held in trust for the benefit of the holders of all Outstanding Bonds.

     Section 510. Fees, Charges and Expenses. The reasonable fees and expenses of the Trustee, including but not limited to reasonable legal fees and expenses, in connection with any Bonds or the administration of this Indenture or the Loan Agreement shall be paid separately by the Borrower.

     Section 511. Lease Reserve Fund. There is hereby established a Lease Reserve Fund into which the Trustee shall deposit such amounts as are required to be deposited therein pursuant to Section 509 of the Loan Agreement. Moneys in the Lease Reserve Fund shall be applied (to the extent necessary) upon the written direction of the Borrower to pay Rent (as defined in the Lease) and other amounts due under the Lease. Moneys remaining in the Lease Reserve Fund after the expiration of the Lease shall be returned to the Borrower pursuant to the Loan Agreement.

     Section 512. Operations and Maintenance Expense Reserve Fund. There is hereby established an Operation and Maintenance Expense Reserve Fund into which the Trustee shall deposit such amounts as are required to be deposited therein pursuant to Section 717 of the Loan Agreement, provided however that amounts contained in the Operation and Maintenance Expense Reserve Fund shall not be required to exceed $1,200,000 at any time. Moneys in the Operations and Maintenance Expense Reserve Fund shall be applied (to the extent necessary) to pay operations and maintenance expenses in excess of those set forth in the Annual Budget described in Section 717 of the Loan Agreement. Moneys remaining in the Operation and Maintenance Expense Reserve Fund after payment in full of all amounts owing hereunder and under the Loan Agreement shall be returned to the Borrower.

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ARTICLE VI
SECURITY FOR AND INVESTMENT OR DEPOSIT OF FUNDS

     Section 601. Deposits. All moneys received by the Trustee under this Indenture shall, except as hereinafter provided, be deposited with the Trustee, and held by the Trustee in accordance with the terms of this Indenture, until or unless invested as provided in Section 602 hereof.

     Section 602. Investments. The Trustee shall invest any moneys held by it and not needed for immediate application in Investment Obligations; provided that the accrued interest, if any, received upon the issuance of the Bonds held in the Debt Service Fund shall be invested only in Government Obligations or Investment Obligations as described in (v) of the definition of Investment Obligation; and provided further, that all Investment Obligations shall mature no later than the date when the amounts will foreseeably be needed for purposes of this Indenture. Except as otherwise expressly set forth herein, all investment earnings shall be credited to the Fund or Account in which the investment is held.

     Absent written directions from the Borrower, the Trustee shall invest any moneys not otherwise invested in Investment Obligations as described in (v) of the definition of Investment Obligations.

     The Borrower shall be entitled to receive from the Trustee monthly and at such other times as the Borrower may reasonably request, a statement of account of any moneys held in the Funds by the Trustee.

     Section 603. Valuation.

(a)	The Trustee shall compute the value of the assets of each Fund or account established under this Indenture of Trust as of August 1 and February 1 in each year after taking into account any payments required to be made to Bondholders on such dates and any transfers required to be made from the Debt Service Reserve Fund pursuant to Section 505 hereof.
(b)	In computing the assets of any Fund or account, investments and accrued interest thereon shall be deemed a part thereof. Such investments shall be valued at the current market value thereof, or at the redemption price thereof, if then redeemable at the option of the Trustee.

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ARTICLE VII
REDEMPTION OF BONDS

     Section 701. Bonds Subject to Redemption. The Bonds of any series shall be subject to redemption prior to maturity upon such terms as are acceptable to the Authority and the Borrower and expressed in such Bonds, subject, however, to the following:

(a) Mandatory Redemption. Bonds of specified maturities may be required to be redeemed from moneys deposited in the Debt Service Fund for such purpose, such redemptions to be made in such amounts and on such dates as set forth in Exhibit B hereto or in the Supplemental Indenture entered into in connection with the issuance of any Additional Bonds, at a Redemption Price equal to 100% of the principal amount thereof, plus accrued interest to the Redemption Date.

(b) Optional Redemption. The Bonds shall be subject to redemption prior to maturity, at the option of the Authority at the direction of the Borrower, as a whole or in part in Authorized Denominations at any time on or after August 1, 2017, upon thirty (30) day prior written notice given to the Trustee, in such order of maturity as shall be directed by the Authority at the direction of the Borrower, at a redemption price equal to the percentage of the principal amount to be so redeemed shown in the table below, plus accrued interest to the Redemption Date.

Dates (inclusive)	Redemption Price
August 1, 2017 – July 31, 2018		106	%
August 1, 2018 – July 31, 2019		103	%
August 1, 2019 and thereafter		100	%

(c) Special Mandatory Redemption — Demise of Mortgaged Property. Bonds of any series in Authorized Denominations may be subject to redemption from surplus money in the Project Fund which are transferred to the Bond Redemption Fund, and from insurance proceeds, condemnation awards or proceeds of conveyances in lieu of condemnation arising out of the Project Facilities deposited in the Redemption Fund and available for such purpose, at a Redemption Price equal to 100% of the principal amount thereof, plus accrued interest to the Redemption Date.

(d) Extraordinary Mandatory Redemption. The Bonds are subject to extraordinary mandatory redemption in whole after receipt by the Trustee of the Authority’s written direction that either of the following events has occurred:

(i)	if the Borrower ceases to operate the Project, or to cause the Project to be operated, as an authorized “project” under the Act for twelve (12) consecutive months, without first obtaining the prior written consent of the Authority; or
(ii)	if any representation or warranty made by the Borrower in the Loan Agreement or in any report, certificate, financial statements or other

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instrument furnished by the Borrower in connection with the Loan Agreement shall prove to be false or misleading in many material respect when made.

(e)	Extraordinary Optional Redemption . The Bonds are subject to extraordinary optional redemption in whole at the option of the Authority, upon the written notice to the Borrower and the Trustee, at any time prior to maturity, at a redemption price equal to the principal amount thereof to be redeemed, plus accrued interest to the redemption date if, as evidenced by a certificate of an Authorized Officer of the Borrower (i) as a result of any change in the Constitution of the United States of America or of the State or of any final legislative or executive action of the United States of America or of the State or any political subdivision thereof or by final decree or judgment of any court after the contest thereof by the Borrower, the Loan Agreement becomes void or unenforceable or legally impossible of performance in accordance with the intent and purpose of the Authority or the Borrower, in which case such redemption shall be in whole only at anytime and not in part or (ii) as set forth in an Opinion of Bond Counsel that the redemption of the Bonds is required to maintain the exclusion from gross income of interest on the Bonds for federal income tax purposes.
	The Authority shall provide written notice to the Trustee of its election to redeem the Bonds pursuant to this paragraph, the principal amount of such Bonds to be redeemed and the date, within one hundred eighty (180) days from the effective date of any such constitutional amendment, legislative or executive action, final decree, judgment or order but not less than sixty (60) days from the date such notice is mailed, on which the Bonds shall be redeemed pursuant to this paragraph.
(f)	Special Mandatory Redemption on Determination of Taxability. The Bonds are subject to special mandatory redemption, in whole, on a pro rata basis, after receipt by the Trustee of the Authority’s written direction that a Determination of Taxability has occurred (i) as a result of a failure by the Borrower to observe the provisions of its tax covenants in Loan Agreement, or in any tax certificate delivered by the Borrower in connection with the issuance the Bonds, at a Redemption Price equal to 110% of the principal amount thereof, plus accrued interest to the Redemption Date; or (ii) for any reason not specified in subsection (i) above, at a Redemption Price equal to 104% of the principal amount thereof, plus accrued interest to the Redemption Date.
(g)	Special Mandatory Redemption For Transfer without Bondholder Consent. The Bonds are subject to special mandatory redemption, in whole, on a pro rata basis, after receipt by the Trustee of the Authority’s written direction upon notice by the Borrower that the Borrower will (i) merge into or consolidate with any Person; (ii) acquire any material portion of the stock of any Person or a material portion of the assets or business of any Person or the operating business or division of any Person; (iii) permit any Person to merge into it, (iv) form any subsidiaries; or (v)

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sell or transfer any material portion of its membership interests or assets to any Person, pursuant to the requirements of Section 703 of the Loan Agreement but without the consent of the Bondholders, at a Redemption Price equal to the then applicable optional redemption price set forth in the Indenture. If the Bonds are not yet subject to optional redemption upon the occurrence of such event or events, the Borrower is required to deposit funds with the Trustee sufficient to defease the outstanding principal of, premium and interest on the Bonds through the first permitted optional redemption date, and to redeem the Bonds on such date, all in accordance with the terms and conditions of the Indenture.

(h)

Other Redemptions. Bonds of any series may be subject to redemption upon such other terms as are provided in the Supplemental Indenture authorizing the issuance of such Bonds, notwithstanding the fact that other series of Bonds issued and Outstanding hereunder are not subject to such redemption.

     Section 702. Selection of Bonds for Redemption. In the event that less than all Bonds of any series or maturity are to be redeemed, Bonds of such series or maturity shall be selected for redemption in such manner as may be expressed herein, subject, however, to the following:

(a) in the case of any Extraordinary or Special Redemption, the moneys available therefor shall be allocated to each series of Bonds subject to such redemption as nearly as practicable in the same proportion as the Outstanding principal amount of Bonds of such series bears to the Outstanding principal amount of all Bonds subject to such redemption and the selection of Bonds of each series for redemption shall be independent of the selection of Bonds of other series for redemption; and

(b) in the case of any series having Bonds of varying denominations, each Bond of such series shall be treated as representing that number of Bonds which is obtained by dividing the face amount thereof by the smallest authorized denomination; and

(c) if less than all of the Bonds are to be redeemed, the Trustee shall select the particular Bonds for redemption by lot, but in no event shall any partial redemption result in a Bond of a denomination of less than the Authorized Denomination.

     Section 703. Notice of Redemption.

(a) The Trustee shall cause notice of any redemption of Bonds hereunder to be mailed by first class mail to the holders of all Bonds to be redeemed at the register addresses appearing in the registration books kept for such purpose pursuant to Article II hereof. Each such notice shall (i) be mailed not more than 60 nor less than 30 days prior to the redemption date, (ii) identify the Bonds to be redeemed (specifying the CUSIP numbers, if any, assigned to the Bonds) (iii) specify the Redemption Date, the Redemption Price and, if less than all of any particular Bond is to be redeemed, the principal amount so to be redeemed, (iv) state that on

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the Redemption Date the Bonds called for redemption will be payable at the principal corporate trust office of the Trustee, that from that date interest will cease to accrue, that no representation is made as to the accuracy or correctness of the CUSIP numbers (if any) printed therein or on the Bonds, and (v) provide any other descriptive information which may be necessary in order to identify the Bonds to be redeemed, including without limitation the original issuance date, maturity date and interest rate applicable to such Bonds. No defect affecting any Bond, whether in the notice of redemption or mailing thereof (including any failure to mail such notice), shall affect the validity of the redemption proceedings for any other Bonds.

(b) Notice of any redemption of Bonds hereunder shall also be given by the Trustee on the same day as the mailed notice to Bondholders, by first class mail or confirmed fax to (i) Financial Information, Inc.’s “Daily Called Bond Service”, 30 Montgomery Street, 10th Floor, Jersey City, New Jersey 07302, Attention: Editor; Kenny Information Services’ “Called Bond Service”, 55 Bond Street, 28th Floor, New York, New York 10004; Moody’s “Municipal and Government Bond Service”, 99 Church Street, 8th Floor, New York, New York 10007, Attention: Municipal News Report; and Standard and Poor’s “Called Bond Record”, 26 Broadway, 3rd Floor, New York, New York 10004; or, in accordance with then current guidelines of the Securities and Exchange Commission, to such other addresses and/or such other services, as the Authority may designate with respect to the Bonds; and (ii) the Authority. Such further notice shall contain the information required in subsection (a) above. Failure to give all or any portion of such further notice shall not in any manner defeat the effectiveness of a call for redemption if notice thereof is given to the Bondholders as described in Section (a) above.

(c) If at the time of mailing of any notice of optional redemption here shall not have been deposited with the Trustee moneys sufficient to redeem all the Bonds called for optional redemption, such notice shall state that it is subject to the deposit of the redemption moneys with the Trustee not later than two business days prior to the Redemption Date and shall be of no effect unless such moneys are so deposited.

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ARTICLE VIII
COVENANTS OF AUTHORITY

     Section 801. Payment of Principal of and Interest on Bonds. The Authority shall promptly pay or cause to be paid the principal or Redemption Price of, and the interest on, every Bond issued hereunder according to the terms thereof, but shall be required to make such payment or cause such payment to be made only out of Revenues or any other moneys held by the Trustee under this Indenture. The Authority shall appoint one or more paying agents for such purpose, each such agent to be a national banking association, a state bank, a bank and trust company or a trust company. The Authority hereby appoints the Trustee as Paying Agent, and designates the principal corporate trust office of such agent as the place of payment or such other location where the Trustee’s principal payment operations exist, such appointment and designation to remain in effect until notice of change is filed with the Trustee.

     Notwithstanding the foregoing, the Authority may enter into a written agreement with any Holder of any Bond providing for the payment of principal or Redemption Price of and interest on such Bond at a place other than the place specified in such Bond as the place for payment without the necessity of surrendering the Bond to the Trustee; provided, that (a) there shall be filed with the Trustee a duplicate original of such agreement and (b) such agreement will provide that in each case in which payment of principal is so made, the Holder will not sell, transfer or otherwise dispose of such Bond unless it shall have caused notation to be made thereon by the Trustee of the amount of principal paid thereon and the last date to which interest has been paid thereon.

     Section 802. Corporate Existence; Compliance with Laws. The Authority shall maintain its corporate existence; shall use its best efforts to maintain and renew all its rights, powers, privileges and franchises; and shall comply with all valid and applicable laws, acts, rules, regulations, permits, orders, requirements and directions of any legislative, executive, administrative or judicial body.

     Section 803. Enforcement of Agreement; Prohibition Against Amendments of Agreement; Notice of Default. The Authority has assigned its rights (subject to its Reserved Rights) to the Trustee which shall require the Borrower to perform its obligations under the Loan Agreement. The Authority may exercise all its rights under the Loan Agreement as amended or supplemented from time to time, including the right to amend the Loan Agreement to cure any ambiguity or to correct or supplement any provision contained therein which may be defective or inconsistent with any other provision contained therein or herein and to make such other provision in regard to matters or questions arising under the Loan Agreement or this Indenture; provided that it shall not amend the Loan Agreement or make such other provisions in a manner which materially and adversely affect the interests of Bondholders without the consent of the Trustee pursuant to Section 1103 hereof. Prior to making any amendment, the Authority shall file with the Trustee (i) a copy of the proposed amendment and (ii) an opinion of Bond Counsel to the effect that such amendment or supplemental is authorized under Section 1104 hereof, and, to the further effect that such amendment or supplement will not otherwise materially and adversely affect the interests of the Bondholders. The Authority shall give prompt written notice

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to the Trustee of any default known to the Authority under the Loan Agreement or any amendment or supplement thereto.

     Section 804. Further Assurances. Except to the extent otherwise provided in this Indenture, the Authority shall not enter into any contract or take any action by which the rights of the Trustee or the Bondholders may be impaired and shall, from time to time, execute and deliver such further instruments and take such further action as may be required to carry out the purposes of this Indenture.

     Section 805. Filing and Recording. The Authority has been advised by Bond Counsel in its opinion to the Authority and the Borrower, that no recording, rerecording, filing or refiling of the Indenture or any other instrument is required in order to protect the lien of this Indenture or to perfect the security interest created hereby. Upon written request of the holders of a majority in aggregate principal amount of the Bonds or upon receipt of a written opinion of Bond Counsel requiring the same, the Borrower shall cause this Indenture or a financing statement relating hereto to be filed, in such manner and at such places as may be required by law fully to protect the security of the Holders of the Bonds and the right, title and interest of the Trustee in and to the right, title and interest of the Authority in and to the Revenues and the various Funds created hereunder or any part thereof. The Authority shall execute or cause to be executed any and all further instruments as may be required by law or as shall reasonably be requested by the Trustee for such protection of the interests of the Bondholders, and the Borrower shall furnish satisfactory evidence to the Trustee of filing and refiling of such instruments and of every additional instrument which shall be necessary to preserve the lien of this Indenture upon the trust estate or any part thereof until the principal, redemption premium, if any, and interest on the Bonds issued hereunder shall have been paid. The Trustee shall execute or join in the execution of any such further or additional instrument and file or join in the filing thereof at such time or times and in such place or places as it may be advised by an opinion of Counsel will preserve the lien of this Indenture upon the foregoing right, title and interest of the Authority assigned to the Trustee by this Indenture or any part thereof and to preserve the Trustee’s interests as a secured party in the Collateral until the aforesaid principal, redemption premium, if any, and interest shall have been paid. In accordance with Section 701(b) of the Loan Agreement in the event that U.C.C.-1 financing statement(s) are filed, the Trustee shall advise the Borrower no earlier than six (6) months and no later than sixty (60) days prior to each fifth anniversary of the filing of any U.C.C.-1 financing statement of the requirement to renew or continue such filing. The Authority agrees that it will cooperate with the Borrower in connection with the Borrower’s obligation to cause all documents, statements, memoranda or other instruments to be registered, filed or recorded in such manner and at such places as may be required by law fully to protect the security of the registered owners and the right, title and interest of the Trustee in and to any moneys or securities held hereunder or any part thereof (including any refilings, continuation statements or such other documents as may be required).

     Section 806. Non-Presentment of Bonds; Escheats. If any Bond or evidence of beneficial ownership of such Bond shall not be presented for payment when the principal thereof becomes due (whether at maturity, by acceleration, upon call for redemption, upon purchase or otherwise), all liability of the Authority to the registered owner thereof for the payment of such Bond, shall forthwith cease, terminate and be completely discharged if funds sufficient to pay such Bond and interest due thereon, if any, are held by the Trustee uninvested for the benefit of

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the registered owner thereof. Thereupon it shall be the duty of the Trustee to comply with the Uniform Unclaimed Property Act, N.J.S.A. 46:30B-1 et. seq. with respect to such funds. The registered owner shall thereafter be restricted exclusively to such funds for any claim of whatsoever nature on his or her part under this Indenture or on, or with respect to, such Bond.

     Section 807. Indemnification. Pursuant to Sections 715 and 718, respectively, of the Loan Agreement, the Borrower has agreed to indemnify the Authority, any person who “controls” the Authority within the meaning of Section 15 of the Securities Act of 1933, as amended, or Section 20 of the Securities Exchange Act of 1934, as amended, and any member, director, officer, official, agent, attorney and employee of the authority or the State, and the Trustee (herein, the Indemnified Parties”).

(a) To secure the Borrower’s indemnification payment obligation under the Loan Agreement, the Indemnified Parties shall have a lien prior to the lien created by this Indenture for the benefit of the registered owners of the Bonds on all money or property held or collected by the Trustee other than money held for the payment of the principal and redemption price, if any, of, and interest on, any Bonds previously matured or called for redemption in accordance with this Indenture, which shall be held for the benefit of the registered owners of such Bonds only. Such obligations shall survive the satisfaction and discharge of this Indenture.

(b) When an Indemnified Party incurs expenses or renders services after an Event of Default, the expenses and compensation for the services are intended to constitute expenses of administration under any applicable bankruptcy law.

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ARTICLE IX
EVENTS OF DEFAULT AND REMEDIES

     Section 901. Events of Default. Each of the following shall be an “Event of Default” hereunder:

(a)	If the principal or Redemption Price of any Bond is not paid when the same shall become due and payable at maturity, upon redemption or otherwise; or
(b)	If an installment of interest on any Bond is not paid when the same shall become due and payable; or
(c)	If the Borrower shall fail to pay, when due and payable, any sum due pursuant to the provisions of the Loan Agreement and such failure continues to exist as of the expiration of any grace period provided in the Loan Agreement; or
(d)	If any other event of default under the Loan Agreement or any other Loan Document shall occur and be continuing; or
(e)	If the Authority fails to perform any of its covenants, conditions, agreements and provisions contained in the Bonds or in this Indenture (other than as specified in subsections (a) or (b) above).

     Section 902. Notice of Default; Opportunity to Cure Such Default. No default under Section 901(d), (e) or (f) hereof shall constitute an Event of Default until actual notice of such default by registered or certified mail shall be given to the Authority and the Borrower by the Trustee or by the holders of not less than 25% in aggregate principal amount of all Bonds Outstanding and until the Authority and the Borrower shall have had 30 days after receipt of such notice to correct such default, and shall not have corrected it; provided, however, if said default be shall be such that it cannot be corrected within such 30 day period, it shall not constitute an Event of Default if corrective action is instituted by the Authority or the Borrower within such 30 day period and is diligently pursued to completion by the Authority or the Borrower.

     Section 903. Acceleration; Cure. Should any Event of Default occur and be continuing, then the Trustee may, by notice in writing delivered to the Authority, the Borrower and the Bondholders, declare the principal of all Bonds then Outstanding to be due and payable immediately, and upon such declaration the said principal, together with interest accrued thereon, shall become due and payable immediately at the place of payment provided therein without any presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived; provided, however, that no such declaration shall be made if the Borrower cures such Event of Default prior to the date of the declaration. The Trustee shall be required to take the foregoing actions if requested in writing to do so by the holders of at least 25% in aggregate principal amount of all Outstanding Bonds.

     The above provisions, however, are subject to the condition that if, after the principal of the Bonds shall have been so declared to be due and payable, all arrears of interest upon the

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Bonds, and all other sums payable under this Indenture (except the principal of, and interest on, the Bonds which by such declaration shall have become due and payable) shall have been paid by or on behalf of the Authority, and the Authority also shall have performed or caused to be performed all other things in respect of which it may have been in default hereunder, and shall have paid or caused to be paid the reasonable charges of the Trustee, its counsel and the Bondholders, including reasonable attorneys’ fees paid or incurred, then and in every such case, the Trustee may annul such declaration and its consequences and such annulment shall be binding upon the Trustee and upon all holders of Bonds issued hereunder; but no such waiver, rescission and annulment shall extend to or affect any subsequent default or impair any right or remedy consequent thereon.

     Section 904. Powers of Trustee.

(a) Upon the happening and continuance of any Event of Default, then and in every such case the Trustee may, and upon the written request of the holders of not less than a majority in aggregate principal amount of the Bonds then Outstanding hereunder shall, proceed to protect and enforce its rights and the rights of the Bondholders under the laws of the State and under the Loan Agreement, as assignee of the Authority (but not in the name of the Authority) and this Indenture by such suits, actions or special proceedings in equity or at law, or by proceedings in the office of any board or office having jurisdiction, either for the specific performance of any covenant, condition or agreement contained herein or in aid of execution of any power herein granted or for the enforcement of any proper legal or equitable remedy, as the Trustee, being advised by Counsel, shall deem most effectual to protect and enforce such rights.

(b) The Authority agrees that the Trustee, subject to the provisions of the Loan Agreement and this Indenture reserving certain rights to the Authority, as assignee of the Authority, (but not in the name of the Authority) may enforce all rights of the Authority and all obligations of the Borrower under and pursuant to the Loan Agreement for and on behalf of the registered owners whether or not the Authority is in default hereunder.

(c) Notwithstanding anything in the Indenture or in any of the other Loan Documents to the contrary, neither the Trustee nor the registered owners shall have the right to waive an Event of Default under any of the Loan Documents which arises out of a violation of a Reserved Right without the prior written consent of the Authority, which it shall give in its sole and complete discretion. Notwithstanding anything herein or in any document executed in connection herewith to the contrary, nothing herein shall affect the Authority’s unconditional right to enforce its Reserved Rights.

(d) Upon the occurrence and continuance of an Event of Default under Sections 901(a) 901(b) or 901(c) and upon the filing of a suit or other commencement of judicial proceedings to enforce the rights of the Trustee and of the Bondholders under this Indenture, the Trustee shall be entitled, as a matter of right, to the appointment of a receiver or receivers with respect to the Borrower, its Property

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and the rents, revenues, issues, earnings, income, products and profits thereof, pending such proceedings, with such powers as the court making such appointment shall confer.

(e) The Trustee may maintain any proceedings without the possession of any of the Bonds or the production thereof in connection with said proceeding.

(f) If any proceeding taken by the Trustee on account of any Event of Default is discontinued or abandoned for any reason, or determined adversely to the Trustee, then and in every case the Authority, the Trustee and the Bondholders shall be restored to their former positions and rights hereunder, respectively, and all rights, remedies and powers of the Trustee shall continue as though no such proceeding had been taken.

     Section 905. Powers of Bondholders. The holders of a majority in aggregate principal amount of the Bonds then Outstanding shall have the right, by an instrument in writing executed and delivered to the Trustee, to direct the method and place of conducting all remedial proceedings to be taken by the Trustee hereunder.

     Section 906. Limitations on Bondholders. No Bondholder shall have any right to institute any suit, action or proceeding in equity or at law for the execution of any trust hereunder, or any other remedy hereunder or on the Bonds, unless:

(a)	the Trustee shall have been given written notice of an Event of Default;
(b)	the holders of not less than 25% in aggregate principal amount of the Bonds then Outstanding shall have requested the Trustee, in writing, to exercise the powers hereinabove granted or to pursue such remedy in its or their name or names;
(c)	there shall have been offered to the Trustee security and indemnity satisfactory to it against the costs, expenses and liabilities, including but not limited to, counsel fees to be incurred therein or thereby; and
(d)	the Trustee shall have refused or neglected to comply with such request within a reasonable time.

     Such notification, request and offer of indemnity are hereby declared in every such case, at the option of the Trustee, to be conditions precedent to the execution of the powers and trusts of this Indenture or to any other remedy hereunder; it being understood and intended that no Bondholder shall have any right in any manner whatever by his action to affect, disturb or prejudice the security of this Indenture, or to enforce any right hereunder or under the Bonds, except in the manner herein provided, and that all proceedings at law or in equity shall be instituted, had and maintained in the manner herein provided and for the full and ratable benefit of all holders of Outstanding Bonds affected thereby, subject to the provisions of this Indenture. Nothing in this Indenture contained shall, however, affect or impair the right of any Bondholder to institute suit for enforcement of payment of the principal of and the premium, if any, and interest on such Bond when due and payable in accordance with its terms, upon redemption or otherwise.

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     Section 907. Remedies Not Exclusive. Except as limited under Section 1301 of this Indenture, no remedy herein conferred upon or reserved to the Trustee of the Bondholders is intended to be exclusive of any other remedy or remedies, and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute.

     Section 908. Delay or Omission of Trustee. No delay or omission of the Trustee or of any Bondholder to exercise any right or power accruing upon any Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein; and every power and remedy given by this Article IX to the Trustee and to the Bondholders, respectively, may be exercised from time to time and as often as may be deemed expedient.

     Section 909. Application of Moneys. Upon the occurrence and during the continuance of any Event of Default, any moneys on deposit in any Fund or Account established hereunder and any moneys received by the Trustee under this Article IX shall be applied,

     First: to the payment of the reasonable costs of the Trustee, including but not limited to counsel fees, any disbursements of the Trustee with interest thereon and its reasonable compensation;

     Second: Subject to the provisions of Section 508 hereof, to the payment of all interest then due or overdue on Outstanding Bonds or, if the amount available for the payment of interest is insufficient for such purpose, to the payment of interest ratably in accordance with the amount due in respect of each Bond; and

     Third: Subject to the provisions of Section 508 hereof, to the payment of the outstanding principal amount due or overdue, by acceleration or otherwise, with respect to all Bonds or, if the amount available for the payment of principal is insufficient for such purpose, to the payment of principal ratably in accordance with the amount due in respect of each Bond.

     Notwithstanding the foregoing, moneys in the Debt Service Reserve Fund shall be applied only to the payment of the Bonds and such Additional Bonds as shall specifically benefit from deposits made therein as provided in any Supplemental Indenture. The surplus, if any, shall be paid to the Borrower or the Person lawfully entitled to receive the same or as a court of competent jurisdiction may direct.

     Section 910. Severability of Remedies. It is the purpose and intention of this Article IX to provide rights and remedies to the Trustee and the Bondholders which may be lawfully granted under the provisions of the Act, but, should any right or remedy herein granted be held to be unlawful, the Trustee and the Bondholders shall be entitled, as above set forth, to every other right and remedy provided in this Indenture.

     Section 911. Borrower’s Right of Possession and Use of its Property. So long as the Borrower is in compliance with the terms and provisions of the Loan Agreement, the Borrower shall be entitled to possess, use, operate and enjoy its Property without interference from, and

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free from claims of, the Authority and the Trustee or persons claiming by, through or under them.

