UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-K







x
            Annual
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934.For
      the fiscal year ended November 30, 2008o
            Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934.Commission
      file number 0-5131





ART’S-WAY
      MANUFACTURING CO., INC.(Exact
      name of registrant as specified 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(Registrant’s
      telephone number, including area code)Securities
      registered under Section 12(b) of the Act:Common
      stock $.01 par value
                                
                                NASDAQ
      Capital Market(Title
      of each class)
                                
                                (Name
      of each exchange on which registered)Securities
      registered pursuant to Section 12(g) of the
  Act:None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.     £  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.     £  Yes  x No





Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.


Yes  x   No  o


Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  o




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





Large
accelerated filer o   Accelerated
filer  o


Non-accelerated
filer  o     
Smaller reporting company x





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





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
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter (public float). $15,415,571.49





As of
February 16, 2009, there were 3,986,352 shares of the registrant’s common stock
outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Definitive Proxy Statement for the registrant’s 2009 Annual Meeting of
Stockholders to be filed within 120 days of November 30, 2008, are incorporated
by reference into Part III of this Form 10-K.





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





Art’s-Way
Manufacturing Co., Inc.


Index
to Annual Report on Form 10-K





PageItem 1.
                                                                                          BUSINESS
                                                                                          3Item 2.
                                                                                          PROPERTIES
                                                                                          9Item 3.
                                                                                          LEGAL PROCEEDINGS
                                                                                          9Item 4.
                                                                                          SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
                                                                                          9Item 5.
                                                                                          MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
      STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
      SECURITIES
                                                                                          9Item 7.
                                                                                          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
      CONDITION AND RESULTS OF OPERATIONS
                                                                                          10Item 8.
                                                                                          FINANCIAL STATEMENTS AND SUPPLEMENTARY
      DATA
                                                                                          16Item 9.
                                                                                          CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING AND FINANCIAL DISCLOSURE
                                                                                          35Item 9A.(T)
                                                                                          CONTROLS AND PROCEDURES
                                                                                          35Item 9B.
                                                                                          OTHER INFORMATION
                                                                                          36Item 10.
                                                                                          DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
      GOVERNANCE
                                                                                          36Item 11.
                                                                                          EXECUTIVE COMPENSATION
                                                                                          37Item 12.
                                                                                          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
      AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
                                                                                          37Item 13.
                                                                                          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
      AND DIRECTOR INDEPENDENCE
                                                                                          37Item 14.
                                                                                          PRINCIPAL ACCOUNTING FEES AND
      SERVICES
                                                                                          37Item 15.
                                                                                          EXHIBITS, FINANCIAL STATEMENT
      SCHEDULES
                                                                                          37




2


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.  Our forward-looking statements in
this report relate to the following: our intent to focus our product offerings
on research facilities in primary market sectors; our intent to pursue
acquisitions that fit into our strategic plans and goals; our expectations
regarding fluctuations in backlogs; our beliefs regarding competitive factors
and our competitive strengths; our expectations regarding sales, future
production levels and demand; our beliefs about the importance of intellectual
property; our predictions regarding the impact of seasonality; our cash position and ability to obtain or renew
financing; and our intentions for paying dividends. Many of these
forward-looking statements are located in this report under “Item 1. BUSINESS;”
“Item 2. “PROPERTIES” and “Item 7. 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. These factors include, but are not limited to:
economic conditions that affect demand for our products; our ability to maintain
compliance with our loan covenants, renew our line of credit and retain
sufficient cash during the economic downturn; the ability of our suppliers to
meet our demands for raw materials and component parts; fluctuations in the
price of raw materials, especially steel; our ability to predict and meet the
demands of each market in which our segments operate; our ability to predict and
respond to any seasonal fluctuations in demand; the existence and outcome of
product liability claims; changes in environmental, health and safety
regulations and employment laws; our ability to retain our principal executive
officer; the cost of complying with laws, regulations, and standards relating to
corporate governance and public disclosure, including Section 404 of the
Sarbanes-Oxley Act and related regulations implemented by the SEC, and the
demand such compliance places on management’s time; and loan covenant
restrictions on our ability to pay dividends. We do not intend 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.  BUSINESS.





General





Art’s-Way
Manufacturing Co., Inc., a Delaware corporation (“we,” “us,” “our,” and the
“Company”), 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.





We have
organized our business into three operating segments. Management separately
evaluates the financial results of each segment because each is a strategic
business unit offering different products and requiring different technology and
marketing strategies.  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. For detailed financial information relating to segment reporting,
see Note 16 to our financial statements in Item 8 of this report.





Business
of Our Segments





Business
of Art’s-Way Manufacturing


3





Art’s-Way
Manufacturing (our “Agricultural Products” segment), which accounted for 65.7%
of our net revenue in the 2008 fiscal year, 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 harvesting equipment; and a line of land maintenance 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 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 5.4% of
our consolidated sales for the fiscal year ended November 30, 2008.





Business
of Art’s-Way Vessels





Art’s-Way
Vessels, Inc. (our “Pressurized Vessels” segment), which accounted for 1.0% of
our net revenue in the 2008 fiscal year, 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, hydro pneumatic, 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, Inc. (our “Modular Buildings” segment), which accounted for 33.3% of
our net revenue in the 2008 fiscal year, is an Iowa corporation with its
principal place of business in Monona, Iowa. Art’s-Way Scientific produces and
sells modular buildings, which 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 2009, 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 related to the hay merger.


4





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.





Our
Principal Products





Art’s-Way
Manufacturing





From its
beginnings as a producer of portable grinder mixers, our Agricultural Products
segment has grown through developing several new products.  Today, its
products include an array of feed processing, hay and forage, tillage and land
management and sugar beet harvesting equipment.  Our Agricultural
Products segment also maintains a high volume of OEM work for the industry’s
leading manufacturers.  Brand names include Art’s-Way, Miller Pro, and
Badger.





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.  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. Our Cattle Maxx rollermill mixer
products offer consistent feed grain rations for beef and dairy operations and
are available in 105-bushel and 165-bushel capacities.





Stationary feed grain processing
line.We offer stationary hammermills and
rollermills.  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.





Crop Production 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.





Moldboard Plow
line.  The Art’s-Way moldboard plows offer conservation tillage
choices to match your preference.  The moldboard plow delivers all the
advantages recognized over the years.




5


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 harvest 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.





Hay and forage
line.We offer highly productive hay and forage tools for the
full range of producers.  This product line includes high capacity
forage boxes for transporting hay from the field with optional running gear to
provide superior stability and tracking.  High velocity, high volume
forage blowers are able to fill the tallest silos with lower power
requirements.  Cam action rotary rakes and power mergers will gently
lift the crop, carry it to the windrow and release it, saving more leaves and
forming a faster drying, fluffier windrow.  High performance V-style
and carted finger wheel rakes offer growers value with features like big
capacity and high clearance with ease of adjustment and operation.





Art’s-Way
Vessels





We build
vessels in carbon steel and stainless steel, ranging from atmospheric (0 PSI)
storage vessels up to any PSI pressure rating required.  Sizes range
from 4" to 168" diameter and larger and to any length of vessel you
require.





Art’s-Way
Scientific





We supply
laboratories for bio-containment, animal science, public health, and security
requirements. We custom design, manufacture, deliver, and install laboratories
and research facilities to meet customers’ critical requirements





Product
Distribution and Markets





We
distribute goods for our Agricultural Products primarily through a network of
approximately 1,850 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.  Our 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. Our
vessel and modular building divisions traditionally sell products customized to
the end user requirements directly to the end user.





We began
exporting new agricultural products during the latter part of 2006, and we
currently export products to six foreign countries. In July 2006, 2007, and
2008, 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 and Eurotier 2008 exhibitions
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 19, 2009,
Art’s-Way Vessels had $173,034 of backlog, Art’s-Way Scientific had
approximately $3,536,757 of backlog and Art’s-Way Manufacturing had a backlog of
$11,302,493.  We expect that our order backlogs will continue to fluctuate
as orders are received and filled.





Recent
Product Developments





During
2008, our product developments in our Agricultural Products segment consisted of
commonizing the Badger forage box to match the Miller Pro line. These changes
create additional efficiencies in the manufacturing process, and also reduce the
amount of stock dealers need to keep. We also introduced a windrow option on our
180C shredder.





Our
Pressurized Vessels and Modular Buildings segments fill orders based on customer
specifications, so we did not engage in significant product developments for
these segments during 2008.




6




Competition





Competition.Our
Agricultural Products segment competes in a highly competitive agricultural
equipment industry. 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 our 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 in specific product areas 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.





To
continue sales growth in the pressurized vessel industry, Art’s-Way Vessels
offers quality tanks at competitive prices. We believe that competition in the
industry is intense, but that our competitive strengths will allow us to compete
effectively in the industry.





Competitive
Strengths.We believe that our competitive strengths include
competitive pricing, product quality and performance, a network of worldwide and
domestic distributors and our strong market share for many of our products. In
addition, we believe our Company has a diversified revenue base. Our Pressurized
Vessels and Modular Buildings segments provide the Company with diversified
revenues rather than solely relying on the agricultural machinery sector. We are
also diversified on the basis of our geographical presence and customer
base.





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.





In order
to capitalize on brand recognition for our Agricultural Products segment, we
have numerous product lines produced under our label and private labels, and
have made strategic acquisitions to strengthen our dealer base.  In
addition, we provide aftermarket service parts which are available to keep our
branded and OEM-produced equipment operating to the satisfaction of the
customer.  Art’s-Way Manufacturing sells products to customers in the
United States and six foreign countries through a network of approximately 1,850
independent dealers in the United States and Canada, as well as overseas dealers
in the United Kingdom and Australia.





