**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**







**FORM
      10-KSB**







**x**
            **Annual
                report under Section 13 or 15(d) of the Securities Exchange Act of
                1934.**For
                the fiscal year ended November 30, 2007**o**
            **Transition
                report under Section 13 or 15(d) of the Exchange
                Act.**Commission
                file number 0-5131




**ART’S-WAY
        MANUFACTURING CO., INC.**
 (Name
        of
        small business issuer in its charter)
 
 **Delaware**
              
              **42-0920725****(State
                  or other jurisdiction of****incorporation
                  or organization)**
              
              **(I.R.S.
                  Employer Identification
                  No.)**
  **5556
        Highway 9**
 **Armstrong,
        Iowa 50514**
 (Address
        of principal executive offices)
 
 **(712)
        864-3131**
 (Issuer’s
        telephone number)
 
 Securities
        registered under Section 12(b) of the Exchange Act:
 
 **Common
        stock $.01 par value**
 
 Securities
        registered under Section 12(g) of the Exchange Act:
 
 **None**
  Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act. o Yes x No





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





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










Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


o Yes x No





State
      issuer’s revenues for its most recent fiscal year. $25,517,750





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked prices of such common equity as of a
      specified date written the past 60 days: The average bid and asked prices of
      our
      common stock were $27.50 and $28.99, respectively, on January 7,
      2008.





As
      of
      January 4, 2008, there were 1,985,176 shares of common stock outstanding.





DOCUMENTS
      INCORPORATED BY REFERENCE





Portions
      of the Definitive Proxy Statement for the registrant’s 2008 Annual Meeting of
      Stockholders to be filed within 120 days of November 30, 2007, are incorporated
      by reference into Part III of this Form 10-KSB.




Transitional
      Small Business Disclosure Format (Check one): o Yes x No







**Art’s-Way
        Manufacturing Co., Inc.**  **Index
        to Annual Report on Form 10-KSB**


**Part
                  I**
              
              **Page****Item
                  1. DESCRIPTION OF BUSINESS**
              4**Item
                  1A. RISK FACTORS**
              10**Item
                  2. DESCRIPTION OF PROPERTY**
              13**Item
                  3. LEGAL PROCEEDINGS**
              13**Item
                  4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS**
              14**Part
                  II****Item
                  5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS**
              14**Item
                  6. MANAGEMENT’S DISCUSSION AND ANALYSIS**
              16**Item
                  7. FINANCIAL STATEMENTS**
              22**Item
                8.
                CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE**
              38**Item
                  8A. CONTROLS AND PROCEDURES**
              38**Item
                  8B. OTHER INFORMATION**
              38**Part
                  III****Item
                  9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
                  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT**
              38**Item
                  10. EXECUTIVE COMPENSATION**
              38**Item
                  11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                  AND
                  RELATED STOCKHOLDER MATTERS**
              38**Item
                  12. CERTAIN RELATIONSHIPS AND RELATED
                  TRANSACTIONS**
              39**Item
                  13. EXHIBITS**
              39**Item
                  14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**
              39  3


**FORWARD
      LOOKING STATEMENTS**





Some
      of
      the statements in this report may contain forward-looking statements that
      reflect our current view on future events, future business, industry and other
      conditions, our future performance, and our plans and expectations for future
      operations and actions. In some cases you can identify forward-looking
      statements by the use of words such as “may,” “should,” “anticipate,” “believe,”
“expect,” “plan,” “future,” “intend,” “could,” “estimate,” “predict,” “hope,”
“potential,” “continue,” or the negative of these terms or other similar
      expressions. Many of these forward-looking statements are located in this report
      under “Item 1. DESCRIPTION OF BUSINESS;” “Item 2. “DESCRIPTION OF PROPERTY” and
“Item 6. MANAGEMENT’S DISCUSSION AND ANALYSIS,” but they may appear in other
      sections as well.





You
      should read this report thoroughly with the understanding that our actual
      results may differ materially from those set forth in the forward-looking
      statements for many reasons, including events beyond our control and assumptions
      that prove to be inaccurate or unfounded. We cannot provide any assurance with
      respect to our future performance or results. Our actual results or actions
      could and likely will differ materially from those anticipated in the
      forward-looking statements for many reasons, including the reasons described
      in
      this report. We are not under any duty to update the forward-looking statements
      contained in this report. We cannot guarantee future results, levels of
      activity, performance or achievements. We caution you not to put undue reliance
      on any forward-looking statements, which speak only as of the date of this
      report. You should read this report and the documents that we reference in
      this
      report and have filed as exhibits completely and with the understanding that
      our
      actual future results may be materially different from what we currently expect.
      We qualify all of our forward-looking statements by these cautionary statements.




**PART
      I**





**Item
      1. DESCRIPTION OF BUSINESS.**





**General**





Art’s-Way
      Manufacturing Co., Inc., a Delaware corporation, began operations as a farm
      equipment manufacturer in 1956. Since that time, we have become a major
      worldwide manufacturer of agricultural equipment. Our principal manufacturing
      plant is located in Armstrong, Iowa.





Art’s-Way
      Manufacturing manufactures farm equipment under our own and private labels.
      Art’s-Way Manufacturing has two wholly-owned operating subsidiaries. Art’s-Way
      Vessels manufactures pressure vessels and Art’s-Way Scientific manufactures
      modular buildings for various uses, commonly animal containment and research
      laboratories.





Art’s-Way
      Manufacturing manufactures a variety of specialized farm machinery under our
      own
      label, including: portable and stationary animal feed processing equipment
      and
      related attachments used to mill and mix feed grains into custom animal feed
      rations; a high bulk mixing wagon to mix animal feeds containing silage, hay
      and
      grain; a line of stalk shredders; sugar beet and potato harvesting equipment;
      and a line of land maintenance equipment, edible bean equipment, moldboard
      plows
      and grain drill equipment. We sell our labeled products through independent
      farm
      equipment dealers throughout the United States. In addition, we manufacture
      moldboard plows and supply hay blowers under an original equipment manufacturer
      (OEM) agreement with Case New Holland (CNH). Sales under our OEM agreement
      with
      CNH accounted for 7.6% of our consolidated sales for the fiscal year ended
      November 30, 2007.





4




**Business
      of Our Subsidiaries**





*Business
      of Art’s-Way Vessels*





Art’s-Way
      Vessels is an Iowa corporation with its principal place of business located
      in
      Dubuque, Iowa. Art’s-Way Vessels produces and sells pressurized vessels, both
      American Society of Mechanical Engineers (ASME) code and non-code. Art's-Way
      Vessels provides a combination of services as a manufacturer and supplier of
      steel vessels and steel containment systems. We build in carbon steel and
      stainless steel, ranging from atmospheric (0 PSI) storage vessels up to any
      PSI
      pressure rating required. We provide vessels ranging in size from 4-inches
      to
      168-inches in diameter and in various lengths as our customers require. The
      vessels are primarily sold to manufacturing facilities that will use the vessel
      as a component part of their end product. We primarily serve the following
      industries: water treatment, air receivers, refineries, co-generation, chemical,
      petrochemical, storage tanks, agriculture, marine, refrigeration,
      hydropneumatic, heavy equipment, pharmaceuticals and mining. In addition to
      our
      role as a fabricator of vessels, we provide services including: custom CAD
      drawing, welding, interior linings and exterior finishing, passivation of
      stainless steel, hydrostatic and pneumatic testing, design, build and finishing
      of skids, installation of piping, non-destructive examination and heat treating.





*Business
      of Art’s-Way Scientific*




Art’s-Way
      Scientific is an Iowa corporation with its
      principal place of business located in Monona, Iowa.


Art’s-Way
      Scientific produces and sells modular buildings. The buildings are custom
      designed to meet the research needs of our customers. Buildings commonly
      produced range from basic swine buildings to complex containment research
      laboratories. In 2008, we plan to focus on providing research facilities for
      academic research institutions, government research and diagnostic centers,
      public health institutions and private research and pharmaceutical companies,
      as
      those are our primary market sectors. Art’s-Way Scientific provides services
      from start to finish by designing, manufacturing, delivering and installing
      our
      building units.





**Material
      Asset Purchases**





In
      October 2005, we purchased certain assets of Vessel Systems Inc., a manufacturer
      of pressurized tanks and vessels, located in Dubuque, Iowa. We purchased the
      inventory, fixed assets and accounts receivable, and we operate this new
      business through our wholly-owned subsidiary, Art’s-Way Vessels,
      Inc.





In
      August
      2006, we purchased certain assets of Techspace, Inc., a manufacturer of modular
      laboratories, located in Monona, Iowa. We purchased the inventory, fixed assets
      and accounts receivable, and we operate this business through our wholly-owned
      subsidiary, Art’s-Way Scientific, Inc.





In
      September 2007, we purchased certain assets of Miller-St. Nazianz, Inc.,
      specifically portions of its Miller Pro and Badger lines of agricultural
      products. These product lines are hay and forage lines, and our purchase
      generally included all customer lists, inventories, tooling and other
      proprietary rights to these product lines. Under the purchase agreement,
      Miller-St. Nazianz also granted us a license to use the Badger product line
      trademark in connection with the sale and production of the Badger product
      line
      which consists of forage boxes, forage blowers, running gears, dump boxes and
      options for any of those products. We can only use the Badger trademark on
      any
      of those products that we sell; any other products that are manufactured or
      marketed using the Badger trade name or trademark were not included in our
      asset
      purchase. We also purchased the entire Miller Pro product line except for
      pole-type sprayers marketed under the Miller Pro brand and products manufactured
      by Ziegler. The Miller Pro product line consists of forage boxes, receiver
      boxes, running gears and tires, forage blowers, dump boxes, rotary rakes,
      finger-wheel rakes, Miller produced hay-mergers and all “Hay Buddy” equipment
      and options for any of those products. In addition to purchasing rights to
      certain trade names and goodwill relating to those names, we purchased the
      Hay
      Buddy trademark, the Miller Pro trademark and a patent.





In
      addition, our purchase included all distribution agreements with manufacturers
      pertaining to the product lines. Further, the purchase agreement included all
      dealership agreements; as such, Miller Pro and Badger dealers are now Art’s-Way
      distributors. Currently, both names appear on the hay and forage products.
      We
      moved the production of the lines to our main manufacturing facility in
      Armstrong, Iowa, as the purchased lines were incorporated into our existing
      Art’s-Way Manufacturing business.





Miller-St.
      Nazianz and its President, John Miller, agreed to sign non-compete agreements
      in
      consideration for the purchase of the product lines. For a period of five years
      after the closing, Miller-St. Nazianz and Mr. Miller agreed not to compete
      with
      the products or activities of the purchased assets.





We
      will
      continue to seek acquisitions as they fit into our strategic plans and goals.
      At
      this time, however, we are not actively pursuing any material asset purchases
      outside of our current product lines, and no significant dispositions of assets
      are planned.





5




**Our
      Principal Products**





From
      our
      beginnings as a producer of portable grinder mixers, we have grown through
      developing several new products. Today, our products include an array of feed
      processing, forage blending, land management and sugar beet harvesting
      equipment. We also maintain a high volume of OEM work for the industry’s leading
      manufacturers. Our brand names include Art’s-Way, Peerless Rollermills, SupRaMix
      vertical tub mixer and Eversman land management equipment.





*Grinder
      mixer line.* The
      grinder mixer line represents our original product line. Our founder, Arthur
      Luscombe, designed the original PTO powered grinder-mixer prior to the company’s
      inception. The grinder mixer line was expanded to include doing OEM work for
      companies such as Case New Holland. Grinder mixers are used to grind grain
      and
      mix in proteins for animal feed. They have several agricultural applications,
      and are commonly used in livestock operations. Our grinder mixers have wide
      swing radiuses to allow users to reposition the discharge tube from one side
      of
      the tank to the other in one step. Our PM25 grinder mixer offers a 105-bushel
      tank with a 20-inch hammermill, and it was recently upgraded to our new 5105
      grinder mixer model. Our 5165 grinder mixer is the largest in the industry,
      with
      a 165-bushel tank and a 26-inch hammermill.





*Feed
      grain processing line.* We
      offer
      stationary hammermills and rollermills. Our Cattle Maxx products offer
      consistent feed grain rations for beef and dairy operations and are available
      in
      105-bushel and 165-bushel capacities. Harvesting leaves various amounts of
      extraneous materials that must be removed through processing the seeds.
      Hammermills are aggressive pre-cleaners that are designed to remove appendages,
      awns and other chaff from seeds by vigorously scraping the seed over and through
      the screen. The screen has holes that are big enough to let the seed pass
      through undamaged, but are small enough to catch and remove the appendages.
      Our
      rollermills roll the feed grain to minimize dust, and they fracture the outside
      hull to release the digestive juices more rapidly. Rolling feed provides more
      palatable and digestible feed for use in animal feeding operations.





*Forage
      blending line.* Our
      no-till drills are farm implements designed to plant seed and spread fertilizer
      in one operation and are generally used by farmers to plant or improve their
      pastures. Art’s-Way shredders assure maximum crop shredding and destroy insect
      habitats. The shredded crop material allows for faster decomposition and
      restores nutrients to the soil more quickly while providing ground cover to
      reduce wind and water erosion.





*Land
      management line.* Land
      planes are used to ensure even distribution of rainfall or irrigation by
      eliminating water pockets, furrows and implement scars in fields. Our land
      planes have a patented Art’s-Way floating hitch design. Our moldboard plows are
      designed to slice and invert the soil to leave a rough surface exposed, and
      they
      are primarily used on clean-tilled cropland with high amounts of crop residue.
      We offer pull-type graders to help our customers perform many tasks such as
      maintaining terraces and waterways, leveling ground, cleaning ditches and
      removing snow. The pull-type graders follow close to the back of a tractor
      for
      leveling uneven areas or for turning in smaller spaces. Because of the wide
      array of depths and widths available, our adjustable ditchers are ideal for
      digging irrigation or drainage channels. Optional models of our ditchers can
      be
      adjusted from inside the tractor for added convenience.





*Sugar
      beet harvesting line.* Our
      sugar beet defoliators and harvesters are innovative products in the industry
      because we continuously improve our products, both in reaction to customer
      requests and in anticipation of our customers’ needs. Our machines can do six,
      eight, or twelve rows at one time, and we were the first manufacturer to
      introduce a larger, 12-row harvester. We have obtained patents on certain
      components of our sugar beet harvesting line. Our sugar beet defoliators cut
      and
      remove the leaves of the sugar beets without damaging them, and the leaf
      particles are then incorporated back into the soil. Our sugar beet harvesters
      use digger wheels to lift the beets out of the ground.





**Product
      Distribution and Markets**





We
      distribute our products primarily through a network of approximately 1,650
      U.S.
      and Canadian independent dealers whose customers require specialized
      agricultural machinery. We have sales representation in 47 states and seven
      Canadian provinces; however, many dealers sell only service parts for our
      products. The company’s dealers sell our products to various agricultural and
      commercial customers. We also maintain a local sales force in our Armstrong,
      Iowa facility to provide oversight services for our distribution network,
      communicate with end users and recruit and train dealers on the uses of our
      products. Our local service parts staff is available to help customers and
      dealers with their service parts needs.





