Document:

April 8,
2008

    

    Mr. J.
Ward McConnell, Jr., Chairman

    Ms.
Carrie Majeski, Secretary/CFO

    Arts-Way
Manufacturing Co., Inc.

    5556
Highway 9 West

    P.O. Box
288

    Armstrong,
IA 50514

    

    Re:        Commitment
Letter

    

    Dear Ward
and Carrie:

    

    We are
pleased to inform you that West Bank (“Bank”) commits to renew a $3,500,000 line
of credit to Art’s-Way Manufacturing Company, Inc. and alt affiliated entities
(“Borrower”) to provide working capital financing under the following terms and
conditions:

     

    
      
        	
                FACILITY/PURPOSE:

              	 
      	
                $3,500,000
      Revolving Line of Credit advances funding the working capital, letter of
      credit, and corporate credit card needs of Borrowers.

              
	 
      	 
      	 
      
	
                MATURITY
      DATE:

              	 
      	
                April
      30, 2009

              
	 
      	 
      	 
      
	
                INTEREST
      RATE:

              	 
      	
                The
      Bank’s Prime Interest Rate (presently 5.25%) adjusted
    daily.

              
	 
      	 
      	 
      
	
                PAYMENT
      SCHEDULE:

              	 
      	
                Monthly
      interest only payments shall be required.  All remaining unpaid
      principal and interest shall be due on the maturity date of April 30,
      2009.

              
	 
      	 
      	 
      
	
                COLLATERAL:

              	 
      	
                First
      and paramount security and mortgage interests in all assets owned by the
      Borrower and all subsidiary companies including, but not limited to cash,
      inventory, accounts, accounts receivable, equipment, and real
      estate.

              
	 
      	 
      	 
      
	
                OTHER
      TERMS AND CONDITIONS:

              	
                  

              	
                1)
      Borrowers agree to provide the Bank with the following financial
      reports:

              
	 
      	 
      	 
      
	 
      	 
      	
                a)

              	
                A
      monthly internally prepared balance sheet, income statements, accounts
      receivable aging schedules, and borrowing base
      certificates.  The borrowing bases shall Limit the advances from
      Facility #1 to 60% of accounts receivable less than 90 days plus 60% of
      finished goods inventory and 50% of raw material inventories and
      work-in-process.

              

      

    

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    
      
        
          
            	 
      	 
      	
                    b)

                  	
                    CPA-prepared
      audited financial statement at the conclusion of Borrowers’ fiscal
      year-end.

                  
	 
      	 
      	 
      
	 
      	 
      	
                    2)
      Borrowers agree to maintain a minimum debt service coverage ratio
      (measured at the conclusion of Borrower’s year-end) of 1.5
      times.

                  
	 
      	 
      	 
      
	 
      	 
      	
                    3)
      Borrowers shall maintain primary deposit
      accounts and credit card accounts at West Bank.

                  
	 
      	 
      	 
      
	 
      	 
      	
                    4)
      Borrowers agree to maintain a maximum debt/tangible net worth ratio of
      1.25 times and a minimum tangible net worth of $8,500,000 by each fiscal
      year-end.

                  

          

        

      

    

    

    We
appreciate the opportunity to provide this commitment for your
consideration.  Please sign one copy of this letter where indicated
below and return it to the Bank on or before April.  18, 2008 at which
time this commitment shall expire unless otherwise extended in writing by the
Bank.  The terms of this financing proposal are not to be shared with
anyone other than the CPA, attorney, Board, or management team of the
Borrower(s).

    

    Please
contact me at (515) 222-2322 with remaining questions or issues.

    

    
      
        	
                Sincerely,

              
	
                /s/ Kevin J. Smith

              
	
                Kevin
      J. Smith

              
	
                Sr.
      Vice President

              

      

    

    

    We accept
the aforementioned terms of this commitment letter this 18th day of April
2008.

    

    ART’S-WAY
MANUFACTURING CO, INC.

    

    
      
        
          	
                  By:

                	
                  /s/ J. Ward McConnell, Jr.

                	 
      	
                  /s/ Carrie Majeski

                
	
                  J.
      Ward McConnell, Jr., Chairman

                	
                    

                	
                  Carrie
      Majeski, Presitient/CFOCOMMERCIAL
SECURITY AGREEMENT

    

    
      
        	
                Principal

                $2,500,000.00

              	
                Loan Date

                04-25-2003

              	
                Maturity

                02-28-2004

              	
                Loan No.

                70290

              	
                Call/Coll

                50/71

              	
                Account

                0000128524

              	
                Officer

                332

              	
                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.