We
believe the main competitive strength of our Pressurized Vessels segment is our
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 our Modular Buildings segment is our 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, we manage to
provide high quality buildings at reasonable prices to meet our customers’ time,
flexibility and security expectations.




7




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.  Currently, we purchase the lifter wheels used to
manufacture our sugar beet harvesters from a supplier located in China. However,
there are domestic sources for lifter wheels available.




We have
an original equipment manufacturer (OEM) supplier agreement with Case New
Holland (CNH) for our Agricultural Products segment. 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.  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, 2008. For the years
ended November 30, 2008 and 2007, sales under the CNH label aggregated
approximately 5.4% and 7.6% of consolidated sales, respectively.





Over the
last two years, we have regularly partnered with Lockard Construction on various
projects for our Modular Buildings segment.  Our sales to Lockard
Construction were 16.9% of consolidated sales in 2008 and 6.7% of consolidated
sales in 2007. We believe that competitively priced, high quality alternative
construction companies are available should the need arise.





Intellectual
Property





We
maintain manufacturing rights on several products, including those purchased
from Miller-St. Nazianz in 2007, which cover unique aspects of design. We also
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. Under our material OEM
and royalty agreement with CNH, 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.





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; they may be high in one year, but would tend
to be lower the next, with an increase in production expenses as our new ideas
are manufactured.  Research and development expenses during our 2008
fiscal year accounted for $207,000 of our overall engineering expenses. For more
information please see “Item 7. 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
designs 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 2008.




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.  In addition, we are subject to
various federal, state and local laws and regulations pertaining to
environmental protection and the discharge of materials into the environment.
During our 2008 fiscal year, we expended $13,747 on environmental
compliance.





Employees





During
the fiscal year ended November 30, 2008, we employed 129 employees at Art’s-Way
Manufacturing, four of whom were employed on a part-time basis.  For
the same period, we had ten full-time employees at Art’s-Way
Vessels.  In addition Art’s-Way Scientific employed 45 employees, of
which three worked on a part-time basis.  Employee levels fluctuate
based upon the seasonality of the product line, and the numbers provided above
do not represent our peak employment during our 2008 fiscal year.  See
“Item 2. PROPERTIES.”




8





Item
2.  PROPERTIES.




Our
executive offices are located in Armstrong, Iowa along with our production and
warehousing facilities.  The facilities in Armstrong contain
approximately 240,000 square feet of usable space. During fiscal year 2008, we
installed approximately 40,100 square feet of raised steel roofing at a cost of
$300,000.  We plan to complete the reroofing project over the next
several years.  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 situated. We
currently lease excess land to third parties for farming.




We leased
a facility from Markee, LLC in Dubuque, Iowa, to accommodate the manufacturing
for Art's-Way Vessels. This lease expired in October 2007, and we have since
completed construction on a new facility for Art’s-Way Vessels as of February
2008.   The new facility is located in the same industrial park
in Dubuque.  The facility is 34,450 square feet, steel-framed, with a
crane that runs the length of the building.  A paint booth and a blast
booth were installed in the first quarter of 2009. The new facility gives us
capacity to hire additional employees and increase production; however we have
not yet done so due to the downturn in demand for vessel products in 2008. We
expect that production will return to normal levels in the future, at which
point the size of our new facility will give us a competitive
advantage.




We
completed construction in November 2007 of our facility in Monona, Iowa, which
houses the manufacturing for Art's-Way Scientific. The previous facility was
completely destroyed by fire in January 2007.  The facility was
custom-designed to meet our production needs. It has approximately 50,000 square
feet and accommodates a sprinkler system and crane.




All of
our real property is subject to mortgages granted to West Bank as security for
our long-term debt.  See “Item 7. 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.





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





We did
not submit any matter to a vote of our stockholders through the solicitation of
proxies or otherwise during the fourth fiscal quarter of 2008.





PART
II





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





Market
Information





Our
common stock trades on the NASDAQ Capital Market®under
the symbol “ARTW.”  The ranges of high and low sales prices for each
quarter, as reported by NASDAQ, are shown below.


9





Common
      Stock High and Low Sales Prices Per Share by QuarterFiscal Year Ended November 30, 2008
                    
                    
                    Fiscal Year Ended November 30, 2007High
                    
                    
                    Low
                    
                    
                    High
                    
                    
                    LowFirst
      Quarter
                    
                    $
                    19.875
                    
                    
                    $
                    7.75
                    
                    
                    $
                    4.45
                    
                    
                    $
                    3.095Second
      Quarter
                    
                    $
                    12.50
                    
                    
                    $
                    8.435
                    
                    
                    $
                    4.87
                    
                    
                    $
                    3.51Third
      Quarter
                    
                    $
                    19.52
                    
                    
                    $
                    9.00
                    
                    
                    $
                    9.995
                    
                    
                    $
                    4.254Fourth
      Quarter
                    
                    $
                    13.88
                    
                    
                    $
                    2.919
                    
                    
                    $
                    13.39
                    
                    
                    $
                    7.885





Stockholders





We have
one class of $0.01 par value common stock.  As of November 30, 2008,
we had approximately 121 stockholders of record.  As of January 19,
2009, we have approximately 115 stockholders of record.





Stock Split





On July
9, 2008, we declared a two-for-one stock split.  Each stockholder of
record at the close of business on July 23, 2008 received one additional share
for every outstanding share held on the record date, and trading began on a
split-adjusted basis on July 30, 2008. All granted but unexercised stock options
were also adjusted for the stock split.





Dividends





On July
9, 2008, we declared a dividend of $0.06 per share that was paid on November 30,
2008 to stockholders of record as of November 15, 2008.   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.





During
our 2008 fiscal year, we issued the following unregistered equity securities
pursuant to stock option exercises by certain directors under our 2007 Director
Stock Option Plan:





Date
      of Issuance
                      
                      Number of Shares
                      
                      
                      Price12/13/2007
                      
                      
                      2,000
                      
                      
                      $
                      3.842/27/2008
                      
                      
                      2,000
                      
                      
                      $
                      3.848/28/2008
                      
                      
                      2,000
                      
                      
                      $
                      12.1010/16/2008
                      
                      
                      2,000
                      
                      
                      $
                      3.84





For information on our equity
compensation plans, refer to Item 12, “Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters.”





Item
7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.





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 Item 8 of this
report.





Financial
Position





We
believe that our consolidated balance sheet indicates a strong financial
position.  Our growth has caused us to incur higher salary expenses,
as we have hired more employees and offer wages that are competitive in the
industry.  Despite our recent success, our amount of cash was
significantly lower as of November 30, 2008 versus November 30, 2007. This lower
cash position is due to the purchase of inventory and capital expenditures
related to the construction of the new manufacturing facility in Dubuque, Iowa,
and management believes this lower cash position reflects our
growth.  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 2008 fiscal
year which also caused increased inventory levels in 2008 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.


10





The
operations of our Art’s-Way Scientific subsidiary require us to include
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 2008 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. PROPERTIES,” 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.





Critical
Accounting Policies





Our
significant accounting policies are described in Note 1 to our Consolidated
Financial Statements contained in Item 8 of this report, which were prepared in
accordance with GAAP. Critical accounting policies are those that we believe are
both important to the portrayal of our financial condition and results and
require our most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.





We
believe that the following discussion represents our more critical accounting
policies and estimates used in the preparation of our consolidated financial
statements, although it is not inclusive.





Inventories





Inventories
are stated at the lower of cost or market, and cost is determined using
the standard costing 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.  We record 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.





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.





Revenue
Recognition





Revenue
is recognized when risk of ownership and title pass to the buyer, generally upon
the shipment of the product. All sales are made to an authorized dealer that has
submitted an application for dealer status, and was informed of general sales
policies when approved. Any changes in Company terms are documented in the most
recently published price lists. Pricing is fixed and determinable according to
the Company’s published equipment and parts price lists. Title to all equipment
and parts sold shall pass to the buyer upon delivery to the carrier and is not
subject to a customer acceptance provision. Proof of the passing of title is
documented by the signing of the delivery receipt by a representative of the
carrier. Post shipment obligations are limited to any claim with respect to the
condition of the equipment or parts. A provision for warranty expenses, based on
sales volume, is included in the financial statements. Our returns policy allows
for new and saleable parts to be returned, subject to inspection and a
restocking charge which is included in net sales. Whole goods are not
returnable. Shipping costs charged to customers are included in net
sales.  Freight costs incurred are included in cost of goods
sold.


11





In
certain circumstances, upon the customer’s written request, we may recognize
revenue when production is complete and the good is ready for shipment. At the
buyer’s request, we will bill the buyer upon completing all performance
obligations, but before shipment. The buyer dictates that we ship the goods per
their direction from our manufacturing facility, as is customary with this type
of agreement, in order to minimize shipping costs. The written agreement with
the customer specifies that the goods will be delivered on a schedule to be
determined by the customer, with a final specified delivery date, and that we
will segregate the goods from our inventory, such that they are not available to
fill other orders. This agreement also specifies that the buyer is required to
purchase all goods manufactured under this agreement. Title of the goods will
pass to the buyer when the goods are complete and ready for shipment, per the
customer agreement. At the transfer of title, all risks of ownership have passed
to the buyer, and the buyer agrees to maintain insurance on the manufactured
items that have not yet been shipped.  We have operated using bill and
hold agreements with certain customers for many years, with consistent
satisfactory results for both buyer and seller. The credit terms on this
agreement are consistent with the credit terms on all other
sales.  All risks of loss are shouldered by the buyer, and there are
no exceptions to the buyer’s commitment to accept and pay for these manufactured
goods. Revenues recognized at the completion of production in 2008, 2007, and
2006 were $1,122,037, $1,307,820 and $1,907,470, respectively.