6




We
      began
      exporting new products during the latter part of 2006, and we currently export
      products to six foreign countries. In July 2006, we exported our newly-designed
      sugar beet harvesters and defoliators. In September 2006, our first shipment
      of
      grinder mixers sold internationally left our Armstrong facility. At the
      Agritechnica 2007 exhibition in Germany, we met with prospective European
      distributors. We look forward to strengthening these relationships and
      developing new international markets as well.





*Backlog.* Our
      backlogs of orders vary on a daily basis. As of February 6, 2008, Art’s-Way
      Vessels had $100,699 of backlog, Art’s-Way Scientific had approximately
      $4,987,224 of backlog and Art’s-Way Manufacturing had a backlog of
      $10,318,226.  We expect that our order backlogs will continue to fluctuate
      as orders are received and filled.





**Recent
      Product Developments**





In
      November 2007, we introduced our 5105 and 5165 Grinder Mixers at the
      Agritechnica 2007 show in Hanover, Germany. Agritechnica is the world’s largest
      agricultural equipment exhibition. We featured the 5105 grinder mixer, which
      has
      a 105-bushel tank and a 20-inch hammermill. The 5105 model is an upgraded
      version of our PM25 grinder mixer. In addition, our portable, 165-bushel 5165
      model was highlighted at the exhibition and is the largest grinder mixer in
      the
      industry.





During
      the 2005 sugar beet harvesting season, we field tested a new single pass
      defoliator and placed this product in production and in the field for the 2006
      sugar beet harvest. This year, we upgraded the sugar beet defoliator to make
      it
      high-speed. The new high-speed defoliator is in production and went in the
      field
      for the 2007 harvest season. We also tested a new exportable sugar beet
      harvester in 2006. The export unit is designed off of our model 6812 but
      down-sized to fit in a cargo container for shipping. In July 2006, we exported
      our newly-designed sugar beet harvester and defoliator, and we exported units
      during our 2007 fiscal year as well.





**Competition,
      Our Competitive Position and Strategies**





*Competition.* The
      agricultural equipment industry is highly competitive. We compete with larger
      manufacturers and suppliers that have broader product offerings and significant
      resources at their disposal; however, we believe that our competitive strengths
      allow us to compete effectively in our market.





Management
      believes that grain and livestock producers, as well as those who provide
      services to grain and livestock operations, are the primary purchasers of
      agricultural equipment. Many factors influence a buyer’s choice for agricultural
      equipment. Any one or all factors may be determinative, but they include brand
      loyalty, the relationship with the company’s dealers, product quality and
      performance, product innovation, product availability, parts and warranty
      programs, price and customer service. While our larger competitors may have
      resources greater than ours, we believe we compete effectively in the farm
      equipment industry by serving smaller markets rather than directly competing
      with larger competitors across an extensive range of products.





We
      expect
      continued competition from Art’s-Way Scientific’s existing competitors as well
      as competition from new entrants into the modular building market. To some
      extent, we believe barriers to entry in the modular building industry limit
      the
      competition we face in the industry. Barriers to entry in the market consist
      primarily of access to capital, access to a qualified labor pool, and the
      bidding process that accompanies many jobs in the health and education markets.
      Despite these barriers, manufacturers who have a skilled work force and adequate
      production facilities could adapt their manufacturing facilities to produce
      modular structures. We expect that the threat of entry posed by other
      manufacturers is strongest during economic downturns in the manufacturing
      industry.





To
      continue sales growth in the pressurized vessel industry, Art’s-Way Vessels must
      offer quality tanks at competitive prices. The company believes that competition
      in the industry is intense. However, management believes our competitive
      strengths will allow us to compete effectively in the industry.





7




*Competitive
      Strengths.* The
      company believes that our competitive strengths include competitive pricing,
      product quality and performance, diversified revenues, a network of worldwide
      and domestic distributors and our strong market share for many of our
      products.





Art’s-Way
      Manufacturing caters to niche markets in the agricultural industry. We do not
      have a direct competitor that has the same product offerings that we do;
      instead, each of our product lines for Art’s-Way Manufacturing competes with
      similar products of many other manufacturers. Some of our product lines face
      greater competition than others, but we believe that our products are
      competitively priced with greater diversity than most competitor product lines.
      Other companies produce feed processing equipment, sugar beet harvesting and
      defoliating equipment, grinders, shredders and other products similar to ours;
      therefore, we focus on providing the best product available at a reasonable
      price. Overall, we believe our products are competitively priced with above
      average quality and performance, in a market where price, product performance
      and quality are principal elements.





Management
      believes that our purchase of the Miller Pro hay and forage product lines from
      Miller-St. Nazianz, Inc. benefited the company in a number of ways. We believe
      we will be able to capitalize on the use of the Miller Pro name and its
      popularity in the agricultural community. In addition, the asset purchase led
      to
      an increase in the number of dealers who sell our products, as the Miller Pro
      dealers continue to sell the Miller Pro products, but with the Art’s-Way
      Manufacturing name attached.





We
      believe our company has a diversified revenue base due to its various product
      lines and those of its subsidiaries, geography, and customer base. We have
      numerous product lines produced under our label and private labels. In addition,
      we provide after market service parts which are available to keep our branded
      and OEM-produced equipment operating to the satisfaction of the customer. Our
      subsidiaries produce and sell pressurized vessels and tanks and modular
      buildings, which allows us to have diversified revenues rather than solely
      relying on the agricultural machinery sector. We also have a diversified revenue
      base due to geography. We sell products to customers in the United States and
      six foreign countries through a network of approximately 1,650 independent
      dealers in the United States and Canada, as well as overseas dealers in the
      United Kingdom and Australia. Although we have a material license agreement
      with
      Case New Holland, no single customer or product class represented more than
      10%
      of the company’s sales over the past two fiscal years.





We
      believe the main competitive strength of Art’s-Way Vessels is the company’s
      ability to provide products and services under one entity. Often, the services
      provided by Art’s-Way Vessels are handled by two or more of our competing
      suppliers. We have the ability to fabricate pressurized vessels to our
      customers’ specifications, and we also provide a variety of services before and
      after installation. Our high quality products and services save our customers
      time in an industry where time and quality are of utmost
      importance.





We
      believe the competitive strength of Art’s-Way Scientific is the company’s
      ability to design and produce high-tech modular buildings in a fraction of
      the
      time of conventional design/build firms. Conventional design/build construction
      may take two to five years, while our modular laboratories can be delivered
      in
      as little as six months. As one of the few companies in the industry to supply
      turnkey modular buildings and laboratories, the company manages to provide
      high
      quality buildings at reasonable prices to meet our customers’ time, flexibility
      and security expectations. No single customer or product class of Art’s-Way
      Scientific represented more than 10% of the company’s consolidated sales over
      the past two fiscal years.





**Raw
      Materials, Principal Suppliers and Customers**





Raw
      materials for Art’s-Way Manufacturing, Art’s-Way Vessels and Art’s-Way
      Scientific are acquired from domestic and foreign sources and normally are
      readily available. In the past, the lifter wheels used to manufacture our sugar
      beet harvesters were bought only from China. However, we have located domestic
      sources for lifter wheels and no longer import them solely from
      China.





We
      have
      an original equipment manufacturer (OEM) supplier agreement with Case New
      Holland (CNH). Under the OEM agreement, we have agreed to supply CNH’s
      requirements for certain feed processing and service parts, primarily blowers,
      under CNH’s label. The agreement has no minimum requirements and can be
      cancelled upon certain conditions. For the years ended November 30, 2007 and
      2006, sales under the CNH label aggregated approximately 7.6% and 8% of
      consolidated sales, respectively, demonstrating CNH’s value as a major customer.





8




**Intellectual
      Property**





We
      maintain manufacturing rights on several products covering unique aspects of
      design and have trademarks covering product identification. We believe our
      trademarks and licenses help us to retain existing business and secure new
      relationships with customers. We currently have no pending applications for
      intellectual property rights.





We
      pay
      royalties for our use of certain manufacturing rights. We entered into a
      material OEM and royalty agreement on moldboard plows and hay blowers with Case
      New Holland (CNH) on September 30, 2003. Under the agreement, CNH sold us the
      license to manufacture, sell and distribute certain plow products designed
      by
      CNH and their replacement and component parts. We pay semi-annual royalty
      payments based on the invoiced price of each licensed product and service part
      we sell. The agreement with CNH ran through September 2006, but the agreement
      continues in force until terminated or cancelled. We have not terminated or
      cancelled the agreement as of November 30, 2007.





**Research
      and Development Activities**





Art’s-Way
      Manufacturing is continually engaged in research and development activities
      to
      improve and enhance our existing products. We perform research and development
      activities internally, and the cost of our research and development activities
      is not borne by our customers. Our research and development expenses are
      cyclical; in one year, they may be high, and then the next year we tend to
      see
      lower research and development expenses and an increase in production expenses
      as our new ideas are manufactured. Research and development expenses during
      our
      2007 fiscal year accounted for $178,000 of our overall engineering expenses.
      For
      more information please see “Item 6. MANAGEMENT’S DISCUSSION AND
      ANALYSIS.”





Art’s-Way
      Vessels produces custom tanks and vessels that are manufactured in accordance
      with specifications provided by our customers. Similarly, Art’s-Way Scientific
      engineers modular buildings in accordance with customer specifications.
      Art’s-Way Vessels and Art’s-Way Scientific did not incur any research and
      development costs in 2007.




**Government
      Relationships and Regulations; Environmental Compliance**





Art’s-Way
      Scientific must design, manufacture and install its modular buildings in
      accordance with state building codes, and the company has been able to achieve
      the code standards in all instances. Except for building our modular buildings
      up to state building code standards, we currently do not do business with any
      local, state or federal government agencies that must approve our products.





We
      are
      subject to various federal, state and local laws and regulations pertaining
      to
      environmental protection and the discharge of materials into the environment.
      In
      2006, Art’s-Way Manufacturing completed the installation of a liquid paint
      system for our whole goods which significantly improved the quality of our
      paint, in terms of luster, hardness and longevity. The paint system is situated
      in a new location within the plant, and we redesigned our workflow to optimize
      productivity. We obtained the necessary permits that allowed us to change the
      paint system and we remain in compliance with all applicable laws and
      regulations. During our 2007 fiscal year, we expended $2,787 on environmental
      compliance.





**Employees**





During
      the fiscal year ended November 30, 2007, we employed 107 employees at Art’s-Way
      Manufacturing, five of whom were employed on a part-time basis. For the same
      period, we had 22 full-time employees and one part-time employee at Art’s-Way
      Vessels. In addition,Art’s-Way Scientific employed 35 employees, one of whom was
      a part-time employee. Employee levels fluctuate based upon the seasonality
      of
      the product line, and the numbers provided above represent our peak employment
      during our 2007 fiscal year. In addition, the number of employees at Art’s-Way
      Vessels decreased substantially following the expiration of our lease in
      Dubuque. See “Item 2. DESCRIPTION OF PROPERTY.”





9




**Item
      1A. RISK FACTORS.**





**Risks
      Related to Our Shares**





*Our
      stock is publicly traded, but the trading volume and price is subject to change
      and you may not be able to resell your shares on favorable terms.* The
      bid
      price of our common stock ranged from $6.19 to $26.78 per share during our
      2007
      fiscal year. In our 2006 fiscal year, it ranged from $4.74 to $9.19 per share.
      Our stock price may fluctuate in response to the risk factors set forth below
      or
      in response to a number of other factors. These factors include variations
      in
      our financial results, recommendations made by analysts, stock performance
      of
      other companies and the general strength of the economy.





*Future
      sales of our common stock may depress the market price of our common stock.* Future
      sales of substantial amounts of our common stock could depress the prevailing
      market price and impair our ability to raise capital through additional sales
      of
      our securities. If we or our existing shareholders undertake to sell a
      significant amount of our stock in the public market, or if there is a public
      perception that these sales may occur, the market price of our stock could
      decline.





*You
      may experience dilution due to the future issuance of additional shares of
      our
      common stock.* As
      of
      January 4, 2008, we have 3,014,824 previously authorized and unissued shares
      of
      common stock, and 1,985,176 shares issued and outstanding. If we issue these
      shares in the future, it will result in dilution of the ownership interests
      of
      our current shareholders. In addition, we have additional shares available
      for
      grant under our 2007 Non-Employee Directors’ Stock Option Plan and 2007 Employee
      Stock Option Plan. Additional stock options or other compensation plans or
      amendments to our existing plans may be adopted. We may also issue additional
      shares of our common stock for other business purposes such as acquisitions
      or
      hiring of personnel, or we may choose to conduct a future private or public
      offering to raise additional capital. This would result in further dilution
      to
      our existing shareholders.





*There
      is no assurance that we will declare dividends or have cash available to pay
      them.* We
      do not
      declare and pay dividends on a consistent basis, and there is no guarantee
      that
      we will declare dividends in the future or that funds will be available for
      this
      purpose. Our declaration and payment of dividends is conditioned by the terms
      of
      our loan agreement and revolving line of credit agreement with West Bank. We
      may
      issue dividends without the permission of West Bank if we meet all of our
      financial covenants which include, but are not limited to, providing financial
      statements to the bank, maintaining our primary deposit accounts at West Bank
      and meeting certain financial performance ratios.





*One
      of our shareholders owns a significant amount of our common stock, and his
      interests may conflict with those of our other shareholders.* J.
      Ward
      McConnell, Jr., our Executive Chairman, owns approximately 40% of our
      outstanding common stock. As a result, he may be able to significantly influence
      the direction of our company, the election of our Board of Directors and any
      other matter requiring shareholder approval. His interests may conflict with
      the
      interests of our other shareholders.





**Risks
      Related to Our Business**





*A
      downturn in the economy may negatively impact our results of operations and
      financial condition.* The
      profitability and success of our business depends on the overall demand for
      our
      products. Our sales revenues are subject to general economic conditions.
      Consumers are generally less likely to purchase farm equipment, vessels or
      modular buildings during periods of economic uncertainty. Levels of interest
      rates also affect our customers’ buying decisions. A downturn in the general
      economy or the economy of a particular region containing a large part of our
      customer base could result in fewer customers purchasing our products and would
      adversely affect our financial results.





*Our
      success depends on our ability to enhance our existing product lines through
      research and development.* The
      long-term financial success of our business depends on our ability to introduce
      and market new products successfully, which requires significant expenditures
      on
      research and development, production and marketing. As we refine our existing
      products, our success will depend upon a number of factors that are largely
      beyond our control. These factors include customer acceptance, the availability
      of component parts from our suppliers, the strength of our dealer system, the
      intensity of competition in the industry and the economy in general. To continue
      our strategy to introduce new versions of our products, we expect to use a
      substantial amount of capital. Such expenditures could adversely affect our
      financial condition.





10




*We
      depend on suppliers for our raw materials and component parts for our products,
      and any failure of our suppliers to meet our demands will harm our ability
      to
      manufacture and sell our products on a timely basis.* Our
      products are made from component parts that are manufactured by others. At
      any
      particular time, we depend on a number of suppliers so that we may efficiently
      manufacture our products, develop enhancements to existing products and deliver
      products to our dealers and customers. The failure of our suppliers to meet
      our
      expectations will result in fewer products being manufactured and sold, and
      our
      financial results could be negatively impacted.





