COMMERCIAL
SECURITY AGREEMENT

     

    
      
        	
                Principal

                $3,500,000.00

              	
                Loan
      Date

                04-20-2007

              	
                Maturity

                04-30-2008

              	
                Loan
      No

                70290

              	
                Call/Coll

              	
                Account

                0000128524

              	
                Officer

                322

              	
                Initials

              
	
                References
      in the shaded area are for Lender’s use only and do not limit the
      applicability of this document to any particular loan or
      item.  Any item above containing “* * *” has been omitted due to
      text length limitations.

              


      

    

     

    
      
        
          
            	
                    Borrower:

                  	
                    ART’S-WAY
      MANUFACTURING CO., INC. (TIN:  42-0920725)

                    5556
      HWY 9 WEST, PO BOX 288

                    ARMSTRONG,
      IA  50514-0288

                  	 	
                    Lender:

                  	
                    WEST
      BANK

                    MAIN
      BANK

                    1601
      22ND STREET

                    WEST
      DES MOINES, IA 50266

                    (515)
      222-2300

                  
	
                    Grantor:

                  	
                    ART’S-WAY
      SCIENTIFIC INC (TIN: 20-5432742)

                    HWY
      9 WEST, PO BOX 288

                    ARMSTRONG,
      IA  50514-0288

                  	 	 
      	 
      
	 	 	 	 	 


          

        

      

    

     

    THIS
COMMERCIAL SECURITY AGREEMENT dated April 20, 2007, is made and executed among
ART’S-WAY SCIENTIFIC INC (“Grantor”); ART’S-WAY MANUFACTURING CO., INC.
(“Borrower”); and WEST BANK (“Lender).

    


    GRANT
OF SECURITY INTEREST.  For valuable consideration, Grantor grants to
Lender a security interest in the Collateral to secure the Indebtedness and
agrees that Lender shall have the rights stated in this Agreement with respect
to the Collateral, in addition to all other rights which Lender may have by
law.

    


    COLLATERAL
DESCRIPTION.  The word “Collateral” as used in this Agreement
means the following described property, whether now owned or hereafter acquired,
whether now existing or hereafter arising, and wherever located, in which
Grantor is giving to Lender a security interest for the payment of the
Indebtedness and performance of all other obligations under the Note and this
Agreement:

    


    All
inventory, equipment, accounts (including but not limited to all
health-care-insurance receivables), chattel paper, instruments (including but
not limited to all promissory notes), letter-of-credit rights, letters of
credit, documents, deposit accounts, investment property, money, other rights to
payment and performance, and general intangibles (including but not limited to
all software and all payment intangibles); all oil, gas and other minerals
before extraction; all oil, gas, other minerals and accounts constituting
as-extracted collateral; all fixtures; all timber to be cut; all attachments,
accessions, accessories, fittings, increases, tools, parts, repairs, supplies,
and commingled goods relating to the foregoing property, and all additions,
replacements of and substitutions for all or any part of the foregoing property;
all insurance refunds relating to the foregoing property; all good will relating
to the foregoing property; all records and data and embedded software relating
to the foregoing property, and all equipment, inventory and software to utilize,
create, maintain and process any such records and data on electronic media; and
all supporting obligations relating to the foregoing property; all whether now
existing or hereafter arising, whether now owned or hereafter acquired or
whether now or hereafter subject to any rights in the foregoing property; and
all products and proceeds (including but not limited to all insurance payments)
of or relating to the foregoing property.

    


    In
addition, the word “Collateral” also includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:

    


    (A)  All
accessions, attachments, accessories, tools, parts, supplies, replacements of
and additions to any of the collateral described herein, whether added now or
later.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    
      	
               

              Loan
      No:  70290

            	
              COMMERCIAL
      SECURITY AGREEMENT

              (Continued)

            	
               

              Page
      2

            


    

    


    (B)  All
products and produce of any of the property described in this Collateral
section.

    


    (C)  All
accounts, general intangibles, instruments, rents, monies, payments, and all
other rights, arising out of a sale, lease, consignment or other disposition of
any of the property described in this Collateral section.

    


    (D)  All
proceeds (including insurance proceeds) from the sale, destruction, loss, or
other disposition of any of the property described in this Collateral section,
and sums due from a third party who has damaged or destroyed the Collateral or
from that party’s insurer, whether due to judgment, settlement or other
process.

    


    (E)  All
records and data relating to any of the property described in this Collateral
section, whether in the form of a writing, photograph, microfilm, microfiche, or
electronic media, together with all of Grantor’s right, title, and interest in
and to all computer software required to utilize, create, maintain, and process
any such records or data on electronic media.

    


    FUTURE ADVANCES.  In
addition to the Note, this Agreement secures all future advances made by Lender
to Borrower regardless of whether the advances are made a) pursuant to a
commitment or b) for the same purposes.

    


    BORROWER’S WAIVERS AND
RESPONSIBLITIES.  Except as otherwise required under this
Agreement or by applicable law, (A) Borrower agrees that Lender need not tell
Borrower about any action or inaction Lender takes in connection with this
Agreement; (B) Borrower assumes the responsibility for being and keeping
informed about the Collateral; and (C) Borrower waives any defenses that may
arise because of any action or inaction of Lender, including without limitation
any failure of Lender to realize upon the Collateral or any delay by Lender in
realizing upon the Collateral; and Borrower agrees to remain liable under the
Note no matter what action Lender takes or fails to take under this
Agreement.