     Section 912. Notice of Default. The Trustee shall mail to all owners of the Bonds, at their addresses as they appear on the registration books kept pursuant to Article II hereof, written notice of the occurrence of any Event of Default set forth in Section 901 hereof within thirty (30) days after the Trustee shall have notice of the same; provided, that the Trustee shall not be subject to any liability to any Bondholder by reason of its failure to mail any such notice.

     Section 913. Remedies Herein Additional to Remedies in Agreement. The remedies conferred in this article shall be in addition to all remedies provided for in the Loan Agreement, which remedies are hereby incorporated herein by reference.

     Section 914. Trustee May Enforce Rights Without Possession of Bonds. All rights under this Indenture and the Bonds may be enforced by the Trustee without the possession of any Bonds or the production thereof at the trial or other proceedings relative thereto, and any proceeding instituted by the Trustee shall be brought in its name for the ratable benefit of the holders of the Bonds.

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ARTICLE X
THE TRUSTEE

     Section 1001. Acceptance of Trust. The Trustee hereby accepts the trusts imposed upon it by this Indenture and agrees to perform said trusts, but only upon and subject to the following express terms and conditions:

(a)	The Trustee may execute any of the trusts or powers hereof and perform any of its duties by or through attorneys, agents, receivers or employees but shall be answerable for the conduct of the same in accordance with the standard specified in this Article, and shall be entitled to advice of Counsel concerning all matters of trusts hereof and the duties hereunder and may in all cases pay such reasonable compensation to all such attorneys, agents, receivers and employees as may reasonably be employed in connection with the trusts hereof. The Trustee may act upon the opinion or advice of Counsel in the exercise of reasonable care. Trustee shall not be responsible for any loss or damage resulting from any action or non-action in good faith in reliance upon such opinion or advice.
(b)	The Trustee shall not be responsible for any recital herein, or in the Bonds (except in respect to the authentication of the Trustee endorsed on the Bonds), or for the recording or re-recording, filing or re-filing of this Indenture or for insuring the property herein conveyed, or for collecting any insurance moneys, or for the validity of the execution by the Authority of this Indenture or of any supplements hereto or instruments of further assurance, or for the sufficiency of the security for the Bonds issued hereunder or intended to be secured hereby, or for the value or title of the property herein conveyed or otherwise as to the maintenance of the security hereof, except that in the event the Trustee enters into possession of a part or all of the property pursuant to any provision of this Indenture it shall use due diligence in preserving such property; and the Trustee shall not be bound to ascertain or inquire as to the performance or observance of any covenants, conditions or agreements on the part of the Authority or on the part of the Borrower under the Loan Agreement, except as hereinafter set forth. The Trustee shall have no obligation to perform any of the duties of the Authority under the Loan Agreement. The Trustee shall be obligated to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee.
(c)	The Trustee shall not be accountable for the use of any Bonds authenticated or delivered hereunder after such Bonds shall have been delivered in accordance with instructions of the Authority. The Trustee may become the owner of Bonds secured hereby with the same rights which it would have if not Trustee.
(d)	Any action taken by the Trustee, pursuant to this Indenture upon the request, or consent of any person who at the time of making such request or giving such authority or consent is the owner of any Bond, shall be conclusive and binding

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	upon all future owners of the same Bond and upon Bonds issued in exchange therefor or in place thereof.
(e)	As to the existence or nonexistence of any fact or as to the sufficiency or validity of any instrument, paper or proceeding, the Trustee shall be entitled to rely upon an Authority Certificate or any Borrower Certificate as sufficient evidence of the facts therein contained and, prior to the occurrence of a default of which the Trustee has been notified as provided in subsection (g) of this Section, or of which by said subsection it is deemed to have notice, shall also be at liberty to accept a similar Certificate to the effect that any particular dealing, transaction or action is necessary or expedient, but may at its discretion secure such further evidence deemed necessary or advisable, but shall in no case be bound to secure the same.
(f)	The permissive right of the Trustee (indicated by the word “may” and not by the word “shall”) to do things enumerated in this Indenture shall not be construed as a duty, and the Trustee shall not be answerable for other than its gross negligence or willful misconduct.
(g)	The Trustee shall not be deemed to have notice of any Event of Default under Section 901(d), (e) or (f) hereof unless the Trustee shall have actual knowledge of such default or shall be specifically notified in writing of such default by the Authority, the Borrower or the holders of at least 25% in aggregate principal amount of Bonds then Outstanding. In the absence of such actual knowledge or written notice, the Trustee may conclusively assume there is no such default.
(h)	The Trustee shall not be personally liable, except with respect to matters involving its willful misconduct or gross negligence, for any actions taken by it, debts contracted or for damages to persons or property, or for salaries or nonfulfillment of contracts during any period following an Event of Default in which it may be in the possession of or managing real or tangible personal property pursuant to this Indenture.
(i)	At any and all reasonable times the Trustee, and its authorized agents, attorneys, experts, engineers, accountants and representatives, shall have the right to inspect any and all property and all books, papers and records of the Authority pertaining to any improvements and the Bonds and to make copies thereof and to take such information from and in regard thereto as may be desired to the extent permitted by law.
(j)	The Trustee shall not be required to give any bond or security in respect of the execution of the said trusts and powers or otherwise in respect of the premises; provided, however, that prior to taking any remedial action hereunder, the Trustee shall be entitled to reasonable indemnity therefor.

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(k) All moneys received by the Trustee shall, applied or invested as herein provided, be held in trust for purposes for which they were received but need not be segregated from other funds except to the extent required by law.

     Section 1002. Rights and Powers During Default. Subject to its responsibility to act upon the direction of the Bondholders hereunder, the Trustee shall exercise such of the rights and remedies vested in it by this Indenture and shall use the same degree of care in their exercise as a prudent person would exercise or use in the circumstances in the conduct of its personal affairs; provided, that, if in the opinion of the Trustee such action may tend to involve expense or liability, it shall not be obligated to take such action unless it is furnished with indemnity reasonably satisfactory to it.

     Section 1003. Right to Rely Upon Documents. The Trustee shall be protected and shall incur no liability in acting or proceeding in good faith upon any resolution, notice, telegram, request, consent, waiver, certificate, statement, affidavit, voucher, bond, requisition or other paper or document which it shall in good faith believe to be genuine. The Trustee shall be under no duty to make any investigation or inquiry as to any statements contained or matters referred to in any such instrument, but may accept and rely upon the same as conclusive evidence of the truth and accuracy of such statements.

     Section 1004. Right to Own and Deal in Bonds. The Trustee, either as principal or agent, may also engage in or be interested in any financial or other transaction with the Authority or the Borrower and may act as depository, trustee or agent for any committee or body of holders of the Bonds or other obligations of the Authority, as freely as if it were not Trustee hereunder.

     Section 1005. Interest Upon Moneys Received. The Trustee shall not be under any liability for interest on any moneys received under any of the provisions of this Indenture, except such as may be agreed upon between the Trustee and the Borrower. All interest allowed on any such moneys shall be credited as provided in Article VI hereof with respect to interest on investments.

     Section 1006. Construction of Provisions of Indenture. The Trustee may construe any of the provisions of this Indenture insofar as the same may appear to be ambiguous or inconsistent with any other provision thereof.

     Section 1007. Co-Trustee. The Trustee, with the approval of the Authority and the Borrower, may appoint an additional individual or institution as an additional or co-trustee. If the Trustee appoints an additional or co-trustee, each power or right vested in the Trustee hereunder shall be exercisable by and vest such additional or co-trustee to the extent necessary or desirable to enable the co-trustee to exercise such powers or rights, and every covenant and obligation necessary to the exercise thereof by such additional or co-trustee shall run to and be enforceable by either of them.

     Section 1008. Resignation by Trustee. The Trustee may at any time resign from the trusts hereby created by giving written notice to the Authority, the Borrower and each registered owner of Bonds then Outstanding. Any such resignation shall take effect upon the later of (a) the date specified by the Trustee in the foregoing notice (which shall be not less than 30 days after

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the giving of such notice), or (b) the appointment of a successor Trustee (i) by the Borrower, unless an Event of Default has occurred under the Loan Agreement or an event has occurred which, with the passage of time or the giving of notice, would constitute such an Event of Default (a “Potential Default”), or (ii) by the holders of at least 25% in aggregate principal amount of Outstanding Bonds.

     Section 1009. Removal of Trustee. The Trustee may be removed at any time upon written notice, appointing a successor Trustee, given by the Borrower, unless an Event of Default or Potential Default (as defined in Section 1008 above) has occurred under the Loan Agreement, or by the holders of at least 51% in aggregate principal amount of Outstanding Bonds. Such notice shall be given to the Trustee to be removed, the Authority and (if given by the Bondholders) the Borrower and shall be effective immediately, if the removal is for a breach of the Trustee’s duties hereunder, or on a specified date not less than 30 days after the giving of the notice, in all other cases. Any unpaid fees and expenses of the Trustee shall be paid prior to effectiveness of such removal. The successor Trustee shall notify all Bondholders of such removal and appointment.

     Section 1010. Appointment of Temporary Successor Trustee

(a) In case at any time the Trustee shall resign or shall be removed or shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or if a receiver, liquidator or conservator of the Trustee, or of its property, shall be appointed, or if any public officer shall take charge or control of the Trustee, or of its property or affairs, a successor Trustee shall be appointed by the Authority, at the direction of the Borrower, by a duly executed written instrument signed by an Authorized Officer of the Authority, but if the Borrower does not direct the Authority to appoint a successor Trustee within sixty (60) days, then by the Holders of a majority in principal amount of the Bonds then Outstanding, excluding any Bonds held by or for the account of the Authority, by an instrument or concurrent instruments in writing signed and acknowledged by such Bondholders or by their attorneys-in-fact duly authorized and delivered to such successor Trustee, notification thereof being given to the Authority and the predecessor Trustee. After such appointment of a successor Trustee, the Borrower shall mail notice of any such appointment to the registered owners of the Bonds then Outstanding.

(b) If no appointment of a successor Trustee shall be made pursuant to the foregoing provisions of this Section within 120 days after the Trustee shall have given to the Authority written notice or after a vacancy in the office of the Trustee shall have occurred by reason of its inability to act, removal, or for any other reason whatsoever, the Trustee or the Holder of any Bond (in any case) may apply to any court of competent jurisdiction to appoint a successor Trustee. Said court may thereupon, after such notice, if any, as such court may deem proper, appoint a successor Trustee.

     Section 1011. Qualifications of Successor Trustee. Every successor Trustee appointed pursuant to any of the foregoing provisions shall be a trust company or a national banking association or state bank with trust powers in good standing located in or incorporated under the

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laws of the State, duly authorized to exercise trust powers and subject to examination by federal or state authority, and, if there be such a trust company, national banking association or state bank willing and able to accept the trust on reasonable and customary terms, shall have a reported capital and surplus of not less than $100,000,000.

     Section 1012. Court Appointment of Successor Trustee. In case at any time the Trustee shall resign and no appointment of a successor Trustee shall be made pursuant to the foregoing provisions of this Article X prior to the date specified in the notice of resignation as the date when such resignation shall take effect, the resigning Trustee or any Bondholder may forthwith apply to a court of competent jurisdiction for the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribed, appoint a successor Trustee.

     Section 1013. Acceptance and Transfer of Trust. Any successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Authority and the Borrower an instrument accepting such appointment hereunder, and thereupon such successor Trustee, without any further act, deed or conveyance, shall become duly vested with all the trust estate and the rights, powers, trusts, duties and obligations of its predecessor in the trust hereunder, with like effect as if originally named Trustee herein. Upon request of such Trustee, the Trustee ceasing to act and the Authority shall execute and deliver an instrument transferring to such successor Trustee all the trust estate and the rights, powers and trusts hereunder of the Trustee so ceasing to act; and the Trustee so ceasing to act shall pay over to the successor Trustee all moneys and other assets at the time held by it hereunder.

     Section 1014. Successor Trustee by Merger. Any corporation into which any Trustee hereunder may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which any Trustee hereunder shall be a party, shall be the successor Trustee under this Indenture, without the execution or filing of any paper or any further act on the part of the parties hereto, anything herein to the contrary notwithstanding.

     Section 1015. Trustee’s Right to Make Advances. In case any tax, assessment or governmental or other charge upon, or insurance premium with respect to, any part of the Borrower’s Property is not paid as may be required under the Loan Agreement, the Trustee may, with prior notice to the Borrower, pay such tax, assessment or governmental charge or insurance premium, without prejudice, however, to any rights of the Trustee or the Bondholders hereunder arising in consequence of such failure; and any amount at any time so paid under this Section, with interest thereon from the date of payment at the Trustee’s prime rate of lending at the time or for the period in question, shall be given a preference in payment over any payment of principal of and premium, if any, and interest on the Bonds, and shall be paid out of the proceeds of revenues collected under the Loan Agreement, if not otherwise caused to be paid; provided however, that the Trustee shall be under no obligation to make any such payment unless it shall have been requested to do so by the holders of at least 25% in aggregate principal amount of Bonds then Outstanding and shall have been provided with adequate funds for the purpose of such payment.

     Section 1016. Intervention by Trustee. The Trustee may intervene on behalf of the Bondholders in any judicial proceeding to which the Authority is a party and which, in the

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opinion of the Trustee and its counsel, has a substantial bearing on the interests of the Bondholders, and shall intervene if it is requested in writing by the holders of at least 25% in aggregate requested principal amount of the Bonds then Outstanding and is provided indemnity pursuant to Section 1002. The rights and obligations of the Trustee under this Section 1016 are subject to the approval of a court of competent jurisdiction.

     Section 1017. Fees, Charges and Expenses of Trustee. The Trustee shall be entitled from the Borrower to payment and/or reimbursement for reasonable fees and for its services rendered hereunder and all advances, counsel fees and other expenses reasonably and necessarily made or incurred by the Trustee in connection with such services, including but not limited to counsel fees. Upon an Event of Default, but only upon an Event of Default, the Trustee shall have a right of payment prior to payment on account of interest on or principal of, or premium, if any, on, any Bond for the foregoing advances, fees, costs and expenses incurred. The Authority shall not be responsible for payment of any such fees and expenses.

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ARTICLE XI
AMENDMENTS AND SUPPLEMENTS

     Section 1101. Amendments and Supplements Without Bondholders’ Consent. This Indenture may be amended or supplemented from time to time, without the consent of the Bondholders by a Supplemental Indenture for one or more of the following purposes:

(a)	in connection with the issuance of Additional Bonds, to set forth such matters as are specifically required or permitted hereunder or such other matters as will not adversely affect the holders of the Bonds then Outstanding;
(b)	to make conforming changes in connection with any changes to the Loan Agreement pursuant to Section 1104(c) hereof; and
(c)	in connection with obtaining a rating on any series of Bonds from a Rating Agency; provided that the amendments do not impair the security hereof or adversely affect the Bondholders.

     Section 1102. Amendments With Bondholders’ Consent. This Indenture may be amended or supplemented from time to time by a Supplemental Indenture with the consent of the holders of at least 51% in aggregate principal amount of the Bonds then Outstanding; provided, that (a) no amendment shall be made which adversely affects one or more but less than all series of Bonds without the consent of the holders of at least 51% of the then Outstanding Bonds of each series so affected, (b) no amendment shall be made which affects the rights of some but less than all the Outstanding Bonds of any one series without the consent of the holders of 51% of the Bonds so affected, and (c) no amendment which alters the interest rates on any Bonds, the maturities, interest payment dates or redemption provisions of any Bonds, this Article XI or the security provisions hereunder may be made without the consent of the holders of all Outstanding Bonds adversely affected thereby.

     Section 1103. Trustee Authorized to Join in Amendments and Supplements: Reliance on Counsel. The Trustee is authorized to join with the Authority in the execution and delivery of any Supplemental Indenture or amendment permitted by this Article XI and in so doing shall be protected by an opinion of Counsel that such Supplemental Indenture or amendment is so permitted and has been duly authorized by the Authority and that all things necessary to make it a valid and binding agreement have been done.

     Section 1104. Amendments to the Loan Agreement or the other Loan Documents Without Consent of Bondholders. The Loan Agreement or the other Loan Documents may be amended without the consent of the Bondholders (a) to correct any formal defect or omission therein, provided such correction does not adversely affect the Bondholders, or (b) in connection with the issuance of Additional Bonds, to set forth such matters as are permitted or required hereunder in connection with such issuance or to set forth other matters not adversely affect the holders of the Bonds then Outstanding. No prior notice to the Bondholders of any proposed changes pursuant to this Section shall be required.

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     Section 1105. Amendments to the Loan Agreement or the other Loan Documents with Consent of Bondholders. Except for amendments, changes or modifications as specifically provided in Section 1104 hereof, neither the Authority nor the Trustee shall consent to any amendment, change or modification of the Loan Agreement or the other Loan Documents or waive any obligation or duty of the Borrower under the Loan Agreement or the other Loan Documents without the written consent of the holders of not less than 51% in aggregate principal amount of the Outstanding Bonds affected thereby; provided, however, that no such waiver, amendment, change or modification shall permit termination or cancellation of the Loan Agreement or the other Loan Documents or any reduction of the amounts payable under Section 401 of the Loan Agreement or the other Loan Documents or change the date when such payments are due without the consent of the holders of all the Bonds then Outstanding.

     Section 1106. Conditions to Supplements and Amendments. Before the Authority and the Trustee shall enter into any Supplemental Indenture, or before the Authority, the Borrower and the Trustee shall enter into any amendment or supplement of the Loan Agreement, there shall have been delivered to the Trustee: (a) a Favorable Opinion, including an opinion that upon execution thereof such supplemental indenture or other amendment or supplement will be valid and binding upon each of the Authority and the Borrower, as applicable, and (b) any required consents, in writing, of the Bondholders.

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ARTICLE XII

DEFEASANCE

     Section 1201. Defeasance. When principal or Redemption Price (as the case may be) of, and interest on, all Bonds issued hereunder have been paid, or provision has been made for payment of the same when due in the manner described in this Section 1201, whether at maturity or upon redemption, acceleration, or otherwise, together with all other sums payable hereunder or under the Loan Agreement, the right, title and interest of the Trustee shall thereupon cease (except with respect to moneys or securities held by the Trustee hereunder for the payment of the principal or Redemption Price (as the case may be) of, and interest on, the Bonds and other amounts) and the Trustee, on written demand of the Authority, shall release the lien of this Indenture and shall execute documents to evidence such release as may be reasonably required by the Authority, shall surrender the Series 2007 Note to the Borrower and shall turn over to the Borrower or to such person, body or authority as may be entitled to receive the same all balances then held by it hereunder.

     Provision for the payment of Bonds shall be deemed to have been made upon the delivery to the Trustee of (i) cash in an amount which, when added to any other moneys held by the Trustee and available for such payment, would be sufficient to make all payments specified above, or (ii) Government Obligations which are non callable prior to the stated maturity thereof and having stated maturities arranged so that the principal of and interest becoming due and payable on such Government Obligations will, under any and all circumstances (and without further investment or reinvestment of either the principal amount thereof or the interest earned thereon), be sufficient (as confirmed by a nationally recognized firm of public accountants) to make all such payments, or (iii) any combination of such cash and such Government Obligations the amounts of which and interest thereon, when due, are or will be, in the aggregate, sufficient to make all such payments, and in each case, the delivery to the Trustee of (a) an opinion of Bond Counsel to the effect that such defeasance is permitted under this Section 1201 and (b) an opinion of Counsel selected by the Trustee and reasonably acceptable to the Borrower as to such other matters as the Trustee may reasonably request. Neither the obligations nor moneys deposited with the Trustee pursuant to this Section shall be withdrawn or used for any purpose other than, and shall be segregated and held in trust for the payment of the principal of, Redemption Price and interest on said Bonds.

     The release of the obligations of the Authority under this Section 1201 shall not affect the obligations of the Borrower to make direct payments to the Authority or the Trustee pursuant to the Loan Agreement.

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ARTICLE XIII
MISCELLANEOUS PROVISIONS

     Section 1301. Limitations on Recourse. No personal recourse shall be had for any claim based on this Indenture or the Bonds against any member, officer employee, past, present or future, of the Authority or of any successor body as such, either directly or through the Authority or any such successor body, under any constitutional provision, statute or rule of law or by the enforcement of any assessment or penalty or otherwise. The Bonds are payable solely from the Revenues and other moneys held by the Trustee hereunder for such purpose. There shall be no other recourse under the Bonds, this Indenture, the Loan Agreement or otherwise against the Authority or any other property now or hereafter owned by it and, upon entry of any judgment. The Authority shall be conclusively deemed to have complied with all of its covenants and other obligations hereunder, including but not limited to those set forth in Articles IV, V and VIII hereof, upon requiring the Borrower in the Loan Agreement to agree to perform such Authority covenants and other obligations (excepting only any approvals or consents permitted or required to be given by the Authority hereunder, and any exceptions to the performance by the Borrower of the Authority’s covenants and other obligations hereunder, as may be contained in such agreement in the Loan Agreement). However, nothing contained in any such agreement in the Loan Agreement shall prevent the Authority from time to time, in its discretion, from performing any such covenants or other obligations. The Authority shall have no liability for any failure to fulfill, or breach by the Borrower of, the Borrower’s obligations under the Bonds, this Indenture, the Loan Agreement or otherwise.

     Section 1302. No Rights Conferred on Others. Nothing in this Indenture expressed or implied is intended or shall be construed to confer upon, or to give to, any person or entity, other than the Authority, the Trustee, and the registered owners of the Bonds, any right, remedy or claim under or by reason of this Indenture or any covenant, condition or stipulation hereof, and all covenants, stipulations, promises and agreements in this Indenture contained by and on behalf of the Authority shall be for the sole and exclusive benefit of the Authority, the Trustee, and the registered owners of the Bonds.

     Section 1303. Illegal, etc. Provisions Disregarded. If any term or provision of this Indenture or the Bonds or the application thereof for any reason or circumstances shall to any extent be held invalid or unenforceable, the remaining provisions or the application of such term or provision to persons and situations other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision hereof and thereof shall be valid and enforced to the fullest extent permitted by law.

     Section 1304. Authority Not Responsible for Insurance, Taxes, Execution of Indenture or Application of Moneys Applied in Accordance with this Indenture.

(a) The Authority is not under any obligation to effect or maintain insurance or to renew any policies of insurance or to inquire as to the sufficiency of any policies of insurance carried by the Borrower, or to report, or make or file claims or proof of loss for, any loss or damage insured or advised as to which the payment of any taxes or assessments, or to require any such payment to be made. The Authority

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shall have no responsibility in respect of the sufficiency of the security provided by this Indenture. The Authority shall not be under any obligation to see that any duties herein imposed upon any party other than itself, or any covenants herein contained on the part of any party other than itself to be performed, shall be done or performed, and the Authority shall not be under any liability for failure to see that such duties or covenants are so done or performed.

(b) The immunities and exemptions from liability of the Authority hereunder shall extend to its directors, members, attorneys, officers, employees and agents.

     Section 1305. Authority May Rely on Certificates.

(a) The Authority shall be protected and shall incur no liability in acting or proceeding, or in not acting or not proceeding, in good faith and in accordance with the terms of this Indenture, upon any resolution, order, notice request, consent, waiver, certificate, statement, affidavit, requisition, bond or other paper or document, which it shall in good faith believe to be genuine and to have been adopted or signed by the proper board or person or to have been prepared and furnished pursuant to any of the provisions of the Loan Agreement or this Indenture, or upon the written opinion of any attorney, engineer, accountant or other expert believed by it to be qualified in relation to the subject matter, and the Authority shall not be under any duty to make any investigation or inquiry as to any statements contained or matters referred to in any such instrument.

(b) Upon receipt of notice by or actual knowledge of any officer responsible for the administration of the Project Fund, the Trustee shall report immediately to the Authority any breach of any covenant or any Event of Default by the Borrower under this Loan Agreement or any fact or circumstance which, except for any grace period permitted by this Loan Agreement, would result in any breach of a covenant or Event of Default by the Borrower hereunder.

     Section 1306. Notices to Trustee and Authority. Any notice to or demand upon the Trustee may be made, and shall be deemed to have been sufficiently given, if served or presented at or sent by registered or certified United States mail to the principal corporate trust office of the Trustee at 385 Rifle Camp Road, West Paterson, New Jersey 07424, Attention: Corporate Trust Department. Any notice to or demand upon the Authority may be made, and shall be deemed to have been sufficiently given if served or presented at or sent by registered or certified United States mail to New Jersey Economic Development Authority, PO Box 990, 36 West State Street, Trenton, New Jersey 08625 or such other address as may be filed in writing by the Authority with the Trustee. Copies of any and all such notices or demands sent to the Authority or the Trustee be provided to the Borrower immediately upon receipt thereof at the Borrower’s address set forth in Section 901 of the Loan Agreement.

     Section 1307. Controlling Law. The laws of the State shall govern the construction of this Indenture.

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     Section 1308. Successors and Assigns. All the covenants, promises and agreements in this Indenture contained by or on behalf of the Authority or by or on behalf of the Trustee shall bind and inure to the benefit of their respective successors and assigns, whether so expressed or not.

     Section 1309. Headings for Convenience Only. The table of contents and descriptive headings in this Indenture are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof.

     Section 1310. Counterparts. This Indenture may be executed in any number of counterparts, each of which when so executed and delivered shall be an original; but such counterparts shall together constitute but one and the same instrument.

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     IN WITNESS WHEREOF, the Authority and the Trustee have caused their respective corporate seals to be hereunto affixed and attested and these presents to be signed by their respective officers thereunto duly authorized and this Indenture to be dated as of the day and year first above written.

	NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY
ATTEST:
	By:
Gregory Ritz		Teri Dunlop
Assistant Secretary		Director of Lending Services
	THE BANK OF NEW YORK
ATTEST:
	By:
		Name:
		Title:

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EXHIBIT A

FORM OF THE BOND

THE STATE OF NEW JERSEY IS NOT OBLIGATED TO PAY, AND NEITHER THE FAITH AND CREDIT NOR TAXING POWER OF THE STATE OF NEW JERSEY IS PLEDGED TO THE PAYMENT OF, THE PRINCIPAL OR REDEMPTION PRICE, IF ANY, OF OR INTEREST ON THIS BOND. THIS BOND IS A SPECIAL, LIMITED OBLIGATION OF THE AUTHORITY, PAYABLE SOLELY OUT OF THE REVENUES OR OTHER RECEIPTS, FUNDS OR MONEYS OF THE AUTHORITY PLEDGED UNDER THE INDENTURE AND FROM ANY AMOUNTS OTHERWISE AVAILABLE UNDER THE INDENTURE FOR THE PAYMENT OF THE BOND. THIS BOND DOES NOT NOW AND SHALL NEVER CONSTITUTE A CHARGE AGAINST THE GENERAL CREDIT OF THE AUTHORITY. THE AUTHORITY HAS NO TAXING POWER.

THIS BOND IS NOT RATED AND NO APPLICATION IS EXPECTED TO BE MADE TO OBTAIN A RATING THEREON. PURCHASE OF THIS BOND SHOULD BE CONSIDERED ONLY BY INVESTORS WHO (A) CAN BEAR THE ECONOMIC RISK OF SUCH BOND; (B) HAVE KNOWLEDGE AND EXPERIENCE IN BUSINESS AND FINANCIAL MATTERS AS TO BE CAPABLE OF EVALUATING THE RISKS AND MERITS OF SUCH BOND; (C) ARE A NATIONAL BANK, COMMERCIAL BANK, REGISTERED INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE “INVESTMENT COMPANY ACT”), AN ACCREDITED INVESTOR UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), A QUALIFIED INSTITUTIONAL BUYER AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT OR A QUALIFIED PURCHASER AS SUCH TERM IS DEFINED UNDER SECTION 2(A)(5)(A) OF THE INVESTMENT COMPANY ACT; (D) ACKNOWLEDGE THAT SUCH BOND IS HIGH RISK AND SHOULD ONLY BE CONSIDERED FOR PURCHASE AS PART OF A DIVERSIFIED PORTFOLIO OF HIGH YIELD, HIGH RISK SECURITIES; AND (E) HAVE UNDERTAKEN THE RESPONSIBILITY FOR OBTAINING ALL INFORMATION THAT THEY DEEM NECESSARY AND DESIRABLE TO FORM A DECISION TO PURCHASE SUCH BOND. BY PURCHASING SUCH BOND, EACH PURCHASER OF SUCH BONDS AGREES THAT THE AUTHORITY IS NOT RESPONSIBLE FOR ITS DECISION TO PURCHASE SUCH BOND AND ACKNOWLEDGES THAT IT HAS NO RIGHTS OR RECOURSE AGAINST THE AUTHORITY WITH RESPECT TO THE DECISION TO PURCHASE SUCH BOND.