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. Contract losses
are recognized when current estimates of total contract revenue and contract
cost indicate a loss. Estimated contract costs include any and all costs
appropriately allocable to the contract. The provision for these contact losses
will be the excess of estimated contract costs over estimated contract
revenues.





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.





Stock
Based Compensation





We
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. We utilized the Black Scholes option
pricing model to value stock options.





Results
of Operations





Fiscal
Year Ended November 30, 2008 Compared to Fiscal Year Ended November 30,
2007





On a
consolidated basis, our sales and gross profit increased during our 2008 fiscal
year.  Our consolidated net sales totaled $32,041,138 for the period
ended November 30, 2008, which represents a 25.6% increase from our consolidated
net sales of $25,517,750 in 2007.  Our gross profit increased by 3.7%
between our 2007 and 2008 fiscal years, from $7,680,720 to $7,962,391,
respectively.  Our consolidated expenses increased by 32.4%, from
$3,923,870 to $5,196,131. Because the majority of our corporate general and
administrative expenses are borne by Art’s-Way Manufacturing, that entity
represented $3,913,598 of our total consolidated operating expenses, while
Art’s-Way Vessels and Art’s-Way Scientific represented $441,888 and $840,645 of
the total, respectively. Art’s-Way Manufacturing was responsible for $1,769,776
of our consolidated income from operations, while $2,057,228 was contributed by
Art’s-Way Scientific.  Art’s Way Vessels had an operating loss of
$1,060,744.





Art’s-Way Manufacturing.Art’s-Way Manufacturing’s sales revenue in our 2008 fiscal year totaled
$21,045,124 which represented a 47.6% increase in revenues from our 2007 total
of $14,257,471.  The increase in sales for Art’s-Way Manufacturing was
largely due to the $4,538,678 sales from the Miller Pro product line, which we
acquired in September 2007.  Gross profit for Art’s-Way Manufacturing
decreased from 31.5% for 2007 to 27.0% for 2008. This decrease is due to several
factors:  While we were gearing up for full production of the Miller
Pro product line, we outsourced many items due to the capacity limitations of
our laser cutting machine.  We have since purchased a plasma cutter to
reduce these expenses.  Also, our manufacturing wage expenses for the
year were $3,275,082 compared to $2,141,185 in 2007.  This increase is
a result of hiring and training additional staff for our increased production.
These factors, along with the rising costs of our inputs, such as steel and
freight, have negatively impacted our gross profits.


12





Art’s Way
Manufacturing also incurred other infrastructure expenses in 2008.  In
June of 2007, we implemented a new ERP system.  While this ERP system
is technologically advanced, we continued to overcome hurdles in 2008 in getting
it up and running.  Our main struggle in implementing this system
revolved around the transactions for inventory.  This resulted in
large variances during the physical count at year end.  Another area
of concern for our Agricultural Products segment has been the hiring and
retention of key production personnel and management.  In September
2008, we addressed this by hiring a manager of manufacturing who has significant
prior experience in managing manufacturing operations and is knowledgeable about
process improvement, lean manufacturing, quality assurance, and safety
management.





Total
operating expenses in our 2008 fiscal year were $3,913,598 for Art’s-Way
Manufacturing, representing approximately 18.6% of net sales and a 39.2%
increase from the prior year.  These expenses include upgrades to our
investor relations programs, increased sales expenses, and increased general
corporate expenses.  Finally, total income from operations for
Art’s-Way Manufacturing increased from $1,686,158 in our 2007 fiscal year to
$1,769,776, representing a 5.0% increase for our 2008 fiscal year.





Art’s-Way Vessels.Art’s-Way
Vessels experienced a 92.3% decrease in net sales for the fiscal year ended
November 30, 2008, from $4,272,035 to $330,643.  Our vessels business
suffered significant disruption to both manufacturing and sales due to having to
leave a leased facility and move into a newly constructed wholly-owned facility
that we believe will best serve our needs for the long term. During the third
quarter of 2008, we hired a new general manager for our Pressurized Vessels
segment. This person has a great deal of experience in the water treatment
industry, and we are confident sales will increase with his
leadership.   During fiscal year 2008, Art’s-Way Vessels also
spent several months manufacturing graders for Art’s-Way
Manufacturing.  This restricted the time available for the sale and
manufacture of vessels.  Art’s-Way Vessels has a gross profit of
-187.2% and 33.6% in 2008 and 2007, respectively.  Certain
manufacturing expenses, such as depreciation for manufacturing equipment and
inventory obsolescence, are consistent despite reduced sales. Costs for steel
and freight also negatively impacted the gross profit of Art’s-Way
Vessels.





Art’s-Way Scientific.For the
second year in a row, Art’s-Way Scientific experienced continued marked growth
during the 2008 fiscal year.  During 2008, we resumed full production
in our new facility after losing our former facility to fire in January
2007.  Net sales increased from $6,988,244 in 2007 to $10,665,371 in
2008.  Similarly, gross profit increased from $1,748,696 to
$2,897,873, a 65.7% increase.  Operating expenses increased from
$594,373 for the fiscal year ended November 30, 2007 to $840,645 for the fiscal
year ended November 30, 2008.  Income from operations totaled
$2,057,228 for the 2008 fiscal year, as compared to $1,154,323 for the previous
fiscal year.  Art’s Way Scientific also contributed $417,719 of income
under the caption “Other” on the Consolidated Statements of Operations as a
result of the gains from insurance proceeds due to the fire in January
2007.





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.  Similar to
other farm equipment manufacturers, we are affected by items unique to the farm
industry, 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.
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.





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 in September 2007, former Miller Pro dealers began selling our
products, which management believes improves recognition and acceptance of our
products.





The price
of steel influences our cost of goods sold for Art’s-Way Manufacturing and
Art’s-Way Vessels.  In 2005 and 2008, we experienced challenges due to
a sharp increase in the price of steel. We are currently seeing negative effects
due to the price of steel, and continued increases may have a more significant
negative impact on our cost of goods sold.


13





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, 2008





Sources
of liquidity during our 2008 fiscal year were due in large part to additional
proceeds from our construction loan and our revolving credit
loan.  See “Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS – Capital
Resources and Credit Facilities” for more information.  We had cash
used by operations of $1,773,811 for our 2008 fiscal year.  Our
accounts receivable increased from November 30, 2007 by $163,545 to $3,251,326
as of November 30, 2008, and our consolidated inventory increased by $6,536,121,
to $15,172,723 as of November 30, 2008. This was partially due to the dramatic
increases in the price of steel seen during 2008.  Nearly all of our
inventory items at Art’s-Way Manufacturing and Art’s-Way Vessels are
steel-based.  We also increased our purchasing due to the production
of items associated with our newly acquired Miller Pro product
line.  At November 30, 2008, our inventory of raw materials and
finished goods for the Miller Pro product line was approximately
$5,836,000.





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 7.
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 was 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.





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, as well as a revolving line of credit that we continue to
maintain.  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%.  We compensated Mr. McConnell for his guarantees on a monthly
basis in an amount representing 2% of the outstanding
balance.  Guarantee payments in fiscal 2007 and 2006 totaled
approximately $30,000 and $60,000, respectively. After the restructuring, the loans are no longer
personally guaranteed by Mr. McConnell.




14





We have a
revolving line of credit with West Bank, which permitted advances up to
$3,500,000 during our 2008 fiscal year. As of November 30, 2008, we had borrowed
$2,581,775 against this line of credit, compared to $397,859 on November 30,
2007. The available amounts remaining on the line of credit were $918,225 and
$3,102,141 on November 30, 2008 and November 30, 2007,
respectively.  The line was increased to $4,500,000 on December 16,
2008, subsequent to the end of our fiscal year. Advances made under this
revolving credit line are used for funding our working capital and letter of
credit needs. The interest rate is West Bank’s prime rate of interest, adjusted
daily and with a minimum rate of 4.000% per annum. As of December 16, 2008, the
interest rate for the line of credit was 4.000%. Monthly interest-only payments
are required. The unpaid principal balance is due on the maturity date, which is
April 30, 2009, although we have historically renewed this line on an annual
basis.  Mr. McConnell was required to issue a personal guarantee for
our revolving line of credit until April 30, 2007. The line of credit is now
secured by first lien on all of our assets and those of our subsidiaries,
including real estate, inventory, accounts receivable, machinery and equipment.
Each of the Company’s wholly-owned subsidiaries has also granted unlimited
secured guaranties.





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 revised loan amounted to
$4,100,000.  The loan was to mature on May 1, 2017.  For the
first five years, our interest rate on the loan was fixed at
7.25%.  We paid monthly principal and interest payments in the amount
of $42,500. On May 1, 2008, the terms of this loan were changed to modify the
maturity date, interest rate, and payments.  The loan, with a
principal amount of $3,898,161, will now mature on May 1, 2013 and bears fixed
interest at 5.75%.  Monthly principal and interest payments in the
amount of $42,500 are required, with a final payment of principal and accrued
interest in the amount of $2,304,789 due on May 1, 2013. As of November 30,
2008, our outstanding principal balance on our long-term loan is
$3,757,213.





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 supplemented the insurance proceeds received when our
previous facility was destroyed by fire in January 2007.  The
principal amount of the loan was $1,330,000.  We were required to make
monthly payments on the loan of $9,500 including interest at 7% until the final
remaining balance was due on May 1, 2017. On May 1, 2008 the terms of this loan
were changed to modify the maturity date, interest rate, and
payments.  On May 1, 2008, the principal amount of the loan was
$1,316,003.  The new terms changed the maturity date to May 1, 2013
and the interest rate is now fixed at 5.75%.  Monthly payments of
$11,000 are required for principal and interest, with a final payment of accrued
interest and principal in the amount of $1,007,294 due on May 1, 2013. As of
November 30, 2008, our outstanding principal balance on this loan is
$1,288,758.