*The
      price and availability of raw materials, component parts and fuel are subject
      to
      price fluctuations which can increase our production costs and negatively impact
      our financial results.* We
      have
      no control over price fluctuations in, for example, the price of steel and
      fuel.
      Additionally, although we are typically able to procure our supplies from a
      network of domestic and foreign suppliers, we could experience disruptions
      in
      the availability of our supplies for a number of reasons and may have to obtain
      the supplies from a higher-priced supplier. We may not be able to offset
      increased production costs by passing these costs on to our customers. A
      significant increase in the price or change in the availability of any raw
      material, component part or fuel could adversely affect our
      profitability.





*Our
      businesses operate in highly competitive industries, and many of our competitors
      have greater resources that may enable them to compete more effectively.* We
      compete with several large domestic and international companies that offer
      a
      broader range of products than us, in addition to local and regional
      manufacturers that supply a more limited product range. Some of our competitors
      have greater resources than we do, and having greater resources at their
      disposal may enable them to compete more effectively. Our competitors may devote
      their resources to developing and marketing products that will directly compete
      with our product lines, and new competitors may enter the market. Our inability
      to compete with existing companies and new entrants to the markets in which
      we
      operate will have a negative impact on our business and financial condition.





*The
      markets that we serve vary, and we face a challenge in adequately meeting each
      market’s needs.* We
      offer
      products for a number of markets, including agricultural equipment, modular
      building and scientific research laboratories, and pressurized vessels. Because
      we operate in multiple markets, we must work constantly to understand the needs,
      standards and technical requirements of several different industries and must
      devote significant resources to developing products for these industries. If
      we
      do not accurately predict our customers’ needs, we may expend valuable resources
      in developing products that do not achieve broad acceptance across the markets.
      If we fail to adequately meet our customers’ needs and our product offerings in
      any particular market are not competitive, our business and results of
      operations would be harmed.





*Like
      other manufacturers, we are subject to an ongoing risk of product liability
      claims.* We
      may be
      exposed to product liability claims in the event that any of our products
      results, or is claimed to have resulted in, bodily injury or property damage.
      We
      cannot provide assurance that we will not suffer material losses due to product
      liability claims in the future, and we may incur significant costs in order
      to
      defend against such claims. Our insurance may be insufficient to cover these
      claims; as such, significant product liability claims may damage our reputation
      and harm our financial condition.





*We
      are subject to environmental, health and safety and employment laws and
      regulations which lead to significant compliance costs.* Like
      other manufacturers, our business is heavily regulated with regard to hazardous
      substances, waste materials, workplace safety and equal employment
      opportunities. We have incurred and will continue to incur expenses associated
      with complying with the laws and regulations that impact our operations. These
      laws and regulations are continually subject to change, and we cannot predict
      the cost of future compliance. If we face unexpected obligations or are unable
      or unwilling to comply with these laws and regulations, our business and
      financial condition could suffer.





11




*If
      we
      do not retain key personnel and hire highly skilled employees, our business
      will
      suffer.* Our
      ability to maintain and improve our financial results will depend on, among
      other things, the efforts and skills of our management and employees. We depend
      primarily on our executive officers to move forward with our business plans
      and
      strategies, and we also depend on our ability to attract and retain qualified
      technical, manufacturing and sales personnel. We do not maintain “key person”
life insurance for any of our employees or management, and all of our employees
      and management are employed at will. The loss of a key member of management
      or
      key employees could have an adverse effect on our business and financial
      results.





*Although
      we have no planned acquisitions at this time, our strategy in acquiring
      businesses or product lines in the future may adversely affect our business.* We
      intend
      to evaluate the possibility of acquiring additional product lines or businesses
      in the future as opportunities arise. We cannot provide assurance that we will
      be able to identify targets, obtain financing for acquisitions on favorable
      terms, or successfully acquire and integrate target companies or product lines.
      Competition for acquisitions may prevent us from following through with
      acquisition plans. Once acquired, integration of product lines into our existing
      operations may lead to substantial costs, delays and other challenges. We may
      not be able to successfully produce and distribute new product lines in a
      cost-effective manner. In addition, acquisitions may divert our management’s
      time and expertise away from production. Any one or all of these factors may
      adversely affect our financial condition.





*We
      have incurred substantial amounts of long-term debt with West Bank which could
      have adverse consequences to our financial results.* Our
      indebtedness to West Bank requires us to divert a substantial portion of our
      cash flow from operations to payments on our indebtedness. These payments may
      reduce our available cash flow for working capital, capital expenditures,
      acquisitions and pursuing other business opportunities. Indebtedness could
      also
      increase our susceptibility to downturns in the industry and the economy in
      general. Our failure to maintain financial performance ratios or to meet certain
      financial covenants in our loan and credit agreements with West Bank may require
      us to request West Bank’s permission to pay dividends. Finally, indebtedness
      could place us at a competitive disadvantage compared to our competitors that
      may have less indebtedness.





**Risks
      Related to the Production of Agricultural Equipment**





*Our
      financial results for our Art’s-Way Manufacturing segment primarily depend upon
      the agricultural industry, and factors that adversely affect the agricultural
      industry may also negatively impact our business.* Sales
      of
      agricultural equipment are closely tied to the well-being of the agricultural
      industry. Historically, the agricultural industry has been cyclical and is
      often
      impacted by factors beyond our control, including general economic conditions,
      weather patterns and legislation. Adverse weather conditions, crop pest or
      animal disease outbreaks during important sales seasons may dramatically impact
      our business. In the United States, legislation such as the 2007 Farm Bill
      may
      significantly affect commodity prices and our customers’ ability to purchase our
      products. Our business will likely be subject to fluctuations in the farm
      industry, and we expect downturns in the industry to negatively impact our
      financial results.





*The
      continuing globalization of the agricultural industry may alter our business
      in
      unpredictable and potentially negative ways.* Our
      competition, customer base and products may change significantly due to the
      globalization of the agricultural industry. To some extent, our success depends
      on the development of the global agricultural market, and we may have to adapt
      quickly in order to maintain our position in the industry. Our failure to keep
      pace with the globalization of the industry may adversely impact our financial
      condition.





*The
      agricultural equipment industry is seasonal, and seasonal fluctuations in our
      operations may negatively impact our financial results.* Sales
      often fluctuate as a result of our customers’ tax planning considerations,
      planting and harvest times and dealer incentives. As a result, our quarterly
      results and available cash flow fluctuates due to the seasonality of our
      agricultural equipment sales.





*Changing
      demand for farm outputs could affect the demand for our agricultural equipment.* Worldwide
      demand for food coupled with increased demand for crop-based renewable fuels
      could have an effect on prices and demand for farm commodities. As such, the
      demand for our agricultural equipment may experience fluctuations along with
      the
      demand for agricultural products. As with other factors impacting the
      agricultural industry, we have no control over demand for farm outputs, and
      our
      business is subject to both positive and negative changes in
      demand.





12




*We
      recently began exporting our agricultural machinery internationally, which
      will
      expose us to the risks of doing business abroad.* Selling
      our products to other countries exposes us to various risks, including: import
      and export restrictions, tariffs and quotas; uncertain political environments,
      economic conditions and foreign business cycles; changes in laws and policies;
      cultural differences; and changes in currency exchange rates. Political
      developments and policies, such as changes in farm subsidies, could directly
      impact the demand for our products. Further, our profitability is affected
      by
      fluctuations in the value of the U.S. dollar as compared to the currencies
      of
      countries in which we sell our products. Significant fluctuations in exchange
      rates could prevent us from realizing the advantages of exporting our products.
      Our lack of experience in exporting may impact our ability to adapt to these
      risks which could adversely affect our success as an exporter.





*Our
      failure to accurately predict and maintain adequate inventory to meet our
      customers’ demands may reduce our profitability.* The
      modular building and research laboratory industry is somewhat cyclical in
      nature, mainly due to the budgeting processes of health centers and educational
      institutions. We cannot reliably forecast the timing and size of our customers’
orders. In order to meet expected demand, we order raw materials and build
      a
      quantity of inventory to anticipate purchase orders. Our financial results
      could
      be harmed if we do not accurately estimate our customers’ demands and are unable
      to adapt to the cyclical nature of our business.




**Item
      2. DESCRIPTION OF PROPERTY.**




Our
      executive offices are located in Armstrong, Iowa along with our production
      and
      warehousing facilities. The facilities in Armstrong are constructed of hollow
      clay block and concrete and contain approximately 240,000 square feet of usable
      space. These facilities were constructed after 1965 and remain in good
      condition. We own approximately 127 acres of land west of Armstrong, on which
      the factory and inventory storage space is constructed. We currently lease
      excess land to third parties for farming.




We
      leased
      a facility from Markee in Dubuque, Iowa, to accommodate the manufacturing for
      Art's-Way Vessels. This lease expired in October 2007, and we have started
      construction on a new facility for Art’s-Way Vessels. The new facility will be
      located in the same industrial park in Dubuque, and construction is expected
      to
      be completed in February 2008. The facility will be 34,450 square feet,
      steel-framed, and will have a sprinkler system and crane inside. In the time
      period between the expiration of our lease and the completion of construction,
      our Art’s-Way Vessels business slowed, but we were able to cut expenses
      significantly. Due to the slowdown in our business, Art’s-Way Vessels lost a
      significant number of employees; however, we expect to add staff when we move
      into the new facility in February. We intend to add staff as we begin to receive
      purchase orders, and we expect to have between six and 23 employees, which
      is
      the same amount of employees we had prior to the expiration of our lease.




The
      facility in Monona, Iowa, which housed the manufacturing for Art's-Way
      Scientific, was stick built with steel siding. The main manufacturing facility
      contained approximately 36,000 square feet of usable space, and was constructed
      in 1969. This structure was totally destroyed by fire on January 16, 2007.
      There
      is also a warehouse at this location that is approximately 5,000 square feet
      and
      that was constructed in 1994. We temporarily operated in this facility during
      the construction of our replacement production facility. We began operations
      in
      our new production facility in November 2007. The new Monona manufacturing
      facility is custom-designed to meet our production needs, has approximately
      50,000 square feet constructed of a steel frame with steel siding, and it also
      accommodates a sprinkler system and crane.




Our
      real
      property is subject to mortgages granted to West Bank as security for our
      long-term debt. See “Item 6. MANAGEMENT’S DISCUSSION AND ANALYSIS – Capital
      Resources
      and Credit Facilities” for more information.





**Item
      3. LEGAL PROCEEDINGS.**





From
      time
      to time in the ordinary course of business, we may be named as a defendant
      in
      legal proceedings related to various issues, including without limitation,
      workers’ compensation claims, tort claims, or contractual disputes. We are not
      currently involved in any material legal proceedings, directly or indirectly,
      and we are not aware of any claims pending or threatened against us or any
      of
      the directors that could result in the commencement of material legal
      proceedings.





13




**Item
      4.** **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS** **.**





We
      did
      not submit any matter to a vote of our shareholders through the solicitation
      of
      proxies or otherwise during the fourth fiscal quarter of 2007. However, as
      of
      the date of this report, we will submit election of directors, approval of
      our
      auditors and approval of our 2007 Non-Employee Directors’ Stock Option Plan to a
      vote of our shareholders through the solicitation of proxies. The information
      required by Item 4 for solicitations, which will be submitted during the second
      quarter of fiscal year 2008, is incorporated by reference to our definitive
      proxy statement relating to our 2008 annual shareholders’ meeting. In accordance
      with Regulation 14A, we will be filing our proxy statement no later than 120
      days after the end of the last fiscal year. The 2008 annual meeting, at which
      voting on the proposed matters and election of directors will take place, is
      scheduled for April 24, 2008.





**PART
      II**





**Item
      5.** **MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS** **.**





**Market
      Information**





Our
      common stock trades on the NASDAQ Capital Market ® under
      the
      symbol “ARTW.” The ranges of closing bid prices for each quarter, as reported by
      NASDAQ, are shown below. The quotations represent inter-dealer prices, without
      retail mark-up, mark-down or commission, and may not accurately represent actual
      transactions.





**Common Stock High and Low Bid Prices Per Share by Quarter****Fiscal Year Ended November 30, 2007**
            
            **Fiscal Year Ended November 30, 2006****High**
            
            **Low**
            
            **High**
            
            **Low****First
                Quarter**
            
            $
            8.90
            
            $
            6.19
            
            $
            6.70
            
            $
            4.74**Second
                Quarter**
            
            $
            9.74
            
            $
            7.02
            
            $
            9.19
            
            $
            5.47**Third
                Quarter**
            
            $
            19.99
            
            $
            8.51
            
            $
            7.35
            
            $
            4.87**Fourth
                Quarter**
            
            $
            26.78
            
            $
            15.77
            
            $
            7.85
            
            $
            5.01





**Shareholders**





We
      have
      one class of $0.01 par value common stock. As of November 30, 2007, we had
      approximately 129 shareholders of record. As of January 4, 2008, we have
      approximately 141 shareholders of record.





**Dividends**





On
      November 13, 2007, we declared a dividend of $0.10 per share that was paid
      on
      November 30, 2007 to stockholders of record as of November 15, 2007. This was
      the first time that our board of directors has declared a $0.10 per share
      dividend, as our dividends were typically $0.05 per share in the past. On
      October 26, 2006, our Board of Directors declared a dividend of $0.05 per share
      to be paid on November 30, 2006 to stockholders of record as of November 15,
      2006. We obtained a waiver from our lender of the loan covenants regarding
      the
      payment of dividends for our 2006 dividend. In 2007, our debt was restructured
      on different terms, and we did not have to obtain a waiver from our lender.
      If
      we maintain certain financial performance ratios and meet other financial
      covenants in a given fiscal year, we may declare dividends without obtaining
      West Bank’s permission. We expect that the payment of and the amount of any
      future dividends will depend on our financial condition at that time, and we
      may
      have to request permission from our lender to declare dividends in the
      future.





14




**Securities
      Authorized for Issuance under Equity Compensation Plans**





**Equity Compensation Plan Information**
              **For the Fiscal Year Ended November 30, 2007**(1)**Plan Category**
            
            **Securities to be Issued**
              **upon Exercise of**
              **Outstanding Options,**
              **Warrants and Rights**
              **(a)**
            
            **Weighted-average**
              **Exercise Price of**
              **Outstanding Options,**
              **Warrants and Rights**
              **(b)**
            
            **Number of Securities**
              **Remaining Available for**
              **Future Issuance under**
              **Equity Compensation**
              **Plans (Excluding**
              **Securities in Column (a))**
              **(c)****Equity
                Compensation Plans Approved by Security Holders**
            
            
            16,000
            
            $
            21.14
            
            
            84,000**Equity
                Compensation Plans Not Approved by Security
                Holders**
            
            
            11,000
            (2)
            $
            6.56
            
            
            93,000**TOTAL**
            
            
            **27,000**
            
            **$**
            **15.20**
            
            
            **177,000**





(1)
      Please refer to Note 10 of our financial statements.


(2)
      The
      11,000 shares to be issued upon the exercise of outstanding options represents
      the total of 6,000 options granted during our 2007 fiscal year and 5,000 options
      granted in previous years under our 2001 Director Stock Option
      Plan.