              

      

    

    

    
      
        	
                Grantor:

              	
                ARTS-WAY MANUFACTURING CO., INC. 

              	
                Lender:

              	
                WEST DES MOINES STATE BANK 

              
	 
      	
                (TIN:  42-0920725)

              	 
      	
                MAIN BANK

              
	 
      	
                HWY 9 WEST, PO BOX 288

              	 
      	
                1601 22ND STREET

              
	 
      	
                ARMSTRONG, IA 50514-0288

              	 
      	
                WEST DES MOINES, IA 50266 

              
	 
      	 
      	 
      	
                (515) 222-2300

              

      

    

    
      

    

    THIS
COMMERCIAL SECURITY AGREEMENT dated April 25, 2003, is made and executed between
ART’S-WAY MANUFACTURING CO., INC. (“Grantor”) and WEST DES MOINES STATE 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, Chattel Paper, Accounts,
Equipment and General Intangibles

    

    In
addition, the word “Collateral” also includes all the following, whether now
owned or hereafter acquired, whether nor 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.

    

    (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, 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.

    

    Despite
any other provision of this Agreement, Lender is not granted, and will not have,
a nonpurchase money security interest in household goods, to the extent such a
security interest would be prohibited by applicable law.  In addition,
if because of the type of any Property, Lender is required to give a notice of
the right to cancel under Truth in Lending for the Indebtedness, then Lender
will not have a security interest in such Collateral unless and until such a
notice is given.

    
      
         

      

      
        1

        
          

        

      

      
         

      

    

    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 execute financing statements and
to take whatever other 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 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
Grantor may not be indebted to Lender.

    

    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 to 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 afferent 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 prior 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.

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    

    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.

    

    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 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.

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

    

    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.

    

    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 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 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.  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.

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

    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-1
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.  This includes
making sure Lender is shown as the first and only security interest holder on
the title covering the Property.  Grantor will pay all filing fees,
title transfer tees, 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 financing
statements and documents of title in Grantor’s name and to execute all 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 we 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 prior 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.  Grantor fails to make any payment when due under the
Indebtedness.

    

    Other
Defaults.  Grantor fails 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
Grantor.

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

    

    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 Grantor’s or any Grantees 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 Grantor or on 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 any
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 Grantor’s existence as a going business, the
insolvency of Grantor, the appointment of a receiver for any part of 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 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 Grantor or by any governmental agency against any
collateral securing the Indebtedness.  This includes a garnishment of
any of Grantor’s accounts, including deposit accounts, with
Lender.  However, this Event of Default shall not apply if there is a
good faith dispute by Grantor as to the validity or reasonableness of the claim
which is the basis of the creditor or forfeiture proceeding and if 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
Guarantor of any of the Indebtedness or Guarantor dies or becomes incompetent or
revokes or disputes the validity of, or liability under, any Guaranty of the
Indebtedness.

    

    Adverse Change.  A
material adverse change occurs in 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 provision of this Agreement within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) 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 Event 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:

    

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

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

    

    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
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 Grantor 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.  Grantor 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.

    

    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.

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

    

    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 directed 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, construed and enforced in
accordance with federal law and the laws of the State of Iowa.  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.

    

    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 other 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.

    

    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.

    
      
         

      

      
        8

        
          

        

      

      
         

      

    

    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 Grantor’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:

    

    Account.  The word
“Account” means a trade account, account receivable, other receivable, or other
right to payment for goods sold or services rendered owing to Grantor (or to a
third party grantor acceptable to Lender).

    

    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 ARTS-WAY MANUFACTURING CO., INC., and all other persons and
entities signing the Note in whatever capacity.

    

    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”.

    

    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 ARTS-WAY MANUFACTURING CO., INC.

    

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

    
      
         

      

      
        9

        
          

        

      

      
         

      

    

    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 Grantor is responsible under this
Agreement or under any of the Related Documents.

    

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

    

    Note.  The word
“Note” means the Note executed by ARTS-WAY MANUFACTURING CO., INC. in the
principal amount of $2,500,000.00 dated April 25, 2003, 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.

    

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

    

    GRANTOR
HAS READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT
AND AGREES TO ITS TERMS.  THIS AGREEMENT IS DATED APRIL 25,
2003.

    

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

    

    GRANTOR:

    

    ART’S-WAY
MANUFACTURING CO., INC.

    

    
      	
              By:

            	
              /s/ John C. Breitung

            	 
      
	 
      	
              JOHN
      C. BREITUNG, PRESIDENT of

            
	 
      	
              ART’S-WAY
      MANUFACTURING CO., INC.

            

    

    
      
         

      

      
        10

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