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.  The loan bore interest at a fixed rate of 7.25% for 5
years.  We made four monthly consecutive interest payments beginning
in January 2008, with interest calculated at a rate of 7.25% on the unpaid
principal.  On May 1, 2008 the terms of this loan were changed to
modify the maturity date, interest rate, and payments.  On May 1,
2008, the principal amount of the loan was $1,498,063.  The new terms
changed the maturity date to May 1, 2013 and the interest rate is now fixed at
5.75%.  Payments of $12,550 are due monthly for principal and
interest, with a final accrued interest and principal payment in the amount of
$1,114,714 due on May 1, 2013. As of November 30, 2008, our outstanding
principal balance on this loan is $1,466,877.





Material
terms and conditions of our debt obligations with West Bank are that we maintain
insurance coverage on collateral and provide internally-prepared monthly
financial reports 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 50% of work-in-process inventory plus 40% of appraisal value of
machinery and equipment.





The loan
covenants also place restrictions on our debt service coverage ratio and debt to
tangible net worth ratio. West Bank may declare any unpaid principal balance due
if any of the following events occur and the Company fails to cure within 20
days: (i) the Company fails to make a payment when due or fails to comply with
any obligations under the line of credit or any other agreement with West Bank;
(ii) the Company or either of its subsidiaries defaults under any agreement that
would affect the Company’s ability to repay West Bank; (iii) the Company or
either of its subsidiaries is declared insolvent or are made party to
foreclosure or forfeiture proceedings; or (iv) there is any change in ownership
of 25% or more of the Company’s common stock. As of November 30, 2008, we were
not in compliance with certain covenants regarding our debt to tangible net
worth ratio. We obtained a letter agreement dated January 20, 2009, in which
West Bank agreed to waive this covenant and its right to demand payment through
November 30, 2009.  We did not receive a notice of default from West
Bank.


15





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 EndedNovember 30, 2008
                          
                          
                          November 30, 2007Current
      Assets
                          
                          $
                          19,756,362
                          
                          
                          $
                          13,784,624Current
      Liabilities
                          
                          
                          8,642,633
                          
                          
                          
                          3,547,658Working
      Capital
                          
                          $
                          11,113,729
                          
                          
                          $
                          10,236,966Current
      Ratio
                          
                          
                          2.29
                          
                          
                          
                          3.88





Off
Balance Sheet Arrangements





None.




Item
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


16




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, 2008 and 2007, 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 consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Art's-Way Manufacturing Co.,
Inc. and Subsidiaries as of November 30, 2008 and 2007, 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
26, 2009
 
 17


ART’S-WAY
MANUFACTURING CO., INC.
 Consolidated
Balance Sheets
 November
30, 2008 and 2007
  2008
                                      
                                      
                                      2007AssetsCurrent
      assets:Cash
                                      
                                      $
                                      103,450
                                      
                                      
                                      $
                                      612,201Accounts
      receivable-customers, net of allowance for doubtfulaccounts
      of $177,434 and $148,636 in 2008 and 2007, respectively
                                      
                                      
                                      3,251,326
                                      
                                      
                                      
                                      3,087,781Inventories,
      net
                                      
                                      
                                      15,172,723
                                      
                                      
                                      
                                      8,636,602Deferred
      taxes
                                      
                                      
                                      780,000
                                      
                                      
                                      
                                      773,555Cost
      and Profit in Excess of Billings
                                      
                                      
                                      250,330
                                      
                                      
                                      
                                      265,615Income
      taxes receivable
                                      
                                      
                                      87,000
                                      
                                      
                                      
                                      -Other
      current assets
                                      
                                      
                                      111,533
                                      
                                      
                                      
                                      408,870Total
      current assets
                                      
                                      
                                      19,756,362
                                      
                                      
                                      
                                      13,784,624Property,
      plant, and equipment, net
                                      
                                      
                                      6,855,042
                                      
                                      
                                      
                                      5,497,200Covenant
      not to Compete
                                      
                                      
                                      240,000
                                      
                                      
                                      
                                      300,000Goodwill
                                      
                                      
                                      375,000
                                      
                                      
                                      
                                      375,000Other
      Assets
                                      
                                      
                                      -
                                      
                                      
                                      
                                      9,771Total
      assets
                                      
                                      $
                                      27,226,404
                                      
                                      
                                      $
                                      19,966,595Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Notes
      payable to bank
                                      
                                      $
                                      2,581,775
                                      
                                      
                                      $
                                      397,859Current
      portion of term debt
                                      
                                      
                                      429,689
                                      
                                      
                                      
                                      250,027Accounts
      payable
                                      
                                      
                                      3,425,885
                                      
                                      
                                      
                                      1,368,988Checks
      issued in excess of deposits
                                      
                                      
                                      274,043
                                      
                                      
                                      
                                      -Customer
      deposits
                                      
                                      
                                      75,980
                                      
                                      
                                      
                                      53,196Billings
      in Excess of Cost and Profit
                                      
                                      
                                      531,736
                                      
                                      
                                      
                                      7,675Accrued
      expenses
                                      
                                      
                                      1,323,525
                                      
                                      
                                      
                                      1,323,008Income
      taxes payable
                                      
                                      
                                      -
                                      
                                      
                                      
                                      146,905Total
      current liabilities
                                      
                                      
                                      8,642,633
                                      
                                      
                                      
                                      3,547,658Long-term
      liabilitiesDeferred
      taxes
                                      
                                      
                                      490,000
                                      
                                      
                                      
                                      205,998Term
      debt, excluding current portion
                                      
                                      
                                      6,083,159
                                      
                                      
                                      
                                      6,069,657Total
      liabilities
                                      
                                      
                                      15,215,792
                                      
                                      
                                      
                                      9,823,313Stockholders’
      equity:Common
      stock – $0.01 par value. Authorized 5,000,000 shares;issued
      3,986,352 and  1,984,176 shares in 2008 and 2007
                                      
                                      
                                      39,864
                                      
                                      
                                      
                                      19,842Additional
      paid-in capital
                                      
                                      
                                      2,085,349
                                      
                                      
                                      
                                      1,828,427Retained
      earnings
                                      
                                      
                                      9,885,399
                                      
                                      
                                      
                                      8,295,013Total
      stockholders’ equity
                                      
                                      
                                      12,010,612
                                      
                                      
                                      
                                      10,143,282Total
      liabilities and stockholders’ equity
                                      
                                      $
                                      27,226,404
                                      
                                      
                                      $
                                      19,966,595
 See
accompanying notes to consolidated financial statements.
  18
 
 ART’S-WAY
MANUFACTURING CO., INC.
 Consolidated
Statements of Operations
 Years
ended November 30, 2008 and 2007
 2008
                          
                          
                          2007Net
      sales
                          
                          $
                          32,041,138
                          
                          
                          $
                          25,517,750Cost
      of goods sold
                          
                          
                          24,078,747
                          
                          
                          
                          17,837,030Gross
      profit
                          
                          
                          7,962,391
                          
                          
                          
                          7,680,720Expenses:Engineering
                          
                          
                          323,265
                          
                          
                          
                          338,286Selling
                          
                          
                          1,735,936
                          
                          
                          
                          1,117,579General
      and administrative
                          
                          
                          3,136,930
                          
                          
                          
                          2,468,005Total
      expenses
                          
                          
                          5,196,131
                          
                          
                          
                          3,923,870Income
      from operations
                          
                          
                          2,766,260
                          
                          
                          
                          3,756,850Other
      income (expense):Interest
      expense
                          
                          
                          (461,412
                          )
                          
                          
                          (383,616
                          )Other
                          
                          
                          445,802
                          
                          
                          
                          6,095Total
      other expense
                          
                          
                          (15,610
                          )
                          
                          
                          (377,521
                          )Income
      before income taxes
                          
                          
                          2,750,649
                          
                          
                          
                          3,379,329Income
      tax
                          
                          
                          921,082
                          
                          
                          
                          1,145,648Net
      income
                          
                          $
                          1,829,567
                          
                          
                          $
                          2,233,681Net
      income per share:Basic
                          
                          
                          0.46
                          
                          
                          
                          0.56Diluted
                          
                          
                          0.46
                          
                          
                          
                          0.56
 
 See
accompanying notes to consolidated financial statements.
  19
 
 ART’S-WAY
MANUFACTURING CO., INC.
 Consolidated
Statements of Cash Flows
 Years
ended November 30, 2008 and 2007
 
 2008
                                
                                
                                2007Cash
      flows from operations:Net
      income
                                
                                $
                                1,829,567
                                
                                
                                $
                                2,233,681Adjustments
      to reconcile net income tonet
      cash provided by operating activities:Stock
      based compensation
                                
                                
                                198,452
                                
                                
                                
                                41,360(Gain)
      Loss on disposition of property, plant, and equipment
                                
                                
                                (418,269
                                )
                                
                                
                                (134,672
                                )Depreciation
      expense
                                
                                
                                534,673
                                
                                
                                
                                347,046Amortization
      expense
                                
                                
                                60,000
                                
                                
                                
                                98,520Fire
      loss of operating supplies
                                
                                
                                -
                                
                                
                                
                                (371,792
                                )Deferred
      income taxes
                                
                                
                                277,557
                                
                                
                                
                                204,443Changes
      in assets and liabilities, net ofMiller
      Pro acquisition in 2007:(Increase)
      decrease in:Accounts
      receivable
                                
                                
                                (163,545
                                )
                                
                                
                                (774,491
                                )Inventories
                                
                                
                                (6,536,121
                                )
                                