**Description
      of 2007 Stock Option Plans**





*2007
      Non-Employee Directors’ Stock Option Plan.* On
      January 25, 2007, the Board of Directors adopted the 2007 Non-Employee
      Directors’ Stock Option Plan. The purpose of the plan is to enable the company
      to provide incentives to non-employee directors so that they will be encouraged
      to serve on the board of directors. Management believes these incentives
      correlate with increases in shareholder value, as the non-employee directors
      have motivation to act in the shareholders’ best interests.





Under
      the
      plan, non-qualified stock options (“NQSOs”) may be granted to non-employee
      directors to purchase shares of the company’s common stock at a price not less
      than fair market value at the date the NQSOs are granted. The maximum aggregate
      number of shares that may be issued under the plan is 100,000 shares, subject
      to
      adjustment for changes in the company’s capital structure or similar events as
      described in the plan. The fair market value is the average of the high and
      low
      bid prices for the company’s common stock on the date the NQSOs are granted or
      the next reporting date. At November 30, 2007, the weighted-average exercise
      price for the options outstanding under the Non-Employee Directors’ Stock Option
      Plan was $6.56. On the beginning date of each year of the plan, which is marked
      by the date of the annual meeting, non-employee directors are automatically
      granted NQSOs to purchase 1,000 shares of common stock. Options to purchase
      a
      total of 7,000 shares were granted during our 2007 fiscal year under this plan.
      With respect to a non-employee director who first becomes a director after
      the
      beginning date of the year of the plan, the NQSO to purchase 1,000 shares is
      granted automatically on the next business day following his or her election.
      Additional NQSOs may be granted to any non-employee director by the board of
      directors in its sole discretion. The NQSOs are immediately vested and
      exercisable at the time they are granted. The term of each NQSO is five years
      from the date of its grant unless terminated earlier. The NQSOs cannot be
      granted on or after January 25, 2017.





In
      the
      event that a non-employee director is removed from the board of directors for
      cause, all unexercised NQSOs immediately expire. In the event that a
      non-employee director ceases to be a member of the board for any other reason
      or
      a non-employee director becomes an officer or employee of Art’s-Way or one of
      our subsidiaries, all NQSOs which have vested prior to such time will expire
      12
      months thereafter unless they expire sooner by their terms.





*2007
      Employee Stock Option Plan.* On
      February 5, 2007, the Board of Directors adopted the 2007 Employee Stock Option
      Plan which was approved by the shareholders at their annual meeting on April
      26,
      2007. On October 1, 2007, the Board of Directors granted options to purchase
      a
      total of 16,000 shares under this plan. The weighted-average exercise price
      for
      the options outstanding under the Employee Stock Option Plan was $21.14.





15




*Options
        Exercised.* On
        October 15, 2007, our director, Marc McConnell, exercised options to purchase
        a
        total of 6,000 shares. Of that amount, 1,000 shares were granted under our
        2007
        Non-employee Directors’ Stock Option Plan, and 5,000 had been granted under our
        2001 Director Stock Option Plan. There are no remaining shares available
        for
        issuance under the 2001 Director Stock Option Plan. The exercise price of
        1,000
        shares issued under our 2007 Non-employee Directors’ Stock Option Plan was $7.68
        per share, and the exercise price for the remaining 5,000 shares was $2.75
        per
        share. The total exercise price of Mr. McConnell’s options was $21,430, which
        was paid in cash to the company. This transaction was exempt from registration
        under Section 4(2) of the Securities Act of 1933, as a transaction by the
        issuer
        not involving any public offering.
 **Item
        6.** **MANAGEMENT’S
        DISCUSSION AND ANALYSIS** **.**




***This
      report contains forward-looking statements that involve significant risks and
      uncertainties. The following discussion, which focuses on our results of
      operations contains forward-looking information and statements. Actual events
      or
      results may differ materially from those indicated or anticipated, as discussed
      in the section entitled “Forward Looking Statements.” The following discussion
      of our financial condition and results of operations should also be read in
      conjunction with our financial statements and notes to financial statements
      contained in this report.***





**Financial
      Position**





Management
      believes that our consolidated balance sheet indicates a strong financial
      position. The company’s growth has caused us to incur higher salary expenses, as
      we have hired more employees and have begun to offer wages that are competitive
      in the industry. Despite our recent success, our amount of cash is significantly
      lower for the fiscal year ended 2007. This lower cash position is due to the
      acquisition of the Miller-St. Nazianz product lines and capital expenditures
      related to the construction of new manufacturing facilities in Monona, Iowa
      and
      Dubuque, Iowa, and management believes this lower cash position reflects the
      company’s growth. The Miller-St. Nazianz acquisition caused our amount of
      inventory to increase by approximately $1.5 million from our 2006 fiscal year.
      In prior years, Art’s-Way Manufacturing has not purchased a significant amount
      of inventory in the fourth quarter; however, recent growth of the business
      led
      us to purchase inventory steadily throughout our 2007 fiscal year which also
      caused increased inventory levels in 2007 on a consolidated basis. The
      increase in inventory for Art’s-Way Manufacturing, coupled with the growth of
      Art’s-Way Scientific since its acquisition in 2006, led to a significant
      increase in our consolidated accounts payable .





The
      addition of Art’s-Way Scientific led to long-term construction contract
      disclosures to our consolidated balance sheet. For purposes of our financial
      statement presentation, we estimate a percentage of revenue earned based on
      percentage of completion. The outcome for 2007 is an asset representing our
      cost
      and profit in excess of billing, and a liability representing our billings
      in
      excess of cost and profit.





As
      discussed earlier in “Item 2. DESCRIPTION OF PROPERTY,” our Monona facility for
      Art’s-Way Scientific was completely destroyed by fire in January 2007. We are
      still in the process of negotiating with our insurance company; as such, we
      may
      receive insurance proceeds in the future, but we cannot accurately estimate
      how
      much we may receive.





**Results
      of Operations**





*Fiscal
      Year Ended November 30, 2007 Compared to Fiscal Year Ended November 30,
      2006*





On
      a
      consolidated basis, our sales, gross profit and operating income increased
      during our 2007 fiscal year. Our consolidated net sales totaled $25,517,750
      for
      the period ended November 30, 2007 which represents a 28.5% increase from our
      consolidated net sales of $19,853,812 in 2006. Our gross profit increased by
      approximately 35% between our 2006 and 2007 fiscal years, from $5,705,025 to
      $7,680,720, respectively. Our consolidated expenses decreased by less than
      1%,
      from $3,932,185 to $3,923,870. Art’s-Way Manufacturing represented $2,811,730 of
      our operating expenses, while Art’s-Way Vessels and Art’s-Way Scientific
      represented $517,767 and $594,373 of the total, respectively. Finally, our
      total
      income from operations more than doubled between our 2006 and 2007 fiscal year.
      For the year ended November 30, 2006, our consolidated total income from
      operations totaled $1,772,840, and it totaled $3,756,850 for the 2007 fiscal
      year. Art’s-Way Manufacturing was responsible for $1,686,158 of our consolidated
      income from operations, while $1,154,323 and $916,369 was contributed by
      Art’s-Way Scientific and Art’s-Way Vessels, respectively.





16




*Art’s-Way
      Manufacturing.* Art’s-Way
      Manufacturing’s sales revenue in our 2007 fiscal year totaled $14,257,471 which
      represented a 5.1% decrease in revenues from our 2006 total of $15,025,126.
      Art’s-Way Manufacturing had a lower cost of goods sold amount in our 2007 fiscal
      year; as such, gross profit increased by 9.6%. Total expenses in our 2007 fiscal
      year totaled $2,811,730 for Art’s-Way Manufacturing, representing approximately
      20% of net sales and a less than 1% decrease from the prior year. Finally,
      total
      income from operations for Art’s-Way Manufacturing increased from $1,280,111 in
      our 2006 fiscal year to $1,686,158, representing a 32% increase for our 2007
      fiscal year.





*Art’s-Way
      Vessels.* Art’s-Way
      Vessels experienced a 12.5% increase in net sales for the fiscal year ended
      November 30, 2007, increasing from $3,796,924 to $4,272,035. In addition, gross
      profit increased by 4%, from $1,376,084 to $1,434,136 during the 2006 and 2007
      fiscal year, respectively. Operating expenses for Art’s-Way Vessels decreased by
      38% in the 2007 fiscal year and operating expenses represented 12% of net sales.
      Finally, income from operations totaled $916,369 for the 2007 fiscal year,
      representing a 71% increase from the previous year.





*Art’s-Way
      Scientific.* Art’s-Way
      Scientific experienced drastic growth during the 2007 fiscal year. 2007 was
      the
      first full fiscal year for Art’s-Way Scientific. Net sales increased from
      $1,031,762 in 2006 to $6,988,244 in 2007. Similarly, gross profit increased
      dramatically from $226,721 to $1,748,696. Operating expenses increased from
      $268,521 for the fiscal year ended November 30, 2006 to $594,373 for the fiscal
      year ended November 30, 2007. In 2007, operating expenses represented 8.5%
      of
      net sales for Art’s-Way Scientific. Income from operations totaled $1,154,323
      for the 2007 fiscal year, as compared to a $41,800 operating loss for the
      previous fiscal year.





*Fiscal
      Year Ended November 30, 2006 Compared to Fiscal Year Ended November 30,
      2005*





On
      a
      consolidated basis, our sales, gross profit, operating expenses and operating
      income increased during our 2006 fiscal year. Our consolidated net sales totaled
      $19,853,812 for the period ended November 30, 2006, representing a 35.8%
      increase from our consolidated net sales of $14,618,904 in 2005. Our gross
      profit also increased by approximately 29.5% between our 2005 and 2006 fiscal
      years, from $4,404,953 to $5,705,025, respectively. In addition, our
      consolidated expenses increased by approximately 44.8%, from $2,715,263 to
      $3,932,185. Finally, our total income from operations experienced a modest
      increase of approximately 4.9% between our 2005 and 2006 fiscal year. For the
      year ended November 30, 2005, our consolidated total income from operations
      totaled $1,689,690, and it totaled $1,772,840 for the 2006 fiscal
      year.





*Art’s-Way
      Manufacturing.* Art’s-Way
      Manufacturing’s sales revenue in our 2006 fiscal year totaled $15,025,126 which
      represented a 5.4% increase in revenues from our 2005 total of $14,260,756.
      Art’s-Way Manufacturing’s gross profit decreased slightly, from $4,274,569 in
      2005 to $4,102,220 in 2006. Total expenses in our 2006 fiscal year totaled
      $2,822,109 for Art’s-Way Manufacturing, representing an 8.9% increase from the
      prior year. However, engineering expenses decreased by approximately $56,000
      due
      to a decrease in research and development during 2006 because our development
      expenses associated with the exportable beet harvester and defoliator and the
      domestic defoliator decreased. Finally, total income from operations for
      Art’s-Way Manufacturing went from $1,682,526 in our 2005 fiscal year to
      $1,280,111, representing a 24% decrease for our 2006 fiscal year. Significant
      changes were made during the 2006 fiscal year to our manufacturing facility
      in
      Armstrong, Iowa. We transitioned from a batch process to a continuous flow
      process for the production of our grinder mixer line. We also had a number
      of
      products that went into production during 2006, and we struggled to maintain
      efficiencies in the move from the design stage to the manufacturing
      process.





17




*Art’s-Way
      Vessels.* We
      began
      operating Art’s-Way Vessels in October 2005; as such, our fiscal year 2005
      results only reflect our first two months of operations. To demonstrate,
      Art’s-Way Vessels experienced a $3,438,776 increase in net sales for the fiscal
      year ended November 30, 2006 and gross profit increased ten-fold. Operating
      expenses for Art’s-Way Vessels increased by five times in the 2006 fiscal year,
      as the 2005 fiscal year included only general and administrative expenses.
      Finally, income from operations totaled $534,529 for the 2006 fiscal year,
      representing a dramatic increase from $7,164 the previous year. The comparison
      of our 2005 and 2006 fiscal years for Art’s-Way Vessels is not a strong
      indicator of our financial results due to the short time frame of Art’s-Way
      Vessels’ operation during our 2005 fiscal year. For a comparison of full fiscal
      years of operations, see “Item 6. MANAGEMENT’S DISCUSSION AND ANALYSIS - Results
      of Operations  - Fiscal
      Year Ended November 30, 2007 Compared to Fiscal Year Ended November 30, 2006.”





**Items
      Affecting Comparability**





Management
      believes the company’s overall growth in its income from operations over the
      2007 fiscal year was largely driven by Art’s-Way Scientific. The assets of Tech
      Space, Inc., were purchased in August 2006 and is operated by Art’s-Way
      Scientific. Management believes that meeting the remaining contractual
      obligations of Tech Space, Inc. after its acquisition led to an operating loss
      for Art’s-Way Scientific during our 2006 fiscal year. Art’s-Way offered
      liquidity for Art’s-Way Scientific’s sales and marketing activities, and
      management believes that these efforts resulted in a surge of growth in its
      business. In addition to agricultural confinement facilities, Art’s-Way
      Scientific plans to focus its efforts in 2008 on providing research labs for
      government entities, universities and hospitals in response to the country’s
      ever-expanding need for health care and research facilities. Management expects
      Art’s-Way Scientific to experience solid growth in 2008.





Art’s-Way
      Manufacturing experienced a minor decrease in sales during our 2007 fiscal
      year.
      The Miller-St. Nazianz acquisition was completed in the last quarter of our
      2007
      fiscal year; as such, management expects to see increased sales for Art’s-Way
      Manufacturing in 2008.





Art’s-Way
      Vessels has completed two full years of operations since its acquisition in
      October 2005, but our 2006 fiscal year is likely the best representation of
      Art’s-Way Vessel’s business due to our lack of a facility in late 2007.
      Operating expenses for Art’s-Way Vessels decreased by 35% in the 2007 fiscal
      year. This sharp decrease in operating expenses was due the expiration of the
      lease for our Dubuque facility in October 2007 and our transition into a smaller
      temporary facility. We expect to begin hiring additional employees in January
      2008 to staff our new facility that is scheduled for completion in February
      2008. Therefore, we anticipate that our 2008 operating expenses will increase
      and be near the operating expenses of our 2006 fiscal year if we are able to
      retain customers and attract new ones. Management believes that Art’s-Way
      Vessels may face challenges in 2008 in its efforts to obtain purchase orders
      for
      its products. As such, Art’s-Way Vessels may experience a decline in its income
      from operations in 2008.