    


    GRANTOR’S REPRESENTATIONS AND
WARRANTIES.  Grantor warrants that:  (A) this
Agreement is executed at Borrower’s request and not at the request of Lender;
(B) Grantor has the full right, power and authority to enter into this Agreement
and to pledge the Collateral to Lender; (C) Grantor has established adequate
means of obtaining from Borrower on a continuing basis information about
Borrower’s financial condition; and (D) Lender has made no representation to
Grantor about Borrower or Borrower’s creditworthiness.

    


    GRANTOR’S
WAIVERS.  Grantor waives all requirements of presentment,
protest, demand, and notice of dishonor or non-payment to Borrower or Grantor,
or any other party to the Indebtedness or the Collateral.  Lender may
do any of the following with respect to any obligation of any Borrower, without
first obtaining the consent of Grantor:  (A) grant any extension of
time for any payment, (B) grant any renewal, (C) permit any modification of
payment terms or other terms, or (D) exchange or release any Collateral or other
security.  No such act or failure to act shall affect Lender’s rights
against Grantor or the Collateral.

    


    RIGHT OF SETOFF.  To
the extent permitted by applicable law, Lender reserves a right of setoff in all
Grantor’s accounts with Lender (whether checking, savings, or some other
account).  This includes all accounts Grantor holds jointly with
someone else and all accounts Grantor may open in the
future.  However, this does not include any IRA or Keogh accounts, or
any trust accounts for which setoff would be prohibited by
law.  Grantor authorizes Lender, to the extent permitted by applicable
law, to charge or setoff all sums owing on the Indebtedness against any and all
such accounts, and, at Lender’s option, to administratively freeze all such
accounts to allow Lender to protect Lender’s charge and setoff rights provided
in this paragraph.

    


    GRANTOR’S REPRESENTATIONS AND
WARRANTIES WITH RESPECT TO THE COLLATERAL.  With respect to the
Collateral, Grantor represents and promises to Lender that:

    


    Perfection of Security
Interest.  Grantor agrees to take whatever actions are
requested by Lender to perfect and continue Lender’s security interest in the
Collateral.  Upon request of Lender, Grantor will deliver to Lender
any and all of the documents evidencing or constituting the Collateral, and
Grantor will note Lender’s interest upon any and all chattel paper and
instruments if not delivered to Lender for possession by
Lender.  This is a
continuing Security Agreement and will continue in effect even though all or any
part of the Indebtedness is paid in full and even though for a period of time
Borrower may not be indebted to Lender.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    
      	
               

              Loan
      No:  70290

            	
              COMMERCIAL
      SECURITY AGREEMENT

              (Continued)

            	
               

              Page
      3

            


    

    


    Notices to
Lender.  Grantor will promptly notify Lender in writing at
Lender’s address shown above (or such other addresses as Lender may designate
from time is time) prior to any (1) change in Grantor’s name; (2) change in
Grantor’s assumed business name(s); (3) change in the management of the
Corporation Grantor; (4) change in the authorized signer(s); (5) change in
Grantor’s principal office address; (6) change in Grantor’s state of
organization; (7) conversion of Grantor to a new or different type of business
entity; or (8) change in any other aspect of Grantor that directly or indirectly
relates to any agreements between Grantor and Lender.  No change in
Grantor’s name or state of organization will take effect until after Lender has
received notice.

     

    No Violation.  The
execution and delivery of this Agreement will not violate any law or agreement
governing Grantor or to which Grantor is a party, and its certificate or
articles of incorporation and bylaws do not prohibit any term or condition of
this Agreement.

     

    Enforceability of
Collateral.  To the extent the Collateral consists of accounts,
chattel paper, or general intangibles, as defined by the Uniform Commercial
Code, the Collateral is enforceable in accordance with its terms, is genuine,
and fully complies with all applicable laws and regulations concerning form,
content and manner of preparation and execution, and all persons appearing to be
obligated on the Collateral have authority and capacity to contract and are in
fact obligated as they appear to be on the Collateral.  At the time
any account becomes subject to a security interest in favor of Lender, the
account shall be a good and valid account representing an undisputed, bona fide
indebtedness incurred by the account debtor, for merchandise held subject to
delivery instructions or previously shipped or delivered pursuant to a contract
of sale, or for services previously performed by Grantor with or for the account
debtor.  So long as this Agreement remains in effect, Grantor shall
not, without Lender’s poor written consent, compromise, settle, adjust, or
extend payment under or with regard to any such Accounts.  There shall
be no setoffs or counterclaims against any of the Collateral, and no agreement
shall have been made under which any deductions or discounts may be claimed
concerning the Collateral except those disclosed to Lender in
writing.

     

    Location of the
Collateral.  Except in the ordinary course of Grantor’s
business, Grantor agrees to keep the Collateral (or to the extent the Collateral
consists of intangible property such as accounts or general intangibles, the
records concerning the Collateral) at Grantor’s address shown above or at such
other locations as are acceptable to Lender.  Upon Lender’s request,
Grantor will deliver to Lender in form satisfactory to Lender a schedule of real
properties and Collateral locations relating to Grantor’s operations, including
without limitation the following:  (1) all real property Grantor owns
or is purchasing; (2) all real property Grantor is renting or leasing; (3) all
storage facilities Grantor owns, rents, leases, or uses; and (4) all other
properties where Collateral is or may be located.