                                
                                (1,263,651
                                )Other
      current assets
                                
                                
                                48,465
                                
                                
                                
                                3,116Income
      taxes receivable
                                
                                
                                (87,000
                                )
                                
                                
                                -Other,
      net
                                
                                
                                9,771
                                
                                
                                
                                1,949Increase
      (decrease) in:Accounts
      payable
                                
                                
                                2,056,897
                                
                                
                                
                                781,433Contracts
      in progress, net
                                
                                
                                539,346
                                
                                
                                
                                (694,581
                                )Customer
      deposits
                                
                                
                                22,784
                                
                                
                                
                                (371,009
                                )Income
      taxes payable
                                
                                
                                (146,905
                                )
                                
                                
                                (3,806
                                )Accrued
      expenses
                                
                                
                                517
                                
                                
                                
                                46,061Net
      cash provided (used) by operating activities
                                
                                
                                (1,773,811
                                )
                                
                                
                                143,607Cash
      flows from investing activities:Purchases
      of property, plant, and equipment
                                
                                
                                (1,892,515
                                )
                                
                                
                                (2,982,645
                                )Purchase
      of assets of Miller Pro
                                
                                
                                -
                                
                                
                                
                                (2,337,745
                                )Proceeds
      from insurance recoveries
                                
                                
                                666,591
                                
                                
                                
                                1,233,633Proceeds
      from sale of property, plant, and equipment
                                
                                
                                550
                                
                                
                                
                                15,000Net
      cash (used in) investing activities
                                
                                
                                (1,225,374
                                )
                                
                                
                                (4,071,757
                                )Cash
      flows from financing activities:Net
      change in line of credit
                                
                                
                                2,183,916
                                
                                
                                
                                397,859Net
      activity as a result of checks issued in excess of
deposits
                                
                                
                                274,043
                                
                                
                                
                                -Payments
      of notes payable to bank
                                
                                
                                (306,836
                                )
                                
                                
                                (3,158,453
                                )Proceeds
      from term debt
                                
                                
                                500,000
                                
                                
                                
                                5,405,206Proceeds
      from the exercise of stock options
                                
                                
                                78,492
                                
                                
                                
                                21,430Dividends
      paid to stockholders
                                
                                
                                (239,181
                                )
                                
                                
                                (197,812
                                )Net
      cash provided by financing activities
                                
                                
                                2,490,434
                                
                                
                                
                                2,468,230Net
      increase/(decrease) in cash
                                
                                
                                (508,751
                                )
                                
                                
                                (1,459,920
                                )Cash
      at beginning of period
                                
                                
                                612,201
                                
                                
                                
                                2,072,121Cash
      at end of period
                                
                                $
                                103,450
                                
                                
                                $
                                612,201
 
 See
accompanying notes to consolidated financial statements.
  20
 
 Supplemental
      disclosures of cash flow information:Cash
      paid/(received) during the period for:Interest
                    
                    $
                    504,191
                    
                    
                    $
                    299,273Income
      taxes
                    
                    
                    877,380
                    
                    
                    
                    1,135,960Supplemental
      schedule of investing activities:Miller
      Pro acquisition:Inventories
                    
                    
                    -
                    
                    
                    
                    1,462,745Property,
      plant and equipment
                    
                    
                    -
                    
                    
                    
                    200,000Covenant
      not to Compete
                    
                    
                    -
                    
                    
                    
                    300,000Goodwill
                    
                    
                    -
                    
                    
                    
                    375,000Cash
      paid
                    
                    $
                    -
                    
                    
                    $
                    2,337,745Supplemental
      disclosures of noncash investing activities:Proceeds
      from insurance recoveries
                    
                    $
                    666,591
                    
                    
                    $
                    1,233,633Insurance
      recoveries receivable
                    
                    
                    -
                    
                    
                    
                    248,872Gain
      recognized in previous years
                    
                    
                    (248,872
                    )Net
      book value of assets destroyedProperty,
      plant and equipment
                    
                    
                    -
                    
                    
                    
                    (339,258
                    )Cost
      incurred on contracts in progress
                    
                    
                    -
                    
                    
                    
                    (379,375
                    )Cost
      incurred for plant supplies
                    
                    
                    -
                    
                    
                    
                    (371,792
                    )Inventories
                    
                    
                    -
                    
                    
                    
                    (87,969
                    )Gain
      on insurance recovery
                    
                    $
                    417,719
                    
                    
                    $
                    304,111Noncash
      financing activity:Refinanced
      existing debt with West Bank
                    
                    $
                    -
                    
                    
                    $
                    1,024,794
 
 See
accompanying notes to consolidated financial statements.
  21
 
 ART’S-WAY
MANUFACTURING CO., INC.
 Consolidated
Statements of Stockholders’ Equity
 Years
ended November 30, 2008 and 2007
 
 Common stock
                                      
                                      
                                      AdditionalNumber of
                                      
                                      
                                      
                                      
                                      
                                      paid-in
                                      
                                      
                                      Retainedshares
                                      
                                      
                                      Par value
                                      
                                      
                                      capital
                                      
                                      
                                      earnings
                                      
                                      
                                      TotalBalance,
      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, $0.5 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
                                      
                                      
                                      $
                                      10,143,282Additional
      shares available due totwo-for-one
      common stock split
                                      
                                      
                                      1,984,176
                                      
                                      
                                      
                                      19,842
                                      
                                      
                                      
                                      (19,842
                                      )
                                      
                                      
                                      
                                      
                                      
                                      
                                      —Exercise
      of stock options
                                      
                                      
                                      18,000
                                      
                                      
                                      
                                      180
                                      
                                      
                                      
                                      78,312
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      78,492Stock
      based compensation
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      198,452
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      198,452Dividends
      paid, $0.06 per share
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      (239,181
                                      )
                                      
                                      
                                      (239,181
                                      )Net
      income
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,829,567
                                      
                                      
                                      
                                      1,829,567Balance,
      November 30, 2008
                                      
                                      
                                      3,986,352
                                      
                                      
                                      $
                                      39,864
                                      
                                      
                                      $
                                      2,085,349
                                      
                                      
                                      $
                                      9,885,399
                                      
                                      
                                      $
                                      12,010,612
 
 See
accompanying notes to consolidated financial statements.
  22





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, hay and forage 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, and balances in these accounts are periodically in excess of
federally insured limits.





(d)
            Customer
      Concentration





One of
the Company’s customers accounted for approximately 16.9% and 6.7% of
consolidated revenues for the years ended November 30, 2008 and November 30,
2007, respectively.





(e)
              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.





(f)
              Inventories





Inventories
are stated at the lower of cost or market, and cost is determined using the
standard costing 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.


23





(g)
            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.





(h)
            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 4
years.





(i)
            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.





(j)
            Revenue
      Recognition




Revenue
is recognized when risk of ownership and title pass to the buyer, generally upon
the shipment of the product.  All sales are made to an authorized
dealer that has submitted an application for dealer status, and was informed of
general sales policies when approved.   Any changes in Company
terms are documented in the most recently published price
lists.  Pricing is fixed and determinable according to the Company’s
published equipment and parts price lists.  Title to all equipment and
parts sold shall pass to the Buyer upon delivery to the carrier and is not
subject to a customer acceptance provision.  Proof of the passing of
title is documented by the signing of the delivery receipt by a representative
of the carrier.   Post shipment obligations are limited to any
claim with respect to the condition of the equipment or
parts.  Applicable sales taxes imposed on our revenues are presented
on a net basis on the consolidated statements of operations and therefore do not
impact net revenues or cost of goods sold.  A provision for warranty
expenses, based on sales volume, is included in the financial
statements.  The Company returns policy allows for new and saleable
parts to be returned, subject to inspection and a restocking charge which is
included in net sales.  Whole goods are not
returnable.    Shipping costs charged to customers are
included in net sales.  Freight costs incurred are included in cost of
goods sold.





In
certain circumstances, upon the customer’s written request, we may recognize
revenue when production is complete and the good is ready for
shipment.  At the buyer’s request, we will bill the buyer upon
completing all performance obligations, but before shipment.  The
buyer dictates that we ship the goods per their direction from our manufacturing
facility, as is customary with this type of agreement, in order to minimize
shipping costs. The written agreement with the customer specifies that the goods
will be delivered on a schedule to be determined by the customer, with a final
specified delivery date, and that we will segregate the goods from our
inventory, such that they are not available to fill other orders. This agreement
also specifies that the buyer is required to purchase all goods manufactured
under this agreement.  Title of the goods will pass to the buyer when
the goods are complete and ready for shipment, per the customer
agreement.  At the transfer of title, all risks of ownership have
passed to the buyer, and the buyer agrees to maintain insurance on the
manufactured items that have not yet been shipped.  We have operated
using bill and hold agreements with certain customers for many years, with
consistent satisfactory results for both buyer and seller.  The credit
terms on this agreement are consistent with the credit terms on all other
sales.  All risks of loss are shouldered by the buyer, and there are
no exceptions to the buyer’s commitment to accept and pay for these manufactured
goods.   Revenues recognized at the completion of production in
2008, 2007, and 2006 were $1,122,037, $1,307,820 and $1,907,470,
respectively.


24




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.  Contract losses are recognized when
current estimates of total contract revenue and contract cost indicate a
loss.  Estimated contract costs include any and all costs
appropriately allocable to the contract.  The provision for these
contract losses will be the excess of estimated contract costs over estimated
contract revenues.





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.





(k)
            Research
      and Development





Research
and development costs are expensed when incurred.  Such costs
approximated $207,000 and $178,000 for the years ended November 30, 2008
and 2007, respectively.