**Trends
      and Uncertainties**





We
      are
      subject to a number of trends and uncertainties that may affect our short-term
      or long-term liquidity, sales revenues and operations. The agriculture industry
      has experience marked growth over the past few years which has benefited the
      agricultural equipment industry. According to the Agricultural Income and
      Finance Outlook released in December 2007 by the United States Department of
      Agriculture (USDA), U.S. net farm income for 2007 is expected to reach $87.5
      billion. This represents a $28.5 billion increase from 2006. The USDA believes
      that the rise in net farm income is a result of dramatic increases in the value
      of crop and livestock production which more than offset declines in direct
      government payments and high farm production expenses. According to the USDA,
      the value of crop production in 2007 is expected to increase by $30.5 billion,
      representing the largest annual increase since 1984, and the value of livestock
      production may increase by nearly $20 billion. The USDA believes that the large
      increases are largely due to increased demand for renewable fuels and
      agricultural exports, which has raised the price of farm commodities. Management
      believes that our business is dependent on the farming industry for the bulk
      of
      our sales revenues. As such, our business tends to reap the benefits of
      increases in farm net income, as farmers tend to purchase equipment in lucrative
      times and forgo purchases in less profitable years. Direct government payments
      are declining and costs of agricultural production are increasing; therefore,
      we
      anticipate that further increases in the value of production will benefit our
      business, while any future decreases in the value of production will decrease
      farm net income and may harm our financial results.





18




As
      with
      other farm equipment manufacturers, we depend on our network of dealers to
      influence customers’ decisions, and dealer influence is often more persuasive
      than a manufacturer’s reputation or the price of the product. Following our
      acquisition of the Miller Pro hay and forage product lines, former Miller Pro
      dealers began selling our products. We anticipate that the Miller Pro dealers
      will encourage the sales of products in the same way that they benefited
      Miller-St. Nazianz.





The
      value
      of a dollar overseas may affect our business as we continue to increase exports
      to foreign countries such as China and the United Kingdom. During our 2007
      fiscal year, the value of a U.S. dollar fell compared to the Chinese yuan and
      the Euro. The falling dollar helps our business overseas, as our products are
      priced low in comparison to overseas manufacturers, and overseas purchasers
      can
      buy more of our products for less of their currency. In order to avoid excess
      risk exposure, we have remained cautious when we price our
      products.





The
      price
      of steel influences our cost of goods sold for Art’s-Way Manufacturing and
      Art’s-Way Vessels. In 2005, we experienced challenges due to a sharp increase in
      the price of steel. Although we are not currently seeing any adverse effects
      due
      to the price of steel, sharp increases in the future may have a negative impact
      on our cost of goods sold.





**Seasonality**





Sales
      of
      our agricultural products are seasonal; however, we have tried to decrease
      this
      impact of seasonality through the development of shredders and beet harvesting
      machinery coupled with private labeled products, as the peak periods for these
      different products occur at different times. Similar to other manufacturers
      in
      the farm equipment industry, we are affected by factors unique to the farm
      equipment field, including items such as fluctuations in farm income resulting
      from the change in commodity prices, crop damage caused by weather and insects,
      government farm programs, interest rates and other unpredictable
      variables.





We
      believe that our pressurized vessel sales are not seasonal. Our modular building
      sales are somewhat seasonal, and we believe that this is due to the budgeting
      and funding cycles of the universities that commonly purchase our modular
      buildings. We believe that this cycle can be offset by building backlogs of
      inventory and through increased sales to other public and private
      sectors.





**Liquidity**





*Fiscal
      Year Ended November 30, 2007*





Sources
      of liquidity during our 2007 fiscal year were due in large part to construction
      loans, our term loan, and our revolving credit loan. See “Item 6. MANAGEMENT’S
      DISCUSSION AND ANALYSIS - Capital Resources and Credit Facilities” for more
      information. We had cash generated from operations of $143,607 for our 2007
      fiscal year. Our accounts receivable increased by $774,491 and our consolidated
      inventory increased by $2,638,427. The increase in accounts receivable reflects
      our successful year of sales, as gross profit increased across all three of
      our
      subsidiaries. The increase in consolidated inventory is partially due to
      Art’s-Way Manufacturing purchasing inventory throughout the year, rather than in
      only the first three quarters as in prior years. In addition, our acquisition
      of
      Miller-St. Nazianz in September 2007 added approximately $1,500,000 to our
      inventory.





*Fiscal
      Year Ended November 30, 2006*





Our
      main
      sources of liquidity were from cash generated from operations and a long-term
      loan from West Bank of $1,500,000. The loan was used to purchase new equipment
      for our operations and certain assets of Techspace, Inc., now operated through
      Art’s-Way Scientific. Our cash generated from operations was $1,626,963 for our
      2006 fiscal year. Our accounts receivable increased by $1,356,899 because we
      were able to reduce our consolidated inventory by $526,876. Our reduction in
      inventory is largely due to exports of our products, which began in 2006. We
      allowed extended terms to our export customers, as they must wait approximately
      two months to receive delivery of our products as the freight travels overseas.
      However, we establish letters of credit with our export customers in order
      to
      secure payment of their accounts.





19





**Capital
      Resources and Credit Facilities**





We
      utilize West Bank for our long-term financing needs. Prior to our long-term
      debt
      restructuring, as explained below, we had three long-term loans with West Bank
      and a revolving line of credit. The first loan was a $2,000,000 loan supported
      by a guarantee issued by the USDA for 75% of the principal amount outstanding.
      The variable interest rate was West Bank’s prime rate plus 1.5%, adjusted daily.
      Monthly principal and interest payments were amortized over 20 years, and the
      loan had a maturity date of May 31, 2023. Our second loan was a $1,000,000
      loan,
      also supported by a guarantee issued by the USDA for 75% of the outstanding
      principal. This loan was set to mature on March 31, 2015. The third loan was
      a
      $1,500,000 loan also guaranteed by the USDA for 75% of the principal amount.
      This loan was set to mature in April 2016, and the proceeds from this loan
      were
      used to finance our 2006 acquisitions and equipment purchases. J. Ward
      McConnell, Jr. was required to personally guarantee all three loans. The
      guarantee of the term debt was reduced after the first three years to a
      percentage representing Mr. McConnell’s ownership percentage in the company, and
      it would have been removed in the event that his ownership was reduced to a
      level of less than 20%. The company compensated Mr. McConnell for his guarantees
      on a monthly basis in an amount representing 2% of the outstanding balance.
      Guarantee payments in 2006 totaled approximately $60,000.





Our
      revolving line of credit for $3,500,000 originally matured on March 31, 2007;
      however, this has now been extended to mature on April 30, 2008. Advances made
      under this revolving credit line are used for funding our working capital,
      letter of credit and corporate credit card needs. The interest rate is West
      Bank’s prime rate of interest, adjusted daily. In September 2007, we used our
      revolving line of credit to acquire certain assets of Miller-St. Nazianz, Inc.,
      specifically portions of its Miller Pro line of agricultural products. As of
      November 30, 2007, we had borrowed $397,859 against this line of credit, but
      we
      did not borrow against this line of credit in our 2006 fiscal year. Mr.
      McConnell issued a personal guarantee for our revolving line of credit before
      it
      was extended. Guarantee payments to Mr. McConnell totaled $30,000 during our
      2007 fiscal year which represents the time period prior to our debt refinancing
      in June.





On
      June
      7, 2007, we refinanced our long-term debt with West Bank. In connection with
      the
      restructuring, we paid early payment penalties of approximately $50,000 and
      incurred a non-cash expense of $98,000 in loan amortization fees. The company
      now has one loan in the principal amount of $4,100,000. The loan will mature
      on
      May 1, 2017, at which time the outstanding principal and accrued interest will
      be due. The loan bears interest at the U.S. daily 5-year treasury index plus
      2.75 basis points fixed for five years and is then adjusted to the prevailing
      same index and margin on the sixth anniversary of the loan for the balance
      of
      the term. For the first five years, our interest rate on the loan is fixed
      at
      7.25%. We pay monthly principal and interest payments in the amount of $42,500.
      Under our previous three loans with West Bank, our monthly principal and
      interest payments totaled $50,000. As of November 30, 2007, our outstanding
      principal balance on our long-term loan is $3,989,684. This loan is not
      guaranteed by the USDA or Mr. McConnell.





On
      October 9, 2007, we took out a loan with West Bank to finance the construction
      of the Art’s-Way Scientific manufacturing facility in Monona, Iowa. This loan
      will supplement the insurance proceeds received when our previous facility
      was
      completely destroyed by fire in January 2007. The principal amount of the loan
      was $1,330,000 and it bears interest at the U.S. daily 5-year treasury index
      plus 2.75 basis points, fixed at 7% for 5 years. On the sixth anniversary of
      the
      loan, the interest rate will be adjusted to the U.S. daily 5-year treasury
      index
      plus 2.75 basis points for the balance of the term. We will make monthly
      payments on the loan of $9,500 until the final remaining balance is due on
      May
      1, 2017. As
      of
      November 30, 2007, our outstanding principal balance on this loan is $1,330,000.





On
      November 30, 2007, we took out a $1,500,000 loan with West Bank to finance
      the
      construction of a new Art’s-Way Vessels facility in the industrial park in
      Dubuque, Iowa; however, only $1,000,000 of this loan was received during our
      2007 fiscal year. The loan bears interest at the U.S. daily 5-year treasury
      index plus 2.75 basis points, fixed at 7.25% for 5 years. On the sixth
      anniversary of the loan, the interest rate will be adjusted to the U.S. daily
      5-year treasury index plus 2.75 basis points for the balance of the term. We
      will make four monthly consecutive interest payments beginning in January 2008,
      with interest calculated at a rate of 7.25% on the unpaid principal; followed
      by
      108 monthly principal payments of $11,000 beginning in May 2008; and one
      principal and interest payment of the remaining balance on May 1, 2017, with
      interest calculated at a rate of 7.25% on the unpaid principal balance. As
      of
      November 30, 2007, our outstanding principal balance on this loan is $1,000,000.





20




Material
      terms and conditions of our debt obligations with West Bank are that we are
      required to provide monthly financial reports, prepared internally, and annual
      audited financial statements. The monthly reports must include accounts
      receivable aging schedules and we must provide borrowing base certificates.
      The
      borrowing bases limit advances on our revolving line of credit to 60% of our
      less than 90-days accounts receivable, 60% of finished goods inventory, 50%
      of
      raw material inventories and work-in-process. The loan covenants place
      restrictions on our debt service coverage ratio and debt to tangible net worth
      ratio. During our fiscal year ended November 30, 2006, we obtained waivers
      from
      West Bank on covenants regarding capital expenditures and payments of dividends
      and loans to third parties. Under our restructured loan terms, we can issue
      dividends without the consent of West Bank so long as we achieve all of the
      financial covenants stated above for the previous fiscal year end.





Our
      loans
      and line of credit from West Bank are secured by a first lien on all of our
      assets and those of our subsidiaries, including real estate, inventory, accounts
      receivable, machinery and equipment.





The
      following table represents our working capital and current ratio for the past
      two fiscal years:





**Fiscal
                Year Ended****November 30, 2007**
            
            **November 30, 2006**Current
                Assets
            
            $
            13,784,624
            
            $
            11,218,700Current
                Liabilities
            
            
            3,547,658
            
            
            2,717,243Working
                Capital
            
            $
            10,236,966
            
            $
            8,501,457Current
                Ratio
            
            
            3.88
            
            
            4.13





**Off
      Balance Sheet Arrangements**





None.




21




**Item
      7.** **FINANCIAL
      STATEMENTS** **.**


**REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
   To
          the
          Board of Directors and Stockholders
 **Art’s
          Way- Manufacturing Co., Inc.**
 Armstrong,
          Iowa
  We
          have
          audited the accompanying consolidated balance sheets of Art’s-Way Manufacturing
          Co., Inc. and Subsidiaries as of November 30, 2007 and 2006, and the related
          consolidated statements of operations, stockholders’ equity, and cash flows for
          the years then ended. These financial statements are the responsibility
          of the
          Company’s management. Our responsibility is to express an opinion on these
          financial statements based on our audits.
 
 We
          conducted our audit in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes consideration
          of
          internal control over financial reporting as a basis for designing audit
          procedures that are appropriate in the circumstances, but not for the purpose
          of
          expressing an opinion on the effectiveness of the Company’s internal control
          over financial reporting. Accordingly, we do not express such an opinion.
          An
          audit also includes examining, on a test basis, evidence supporting the
          amounts
          and disclosures in the financial statements. An audit also includes assessing
          the accounting principles used and significant estimates made by management,
          as
          well as evaluating the overall financial statement presentation. We believe
          that
          our audits provide a reasonable basis for our opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the financial position of Art’s-Way Manufacturing Co.,
          Inc. and Subsidiaries as of November 30, 2007 and 2006, and the results
          of its
          operations and its cash flows for the years then ended in conformity with
          accounting principles generally accepted in the United States of
          America.
  /s/
          Eide
          Bailly LLP
  Minneapolis,
          Minnesota
 February
          19, 2008


22
 
  **ART’S-WAY
            MANUFACTURING CO., INC.**
 Consolidated
            Balance Sheets
 November
            30, 2007 and 2006
 
 **2007**
                  
                  **2006****Assets**Current
                      assets:Cash
                  
                  $
                  612,201
                  
                  $
                  2,072,121Accounts
                      receivable-customers, net of allowance for doubtful accounts
                      of $148,636
                      and $108,372 in 2007 and 2006, respectively
                  
                  
                  3,087,781
                  
                  
                  2,313,290Inventories,
                      net
                  
                  
                  8,636,602
                  
                  
                  5,998,175Deferred
                      taxes
                  
                  
                  773,555
                  
                  
                  672,000Cost
                      and Profit in Excess of Billings
                  
                  
                  265,615
                  
                  
                  —Other
                      current assets
                  
                  
                  408,870
                  
                  
                  163,114Total
                      current assets
                  
                  
                  13,784,624
                  
                  
                  11,218,700Property,
                      plant, and equipment, net
                  
                  
                  5,497,200
                  
                  
                  3,185,298Deferred
                      taxes
                  
                  
                  —
                  
                  
                  100,000Covenant
                      not to Compete
                  
                  
                  300,000
                  
                  
                  —Goodwill
                  
                  
                  375,000
                  
                  
                  —Other
                      Assets
                  
                  
                  9,771
                  
                  
                  110,240Total
                      assets
                  
                  $
                  19,966,595
                  
                  $
                  14,614,238**Liabilities
                      and Stockholders’ Equity**Current
                      liabilities:Notes
                      payable to bank
                  
                  $
                  397,859
                  
                  $
                  —Current
                      portion of term debt
                  
                  
                  250,027
                  
                  
                  220,559Accounts
                      payable
                  
                  
                  1,368,988
                  
                  
                  587,555Customer
                      deposits
                  
                  
                  53,196
                  
                  
                  424,205Billings
                      in Excess of Cost and Profit
                  
                  
                  7,675
                  
                  
                  57,266Accrued
                      expenses
                  
                  
                  1,323,008
                  
                  
                  1,276,947Income
                      taxes payable
                  
                  
                  146,905
                  
                  
                  150,711Total
                      current liabilities
                  
                  
                  3,547,658
                  
                  
                  2,717,243Long-term
                      liabilitiesDeferred
                      taxes
                  
                  
                  205,998
                  
                  
                  —Term
                      debt, excluding current portion
                  
                  
                  6,069,657
                  
                  
                  3,852,372Total
                      liabilities
                  
                  
                  9,823,313
                  
                  
                  6,569,615Stockholders’
                      equity:Common
                      stock – $0.01 par value. Authorized 5,000,000 shares; issued
                      1,984,176 and 1,978,176 shares in 2007 and 2006
                  