No. R-1 $17,500,000

NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY

SOLID WASTE FACILITIES REVENUE BONDS

(CONVERTED ORGANICS OF WOODBRIDGE, LLC. — 2007 PROJECT) SERIES A

		Accrued
Maturity Date	Dated Date	Interest Date	Rate			CUSIP
August 1, 2027	February 16, 2007	February 16, 2007		8	%	645903AM7

REGISTERED OWNER: CEDE & CO.

PRINCIPAL AMOUNT: SEVENTEEN MILLION FIVE HUNDRED THOUSAND DOLLARS

     The NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY (the “Authority”), a public body corporate and politic constituting an instrumentality of the State of New Jersey (the “State”), for value received, hereby promises to pay (but only out of the sources hereinafter mentioned) to the Registered Owner identified above, or registered assigns, on the Maturity Date shown above unless this Bond shall have been called for redemption in whole or in part and payment of the redemption price shall have been duly made or provided for, upon surrender hereof, the Principal Amount identified above and to pay to the registered owner hereof (but only

out of the sources hereinafter mentioned) interest thereon from the Dated Date shown above until payment of said principal sum has been made or provided for, at the Interest Rate stated above on August 1, 2007 and thereafter on each August 1 and February 1, to the registered owner hereof as of the close of business on the July 15 or January 15 next preceding such interest payment date, and to pay interest on overdue interest (to the extent permitted by applicable law) at the rate per annum above specified. Except as otherwise provided in the Trust Indenture dated as of February 1, 2007 (the “Indenture”) between the Authority and The Bank of New York, as Trustee (the “Trustee”), principal and interest shall be paid at the principal corporate trust office of the Trustee, or at such other location where the Trustee’s principal operations exist, or at the duly designated office of any duly appointed alternate or successor paying agent, in any coin or currency of the United States of America which, at the time of payment, is legal tender for the payment of public and private debts, provided that interest may be paid by check or draft drawn upon any such paying agent and mailed to the registered owner hereof at his address as it appears on the Bond registry of the Authority.

     This Bond is one of a duly authorized series (the “Bonds”) limited in aggregate principal amount to $17,500,000 issued under the Indenture and pursuant to a resolution of the Authority dated January 9, 2007, to accomplish the public purposes of the Act by aiding Converted Organics of Woodbridge, LLC (the “Borrower”) in financing the (i) costs of certain improvements to and equipment and miscellaneous expenditures for, the premises located on certain leased property located in Woodbridge, New Jersey, on which the Borrower will build a solid waste recovery facility (the “Facility”), (ii) funding of the Reserve Fund Requirement on the Bonds; (iii) payment of capitalized interest on the Bonds; and (iv) paying of costs of issuing the Bonds (collectively, the “Project”).

     The Bonds are special limited obligations of the Authority, payable solely from payments made on the promissory note (the “Note”) delivered or to be delivered by the Borrower evidencing a loan made by the Authority to the Borrower to finance the Project and from certain payments made by the Borrower pursuant to the Loan Agreement by and between the Authority and the Borrower dated as of February 1, 2007 (the “Agreement”). Repayment of the Bonds and the Borrower’s obligations under the Note will be secured by (i) the Loan Agreement (except for the Reserved Rights of the Authority under the Loan Agreement); (ii) the Leasehold Mortgage from the Borrower to the Authority dated February 16, 2007 (the “Leasehold Mortgage”), constituting a first lien on the Project and the Borrower’s rights under that certain Agreement of Lease dated as of June 2, 2007, between Recycling Technology Development, LLC, as landlord, and Converted Organics Inc., as tenant, as assigned to the Borrower pursuant to an Assignment to be executed prior to the issuance of the Bonds (as so assigned, the “Lease Agreement”), (iii) the Assignment of Leases and Other Agreements from the Borrower to the Authority dated as of February 1, 2007 (the “Assignment of Lease”); (iv) the Corporate Guaranty dated February 16, 2007 of Converted Organics (the “Guaranty Agreement”), and (v) all the right, title and interest of the Authority in and to the Revenues and the Funds as defined in the Indenture (collectively, the “Trust Estate”); and other than as provided in the Indenture, there shall be no other recourse against the Authority.

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     Except as otherwise specified in the Indenture, this Bond is entitled to the benefits of the Indenture equally and ratably both as to principal (and redemption price) and interest with all other Bonds issued under the Indenture, to which reference is made for a description of the rights of the holders of the Bonds, the rights and obligations of the Authority, the rights, duties and obligations of the Trustee, the provisions relating to amendments to and modifications of the Indenture. The holder of this Bond may not enforce the provisions of the Borrower’s Note, the Leasehold Mortgage and the Assignment of Leases and Other Agreements except in accordance with the provisions of the Indenture. Copies of the Indenture and the Agreement are on file at the principal corporate trust office of the Trustee.

     The Bonds are issuable only as fully-registered bonds without coupons in denominations of $100,000 or any integral multiple of $5,000 in excess thereof (“Authorized Denominations”). At any other time, interest on the Bonds will be payable by check mailed to each registered owner thereof at his address as it appears on the registration books of the Authority kept by the Trustee at the close of business on the 15^th day (or the last preceding Business Day if such date is not a Business Day) of the calendar month immediately preceding the Interest Payment Date (the “Record Date”), and the principal amount and premium, if any, of the Bonds will be payable upon presentation and surrender of the Bonds when due at the principal corporate trust office of the Trustee; provided, however, upon the written request to the Trustee by a registered owner of at least $500,000 aggregate principal amount of the Bonds, interest may be payable by wire transfer to an account designated by such registered owner. So long as the Bonds shall be maintained under a book-entry only system, payments of the principal of and redemption premium (if any) and interest on the Bonds will be made as described under the subsection entitled “Book-Entry Only System” herein.

MANDATORY SINKING FUND REDEMPTION

     The Bonds are subject to mandatory sinking fund redemption prior to maturity in part by lot, on August 1 of the years and in the amounts applicable to each respective maturity set forth as follows, at a redemption price equal to 100% plus accrued interest to the date fixed for redemption.

Redemption	Principal		Redemption			Principal
Date	Amount		Date			Amount
2013	$	645,000		2021		$	1,195,000
2014		695,000		2022			1,290,000
2015		750,000		2023			1,390,000
2016		810,000		2024			1,505,000
2017		875,000		2025			1,625,000
2018		945,000		2026			1,750,000
2019		1,025,000		2027	*		1,895,000
2020		1,105,000

* Final Maturity

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OPTIONAL REDEMPTION

     The Bonds shall be subject to redemption prior to maturity, at the option of the Authority at the direction of the Borrower, as a whole or in part in Authorized Denominations at any time on or after August 1, 2017, upon thirty (30) day prior written notice given to the Trustee, in such order of maturity as shall be directed by the Authority at the direction of the Borrower, at a redemption price equal to the percentage of the principal amount to be so redeemed shown in the table below, plus accrued interest to the date of redemption.

Dates (inclusive)	Redemption Price
August 1, 2017 – July 31, 2018		106	%
August 1, 2018 – July 31, 2019		103	%
August 1, 2019 and thereafter		100	%

SPECIAL MANDATORY REDEMPTION — DEMISE OF MORTGAGED PROPERTY

     Bonds may be subject to redemption, in authorized denominations, from surplus money in the Project Fund, which are transferred to the Redemption Fund, and from insurance proceeds, condemnation awards or proceeds of conveyances in lieu of condemnation arising out of the Mortgaged Property deposited in the Redemption Fund and available for such purpose, at a Redemption Price equal to 100% of the principal amount thereof, plus accrued interest to the Redemption Date.

EXTRAORDINARY MANDATORY REDEMPTION

     The Bonds are subject to extraordinary mandatory redemption in whole after receipt by the Trustee of the Authority’s written direction that either of the following events has occurred:

(i)	if the Borrower ceases to operate the Project, or to cause the Project to be operated, as an authorized “project” under the Act for twelve (12) consecutive months, without first obtaining the prior written consent of the Authority; or
(ii)	if any representation or warranty made by the Borrower in the Agreement or in any report, certificate, financial statements or other instrument furnished by the Borrower in connection with the Agreement shall prove to be false or misleading in any material respect when made.

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EXTRAORDINARY OPTIONAL REDEMPTION

     The Bonds are further subject to extraordinary optional redemption in whole at the option of the Authority, upon the written notice to the Borrower and the Trustee, at any time prior to maturity, at a redemption price equal to the principal amount thereof to be redeemed, plus accrued interest to the redemption date if, as evidenced by a certificate of an Authorized Officer of the Borrower (i) as a result of any change in the Constitution of the United States of America or of the State or of any final legislative or executive action of the United States of America or of the State or any political subdivision thereof or by final decree or judgment of any court after the contest thereof by the Borrower, the Agreement becomes void or unenforceable or legally impossible of performance in accordance with the intent and purpose of the Authority or the Borrower, in which case such redemption shall be in whole only at anytime and not in part or (ii) as set forth in an Opinion of Bond Counsel that the redemption of the Bonds is required to maintain the exclusion from gross income of interest on the Bonds for federal income tax purposes.

     The Authority shall provide written notice to the Trustee of its election to redeem the Bonds pursuant to this paragraph, the principal amount of such Bonds to be redeemed and the date, within one hundred eighty (180) days from the effective date of any such constitutional amendment, legislative or executive action, final decree, judgment or order but not less than sixty (60) days from the date such notice is mailed, on which the Bonds shall be redeemed pursuant to this paragraph.

SPECIAL MANDATORY REDEMPTION ON DETERMINATION OF TAXABILITY

     The Bonds are subject to special mandatory redemption, in whole, on a pro rata basis, after receipt by the Trustee of the Authority’s written direction that a Determination of Taxability has occurred (i) as a result of a failure by the Borrower to observe the provisions of its tax covenants in the Agreement, or in any tax certificate delivered by the Borrower in connection with the issuance the Bonds, at a Redemption Price equal to 110% of the principal amount thereof, plus accrued interest to the Redemption Date; or (ii) for any reason not specified in subsection (i) above, at a Redemption Price equal to 104% of the principal amount thereof, plus accrued interest to the Redemption Date.

SPECIAL MANDATORY REDEMPTION FOR TRANSFER WITHOUT BONDHOLDER CONSENT

     The Bonds are subject to special mandatory redemption, in whole, on a pro rata basis, after receipt by the Trustee of the Authority’s written direction upon notice by the Borrower that the Borrower will (i) merge into or consolidate with any Person; (ii) acquire any material portion of the stock of any Person or a material portion of the assets or business of any Person or the operating business or division of any Person; (iii) permit any Person to merge into it, (iv) form any subsidiaries; or (v) sell or transfer any material portion of its membership interests or assets to any Person, pursuant to the requirements of Section 703 of the Loan Agreement but without the consent of the Bondholders, at a Redemption Price equal to the then applicable optional

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redemption price set forth in the Indenture. If the Bonds are not yet subject to optional redemption upon the occurrence of such event or events, the Borrower is required to deposit funds with the Trustee sufficient to defease the outstanding principal of, premium and interest on the Bonds through the first permitted optional redemption date, and to redeem the Bonds on such date, all in accordance with the terms and conditions of the Indenture.

OTHER REDEMPTIONS

     Bonds may be subject to redemption upon such other terms as are provided in a supplemental indenture authorizing the issuance of such bonds, notwithstanding the fact that other Bonds issued and Outstanding hereunder are not subject to such redemption.

SELECTION OF BONDS FOR REDEMPTION

In the event that less than all of the Bonds of any series or maturity are to be redeemed, Bonds of such series or maturity shall be selected for redemption in such manner as may be provided in the Indenture or in a Supplemental Indenture, subject, however, to the following:

     (a) in the case of any Extraordinary or Special Redemption, the moneys available therefor shall be allocated to each series of Bonds subject to such redemption as nearly as practicable in the same proportion as the Outstanding principal amount of Bonds of such series bears to the Outstanding principal amount of all Bonds subject to such redemption and the selection of Bonds of each series for redemption shall be independent of the selection of Bonds of other series for redemption; and

     (b) in the case of any series having Bonds of varying denominations, each Bond of such series shall be treated as representing that number of Bonds which is obtained by dividing the face amount thereof by the smallest authorized denomination; and

     (c) if less than all of the Bonds are to be redeemed, the Trustee shall select the particular Bonds for redemption by lot, but in no event shall any partial redemption result in a Bond of a denomination of less than the Authorized Denomination.

NOTICE OF REDEMPTION

     The Trustee shall cause notice of any redemption of Bonds under the Indenture to be mailed by first class mail to the holders of all Bonds to be redeemed at the register addresses appearing in the registration books kept for such purpose pursuant to Article II of the Indenture. Each such notice shall (i) be mailed not more than sixty (60) nor less than thirty (30) days prior to the Redemption Date, (ii) identify the Bonds to be redeemed (specifying the CUSIP numbers, if any, assigned to the Bonds) (iii) specify the Redemption Date, the Redemption Price and, if less than all of any particular Bond is to be redeemed, the principal amount so to be redeemed, (iv) state that on the Redemption Date the Bonds called for redemption will be payable at the

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principal corporate trust office of the Trustee, that from that date interest will cease to accrue, that no representation is made as to the accuracy or correctness of the CUSIP numbers (if any) printed therein or on the Bonds, and (v) provide any other descriptive information which may be necessary in order to identify the Bonds to be redeemed, including without limitation the original issuance date, maturity date and interest rate applicable to such Bonds. No defect affecting any Bond, whether in the notice of optional redemption or mailing thereof (including any failure to mail such notice), shall affect the validity of the redemption proceedings for any other Bonds.

     If at the time of mailing of any notice of optional redemption there shall not have been deposited with the Trustee moneys sufficient to redeem all of the Bonds called for optional redemption, such notice shall state that it is subject to the deposit of the redemption moneys with the Trustee not later than the opening of business on the Redemption Date and shall be of no effect unless such moneys are so deposited.

     Notwithstanding any provision in the Indenture or this Bond to the contrary, this Bond may only be resold in authorized denominations upon receipt by the Trustee of an Investor Representation Letter from the proposed transferee or purchaser in the form attached as Exhibit C to the Indenture.

     This Bond is transferable by the registered owner hereof or his duly authorized attorney at the principal corporate trust office of the Trustee, upon surrender of this Bond, accompanied by a duly executed instrument of transfer satisfactory to the Trustee, subject to such reasonable regulations as the Authority or the Trustee may prescribe, and upon payment of any tax, fee or other governmental charge and any mailing, delivery or insurance expense incurred with respect to such transfer. Upon any such transfer a new Bond or Bonds in the same aggregate principal amount will be issued, upon request, to the transferee. The person in whose name this Bond is registered shall be deemed the owner hereof for all purposes, and the Authority and the Trustee shall not be affected by a notice to the contrary.

     The New Jersey Economic Development Authority Act, constituting Chapter 80 of the Pamphlet Laws of 1974 of the State of New Jersey, approved on August 7, 1974, as amended and supplemented (the “Act”) provides that no member of the Authority nor any person executing bonds for the Authority shall be liable personally on this Bond by reason of the issuance hereof.

     THE STATE OF NEW JERSEY IS NOT OBLIGATED TO PAY, AND NEITHER THE FAITH AND CREDIT NOR TAXING POWER OF THE STATE IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OR REDEMPTION PREMIUM, IF ANY, OF OR INTEREST ON THE BONDS. THE BONDS ARE SPECIAL, LIMITED OBLIGATIONS OF THE AUTHORITY, PAYABLE SOLELY OUT OF THE REVENUES OR OTHER RECEIPTS, FUNDS OR MONEYS OF THE AUTHORITY PLEDGED UNDER THE INDENTURE AND FROM ANY AMOUNTS OTHERWISE AVAILABLE UNDER THE INDENTURE FOR THE PAYMENT OF THE BONDS. THE BONDS DO NOT NOW AND SHALL NEVER CONSTITUTE A

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CHARGE AGAINST THE GENERAL CREDIT OF THE AUTHORITY. THE AUTHORITY HAS NO TAXING POWER.

     It is hereby certified and recited that all conditions, acts and things required by the Constitution or statutes of the State of New Jersey or the Indenture to exist, to have happened or to have been performed precedent to or in the issuance of this Bond, exist, have happened and have been performed and that said issue of Bonds, together with all other indebtedness of the Authority, is within every debt and other limit prescribed by said Constitution or statutes.

     This Bond is not valid unless the Certificate of Authentication endorsed hereon is duly executed by the Trustee.

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     IN WITNESS WHEREOF, the New Jersey Economic Development Authority has caused this Bond to be signed in its name and on its behalf by the manual or facsimile signature of its Director of Lending Services or any other Authorized Officer of the Authority, and attested by the manual or facsimile signature of its Secretary or Assistant Secretary, and this Bond to be dated the Dated Date.

[Seal]

	NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY
ATTEST:
	By:
Gregory Ritz		Teri Dunlop
Assistant Secretary		Director of Lending Services

[SIGNATURE PAGE TO TRUST INDENTURE]

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TRUSTEE’S CERTIFICATE OF AUTHENTICATION

     This Bond is one of the New Jersey Economic Development Authority Solid Waste Facilities Revenue Bonds (Converted Organics of Woodbridge, LLC. — 2007 Project) Series A described in the within-mentioned Indenture.

THE BANK OF NEW YORK, as Trustee
By:
	Authorized Signature

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ASSIGNMENT

     FOR VALUE RECEIVED, the undersigned sells, assigns and transfers unto                                          the within-mentioned registered Certificate and does hereby irrevocably constitute and appoint                                                              to transfer the such Certificate on the Certificate register of the Agent with full power of substitution in the premises.

     This Bond may only be resold in authorized denominations upon receipt by the Trustee of an Investor Representation Letter from the proposed transferee or purchaser in the form attached as Exhibit C to the Indenture.

Dated:

Signature:	Signature:
NOTICES: Signature(s) must be guaranteed by a member firm of the New York Stock Exchange or a commercial bank, trust company, national bank association or other banking institution incorporated under the laws of the United States or a state of the United States.	NOTICE: The Signature of this Assignment must correspond with the name that appears upon the face of the within Certificate in particular, without alteration, enlargement or any change whatever.

     The Agent will be required to register a Certificate in the name of a transferee only if provided with the information requested below. The transferee (or his designated representative(s) should provide as much of the information below as is applicable to him prior to submitting this Certificate for transfer.

Name:

Address:

Social Security or Employer Identification Number:

If a Trust, Name and Address of Trustee:

EXHIBIT B

CERTAIN TERMS OF BONDS

Dated Date of Bonds:	February 16, 2007
Interest Payment Dates:	February 1st and August 1st, commencing August 1, 2007
Aggregate Principal Amount:	$17,500,000
Authorized Denominations:	$100,000 and integral multiples in excess thereof.

SERIES	CUSIP	MATURITY	AMOUNT	INTEREST RATE
2007	645903AM7	August 1, 2027	$17,500,000	8.0%

Redemption Provisions

     In the manner and with the effect provided in this Indenture, the Bonds will be subject to redemption prior to maturity as described below.

Mandatory Redemption

The Bonds are subject to mandatory sinking fund redemption prior to maturity in part by lot, on August 1 of the years and in the amounts applicable to each respective maturity set forth as follows, at a redemption price equal to 100% plus accrued interest to the date fixed for redemption.

Redemption	Principal		Redemption			Principal
Date	Amount		Date			Amount
2013	$	645,000		2021		$	1,195,000
2014		695,000		2022			1,290,000
2015		750,000		2023			1,390,000
2016		810,000		2024			1,505,000
2017		875,000		2025			1,625,000
2018		945,000		2026			1,750,000
2019		1,025,000		2027	*		1,895,000
2020		1,105,000

* Final Maturity

Optional Redemption

The Bonds shall be subject to redemption prior to maturity, at the option of the Authority at the direction of the Borrower, as a whole or in part in Authorized Denominations at any time on or after August 1, 2017, upon thirty (30) day prior written notice given to the

Trustee, in such order of maturity as shall be directed by the Authority at the direction of the Borrower, at a redemption price equal to the percentage of the principal amount to be so redeemed shown in the table below, plus accrued interest to the date of redemption.

Dates (inclusive)	Redemption Price
August 1, 2017 – July 31, 2018		106	%
August 1, 2018 – July 31, 2019		103	%
August 1, 2019 and thereafter		100	%

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Special Mandatory Redemption — Demise of Mortgaged Property

Bonds may be subject to redemption, in Authorized Denominations, from surplus money in the Project Fund, which are transferred to the Redemption Fund, and from insurance proceeds, condemnation awards or proceeds of conveyances in lieu of condemnation arising out of the Mortgaged Property deposited in the Redemption Fund and available for such purpose, at a Redemption Price equal to 100% of the principal amount thereof, plus accrued interest to the Redemption Date.

Extraordinary Mandatory Redemption

The Bonds are subject to extraordinary mandatory redemption in whole after receipt by the Trustee of the Authority’s written direction that either of the following events has occurred:

(iii)	if the Borrower ceases to operate the Project, or to cause the Project to be operated, as an authorized “project” under the Act for twelve (12) consecutive months, without first obtaining the prior written consent of the Authority; or
(iv)	if any representation or warranty made by the Borrower in the Loan Agreement or in any report, certificate, financial statements or other instrument furnished by the Borrower in connection with the Loan Agreement shall prove to be false or misleading in any material respect when made.

Extraordinary Optional Redemption

The Bonds are further subject to extraordinary optional redemption in whole at the option of the Authority, upon the written notice to the Borrower and the Trustee, at any time prior to maturity, at a redemption price equal to the principal amount thereof to be redeemed, plus accrued interest to the redemption date if, as evidenced by a certificate of an Authorized Officer of the Borrower (i) as a result of any change in the Constitution of the United States of America or of the State or of any final legislative or executive action of the United States of America or of the State or any political subdivision thereof or by final decree or judgment of any court after the contest thereof by the Borrower, the Loan Agreement becomes void or unenforceable or legally impossible of performance in accordance with the intent and purpose of the Authority or the Borrower, in which case such redemption shall be in whole only at anytime and not in part or (ii) as set forth in an Opinion of Bond Counsel that the redemption of the Bonds is required to maintain the exclusion from gross income of interest on the Bonds for federal income tax purposes.

The Authority shall provide written notice to the Trustee of its election to redeem the Bonds pursuant to this paragraph, the principal amount of such Bonds to be redeemed and the date, within one hundred eighty (180) days from the effective date of any such constitutional amendment, legislative or executive action, final decree, judgment or order

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but not less than sixty (60) days from the date such notice is mailed, on which the Bonds shall be redeemed pursuant to this paragraph. If less than all of the Bonds are to be redeemed, the Trustee shall select the Bonds for redemption by lot.

Special Mandatory Redemption on Determination of Taxability

The Bonds are subject to special mandatory redemption, in whole, on a pro rata basis, after receipt by the Trustee of the Authority’s written direction that a Determination of Taxability has occurred (i) as a result of a failure by the Borrower to observe the provisions of its tax covenants in the Loan Agreement, or in any tax certificate delivered by the Borrower in connection with the issuance the Bonds, at a Redemption Price equal to 110% of the principal amount thereof, plus accrued interest to the Redemption Date; or (ii) for any reason not specified in subsection (i) above, at a Redemption Price equal to 104% of the principal amount thereof, plus accrued interest to the Redemption Date.

Special Mandatory Redemption For Transfer without Bondholder Consent

The Bonds are subject to special mandatory redemption, in whole, on a pro rata basis, after receipt by the Trustee of the Authority’s written direction upon notice by the Borrower that the Borrower will (i) merge into or consolidate with any Person; (ii) acquire any material portion of the stock of any Person or a material portion of the assets or business of any Person or the operating business or division of any Person; (iii) permit any Person to merge into it, (iv) form any subsidiaries; or (v) sell or transfer any material portion of its membership interests or assets to any Person, pursuant to the requirements of Section 703 of the Loan Agreement but without the consent of the Bondholders, at a Redemption Price equal to the then applicable optional redemption price set forth in the Indenture. If the Bonds are not yet subject to optional redemption upon the occurrence of such event or events, the Borrower is required to deposit funds with the Trustee sufficient to defease the outstanding principal of, premium and interest on the Bonds through the first permitted optional redemption date, and to redeem the Bonds on such date, all in accordance with the terms and conditions of the Indenture.

Selection of Bonds for Redemption

In the event that less than all of the Bonds of any series or maturity are to be redeemed, Bonds of such series or maturity shall be selected for redemption in such manner as may be provided in the Indenture or in a Supplemental Indenture, subject, however, to the following:

in the case of any Extraordinary or Special Redemption, the moneys available therefor shall be allocated to each series of Bonds subject to such redemption as nearly as practicable in the same proportion as the Outstanding principal amount of Bonds of such series bears to the Outstanding principal amount of all Bonds subject to such redemption and the selection of Bonds of each series for redemption shall be independent of the selection of Bonds of other series for redemption; and

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in the case of any series having Bonds of varying denominations, each Bond of such series shall be treated as representing that number of Bonds which is obtained by dividing the face amount thereof by the smallest authorized denomination; and

if less than all of the Bonds are to be redeemed, the Trustee shall select the particular Bonds for redemption by lot, but in no event shall any partial redemption result in a Bond of a denomination of less than the Authorized Denomination.

Notice of Redemption

The Trustee shall cause notice of any redemption of Bonds under the Indenture to be mailed by first class mail to the holders of all Bonds to be redeemed at the register addresses appearing in the registration books kept for such purpose pursuant to Article II of the Indenture. Each such notice shall (i) be mailed not more than sixty (60) nor less than thirty (30) days prior to the Redemption Date, (ii) identify the Bonds to be redeemed (specifying the CUSIP numbers, if any, assigned to the Bonds) (iii) specify the Redemption Date, the Redemption Price and, if less than all of any particular Bond is to be redeemed, the principal amount so to be redeemed, (iv) state that on the Redemption Date the Bonds called for redemption will be payable at the principal corporate trust office of the Trustee, that from that date interest will cease to accrue, that no representation is made as to the accuracy or correctness of the CUSIP numbers (if any) printed therein or on the Bonds, and (v) provide any other descriptive information which may be necessary in order to identify the Bonds to be redeemed, including without limitation the original issuance date, maturity date and interest rate applicable to such Bonds. No defect affecting any Bond, whether in the notice of optional redemption or mailing thereof (including any failure to mail such notice), shall affect the validity of the redemption proceedings for any other Bonds.

If at the time of mailing of any notice of optional redemption there shall not have been deposited with the Trustee moneys sufficient to redeem all of the Bonds called for optional redemption, such notice shall state that it is subject to the deposit of the redemption moneys with the Trustee not later than the opening of business on the Redemption Date and shall be of no effect unless such moneys are so deposited.

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EXHIBIT C

FORM OF INVESTOR REPRESENTATION LETTER

[Date]

New Jersey Economic Development Authority
36 West State Street
P.O. Box 990
Trenton, NJ 08625

The Bank of New York
385 Rifle Camp Road
West Paterson, New Jersey 07424
Attention: Corporate Trust Department

     Re: Purchase of New Jersey Economic Development Authority
$17,500,000 Solid Waste Facilities Revenue Bonds
(Converted Organics of Woodbridge, LLC — 2007 Project) Series A

Ladies and Gentlemen:

     This letter in being delivered in connection with the purchase of all or a portion of the $17,500,000 principal amount of New Jersey Economic Development Authority Solid Waste Facilities Revenue Bonds (Converted Organics of Woodbridge, LLC — 2007 Project) Series A (the “Bonds”) issued pursuant to the Trust Indenture by and between the NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY, a public body corporate and politic and a political subdivision of the State of New Jersey (the “Authority”), and THE BANK OF NEW YORK, as trustee (the “Trustee”), dated as of February 1, 2007 (the “Indenture”). Capitalized terms used herein, unless otherwise defined, will have the meanings set forth in the Indenture.

          In connection with the purchase of the Bonds, the undersigned represents, warrants, covenants and consents that:

          1. The undersigned has received and reviewed a copy of the Private Placement Memorandum (with attachments) dated                     , 2007 relating to the Bonds.

          2. The undersigned is a national bank, commercial bank or registered investment company under the Investment Company Act of 1940, as amended (the “Investment Company Act”), an accredited investor under the Securities Act of 1933, as amended (the “Securities Act”), a “qualified institutional buyer” within the meaning of 144(A) of the Securities Act, or a “qualified purchaser” within the meaning of Section 2(a)(5)(A) of the Investment Company Act.