(l)
            Advertising





Advertising
costs are expensed when incurred.  Such costs approximated $210,000
and $205,000 for the years ended November 30, 2008 and 2007,
respectively.





(m)
              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.  Per share computations reflect the results of the two for
one stock split that became effective July 30, 2008.





Basic and
diluted earnings per common share have been computed based on the following as
of November 30, 2008 and 2007:





2008
                  
                  
                  2007Basic:Numerator,
      net income
                  
                  $
                  1,829,567
                  
                  
                  $
                  2,233,681Denominator:
      Average number of common shares outstanding
                  
                  
                  3,973,816
                  
                  
                  
                  3,957,864Basic
      earnings per common share
                  
                  $
                  0.46
                  
                  
                  $
                  0.56DilutedNumerator,
      net income
                  
                  $
                  1,829,567
                  
                  
                  $
                  2,233,681Denominator:
      Average number of common shares outstanding
                  
                  
                  3,973,816
                  
                  
                  
                  3,957,864Effect
      of dilutive stock options
                  
                  
                  16,684
                  
                  
                  
                  10,7503,990,500
                  
                  
                  
                  3,968,614Diluted
      earnings per common share
                  
                  $
                  0.46
                  
                  
                  $
                  0.56




25


(n)
              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.





(o)
              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.





(p)
              Recently
      Issued Accounting
Pronouncements




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.  FASB Staff Position FAS 157-1 and FAS 157-2 were issued in
February 2008.  FSP FAS 157-1 amends SFAS No. 157 to exclude
pronouncements that address the fair value measurement for lease classifications
from the scope of SFAS No. 157.  FSP FAS 157-2 delays the effective
date of SFAS No. 157 to fiscal years beginning after November 15,
2008.  This delay does not include items that are recognized or
disclosed at fair value in the financial statements on a recurring
basis.  The applicable elements of FAS 157 that are currently
effective have been adopted by the Company without a material impact on the
financial statements.  The elements of FAS 157 that are not yet
effective are not expected to have a material impact on the financial
statements.





In
December 2007, the FASB issued FASB Statement No. 141 (Revised 2007) “Business
Combinations,” which requires the Company to record fair value estimates of
contingent consideration and certain other potential liabilities during the
original purchase price allocation, expense acquisition costs as incurred and
does not permit certain restructuring activities previously allowed to be
recorded as a component of purchase accounting.  SFAS No. 141(R)
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008, except for the presentation and disclosure
requirements, which shall be applied retrospectively for all periods
presented.  The Company has not determined the effect that the
adoption of SFAS No. 141(R) will have on the financial results of the
Company.





In
December 2007, the FASB issued FASB Statement No. 160 “Noncontrolling Interests
in Consolidated Financial Statements – an amendment of ARB No. 51,” which causes
noncontrolling interests in subsidiaries to be included in the equity section of
the balance sheet.  SFAS No. 160 applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008, except
for the presentation and disclosure requirements, which shall be applied
retrospectively for all periods presented.  The Company has not
determined the effect that the adoptions of SFAS No. 160 will have on the
financial results of the Company.


26




In
December 2007, the SEC published SAB 110, Share-Based Payment. The
interpretations in SAB 110 express the SEC staff's views regarding the
acceptability of the use of a "simplified" method, as discussed in SAB 107,
in developing an estimate of expected term of share options in accordance with
FASB Statement No. 123 (Revised) Share-Based Payment. The use
of the simplified method requires our option plan to be consistent with a "plain
vanilla" plan and was originally permitted through December 31, 2007 under
SAB 107. In December 2007, the SEC issued SAB 110, Share-Based Payment, to amend
the SEC's views discussed in SAB 107 regarding the use of the simplified
method in developing an estimate of expected life of share options in accordance
with FAS No. 123(R). SAB 110 is effective for the Company beginning
December 31, 2007. The Company will continue to use the simplified method
until it has the historical data necessary to provide a reasonable estimate of
expected life, in accordance with SAB 107, as amended by
SAB 110.




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.  SFAS No. 159 has been adopted by the Company, and
has had no 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:





2008
                    
                    
                    2007Balance,
      beginning
                    
                    $
                    148,636
                    
                    
                    $
                    108,372Provision
      charged to expense
                    
                    
                    37,835
                    
                    
                    
                    81,026Less
      amounts charged-off
                    
                    
                    (9,037
                    )
                    
                    
                    (40,762
                    )Balance,
      ending
                    
                    $
                    177,434
                    
                    
                    $
                    148,636





(3)
            Inventories





Major
classes of inventory are:




2008
                
                
                2007Raw
      materials
                
                $
                10,622,204
                
                
                $
                4,468,920Work
      in process
                
                
                825,330
                
                
                
                336,108Finished
      goods
                
                
                5,667,449
                
                
                
                5,033,063$
                17,114,983
                
                
                $
                9,838,091Less:
      Reserves
                
                
                (1,942,260
                )
                
                
                (1,201,489
                )$
                15,172,723
                
                
                $
                8,636,602




(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, 2008Costs
                        
                        $
                        1,718,066
                        
                        
                        $
                        6,068,582Estimated
      earnings
                        
                        
                        468,486
                        
                        
                        
                        2,435,5502,186,552
                        
                        
                        
                        8,504,132Less:  amounts
      billed
                        
                        
                        (1,936,222
                        )
                        
                        
                        (9,035,867
                        )$
                        250,330
                        
                        
                        $
                        (531,736
                        )November
      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
                        )


27


The
amounts billed on these long term contracts are due 30 days from invoice
date.  All amounts billed are expected to be collected within the next
12 months.  As of November 30, 2008, no retainages were
receivable.





(5)
            Property,
      Plant, and Equipment





Major
classes of property, plant, and equipment are:





2008
                  
                  
                  2007Land
                  
                  $
                  455,262
                  
                  
                  $
                  455,262Buildings
      and improvements
                  
                  
                  6,721,957
                  
                  
                  
                  4,755,097Construction
      in Progress
                  
                  
                  169,559
                  
                  
                  
                  790,176Manufacturing
      machinery and equipment
                  
                  
                  10,162,377
                  
                  
                  
                  9,685,762Trucks
      and automobiles
                  
                  
                  231,331
                  
                  
                  
                  174,174Furniture
      and fixtures
                  
                  
                  107,982
                  
                  
                  
                  107,98217,848,468
                  
                  
                  
                  15,968,453Less
      accumulated depreciation
                  
                  
                  (10,993,426
                  )
                  
                  
                  (10,471,253
                  )Property,
      plant and equipment
                  
                  $
                  6,855,042
                  
                  
                  $
                  5,497,200





Depreciation
expense totaled $534,673 and $347,046 for the fiscal years ended November 30,
2008 and 2007, respectively.





(6)
            Accrued
      Expenses





Major
components of accrued expenses are:





2008
                  
                  
                  2007Salaries,
      wages, and commissions
                  
                  $
                  780,293
                  
                  
                  $
                  562,806Accrued
      warranty expense
                  
                  
                  327,413
                  
                  
                  
                  262,665Other
                  
                  
                  215,819
                  
                  
                  
                  497,537$
                  1,323,525
                  
                  
                  $
                  1,323,008





(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.


28





Changes
in the Company’s product warranty liability for the years ended November 30,
2008 and 2007 are as follows:





2008
                    
                    
                    2007Balance,
      beginning
                    
                    $
                    262,665
                    
                    
                    $
                    230,740Settlements
      made in cash or in-kind
                    
                    
                    (275,158
                    )
                    
                    
                    (194,889
                    )Warranties
      issued
                    
                    
                    339,906
                    
                    
                    
                    226,814Balance,
      ending
                    
                    $
                    327,413
                    
                    
                    $
                    262,665





(8)
            Loan
      and Credit Agreements





The
Company has a revolving line of credit for $3,500,000 that matures on April 30,
2009 and is renewable annually with advances funding the working capital, and
letter of credit needs.  The interest rate is West Bank’s prime
interest rate, adjusted daily.  As of November 30, 2008, the interest
rate was 4.0%.  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, 2008 and November 30, 2007, the Company had borrowed $2,581,775 and
$397,859 respectively, against the line of credit.  The available
amounts remaining on the line of credit were $918,225 and $3,102,141 on November
30, 2008 and November 30, 2007, 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 was written to mature on May 1, 2017 and bore fixed interest at
7.25%.  On May 1, 2008, the terms of this loan were changed to modify
the maturity date, interest rate, and payments.  The loan, with a
principal amount of $3,898,161, will now mature on May 1, 2013 and bears fixed
interest at 5.75%.  Monthly principal and interest payments in the
amount of $42,500 are required, with a final payment of principal and accrued
interest in the amount of $2,304,789 due on May 1, 2013.





The
Company obtained two additional loans in 2007.  Both of these loans
were 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 bore fixed interest at 7%.  On May 1, 2008 the terms
of this loan were changed to modify the maturity date, interest rate, and
payments.  On May 1, 2008, the principal amount of the loan was
$1,316,003.  The new terms changed the maturity date to May 1, 2013
and the interest rate is now fixed at 5.75%.  Monthly payments of
$11,000 are required for principal and interest, with a final payment of accrued
interest and principal in the amount of $1,007,294 due on May 1,
2013.





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. The loan bore fixed interest at 7.25%. On December 19, 2007, the
additional $500,000 available was disbursed.  On May 1, 2008 the terms
of this loan were changed to modify the maturity date, interest rate, and
payments.  On May 1, 2008, the principal amount of the loan was
$1,498,063.  The new terms changed the maturity date to May 1, 2013
and the interest rate is now fixed at 5.75%.  Payments of $12,550 are
due monthly for principal and interest, with a final accrued interest and
principal payment in the amount of $1,114,714 due on May 1, 2013.