     

    Removal of the
Collateral.  Except in the ordinary course of Grantor’s
business, including the sales of inventory, Grantor shall not remove the
Collateral from its existing location without Lender’s prior written
consent.  To the extent that the Collateral consists of vehicles, or
other titled property, Grantor shall not take or permit any action which would
require application for certificates of title for the vehicles outside the State
of Iowa, without Lender’s prior written consent.  Grantor shall,
whenever requested, advise Lender of the exact location of the
Collateral.

     

    Transactions Involving
Collateral.  Except for inventory sold or accounts collected in
the ordinary course of Grantor’s business, or as otherwise provided for in this
Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or
dispose of the Collateral.  While Grantor is not in default under this
Agreement, Grantor may sell inventory, but only in the ordinary course of its
business and only to buyers who qualify as a buyer in the ordinary course of
business.  A sale in the ordinary course of Grantor’s business does
not include a transfer in partial or total satisfaction of a debt or any bulk
sale.  Grantor shall not pledge, mortgage, encumber or otherwise
permit the Collateral to be subject to any lien, security interest, encumbrance,
or charge, other than the security interest provided for in this Agreement,
without the prior written consent of Lender.  This includes security
interests even if junior in right to the security interests granted under this
Agreement.  Unless waived by Lender, all proceeds from any disposition
of the Collateral (for whatever reason) shall be held in trust for Lender and
shall not be commingled with any other funds; provided however, this requirement
shall not constitute consent by Lender to any sale or other
disposition.  Upon receipt, Grantor shall immediately deliver any such
proceeds to Lender.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    
      	
               

              Loan
      No:  70290

            	
              COMMERCIAL
      SECURITY AGREEMENT

              (Continued)

            	
               

              Page
      4

            


    

     

    Title.  Grantor
represents and warrants to Lender that Grantor holds good and marketable title
to the Collateral, free and clear of all liens and encumbrances except for the
lien of this Agreement.  The liens granted hereby are not the type of
lien referred to in Chapter 575 of the Iowa Code Supplement, as now enacted or
hereafter modified, amended or replaced.  Grantor, for itself and all
persons claiming by, through or under Grantor, agrees that it claims no lien or
right to a lien of the type contemplated by Chapter 575 or any other chapter of
the Code of Iowa and further waives all notices and rights pursuant to said law
with respect to the liens hereby granted, and represents and warrants that it is
the sole party entitled to do so and agrees to indemnify, defend, and hold
harmless Lender from any loss, damage, and costs, including reasonable attorney
fees, threatened or suffered by Lender arising either directly or indirectly as
a result of any claim of the applicability of said law to the liens hereby
granted.  No financing statement covering any of the Collateral is on
file in any public office other than those which reflect the security interest
created by this Agreement or to which Lender has specifically
consented.  Grantor shall defend Lender’s rights in the Collateral
against the claims and demands of all other persons.

     

    Repairs and
Maintenance.  Grantor agrees to keep and maintain, and to cause
others to keep and maintain, the Collateral in good order, repair and condition
at all times while this Agreement remains in effect.  Grantor further
agrees to pay when due all claims for work done on, or services rendered or
material furnished in connection with the Collateral so that no lien or
encumbrance may ever attach to or be filed against the Collateral.

     

    Inspection of
Collateral.  Lender and Lender’s designated representatives and
agents shall have the right at all reasonable times to examine and inspect the
Collateral wherever located.

     

    Taxes, Assessments and
Liens.  Grantor will pay when due all taxes, assessments and
liens upon the Collateral, its use or operation, upon this Agreement, upon any
promissory note or notes evidencing the Indebtedness, or upon any of the other
Related Documents.  Grantor may withhold any such payment or may elect
to contest any lien if Grantor is in good faith conducting an appropriate
proceeding to contest the obligation to pay and so long as Lender’s interest in
the Collateral is not jeopardized in Lender’s sole opinion.  If the
Collateral is subjected to a lien which is not discharged within fifteen (15)
days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond
or other security satisfactory to Lender in an amount adequate to provide for
the discharge of the lien plus any interest, costs, attorneys’ fees or other
charges that could accrue as a result of foreclosure or sale of the
Collateral.  In any contest Grantor shall defend itself and Lender and
shall satisfy any final adverse judgment before enforcement against the
Collateral.  Grantor shall name Lender as an additional obligee under
any surety bond furnished in the contest proceedings.  Grantor further
agrees to furnish Lender with evidence that such taxes, assessments, and
governmental and other charges have been paid in full and in a timely
manner.  Grantor may withhold any such payment or may elect to contest
any lien if Grantor is in good faith conducting an appropriate proceeding to
contest the obligation to pay and so long as Lender’s interest in the Collateral
is not jeopardized.

     

    Compliance with Governmental
Requirements.  Grantor shall comply promptly with all laws,
ordinances, rules and regulations of all governmental authorities, now or
hereafter in effect, applicable to the ownership, production, disposition, or
use of the Collateral, including all laws or regulations relating to the undue
erosion of highly-erodible land or relating to the conversion of wetlands for
the production of an agricultural product or commodity.  Grantor may
contest in good faith any such law, ordinance or regulation and withhold
compliance during any proceeding, including appropriate appeals, so long as
Lender’s interest in the Collateral, in Lender’s opinion, is not
jeopardized.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    
      	
               

              Loan
      No:  70290

            	
              COMMERCIAL
      SECURITY AGREEMENT

              (Continued)

            	
               

              Page
      5

            


    

     

    Hazardous
Substances.  Grantor represents and warrants that the
Collateral never has been, and never will be so long as this Agreement remains a
lien on the Collateral, used in violation of any Environmental Laws or for the
generation, manufacture, storage, transportation, treatment, disposal, release
or threatened release of any Hazardous Substance.  The representations
and warranties contained herein are based on Grantor’s due diligence in
investigating the Collateral for Hazardous Substances.  Grantor hereby
(1) releases and waives any future claims against Lender for indemnity or
contribution in the event Grantor becomes liable for cleanup or other costs
under any Environmental Laws, and (2) agrees to indemnify, defend, and hold
harmless Lender against any and all claims and losses resulting from a breach of
this provision of this Agreement.  This obligation to indemnify and
defend shall survive the payment of the Indebtedness and the satisfaction of
this Agreement.