          3. The undersigned is purchasing the Bonds for its own account and not with a view toward distributing or reselling any of the Bonds, provided nevertheless that it may at any time, in its sole discretion and control sell some or all of the Bonds. The undersigned shall comply with all applicable federal and state securities laws in connection with any subsequent resale of the Bonds. The undersigned acknowledges that the Bonds have not been and will not be registered under the Securities Act. The undersigned shall require each subsequent purchaser of the Bonds to provide a letter to the Trustee in substantially the same form as this letter.

          4. The undersigned has received copies of the Indenture, the Loan Agreement and the Leasehold Mortgage, as well as other information concerning the Bonds, Converted Organics of Woodbridge, LLC, a New Jersey limited liability company (the “Borrower”), and the Project as has been requested by it and otherwise deemed by it to be relevant to its decision to purchase the Bonds.

          5. The undersigned understands that the Bonds are not general obligations of the New Jersey Economic Development Authority (the “Authority”), but rather special and limited obligations of the Authority payable and secured solely as provided in the resolution of the Authority adopted on January 9, 2007 (the “Resolution”).

          6. The undersigned has made its own independent investigation and evaluation of the financial position and business condition of the Borrower. Although certain financial information regarding the Borrower and the Project was distributed by the Authority, the undersigned hereby acknowledges that it has not relied upon the Authority for any information or analysis with respect to the Borrower or the Project in making its decision to purchase the Bonds, and that the Authority has made no representations to it with respect to such information.

          7. The undersigned hereby waives the right to receive information from the Authority relating to the Borrower and the Project and relieves the Authority and its agents, representatives and attorneys of any liability for failure to provide such information or for the inclusion of such information in any of the documents, representations or certifications provided by the Borrower of any untrue statement or for failure to include therein any fact.

          8. The undersigned acknowledges the requirement to be contained in the Bonds to give notice to the Trustee and to the Authority of the assignment or sale of the Bonds and the name and address of such assignee or owner in addition to the street name owner for registration purposes. The undersigned also acknowledges the requirement to be contained in the appropriate bond documents that it will require each subsequent purchaser of the Bonds to provide a letter to the Trustee in substantially the same form as this letter.

          9. The undersigned agrees to protect, exonerate, defend, indemnify and save the Authority and its members, directors, officers, employees, agents and attorneys, and each person, if any, who controls the Authority within the meaning of the Securities Act (all such indemnified parties being referred to herein as “Indemnified Panics”) harmless from and against any and all losses, claims, damages, liabilities or expenses (including, without limitation, the reasonable costs of investigating, defending or preparing to defend any such action or claim) to which the Authority may become subject through claims, actions or proceedings by subsequent purchasers of the Bonds arising out of the Authority’s issuance and sale of the Bonds, whether under federal or state securities laws or other statutes, at common law or otherwise.

[Name of Investor]

Signature

Print Name:

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     In any event, if not sooner paid, on August 1, 2027, all unpaid principal and accrued interest on the Bonds shall be due and payable.

     This Note is the Promissory Note referred to in the Indenture and is subject to all the terms and provisions of said Indenture and a Loan Agreement dated as of February 1, 2007 by and between the Authority and the Borrower (the “Agreement”). This Note is secured by a Leasehold Mortgage from the Borrower to the Authority dated February 16, 2007 (the “Leasehold Mortgage”) and an Assignment of Leases and Other Agreements from the Borrower to the Authority dated as of February 1, 2007 (the “Assignment of Leases and Other Agreements”). This Note, the Agreement, the Leasehold Mortgage and the Assignment of Leases and Other Agreements have been assigned by the Authority to the Trustee in accordance with the terms of the Indenture.

     In the event of a Determination of Taxability with respect to interest on the Bonds issued by the Authority in connection with the Project, this Note shall become subject to acceleration and shall be due and payable in an amount equal to the principal amount due hereunder, plus accrued interest to the date set for redemption of the Bonds as a result of a Mandatory Redemption.

     In the event that any of the Bonds may be subject to redemption, as described in the Indenture, the amount necessary to pay the Redemption Price of the Bonds shall become due and payable hereunder, together with interest accrued to the date set for redemption of the Bonds.

     If any Event of Default (as defined in the Agreement) occurs, the principal of and interest on this Note may become payable at the times, in the manner, with the effect and subject to the conditions provided in the Indenture and the Agreement.

     Undersigned and all endorsers (if any) of this Note waive presentment, demand for payment, protest and notice of dishonor of this Note, and authorize the holder, without notice or further consent, to grant extensions of time in the payment of any moneys payable under this Note, to waive compliance with any of the provisions of this Note or the Agreement (except as otherwise provided in the Agreement), and to release all or any part of the collateral subject to the Agreement from the lien thereof.

     IN WITNESS WHEREOF, the undersigned has caused this Note to be duly executed by its proper officer as of the day and year first above written.

		CONVERTED ORGANICS OF WOODBRIDGE, LLC
ATTEST:
		By:
Name:	Thomas Buchanan		Name: Edward Gildea
Title:	Chief Financial Officer		Title: Chief Executive Officer

PROMISSIORY NOTE

$17,500,000 Newark, New Jersey
Dated: February 16, 2007

     FOR VALUE RECEIVED, CONVERTED ORGANICS OF WOODBRIDGE, LLC (the “Borrower”) promises to pay to the order of the NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY (the “Authority”) at its offices located at 36 West State Street, P.O. Box 990, Trenton, New Jersey, the sum of SEVENTEEN MILLION FIVE HUNDRED THOUSAND and 00/100 DOLLARS ($17,500,000) in lawful money of the United States, together with interest thereon at the rates per annum set forth in the Bonds (as defined below).

     This Note shall be payable in such manner and upon such terms so as to provide for the timely payment of the principal and interest of the Authority’s $17,500,000 Solid Waste Facilities Revenue Bonds (Converted Organics of Woodbridge, LLC. — 2007 Project) Series A (the “Bonds”), as set forth on the attached Schedule A, and any other sums due and owing from the Authority under the Trust Indenture dated as of February 1, 2007, by and between the Authority and The Bank of New York, as Trustee (the “Indenture”). To that end, the Borrower shall make the following payments to the Trustee for the account of the Authority:

     Commencing on or before the second Business Day prior to August 1, 2012, and the second Business Day prior to the first day of each month thereafter, one-twelfth (1/12th) of the amount which is necessary for the payment of the principal of the Bonds becoming due on August 1, 2013 and on or before the first day of each month of each year thereafter one-twelfth (1/12th) of the principal amount of the Bonds coming due on the immediately succeeding August 1st, whether for the payment of principal on a principal maturity or a mandatory redemption date, subject to credit for other available funds in the manner provided in the Indenture. In lieu of the aforementioned portion of the payments due, the Borrower or, at its written direction, the Authority or the Trustee, may purchase for cancellation Bonds of the maturity next becoming due, subject to the applicable requirements set forth in the Indenture.

     Commencing on or before the second Business Day prior to the first day of August 1, 2007, the amount of interest coming due on August 1, 2007 and on the first day of each month thereafter, one-sixth (1/6th) of the amount of interest coming due on the Bonds on the immediately succeeding February 1st and on the first day of each month thereafter one-sixth (1/6th) of the amount of interest coming due on the Bonds on the immediately succeeding August 1st, subject to credit for other available funds in the manner provided in the Indenture.

     Commencing on or before the second Business Day prior to the first day of each month beginning August 2007, one-sixth (1/6^th) of the amount that is required to restore the amount in the Debt Service Reserve Fund to the Debt Service Reserve Fund Requirement relating thereto (as defined in the Indenture) and until the deficiency is made up in full which may occur in any of the other funds established under the Indenture.

LOAN AGREEMENT

BETWEEN

NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY

AND

CONVERTED ORGANICS OF WOODBRIDGE, LLC

DATED AS OF FEBRUARY 1, 2007

TABLE OF CONTENTS

	Page
ARTICLE I DEFINITIONS		2
Section 101. Definition of Terms		2
ARTICLE II REPRESENTATIONS AND WARRANTIES		13
Section 201. Authority Representations and Findings		13
Section 202. Borrower Representations		14
ARTICLE III PROJECT FUNDS		17
Section 301. Application of Bond Proceeds		17
Section 302. Disbursements from the Project Fund		17
Section 303. No Liability of Authority or Trustee		18
Section 304. Establishment of Completion Date		18
Section 305. Borrower Required to Pay if Project Fund Insufficient		19
Section 306. [Intentionally Omitted		19
Section 307. Investment of the Funds		19
Section 308. The Trustee		19
ARTICLE IV THE LOAN		20
Section 401. Loan of Bond Proceeds		20
Section 402. Borrower’s Financial Obligations		20
ARTICLE V PAYMENTS UNDER LOAN AGREEMENT		21
Section 501. Payments Under the Agreement.		21
Section 502. Acceleration of Payment to Redeem Bonds		22
Section 503. Unconditional General Obligations of Borrower		22
Section 504. Assignment of Authority’s Rights		22
Section 505. Opinion of Counsel for Borrower		22
Section 506. Opinion of Bond Counsel		23
Section 507. Loan and Other Documents		23
Section 508. Excess Funds		23
Section 509. Deposit to Lease Reserve Fund		24
ARTICLE VI PROJECT FACILITIES		25
Section 601. Description of Project Facilities		25
Section 602. Notices and Permits		25
Section 603. Additions and Changes to Project Facilities		25
Section 604. Opinion of Bond Counsel		25
Section 605. Preservation of Project Facilities		25
ARTICLE VII FURTHER AGREEMENTS		27
Section 701. Security for Borrower’s Obligations.		27
Section 702. Fees and Charges; Coverage Ratio; Liquidity Ratio		27
Section 703. Existence; Cash Distributions		28
Section 704. Additional Debt; Limitations on Creation of Liens.		29
Section 705. Compliance with Laws		30
Section 706. Environmental Covenant		30
Section 707. Taxes		30
Section 708. Permitted Contests		31
Section 709. Inspection of the Project Facilities		31
Section 710. Right of Authority or Trustee to Perform Borrower’s Covenants		31
Section 711. Investments		32
Section 712. Insurance		32
Section 713. Insurance Proceeds and Condemnation Awards		34
Section 714. Borrower to Perform Certain Covenants Under Indenture		34
Section 715. No Personal Recourse Against Authority; Indemnification.		35
Section 716. Financial Statements		36
Section 717. Operating and Maintenance Budget		37
Section 718. Indemnification of the Trustee		37
Section 719. Compliance with Contractual Obligations		38

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	Page
Section 720. ERISA		38
Section 721. Required Notices		38
Section 722. Management		38
Section 723. Project Sign		39
Section 724. Approval of Tenants by the Authority		39
Section 725. Report of Number of Employees		39
Section 726. Certificate of No Default		39
Section 727. Payment of Prevailing Wage		39
Section 728. Compliance with the Affirmative Action and Prevailing Wage Requirements		40
Section 729. Arbitrage and Rebate Regulations		40
Section 730. Annual Certification		44
Section 731. Right of First Refusal		44
ARTICLE VIII EVENTS OF DEFAULT AND REMEDIES		45
Section 801. Events of Default		45
Section 802. Notice of Defaults: Opportunity to Cure Such Defaults		45
Section 803. Remedies		45
Section 804. Mandatory Prepayment		46
Section 805. No Remedy Exclusive		46
Section 806. No Additional Waiver Implied by One Waiver		46
Section 807. Agreement to Pay Attorneys’ Fees and Expenses		47
Section 808. Right of Specific Enforcement		47
ARTICLE IX MISCELLANEOUS		48
Section 901. Notices		48
Section 902. Severability		49
Section 903. Redemption of Bonds		49
Section 904. Payment of Fees and Expenses		49
Section 905. Benefit of Agreement		49
Section 906. Termination		49
Section 907. Governing Law		50
Section 908. Entire Agreement		50
Section 909. Amendments		50
Section 910. Counterparts		50

EXHIBITS AND SCHEDULES

Exhibit A — Project Facilities
Exhibit B — Borrower’s Completion Certificate
Exhibit C — Requisition Form
Exhibit D — [Intentionally Omitted]
Exhibit E — Addendum to Construction Contract
Exhibit F — Affirmative Action Certificate
Exhibit G — New Jersey Economic Development Authority Completion Certificate
Schedule A — Certain Exceptions, Existing Liens and Section 722 Management Agreements

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LOAN AGREEMENT

     THIS LOAN AGREEMENT (the “Agreement” or “Loan Agreement”) made and entered into as of the 1st day of February, 2007, between NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY, a public instrumentality and body corporate and politic organized and existing under the laws of the State of New Jersey (the “Authority”), and CONVERTED ORGANICS OF WOODBRIDGE, LLC, a limited liability company organized and existing under the laws of the State of New Jersey (the “Borrower”).

W I T N E S S E T H:

     WHEREAS, the New Jersey Economic Development Authority Act, constituting Chapter 80 of the Pamphlet Laws of 1974 of the State of New Jersey, approved on August 7, 1974, as amended and supplemented, (the “Act”) declares it to be in the public interest and to be the policy of the State of New Jersey (the “State”) to foster and promote the economy of the State, increase opportunities for gainful employment and improve living conditions, assist in the economic development or redevelopment of political subdivisions within the State, and otherwise contribute to the prosperity, health and general welfare of the State and its inhabitants by inducing manufacturing, industrial, commercial, recreational, retail, service and other employment promoting enterprises to locate, remain or expand within the State by making available financial assistance; and

     WHEREAS, the Authority, to accomplish the purposes of the Act, is empowered to extend credit to such employment promoting enterprises in the name of the Authority on such terms and conditions and in such manner as it may deem proper for such consideration and upon such terms and conditions as the Authority may determine to be reasonable; and

     WHEREAS, the Borrower has applied to the Authority for financial assistance in the principal amount of not to exceed $17,500,000 for the purpose of: (i) financing the costs of certain improvements to and equipment and miscellaneous expenditures for, the premises located on certain leased property located in Woodbridge, New Jersey, on which the Borrower will build a solid waste recovery facility (the “Facility”), (ii) funding of the Reserve Fund Requirement on the Bonds; (iii) payment of capitalized interest on the Bonds; and (iv) paying of costs of issuing the Bonds (collectively, the “Project”);

     WHEREAS, the Authority has by resolution, duly adopted in accordance with the Act on January 9, 2007, authorized the issuance and sale of its $17,500,000 aggregate principal amount Solid Waste Facilities Revenue Bonds (Converted Organics of Woodbridge, LLC — 2007 Project) Series A (the “Bonds”), for the purpose of making a loan to the Borrower for the purposes described above; and

     WHEREAS, the Authority contemporaneously with the execution and delivery of this Loan Agreement shall enter into a Trust Indenture dated as of February 1, 2007 (the “Indenture”) wherein the Authority has assigned certain of its rights under this Agreement to the Trustee for the benefit of the Holders from time to time of the Bonds; and

     WHEREAS, the execution and delivery of this Agreement have been duly authorized by the parties and all conditions, acts and things necessary and required by the Constitution or statutes of the State or otherwise to exist, to have happened, or to have been performed precedent to or in the execution and delivery of this Loan Agreement do exist, have happened and have been performed.

     NOW THEREFORE, in consideration of the premises and the mutual covenants and representations herein, and intending to be legally bound the parties hereto hereby mutually agree as follows:

ARTICLE I
DEFINITIONS

     Section 101. Definition of Terms. Unless otherwise defined herein, all words and terms used herein and defined in the recitals hereto or in Article I of the Indenture shall have the meanings set forth therein. All references herein to the “Bond Redemption Fund”, the “Project Fund”, the “Debt Service Fund”, the “Debt Service Reserve Fund”, the “Rebate Fund” and the “Revenue Fund” means the Funds so designated which are established pursuant to Article IV and V of the Indenture. In addition, the following terms shall have the following meanings unless the context otherwise requires:

     “Accounts Receivable” means any and all right to payment for services rendered or for goods sold or leased which is not evidenced by an instrument or chattel paper, whether or not it has been earned by performance.

     “Additional Bonds” means any Bonds or series of Bonds, authenticated and delivered under the Indenture.

     “Affirmative Action Program” means the program of the Authority set forth in N.J.A.C. 19:30-3.1 et seq.

     “Annual Debt Service” means the Debt Service Requirement for the Fiscal Year in question.

     “Application” means the Borrower’s Application to the Authority dated May 11, 2007, seeking financial assistance for the Project and all attachments, exhibits, correspondence and modifications submitted in writing to the Authority in connection with said application.

     “Assignment of Leases” means the Assignment of Leases and Other Agreements dated as of February 1, 2007 from the Borrower to the Authority.

     “Authorized Authority Representative” means the Chief Executive Officer, Chief Operating Officer, any Director of the Authority or any individual or individuals duly authorized by the by-laws of the Authority or any resolutions of the Authority to execute contracts on behalf of the Authority.

     “Authorized Borrower Representative” means any individual or individuals duly authorized in writing by the Borrower to act on its behalf.

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     “Bankruptcy Code” means the Federal Bankruptcy Code of 1978.

     “Bankruptcy Event” means in respect of the Borrower, (a) the Borrower’s general inability, or its admission of its inability, to pay its debts as such debts become due, (b) the application by the Borrower for or its consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (c) the commencement by the Borrower of a voluntary case under the Bankruptcy Code, (d) the making by the Borrower of a general assignment for the benefit of its creditors, (e) the filing of a petition by the Borrower seeking to take advantage as a debtor of any other law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement, winding up or readjustment of debts, (f) the failure by the Borrower to controvert in a timely and appropriate manner, or its acquiescence in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code, (g) the taking of any corporate, or other action by the Borrower for the purpose of effecting any of the foregoing, (h) the commencement of a proceeding or case, without the application or consent of the Borrower, in any court seeking (i) the Borrower’s reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator, examiner or the like of the Borrower or all or any substantial part of its property or (iii) similar relief in respect of the Borrower under any law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debt and such proceeding or case specified in this clause (h) shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of 60 or more days or (i) an order for relief against the Borrower shall be entered in any involuntary case under the Bankruptcy Code.

     “Bondholder”, “holder” or “owner” means, when used with respect to Bonds, the Person in whose name any Bond is registered in the registration books kept pursuant to Article II of the Indenture.

     “Bond” or “Bonds” means the aggregate $17,500,000 Solid Waste Facilities Revenue Bonds (Converted Organics of Woodbridge, LLC — 2007 Project) Series A, and any Additional Bonds authenticated and delivered under and pursuant to the Indenture.

     “Bond Counsel” means Cozen O’Connor, or any other attorney or firm of attorneys of nationally recognized standing on the subject of municipal bonds appointed by the Authority or the Borrower and acceptable to the Trustee.

     “Bond Proceeds” shall mean the amount paid to the Authority by the Purchaser as the purchase price of the Bonds, and interest income earned thereon prior to the Completion Date.

     “Bond Placement Agreement” means the Bond Placement Agreement dated February 13, 2007 among the Authority, the Borrower and the Purchaser.

     “Bond Year” when used in the context of the rebate requirement imposed under Section 148(f) of the Code means, with respect to the first Bond Year, the period beginning on the date of issuance of tax-exempt Bonds, i.e., the date of initial delivery of tax-exempt Bonds in exchange for the issue price from the Purchaser, and ending on the date one (1) year later or the

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close of business of such earlier date selected by the Authority at the direction of the Borrower which is the last day of a compounding interval used in computing the Yield on such Bonds. Each subsequent Bond Year begins on the day after the expiration of the preceding Bond Year.

     “Borrower’s Completion Certificate” means the certificate described in Section 304, executed by the Borrower in form attached hereto as Exhibit B.

     “Business Day” means any day upon which the Trustee is not authorized or required by law or executive order to remain closed and on which the New York Stock Exchange remains open.

     “Certificate” means a certificate, requisition or report executed: (a) in the case of an Authority Certificate, by an Authorized Authority Representative; (b) in the case of a Borrower Certificate, by an Authorized Borrower Representative; and (c) in the case of a Certificate of any other Person, by such Person, if an individual, and otherwise by an officer, partner or other authorized representative of such Person.

     “Code” shall mean the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder from time to time in effect.

     “Collateral” means the obligations of the Borrower hereunder and under the Note, the personal property in which the Authority is receiving a security interest under Section 701(b) hereof and the other Loan Documents, and the remainder of the Trust Estate (as defined in the Indenture).

     “Completion Date” means the date of completion of the Project Facilities as stated in the Borrower’s Completion Certificate described in Section 304 hereof.

     “Condemnation Award” means any award or payment (less any reasonable expenses, including attorneys fees, incurred by the Authority or the Borrower in connection therewith) which may be made with respect to the Project Facilities as a result of the taking of all or a portion of the Project Facilities by the exercise of the powers of eminent domain (or a bona fide sale in lieu of such taking).

     “Construction Contract” means, for purposes of the Prevailing Wage Provision of the Authority, any contract or subcontract in the amount of $2,000 or more for construction, reconstruction, demolition, alteration, repair or maintenance work, including painting and decorating undertaken in connection with the Project Facilities and shall mean for purposes of the Affirmative Action Program of the Authority, any contract or subcontract for construction, reconstruction, demolition, alteration, repair, or maintenance work undertaken in connection with the Project Facilities.

     “Consultant” means an Independent, nationally recognized consulting firm which is appointed by the Borrower for the purpose of passing on questions relating to its financial affairs, management or operations, has a favorable reputation for skill and experience in performing similar services in respect of entities of a comparable size and nature and is not unsatisfactory to the Authority.

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     “Contractor” means the principal or general contractor or contractors engaged by the Company in the performance of a Construction Contract.

     “Contractor’s Certificate and Agreement” means the instrument executed by the Contractor wherein the Contractor agrees to undertake or perform such obligations and certifies as to such matters as the Authority shall require, including, without limitation, that for purposes of the Prevailing Wage Provision all workers engaged in the performance of Construction Contracts shall be paid a wage rate not less than the Prevailing Wage Rate and that all Construction Contracts will so provide and that for purposes of the Affirmative Action Program the Contractor will make every effort to hire or cause to be hired minority workers so as to meet the minority employment goals of the Affirmative Action Program and that all Construction Contracts will so provide.

     “Contractor’s Completion Certificate” means the certificate or certificates, executed by the Contractor and any Subcontractors, upon substantial completion of construction of the Project Facilities, in form and substance acceptable to the Authority, wherein the Contractor or Subcontractor certifies as to such matters as the Authority shall require, including, without limitation, that the Contractor or Subcontractor has made every effort to satisfy the minority employment goals established in the Affirmative Action Program and that the Contractor or Subcontractor has submitted all certificates, reports, and records required by the Authority.

     “Converted Organics” means Converted Organics Inc., the sole member of the Borrower.

     “Cost” or “Costs” means: (a) when used with respect to new construction, all costs which are allocable thereto and properly capitalized (or, with a proper election, could be properly capitalized) under generally accepted accounting principles and any other costs (whether or not properly capitalized) which are incidental thereto and reasonably necessary or desirable in connection therewith (or with the financing thereof); and (b) when used with respect to the refinancing of Indebtedness, all costs which are allocable to the retirement of the Indebtedness to be refinanced (whether at or prior to maturity) and all costs incidental to and reasonably necessary or desirable in connection with the incurrence of any Indebtedness for the purpose of the refinancing.

     “Counsel” means an attorney or law firm (which may be counsel to the Authority and/or the Borrower) not unsatisfactory to the Authority and/or the Borrower.

     “Days Cash on Hand” means, as of the end of any Fiscal Year, the product obtained by multiplying the number of days in such Fiscal Year period by a fraction (a) the numerator of which is the sum of the Borrower’s unrestricted cash, cash equivalents or marketable securities, exclusive of any funds held by the Trustee, and (b) the denominator of which is the Borrower’s total operating expenses as shown on its most recent annual audited financial statements, including interest expenses, but excluding amortization, depreciation and other non-cash expenses.

     “Debt Service” shall mean the scheduled amount of interest and amortization of principal payable for any Bond Year with respect to the Bonds as defined in Section 148(d)(3)(D) of the Code.

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     “Debt Service Coverage Ratio” means, for any Fiscal Year, the ratio of Income Available for Debt Service for such Fiscal Year to Annual Debt Service for such Fiscal Year.

     “Debt Service Requirement” means, for any period of time, the aggregate of the scheduled payments to be made (other than from amounts irrevocably deposited with the Trustee or otherwise held for the benefit of a lender for purposes of such payments, including funds held in connection with an advance refunding or a cross-over refunding) in respect of principal of and interest on the Bonds during such period, also taking into account amounts required to be deposited in the Debt Service Reserve Fund.

     “EBITDA” means, with respect to the Borrower, as to any Fiscal Year, net income determined in accordance with generally accepted accounting principles, consistently applied, plus (a) interest expense, (b) taxes on income, whether paid, payable or accrued, (c) depreciation expense, and (d) amortization expense, all of the foregoing items (a) through (d) determined in accordance with generally accepted accounting principles consistently applied.

     “Event of Default” means any of the events described as an event of default Section 801 hereof.

     “Favorable Opinion” means an opinion of Bond Counsel acceptable to the Trustee addressed to the Authority and the Trustee to the effect that: (i) the action proposed to be taken is authorized or permitted by the Act and this Agreement and complies with their respective terms; (ii) such action will not adversely affect the exemption of interest on the Bonds from New Jersey gross income tax; and (iii) the validity of the Bonds.

     “Financing Statements” means the UCC-1 Financing Statements granting the Trustee a security interest in the Collateral.

     “Fiscal Year” means the annual accounting year of the Borrower, which currently begins on January 1 in each fiscal year.

     “Gross Proceeds” shall have the meaning given it in Section 148(f)(6)(B) of the Code, presently including, without limitation, the original proceeds of the Bonds, investment proceeds, amounts held in a sinking fund, amounts invested in a Reasonably Required Reserve or Replacement Fund (as defined in Section 148(d) of the Code), any amounts used to pay Debt Service on the Bonds and any amounts received as a result of investing any of the foregoing. Gross proceeds shall not include Gross Proceeds held in a bona fide debt service fund to the extent that the earnings on such fund do not exceed $100,000 in any one Bond Year.

     “Guaranty Agreement” means the Corporate Guaranty dated February 16, 2007 from Converted Organics to the Authority and Oppenheimer Funds.

     “Income Available for Debt Service” means, with respect to the Borrower, as to any Fiscal Year, net income determined in accordance with generally accepted accounting principles, consistently applied, plus, (a) interest expense, (b) taxes on income, whether paid, payable or accrued, (c) depreciation expense, (d) amortization expense, (e) all other non-cash, non recurring charges and expenses, excluding accruals for cash expenses made in the ordinary course of business, and (f) loss from any sale of assets, other than sales in the ordinary course of business,

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minus (x) gains from any sale of assets, other than sales in the ordinary course of business and (y) other extraordinary or non-recurring gains, all of the foregoing items (a) through (f) and (x) and (y) determined in accordance with generally accepted accounting principles consistently applied.

     “Indebtedness” means all obligations for payment of principal and interest with respect to money borrowed, incurred or assumed by the Borrower, and all purchase money mortgages, financing or capital leases, installment purchase contracts, or other similar instruments in the nature of a borrowing by which the Borrower will be unconditionally obligated to pay.

     “Independent” means (a) in the case of an individual, one who not a member of the governing body of the Authority or the Borrower or an officer or employee of the Authority or the Borrower, and (b) in the case of a partnership, corporation or association, one which does not have a partner, director, officer, member or substantial stockholder who is a member of the governing body of the Authority or the Borrower or an officer or employee of the Authority or the Borrower; provided, however, that the fact that a Person is retained regularly by or transacts business with the Authority or the Borrower shall not make such Person an employee within the meaning of this definition.

     “Independent Public Accountant” means Carlin, Charron & Rosen LLP or any other Independent accounting firm which is appointed by the Borrower and is not unsatisfactory to the Authority.

     “Insurance Consultant” means any Independent firm of insurance agents, brokers or consultants which is appointed by the Borrower for the purpose of reviewing and recommending insurance coverages for the facilities and operations of the Borrower and is not unsatisfactory to the Authority.