J. Ward
McConnell, Jr. was required until June 2007 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 $0, for the year ended November 30, 2007, and 2008,
respectively.


29




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





2008
                        
                        
                        2007West
      Bank loan payable in monthly installments of $42,500 including interest at
      5.75% and then due May 1, 2013 (A)
                        
                        $
                        3,757,213
                        
                        
                        $
                        3,989,684West
      Bank loan payable in monthly installments of $11,000 including interest at
      5.75% and then due May 1, 2013 (A)
                        
                        
                        1,288,758
                        
                        
                        
                        1,330,000West
      Bank loan payable in monthly installments of $12,550 including interest at
      5.75% and then due May 1, 2013 (A)
                        
                        
                        1,466,877
                        
                        
                        
                        1,000,000Total
      term debt
                        
                        
                        6,512,849
                        
                        
                        
                        6,319,684Less
      current portion of term debt
                        
                        
                        (429,689
                        )
                        
                        
                        (250,027
                        )Term
      debt, excluding current portion
                        
                        $
                        6,083,159
                        
                        
                        $
                        6,069,657




(A)
            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.





We
received a debt waiver letter from West Bank for violating the debt/tangible net
worth ratio covenant as of November 30, 2008.  This waiver is in
effect until the covenant is measured again at November 30, 2009.





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





Year:
                      
                      Amount2009
                      
                      $
                      429,6902010
                      
                      
                      453,5702011
                      
                      
                      480,4092012
                      
                      
                      508,8352013
                      
                      
                      4,640,345$
                      6,512,849





(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 $32,348 and $29,799
related to this plan during the years ended November 30, 2008 and 2007,
respectively.





(10)
            Stock
      Option Plan





On
November 30, 2008, the Company has two stock options plans, which are described
below.  The compensation cost that has been charged against income for
those plans was $198,452 and $41,360 for 2008 and 2007,
respectively.  The total income tax benefit recognized in the income
statement for share-based compensation arrangements was $82,258 and $0 for 2008
and 2007, respectively.  No compensation cost was capitalized as part
of inventory or fixed assets.





On
January 25, 2007 the Board of Directors adopted the 2007 Non-Employee Directors’
Stock Option Plan, which was also approved by the stockholders at the annual
stockholders meeting on April 24, 2008.  This plan authorizes 200,000
shares to be issued.  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 2,000 shares of common stock annually or initially upon their election
to the Board, which are automatically vested.  Options granted are
nonqualified stock options and expire five years after the date of grant, if not
exercised.  Shares received upon the exercise of options are
previously authorized, but unissued shares.


30





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.  This plan authorizes 200,000 shares to be
issued.  Options will be granted to employees 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.  Options are granted to employees at the
discretion of the Board of Directors.  Options granted are either
nonqualified stock options or incentive stock options and expire ten years after
the date of grant, if not exercised.  Shares received upon the
exercise of options are previously authorized, but unissued
shares.     Options shall vest and become first
exercisable as determined by the Board of Directors.  Compensation
cost is determined through use of the Black Scholes model, which is communicated
to employees receiving options.





The fair
value of each option award is estimated on the date of grant using the Black
Scholes option-pricing model.  Expected volatility is based on
historical volatility of the Company’s stock and other factors.  The
Company uses historical option exercise and termination data to estimate the
expected term the options are expected to be outstanding.  The
risk-free rate is based on the U.S. Treasury yield curve in effect at the time
of grant.  The expected dividend yield is calculated using historical
dividend amounts and the stock price at the option issuance date.





2008
                      
                      
                      2007Expected
      Volatility
                      
                      57.61% to 78.53
                      %
                      
                      
                      50.00
                      %Expected
      Dividend Yield
                      
                      0.001% to 0.780
                      %
                      
                      
                      0.001
                      %Expected
      Term (in years)
                      
                      
                      2
                      
                      
                      
                      2Risk-free
      Rate
                      
                      
                      4.25
                      %
                      
                      
                      4.25
                      %


A summary
of activity under the plans as of November 30, 2008, and changes during the year
then ended as follows:





Options
                    
                    Shares
                    
                    
                    Weighted-
                      Average
                      Exercise
                      Price
                    
                    
                    Weighted-
                      Average
                      Remaining
                      Contractual
                      Term
                    
                    
                    Aggregate
                      Intrinsic
                      ValueOptions
      outstanding at beginning of period
                    
                    
                    54,000
                    
                    
                    $
                    7.60Granted
                    
                    
                    92,000
                    
                    
                    $
                    10.16Exercised
                    
                    
                    (18,000
                    )
                    
                    $
                    4.07
                    
                    
                    
                    
                    
                    $
                    0Options
      Expired or Forfeited
                    
                    
                    (2,000
                    )
                    
                    $
                    13.38Options
      outstanding at end of period
                    
                    
                    126,000
                    
                    
                    $
                    9.88
                    
                    
                    
                    8.36
                    
                    
                    $
                    0Options
      exercisable at end of period
                    
                    
                    78,500
                    
                    
                    $
                    10.71
                    
                    
                    
                    7.76
                    
                    
                    $
                    0





The
weighted-average grant-date fair value of options granted during the year 2008
and 2007 was $4.07 and $2.58, respectively.





A summary
of the status of the Company’s nonvested shares as of November 30, 2008, and
changes during the year ended November 30, 2007, is presented
below:





Nonvested Shares
                  
                  Shares
                  
                  
                  Weighted-Average Grant-
                    Date Fair ValueNonvested
      at beginning of period
                  
                  
                  24,000
                  
                  
                  $
                  3.25Granted
                  
                  
                  92,000
                  
                  
                  $
                  3.37Vested
                  
                  
                  (66,500
                  )
                  
                  $
                  4.33Forfeited
                  
                  
                  (2,000
                  )
                  
                  $
                  5.47Nonvested
      at end of period
                  
                  
                  47,500
                  
                  
                  $
                  3.20




31





As of
November 30, 2008, there was $112,110 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements under the
plans.  That cost is expected to be recognized over a weighted-average
period of two years.  The total fair value of shares vested during the
years ended November 30, 2008 and 2007 was $198,452 and $41,360,
respectively.





The cash
received from the exercise of options during fiscal year 2007 was
$78,492.





(11)
            Income
      Taxes





Total
income tax expense (benefit) for the years ended November 30, 2008 and 2007
consists of the following:





November 302008
                    
                    
                    2007Current
      expense
                    
                    $
                    643,525
                    
                    
                    $
                    941,205Deferred
      expense
                    
                    
                    277,557
                    
                    
                    
                    204,443$
                    921,082
                    
                    
                    $
                    1,145,648





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





November 302007
                      
                      
                      2007Statutory
      federal income tax rate
                      
                      
                      34.0
                      %
                      
                      
                      34.0
                      %Other
                      
                      
                      (0.5
                      )
                      
                      
                      (0.1
                      )33.5
                      %
                      
                      
                      33.9
                      %





Tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets (liabilities) at November 30, 2008 and 2007 are
presented below:





November 302008
                      
                      
                      2007Current
      deferred tax  assets:Accrued
      expenses
                      
                      $
                      242,000
                      
                      
                      $
                      156,821Inventory
      capitalization
                      
                      
                      148,000
                      
                      
                      
                      148,000Asset
      reserves
                      
                      
                      390,000
                      
                      
                      
                      468,734Total
      current deferred tax assets
                      
                      $
                      780,000
                      
                      
                      $
                      773,555Non-current
      deferred tax  assets (liabilities):Fire
      Proceeds
                      
                      
                      (154,000
                      )
                      
                      
                      (123,244
                      )Property,
      plant, and equipment
                      
                      
                      (336,000
                      )
                      
                      
                      (82,754
                      )Total
      non-current deferred tax assets (liabilities)
                      
                      $
                      (490,000
                      )
                      
                      $
                      (205,998
                      )





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.


32





The
Company files income tax returns in the U.S. federal jurisdiction and various
states.  The company is no longer subject to U.S. federal or state
income tax examinations by tax authorities for years ended before November 30,
2005.





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, 2008
and 2007 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, 2008 and 2007, 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 Christensen Construction Company to build an
addition to the facility in Armstrong.  The total contract is for
$159,200 of which $0 had been billed by November 30, 2008.





(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.





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.


33





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, 2008


Agricultural
                      Products
                    
                    
                    Pressurized
                      Vessels
                    
                    
                    Modular
                      Buildings
                    
                    
                    ConsolidatedRevenue
      from  external customers
                    
                    $
                    21,045,000
                    
                    
                    $
                    331,000
                    
                    
                    $
                    10,665,000
                    
                    
                    $
                    32,041,000Income
      from operations
                    
                    
                    1,770,000
                    
                    
                    
                    (1,061,000
                    )
                    
                    
                    2,057,000
                    
                    
                    
                    2,766,000Income
      before tax
                    
                    
                    1,585,000
                    
                    
                    
                    (1,216,000
                    )
                    
                    
                    2,382,000
                    
                    
                    
                    2,751,000Total
      Assets
                    
                    
                    20,764,000
                    
                    
                    
                    2,734,000
                    
                    
                    
                    3,728,000
                    
                    
                    
                    27,226,000Capital
      expenditures
                    
                    
                    680,000
                    
                    
                    
                    1,036,000
                    
                    
                    
                    177,000
                    
                    
                    
                    1,893,000Depreciation
      & Amortization
                    
                    
                    453,000
                    
                    
                    
                    54,000
                    
                    
                    
                    88,000
                    
                    
                    
                    595,000




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





(17)
            Subsequent
      Events





On
December 16, 2008, we signed an agreement with West Bank to amend the terms of
our revolving line of credit to allow for maximum borrowing of
$4,500,000.  The line of credit matures on April 30, 2009 and is
renewable annually with advances funding the working capital, and letter of
credit needs.  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.