                  
                  19,842
                  
                  
                  19,782Additional
                      paid-in capital
                  
                  
                  1,828,427
                  
                  
                  1,765,697Retained
                      earnings
                  
                  
                  8,295,013
                  
                  
                  6,259,144Total
                      stockholders’ equity
                  
                  
                  10,143,282
                  
                  
                  8,044,623Total
                      liabilities and stockholders’ equity
                  
                  $
                  19,966,595
                  
                  $
                  14,614,238
  See
              accompanying notes to consolidated financial statements.
  23
 
 **ART’S-WAY
            MANUFACTURING CO., INC.**
 Consolidated
            Statements of Operations
 Years
            ended November 30, 2007 and 2006
 
 **2007**
                  
                  **2006**Net
                      sales
                  
                  $
                  25,517,750
                  
                  $
                  19,853,812Cost
                      of goods sold
                  
                  
                  17,837,030
                  
                  
                  14,148,787Gross
                      profit
                  
                  
                  7,680,720
                  
                  
                  5,705,025Expenses:Engineering
                  
                  
                  338,286
                  
                  
                  428,336Selling
                  
                  
                  1,117,579
                  
                  
                  821,291General
                      and administrative
                  
                  
                  2,468,005
                  
                  
                  2,682,558Total
                      expenses
                  
                  
                  3,923,870
                  
                  
                  3,932,185Income
                      from operations
                  
                  
                  3,756,850
                  
                  
                  1,772,840Other
                      income (expense):Interest
                      expense
                  
                  
                  (383,616
                  )
                  
                  (408,618
                  )Other
                  
                  
                  6,095
                  
                  
                  52,624Total
                      other expense
                  
                  
                  (377,521
                  )
                  
                  (355,994
                  )Income
                      before income taxes
                  
                  
                  3,379,329
                  
                  
                  1,416,846Income
                      tax
                  
                  
                  1,145,648
                  
                  
                  483,306Net
                      income
                  
                  $
                  2,233,681
                  
                  $
                  933,540Net
                      income per share:Basic
                  
                  
                  1.13
                  
                  
                  0.47Diluted
                  
                  
                  1.13
                  
                  
                  0.47
  See
            accompanying notes to consolidated financial statements.
  24


**ART’S-WAY
            MANUFACTURING CO., INC.**
 Consolidated
            Statements of Cash Flows
 Years
            ended November 30, 2007 and 2006
 
 **2007**
                  
                  **2006**Cash
                      flows from operations:Net
                      income
                  
                  $
                  2,233,681
                  
                  $
                  933,540Adjustments
                      to reconcile net income to net cash provided by operating
                      activities:Stock
                      based compensation
                  
                  
                  41,360
                  
                  
                  5,360(Gain)
                      Loss on sale of property, plant, and equipment
                  
                  
                  (134,672
                  )
                  
                  (71,764
                  )Depreciation
                      expense
                  
                  
                  347,046
                  
                  
                  303,754Amortization
                      expense
                  
                  
                  98,520Fire
                      loss of operating supplies
                  
                  
                  (371,792
                  )Deferred
                      income taxes
                  
                  
                  204,443
                  
                  
                  92,000Changes
                      in assets and liabilities, net ofTechSpace
                      Inc & Miller Pro acquisition:(Increase)
                      decrease in:Accounts
                      receivable
                  
                  
                  (774,491
                  )
                  
                  (1,031,074
                  )Inventories
                  
                  
                  (1,263,651
                  )
                  
                  1,119,386Other
                      current assets
                  
                  
                  3,116
                  
                  
                  (34,237
                  )Other,
                      net
                  
                  
                  1,949
                  
                  
                  (35,887
                  )Increase
                      (decrease) in:Accounts
                      payable
                  
                  
                  781,433
                  
                  
                  56,833Contracts
                      in progress, net
                  
                  
                  (694,581
                  )
                  
                  57,266Customer
                      deposits
                  
                  
                  (371,009
                  )
                  
                  (459,402
                  )Income
                      taxes payable
                  
                  
                  (3,806
                  )
                  
                  -Accrued
                      expenses
                  
                  
                  46,061
                  
                  
                  691,188Net
                      cash provided by operating activities
                  
                  
                  143,607
                  
                  
                  1,626,963Cash
                      flows from investing activities:Purchases
                      of property, plant, and equipment
                  
                  
                  (2,982,645
                  )
                  
                  (974,716
                  )Purchase
                      of assets of Miller Pro
                  
                  
                  (2,337,745
                  )
                  
                  0Proceeds
                      from insurance recoveries
                  
                  
                  1,233,633Purchase
                      of assets of Tech Space Inc.
                  
                  
                  0
                  
                  
                  (1,137,606
                  )Proceeds
                      from sale of property, plant, and equipment
                  
                  
                  15,000
                  
                  
                  126,489Net
                      cash (used in) investing activities
                  
                  
                  (4,071,757
                  )
                  
                  (1,985,833
                  )Cash
                      flows from financing activities:Net
                      change in line of credit
                  
                  
                  397,859
                  
                  
                  0Payments
                      of notes payable to bank
                  
                  
                  (3,158,453
                  )
                  
                  (209,288
                  )Proceeds
                      from term debt
                  
                  
                  5,405,206
                  
                  
                  1,500,000Proceeds
                      from the exercise of stock options
                  
                  
                  21,430
                  
                  
                  40,700Dividends
                      paid to stockholders
                  
                  
                  (197,812
                  )
                  
                  (98,659
                  )Net
                      cash provided by financing activities
                  
                  
                  2,468,230
                  
                  
                  1,232,753Net
                      increase/(decrease) in cash
                  
                  
                  (1,459,920
                  )
                  
                  873,883Cash
                      at beginning of period
                  
                  
                  2,072,121
                  
                  
                  1,198,238Cash
                      at end of period
                  
                  $
                  612,201
                  
                  $
                  2,072,121Supplemental
                      disclosures of cash flow information:Cash
                      paid/(received) during the period for:Interest
                  
                  $
                  299,273
                  
                  $
                  391,149Income
                      taxes
                  
                  
                  1,135,960
                  
                  
                  40,359Supplemental
                      schedule of investing activities:Miller
                      Pro acquisition:Inventories
                  
                  
                  1,462,745
                  
                  
                  0Property,
                      plant and equipment
                  
                  
                  200,000
                  
                  
                  0Covenant
                      not to Compete
                  
                  
                  300,000Goodwill
                  
                  
                  375,000
                  
                  
                  0Cash
                      paid
                  
                  $
                  2,337,745
                  
                  $
                  0
  25
 Supplemental
                      disclosures of noncash investing activities:Proceeds
                      from insurance recoveries
                  
                  $
                  1,233,633
                  
                  $
                  0Insurance
                      recoveries receivable
                  
                  
                  248,872
                  
                  
                  0Net
                      book value of assets destroyedProperty,
                      plant and equipment
                  
                  
                  (339,258
                  )
                  
                  0Cost
                      incurred on contracts in progress
                  
                  
                  (379,375
                  )
                  
                  0Cost
                      incurred for plant supplies
                  
                  
                  (371,792
                  )Inventories
                  
                  
                  (87,969
                  )
                  
                  0Gain
                      on insurance recovery
                  
                  $
                  304,111
                  
                  $
                  0Supplemental
                      schedule of investing activities:Tech
                      Space Inc acquisition:Accounts
                      Receivable
                  
                  $
                  0
                  
                  $
                  325,825Inventories
                  
                  
                  0
                  
                  
                  447,639Property,
                      plant and equipment
                  
                  
                  0
                  
                  
                  678,395Customer
                      deposits
                  
                  
                  0
                  
                  
                  (314,253
                  )Cash
                      paid
                  
                  $
                  0
                  
                  $
                  1,137,606Noncash
                      financing activity:Refinanced
                      existing debt with West Bank
                  
                  $
                  1,024,794
                  
                  $
                  0
 
 See
            accompanying notes to consolidated financial statements.
  26
 
 **ART’S-WAY
            MANUFACTURING CO., INC.**
 Consolidated
            Statements of Stockholders’ Equity
 Years
            ended November 30, 2007 and 2006
 
 **Common stock**
                  
                  **Additional****Number****of**
                  
                  
                  
                  **paid-in**
                  
                  **Retained****shares**
                  
                  **Par value**
                  
                  **capital**
                  
                  **earnings**
                  
                  **Total**Balance,
                      November 30, 2005
                  
                  
                  1,963,176
                  
                  $
                  19,632
                  
                  $
                  1,719,787
                  
                  $
                  5,424,263
                  
                  $
                  7,163,682Exercise
                      of stock options
                  
                  
                  15,000
                  
                  
                  150
                  
                  
                  40,550
                  
                  
                  —
                  
                  
                  40,700Stock
                      based compensation
                  
                  
                  —
                  
                  
                  —
                  
                  
                  5,360
                  
                  
                  —
                  
                  
                  5,360Dividends
                      paid, $0.05 per share
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (98,659
                  )
                  
                  (98,659
                  )Net
                      income
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  933,540
                  
                  
                  933,540Balance,
                      November 30, 2006
                  
                  
                  1,978,176
                  
                  $
                  19,782
                  
                  $
                  1,765,697
                  
                  $
                  6,259,144
                  
                  $
                  8,044,623Exercise
                      of stock options
                  
                  
                  6,000
                  
                  
                  60
                  
                  
                  21,370
                  
                  
                  —
                  
                  
                  21,430Stock
                      based compensation
                  
                  
                  —
                  
                  
                  —
                  
                  
                  41,360
                  
                  
                  —
                  
                  
                  41,360Dividends
                      paid, $0.10 per share
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (197,812
                  )
                  
                  (197,812
                  )Net
                      income
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  2,233,681
                  
                  
                  2,233,681Balance,
                      November 30, 2007
                  
                  
                  1,984,176
                  
                  $
                  19,842
                  
                  $
                  1,828,427
                  
                  $
                  8,295,013
                  
                  $
                  10,143,282
 
 See
            accompanying notes to consolidated financial statements.
   27


**Notes
      to Consolidated Financial Statements**





**(1)**
                **Summary
                    of Significant Accounting
                    Policies**


***(a)***
              ***Nature
                  of Business***





Art’s-Way
      Manufacturing Co., Inc. is primarily engaged in the fabrication and sale of
      metal products in the agricultural sector of the United States economy. Major
      product offerings include animal feed processing equipment, sugar beet
      harvesting equipment, land maintenance equipment and crop shredding equipment.
      A
      significant part of the Company’s business is supplying hay blowers to original
      equipment manufacturers (OEMs). Another important part of the Company’s business
      is after market service parts that are available to keep its branded and OEM
      produced equipment operating to the satisfaction of the end user of the
      Company’s products.





Art’s-Way
      Vessels, Inc. is primarily engaged in the fabrication and sale of pressurized
      vessels and tanks.


Art’s-Way
      Scientific, Inc. is primarily engaged in the construction of modular
      laboratories and animal housing facilities.





***(b)***
            ***Principles
                of Consolidation***





The
      consolidated financial statements include the accounts of Art’s-Way
      Manufacturing Co., Inc. and its wholly-owned subsidiaries, Art’s-Way Vessels,
      Inc. and Art’s-Way Scientific, Inc. Art’s-Way Vessels became active in October
      2005 after purchasing certain assets of Vessel Systems, Inc., while Art’s-Way
      Scientific, Inc. became active in August 2006 after purchasing certain assets
      of
      Tech Space, Inc. All material inter-company accounts and transactions are
      eliminated in consolidation.





***(c)***
            ***Cash
                Concentration***




The
      Company maintains its cash balances in several different accounts in two
      different banks, balances in these accounts are periodically in excess of
      federally insured limits.





***(d)***
            ***Accounts
                Receivable***





Accounts
      receivable are carried at original invoice amount less an estimate made for
      doubtful accounts based on a review of all outstanding amounts on a monthly
      basis. Management determines the allowance for doubtful accounts by identifying
      troubled accounts and by using historical experience applied to an aging of
      accounts. Accounts receivable are written-off when deemed uncollectible.
      Recoveries of accounts receivable previously written-off are recorded when
      received. Accounts receivable are considered past due 60 days past invoice
      date,
      with the exception of international sales which primarily are sold with a letter
      of credit for 120 day terms.





***(e)***
            ***Inventories***





Inventories
      are stated at the lower of cost or market, and cost is determined using the
      first-in, first-out (FIFO) method. Management monitors the carrying value of
      inventories using inventory control and review processes that include, but
      are
      not limited to, sales forecast review, inventory status reports, and inventory
      reduction programs. The Company records inventory write downs to market based
      on
      expected usage information for raw materials and historical selling trends
      for
      finished goods. Additional write downs may be necessary if the assumptions
      made
      by management do not occur.





***(f)***
            ***Property,
                Plant, and Equipment***





Property,
      plant, and equipment are recorded at cost. Depreciation of plant and equipment
      is provided using the straight-line method, based on the estimated useful lives
      of the assets which range from three to forty years.




28




**(g)**
            ***Goodwill
                and Other Intangible Assets and
                Impairment***





Goodwill
      represents costs in excess of the fair value of net tangible and identifiable
      net intangible assets acquired in business combinations. In accordance with
      Statement of Financial Accounting Standards (“SFAS”) No. 142, *Goodwill
      and Other Intangible Assets,* Art’s-Way
      performs an annual test for impairment of goodwill during the fourth quarter.
      This test is performed by comparing, at the reporting unit level, the carrying
      value of the reporting unit to its fair value.





Intangible
      assets with finite lives are amortized on a straight-line basis over their
      estimated useful lives, which is five years. Estimated future amortization
      of
      intangible assets is $60,000 in each of the next 5 years.





***(h)***
            ***Income
                Taxes***





Income
      taxes are accounted for under the asset and liability method. Deferred tax
      assets and liabilities are recognized for the estimated future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax bases and operating
      losses. Deferred tax assets and liabilities are measured using enacted tax
      rates
      in effect for the year in which those temporary differences are expected to
      be
      recovered or settled. The effect on deferred tax assets and liabilities of
      a
      change in tax rates is recognized in income in the period that includes the
      enactment date. In assessing the realizability of deferred tax assets,
      management considers whether it is more likely than not that some portion or
      all
      of the deferred tax assets will not be realized. The ultimate realization of
      deferred tax assets is entirely dependent upon the generation of future taxable
      income during the periods in which those temporary differences become
      deductible. Management considers the scheduled reversals of deferred tax
      liabilities, projected future taxable income, and tax planning strategies in
      making this assessment.





***(i)***
            ***Revenue
                Recognition***




Revenue
      is recognized when risk of ownership and title pass to the buyer, generally
      upon
      the shipment of the product. Shipping costs charged to customers are included
      in
      net sales. Freight costs incurred are included in cost of goods sold. In very
      limited circumstances, and only upon a written customer agreement, we recognize
      revenue upon the production and invoicing of the products.





Art’s-Way
      Scientific, Inc. is in the construction industry, and as such accounts for
      long-term contracts on the percentage of completion method. Revenue and gross
      profit are recognized as work is performed based on the relationship between
      actual costs incurred and total estimated costs at completion.





Costs
      and
      profit in excess of amounts billed are classified as current assets and billings
      in excess of cost and profit are classified as current liabilities.