     “Investment Obligations” means, to the extent permitted by law (i) Government Obligations or obligations of the Federal National Mortgage Association, Export Import Bank, Farmers Home Administration, General Services Administration, U.S. Maritime Administration, Small Business Administration, U.S. Department of Housing & Urban Development (PHA’s) or Federal Housing Administration; (ii) bonds, notes or other evidences of indebtedness rated at the time of purchase “AAA” by Standard & Poor’s Ratings Group or “Aaa” by Moody’s Investors Service issued by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation with remaining maturities not exceeding three years; (iii) U.S. dollar denominated deposit accounts and banker’s acceptances with domestic commercial banks which have a rating on their short term certificates of deposit on the date of purchase of “A 1” or “A 1+” by Standard & Poor’s or “P 1” by Moody’s and maturing no more than 360 days after the date of purchase. (Ratings on holding companies are not considered as the rating of the bank); (iv) commercial paper which is rated at the time of purchase in the single highest classification, “A 1+” by Standard & Poor’s or “P 1” by Moody’s Investors Service and which matures not more than 270 days after the date of purchase; (v) investments in a money market fund rated “AAAm” or “AAAm G” or better by Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc., including any fund from which the Trustee or its affiliates may receive advisor compensation; (vi) certificates of deposit and time deposits of any bank organized under the laws of the United States or any state thereof which has a combined capital, surplus and undivided

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profits of at least $25,000,000, including the Trustee and, to the extent then permitted by law for the Trustee, any other investments of its trust funds provided that any such certificates and investments are fully collateralized by obligations mentioned in clauses (i) and (ii) hereof; (vii) repurchase agreements collateralized by Government Obligations having a market value at the time of purchase equal to 102% of the amount of such repurchase agreement; or (viii) Pre refunded Municipal Obligations defined as follows: Any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state which are not callable at the option of the obligor prior to maturity or as to which irrevocable instructions have been given by the obligor to call on the date specified in the notice; and (A) which are rated, based on the escrow established for such pre refunding, in the highest rating category of Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc. or any successors thereto; or (B) (1) which are fully secured as to principal and interest and redemption premium, if any, by a fund consisting only of cash or obligations described in clause (i) above, which fund may be applied only to the payment of such principal of and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate, and (2) which fund is sufficient, as verified by a nationally recognized independent certified public accountant, to pay principal of and interest and redemption premium, if any, on the bonds or other obligations described in this paragraph on the maturity date or dates thereof or on the redemption date or dates specified in the irrevocable instructions referred to above, as appropriate.

     “Lien” means any mortgage, pledge, security interest, lien, judgment lien, easement, or other encumbrance on title, including, but not limited to, any mortgage or pledge of, security interest in or lien or encumbrance on any of the Collateral.

     “Loan” or “Loans” means the loan from the Authority to the Borrower in the aggregate principal amount of $17,500,000, under the terms and conditions provided for herein.

     “Lease” means that Agreement of Lease dated as of June 2, 2006 by and between Recycling Technology Development, LLC and the Borrower (as assignee of Converted Organics), as amended.

     “Leasehold Mortgage” shall mean the mortgage relating to the Project Facilities, dated February 16, 2007, which is made part of the Record of Proceedings, executed by the Borrower, as Mortgagor and given to the Authority, as Mortgagee.

     “Lease Reserve Fund” means the fund so designated and established pursuant to Section 511 hereof.

     “Loan Documents” means any or all of this Agreement, the Indenture, the Series 2007 Note, the Leasehold Mortgage, the Assignment of Leases and Other Agreements, the Guaranty Agreement, the Financing Statements, the Bond Placement Agreement and all documents and instruments executed in connection therewith.

     “Maximum Annual Debt Service” means the maximum Debt Service Requirements for any Fiscal Year throughout the term of the Bonds.

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     “Maximum Annual Debt Service Coverage Ratio” means, for any Fiscal Year, the ratio of EBITDA for such Fiscal Year to Maximum Annual Debt Service.

     “Net Proceeds” shall mean the Bond Proceeds less any amounts placed in a Reasonably Required Reserve or Replacement Fund (as defined in Section 148(d) of the Code).

     “Operation and Maintenance Reserve Fund” shall mean the fund so designated and established pursuant to Section 512 of the Indenture.

     “Outstanding” means all Bonds authenticated and delivered under the Indenture as of the time in question, except (i) all Bonds theretofore cancelled or required to be cancelled under Section 208 of the Indenture, (ii) Bonds for the payment or redemption of which provision has been made in accordance with Article XII of the Indenture; provided that, if such Bonds are being redeemed, the required notice of redemption shall have been given or provision satisfactory to the Trustee shall have been made herefor, and that if such Bonds are being purchased, there shall be a firm commitment for the purchase and sale thereof, and (iii) Bonds in substitution for which other Bonds have been authenticated and delivered pursuant to Article II of the Indenture.

     “Paragraph” means a specified paragraph of a Section, unless otherwise indicated.

     “Permitted Encumbrances” shall have the meaning given in Section 704 hereof.

     “Person” or “Persons” means any individual, corporation, limited liability company, partnership, joint venture, trust, or unincorporated organization, or a governmental agency or any political subdivision thereof.

     “Purchaser” means Ferris, Baker Watts, Inc., Richmond, Virginia, and its successors and assigns.

     “Prevailing Wage Provision” means the provisions of the Act and the resolutions, rules and regulations of the Authority, as adopted, amended and supplemented from time to time, currently set forth in N.J.A.C. 19:30-3, requiring that workers engaged in Construction Contracts be paid the Prevailing Wage Rate, and that the Borrower and all Contractors file such certificates, reports and records and do other prescribed acts as are necessary to demonstrate or assure compliance.

     “Prevailing Wage Rate” means the prevailing wage rate established by the Commissioner of the New Jersey Department of Labor and Industry from time to time in accordance with the provisions of N.J.S.A. 34:11-56.30 for the localities in which the Project Facilities are located.

     “Principal User” shall mean any principal user within the meaning of the proposed amendments to Treas. Reg. Sec. 1.103-10 published by the Internal Revenue Service in the Federal Register on February 21, 1986 or any Related Person to a Principal User within the meaning of Section 144(a) of the Code.

     “Private Placement Memorandum” shall mean the Private Placement Memorandum dated February 8, 2007, distributed by the Purchaser relative to the issuance and sale of the Bonds.

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     “Project Facilities” means the structures, buildings, improvements, equipment and fixtures financed by or acquired with the proceeds of the Bonds as reflected on Exhibit A hereto, as amended from time to time.

     “Project Fund” means the 2007 Project Fund established pursuant to Section 401 of the Indenture and any additional Project Fund established pursuant to Section 402 of the Indenture.

     “Project Municipality” means the Township of Woodbridge, County of Middlesex, State of New Jersey.

     “Proper Charges” means: (i) costs of issuance of the Bonds, attorneys’ fees, printing costs, agent’s fees and similar expenses paid in connection with the Project Facilities; (ii) an expenditure for the Project Facilities, paid and incurred after May 12, 2007 for the acquisition or improvement of land or the acquisition, construction, reconstruction or improvement of property of a character subject to the allowance for depreciation under the Code; or (iii) any costs of issuance, preliminary expenditures or de minimis expenditures described in Treas. Regs. § 1.150-2(f).

     “Property” means any and all of Borrower’s rights, titles and interests in and to any and all property whether real or personal, tangible or intangible and wherever situated.

     “Property, Plant and Equipment” means all Property of the Borrower which is plant, property and equipment under generally accepted accounting principles.

     “Qualified Administrative Costs” means all reasonable, direct administrative costs (other than carrying costs) such as separately stated brokerage or selling commissions, but not legal and accounting fees, record keeping, custody and similar costs. General overhead costs and similar indirect costs of the Borrower such as employee salaries and office expenses and costs associated with computing the Rebate Amount are not Qualified Administrative Costs. In general, administrative costs are not reasonable unless they are comparable to administrative costs that would be charged for the same Investment or a reasonably comparable Investment if acquired with a source of funds other than gross proceeds of the Bonds.

     “Rebate Expert” means any of the following chosen by the Borrower: (a) Bond Counsel, (b) any nationally recognized firm of certified public accountants, (c) any reputable firm which offers to the tax-exempt bond industry rebate calculation services and holds itself out as having expertise in that area, or (d) such other personal as is approved by Bond Counsel.

     “Rebate Fund” shall mean the special fund maintained by the Trustee at its offices and established for the deposit of the amounts to be paid to the United States on behalf of the Authority pursuant to Section 729 hereof and described in Section 514 of the Indenture.

     “Record of Proceedings” means the Loan Documents, certificates, affidavits, opinions and other documentation executed in connection with the sale of the Bonds and the making of the Loan.

     “Redemption Price” means the principal amount of any Bond to be redeemed pursuant to the Indenture, plus the applicable premium, if any, payable upon redemption.

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     “Related Person” shall mean a related person within the meaning of Section 144(a)(3) or Section 147(a) of the Code, as is applicable.

     “Requisition Form” means the form of requisition required by Section 302 hereof as a condition precedent to the disbursement of moneys from the Project Fund, in the form annexed hereto as Exhibit C.

     “Reserved Rights” shall mean the rights of the Authority to consent to any amendments, modifications or supplements to this Agreement and the Indenture to receive notices and payments under and to enforce the following sections of this Agreement: 202 (Borrower Representations and Findings) (i), (j), (k), (l), and (m), 301 (Application of Bond Proceeds), 302 (Disbursements from the Project Fund) (b) and (c), 501 (Payments Under the Agreement) (a), (b), and (c), 502 (Acceleration of Payment to Redeem Bonds), 504 (Assignment of Authority’s Rights), 601 (Description of the Project Facilities), 602 (Notices and Permits), 603 (Additions and Changes to Project Facilities), 605 (Preservation of Project Facilities), 701 (Security for Borrower’s Obligations), 703 (Existence), 705 (Compliance with Laws), 706 (Environmental Covenant), 708 (Permitted Contests), 709 (Inspection of the Project Facilities), 710 (Right of Authority or Trustee to Perform Borrower’s Covenants) , 712 (Insurance), 713 (Insurance Proceeds and Condemnation Awards), 714 (Borrower to Perform Certain Covenants under the Indenture), 715 (No Personal Recourse Against the Authority; Indemnification), 716 (Financial Statements), 721 (Required Notices), 723 (Project Sign), 724 (Approval of Tenant by the Authority), 725 (Report on Number of Employees), 726 (Certificate of No Default), 727 (Payment of Prevailing Wages), 728 (Compliance with the Affirmative Action and Prevailing Wage Requirements), 729 (Arbitrage and Rebate Regulations), 730 (Annual Certification), 801 (Events of Default) b and d, 806 (Agreement to Pay Attorneys’ Fees and Expenses), 807 (Right of Specific Enforcement) and 904 (Payment of Fees and Expenses). These Reserved Rights have been assigned to the Trustee pursuant to the Indenture, but are also held and retained by the Authority concurrently with the Trustee.

     “Resolutions” means the resolution or resolutions of the Authority accepting the Application, making certain findings and determinations and authorizing the issuance and sale of the Bonds and determining other matters in connection with the Project.

     “Section” means a specified section hereof, unless otherwise indicated.

     “Series 2007 Note” shall mean the Series 2007 Note from the Borrower to the Authority in the principal amount of $17,500,000.

     “State” means the State of New Jersey.

     “Subcontractor” means any Person engaged by a Contractor or a Subcontractor in the performance of any Construction Contract.

     “Tax Certificate” shall mean the certificate executed by the Borrower in form and substance acceptable to the Authority, wherein the Borrower certifies as to such matters as the Authority shall require.

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     “Trustee” means The Bank of New York, and its successors in the trust under the Indenture.

     “Value” means when used in connection with the Collateral, the cost basis of such Collateral, net of accumulated depreciation, as it is carried on the books of the Borrower and in conformity with generally accepted accounting principles consistently applied.

     “Yield” shall mean a yield as shall be determined under Section 1.148-4 of the Treasury Regulations.

     “Yield Reduction Payments” means payments made to the United States with respect to any Nonpurpose Investment allocated to the Bonds that (i) are paid at the same time and the same manner as Rebate Amounts are required to be paid and (ii) are paid with respect to Investments that are allocable to Gross Proceeds that previously qualified for a temporary investment period that has since expired.

     The words “hereof’, “herein”, “hereto”, “hereby” and “hereunder” refer to this entire Agreement. Unless otherwise indicated, all references to particular Articles or Sections are references to the Articles or Sections of this Agreement. References to any time of the day in this Agreement shall refer to Eastern standard time or Eastern daylight saving time, as in effect in the State of New Jersey on such day.

     Capitalized terms used herein and not defined herein shall have the same meanings ascribed to them in the Indenture. All accounting terms not otherwise defined herein have the respective meanings assigned to them in accordance with generally accepted accounting principles.

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ARTICLE II
REPRESENTATIONS AND WARRANTIES

     Section 201. Authority Representations and Findings. The Authority hereby confirms its findings and represents that:

          (a) it is a public body corporate and politic constituting an instrumentality of the State, duly organized and existing under the laws of the State, particularly the Act. The Authority is authorized to issue the Bonds in accordance with the Act and to use the proceeds from the sale of the Bonds to make the Loan to the Borrower;

          (b) the Authority has complied with the provisions of the Act and has full power and authority pursuant to the Act to consummate all transactions contemplated by this Agreement, the Indenture, the Bonds, the Resolutions, and any and all other agreements relating thereto and to issue, sell and deliver the Bonds as provided herein and in the Indenture;

          (c) by the Resolutions duly adopted by the Authority and still in full force and effect, the Authority has duly authorized the execution, delivery and due performance of this Agreement, the Indenture and the Bonds and the taking of any and all actions as may be required on the date hereof on the part of the Authority to carry out, give effect to and consummate the transactions contemplated by this Agreement and the Indenture. All approvals of the Authority necessary in connection with the foregoing have been received;

          (d) the Bonds have been duly authorized, executed, issued and delivered and constitute valid special, limited obligations of the Authority, the principal of, premium, if any, and interest on which are payable solely from the revenues and other moneys derived pursuant to this Agreement and pledged therefor by the Indenture and nothing in the Bonds or the Indenture shall be construed as assigning or pledging therefore any other funds or assets of the Authority. The State is not obligated to pay, and neither the faith and credit nor taxing power of the State is pledged to the payment of, the principal or redemption price, if any, of or interest on the Bonds. The Bonds are a special, limited obligation of the Authority, payable solely out of the revenues or other receipts, funds or moneys of the Authority pledged under the Indenture and from any amounts otherwise available under the Indenture for the payment of the Bonds. The Bonds do not now and shall never constitute a charge against the general credit of the Authority. The Authority has no taxing power. The Act provides that neither the members of the Authority nor any person executing the Bonds for the Authority shall be liable personally on said Bonds by reason of the issuance thereof;

          (e) the execution and delivery of the Loan Agreement, the Indenture, the Private Placement Memorandum, the Bond Placement Agreement and the Bonds, and compliance with the provisions hereof and thereof, do not conflict with or constitute on the part of the Authority a violation of the Constitution of the State or a violation or breach of or default under its by-laws or any statute, indenture, mortgage, deed of trust, note agreement or other agreement or instrument to which the Authority is a party or by which the Authority is bound or, to the knowledge of the Authority, any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Authority or any of its activities or properties. All

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consents, approvals, authorizations and orders of governmental or regulatory authorities which are required to be obtained by the Authority for the consummation of the transactions contemplated hereby and thereby have been obtained;

          (f) the Authority shall apply the proceeds from the sale of the Bonds and the revenues derived under this Loan Agreement for the purposes specified and in the manner provided in this Loan Agreement;

          (g) except as disclosed in the Private Placement Memorandum, to the best knowledge of the New Jersey Attorney General’s Office, no action, suit or proceeding at law or in equity pending or threatened against the Authority to restrain or enjoin the issuance or sale of the Bonds or in any way contesting the validity or affecting the power of the Authority with respect to the issuance and sale of the Bonds or the documents or instruments executed by the Authority in connection therewith or the existence of the Authority or the right of the Authority to finance the Project.; and

          (h) any certificate signed by an Authorized Authority Representative and delivered to the relevant party shall be deemed a representation and warranty by the Authority to the Trustee or the Borrower, as the case may be, as to the statements made therein.

     It is specifically understood and agreed that the Authority makes no representation as to the financial position or business condition of the Borrower and does not represent or warrant as to any of the statements, materials (financial or otherwise), representations or certifications furnished or to be made and furnished by the Borrower in connection with the sale of the Bonds, or as to the correctness, completeness or accuracy of such statements.

     Section 202. Borrower Representations. The Borrower represents that:

          (a) The Borrower is a limited liability company duly organized and validly existing under the laws of the State and is duly qualified to do business in the State, has the power and authority to own its properties and assets and to carry on its business as now being conducted (and as now contemplated by the Borrower) and has the corporate power to perform all the undertakings of the Loan Documents, to borrow hereunder and to execute and deliver the Loan Documents.

          (b) The execution, delivery and performance by the Borrower of the Loan Documents and other instruments required by this Loan Agreement:

               (i) have been duly authorized by all requisite corporate action;

               (ii) do not and will not in any material respect conflict with or violate any provision of law, rule or regulation, any order of any court or other agency of government applicable to the Borrower;

               (iii) do not and will not conflict with or violate any provision of any organizational documents of the Borrower;

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               (iv) do not and will not violate or result in a default under any provision of any indenture, agreement or other instrument material to the Borrower;

               (v) do not and will not result in the creation or imposition of any Lien, charge or encumbrance of any nature, other than the Liens created by the Loan Documents.

          (c) The Borrower has or will have a leasehold interest to the Project Facilities, free and clear of any lien or encumbrance, except for the Permitted Encumbrances.

          (d) Except as set forth in Schedule A hereto, there is no action, suit or proceeding at law or in equity or by or before any governmental instrumentality or other agency now pending or, to the knowledge of the Borrower, threatened against or affecting it or any of its properties or rights which, if adversely determined, would (i) materially affect the transactions contemplated hereby, (ii) affect the validity or enforceability of the Loan Documents, (iii) affect the ability of the Borrower to materially perform its obligations under the Loan Documents, (iv) materially impair the value of the Collateral, (v) materially impair the Borrower’s right to carry on its business substantially as now conducted (and as now contemplated by the Borrower) or (vi) have a material adverse effect on the Borrower’s financial condition.

          (e) The Borrower has filed or caused to be filed all Federal, State and local tax returns which are required to be filed, and has paid or caused to be paid all taxes as shown on said returns or on any assessment received by it, to the extent that such taxes have become due except such taxes are as being contested by the Borrower in appropriate proceedings.

          (f) Except as set forth in Schedule A hereto, the Borrower is not in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any material agreement or instrument to which it is a party or by which it is bound.

          (g) Except as set forth in Schedule A hereto, there has been no material adverse change in Project or the financial condition of the Borrower since the dated date of the Private Placement Memorandum.

          (h) The Loan Documents have been duly executed and delivered and are legal, valid and binding obligations of the Borrower enforceable against it in accordance with their respective terms.

          (i) The Private Placement Memorandum, Loan Documents, the Application, the Bond Placement Agreement, or any other document, certificate or statement furnished to the Purchaser, the Authority or the Trustee by the Borrower do not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein and therein regarding the Borrower not misleading or incomplete. It is specifically represented that the Borrower is not involved in any litigation required to be disclosed in the Application nor is it the subject of any investigation or administrative proceeding except, in each case, as disclosed in the Application or as disclosed in the Private Placement Memorandum. It is specifically understood by the Borrower that all such statements, representations and warranties shall be deemed to have been relied upon by the Authority as an inducement to make the Loan and that if any such statements, representations and warranties were false at the time they were made, the Authority may, in its sole discretion, consider any such misrepresentation or breach of

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warranty an Event of Default as defined in Section 901 and exercise the remedies provided for in this Agreement.

          (j) The operation of the Project Facilities in the manner presently contemplated and as described in the Application will not conflict with any current zoning, water, air pollution or other ordinances, orders, laws or regulations applicable thereto. The Borrower will cause the Project Facilities to be designed in accordance with all applicable Federal, State and local laws or ordinances (including rules and regulations) relating to zoning, building, safety and environmental quality.

          (k) The Borrower did not incur any expense prior to the date of the Resolution for which it sought reimbursement, other than a Proper Charge.

          (l) The Borrower has complied with and is in compliance with, in all material respects, all required Federal, State, county and local environmental law, rules and regulations applicable to the Borrower’s operations.

          (m) The availability of financial assistance from the Authority as provided for herein has been an important inducement to the Borrower to undertake the Project and to locate the Project Facilities in the State.

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ARTICLE III
PROJECT FUNDS

     Section 301. Application of Bond Proceeds. In order to provide funds to make the Loan, the Authority concurrently with the execution and delivery of this Agreement, will sell, issue and deliver the Bonds to the purchasers thereof and transfer the proceeds of the Bonds, together with other available funds, to the Trustee for deposit in the Project Fund, the Debt Service Reserve Fund and the Lease Reserve Fund as provided in Section 301 the Indenture, to be disbursed as hereinafter provided and as provided in the Indenture. The Authority reserves the right to request a record of all disbursements from and/or investments of the Project Fund.

     Section 302. Disbursements from the Project Fund. In the Indenture, the Authority has authorized and directed the Trustee to make disbursements first from the Bond Proceeds in the Project Fund and thereafter from the Equity Account in the Project Fund for the Project or to reimburse the Borrower for any costs and expenses of the Project paid by it. Amounts in the Project Fund shall be disbursed only after delivery to the Trustee of the following:

          (a) A completed Requisition Form signed by an Authorized Borrower Representative.

          (b) Prior to the first disbursement from the Bond Proceeds Account of the Project Fund for payment of a Construction Contract, either (i) a Certificate of an Authorized Borrower Representative stating that for purposes of the Prevailing Wage Provision and the Affirmative Action Program none of the moneys disbursed at any time from the Project Fund will be used to pay for work done in performance of any Construction Contract unless prior thereto there shall be submitted to the Authority a Contractor’s Certificate and Agreement or (ii) a Contractor’s Certificate and Agreement executed by the Contractor; and prior to the initial disbursement from the Bond Proceeds Account of the Project Fund for any work done in the performance of any Construction Contract, if not theretofore furnished, a Contractor’s Certificate and Agreement from the Contractor under such Construction Contract.

     If the Authority’s Office of Affirmative Action shall notify the Borrower in writing that the Contractor or a Subcontractor, if any, has not complied with the requirements of the Affirmative Action Program, there shall be retained in the Project Fund a holdback (a “Holdback”) equal to ten per centum (10%) of each sum requisitioned for payment or reimbursement for payment of a Construction Contract with such Contractor or Subcontractor for purposes of the Affirmative Action Program after receipt of such written notice from the Authority, provided, however, if any such requisitioned sum is for reimbursement of a payment by the Borrower, which payment itself was for only ninety per centum (90%) of the payment requested by the Contractor or Subcontractor pursuant to such Construction Contract then such requisitioned sum may be reimbursed without regard to the aforementioned Holdback but the remaining ten per centum (10%), when requisitioned by the Borrower, shall only be disbursed as if it had been held back initially in the Project Fund and such disbursement thereof shall be subject to all the terms and conditions of this Section related to Holdbacks. Said Holdback shall be disbursed from the Project Fund upon compliance with the terms and conditions of this Section and either: (A) after completion of the Project (1) the execution and filing of the

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Contractor’s Completion Certificate; (2) the execution and filing of the Borrower’s Completion Certificate; and (3) receipt by the Borrower of a written notice issued by the Authority’s Office of Affirmative Action that the Contractor and Subcontractors, if any, have complied with the requirements of the Affirmative Action Program; or (B) prior to completion of the Project, receipt by the Borrower of a written notice issued by the Authority’s Office of Affirmative Action that the Contractor and Subcontractor, if any, have complied with the requirements of the Affirmative Action Program.

     Such additional documents, affidavits, certificates and opinions as the Authority may reasonably require; but the Authority shall have no obligation to require any such additional items.

     The Authority is hereby granted a security interest in the amounts on deposit in the Project Fund as security for the payment of the Bonds; however, notwithstanding such security interest, as long as there exists no Event of Default, the Borrower shall have the right to require disbursement from the Project Fund, to the extent of amounts then in the Project Fund, upon compliance with the procedures set forth in this Section 302. Upon an Event of Default and the acceleration of the obligations of the Borrower hereunder, the Trustee shall apply any amounts on deposit in the Project Fund to the prepayment of the principal of and interest on the Loan, and, hence, to the payment of the Bonds, in accordance with Article IX of the Indenture.

     Section 303. No Liability of Authority or Trustee. Nothing contained herein or in any documents and agreements contemplated hereby or in any other Loan Document shall impose upon the Trustee or the Authority any obligation to ensure the proper application of such disbursements by the Borrower or any other recipient thereof, and, in making such disbursements from the Project Fund, the Trustee may conclusively rely on such Requisition Forms and the attachments thereto delivered to it. The Trustee and the Authority shall be relieved of any liability with respect to making such disbursements in accordance with the foregoing.

     Section 304. Establishment of Completion Date. Completion of the Project shall be evidenced by delivery to the Authority and the Trustee of the Borrower’s Completion Certificate signed by an Authorized Borrower Representative. Upon receipt of such certificate by the Trustee, the Borrower shall direct the Trustee in writing to transfer any amounts remaining in the Project Fund (except for (a) amounts deposited in the Equity Account of the Project Fund; and (b) amounts therein sufficient to cover Costs of the Project not then due and payable or not then paid or the Holdback required to be retained in the Project Fund pursuant to Section 302 hereof unless the requirements set forth in Section 302 hereof for the disbursement of the Holdback from the Project Fund have been satisfied) to the Bond Redemption Fund in Authorized Denominations and if such amount is (a) less than an Authorized Denomination or (b) in excess of Authorized Denominations, such amount shall be transferred to the Debt Service Fund to pay interest payments on the Bonds. Amounts transferred into the Bond Redemption Fund hereunder shall be used to redeem the Bonds on the next succeeding Interest Payment date on which such Bonds can be redeemed after providing the holders of the Bonds with notice required by Section 703 of the Indenture. Provided that there is no Event of Default hereunder, upon completion of the Project, all moneys remaining in the Equity Account of the Project Fund (if any) will be returned to the Borrower as provided in the Indenture.

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     Section 305. Borrower Required to Pay if Project Fund Insufficient. In the event the moneys in the Project Fund available for payment of the Costs of the Project are not sufficient to pay all Costs of the Project in full, the Borrower agrees to complete the Project and to pay that portion of the Cost in excess of the moneys available therefor in the Project Fund. The Authority and the Trustee make no warranty, either express or implied, that the moneys paid into the Project Fund and available for payment of the Costs of the Project will be sufficient to pay all of such costs. The Borrower agrees that if, after disbursement of all the money in the Project Fund available for payment of Costs of the Project, the Borrower should pay any portion of the Costs of the Project pursuant to the provisions of this Section, it shall not be entitled to any reimbursement therefor from the Authority or the Trustee.

     Section 306. [Intentionally Omitted.]

     Section 307. Investment of the Funds. Any moneys held as a part of the Funds shall be invested and reinvested by the Trustee, only as directed (by written direction) by the Borrower, in Investment Obligations. The Trustee may make any and all such investments through its own investment department.

     In making such investments as described in this Section, the Trustee may rely upon the written direction of the Borrower as to the investment purchased and shall be and hereby is relieved of all liability with respect to making, redeeming and selling such investments, so long as the Trustee has acted in accordance with the foregoing directions.

     The Borrower shall be entitled to receive from the Trustee monthly and at such other times as the Borrower may reasonably request, a statement of account of any moneys held in the Funds by the Trustee.

     Section 308. The Trustee. The Trustee shall act on behalf of the Bondholders under the Indenture and this Agreement as specifically provided for herein and in the Indenture only insofar as its duties are expressly set forth and shall not have any implied duties but may exercise such additional powers as are reasonably incidental thereto. The Trustee is a third party beneficiary hereto on behalf of itself and on behalf of the Bondholders. Neither the Trustee nor any of its officers, directors or employees shall be liable for any action taken or omitted to be taken by it hereunder or in connection herewith except for its or their own negligence or willful misconduct. The Trustee shall not be under a duty to examine or pass upon the validity, effectiveness or genuineness of any Loan Document or any direction, report, affidavit, requisition form, certificate, opinion or other instrument, document or agreement related thereto, and shall be entitled to assume that the same are valid, effective, genuine and what they purport to be. The Trustee may consult with legal counsel selected by it, and any action taken or suffered by it in accordance with the opinion of such counsel shall be full justification and protection to it. The Trustee shall have the same rights and powers as any other bank or lender and may exercise the same as though it were not the Trustee; and it may accept deposits from, lend money to and generally engage in any kind of business with the Borrower as though it were not the Trustee.

