SECURITY AGREEMENT
 
Protea Biosciences, Inc., 955 Hartman Run Road, Suite 210, Morgantown, West
Virginia 26507, herein called “Debtor,” and West Virginia Economic Development
Authority, herein called “Secured Party,” agree as follows:
 
1.           Debtor hereby grants to Secured Party a first lien security
interest in all equipment, machinery and fixtures of Debtor described in Exhibit
A hereto, and all replacements, additions and improvements thereto and proceeds
thereof.
 
2.           The security interest created by this Security Agreement shall
become a first lien security interest position, shared on a parity, pursuant to
that certain Intercreditor Agreement of even date herewith between Secured Party
and the West Virginia Infrastructure and Jobs Development Council, with the
security interest therein in favor of West Virginia Infrastructure and Jobs
Development Council to secure West Virginia Infrastructure and Jobs Development
Council in the repayment of a loan to Debtor in the original principal amount of
$242,630.00.
 
3.           Debtor warrants and agrees that:
 
a.           Debtor shall pay Secured Party the sum of $242,631.00 evidenced by
that certain Promissory Note of even date herewith and referred to in that
certain Loan Agreement of even date herewith between the parties hereto,
together with the interest and other obligations described in said Promissory
Note and Loan Agreement. This Security Agreement shall, in addition to securing
said sums due to Secured Party, secure all future advances made by Secured
Party, to, or for the account of Debtor, including advances for loans, repairs
to or maintenance of the collateral, and all reasonable costs and expenses
incurred in the collection of any such indebtedness.
 
b.           The collateral covered hereby will be used primarily in Debtor’s
business located at the address mentioned above, unless Secured Party consents
in writing to another use, and said collateral will not be misused or abused,
wasted or allowed to deteriorate, except for the ordinary wear and tear from its
intended primary use.
 
2549013.2
Security Agreement
 
 

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c.           Until this Security Agreement is terminated, the collateral will be
insured against fire, theft, vandalism, malicious mischief, and other hazards in
an amount and with policy or policies of insurance acceptable to Secured Party.
Such casualty insurance policy or policies shall contain a “New York Standard
Mortgage Clause,” or its equivalent. Further, until this Security Agreement is
terminated, Debtor will maintain liability insurance in amounts and coverages
satisfactory to Secured Party and, if Debtor’s county is designated as a flood
prone area and the FIA map shows that Debtor’s property is located within a
special flood hazard area, Debtor will purchase Federal Flood Insurance in
amounts and coverages satisfactory to Secured Party. All aforesaid policies
shall be payable to Secured Party, West Virginia Infrastructure and Jobs
Development Council and Debtor, as their interest appear, and with the policy or
policies, or copies thereof, deposited with Secured Party, and such policy or
policies shall provide for not less than thirty (30) days written notice to
Secured Party of the cancellation of such policy or policies.
 
d.           The collateral will not be sold, transferred or disposed of or be
subjected to any unpaid charges, including taxes, or to any subsequent interest
of a third person created or suffered by Debtor voluntarily or involuntarily,
unless Secured Party consents in advance in writing to such charge, transfer,
disposition or subsequent interest.
 
e.           Debtor hereby authorizes the Secured Party to file and, if
determined by Secured Party to be necessary or convenient, Debtor will sign and
execute alone or with Secured Party any Financing Statements, fixture filings,
or other documents and Debtor agrees to procure any documents and pay all costs
necessary to protect the security interests under this Security Agreement
against the rights or interests of third parties.
 
f.            Debtor will reimburse Secured Party for any action to remedy a
default which Secured Party elects pursuant to the terms hereof or under said
Loan Agreement.
 
4.           Until default hereunder, Debtor shall be entitled to the possession
of the collateral and to use and enjoy the same.
 
2549013.2
Security Agreement
 
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5.           Debtor shall be in default hereunder upon an Event of Default as
set forth in said Loan Agreement or failure to pay any amount payable hereunder
or under said Promissory Note within the time provided in said Promissory Note
or upon failure to observe or perform any of Debtor’s other agreements contained
herein.
 
6.           Upon Debtor’s default, Secured Party may exercise its rights of
enforcement under the Uniform Commercial Code in force in West Virginia, at the
date of this Security Agreement and, in conjunction with, in addition to or in
substitution for those rights, at the discretion of Secured Party, may enter
upon Debtor’s premises to take possession of, assemble, and collect the
collateral or render it unusable, and may require Debtor to assemble the
collateral and make it available at a place designated by Secured Party which is
mutually convenient to allow Secured Party to take possession of or dispose of
the collateral. Secured Party may waive any default or remedy any default in any
reasonable manner without waiving the default remedy and without waiving any
other prior or subsequent defaults. In the event of default by Debtor in his
obligations to Secured Party and the repossession of the collateral by Secured
Party, such Secured Party may sell and transfer the entire interest in and full
and complete title to the collateral.
 
7.           Debtor warrants that it has good title to the collateral described
herein; that the same is free and clear from all liens and encumbrances other
than the aforesaid security interest in favor of Secured Party and the West
Virginia Infrastructure and Jobs Development Council; and that Debtor has the
right to convey the same to Secured Party as collateral.
 
8.           All the collateral described herein is located in Monongalia
County, West Virginia, and will remain in said County until said Promissory Note
is paid in full.
 
9.           The only office of the Debtor is at 955 Hartman Run Road, Suite
210, Morgantown, West Virginia 26507.
 
2549013.2
Security Agreement
 
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Dated this 3rd day of August, 2009.

 
PROTEA BIOSCIENCES, INC.
       
By:
/s/ Stephen Turner
   
Its:
CEO
         
WEST VIRGINIA ECONOMIC
 
DEVELOPMENT AUTHORITY
     
By:
/s/ David G. Warner
   
Its:
Executive Director

 
2549013.2
Security Agreement
 
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EXHIBIT A
 
LIST OF EQUIPMENT, MACHINERY AND FIXTURES

 
QTRAP 5500 Mass Spectrometer, Model No. QTRAP 5500, SN: AU11220904 (Vendor:
Applied Biosystems)and Ultrasonic Welder Model No. 2000XDT, SN: XHF09024862
(Vendor: Branson Ultrasonics)
 
2549013.2
Security Agreement
 
 

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