***(j)***
            ***Research
                and Development***





Research
      and development costs are expensed when incurred. Such costs approximated
      $178,000 and $186,000 for the years ended November 30, 2007 and 2006,
      respectively.





***(k)***
            ***Advertising*******




Advertising
      costs are expensed when incurred. Such costs approximated $205,000 and $99,000
      for the years ended November 30, 2007 and 2006, respectively.





***(l)***
            ***Income
                Per Share***





Basic
      net
      income per common share has been computed on the basis of the weighted average
      number of common shares outstanding. Diluted net income per share has been
      computed on the basis of the weighted average number of common shares
      outstanding plus equivalent shares assuming exercise of stock
      options.




29




Basic
      and
      diluted earnings per common share have been computed based on the following
      as
      of November 30, 2007 and 2006:





**2007**
            
            **2006**Basic:Numerator,
                net income
            
            $
            2,233,681
            
            $
            933,540Denominator:
                Average number of common shares outstanding
            
            
            1,978,932
            
            
            1,970,676Basic
                  earnings percommon
                  share
            
            $
            1.13
            
            $
            0.47DilutedNumerator,
                net income
            
            $
            2,233,681
            
            $
            933,540Denominator:
                Average number of common shares outstanding
            
            
            1,978,932
            
            
            1,970,676Effect
                of dilutive stock options
            
            
            5,375
            
            
            7,4321,984,307
            
            
            1,978,108Diluted
                earnings per common share
            
            $
            1.13
            
            $
            0.47




***(m)***
            ***Stock
                Based Compensation***





The
      Company accounted for stock options in accordance with the provisions of the
      Financial Accounting Standards Board (FASB) Statement No. 123(Revised),
      Share-Based Payments (FAS 123(R)). Statement FAS 123(R) requires that
      share-based compensation, which includes stock options, be accounted for at
      the
      fair value of the applicable equity instrument. The Company utilized the Black
      Scholes option pricing model to value stock options.





***(n)***
            ***Use
                of Estimates***





Management
      of the Company has made a number of estimates and assumptions related to the
      reported amount of assets and liabilities, reported amount of revenues and
      expenses, and the disclosure of contingent assets and liabilities to prepare
      these financial statements in conformity with generally accepted accounting
      principles. These estimates include the valuation of the Company’s accounts
      receivable, inventories and realizability of the deferred tax assets. Actual
      results could differ from those estimates.





***(o)***
            ***Recently
                Issued Accounting
                Pronouncements***





In
      December 2006, the FASB issued Financial Interpretation No. 48, Accounting
      for
      Uncertainty in Income Taxes – an interpretation
      of FASB Statement No. 109 (Issued 6/06). This Interpretation prescribes a
      recognition threshold and measurement attribute for the financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. It also provides guidance on derecognition, classification, interest
      and penalties, accounting in interim periods, disclosure, and transition. For
      the Company, the Statement is effective for fiscal years beginning after
      December 15, 2006. The adoption of FIN 48 is not expected to have any material
      impact on the Company’s financial position, results of operations, or cash
      flows.




30




In
      September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
      statement defines fair value, establishes a framework for measuring fair value
      in generally accepted accounting principles, and expands disclosure about fair
      value measurements. The statement does not require any new fair value
      measurements, but for some entities, the application of the statement will
      change current practice. This statement is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. The Company does not expect the adoption of this
      pronouncement to have a material impact on its financial
      statements.





In
      February 2007, the FASB issued SFAS No. 159, the Fair Value Option for Financial
      Assets and Financial Liabilities. SFAS 159 provides entities with an option
      to
      report selected financial assets and liabilities at fair value and establishes
      presentation and disclosure requirements designed to facilitate comparisons
      between companies that select different measurement attributes. SFAS 159 is
      effective for fiscal years beginning after November 15, 2007. The Company does
      not expect the adoption of SFAS 159 to have a material impact on its financial
      statements.





In
      December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business
      Combinations - Revised 2007. SFAS 141 R provides guidance on improving the
      relevance, representational faithfulness, and comparability of information
      that
      a reporting entity provides in its financial reports about a business
      combination and its effects. SFAS 141R applies to business combinations where
      is
      the acquisition date is on or after the beginning of the first annual reporting
      period beginning on or after December 15, 2008. The Company is in the process
      of
      analyzing the effects SFAS 141R will have on the Company’s financial
      statements.





In
      December 2007, the FASB also issued SFAS No. 160, Noncontrolling Interests
      in
      Consolidated Financial Statements, which establishes accounting and reporting
      standards to improve the relevance, comparability, and transparency of financial
      information in its consolidated financial statements that include an outstanding
      noncontrolling interest in one or more subsidiaries. SFAS 160 is effective
      for
      fiscal years, and the interim periods within those fiscal years, beginning
      on or
      after December 15, 2008. Management of the Company does not expect the adoption
      of this pronouncement to have a material impact on its financial
      statements.





**(2)**
            **Allowance
                for Doubtful Accounts**





A
      summary
      of the Company’s activity in the allowance for doubtful accounts is as
      follows:





**2007**
            
            **2006**Balance,
                beginning
            
            $
            108,372
            
            $
            46,385Provision
                charged to expense
            
            
            81,026
            
            
            88,528Less
                amounts charged-off
            
            
            (40,762
            )
            
            (26,541
            )Balance,
                ending
            
            $
            148,636
            
            $
            108,372





**(3)**
            **Inventories**





Major
      classes of inventory are:





**2007**
            
            **2006**Raw
                materials
            
            $
            4,468,920
            
            $
            3,260,897Work
                in process
            
            
            336,108
            
            
            981,979Finished
                goods
            
            
            5,033,063
            
            
            2,886,860$
            9,838,091
            
            $
            7,129,736Less:
                Reserves
            
            
            (1,201,489
            )
            
            (1,131,561
            )$
            8,636,602
            
            $
            5,998,175





31





**(4)**
            **Contracts
                in Progress**





Amounts
      included in the consolidated financial statements related to uncompleted
      contracts are as follows:





Cost and Profit in
              Excess of Billings
            
            Billings in Excess of Costs
              and ProfitNovember
                30, 2007Costs
            
            $
            2,910,576
            
            $
            375,766Estimated
                earnings
            
            
            648,221
            
            
            105,5003,558,797
            
            
            481,266Less:
                amounts billed
            
            
            (3,293,182
            )
            
            (488,941
            )$
            265,615
            
            $
            (7,675
            )November
                30, 2006Costs
            
            
            
            
            $
            104,213Estimated
                earnings
            
            
            
            
            
            8,468112,681Less:
                amounts billed
            
            
            
            
            
            (169,947
            )$
            (57,266
            )





**(5)**
            **Property,
                Plant, and Equipment**





Major
      classes of property, plant, and equipment are:





**2007**
            
            **2006**Land
            
            $
            455,262
            
            $
            223,509Buildings
                and improvements
            
            
            4,755,097
            
            
            3,341,804Construction
                in Progress
            
            
            790,176Manufacturing
                machinery and equipment
            
            
            9,685,762
            
            
            9,511,453Trucks
                and automobiles
            
            
            174,174
            
            
            167,535Furniture
                and fixtures
            
            
            107,982
            
            
            116,28615,968,453
            
            
            13,360,587Less
                accumulated depreciation
            
            
            10,471,253
            
            
            10,175,289Property,
                plant and equipment
            
            $
            5,497,200
            
            $
            3,185,298





Depreciation
      expense totaled $347,046 and $303,754 for the fiscal years ended November 30,
      2007 and 2006, respectively.





**(6)**
            **Accrued
                Expenses**





Major
      components of accrued expenses are:





**2007**
            
            **2006**Salaries,
                wages, and commissions
            
            $
            562,806
            
            $
            464,609Accrued
                warranty expense
            
            
            262,665
            
            
            230,740Other
            
            
            497,537
            
            
            581,598$
            1,323,008
            
            $
            1,276,947




32




**(7)**
            **Product
                Warranty**





The
      Company offers warranties of various lengths to its customers depending on
      the
      specific product and terms of the customer purchase agreement. The average
      length of the warranty period is 1 year from date of purchase. The Company’s
      warranties require it to repair or replace defective products during the
      warranty period at no cost to the customer. The Company records a liability
      for
      estimated costs that may be incurred under its warranties. The costs are
      estimated based on historical experience and any specific warranty issues that
      have been identified. Although historical warranty costs have been within
      expectations, there can be no assurance that future warranty costs will not
      exceed historical amounts. The Company periodically assesses the adequacy of
      its
      recorded warranty liability and adjusts the balance as necessary.





Changes
      in the Company’s product warranty liability for the years ended November 30,
      2007, and 2006 are as follows:





**2007**
            
            **2006**Balance,
                beginning
            
            $
            230,740
            
            $
            131,832Settlements
                made in cash or in-kind
            
            
            (194,889
            )
            
            (216,068
            )Warranties
                issued
            
            
            226,814
            
            
            314,976Balance,
                ending
            
            $
            262,665
            
            $
            230,740





**(8)**
            **Loan
                and Credit Agreements**





The
      Company has a revolving line of credit for $3,500,000 with advances funding
      the
      working capital, letter of credit and corporate credit card needs that mature
      on
      April 30, 2008. The interest rate is West Bank’s prime interest rate, adjusted
      daily. Monthly interest only payments are required and the unpaid principal
      is
      due on the maturity date. Collateral consists of a first position on assets
      owned by the Company including, but not limited to inventories, accounts
      receivable, machinery and equipment. As of November 30, 2007 and 2006, the
      Company had borrowed $397,859 and $0 respectively, against the line of credit.
      The available amounts remaining on the line of credit were $3,102,141 and
      $3,500,000 on November 30, 2007 and 2006, respectively. Other terms and
      conditions of the debt with West Bank include providing monthly internally
      prepared financial reports including accounts receivable aging schedules and
      borrowing base certificates and year-end audited financial statements. The
      borrowing base shall limit advances from line of credit to 60% of accounts
      receivable less than 90 days, 60% of finished goods inventory, 50% of raw
      material inventory and 50% of work-in-process inventory plus 40% of appraisal
      value of machinery and equipment.





On
      June
      7, 2007 the Company restructured its long-term debt with West Bank. The Company
      now has one loan for $4,100,000. The loan matures on May 1, 2017 and bears
      interest at the U.S. daily 5-year treasury index plus 2.75 bps fixed for 5
      years
      and then adjusted to the prevailing same index and margin on the sixth
      anniversary of the loan for the balance of the term. For the first five years
      the interest is fixed at 7.25%. Monthly principal and interest payments in
      the
      amount of $42,500 are required compared to $50,000 with the previous three
      loans. A final payment of principal and accrued interest is due on May 1, 2017.
      The new loan is not required to be guaranteed by the USDA or by J. Ward
      McConnell, Jr.





The
      Company obtained two additional loans in 2007. Both of these loans are to
      finance the construction of the new facilities in Monona and Dubuque. On October
      9, 2007, the Company obtained a loan for $1,330,000 that bears interest at
      the
      U.S. daily 5-year treasury index plus 2.75 bps, fixed at 7% for 5 years and
      then
      adjusted to the prevailing same index and margin on the sixth anniversary for
      the balance of the term. Monthly payments of $9,500 are required for principal
      and interest, with a final payment of accrued interest and principal due on
      May
      1, 2017. On November 30, 2007, the Company obtained a construction loan to
      finance the Dubuque, Iowa facility. This loan has a principal amount of
      $1,500,000, however only $1,000,000 was received during the 2007 fiscal year.
      The loan bears interest at the U.S. daily 5-year treasury index plus 2.75 bps,
      fixed at 7.25% for 5 years and then adjusted to the prevailing same index and
      margin on the sixth anniversary for the balance of the term. On December 19,
      2007, the additional $500,000 available was disbursed. Payments of $11,000
      are
      due monthly for principal and interest, with a final accrued interest and
      principal payment due on May 1, 2017. Both loans are secured by unlimited
      guarantees of Art’s-Way Vessels, Inc. and Art’s-Way Scientific,
      Inc.




33




J.
      Ward
      McConnell, Jr. was required to personally guarantee the debt on the old loans
      with West Bank on an unlimited and unconditional basis. The guarantee of the
      term debt was reduced after the first three years to a percentage representing
      his ownership of the Company. Mr. McConnell’s guarantee would have been removed
      from the term debt in the event that his ownership interest in the Company
      was
      reduced to a level less than 20% after the first three years of the loan. The
      Company compensated Mr. McConnell for his personal guarantee at an annual
      percentage rate of 2% of the outstanding balance to be paid monthly. Guarantee
      fee payments to Mr. McConnell were approximately  $30,000
      and $60,000, for  the
      year
      ended November 30, 2007, and 2006, respectively.





A
      summary
      of the Company’s term debt is as follows:





**2007**
            
            **2006**West
                Bank loan payable in monthly installments of $17,776 including interest
                at
                Bank's prime rate plus 1.5% due May 2023 (A) (B)
            
            $
            0
            
            $
            1,701,843West
                Bank loan payable in monthly installments of $10,000 including interest
                at
                Bank’s prime rate plus 1.5% due March 2015 (A) (B)
            
            
            0
            
            
            943,034West
                Bank loan payable in monthly installments of $22,063 including interest
                at
                Bank’s prime rate plus 1.0% due April 2016 (A) (B)
            
            
            0
            
            
            1,428,054West
                Bank loan payable in monthly installments of $42,500 including interest
                at
                the U.S daily 5-year treasury index plus 2.75 bps fixed for 5 years
                and
                then due May 1, 2017 (C)
            
            
            3,989,684
            
            
            0West
                Bank loan payable in monthly installments of $9,500 including interest
                at
                the U.S daily 5-year treasury index plus 2.75 bps fixed for 5 years
                and
                then due May 1, 2017 (C)
            
            
            1,330,000
            
            
            0West
                Bank loan payable in monthly installments of $11,000 including interest
                at
                the U.S daily 5-year treasury index plus 2.75 bps fixed for 5 years
                and
                then due May 1, 2017 (C)
            
            
            1,000,000
            
            
            0Total
                term debt
            
            
            6,319,684
            
            
            4,072,931Less
                current portion of term debt
            
            
            250,027
            
            
            220,559Term
                debt, excluding current portion
            
            $
            6,069,657
            
            $
            3,852,372





(A)
      Notes
      are supported by a guarantee issued by the United States Department of
      Agriculture (USDA) for 75% of the loan amount outstanding. Collateral for these
      loans are primarily real estate with a second position on assets securing the
      line of credit. The USDA subordinates collateral rights in all assets other
      than
      real estate in an amount equal to West Bank’s other credit commitments.





(B)
      Covenants include, but are not limited to, restrictions on payment of dividends,
      debt service coverage ratio, debt/tangible net worth ratio, current ratio,
      limitation on capital expenditures, and tangible net worth. During the year
      ended November 30, 2006, the Company violated certain debt covenants that were
      waived.




34




(C)
      Covenants include, but are not limited to, debt service coverage ratio and
      debt/tangible net worth ratio. These loans are secured by real estate and
      unlimited guarantees of Art’s-Way Vessels, Inc. and Art’s-Way Scientific,
      Inc.