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ARTICLE IV
THE LOAN

     Section 401. Loan of Bond Proceeds. Upon the issuance of the Bonds, the Authority shall lend the proceeds thereof to the Borrower for application toward the Costs of the Project. The Authority and the Borrower hereby agree that the aforesaid loan of the Bond proceeds shall be made and applied by depositing the same with the Trustee in the manner and for the purposes set forth in Section 301 of the Indenture.

     Section 402. Borrower’s Financial Obligations. The Borrower hereby agrees that, to the extent that other available moneys are insufficient therefor, it shall provide funds for the payment of the costs of issuing the Bonds. Such funds shall initially be deposited in the Project Fund on the date of delivery of the Bonds in the amount set forth in Section 301 of the Indenture. From time to time thereafter, if moneys in the Project Fund are insufficient for the purpose of paying any remaining costs of issuance, the Borrower shall either pay such costs directly or shall make additional deposits into the Project Fund for the payment thereof.

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ARTICLE V
PAYMENTS UNDER LOAN AGREEMENT

     Section 501. Payments Under the Agreement.

          (a) The Borrower agrees to pay to the Authority its issuance fee of $84,375 and to pay the fees and reasonable expenses of the Authority incurred in fulfilling the Authority’s obligations under this Agreement and the Indenture, including reasonable attorneys fees.

          (b) The Borrower agrees to pay to the Registrar, the Paying Agent and the Trustee, as and when the same becomes due, (1) the initial acceptance fee of the Trustee and the costs and expenses, including reasonable attorneys fees, incurred by the Trustee in entering into and executing the Indenture, and (2) during the term of this Agreement (i) an amount equal to the annual fee of the Trustee for the ordinary services of the Trustee, as trustee, rendered and its ordinary expenses incurred under the Indenture, including but not limited to attorneys’ fees, as and when the same become due, (ii) the fees, charges and expenses of the Trustee, the Paying Agent and the Registrar, as and when the same become due, and (iii) the fees, charges and expenses of the Trustee for the necessary extraordinary services rendered by it and extraordinary expenses incurred by it under the Indenture.

          (c) The Borrower agrees to pay to the Trustee, as the assignee of the Authority, the following sums at the following times:

               (i) On or before the second Business Day prior to August 1, 2012 and the second Business Day prior to the first day of each month thereafter, one-twelfth (1/12th) of the amount which is necessary for the payment of the principal of the Bonds becoming due on August 1, 2013 and on or before the first day of each month of each year thereafter one-twelfth (1/12th) of the principal amount of the Bonds coming due on the immediately succeeding August 1st, whether for the payment of principal on a principal maturity or a mandatory redemption date, subject to credit for other available funds in the manner provided in the Indenture. In lieu of the portion of the payments due under this subsection (d)(i), the Borrower or, at its written direction, the Authority or the Trustee, may purchase for cancellation Bonds of the maturity next becoming due, subject to the applicable requirements set forth in Section 505 of the Indenture.

               (ii) On or before the second Business Day prior to the first day of August, 2007, the amount of interest coming due on August 1, 2007 and on the first day of each month thereafter, one-sixth (1/6th) of the amount of interest coming due on the Bonds on the immediately succeeding February 1st and on the first day of each month thereafter one-sixth (1/6th) of the amount of interest coming due on the Bonds on the immediately succeeding August 1st, subject to credit for other available funds in the manner provided in the Indenture.

               (iii) On or before the second Business Day prior to the first day of each month beginning August 2007, one-sixth (1/6^th) of the amount that is required to restore the amount in the Debt Service Reserve Fund to the Debt Service Reserve Fund Requirement relating thereto (as defined in the Indenture) and until the deficiency is made up in full which may occur in any of the other funds established under the Indenture.

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               (iv) If not sooner paid, on August 1, 2027, all unpaid principal and accrued interest on the Bonds shall be due and payable.

          (d) If the date when any of the payments required to be made by this Section 501 is not a Business Day, then such payments may be made on the next Business Day with the same force and effect as if made on the nominal due date, and no interest shall accrue for the period after such date.

     Section 502. Acceleration of Payment to Redeem Bonds. Whenever the Bonds are subject to optional redemption pursuant to the Indenture, the Borrower on behalf of the Authority will direct the Trustee to call the same for redemption as provided in the Indenture. Whenever the Bonds are subject to mandatory redemption or defeasance pursuant to the Indenture, the Borrower will cooperate with the Authority and the Trustee in effecting such redemption or defeasance. In the event of any mandatory or optional redemption of the Bonds, the Borrower will pay or cause to be paid in accordance with the terms of the Indenture an amount equal to (or sufficient to defease at) the applicable redemption price as a prepayment of that portion of the Loan corresponding to the Bonds to be redeemed, which shall include the applicable premium (if any) and interest accrued to the date of redemption.

     Section 503. Unconditional General Obligations of Borrower. The obligations of the Borrower to make or cause to be made payments of the Loan are and shall be the unconditional general obligations of the Borrower and shall be absolute and unconditional without defense or set-off by reason of any default by the Contractors under the Contracts or by the Authority under this Agreement or under any other agreement between the Borrower and the Authority or for any other reason, failure to complete the Project Facilities, any acts or circumstances that may constitute failure to complete the Project Facilities, commercial frustration of purpose, or failure of the Authority to perform and observe any agreement, whether express or implied, or any duty, liability or obligation arising out of or connected with this Agreement, it being the intention of the parties that the payments required of the Borrower hereunder will be paid in full when due without any delay or diminution whatsoever. Repayments of the Loan and additional sums required to be paid by or on behalf of the Borrower hereunder shall be received by the Authority or the Trustee as net sums and the Borrower agrees to pay or cause to be paid all charges against or which might diminish such net sums.

     Section 504. Assignment of Authority’s Rights. As security for the payment of the Bonds the Authority will assign to the Trustee all the Authority’s rights under this Agreement except the Reserved Rights of the Authority. The Authority retains the right, jointly and severally with the Trustee, to specifically enforce the Reserved Rights contained in the Loan Documents. The Borrower consents to such assignment and agrees to make or cause to be made payments of the Loan under Section 501 (except for subparagraph (b)) directly to the Trustee without defense or set-off by reason of any dispute between the Borrower and the Trustee. Whenever the Borrower is required to obtain the consent of the Authority under this Section 504, the Borrower shall also obtain the consent of the Trustee.

     Section 505. Opinion of Counsel for Borrower. At the time of closing the Loan, the Authority and the Trustee shall receive the opinion of Counsel for the Borrower reasonably satisfactory in form and substance to Bond Counsel and Purchaser’s Counsel:

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          (a) confirming the substance of the representations and warranties set forth in Section 202(a), (b), (d) and (f);

          (b) to the effect that the Loan Documents have been duly executed and delivered by the Borrower, and constitute the valid and binding obligations of the Borrower, enforceable in accordance with their respective terms, except to the extent that the enforceability of such documents may be limited by bankruptcy, insolvency, reorganization or other laws affecting creditors’ rights generally or by general principles of equity or other customary exceptions to enforceability;

          (c) to the effect that the Leasehold Mortgage and the Assignment of Leases are each in form satisfactory for recording in the Office of the County Clerk of Middlesex County, New Jersey and, upon the payment of the applicable mortgage recording tax in connection with the recordation of the Mortgage, such recordation shall constitute a perfected security interest in and a perfected lien upon the property or rights described therein in each case in favor of Trustee; and

          (d) to the effect that the Financing Statements executed by the Borrower are in appropriate form for filing in Middlesex County, New Jersey and the New Jersey Secretary of State’s Office, and upon the filing of the Financing Statements in (a) the Office of the County Clerk of Middlesex County, New Jersey and (b) the New Jersey Secretary of State’s Office, the Trustee shall have a perfected security interest in and perfected lien upon the Trust Estate (as defined in the Indenture) as described therein pursuant to the Uniform Commercial Code of New Jersey (the “Code”) to the extent that a lien may be created under Article 9 of the Code with respect to such personal property by the filing of a Financing Statement.

     Section 506. Opinion of Bond Counsel. At the time of closing the Loan, the Authority shall receive the opinion of Bond Counsel to the effect that the Bonds have been duly authorized and issued under the provisions of the Act.

     Section 507. Loan and Other Documents. At the time of closing the Loan, the Authority shall receive:

          (a) the Loan Documents duly executed by all parties thereto;

          (b) certificates, in form and substance reasonably acceptable to the Authority and the Trustee, evidencing the insurance required to be maintained by this Agreement;

          (c) all other documents reasonably required by the Authority and the Purchaser;

          (d) its issuance fee in an amount equal to $84,375.

     Section 508. Excess Funds. After all of the Bonds have been retired and all interest and applicable premiums, if any, due thereon have been paid or provision for such retirement and payment has been made in accordance with the Indenture, excess moneys in Funds and Accounts established under the Indenture from whatever source derived will be paid to the Borrower as an

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adjustment of the amounts payable hereunder. This paragraph shall survive the termination of this Loan Agreement.

     Section 509. Deposit to Lease Reserve Fund. The Borrower hereby agrees to deposit $195,000 in the Lease Reserve Fund established pursuant to Section 511 of the Indenture, which amounts shall be applied to pay Rent (as defined in the Lease) and such other payments due under the Lease. To the extent that amounts are withdrawn to pay Rent and such other payments as due under the Lease from moneys deposited herein, the Borrower shall immediately replenish the Lease Reserve Fund to the extent of any such withdrawals.

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ARTICLE VI
PROJECT FACILITIES

     Section 601. Description of Project Facilities. The Borrower will supplement the description of any material additions to, deletions from and changes in the Project Facilities as described to the Authority in Exhibit A hereto and will notify the Authority and the Trustee of such modifications.

     Section 602. Notices and Permits. The Borrower shall give or cause to be given all notices and comply or cause compliance, in all material respects, with all laws, ordinances, municipal rules and regulations and requirements of public authorities applying to or affecting the conduct of the work on the Project Facilities, and the Borrower will defend and save the Authority, its members, officers, agents and employees, harmless from all fines due to failure to comply therewith. The Borrower shall procure or cause to be procured all permits and licenses necessary for the prosecution of the acquisition and installation of the Project Facilities.

     Section 603. Additions and Changes to Project Facilities. The Borrower may, at its option and at its own cost and expense, at any time and from time to time, make such improvements, additions and changes to the Project Facilities as it may deem to be desirable for its uses and purposes, provided that (i) such improvements, additions and changes shall constitute part of the Project Facilities and (ii) that the Borrower shall not permit any alienation, removal, demolition, substitution, improvement, alteration or deterioration of the Project Facilities or any other act which might materially impair or reduce the usefulness or value thereof, without the prior written consent of the Authority and the Trustee. No consent shall be required for any fixture or item of equipment permanently removed from the Project Facilities by the Borrower due to obsolescence.

     Section 604. Opinion of Bond Counsel. Prior to effecting any material change in the use of the proceeds from any Bonds, the Borrower shall receive a Favorable Opinion of Bond Counsel.

     Section 605. Preservation of Project Facilities.

          (a) The Borrower will at all times preserve and protect the Project Facilities in good repair, working order and safe condition, and for time to time will make, or will cause to be made, all needed and proper repairs, renewals, replacements, betterments and improvements thereto including those required after a casualty loss. The Borrower shall pay all operating costs, utility charges and other costs and expenses arising out of ownership, operation, possession, use or operation of the Project Facilities. The Authority shall have no obligation and makes no warranties respecting the condition or operation of the Project Facilities.

          (b) The Borrower will not use as a basis for contesting any assessment or levy or any tax the financing under this Agreement or the issuance of the Bonds by the Authority and, if any administrative body or court of competent jurisdiction shall hold for any reason that the Project Facilities are not exempt from taxation by reason of the financing under this Agreement or issuance of the Bonds by the Authority or other Authority action in respect thereto, the

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Borrower covenants to make payments in lieu of all such taxes in an amount equal to such taxes and if, applicable, interest and penalties.

          (c) The Borrower shall not relocate the Project Facilities or any part thereof out of the state. The Borrower shall not relocate the Project Facilities within the state without the prior written consent of an Authorized Authority Representative and an Opinion of Bond Counsel that the relocation will not affect the tax-exempt status of the Bonds.

          (d) The Borrower shall operate or cause the Project Facilities to be operated as an authorized project for a purpose and use as provided for under the Act until the expiration or earlier termination of this Agreement.

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ARTICLE VII
FURTHER AGREEMENTS

     Section 701. Security for Borrower’s Obligations.

          (a) The obligations of the Borrower hereunder are general obligations of the Borrower.

          (b) Subject to the provisions of Section 805, the Borrower hereby grants the Authority a first lien security interest in and lien upon all accounts, contract rights, instruments of whatever nature, general intangibles, machinery, furniture and fixtures now owned or hereinafter acquired, including all the interest from, proceeds of and products from any of the foregoing, including without limitation any insurance or condemnation awards therefrom. This Loan Agreement shall constitute a security agreement within the meaning of the New Jersey Uniform Commercial Code. In addition to all other rights and remedies hereunder, the Authority and the Trustee as its assignee shall have all rights and remedies of a secured party under the New Jersey Uniform Commercial Code. The Borrower shall join with the Authority and the Trustee in the execution and filing of all financing statements, continuation statements and other documents as may be necessary from time to time to perfect or continue the perfection of the security interest granted hereunder. The Borrower authorizes the Authority and the Trustee to file any required financing statements without the Borrower’s signature thereon, as permitted under the New Jersey Uniform Commercial Code.

          (c) As further security for the repayment of the Loan, the Borrower shall furnish to the Authority, the Leasehold Mortgage.

     Section 702. Fees and Charges; Coverage Ratio; Liquidity Ratio. The Borrower shall set its fees, prices and other charges and limit its expenses for each Fiscal Year in order to maintain for each Fiscal Year a Debt Service Coverage Ratio of at least 2.00. Borrower agrees that it shall maintain, for each Fiscal Year, as calculated at the end of such Fiscal Year, a minimum Days Cash on Hand of 60 days.

     If beginning with the Fiscal Year ended December 31, 2009, (i) the Debt Service Coverage Ratio calculated at the end of any two consecutive Fiscal Years is below 2.00 or (ii) the Days Cash on Hand calculated at the end of any two consecutive Fiscal Years is below 60 days, the Borrower covenants to retain a Consultant (at the Borrower’s sole cost and expense), within sixty (60) days after the receipt of all audits for the second of such Fiscal Years, to make recommendations to increase the Debt Service Coverage Ratio and/or the Days Cash on Hand, as applicable, for subsequent Fiscal Years of the Borrower at least to the level required or, if in the opinion of the Consultant the attainment of such level is impracticable, to the highest practicable level. The Borrower shall notify the Trustee and the Trustee shall notify all Bondholders of the retention of any Consultant pursuant to this Section 802. The Borrower agrees that it will upon receipt of the Consultant’s report, file copies thereof with the Authority and the Trustee, and will, to the extent permitted by law, follow the recommendations of the Consultant. So long as the Borrower shall retain a Consultant and shall follow such Consultant’s recommendations to the

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extent permitted by law, this Section shall be deemed to have been complied with for so long as no other Event of Default shall have occurred.

     If as a result of any change in accounting standards, the Borrower’s Debt Service Coverage Ratio falls below 2.00 and/or the Borrower’s Days Cash on Hand falls below 60 days, the same shall not be deemed an Event of Default hereunder upon a showing by a Consultant that the Borrower would be in compliance if the generally accepted accounting principles in effect as of February 1, 2007 were applied.

     Section 703. Existence; Cash Distributions.

               (i) The Borrower covenants that it will maintain its existence as a legal entity and shall not sell, assign, transfer or otherwise dispose of the Project Facilities or substantially all of its assets without the consent of the Authority and the Bondholders; provided, however, that the Borrower may merge with or into or consolidate with another entity, and the Project Facilities or this Agreement may be transferred pursuant to such merger or consolidation without violating this section if (A) the Borrower causes the proposed surviving, resulting or transferee company to furnish the Authority with a Change of Ownership Information Form; (B) the net worth of the surviving, resulting or transferee company following the merger, consolidation or transfer is equal to or greater than the net worth of the Borrower immediately preceding the merger, consolidation or transfer; (C) any litigation or investigations in which the surviving, resulting or transferee company or its principals, officers and directors are involved, and any court, administrative or other orders to which the surviving, resulting or transferee company or its officers and directors are subject, relate to matters arising in the ordinary course of business; (D) the merger, consolidation or transfer shall not impair the excludability of interest paid on the Bonds from the gross income of the purchaser thereof for purposes of federal income taxation or cause a reissuance pursuant to an Opinion of Bond Counsel; and (E) the surviving, resulting or transferee company assumes in writing the obligations of the Borrower under this Loan Agreement and the Series 2007 Note; and provided, further, however, the Borrower may transfer the Project Facilities without the consent of the Bondholders if its complies with all of the other requirements in this subsection and if the Borrower redeems the Bonds pursuant to Section 701(h) of the Indenture.

               (ii) The Borrower is prohibited from making any dividends, payments or other cash distributions to or for the benefit of Converted Organics until such time as (i) the Borrower has achieved, over the course of a full Fiscal Year, as reflected in its audited financial statements delivered pursuant to the terms and conditions of the Loan Agreement, a Maximum Annual Debt Service Coverage Ratio greater than 1.50, (ii) at least $1,200,000 is on deposit with the Trustee in the Operations and Maintenance Reserve Fund and available to satisfy ongoing maintenance, repair and replacement costs associated with the Project Facilities; and the Borrower is in compliance with the covenants set forth in Sections 702 and 717 hereof and all other terms and conditions of the Loan Agreement.

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     Section 704. Additional Debt; Limitations on Creation of Liens.

          (a) The Borrower agrees that it will not, without the consent of the Holders of at least 51% in the aggregate of the Bonds, create or suffer to be created or exist any Indebtedness.

          (b) The Borrower agrees that it will not, without the consent of the Holders of at least 51% in the aggregate of the Bonds, create or suffer to be created or exist any Lien upon the Collateral now owned or hereafter acquired by the Borrower, other than Permitted Encumbrances.

          (c) Permitted Encumbrances shall consist of the following:

               (i) Liens arising by reason of good faith deposits by the Borrower in connection with leases of real estate, bids or contracts (other than contracts for the payment of money), deposits by the Borrower to secure public or statutory obligations, or to secure, or in lieu of, surety, stay or appeal of bonds, and deposits as security for the payment of taxes or assessments or other similar charges;

               (ii) Any Lien arising by reason of deposits with, or the giving of any form of security to, any governmental agency or any body created or approved by law or governmental regulation for any purpose at any time as required by law or governmental regulation as a condition to the transaction of any business or the exercise of any privilege or license, or to enable the Borrower to maintain self-insurance to participate in any funds established to cover any insurance risks or in connection with workmen’s compensation, unemployment insurance, pension or profit sharing plans or other social security, or to share in the privileges or benefits required for companies participating in such arrangements;

               (iii) Any judgment lien against the Borrower so long as such judgment is being contested and execution thereon is stayed;

               (iv) (A) Rights reserved to or vested in any municipality or public authority by the terms of any right, power, franchise, grant, license, permit or provision affecting any Collateral, to (1) terminate such right, power, franchise, grant, license or permit, provided that the exercise of such right would not materially alter the use of such Collateral or materially and adversely affect the Value thereof, or (2) purchase, condemn, appropriate or recapture, or designate a purchaser of, such Collateral; (B) any liens on any Collateral for taxes, assessments, levies, fees, water and sewer rents, and other governmental and similar charges and any liens of mechanics, materialmen, laborers, suppliers or vendors for work or services performed or materials furnished in connection with such Collateral, which are not due and payable or which are not delinquent or the amount or validity of which are being contested and execution thereon is stayed; and (C) rights reserved to or vested in any municipality or public authority to control or regulate any Collateral or to use such Collateral in any manner, which rights do not materially impair the use of such Collateral or materially and adversely affect the Value thereof;

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               (v) Any Lien on Collateral described in Schedule A hereto which is existing on the date of authentication and delivery of the Bonds, including renewals thereof, provided that no such Lien may be extended or modified to apply to any Collateral not subject to such Lien on such date, unless such Lien as so extended or modified otherwise qualifies as a Permitted Encumbrance hereunder;

               (vi) To the extent permitted by the Leasehold Mortgage, lease of Collateral which, in the judgment of the Borrower, is reasonably necessary or appropriate for or incidental to the use of such Collateral, taking into account the nature and terms of the lease and the nature and purposes of the Collateral;

               (vii) The Liens set forth on Schedule A;

               (viii) Liens to secure Indebtedness permitted by Section 704(a)(ii) above; and

               (ix) Exceptions set forth on Schedule B of Commitment No. DC002291-N, as amended, of the Title Insurance Policy issued by Property Title Group, LLC regarding the Collateral which is subject to the Mortgage.

          (d) The Authority agrees to execute and deliver, at the Borrower’s request, any agreements, instruments, certificates or other documents necessary to establish or give effect to any parity Liens permitted under this Section 704.

     Section 705. Compliance with Laws. Except as otherwise provided in Section 708 hereof, the Borrower shall, throughout the term of this Agreement and at no expense to the Authority, promptly comply in all material respects or cause compliance in all material respects with all laws, ordinances, orders, rules, regulations and requirements of duly constituted public authorities which may be applicable to the Borrower or to its Property and operations.

     Section 706. Environmental Covenant. The Borrower shall not knowingly permit any action to occur which would be in direct violation of any and all applicable Federal, State, county and municipal laws, ordinances, rules and regulations now in force or hereinafter enacted, including the regulations of the Authority and the regulations of the State Department of Environmental Protection.

     The Borrower shall give immediate written notice to the Authority and the Trustee of any inquiry, notices of investigation or any similar communication from the State Department of Environmental Protection regarding potential violations by the Borrower of the Industrial Site Recovery Act (N.J.S.A. 13:1K-6 et seq.) and/or the Spill Compensation and Control Act (N.J.S.A. 58:10-23.11 et seq.) or any similar statute.

     Section 707. Taxes. Charges and Assessments.

          (a) The Borrower covenants and agrees, subject to the provisions of Section 809 hereof, to pay or cause to be paid (before the same shall become delinquent):

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               (i) all taxes and charges on account of the use, occupancy or operation of its Property, or the income therefrom, including, but not limited to, all sales, use, occupation, real and personal property taxes, all permit and inspection fees, occupation and license fees and all water, gas, electric light, power or other utility charges assessed or charged on or against its Property or on account of the Borrower’s use or occupancy thereof or the activities conducted thereon or therein; and

               (ii) all taxes, assessments and impositions, general and special, ordinary and extraordinary, of every name and kind, which shall be taxed, levied, imposed or assessed upon all or any part of its Property, or the interest of the Borrower in and to such Property.

          (b) If under applicable law any such tax, charge, fee, rate, imposition or assessment may at the option of the taxpayer be paid in installments, the Borrower may exercise such option.

     Section 708. Permitted Contests. The Borrower shall not be required to pay any tax, charge, assessment or imposition referred to in Section 707 hereof, nor to comply with any law, ordinance, rule, order, regulation or requirement referred to in Section 705 hereof, so long as the Borrower shall contest, in good faith and at its cost and expense, in its own name and behalf, the amount or validity thereof, in an appropriate manner or by appropriate proceedings which shall operate during the pendency thereof to prevent the collection of or other realization upon the tax, assessment, levy, fee, rent or charge so contested, or of the rent or any portion thereof, to satisfy the same. While any such matters are pending, the Authority shall not pay, remove or cause to be discharged the tax, assessment, levy, fee, rent or charge being contested unless the Borrower agrees to settle such contest. Each such contest shall be promptly prosecuted to final conclusion (subject to the right of the Borrower to settle any such contest), and in any event the Borrower will indemnify and save harmless the Authority and the Trustee against all losses, judgments, decrees and costs (including attorneys’ fees and expenses in connection therewith). The Authority agrees to cooperate with the Borrower, at the Borrower’s cost and expense, in any such contest.

     Section 709. Inspection of the Project Facilities. The Borrower agrees that the Authority and the Trustee, and their duly authorized agents shall have the right, at all reasonable times and upon prior notice, to enter upon and to examine and inspect the Project Facilities. The Authority and the Trustee, and their respective officers and agents shall also be permitted, at all reasonable times and upon reasonable prior notice, to examine the books and records of the Borrower with respect to the Project and to make copies or abstracts thereof; provided, that the Authority and the Trustee agree to keep any such information confidential, as reasonably requested by the Borrower in order to comply with the laws applicable to the Borrower or Converted Organics, including, but not limited to, the Federal securities laws.

     Section 710. Right of Authority or Trustee to Perform Borrower’s Covenants. In the event the Borrower shall fail to make any payment or perform any other act required to be performed hereunder, then and in each such case the Authority or the Trustee may (but shall not be obligated to), upon prior notice to the Borrower, remedy such default for the account of the Borrower and make advances for that purpose. No such performance or advance shall operate to

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release the Borrower from any such default, and any sums so advanced by the Authority or the Trustee shall be repayable by the Borrower on demand and shall bear interest at the Trustee’s prime rate of interest, from the date of the advance until paid.

     Section 711. Investments. The Borrower and the Authority agree that all moneys in any fund established by the Indenture may be invested in such Investment Obligations (as defined in the Indenture) as the Borrower may direct; provided, however, that any such directions shall conform to the requirements of the Indenture.

     Section 712. Insurance.

          (a) The Borrower agrees to insure the Project Facilities or cause such to be insured with insurance companies licensed to do business in the State in such amounts, in such manner and against such loss, damage and liability (including liability to third parties), as is customary with companies in the same or similar business and located in the same or similar areas; and pay the premiums thereon. The form and amount of each insurance policy issued pursuant to this Section 712 shall conform in all respects to the provisions of this Section 712.

          (b) Each insurance policy issued pursuant to this Section 712 shall name the Borrower and the Trustee as insureds, as their interests may appear. In addition, the public liability insurance shall also name the Authority and the Trustee as an additional insureds.

          (c) Such insurance coverage shall include:

               (i) comprehensive public liability insurance in a minimum amount of $2,000,000;

               (ii) comprehensive casualty insurance insuring loss by reason of casualty of any kind (except only as limited by the standard form of extended coverage endorsement used in the State) to the Project Facilities or the Collateral in a minimum amount equal to (x) the outstanding principal amount of the Bonds, or (y) the replacement value thereof;

               (iii) during the construction period with respect to the Project Facilities, Builders’ All Risk Insurance written in “100% builders risk completed value, non-reporting form” including coverage therein for “completion and/or premises occupancy”, such insurance to be in the amounts specified in paragraph (ii) above;

               (iv) Business Interruption Insurance covering losses occasioned by an interruption in the Project Facilities’ operation (covering at a minimum amount, all fixed expenses and debt service).

          (d) At all times during the term of this Agreement, the Borrower shall comply with the laws of the State relating to workers’ compensation with respect to the operation of the Project Facilities.

          (e) Each of the policies or binders evidencing the insurance required above to be obtained shall:

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               (i) provide that all insurance proceeds with respect to loss or damage to the Project Facilities or the Collateral (except business interruption insurance) be endorsed and made payable to the Trustee and shall name the Trustee as a loss payee under the standard loss payee clause, which insurance proceeds shall be paid over to the Trustee;

               (ii) provide that there shall be no recourse against the Authority or the Trustee for the payment of premiums or commissions or (if such policies or binders provide for the payment thereof) additional premiums or assessments;

               (iii) [Intentionally Omitted];

               (iv) provide that such insurance shall be primary insurance without any right of contribution from any other insurance carried by the Authority or the Trustee to the extent that such other insurance provides the Authority or the Trustee, as the case may be, with contingent and/or excess liability insurance with respect to its respective interest as such;

               (v) provide that if the insurers cancel such insurance for any reason whatsoever, including the insured’s failure to pay any accrued premium, or the same is allowed to lapse or expire, or there shall be any reduction in amount, or any material change is made in the coverage, such cancellation, lapse, expiration, reduction or change shall not be effective as to the Authority or the Trustee until at least thirty (30) days after receipt by the Authority and the Trustee, respectively, of written notice by such insurers of such cancellation, lapse, expiration or change;

               (vi) waive any right of subrogation of the insurers thereunder against any person insured under such policy, and waive any right of the insurers to any setoff or counterclaim or any other deduction, whether by attachment or otherwise, in respect of any liability of any person insured under such policy.

          (g) Concurrently with the original issuance of the Bonds, the Borrower shall deliver or cause to be delivered to the Authority and the Trustee duplicate copies of insurance policies and/or binders evidencing compliance with the insurance requirements of this Section. At least fifteen (15) days prior to the expiration of any such policy, the Borrower shall furnish the Authority and the Trustee with evidence that such policy has been renewed or replaced or is no longer required by this Agreement.