     

    Maintenance of Casualty
Insurance.  Grantor shall procure and maintain all risks
insurance, including without limitation fire, theft and liability coverage
together with such other insurance as Lender may require with respect to the
Collateral, in form, amounts, coverages and basis reasonably acceptable to
Lender and issued by a company or companies reasonably acceptable to
Lender.  Grantor, upon request of Lender, will deliver to Lender from
time to time the policies or certificates of insurance in form satisfactory to
Lender, including stipulations that coverages will not be cancelled or
diminished without at least thirty (30) days’ prior written notice to Lender and
not including any disclaimer of the insurer’s liability for failure to give such
a notice.  Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any way by
any act, omission or default of Grantor or any other person.  In
connection with all policies covering assets in which Lender holds or is offered
a security interest, Grantor will provide Lender with such loss payable or other
endorsements as Lender may require.  If Grantor at any time fails to
obtain or maintain any insurance as required under this Agreement, Lender may
(but shall not be obligated to) obtain such insurance as Lender deems
appropriate, including if Lender so chooses “single interest insurance,” which
will cover only Lender’s interest in the Collateral.

     

    Application of Insurance
Proceeds.  Grantor shall promptly notify Lender of any loss or
damage to the Collateral, whether or not such casualty or loss is covered by
insurance.  Lender may make proof of loss if Grantor fails to do so
within fifteen (15) days of the casualty.  All proceeds of any
insurance on the Collateral, including accrued proceeds thereon, shall be held
by Lender as part of the Collateral.  If Lender consents to repair or
replacement of the damaged or destroyed Collateral, Lender shall, upon
satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds
for the reasonable cost of repair or restoration.  If Lender does not
consent to repair or replacement of the Collateral, Lender shall retain a
sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay
the balance to Grantor.  Any proceeds which have not been disbursed
within six (6) months after their receipt and which Grantor has not committed to
the repair or restoration of the Collateral shall be used to prepay the
Indebtedness.

     

    Insurance
Reserves.  Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be created by
monthly payments from Grantor of a sum estimated by Lender to be sufficient to
produce, at least fifteen (15) days before the premium due date, amounts at
least equal to the insurance premiums to be paid.  If fifteen (15)
days before payment is due, the reserve funds are insufficient, Grantor shall
upon demand pay any deficiency to Lender.  The reserve funds shall be
held by Lender as a general deposit and shall constitute a non-interest-bearing
account which Lender may satisfy by payment of the insurance premiums required
to be paid by Grantor as they become due.  Lender does not hold the
reserve funds in trust for Grantor, and Lender is not the agent of Grantor for
payment of the insurance premiums required to be paid by Grantor.  The
responsibility for the payment of premiums shall remain Grantor’s sole
responsibility.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    
      	
               

              Loan
      No:  70290

            	
              COMMERCIAL
      SECURITY AGREEMENT

              (Continued)

            	
               

              Page
      6

            


    

    


    Insurance
Reports.  Grantor, upon request of Lender, shall furnish to
Lender reports on each existing policy of insurance showing such information as
Lender may reasonably request including the following:  (1) the name
of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the
property insured; (5) the then current value on the basis of which insurance has
been obtained and the manner of determining that value; and (6) the expiration
date of the policy.  In addition, Grantor shall upon request by Lender
(however not more often than annually) have an independent appraiser
satisfactory to Lender determine, as applicable, the cash value or replacement
cost of the Collateral.

     

    Financing
Statements.  Grantor authorizes Lender to file a UCC financing
statement, or alternatively, a copy of this Agreement to perfect Lender’s
security interest.  At Lender’s request, Grantor additionally agrees
to sign all other documents that are necessary to perfect, protect, and continue
Lender’s security interest in the Property.  Grantor will pay all
filing lees, title transfer fees, and other fees and costs involved unless
prohibited by law or unless Lender is required by law to pay such fees and
costs.  Grantor irrevocably appoints Lender to execute documents
necessary to transfer title if there is a default.  Lender may file a
copy of this Agreement as a financing statement.  If Grantor changes
Grantor’s name or address, or the name or address of any person granting a
security interest under this Agreement changes, Grantor will promptly notify the
Lender of such change.