A
      summary
      of the minimum maturities of term debt follows for the years ending November
      30:





Year:
            
            Amount2008
            
            $
            250,0272009
            
            
            346,9472010
            
            
            354,3392011
            
            
            380,7122012
            
            
            409,049Thereafter
            
            
            4,578,610$
            6,319,684




**(9)**
            **Employee
                Benefit Plans**





The
      Company sponsors a defined contribution 401(k) savings plan which covers
      substantially all full-time employees who meet eligibility requirements.
      Participating employees may contribute as salary reductions a minimum of 4%
      of
      their compensation up to the limit prescribed by the Internal Revenue Code.
      The
      Company began making 25% matching contribution up to 1% of eligible compensation
      starting June 2005. The Company recognized an expense of $29,799 and $17,525
      related to this plan during the years ended November 30, 2007 and 2006,
      respectively.





**(10)**
            **Stock
                Option Plan**





On
      January 25, 2007 the Board of Directors adopted the 2007 Non-Employee Directors’
Stock Option Plan. Options will be granted to non-employee directors to purchase
      shares of common stock of the Company at a price not less than fair market
      value
      at the date the options are granted. Non-employee directors are automatically
      granted options to purchase 1,000 shares of common stock annually or initially
      upon their election to the Board, which are automatically vested. Options
      granted are nonqualified stock options.





On
      February 5, 2007 the Board of Directors adopted the 2007 Employee Stock Option
      Plan which was approved by the stockholders at the Annual Stockholders’ Meeting
      on April 26, 2007.




A
      summary
      of changes in the stock option plan is as follows:





**November
                30****2007**
            
            **2006**Options
                outstanding at beginning of period
            
            
            10,000
            
            
            25,000Granted
            
            
            23,000
            
            
            0Exercised
            
            
            (6,000
            )
            
            (15,000
            )Options
                outstanding at end of period
            
            
            27,000
            
            
            10,000Options
                price range for the period
            
            $
            2.75
            
            $
            2.32To
            
            
            To$
            21.14
            
            $
            5.21Options
                exercisable at end of period
            
            
            15,000
            
            
            8,750




35




At
      November 30, 2007 and 2006, the weighted-average remaining contractual life
      of options outstanding was 9.1 years and 6.5 years respectively, and the
      weighted-average exercise price was $15.20 and $3.98, respectively. The
      weighted-average exercise price of options granted during the year was $17.04,
      while the weighed-average exercise price of options exercised was $3.57. Of
      the
      number of options granted, 10,000 are fully vested with a weighted average
      exercise price of $13.06, and a weighed-average remaining contractual term
      of
      6.6 years. The total compensation cost yet to be recognized due to non-vested
      stock options is $77,880, which shall be recognized over a weighted-average
      period of two years.





The
      per
      share weighted-average fair value of stock options granted during the year
      ended
      November 30, 2007 was $5.17. The fair value was calculated using the Black
      Scholes option-pricing model with the following weighted-average assumptions:
      expected dividend yield 0.0%, risk-free interest rate 4.25%, expected volatility
      factor of 50.00% for 2007, and an expected life of one to two
      years.





**(11)**
            **Income
                Taxes**





Total
      income tax expense (benefit) for the years ended November 30, 2007 and 2006
      consists of the following:





**November
                30****2007**
            
            **2006**Current
                expense
            
            $
            941,205
            
            $
            391,306Deferred
                expense
            
            
            204,443
            
            
            92,000$
            1,145,648
            
            $
            483,306





The
      reconciliation of the statutory Federal income tax rate and the effective tax
      rate are as follows:





**November
                30****2007**
            
            **2006**Statutory
                federal income tax rate
            
            
            34.0
            %
            
            34.0
            %Other
            
            
            (0.1
            )
            
            0.133.9
            %
            
            34.1
            %





Tax
      effects of temporary differences that give rise to significant portions of
      the
      deferred tax assets (liabilities) at November 30, 2007 and 2006 are
      presented below:


**November
                  30****2007**
              
              **2006**Current
                  deferred tax assets:Accrued
                  expenses
              
              $
              156,821
              
              $
              152,000Inventory
                  capitalization
              
              
              148,000
              
              
              202,000Asset
                  reserves
              
              
              468,734
              
              
              440,000Total
                  current deferred tax assets
              
              $
              773,555
              
              $
              794,000Non-current
                  deferred tax assets (liabilities):Fire
                  Proceeds
              
              
              (123,244
              )Property,
                  plant, and equipment
              
              
              (82,754
              )
              
              (22,000
              )Total
                  non-current deferred tax assets (liabilities)
              
              $
              (205,998
              )
              $
              (22,000
              )
  36


In
      assessing the realizability of deferred tax assets, management considers whether
      it is more likely than not that some portion or all of the deferred tax assets
      will not be realized. The ultimate realization of deferred tax assets is
      dependent upon the generation of future taxable income during the periods in
      which those temporary differences become deductible.





The
      Company files income tax returns in the U.S. federal jurisdiction and various
      states. With few exceptions, the company is no longer subject to U.S. federal
      or
      state income tax examinations by tax authorities for years ended before November
      30, 2004.





The
      Company shall classify interest and penalties to be paid on an underpayment
      of
      taxes as income tax expense. For the years ended November 30, 2007 and 2006
      no
      interest or penalty amounts have been recognized in the consolidated statements
      of operations or the consolidated balance sheets.





**(12)**
            **Disclosures
                About the Fair Value of Financial
                Instruments**





SFAS
      107, *Disclosures
      about Fair Value of Financial Instruments,* defines
      fair value of a financial instrument as the amount at which the instrument
      could
      be exchanged in a current transaction between willing parties. At
      November 30, 2007 and 2006, the carrying amount approximates fair value for
      cash, accounts receivable, accounts payable, notes payable to bank, term debt,
      and other current and long-term liabilities. The carrying amounts approximate
      fair value because of the short maturity of these instruments. The fair value
      of
      the Company’s installment term loans payable also approximate recorded value
      because the interest rates charged under the loan terms are not substantially
      different than current interest rates.





**(13)**
            **Litigation
                and Contingencies**





Various
      legal actions and claims are pending against the Company. In the opinion of
      management adequate provisions have been made in the accompanying financial
      statements for all pending legal actions and other claims.





**(14)**
            **Purchase
                Obligations**





The
      Company has a contract with Maryville Construction Co., Inc. to build the
      production facility in Dubuque, Iowa. The total contract is for $818,300, of
      which $538,356 had been billed by November 30, 2007.





**(15)**
            **2007
                and 2006 Acquisition**





Effective
      September 5, 2007, the Company acquired the product lines of Miller Pro, Victor
      and Badger from Miller-St. Nazianz, Inc. for a cash purchase price of
      approximately $2,338,000. Effective August 2, 2006, the Company acquired the
      operating assets of Tech Space, Inc. for a cash purchase price of approximately
      $1,138,000. The operating results of the acquired businesses are reflected
      in
      the Company’s consolidated statement of operations from the acquisition dates
      forward. The acquisitions were made to continue the Company’s growth strategy
      and diversify its product offerings inside and outside the agricultural
      industry. The purchase prices were determined based on an arms-length negotiated
      value. The transactions were accounted for under the purchase method of
      accounting, with the purchase price allocated to the individual assets acquired.
      (See cash flow statement supplemental disclosure)





Proforma
      sales and net income information for Tech Space and the acquired Miller Pro
      product line for 2007 and 2006 were not included, as management believes that
      the Companies would not have had a material impact on the Company’s financial
      statements.





**(16)**
            **Segment
                Information**





On
      October 4, 2005, the Company purchased certain assets of Vessels Systems, Inc.
      which created a separate operating segment. Then on August 2, 2006, the Company
      purchased certain assets of Tech Space, Inc. which created a third operating
      segment. Prior to these acquisitions the Company operated in one reportable
      segment.




37




Our
      reportable segments are strategic business units that offer different products.
      They are managed separately because each business requires different technology
      and marketing strategies.





There
      are
      three reportable segments: agricultural products, pressurized vessels and
      modular buildings. The agricultural products segment fabricates and sells
      farming products as well as replacement parts for these products in the United
      States and worldwide. The pressurized vessel segment produces pressurized tanks.
      The modular building segment produces modular buildings for animal containment
      and various laboratory uses.





The
      accounting policies applied to determine the segment information are the same
      as
      those described in the summary of significant accounting policies. Management
      evaluates the performance of each segment based on profit or loss from
      operations before income taxes, exclusive of nonrecurring gains and
      losses.





Approximate
      financial information with respect to the reportable segments is as follows.




Twelve
      Months Ended November 30, 2007




Agricultural
              Products
            
            Pressurized
              Vessels
            
            Modular
              Buildings
            
            ConsolidatedRevenue
                from external customers
            
            $
            14,258,000
            
            $
            4,272,000
            
            $
            6,988,000
            
            $
            25,518,000Income
                from operations
            
            
            1,687,000
            
            
            916,000
            
            
            1,154,000
            
            
            3,757,000Income
                before tax
            
            
            1,433,000
            
            
            635,000
            
            
            1,311,000
            
            
            3,379,000Total
                Assets
            
            
            12,941,000
            
            
            2,432,000
            
            
            4,594,000
            
            
            19,967,000Capital
                expenditures
            
            
            429,000
            
            
            1,102,000
            
            
            1,652,000
            
            
            3,183,000Depreciation
                & Amortization
            
            
            369,000
            
            
            49,000
            
            
            28,000
            
            
            446,000




Twelve
      Months Ended November 30, 2006




Agricultural
              Products
            
            Pressurized
              Vessels
            
            Modular
              Buildings
            
            ConsolidatedRevenue
                from external customers
            
            $
            15,025,000
            
            $
            3,797,000
            
            $
            1,032,000
            
            $
            19,854,000Income
                from operations
            
            
            1,280,000
            
            
            535,000
            
            
            (42,000
            )
            
            1,773,000Income
                before tax
            
            
            1,004,000
            
            
            478,000
            
            
            (65,000
            )
            
            1,417,000Total
                Assets
            
            
            10,799,000
            
            
            1,736,000
            
            
            2,079,000
            
            
            14,614,000Capital
                expenditures
            
            
            925,000
            
            
            50,000
            
            
            0
            
            
            975,000Depreciation
                & Amortization
            
            
            243,000
            
            
            51,000
            
            
            10,000
            
            
            304,000





38


**Item
      8.** **CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE** **.**





None.





**Item
      8A.** **CONTROLS
      AND PROCEDURES** **.**





Our
      principal executive officer, Carrie L. Majeski, evaluated the effectiveness
      of
      our financial disclosure as of the close of our 2007 fiscal year. Based on
      her
      evaluation, the above-named officer has concluded that our disclosure controls
      and procedures are effective to insure that information required to be disclosed
      by us in our periodic and current reports filed pursuant to our reporting
      obligations under the Exchange Act is (a) collected and communicated to our
      management, including the above-named officer, to allow them to make timely
      decisions regarding required disclosures; and (b) recorded, processed,
      summarized and reported within the periods mandated by the Securities and
      Exchange Commission.





There
      were no changes in our internal control over financial reporting identified
      in
      connection with the evaluation performed by our management during our fourth
      fiscal quarter of 2007 that has materially affected or is likely to materially
      affect our internal control over financial reporting.





**Item
      8B.** **OTHER
      INFORMATION** **.**





None.




**PART
      III**





**Item
      9.** **DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
      16(A)
      OF THE EXCHANGE ACT** **.**





The
      information required by Item 9 is incorporated by reference to our definitive
      proxy statement relating to our 2008 annual meeting of shareholders. In
      accordance with Regulation 14A, we will be filing that proxy statement no later
      than 120 days after the end of the last fiscal year.





We
      have
      adopted a Code of Ethics that applies to our principal executive officer,
      principal financial officer, principal accounting officer and the Board of
      Directors. A copy of our Code of Ethics may be obtained at no charge by writing
      to us at the following address: Art’s-Way Manufacturing Co., Inc. 5556 Highway 9
      Armstrong, Iowa 50514.





**Item
      10.** **EXECUTIVE
      COMPENSATION** **.**





The
      information required by Item 10 is incorporated by reference to our definitive
      proxy statement relating to our 2008 annual meeting of shareholders. In
      accordance with Regulation 14A, we will be filing that proxy statement no later
      than 120 days after the end of the last fiscal year.





**Item
      11.** **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS** **.**





The
      information required by Item 11 is incorporated by reference to our definitive
      proxy statement relating to our 2008 annual meeting of shareholders. In
      accordance with Regulation 14A, we will be filing that proxy statement no later
      than 120 days after the end of the last fiscal year.




39




**Item
      12.** **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS** **.**





The
      information required by Item 12 is incorporated by reference to our definitive
      proxy statement relating to our 2008 annual meeting of shareholders. In
      accordance with Regulation 14A, we will be filing that proxy statement no later
      than 120 days after the end of the last fiscal year.





**Item
      13.** **EXHIBITS** **.**





**Exhibit**
              **No.**
            
            **Description**
            
            **Method of**
              **Filing**3.1
            
            Articles
                of Incorporation of Art’s-Way Manufacturing Co., Inc.
            
            13.2
            
            Bylaws
                of Art’s-Way Manufacturing Co., Inc.
            
            110.1
            
            Asset
                Purchase Agreement with Miller-St. Nazianz, Inc.
            
            *31.1
            
            Certificate
                pursuant to 17 CFR 240 13(a)-14(a)
            
            *32.1
            
            Certificate
                pursuant to 18 U.S.C. Section 1350
            
            *





(1)
            Incorporated
                by reference to the exhibit of the same number on our annual report
                on
                Form 10-K for the fiscal year ended May 27,
                1989.


(*)
            Filed
                herewith.





**Item
      14.** **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES** **.**





The
      information required by Item 14 is incorporated by reference to our definitive
      proxy statement relating to our 2008 annual meeting of shareholders. In
      accordance with Regulation 14A, we will be filing that proxy statement no later
      than 120 days after the end of the last fiscal year.





**SIGNATURES**





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





ART’S-WAY
                MANUFACTURING CO., INC.Date:
                February 19, 2008
            /s/
                Carrie L. MajeskiCarrie
                L. MajeskiPresident,
                Chief Executive Officer




40




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





Date:
                February 19, 2008
            /s/
                Carrie L. MajeskiCarrie
                L. MajeskiPresident,
                Chief Executive OfficerDate:
                February 19, 2008
            /s/
                J. Ward McConnell, Jr.J.
                Ward McConnell, Jr., Executive Chairman, DirectorDate:
                February 19, 2008
            /s/
                David R. CastleDavid
                R. Castle, DirectorDate:
                February 19, 2008
            /s/
                Fred W. KrahmerFred
                W. Krahmer, DirectorDate:
                February 19, 2008
            /s/
                James LynchJames
                Lynch, DirectorDate:
                February 19, 2008
            /s/
                Douglas McClellanDouglas
                McClellan, DirectorDate:
                February 19, 2008
            /s/
                Marc H. McConnellMarc
                H. McConnell, Executive Vice Chairman, DirectorDate:
                February 19, 2008
            /s/
                Thomas E. BuffamanteThomas
                E. Buffamante, Director




41