          (h) The Borrower shall, at its own cost and expense, make all proofs of loss and take all other steps necessary or reasonably requested by the Authority or the Trustee to collect from insurers for any loss covered by any insurance required to be obtained by this Section 712. The Borrower shall not do any act, or suffer or permit any act to be done, whereby any insurance required by this Section 712 would or might be suspended or impaired.

          (i) The Borrower shall supply the Trustee with an annual certificate, within thirty (30) days after the close of the Borrower’s Fiscal Year, certifying that the Borrower is in compliance with this Section 712 and that the insurance policies required to be maintained by the Borrower under this Section are still in force and effect.

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          (j) In the event that the Borrower shall fail to maintain the insurance coverage required by this Loan Agreement, the Authority or the Trustee may (but shall be under no obligation to), after ten (10) days written notice to the Borrower unless cured within such ten (10) days, contract for the required policies of insurance and pay the premiums on the same and the Borrower agrees to reimburse the Authority or the Trustee to the extent of the amounts so advanced with interest therein at the maximum rate permitted by law.

     Section 713. Insurance Proceeds and Condemnation Awards. The Borrower shall notify the Authority and the Trustee promptly of the occurrence of any damage to or destruction, condemnation or conveyance in lieu of condemnation of all or any portion of its Property, Plant and Equipment. All insurance proceeds, condemnation award or other similar sums received as a result of any such occurrence shall be applied as follows:

          (a) At the election of the Borrower, such amounts may be used:

               (i) to pay the cost of reconstructing, replacing or repairing the affected Property; or

               (ii) to pay the Redemption Price of Bonds upon Extraordinary Redemption if the Project cannot be reasonably restored within a period of 12 months from the date of such damage or destruction to the condition thereof immediately preceding such damage or destruction or the Borrower is prevented from carrying on its normal operations in connection with the Project for a period of 12 months from the date of such damage or destruction or the restoration cost of the Project would exceed the total amount of all insurance proceeds including any deductible amount with respect to such damage or destruction.

     The foregoing determinations shall be set forth in a Borrower Certificate delivered to the Authority and the Trustee as soon as practicable after the occurrence to which it relates. Such Certificate shall be supported by such additional Certificates (including an Architect’s Certificate or Consultant’s Certificate) as the Authority or the Trustee may reasonably request.

          (b) If the Borrower determines in good faith that the conditions set forth in subsection (a) above cannot be satisfied with respect to any proposed action, it shall deliver a Borrower Certificate to such effect to the Trustee, and the insurance proceeds, condemnation award or other similar sum shall be required to be used to pay the Redemption Price of Bonds upon Extraordinary Redemption.

          (c) Moneys to be used for any reconstruction, replacement or repair pursuant to subsection (a) above shall be deposited in the Project Fund for such purpose and shall be disbursed by the Trustee upon requisition of the Borrower in substantially the manner set forth in Section 402 of the Indenture. The balance of any moneys so deposited after completion of such reconstruction, replacement or repair (as evidenced to the Trustee by a Certificate of the Borrower) shall be released to the Borrower for its unrestricted use. Moneys to be used to redeem Bonds pursuant to subsection (a) or (b) above shall be deposited in the Redemption Fund for such purpose.

     Section 714. Borrower to Perform Certain Covenants Under Indenture. The Borrower acknowledges that it has received an executed copy of the Indenture, and that it is familiar with

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its provisions, and agrees to be bound to the fullest extent permitted by law to all provisions thereof directly or indirectly relating to it, and that, in consideration of the Loan made hereunder, it will take all such actions as are required or contemplated of it under the Indenture to preserve and protect the rights of the Trustee and of the Bondholders thereunder and that it will not take or effect any action which would cause a default thereunder or jeopardize such rights. The Borrower hereby assumes and agrees to perform all of the covenants and other obligations of the Authority under the Indenture, excepting only any approval or consents permitted or required to be given by the Authority thereunder, and those covenants contained in Article VIII of the Indenture which are not within the control of the Borrower. However, nothing contained herein shall prevent the Authority from choosing from time to time, in its discretion, to perform any of the covenants or other obligations hereby assumed by the Borrower.

     Section 715. No Personal Recourse Against Authority; Indemnification.

          (a) In the exercise of the power of the Authority and its members, directors, officers, officials employees and attorneys under this Agreement including (without limiting the foregoing) the application of moneys and the investment of funds, neither the Authority nor its members, directors, officers, officials employees or attorney shall be accountable to the Borrower for any action taken or omitted by it or them except actions constituting gross negligence or willful misconduct. The Authority and such other persons shall be protected in its or their acting upon any paper or document believed by it or them to be genuine, and it or they may conclusively rely upon the advice of Counsel and may (but need not) require further evidence of any fact or matter before taking any action. No recourse shall be had by the Borrower for any claims based on this Agreement or on the Indenture against any member, officer, employee or agent of the Authority alleging personal liability on the part of such person.

          (b) The Borrower agrees to protect, indemnify and save the Authority, any person who “controls” the Authority (within the meaning of Section 15 of the Securities Act of 1933, as amended) and any member, director, officer, official, attorney and employee of, the State, or of the Authority (collectively, the “Indemnified Parties”) harmless from and against all liabilities, losses, claims, damages, costs, expenses, (including reasonable attorneys’ fees), taxes, causes of action, suits, claims, demands and judgments of any nature or form, (including all costs, expenses and reasonable counsel fees incurred in investigating or defending such claim) by or on behalf of any such person, arising in any manner from the transactions of which this Agreement is a part or arising in any manner in connection with the Project or the financing of the Project including, without limiting the generality of the foregoing, arising from (1) the condition, use, possession, conduct, management, planning, design, acquisition, construction, installation, financing or sale of the project or any part thereof; or (2) any untrue statement of a material fact contained in information submitted or to be submitted to the Indemnified Parties by the Borrower with respect to the transactions contemplated hereby; or (3) any omission of a material fact necessary to be stated therein in order to make such statement to the Indemnified Parties not misleading or incomplete; or (4) any breach or default by the Borrower of or in any of its obligations hereunder or under the Indenture or under any related document, or (5) the performance of any of the duties of any said Indemnified Party under the Indenture, this Agreement or any related document; or (6) any accident, injury or damage whatsoever to any person occurring in or about the Project. In case any action shall be brought against one or more of the Indemnified Parties based upon any of the above and in respect to which indemnity may

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be sought against the Borrower, such Indemnified Parties shall promptly notify the Borrower in writing, and the Borrower shall assume the defense thereof, including the employment of counsel satisfactory to the Indemnified Parties, the payment of all costs and expenses and the right to negotiate and consent to settlement. Any one or more of the Indemnified Parties shall have the right to employ separate counsel at the Borrower’s expense in any such action and to participate in the defense thereof. The Borrower shall not be liable for any settlement of any such action effected without Borrower’s consent, but if settled with the consent of the Borrower, or if there is a final judgment for the claimant on any such action, the Borrower agrees to indemnify and hold harmless the Indemnified Parties from and against any loss or liability by reason of such settlement or judgment.

     The Borrower agrees to and does hereby indemnify and hold harmless the Indemnified Parties against any and all losses, claims, damages or liabilities (including all costs, expenses, and reasonable counsel fees incurred in investigating or defending such claim) suffered by any of the Indemnified Parties and caused by, relating to, arising out of, resulting from, or in any way connected to an examination, investigation or audit of the Bonds by the Internal Revenue Service (IRS). In the event of such examination, investigation or audit, the Indemnified Parties shall have the right to employ counsel at the Borrower’s expense. In such event, the Borrower shall assume the primary role in responding to and negotiating with the IRS, but shall inform the Indemnified Parties of the status of the investigation. In the event Borrower fails to respond adequately and promptly to the IRS, the Authority shall have the right to assume the primary role in responding to and negotiating with the IRS and shall have the right to enter into a closing agreement, for which Borrower shall be liable.

     To secure the Borrower’s indemnification payment obligations hereunder, the Indemnified Parties shall have a lien prior to the lien created by the Indenture for the benefit of the Bondholders on the Trust Estate, other than money held for the payment of the principal or redemption price of any Bonds, and interest on any Bonds previously matured or called for redemption in accordance with the Indenture, which shall be held for the Bondholders only. Such obligations shall survive the satisfaction and discharge of the Indenture.

     When an Indemnified Party incurs expenses or renders services after an Event of Default hereunder, the expenses and compensation for services are intended to constitute expenses of administration under applicable bankruptcy law.

     Notwithstanding anything in this Agreement to the contrary which may limit recourse to the Borrower or may otherwise purport to limit the Borrower’s liability, the provisions of this Section shall control the Borrower’s obligations and shall survive the termination of this Agreement and the repayment of the Bonds and the Borrower’s obligations under the Agreement.

     The provisions of this Section 715 shall not apply to any liabilities, losses, damages, costs, expenses, taxes, causes of action, suits, claims, demands or judgments resulting from the Authority’s or the State’s gross negligence, willful misconduct or fraudulent actions.

     Section 716. Financial Statements. The Borrower or Converted Organics shall cause financial statements for each Fiscal Year to be audited by an Independent Public Accountant

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which show both the financial statements for Converted Organics on a consolidated basis and separate financial statements solely for the activities of the Borrower. A calculation demonstrating compliance or noncompliance with the financial covenants set forth in Section 702 shall be prepared by such Independent Public Accountant and included as part of such annual audited financial statements. Such financial statements and the Independent Public Accountant’s report thereon shall be furnished to the Purchaser, the Authority and the Trustee within 120 days after the end of the Fiscal Year to which they relate. Such financial statements and reports shall be accompanied by the Borrower’s Certificate of No Default as set forth in Section 726 hereof.

     Section 717. Operating and Maintenance Budget. The Borrower shall submit to the Trustee beginning the August 1^st following the Completion Date and each August 1 thereafter, detailed by fiscal quarter, a final operating plan and budget with respect to the Facility covering such Fiscal Year (each such budget, an “Annual Budget”) each Annual Budget shall be approved by an Independent Engineer.

     Each Annual Budget shall specify on a quarterly basis, the estimated project revenues, the estimated rates and revenues for each category of services, all operation and maintenance expenses, an amount to be deposited on a monthly basis into the Operation and Maintenance Reserve Fund created pursuant to Section 512 of the Indenture for reserves for operation and maintenance expenses and a maintenance plan. Each Annual Budget shall also include, solely for information purposes the projected Debt Service Coverage Ratio for the Fiscal Year then ending and the immediately succeeding Fiscal Year, which shall separately break out the debt service payments coming due to the Authority. If a final Annual Budget for a given Fiscal Year is not established by the end of the prior Fiscal Year, the Annual Budget for such Fiscal Year shall, until a final Annual Budget is established, be deemed to consist of the previous year’s Annual Budget.

     The Borrower shall operate and maintain the Facility, or cause the Facility to be operated and maintained, in accordance with such Annual Budget, including, but not limited to, monthly amounts to be deposited in the Operation and Maintenance Reserve Fund. No amounts shall be paid to Converted Organics until such time as the amount contained in the Operation and Maintenance Reserve Fund exceeds $1,200,000 and the requirements of Section 703 hereto are met.

     Amounts on deposit in the Operation and Maintenance Reserve Fund may be used to pay the Borrower (to the extent necessary) to pay operations and maintenance expenses in excess of those set forth in the Annual Budget; provided, however, the Borrower shall restore any amounts withdrawn from the Operation and Maintenance Reserve Fund within 90 days of such withdrawal.

     Each Annual Budget and the maintenance plan may be amended, restated, supplemented or otherwise modified from time to time, at the request of the Borrower with the delivery of an Independent Engineer confirmation.

     Section 718. Indemnification of the Trustee. The Borrower shall at all times indemnify the Trustee from all liabilities, claims, causes of action, costs and expenses (including, without

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limitation, reasonable attorney’s fees and expenses) imposed upon or asserted against the Trustee, except as a result of its negligence or willful misconduct, on account of any actions omitted to be taken by the Trustee relating to or arising out of this Agreement, the Indenture or the Bonds.

     Section 719. Compliance with Contractual Obligations. The Borrower shall, throughout the term of this Loan Agreement, comply in all material respects with any material contract or agreement to which it is a party.

     Section 720. ERISA. The Borrower will not (i) voluntarily terminate any employee benefit or other plan maintained for employees of the Borrower and covered by Title IV of ERISA (an “ERISA Plan”), so as to result in any material liability of the Borrower to Pension Benefit Guaranty Corporation (“PBGC”); (ii) enter into any Prohibited Transaction (as defined in Section 4975 of the Code and in ERISA) involving an ERISA Plan which results in any material liability of the Borrower to PBGC; (iii) cause any occurrence of any Reportable Event (as defined in Title IV of ERISA) which results in any material liability of the Borrower to PBGC; or (iv) allow or suffer to exist any other event or condition known to the Borrower which results in any material liability of the Borrower to PBGC.

     Section 721. Required Notices. The Borrower shall notify the Authority and the Trustee promptly of the occurrence of any of the following:

          (a) a fire or other casualty causing damage in excess of $100,000 to the Project Facilities;

          (b) receipt of notice of eminent domain proceedings or condemnation of all or any part of the Project Facilities;

          (c) receipt of notice from any governmental authority relating to the closure of the Project Facilities or occupancy of the Project Facilities (or any material portion thereof), or which will impede the operation of the Project Facilities;

          (d) substantial change in the occupancy of the Project Facilities;

          (e) receipt of any default or acceleration notice from the holder of any lien or security interest in the Project Facilities; or

          (f) commencement of any material litigation affecting the Project Facilities.

     Section 722. Management. Except as set forth in Schedule A, the Borrower shall not enter into any agreement for the management or operation of all or part of the Project Facilities without (i) furnishing to the Authority and the Trustee a copy thereof together with such financial and other information in respect of the managing party as the Authority and the Trustee may reasonably request and (ii) receiving the Authority’s and the Trustee’s prior written consent thereto, such consent not to be unreasonably withheld. As security for the Borrower’s obligations hereunder, the Borrower hereby grants to Authority a security interest in all of its rights under any agreement for the management or operation of all or part of the Project Facilities, now existing or hereafter created. All such agreements shall recite that the Borrower’s rights

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thereunder have been assigned to the Authority as security for the Borrower’s obligations hereunder.

     Section 723. Project Sign. During the period from the effective date of this Agreement and until thirty (30) days after the Completion Date, the Borrower shall cause to be posted and maintained at the site of the Project Facilities, a sign to be provided to the Borrower by the Authority indicating that financial assistance for the Project has been provided by the Authority. The cost of the sign and the maintenance of the sign shall be at the expense of the Borrower.

     Section 724. Approval of Tenants by the Authority. (i) Prior to leasing, subleasing or consenting to the subleasing or assignment of any lease of all or any part of the Project, during the period commencing on the date hereof and terminating three years after the Borrower has completed the acquisition, renovation and construction of substantially all of the Project, and (ii) upon the request of the Authority from time to time thereafter, the Borrower shall cause a Project Occupant Information Form to be submitted to the Authority by every prospective lessee, sublessee or lease assignee of the Project. The Borrower shall not permit any such leasing, subleasing or assigning of leases that would impair the excludability of interest paid on the Bonds from the gross income of the purchasers thereof for purposes of federal income taxation, or that would impair ability of the Borrower to operate the Project Facilities or cause the Project Facilities to be operated as an authorized project under the Act.

     Section 725. Report of Number of Employees. The Borrower must submit annually to the Authority, a report showing the number and classification of employees employed at the Project Facilities, on a form provided to the Borrower by the Authority.

     Section 726. Certificate of No Default. The Borrower agrees to deliver, or cause to be delivered, to the Authority and the Trustee within one hundred twenty (120) days after the close of each Fiscal Year, a certificate of an Authorized Borrower Representative to the effect that he is not aware of any condition, event or act which constitutes an Event of Default or of any condition, event or act which, with notice or lapse of time, or both, would constitute an Event of Default, or if any such condition, event or act exists, specifying the same. The Borrower further agrees to notify the Trustee and the Authority of an occurrence of an Event of Default or any condition, event or act which, with notice or lapse of time, or both, would constitute an Event of Default and the action which the Borrower proposes to take with respect thereto; the notification shall be given by the Borrower as soon as possible but in any event within ten (10) days of the event giving rise to the requirement of notification.

     Section 727. Payment of Prevailing Wage. The Borrower shall, in every Construction Contract to which it is a party, require the Contractor to pay workers engaged in the performance of such Construction Contract a wage rate not less than the Prevailing Wage Rate. The Borrower shall further require, in every Construction Contract to which it is a party, that the Contractor execute the Contractor’s Certificate and Agreement, submit certified copies of payroll records to the Authority as required by the Authority, and execute and file the Contractor’s Completion Certificate.

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     Section 728. Compliance with the Affirmative Action and Prevailing Wage Requirements. The Borrower shall comply with the Authority’s Affirmative Action and Prevailing Wage Rate Regulations and to that end:

     (A) Insert in all construction bid specifications for any construction contract the following provisions:

               Construction of this project is subject to the Affirmative Action Regulations of the New Jersey Economic Development Authority which establishes hiring goals for minority and female workers. Any contractor or subcontractor must agree to make every effort to meet the established goals and to submit certified reports and records required by the Authority. Copies of the Affirmation Action Regulations may be obtained by writing to: Office of Affirmative Action, New Jersey Economic Development Authority, Gateway One, Suite 2403, Newark, New Jersey 07102;

               Submission of a bid signifies that the bidder knows the requirements of the Affirmative Action Regulations and signifies the bidder’s intention to comply. Construction of this project is subject to N.J.A.C. 19:30-3.1 et seq. Workers employed in construction of this project must be paid at a rate not less than the prevailing wage rate established by the New Jersey Commissioner of Labor;

     (B) Include in all construction contracts those provisions which are set forth in the Addendum to Construction Contract annexed hereto as Exhibit E;

     (C) Obtain from all contractors and submit to the Authority a contractor’s certificate in the form annexed hereto as Exhibit F, within 3 business days of the execution of any construction contract;

     (D) Create an office of Borrower Affirmative Action Officer and maintain in that office until the completion date an individual having responsibility to coordinate compliance by the Borrower with the Authority’s Affirmative Action Regulations and to act as liaison with the Authority’s Office of Affirmative Action;

     (E) Submit to the Authority on the completion date, a completion certificate in the form annexed hereto as Exhibit G; and

     (F) Furnish to the Authority all other reports and certificates required under the Authority’s Affirmative Action and Prevailing Wage Rate Regulations.

     Section 729. Arbitrage and Rebate Regulations. (a) The Borrower shall at all times do and perform all acts and things necessary or desirable in order to assure that interest paid on the Bonds shall, for the purposes of Federal income taxation, be excludable from the gross income of the recipients thereof and exempt from such taxation. The Borrower shall direct the Trustee to make investments of amounts in any Fund or account only at market prices within the meaning of Treasury Regulations Section 1.148-1. For purposes of this Section, any and all actions of any Principal User of the Project or any Related Person to any such Principal User shall be deemed to be actions of the Borrower. In addition, any and all actions to be undertaken by the Borrower or by any other Person as to which the Authority or the Trustee must, pursuant to the terms hereof,

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consent or approve in advance, shall be deemed to be the actions of the Borrower or such other Person (and not the actions of the Authority or the Trustee).

          (b) The Borrower shall not permit at any time or times any of the Gross Proceeds from the sale of the Bonds or other of its funds to be used, directly or indirectly, to acquire any Investment Property (within the meaning of Section 148(b)(2) of the Code) the acquisition of which would cause the Bonds to be “arbitrage bonds” for the purposes of Section 148 of the Code. The Borrower shall utilize the Bond Proceeds from the sale of the Bonds so as to satisfy the reasonable expectations of the Borrower set forth in the Tax Certificate of the Borrower furnished to Bond Counsel and the Authority.

          (c) The Borrower shall use the Net Proceeds of the Bonds to pay the applicable Costs of the Project for which such Bonds were issued.

          (d) The Borrower will retain a Person or firm having expertise to calculate the amount of rebate, if any, due to the United States pursuant to Section 148(f) of the Code, as set forth in paragraph (e) below (the “Rebate Expert”), on or no later than 30 days before the Initial Rebate Computation Date (as defined below) and on each rebate Computation Date thereafter, (A) to compute the Rebate Amount for the period ending on such rebate Computation Date, (B) to deliver an opinion to the Authority and Trustee concerning its conclusions with respect to the amount (if any) of such Rebate Amount together with a written report providing a summary of the calculations relating thereto and (C) to deliver an opinion to the Authority and Trustee that all of the Gross Proceeds of each series of the Bonds (within the meaning of Section 148(f) of the Code), other than Gross Proceeds of such Bonds on deposit in a Bona Fide Debt Service Fund (within the meaning of Section 148(F)(4) of the Code), have been expended on or prior to the initial rebate Computation Date. The Computation Date shall include (i) maturity of the Bonds, (ii) if the Bonds are redeemed prior to maturity, the date on which the Bonds are redeemed, (iii) on the first day of the fifth anniversary date of the Bond Year (the “Initial Rebate Computation Date”) and each fifth anniversary thereafter, and (iv) any other date that may be required by the Code. The computation of the Rebate Amount shall be made separately for each series of Additional Bonds, if any, issued on a tax-exempt basis.

          (e) The Borrower shall direct the Trustee in writing to rebate the Rebate Amount separately for each series of Bonds to the United States on behalf of the Authority. The Rebate Amount as of any Computation Date is the excess of the Future Value of all receipts on Nonpurpose Investments (“Nonpurpose Receipts”) over the Future Value of all payments on Nonpurpose Investments (“Nonpurpose Payments”). To the extent amounts received from Nonpurpose Investments are reinvested, these amounts may be netted against each other and not taken into account in the computation of the Rebate Amount. Nonpurpose Receipts and Nonpurpose Payments shall be determined as described below separately for each series of Bonds.

               (1) Nonpurpose Payments. Nonpurpose Payments include (A) actual payments consisting of Gross Proceeds actually or constructively paid to acquire a Nonpurpose Investment, including Qualified Administrative Costs; (B) allocation payments consisting of payments for a Nonpurpose Investment that is allocated to such Bonds after already having been acquired by the Borrower (e.g., sinking fund proceeds) in an amount equal to the Value of the

41

Investment on the allocation date; (C) Computation Date payments consisting of a Nonpurpose Investment allocated to the Bonds at the end of the preceding Computation Period in an amount equal to the Value of the Investment at the beginning of the Computation Period; (D) Yield Reduction Payments, if any; and (E) the Computation Date credit equal to $1,000.

               (2) Nonpurpose Receipts. Nonpurpose Receipts include Actual receipts (amounts actually or constructively received with respect to a Nonpurpose Investment, such as earnings and return of principal, reduced by Qualified Administrative Costs); “deallocation” receipts (for a Nonpurpose Investment that ceases to be allocated to such Bonds or subject to rebate, the Value of the Investment on the “deallocation” date); Computation Date receipts (the Value of any Nonpurpose Investment held at the end of any Computation Period); and rebate receipts. (any recovery of an overpayment of rebate).

     Investments of amounts held in a Bona Fide Debt Service Fund for each series of tax-exempt Bonds will be excepted from the rebate requirement but only if the gross earnings on such fund for such Bond Year do not exceed $100,000.

          (f) For each investment of Gross Proceeds in a Non-Purpose Investment, the Borrower shall direct the Trustee to record, without limitation, the following information: purchase date, purchase price, face amount, stated interest rate, any accrued interest due on its purchase date, frequency of interest payments, disposition date, disposition price and any accrued interest due on the disposition date. The Yield to maturity for an investment presently means that discount rate, based on a compounding frequency the same as the Bonds (or such other compounding permitted by the Code), which when used to determine the present worth, on the purchase date of such investment or the date on which the investment becomes a Non-Purpose Investment, whichever is later, of all payments of principal and interest on such investment gives an amount equal to the fair market value of such investment including accrued interest due on such date.

          (g) On each Computation Date, if such Rebate Amount payable exceeds the amount then on deposit in the Rebate Account for any series of tax-exempt Bonds, the Borrower shall promptly pay to the Trustee, the amount necessary to make up such deficiency and direct the Trustee to pay the same to the United States within sixty (60) days of the Computation Date. The Borrower shall, in a timely fashion, give all written notices and directions to the Trustee as are called for under Section 506 of the Indenture for the payment of the Rebate Amount. Any sums remaining in the Rebate Account following such payments shall be returned to the Borrower. When due, the Authority shall have the right, but shall not be required, to make such payment to the Trustee on behalf of the Borrower. Any amount advanced by the Authority pursuant to this paragraph (g) shall be added to the moneys owing by the Borrower under this Loan Agreement and shall be payable on demand with interest at the rate of twelve percent (12%) per annum.

          (h) The rebate shall be paid in installments which shall be made at least once every fifth Bond Year. The first such installment shall be due to the United States on behalf of the Authority not later than sixty (60) days after the end of the fifth (5th) Rebate Year and shall be in an amount which ensures that at least ninety percent (90%) of the Rebate Amount described above with respect to the Bonds is paid. Each subsequent payment shall be made not

42

later than five (5) years after the date the preceding payment was due. Within sixty (60) days after the retirement of the Bonds at maturity or upon earlier redemption, the Borrower shall direct the Trustee to pay to the United States on behalf of the Authority one hundred percent (100%) of the aggregate Rebate Amount due with respect to the Bonds not theretofore paid.

          (i) Each payment of the Rebate Amount to be paid to the United States shall be filed with the Internal Revenue Service Center, Philadelphia, Pennsylvania 19255, or such other address that may be specified by the Internal Revenue Service. Each payment shall be accompanied by Form 8038-T (or such other form required by the Internal Revenue Service) and a statement identifying the Authority, the date of the issue, the CUSIP number for the Bond with the longest maturity for each series of tax-exempt Bonds and a copy of the applicable Form 8038-G.

          (j) The Borrower acknowledges that the Authority shall have the right at any time and in the sole and absolute discretion of the Authority to obtain from the Borrower and the Trustee the information necessary to determine the Rebate Amount required to be paid to the United States pursuant to Section 148(f) of the Code. Additionally, the Authority may, with reasonable cause, (i) review or cause to be reviewed any determination of the amount to be paid to the United States made by or on behalf of the Borrower and (ii) make or retain a Rebate Expert to make the determination of the amount to be paid to the United States. The Borrower hereby agrees to be bound by any such review or determination, absent manifest error, to pay the costs of such review, including without limitation the reasonable fees and expenses of counsel or a Rebate Expert retained by the Authority, and to pay to the Trustee any additional amounts for deposit in the Rebate Account required as the result of any such review or determination.

          (k) Except as may be permitted pursuant to Section 148(c) of the Code (relating to certain temporary periods for investment), at no time during the term of the Bonds shall the amount invested by the Borrower in Non-Purpose Investments with a Yield higher than the Yield on the Bonds exceed 10% of the principal amount of the applicable series of tax-exempt Bonds outstanding. The aggregate amount invested in Non-Purpose Investments shall be promptly and appropriately reduced as the outstanding principal of the applicable series of tax-exempt Bonds is reduced.

          (l) Notwithstanding any provision of this Section to the contrary, the Borrower shall be liable, and shall indemnify and hold the Authority and the Trustee harmless against any liability, for payments due to the United States pursuant to Section 148(f) of the Code. Further, the Borrower specifically agrees that neither the Authority nor the Trustee shall be held liable, or in any way responsible, and the Borrower shall indemnify and hold harmless the Trustee and the Authority against any liability, for any mistake or error in the filing of the payment or the determination of the Rebate Amount due to the United States or for any consequences resulting from any such mistake or error. The provisions of this paragraph shall survive termination of this Agreement.

          (m) The Authority, the Trustee and the Borrower acknowledge that the provisions of this Section 729 are intended to comply with Section 148(f) of the Code and the regulations promulgated thereunder and if as a result of a change in such Section of the Code or the promulgated regulations thereunder or in the interpretation thereof, a change in this Section

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729 shall be permitted or necessary to assure continued compliance with Section 148(f) of the Code and the promulgated regulations thereunder, then with written notice to the Trustee, the Authority and the Borrower shall be empowered to amend this Section 729 and the Authority may require, by written notice to the Borrower and the Trustee, the Borrower to amend this Section 729 to the extent necessary or desirable to assure compliance with the provisions of Section 148 of the Code and the regulations promulgated thereunder; provided that either the Authority or the Trustee shall require, prior to any such amendment becoming effective, at the sole cost and expense of the Borrower, an opinion of Bond Counsel satisfactory to the Authority and the Trustee to the effect that either (i) such amendment is required to maintain the exclusion from gross income under Section 103 of the Code of interest paid and payable on the Bonds or (ii) such amendment shall not adversely affect the exclusion from gross income under Section 103 of the Code of the interest paid or payable on the Bonds.