     

    GRANTOR’S RIGHT TO POSSESSION AND TO
COLLECT ACCOUNTS.  Until default and except as otherwise
provided below with respect to accounts, Grantor may have possession of the
tangible personal property and beneficial use of all the Collateral and may use
it in any lawful manner not inconsistent with this Agreement or the Related
Documents, provided that Grantor’s right to possession and beneficial use shall
not apply to any Collateral where possession of the Collateral by Lender is
required by law to perfect Lender’s security interest in such
Collateral.  Until otherwise notified by Lender, Grantor may collect
any of the Collateral consisting of accounts.  At any time and even
though no Event of Default exists, Lender may exercise its rights to collect the
accounts and to notify account debtors to make payments directly to Lender for
application to the Indebtedness.  If Lender at any time has possession
of any Collateral, whether before or after an Event of Default, Lender shall be
deemed to have exercised reasonable care in the custody and preservation of the
Collateral if Lender takes such action for that purpose as Grantor shall request
or as Lender, in Lender’s sole discretion, shall deem appropriate under the
circumstances, but failure to honor any request by Grantor shall not of itself
be deemed to be a failure to exercise reasonable care.  Lender shall
not be required to take any steps necessary to preserve any rights in the
Collateral against price parties, nor to protect, preserve or maintain any
security interest given to secure the Indebtedness.

    


    LENDER’S
EXPENDITURES.  If any action or proceeding is commenced that
would materially affect Lender’s interest in the Collateral or if Grantor fails
to comply with any provision of this Agreement or any Related Documents,
including but not limited to Grantor’s failure to discharge or pay when due any
amounts Grantor is required to discharge or pay under this Agreement or any
Related Documents, Lender on Grantor’s behalf may (but shall not be obligated
to) take any action that Lender deems appropriate, including but not limited to
discharging or paying all taxes, liens, security interests, encumbrances and
other claims, at any time levied or placed on the Collateral and paying all
costs for insuring, maintaining and preserving the Collateral.  All
such expenditures incurred or paid by Lender for such purposes will then bear
interest at the rate charged under the Note from the date incurred or paid by
Lender to the date of repayment by Grantor.  All such expenses will
become a part of the Indebtedness and, at Lender’s option, will (A) be payable
on demand; (B) be added to the balance of the Note and be apportioned among and
be payable with any installment payments to become due during either (1) the
term of any applicable insurance policy; or (2) the remaining term of the Note;
or (C) be treated as a balloon payment which will be due and payable at the
Note’s maturity.  The Agreement also will secure payment of these
amounts.  Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon Default.

    


    DEFAULT.  Each of
the following shall constitute an Event of Default under this
Agreement:

    


    Payment
Default.  Borrower fails to make any payment when due under the
Indebtedness.

     

    Other
Defaults.  Borrower or Grantor falls to comply with or to
perform any other term, obligation, covenant or condition contained in this
Agreement or in any of the Related Documents or to comply with or to perform any
term, obligation, covenant or condition contained in any other agreement between
Lender and Borrower or Grantor.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    
      	
               

              Loan
      No:  70290

            	
              COMMERCIAL
      SECURITY AGREEMENT

              (Continued)

            	
               

              Page
      7

            


    

     

    Default in Favor of Third
Parties.  Should Borrower or any Grantor default under any
loan, extension of credit, security agreement, purchase or sales agreement, or
any other agreement, in favor of any other creditor or person that may
materially affect any of Grantor’s property or Borrower’s or any Grantor’s
ability to repay the Indebtedness or perform their respective obligations under
this Agreement or any of the Related Documents.

     

    False
Statements.  Any warranty, representation or statement made or
furnished to Lender by Borrower or Grantor or on Borrower’s or Grantor’s behalf
under this Agreement or the Related Documents is false or misleading in any
material respect, either now or at the time made or furnished or becomes false
or misleading at any time thereafter.

     

    Defective
Collateralization.  This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of collateral
document to create a valid and perfected security interest or lien) at any time
and for any reason.

     

    Insolvency.  The
dissolution or termination of Borrower’s or Grantor’s existence as a going
business, the insolvency of Borrower or Grantor, the appointment of a receiver
for any part of Borrower’s or Grantor’s property, any assignment for the benefit
of creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower or
Grantor.

     

    Creditor or Forfeiture
Proceedings.  Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self–help, repossession or any
other method, by any creditor of Borrower or Grantor or by any governmental
agency against any collateral securing the Indebtedness.  This
includes a garnishment of any of Borrower’s or Grantor’s accounts, including
deposit accounts, with Lender.  However, this Event of Default shall
not apply if there is a good faith dispute by Borrower or Grantor as to the
validity or reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Borrower or Grantor gives Lender written notice of
the creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount determined
by Lender, in its sole discretion, as being an adequate reserve or bond for the
dispute.

     

    Events Affecting
Guarantor.  Any of the preceding events occurs with respect to
any Guarantor of any of the Indebtedness or Guarantor dies or becomes
incompetent or revokes or disputes the validity of, or lability under, any
Guaranty of the Indebtedness.

     

    Adverse Change.  A
material adverse change occurs in Borrower’s or Grantor’s financial condition,
or Lender believes the prospect of payment or performance of the Indebtedness is
impaired.

     

    Insecurity. Lender in good
faith believes itself insecure.

     

    Cure Provisions.  If
any default, other than a default in payment is curable and if Grantor has not
been given a notice of a breach of the same prevision of this Agreement within
the preceding twelve (12) months, it may be cured if Grantor, after receiving
written notice from Lender demanding cure of such default:  (1) cures
the default within twenty (20) days; or (2) if the cure requires more than
twenty (20) days, immediately initiates steps which Lender deems in Lender’s
sole discretion to be sufficient to cure the default and thereafter continues
and completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.

     

    RIGHTS AND REMEDIES ON DEFAULT.
If an Evert of Default occurs under this Agreement, at any time
thereafter, Lender shall have all the rights of a secured party under the Iowa
Uniform Commercial Code.  In addition and without limitation, Lender
may exercise any one or more of the following rights and remedies:

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    
      	
               

              Loan
      No:  70290

            	
              COMMERCIAL
      SECURITY AGREEMENT

              (Continued)

            	
               

              Page
      8

            


    

     

    Accelerate Indebtedness.
Lender may declare the entire Indebtedness, including any prepayment
penalty which Borrower would be required to pay, immediately due and payable,
without notice of any kind to Borrower or Grantor.

     

    Assemble Collateral. Lender
may require Grantor to deliver to Lender all or any portion of the Collateral
and any and all certificates of title and other documents relating to the
Collateral.  Lender may require Grantor to assemble the Collateral and
make it available to Lender at a place to be designated by
Lender.  Lender also shall have full power to enter upon the property
of Grantor to take possession of and remove the Collateral.  If the
Collateral contains other goods not covered by this Agreement at the time of
repossession, Grantor agrees Lender may take such other goods, provided that
Lender makes reasonable efforts to return them to Grantor after
repossession.

     

    Sell the
Collateral.  Lender shall have full power to sell, lease,
transfer, or otherwise deal with the Collateral or proceeds thereof in Lender’s
own name or that of Grantor.  Lender may sell the Collateral at public
auction or private sale.  Unless the Collateral threatens to decline
speedily in value or is of a type customarily sold on a recognized market,
Lender will give Grantor, and other persons as required by law, reasonable
notice of the time and place of any public sale, or the time after which any
private sale or any other disposition of the Collateral is to be
made.  However, no notice need be provided to any person who, after
Event of Default occurs, enters into and authenticates an agreement waiving that
person’s right to notification of sale.  The requirements of
reasonable notice shall be met if such notice is given at least ten (10) days
before the time of the sale or disposition.  All expenses relating to
the disposition of the Collateral, including without limitation the expenses of
retaking, holding, insuring, preparing for sale and selling the Collateral,
shall become a part of the Indebtedness secured by this Agreement and shall be
payable on demand, with interest at the Note rate from date of expenditure until
repaid.

     

    Appoint
Receiver.  Lender shall have the right to have a receiver
appointed to take possession of all or any part of the Collateral, with the
power to protect and preserve the Collateral, to operate the Collateral
preceding foreclosure or sale, and to collect the Rents from the Collateral and
apply the proceeds, over and above the cost of the receivership, against the
Indebtedness.  The receiver may serve without bond if permitted by
law.  Lender’s right to the appointment of a receiver shall exist
whether or not the apparent value of the Collateral exceeds the Indebtedness by
a substantial amount.  Employment by Lender shall not disqualify a
person from serving as a receiver.

     

    Collect Revenues, Apply
Accounts.  Lender, either itself or through a receiver, may
collect the payments, rents, income, and revenues from the
Collateral.  Lender may at any time in Lender’s discretion transfer
any Collateral into Lender’s own name or that of Lender’s nominee and receive
the payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in such
order of preference as Lender may determine.  Insofar as the
Collateral consists of accounts, general intangibles, insurance policies,
instruments, chattel paper, choses in action, or similar property, Lender may
demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or
realize on the Collateral as Lender may determine, whether or not Indebtedness
or Collateral is then due.  For these purposes, Lender may, on behalf
of and in the name of Grantor, receive, open and dispose of mail addressed to
Grantor; change any address to which mail and payments are to be sent; and
endorse notes, checks, drafts, money orders, documents of title, instruments and
items pertaining to payment, shipment, or storage of any
Collateral.  To facilitate collection, Lender may notify account
debtors and obligors on any Collateral to make payments directly to
Lender.

     

    Obtain Deficiency. If Lender
chooses to sell any or all of the Collateral, Lender may obtain a judgment
against Borrower for any deficiency remaining on the Indebtedness due to Lender
after application of all amounts received from the exercise of the rights
provided in this Agreement.  Borrower shall be liable for a deficiency
even if the transaction described in this subsection is a sale of accounts or
chattel paper.

     

    Other Rights and
Remedies.  Lender shall have all the rights and remedies of a
secured creditor under the provisions of the Uniform Commercial Code, as may be
amended from time to time.  In addition, Lender shall have and may
exercise any or all other rights and remedies it may have available at law, in
equity, or otherwise.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    
      	
               

              Loan
      No:  70290

            	
              COMMERCIAL
      SECURITY AGREEMENT

              (Continued)

            	
               

              Page
      9

            


    

    


    Election of
Remedies.  Except as may be prohibited by applicable law, all
of Lender’s rights and remedies, whether evidenced by this Agreement, the
Related Documents, or by any other writing, shall be cumulative and may be
exercised singularly or concurrently.  Election by Lender to pursue
any remedy shall not exclude pursuit of any other remedy, and an election to
make expenditures or to take action to perform an obligation of Grantor under
this Agreement, after Grantor’s failure to perform, shall not affect Lender’s
right to declare a default and exercise its remedies.

     

    MISCELLANEOUS
PROVISIONS.  The following miscellaneous provisions are a part
of this Agreement:

     

    Amendments.  This
Agreement, together with any Related Documents, constitutes the entire
understanding and agreement of the parties as to the matters set forth in this
Agreement.  No alteration of or amendment to this Agreement shall be
effective unless given in writing and signed by the party or parties sought to
be charged or bound by the alteration or amendment.