          (n) The Borrower shall give immediate telephonic notice, promptly confirmed in writing, to the Authority and the Trustee of any Determination of Taxability whether the Borrower is on Notice of such Determination of Taxability by its own filing of any statement, tax schedule, return or document with the Internal Revenue Service which discloses that an Determination of Taxability shall have occurred, by its receipt of any oral or written advice from the Internal Revenue Service that an Determination of Taxability shall have occurred, or otherwise.

     Section 730. Annual Certification. On each anniversary hereof, the Borrower shall furnish to the Authority the following:

          (a) a certification indicating whether or not the Borrower is aware of any condition, event or act which constitutes an Event of Default, or which would constitute an Event of Default with the giving of notice or passage of time, or both, under any of the Loan Documents;

          (b) a written description of the present use of the Project Facilities and a description of any anticipated material change in the use of the Project Facilities or in the number of employees employed at the Project Facilities; and

          (c) a report from every entity that leases or occupies space at the Project Facilities indicating the number of persons the entity employs at the Project Facilities.

     Section 731. Right of First Refusal. The Borrower covenants, on behalf of itself and any affiliate, to give Oppenheimer Funds the right of first refusal for the purchase of any future tax-exempt obligations issued by the Borrower and any affiliate.

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ARTICLE VIII
EVENTS OF DEFAULT AND REMEDIES

     Section 801. Events of Default. Each of the following shall constitute an Event of Default:

          (a) If the Borrower (i) fails to make any payment required by Section 501(a) or (b) hereof on the due date thereof or (ii) fails to make any other payment or deposit required pursuant to this Agreement within 30 days after written demand therefor has been made.

          (b) If the Borrower fails to perform any other covenant, condition or agreement herein or in any other Loan Document on its part to be performed within thirty (30) days of written notice thereof to the Borrower; or

          (c) If the Borrower proposes or makes an assignment for the benefit of creditors or a composition agreement with all or part of its creditors, or a trustee, receiver, conservator, liquidator, sequestrator or other judicial representative, similar or dissimilar, is appointed for the Borrower or any substantial portion of its assets or revenues, or there is commenced any proceeding in liquidation, bankruptcy, reorganization, arrangement of debts, debtor rehabilitation, creditor adjustment or insolvency, local, state or federal, by or against the Borrower and if such is not vacated, dismissed or stayed on appeal within sixty (60) days; or

          (d) Any representation or warranty made by the Borrower herein or any statement in any report, certificate, financial statement or other instrument furnished in connection with this Agreement or with the purchase of the Bonds shall at any time prove to have been false or misleading in any material respect when made or given.

     Section 802. Notice of Defaults: Opportunity to Cure Such Defaults. No default under Section 801(b) hereof or Section 901(d) hereof (if no acceleration has occurred) shall constitute an Event of Default until actual notice of such default by registered or certified mail shall be given to the Borrower by the Authority or the Trustee and the Borrower shall have had 30 days after receipt of such notice to correct the default and shall not have corrected it; provided. however, if the default cannot be corrected within such 30-day period, it shall not constitute an Event of Default if corrective action is instituted by the Borrower within the applicable period and diligently pursued until the default is corrected.

     Section 803. Remedies. If any Event of Default shall occur and be continuing, the Authority may at its option exercise any one or more of the following remedies:

          (a) upon the three (3) days written notice to the Borrower, accelerate the due dates of all sums due or to become due hereunder and obligate the Borrower to pay such sums in full, together with interest accrued and to accrue to the Redemption Date; or

          (b) by suit, action or proceeding at law or in equity, enforce all rights of the Authority, and require the Borrower to carry out any agreements with or for the benefit of the Authority or the Bondholders and to perform its duties under the Act or this Agreement; or

45

          (c) by action or suit in equity require the Borrower to account as if it were the trustee of an express trust for the Authority; or

          (d) by action or suit in equity enjoin any acts or things which may be unlawful or in violation of the rights of the Authority; or

          (e) upon the filing of a suit or other commencement of judicial proceeding to enforce the rights of the Trustee and the Bondholders, have appointed a receiver or receivers with respect to the Borrower and its Properties, with such powers as the court making such appointment shall confer; or

          (f) exercise all of the rights and remedies set forth in the Mortgage, including the institution of an action of foreclosure of the Mortgage and the taking of all actions permitted a secured credit or under the Uniform Commercial Code as adopted in the State; or

          (g) exercise all of the rights and remedies set forth in the Guaranty Agreement.

     Section 804. Mandatory Prepayment. The Borrower shall prepay the Note in full, together with interest accrued and to accrue to the Redemption Date if required under Section 701(d) of the Indenture. In the event that the Authority gives notice to the Trustee of the requirement for mandatory prepayment, the Trustee shall give notice to the Bondholders of the redemption of the Bonds pursuant to Sections 701(d) and 703 of the Indenture and will set a Redemption Date according to Section 703, but in no event later than sixty (60) days after the Authority gives notice to the Trustee of such acceleration. The payment of all sums due thereunder shall be due and payable on the second business day preceding the Redemption Date. Payment made by the Borrower pursuant to this Section shall be in an amount sufficient, together with other funds on deposit with the Trustee which are available for such purposes, to redeem the Bonds then Outstanding, and to pay (i) all administrative expenses accrued and to accrue through the Redemption Date and (ii) any other expenses and fees required to satisfy and discharge the Indenture.

     Section 805. No Remedy Exclusive. No remedy herein conferred upon or reserved to the Authority is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Loan Agreement or now or hereafter existing at law or in equity or by statute. No delay or omission to exercise any right or power accruing upon any default shall impair any such right or power or shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time and as often as may be deemed expedient. In order to entitle the Authority to exercise any remedy reserved to it in this Article, it shall not be necessary to give any notice, other than such notice as may be herein expressly required.

     Section 806. No Additional Waiver Implied by One Waiver. In the event the breach of any agreement contained in this Agreement should be waived by either party, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder.

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     Section 807. Agreement to Pay Attorneys’ Fees and Expenses. If the Borrower shall default under any of the provisions of this Loan Agreement and the Authority or the Trustee shall employ attorneys or incur other expenses for the collection of the Loan or for the enforcement of performance or observance of any obligation or agreement on the part of the Borrower contained in this Agreement, the Borrower will, on demand therefor, pay the reasonable fees and expenses of the Authority, the Trustee and their attorneys as they are incurred.

     Section 808. Right of Specific Enforcement. If the Borrower commits a breach, or threatens to commit a breach, of any of the provisions of this Agreement, at any time prior to the maturity of the Bonds, the Authority shall have the right and remedy, without posting bond or other security, to have the provisions of this Agreement specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach or threatened breach will cause immediate and irreparable injury to the Authority and that money damages will not provide an adequate remedy therefor.

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ARTICLE IX
MISCELLANEOUS

     Section 901. Notices. Except as otherwise permitted herein and in the Indenture, all communications hereunder shall be in writing and, unless otherwise required under this Agreement, shall be sufficiently given or made if delivered personally to the Person who is to receive the same or if mailed to such person by registered or certified United States mail, addressed:

     if to the Authority:

New Jersey Economic Development Authority
36 West State Street
P.O. Box 990
Trenton, New Jersey 08625
Attention: Director of Investment Banking

     with a copy to:

Cozen O’Connor
One Newark Center, Suite 1900
1085 Raymond Boulevard,
Newark, New Jersey 07102
Attention: Rafael Perez, Esquire

     if to the Borrower:

Converted Organics of Woodbridge, LLC
c/o Converted Organics Inc.
7A Commercial Wharf West
Boston, Massachusetts 02110
Attention: Edward Gildea, President

     with a copy to:

Wilentz Goldman & Spitzer
90 Woodbridge Center Drive
Suite 900 Box 10
Woodbridge, New Jersey 07095
Attention: John Kelly, Esquire

     if to the Purchaser:

Ferris, Baker Watts, Inc.
9211 Forest Hill Drive
Richmond, Virginia 23235
Attention: Tina K. Neal

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     with a copy to:

LeClair Ryan, A Professional Corporation
Riverfront Plaza, East Tower
951 E. Byrd Street
Richmond, VA 23219
Attention: Russell J. Singer, Esquire

     if to the Trustee

The Bank of New York
385 Rifle Camp Road
West Paterson, New Jersey 07424
Attention: Corporate Trust Department

          A duplicate copy of each communication given by either party to the other shall also be given to the Trustee at the address set forth in Section 1304 of the Indenture.

     Section 902. Severability. If any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provision hereof.

     Section 903. Redemption of Bonds. If the Borrower is not in default in the payment of any sum or sums which it is required to pay hereunder, the Authority at the request of the Borrower, at any time the aggregate moneys in the funds created under the Indenture are sufficient to effect such redemption in whole or in part, and if the same are then redeemable under the provisions of the Indenture, shall forthwith take all steps that may be necessary under the applicable provisions of the Indenture to effect redemption of all or as many of the then Outstanding Bonds on such redemption date as may be specified by the Borrower.

     Section 904. Payment of Fees and Expenses. The Borrower will pay all out-of-pocket expenses incurred by the Authority in connection with the preparation of this Agreement and the other Loan Documents (whether or not the transactions hereby contemplated shall be consummated), the making of the Loan hereunder, and the enforcement of the rights of the Authority in connection with this Agreement and the other Loan Documents, including the Authority’s bond issuance fee as established at the time of the issuance of the Bonds, and the fees, disbursements and expenses of Bond Counsel.

     Section 905. Benefit of Agreement. This Agreement shall inure to the benefit of and shall be binding upon the Authority, the Borrower and their respective successors and assigns. In addition, the agreements and representations of the Borrower and the Authority herein contained shall inure to, but only to, the Trustee for the benefit of the holders from time to time of the Bonds.

     Section 906. Termination. This Agreement shall terminate on such date as the principal of and premium, if any, and interest on all Bonds and all other expenses payable by the Borrower hereunder shall have been paid (or provision for such payment shall have been made as provided in the Indenture) and all other conditions of this Agreement and the Indenture shall have been

49

fully satisfied. Upon such termination, the obligations of the Borrower hereunder shall terminate; provided, however, that the Borrower’s obligations under Section 816 hereof shall survive any such termination.

     Section 907. Governing Law. This Agreement shall be governed by the laws of the State.

     Section 908. Entire Agreement. This Agreement constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, between the Authority and the Borrower with respect to the subject matter hereof.

     Section 909. Amendments. This Agreement may be amended by the parties hereto subject to the provisions of Article XI of the Indenture.

     Section 910. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original and all of which together shall constitute but one and the same agreement.

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     IN WITNESS WHEREOF, the parties hereto have executed this Agreement, all as of the day and year first above mentioned.

	NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY
ATTEST:
	By:
Gregory Ritz		Teri Dunlop
Assistant Secretary		Director of Lending Services
	CONVERTED ORGANICS OF WOODBRIDGE, LLC
ATTEST:
	By:
Thomas Buchanan		Edward Gildea
Chief Financial Officer		Chief Executive Officer

[SIGNATURE PAGE OF LOAN AGREEMENT]

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EXHIBIT A

Project Facilities

75 Crows Mill Road, Woodbridge Township in Middlesex County, New Jersey

A-1

EXHIBIT B

FORM OF BORROWER COMPLETION CERTIFICATE

To:	New Jersey Economic Development Authority
	36 West State Street
	P.O. Box 999
	Trenton, New Jersey 08625
	The Bank of New York
	385 Rifle Camp Road
	West Paterson, New Jersey 07424
From:	Authorized Representative of the Borrower
Subject:	NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY
	SOLID WASTE FACILITIES REVENUE BONDS
	(CONVERTED ORGANICS OF WOODBRIDGE, LLC – 2007 PROJECT) SERIES A

     The undersigned hereby certifies in connection with the Project (as defined in the Indenture hereinafter defined), financed with the proceeds of the above-referenced Bonds issued by the New Jersey Economic Development Authority (the “Authority”) pursuant to the Trust Indenture dated as of February 1, 2007 (“Indenture”) between the Authority and The Bank of New York, as trustee (“Trustee”), the proceeds of which have been loaned to Converted Organics of Woodbridge, LLC (the “Borrower”) pursuant to the Loan Agreement between the Borrower and the Authority dated as of February 1, 2007 (the “Agreement’) (words capitalized herein have the meaning ascribed to them in the Agreement):

     1. The Project was substantially completed as of                                         ,                      (“Completion Date”).

     2. The Project has been completed in such manner as to conform with all applicable zoning, planning, building, environmental and other similar governmental regulations and permits. All such permits and any other permissions required to be issued or given by governmental authorities for the occupancy and use of the Project have been obtained. Without limited the foregoing, a copy of the certificate of occupancy for the occupancy and use of the Project, and the Class C Recycling Permit necessary for the operation of the Project are attached hereto.

     3. The equipment necessary for the Project has been installed to the Borrower’s satisfaction, and such equipment is suitable and sufficient for the efficient operation of the Project. The Project is fully operational at its initial design capacity of 250 tons of organic food waste per day, and the Borrower may immediately commence operations of its solid waste recovery facility as described in the Private Placement Memorandum dated February 13, 2007.

B-1

     4. All costs of the Project have been paid in full, except for those not yet due and payable or being contested, which are described below and for which money for payment thereof is being held and should be retained in the 2007 Project Fund.

          (a) Costs of the Project not yet due and payable:

Description Amount

          (b) Payments being contested:

Description Amount

     4. No Event of Default has occurred and is continuing under the Agreement.

     5. The amount, if any, in the Equity Account of the 2007 Project Fund in excess of the total set forth in 4(a) and (b) above shall be transferred at the earliest possible time by the Trustee to the Borrower pursuant to the terms of the Indenture.

     This certificate is given without prejudice to any rights against third parties which exist at the date hereof or which may subsequently come into being.

CONVERTED ORGANICS OF WOODBRIDGE, LLC
By:
	Authorized Representative

Date:                                                             

- 2 -

EXHIBIT C

REQUISITION FORM

TO: The Bank of New York
385 Rifle Camp Road
West Paterson, New Jersey

REQUISITION NO.                     

     The undersigned, an Authorized Representative of Converted Organics of Woodbridge, LLC, pursuant to the Loan Agreement by and between Converted Organics of Woodbridge, LLC (the “Borrower”) and the New Jersey Economic Development Authority, dated as of February 1, 2007 (the “Agreement”) makes the following requisition for payment from the Project Fund established pursuant to the Agreement entered into with regard to the Project. Terms not defined herein shall have the meanings assigned to such terms on the Agreement.

Payment to:
Amount:                                              $
Hold back as to Amount (if any):
Total Amount Payable:
From Which Account:
Reason for Payment:

     Such amount is based on an obligation properly incurred pursuant to the provisions of the Agreement, is a Proper Charge against said Project Fund, is unpaid or unreimbursed from the Project Fund and has not been the basis of any previous withdrawal. The amount requested, to the extent it represents work performed or supervised by officers or employees of the Borrower, does not exceed the actual cost to the Borrower of any cost or expense incurred by reason of work performed or supervised by officers or employees of the Borrower or any of its affiliates. No Event of Default has occurred and is continuing under any provision of the Agreement.

     I further certify that no written notice of any lien, right to lien, attachment upon or claim, affecting the right to receive payment of, any of the monies payable under this requisition has been received, or if any notice of any such lien, attachment or claim has been received, such lien, attachment or claim has been released or discharged or will be released or discharged upon payment of this requisition.

     IN WITNESS WHEREOF, I have hereunto set my hand this ___ day of                     , 200___.

CONVERTED ORGANICS OF WOODBRIDGE, LLC
By:
	Authorized Representative of the Borrower

C-1

EXHIBIT D

Intentionally Omitted

D-1

EXHIBIT E

Every Construction Contract must require that:

          1. Ten percent of each disbursement for the construction of the project will be retained by the Project Owner/Applicant, Agent or Trustee until the Authority’s Affirmative Action Officer gives written notice that the amount may be released.

          2. The Contractor, where applicable, will not discriminate against any employee or applicant for employment because of age, race, creed, color, national origin, ancestry, marital status, affectional or sexual orientation or sex. Except with respect to affectional or sexual orientation, the contractor will take affirmative action to ensure that such applicants are recruited and employed, and that employees are treated during employment, without regard to their age, race, creed, color, national origin, ancestry, marital status, affectional or sexual orientation or sex. Such action shall include, but not be limited to the following: employment, upgrading, demotion, or transfer; recruitment or recruitment advertising; layoff or termination; rates of pay or other forms of compensation; and selection for training, including apprenticeship. The contractor agrees to post in conspicuous places, available to employees and applicants for employment, notices to be provided by the AA Officer setting forth provisions of this nondiscrimination clause;

          3. The contractor, where applicable will, in all solicitations or advertisements for employees placed by or on behalf of the contractor, state that all qualified applicants will receive consideration for employment without regard to age, race, creed, color, national origin, ancestry, marital status, affectional or sexual orientation or sex;

          4. The contractor or subcontractor, where applicable, will send to each labor union or representative or workers with which it has a collective bargaining agreement or other contract or understanding, a notice, to be provided by the agency contracting officer, advising the labor union or workers’ representative of the contractor’s commitments under this act and shall post copies of the notice in conspicuous places available to employees and applicants for employment;

          5. The contractor or subcontractor agrees to make good faith efforts to employ minority and women workers consistent with applicable county employment goals established in accordance with N.J.A.C. 17:27-7.3.

          6. The contractor awarded a construction contract by the Authority or the Project Owner/Applicant must submit an Initial Project Workforce Report, EDA Form AA201, within three (3) business days of signing.

          7. The Contractor must submit Weekly Certified Payrolls to the Authority on a weekly basis.

          8. The Contractor must submit a Monthly Project Workforce Report, EDA Form AA202, within seven (7) business days of the end of each month for which the project is underway.

E-1

          9. The contractor or subcontractor agrees to inform in writing its appropriate recruitment agencies including, but not limited to, employment agencies, placement bureaus, colleges, universities, labor unions, that it does not discriminate on the basis of age, creed, color, national origin, ancestry, marital status, affectional or sexual orientation or sex, and that it will discontinue the use of any recruitment agency which engages in direct or indirect discriminatory practices.

          10. The contractor or subcontractor agrees to revise any of its testing procedures, if necessary, to assure that all personnel testing conforms with the principles of job-related testing, as established by the statutes and court decisions of the State of New Jersey and as established by applicable Federal law and applicable Federal court decisions.

          11. The Contractor must submit an Affirmative Action Certificate to the Authority as required by the application for financial assistance.

          12. The Addendum to Construction Contract, which is provided by the Authority, with its application for financial assistance must be part of all construction contracts and must be signed by the Contractor.

          13. The Contractor shall comply with any applicable rules promulgated by the Treasurer pursuant to N.J.S.A. 10:5-31 et.seq., N.J.A.C. 17: 27 and P.L.1975, c.127 as amended and supplemented from time to time.

          14. The Contractor shall comply with any regulations promulgated by the New Jersey Department of Labor pursuant to P.L. 1963, c. 150 as amended and supplemented from time to time requiring the payment of prevailing wages.

          15. The Contractor shall ascertain from the New Jersey Department of Labor the prevailing wage rate in the locality in which the Project is located for each craft or trade needed to complete the Project.

E-2

EXHIBIT F

NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY

AFFIRMATIVE ACTION CERTIFICATE

Project Owner/	NJEDA
Applicant Name	Project Number
Project Location:

NOTE: Upon completion, this certificate must be mailed to: Affirmative Action Officer, New Jersey Economic Development Authority, Gateway One, Suite 2403, Newark, New Jersey 07102. If there are any questions, contact the Affirmative Action Officer at 201-648-4130.

CERTIFICATE SUBMITTED BY (Check One)

o   General Contractor	o   Engineer
o   Subcontractor	o   Architect
o   Construction Manager	o   Professional Planner

I/We, the undersigned engaged in the construction of the above named project certify that:

1. The full name and business address of the undersigned is:

NAME:
STREET:
P.O. BOX	CN
CITY	COUNTY
STATE	ZIP CODE
TELEPHONE NUMBER (including area code)
AFFIRMATIVE ACTION CONTACT PERSON

F-1

2. Has the aforementioned party been denied a business-related license or had it suspended or revoked by any administrative, governmental or regulatory agency?

o Yes                    o No

3. Is the aforementioned debarred, suspended or disqualified from contracting with any federal, state or municipal agency?

o Yes                    o No

4. I/We are fully familiar with the provisions of the Prevailing Wage Regulations of the New Jersey Economic Development Authority, N.J.A.C. 19:30-4.1, and the applicable prevailing wage rates established by the New Jersey Commissioner of Labor, and the sanctions for failure to pay the prevailing wage provided in N.J.S.A. 34:11-56.35 — 34:11-56.40.

o Yes                    o No

5. I/We have received a copy of the Affirmative Action Regulations of the New Jersey Economic Development Authority, revised August 8, 1990. I/We have agreed as part of the construction contract to comply with the provisions of the Affirmative Action Regulations, to meet the minority employment goals, and to submit to the Authority weekly payroll reports showing the name, race, sex, craft or trade, gender, Social Security Number and all deductions made from wages earned. I/We will also provide the Monthly Project Manning Report within seven (7) days of the end of each month.

o Yes                    o No

6. I/We have agreed as part of the contract to pay to workers employed in the construction of the project wages at a rate not less than the prevailing wage rate established by the Commissioner of Labor for the Locality in which the project is located.

o Yes                    o No

7. I/We require each subcontractor as part of the contract to agree to pay to workers employed in the construction of the project at a rate not less than the prevailing wage rate as determined by the Commissioner of Labor and to comply with the Authority’s Affirmative Action Regulations.

o Yes                    o No

8. I/We are aware that I/we will be required to provide copies of weekly payroll records and minority hiring reports for all workers employed in the construction of the project including workers employed by subcontractors. Also, the Monthly Project Manning Reports will be submitted within seven (7) days of the end of each month.

o Yes                    o No

F-2

9. I/We require each of my/our subcontractors and lower-tier subcontractors to complete and execute a Subcontractor’s Certificate before entering into any contracts with the subcontractor.

o Yes                    o No

10. I/We agree in consideration of any amount paid by the Project/Owner under the construction contract and in consideration of the approval of the Affirmative Action Officer of any construction advance, that the Authority in its own name or in the name of the Project/Owner may take action, in law or in equity, to enforce the provisions of the construction contract regarding compliance with the Affirmative Action Regulations.

o Yes                    o No

11. I/We will provide to the Authority, or its designated representative, complete access to all payroll records and other records necessary to purposes of determining compliance with the Authority’s Affirmative Action Regulations.

o Yes                    o No

12. I/We will keep accurate records identifying the name, address, Social Security Number, race, sex, craft or trade, number of hours worked in each craft or trade, hourly wage rate, gross earnings paid and all deductions made from wages earned to each worker employed by me/us in connection with the performance of the Construction Contract and will preserve such records for two years from the date of completion of the project.

o Yes                    o No

13. The approximate date for the start of construction is/was:

MONTH                                                                   DAY                                                                   YEAR                     < /U>                    

14. “This Contract is subject to the requirement of the Affirmative Action Regulations N.J.A.C. 19:30-3.1 of the New Jersey Economic Development Authority revised August 8, 1990. The Subcontractor agrees to make every effort to meet the applicable employment goals and to comply with all applicable provisions of the Affirmative Action Regulation N.J.A.C. 19:30-3.1, as amended and supplemented from time to time, including the submission of the employment reports to the Authority. This contract is subject to N.J.A.C. 19:30-4.1 et. seq. The construction of the work shall be paid at a rate not less than the prevailing wage rate established by the New Jersey Commissioner of Labor pursuant to N.J.S.A. 34:11-56:30. The Subcontractor shall keep accurate records showing the name, race, sex, craft or trade, and actual hourly rate of wages paid to each worker employed in connection with construction of the work and to preserve such records for two (2) years from completion of the Work.”

SIGNATURE
NAME:
	(Please Print)
TITLE:
DATE:

F-3

EXHIBIT G

NEW JERSEY ECONOMIC DEVELOPMENT AUTHORITY
COMPLETION CERTIFICATE

Project Owner/	NJEDA
Applicant Name	Project Number
Project Location

Completion Certificate to be completed by: Subcontractor, Construction Manager, General Contractor and Project Owner/Applicant and forwarded to: Affirmative Action Officer, New Jersey Economic Development Authority, Gateway One, Suite 2403, Newark, N.J. 07102.

I/We the undersigned 0 Subcontractor 0 Construction Manager 0 General Contractor, certify to the New Jersey Economic Development Authority and the Project Owner/Applicant as follows:

1.	Construction of the above project is substantially complete.
2.	All workers employed in construction of the Project have been paid at a rate not less than the Prevailing Wage rate. In making this certification I have relied on payroll records submitted by subcontractors and lower-tier contractors.
3.	We have met the minority availability required percentage goals established by the Authority’s Affirmative Action Regulations (N.J.A.C. 19:30-3.1 et seq.). We have submitted all reports and certificates required by the Authority

DATE:
	Signature of Authorized Representative for Subcontractor
	Print Name and Title
	Print or Type Company Name of Subcontractor
	Street Address or PO Box of Subcontractor
	City, State and Zip Code of Subcontractor
Date:
	Signature of Authorized Representative for (check one)
	o Construction Manager     o General Contractor
	Print Name & Title
	Print or Type Company name of (check one)
	o Construction Manager     o General Contractor

G-1

Street Address or PO Box of (check one)

o Construction Manager     o General Contractor

City, State and Zip Code of (check one)

o Construction Manager o General Contractor

I/We, the undersigned authorized representative of the Project Owner/Applicant, certify as follows:

1.	I/We have reviewed the attached Completion Certificate of the Contractor.
2.	I/We have no knowledge or information which would cause me/us to believe that any facts, information or representations made herein are false or misleading.

DATE:
	Signature of Authorized Representative for Project Owner/Applicant
	Print Name and Title
	Print or Type Company Name of Project Owner/Applicant
	Street Address or PO Box of Project Owner/Applicant
	City, State and Zip Code of Project Owner/Applicant

DO NOT WRITE BELOW THIS LINE — FOR NJEDA USE ONLY

******************************************************************************

DATE INFO RECEIVED		REQUEST OUTSTANDING		RELEASE AUTHORIZED
Certificate	CPR’s	Certificate	CPR’s	By	Date

Please Note: Outstanding information requested on                                          has not been received

Special Considerations:

G-2

SCHEDULE A

CERTAIN EXCEPTIONS, AND
SECTION 722 MANAGEMENT AGREEMENTS

I.	Exceptions to Section 202(d), (f) & (g)
	None
II.	Existing Liens
	See Title Commitment
III.	Section 722 Management Agreements
	None

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement of Converted Organics Inc. on Form S-8 (No. 333-151505), of our report dated March 27, 2009, relating to the consolidated financial statements of Converted Organics Inc. appearing in the Annual Report on Form 10-K for the years ended December 31, 2008 and 2007.

We also consent to the reference to us under the heading “Experts” in such Registration Statement.

/s/ CCR LLP
Glastonbury, Connecticut
March 27, 2009

49

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934

I, Edward J. Gildea, certify that:

1.	I have reviewed this Form 10-K of Converted Organics Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 27, 2009

/s/ Edward J. Gildea

Edward J. Gildea

President and Chief Executive Officer

50

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934

I, David R. Allen, certify that:

1.	I have reviewed this Form 10-K of Converted Organics Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 27, 2009

/s/ David R. Allen

David R. Allen

Chief Financial Officer

51

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND 18 U.S.C. SECTION 1350

In connection with the Annual Report of Converted Organics Inc. (the “Company”) on Form 10K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Edward J. Gildea, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

     (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: March 27, 2009

/s/ Edward J. Gildea

Edward J. Gildea

President and Chief Executive Officer

This certification is made solely for the purpose of 18 U.S.C. Section 1350, and not for any other purpose. A signed original of this written statement required by Section 906 has been provided to Converted Organics Inc. and will be retained by Converted Organics Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

52

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND 18 U.S.C. SECTION 1350

In connection with the Annual Report of Converted Organics Inc. (the “Company”) on Form 10K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David R. Allen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

     (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: March 27, 2009

/s/ David R. Allen

David R. Allen

Chief Financial Officer

This certification is made solely for the purpose of 18 U.S.C. Section 1350, and not for any other purpose. A signed original of this written statement required by Section 906 has been provided to Converted Organics Inc. and will be retained by Converted Organics Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

53