     

    Attorneys’ Fees;
Expenses.  Grantor agrees to pay upon demand all of Lender’s
costs and expenses, including Lender’s attorneys’ fees and Lender’s legal
expenses, incurred in connection with the enforcement of this
Agreement.  Lender may hire or pay someone else to help enforce this
Agreement, and Grantor shall pay the costs and expenses of such
enforcement.  Costs and expenses include Lender’s attorneys’ fees and
legal expenses whether or not there is a lawsuit, including attorneys’ fees and
legal expenses for bankruptcy proceedings (including efforts to modify or vacate
any automatic stay or injunction), appeals, and any anticipated post--judgment
collection services.  Grantor also shall pay all court costs and such
additional fees as may be affected by the court.

     

    Caption
Headings.  Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or define the
provisions of this Agreement.

     

    Governing
Law.  This Agreement will be governed by federal law applicable to
Lender and, to the extent not preempted by federal law, the laws of the State of
Iowa without regard to its conflicts of law provisions.  This
Agreement has been accepted by Lender in the State of Iowa.

     

    Choice of Venue.  If
there is a lawsuit, Grantor agrees upon Lender’s request to submit to the
jurisdiction of the courts of POLK County, State of Iowa.

     

    Joint and Several
Liability.  All obligations of Borrower and Grantor under this
Agreement shall be joint and several, and all references to Grantor shall mean
each and every Grantor, and all references to Borrower shall mean each and every
Borrower.  This means that each Borrower and Grantor signing below is
responsible for all obligations in this Agreement.  Where any one or
more of the parties is a corporation, partnership, limited lability company or
similar entity, it is not necessary for Lender to inquire into the powers of any
of the officers, directors, partners, members, or other agents acting or
purporting to act on the entity’s behalf, and any obligations made or created in
reliance upon the professed exercise of such powers shall be guaranteed under
this Agreement.

     

    No Waiver by
Lender.  Lender shall not be deemed to have waived any rights
under this Agreement unless such waiver is given in writing and signed by
Lender.  No delay or omission on the part of Lender in exercising any
right shall operate as a waiver of such right or any other right.  A
waiver by Lender of a provision of this Agreement shall not prejudice or
constitute a waiver of Lender’s right otherwise to demand strict compliance with
that provision or any ether provision of this Agreement.  No prior
waiver by Lender, nor any course of dealing between Lender and Grantor, shall
constitute a waiver of any of Lender’s rights or of any of Grantor’s obligations
as to any future transactions.  Whenever the consent of Lender is
required under this Agreement, the granting of such consent by Lender in any
instance shall not constitute continuing consent to subsequent instances where
such consent is required and in all cases such consent may be granted or
withheld in the sole discretion of Lender.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    
      	
               

              Loan
      No:  70290

            	
              COMMERCIAL
      SECURITY AGREEMENT

              (Continued)

            	
               

              Page
      10

            


    

    


    Notices.  Any notice
required to be given under this Agreement shall be given in writing, and shall
be effective when actually delivered, when actually received by telefacsimile
(unless otherwise required by law), when deposited with a nationally recognized
overnight courier, or, if mailed, when deposited in the United States mail, as
first class, certified or registered mail postage prepaid, directed to the
addresses shown near the beginning of this Agreement.  Any party may
change its address for notices under this Agreement by giving formal written
notice to the other parties, specifying that the purpose of the notice is to
change the party’s address.  For notice purposes, Grantor agrees to
keep Lender informed at all times of Grantor’s current
address.  Unless otherwise provided or required by law, if there is
more than one Grantor, any notice given by Lender to any Grantor is deemed to be
notice given to all Grantors.

     

    Power of
Attorney.  Grantor hereby appoints Lender as Grantor’s
irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect, amend, or to continue the security interest granted in
this Agreement or to demand termination of filings of other secured
parties.  Lender may at any time, and without further authorization
from Grantor, file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a financing
statement.  Grantor will reimburse Lender for all expenses for the
perfection and the continuation of the perfection of Lender’s security interest
in the Collateral.

     

    Severability.  If a
court of competent jurisdiction finds any provision of this Agreement to be
illegal, invalid, or unenforceable as to any circumstance, that finding shall
not make the offending provision illegal, invalid, or unenforceable as to any
other circumstance.  If feasible, the offending provision shall be
considered modified so that it becomes legal, valid and
enforceable.  If the offending provision cannot be so modified, it
shall be considered deleted from this Agreement.  Unless otherwise
required by law, the illegality, invalidity, or unenforceability of any
provision of this Agreement shall not affect the legality, validity or
enforceability of any other provision of this Agreement.

     

    Successors and Assigns.
Subject to any limitations stated in this Agreement on transfer of
Grantor’s interest, this Agreement shall be binding upon and inure to the
benefit of the parties, their successors and assigns.  If ownership of
the Collateral becomes vested in a person other than Grantor, Lender, without
notice to Grantor, may deal with Grantor’s successors with reference to this
Agreement and the Indebtedness by way of forbearance or extension without
releasing Grantor from the obligations of this Agreement or liability under the
Indebtedness.

     

    Survival of Representations and
Warranties.  All representations, warranties, and agreements
made by Grantor in this Agreement shall survive the execution and delivery of
this Agreement, shall be continuing in nature, and shall remain in full force
and effect until such time as Borrower’s Indebtedness shall be paid in
full.

     

    Time is of the
Essence.  Time is of the essence in the performance of this
Agreement.

     

    DEFINITIONS.  The
following capitalized words and terms shall have the following meanings when
used in this Agreement.  Unless specifically stated to the contrary,
all references to dollar amounts shall mean amounts in lawful money of the
United States of America.  Words and terms used in the singular shall
include the plural, and the plural shall include the singular, as the context
may require.  Words and terms not otherwise defined in this Agreement
shall have the meanings attributed to such terms in the Uniform Commercial
Code:

     

    Agreement.  The word
“Agreement” means this Commercial Security Agreement, as this Commercial
Security Agreement may be amended or modified from time to time, together with
all exhibits and schedules attached to this Commercial Security Agreement from
time to time.

     

    Borrower.  The word
“Borrower” means ART’S-WAY MANUFACTURING CO., INC. and includes all co-signers
and co-makers signing the Note and all their successors and
assigns.

     

    Collateral.  The
word “Collateral” means all of Grantor’s right, title and interest in and to all
the Collateral as described in the Collateral Description section of this
Agreement.

     

    Default.  The
word “Default” means the Default set forth in this Agreement in the section
titled “Default”.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    
      	
               

              Loan
      No:  70290

            	
              COMMERCIAL
      SECURITY AGREEMENT

              (Continued)

            	
               

              Page
      11

            


    

     

    Environmental
Laws.  The words “Environmental Laws” mean any and all state,
federal and local statutes, regulations and ordinances relating to the
protection of human health or the environment, including without limitation the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments
and Reauthorization Act of 1986, Pub. L. No. 99-499 (“SARA”), the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other
applicable state or federal laws, rules, or regulations adopted pursuant
thereto.

     

    Event of
Default.  The words “Event of Default” mean any of the events
of default set forth in this Agreement in the default section of this
Agreement.

     

    Grantor.  The word
“Grantor” means ART’S-WAY SCIENTIFIC INC.

     

    Guarantor.  The word
“Guarantor” means any guarantor, surety, or accommodation party of any or all of
the Indebtedness.

     

    Guaranty.  The word
“Guaranty” means the guaranty from Guarantor to Lender, including without
limitation a guaranty of all or part of the Note.

     

    Hazardous
Substances.  The words “Hazardous Substances” mean materials
that, because of their quantity, concentration or physical, chemical or
infectious characteristics, may cause or pose a present or potential hazard to
human health or the environment when improperly used, treated, stored, disposed
of, generated, manufactured, transported or otherwise handled.  The
words “Hazardous Substances” are used in their very broadest sense and include
without limitation any and all hazardous or toxic substances, materials or waste
as defined by or listed under the Environmental Laws.  The term
“Hazardous Substances” also includes, without limitation, petroleum and
petroleum by-products or any fraction thereof and asbestos.

     

    Indebtedness.  The
word “Indebtedness” means the Indebtedness evidenced by the Note or Related
Documents, including all principal and interest together with all other
Indebtedness and costs and expenses for which Borrower is responsible under this
Agreement or under any of the Related Documents.  Specifically,
without limitation, Indebtedness includes the future advances set forth in the
Future Advances provision of this Agreement together with all interest
thereon.

     

    Lender.  The word
“Lender” means WEST BANK, its successors and assigns.

     

    Note. The word “Note” means
the Note executed by ART’S-WAY MANUFACTURING CO., INC. in the principal amount
of $3,500,000.00 dated April 20, 2007, together with all renewals of, extensions
of, modifications of, refinancings of, consolidations of, and substitutions for
the note or credit agreement.

     

    Property. The word “Property”
means all of Grantor’s right, title and interest in and to all the Property as
described in the “Collateral Description” section of this
Agreement.

     

    Related
Documents.  The words “Related Documents” mean all promissory
notes, credit agreements, loan agreements, environmental agreements, guaranties,
security agreements, mortgages, deeds of trust, security deeds, collateral
mortgages, and all other instruments, agreements and documents, whether now or
hereafter existing, executed in connection with the Indebtedness.

     

    BORROWER
AND GRANTOR HAVE READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL
SECURITY AGREEMENT AND AGREE TO ITS TERMS.  THIS AGREEMENT IS DATED
APRIL 20, 2007.

     

    GRANTOR
ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS COMMERCIAL SECURITY AGREEMENT
AND ALL OTHER DOCUMENTS RELATING TO THIS DEBT.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    


    
      	
               

              Loan
      No:  70290

            	
              COMMERCIAL
      SECURITY AGREEMENT

              (Continued)

            	
               

              Page
      12

            


    

     

    GRANTOR:

     

    ART’S-WAY
SCIENTIFIC INC.

    


    
      
        
          
            
              	
                      By: 

                    	
                      /s/ Carrie L. Majeski

                    	 	
                      By:

                    	
                      /s/ E.W. Muehelhausen

                    
	 
      	
                      CARRIE
      L. MAJESKI, SECRETARY of ART’S-WAY SCIENTIFIC
      INC

                    	 	 
      	
                      E.W.
      MUEHELHAUSEN, PRESIDENT of ART’S-WAY SCIENTIFIC
      INC

                    


            

          

        

      

       

      
        
          
            
              
                
                  
                    
                      
                        
                          
                            	
                                    BORROWER:

                                  
	 
      
	
                                    ART’S-WAY
      MANUFACTURING CO., INC.

                                  
	 
      
	
                                    By:

                                  	
                                    /s/ Carrie L. Majeski

                                  
	 
      	
                                    CARRIE
      L. MAJESKI, SECRETARY of ART’S-WAY MANUFACTURING
      CO.,
INC.