34


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





None.





Item
9A(T).CONTROLS AND PROCEDURES.





Evaluation
of Disclosure Controls and Procedures





The
person serving as our principal executive officer and principal financial
officer evaluated the effectiveness of our disclosure controls and procedures,
as defined in Rule 13a-15(e) or Rule 15d-15(e), as of the end of the period
subject to this Report.  Based on this evaluation, the person serving
as our principal executive officer and principal financial officer concluded
that our disclosure controls and procedures were not effective to provide
reasonable assurance that information required to be disclosed by us in the
periodic and current reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the periods specified by the
Securities and Exchange Commission’s rules and forms. Due to the material
weakness described below, our disclosure controls and procedures did not ensure
that the information required to be disclosed in the reports that we file or
submit under the Exchange Act was collected and communicated to our management,
including the person serving as our principal executive officer and principal
financial officer, in a manner to allow timely decisions regarding required
disclosures.




Management’s
Report on Internal Control over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Under the supervision
and with the participation of management, including our principal executive
officer and principal financial officer, we conducted an evaluation of the
effectiveness of our internal controls over financial reporting based on the
framework in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this
evaluation, management has concluded that our internal control over financial
reporting was not effective as of November 30, 2008.




A
material weakness (as defined in SEC Rule 12b-2) is a deficiency, or
combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of the
annual or interim financial statements will not be prevented or detected on a
timely basis. Management has identified the following material weakness in
internal control over financial reporting as of November 30, 2008:




Inventory Accounting –
Management has concluded that in our Armstrong, Iowa facility we had a
significant number of variances between the actual quantities on hand for
various items as compared to the quantities recorded in the accounting systems
before the year-end physical inventory count.   The Company’s key
internal control over the recording of accurate inventory quantities is its
cycle count process, which did not identify these variances. Additionally,
management’s process for evaluating and testing this control in conjunction with
its assessment of internal controls over financial reporting did not identify
that the cycle count process was not functioning properly.




Management,
under the oversight of the Audit Committee, is in the process of remediating the
material weakness. Management believes it has taken the appropriate action
through the physical inventory count to ensure that inventory is properly
reflected in the Company’s financial statements.  With respect to the
ineffectiveness of the internal control giving rise to the material weakness,
management, under the oversight of the Audit Committee, is in the process of
identifying and implementing remediation actions, as identified in more detail
under the heading “Changes to Internal Control Over Financial
Reporting.”




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


35


Limitations
on Controls





Our
management, including our principal executive officer [and principal financial
officer], does not expect that our disclosure controls or our internal control
over financial reporting will prevent or detect all errors and all fraud. A
control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objectives will be
met. Internal control over financial reporting is a process that involves human
diligence and compliance and is subject to lapses in judgment and breakdowns
resulting from human failures. In addition, the design of any system of controls
is based in part on certain assumptions about the likelihood of future events,
and controls may become inadequate if conditions change. There can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions.




Changes
to Internal Control Over Financial Reporting





We are
undertaking efforts to remediate the material weakness identified above. During
the first quarter of fiscal 2009, we implemented additional inventory control
procedures.  These procedures include changes made in both the
manufacturing processes and the financial reporting processes.  We
will continue to evaluate the effectiveness of these controls.





Item
9B.OTHER INFORMATION.





On
December 16, 2008, we executed a promissory note to increase our revolving line
of credit with West Bank to $4.5 million (the “Line of Credit”). The line of
credit accrues interest at West Bank’s prime rate, adjusted daily and with a
minimum rate of 4.000% per annum. As of December 16, 2008, the interest rate for
the line of credit was 4.000%. Monthly interest only payments are required and
the unpaid principal is due on the maturity date, which is April 30,
2009.





We have
executed Commercial Security Agreements dated April 25, 2003, April 20, 2007,
and December 16, 2008 (the “Commercial Security Agreements”), which state that
the Line of Credit  is secured by a first lien on all of our assets
and those of our subsidiaries, including real estate, inventory, accounts
receivable, machinery and equipment. Each of the Company’s wholly-owned
subsidiaries has also granted unlimited secured guaranties. The Commercial
Security Agreements require us to maintain insurance coverage on collateral;
accordingly, each of Art’s-Way Manufacturing, Art’s-Way Vessels and Art’s-Way
Scientific executed Agreements to Provide Insurance. We are also required to
provide monthly internally prepared financial reports including accounts
receivable aging schedules and borrowing base certificates and year-end audited
financial statements. The borrowing base limits advances from the line of credit
to 60% of the Company’s 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.





Pursuant
to the Commitment Letter from West Bank dated April 8, 2008 (the “Commitment
Letter”), which sets forth covenants and conditions for maintaining the Line of
Credit, West Bank may declare any
unpaid principal balance due if any of the following events occur and the
Company fails to cure within 20 days: (i) the Company fails to make a payment
when due or fails to comply with any obligations under the line of credit or any
other agreement with West Bank; (ii) the Company or either of its subsidiaries
defaults under any agreement that would affect the Company’s ability to repay
West Bank; (iii) the Company or either of its subsidiaries is declared insolvent
or are made party to foreclosure or forfeiture proceedings; or (iv) there is any
change in ownership of 25% or more of the Company’s common stock.





The
foregoing summary does not purport to be complete and is qualified in its
entirety by reference to the Note, the Commitment Letter, the Commercial
Security Agreements and the Form of Agreement to Provide Insurance, copies of
which are attached hereto as Exhibits 10.7 through 10.12 and are incorporated
herein by reference.





PART
III





Item
10.DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE.





The
information required by Item 10 is incorporated by reference to the sections
entitled “Election of Directors,” “Compliance with Section 16(a) of the Exchange
Act,” and “Corporate Governance” in our definitive proxy statement relating to
our 2009 Annual Meeting of Stockholders.


36


Item
11.EXECUTIVE COMPENSATION.





The
information required by Item 11 is incorporated by reference to the section
entitled “Executive Compensation” in our definitive proxy statement relating to
our 2009 Annual Meeting of Stockholders.





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





The
information required by Item 12 is incorporated by reference to the section
entitled “Principal Stockholders and Management Shareholdings” and “Equity
Compensation Plan Information” in our definitive proxy statement relating to our
2009 Annual Meeting of Stockholders.





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





The information
required by Item 13 is incorporated by reference to the sections entitled
“Corporate Governance” and “Certain Transactions and Business Relationships” in
our definitive proxy statement relating to our 2009 Annual Meeting of
Stockholders.





Item
      14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES





The
information required by Item 14 is incorporated by reference to the section
entitled “Independent Registered Public Accounting Firm” in our definitive proxy
statement relating to our 2009 Annual Meeting of Stockholders.





PART
IV





Item
      15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES.





(a)
            Documents
      filed as part of this report.





(1)
              Financial
      Statements. The following financial statements are included in Part II,
      Item 8 of this Annual Report on Form
10-K:





Report of
Eide Bailly, LLP on Consolidated Financial Statements and Financial Statement
Schedule as of November 30, 2008 and 2007





Consolidated
Balance Sheets as of November 30, 2008 and 2007





Consolidated
Statements of Operations for each of the two years in the period ended November
30, 2008





Consolidated
Statements of Stockholders’ Equity for each of the two years in the period ended
November 30, 2008





Consolidated
Statements of Cash Flows for each of the two years in the period ended November
30, 2008





Notes to
Consolidated Financial Statements





(2)
              Financial
      Statement Schedules. The following consolidated financial statement
      schedule is included in Item 8: Not
applicable.





(3)
              Exhibits.
      See “Exhibit Index to Form 10-K” immediately following the signature page
      of this Form 10-K




37





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:
            02/27/2009
            
            /s/ Carrie L.
  MajeskiCarrie
      L. MajeskiPresident,
      Chief Executive Officer and Principal Financial
              Officer





POWER OF ATTORNEY





Each
person whose signature appears below constitutes CARRIE L. MAJESKI his or her
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any or all amendments to this Annual Report on Form
10-K and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all said attorney-in-fact and agent, or
her substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.





Pursuant
to the requirements of the Securities Exchange Act of 1934, 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:  2/27/2009
              
              /s/ Carrie L. MajeskiCarrie L. Majeski
                President, Chief Executive Officer and
                Principal Financial OfficerDate:  2/27/2009
              
              /s/ Amber J. Murra, CPAAmber J. Murra, CPA
                Principal Accounting OfficerDate: 2/27/2009
              
              /s/ J. Ward McConnell, Jr.,J. Ward McConnell, Jr., Executive
                Chairman, DirectorDate: 2/27/2009
              
              /s / David R. CastleDavid R. Castle, DirectorDate:  2/27/2009
              
              /s/ Fred W. KrahmerFred W. Krahmer, DirectorDate:  2/27/2009
              
              /s/ James LynchJames Lynch, DirectorDate:  2/27/2009
              
              /s/ Douglas McClellanDouglas McClellan, DirectorDate: 2/27/2009
              
              /s/ Marc H. McConnellMarc H. McConnell, Executive Vice
                Chairman,Date:  2/27/2009
              
              /s/ Thomas E. BuffamanteThomas E. Buffamante, Director







38




Exhibit
Index


Art’s-Way
Manufacturing Co., Inc.


Form
10-K


For
Fiscal Year Ended November 30, 2008





Exhibit
                  No.
              
              Description3.1
              
              Articles
      of Incorporation of Art’s-Way Manufacturing Co., Inc.– filed
      herewith3.2
              
              Bylaws
      of Art’s-Way Manufacturing Co., Inc.– filed herewith3.3
              
              Amendments
      to Bylaws of Art's-Way Manufacturing Co., Inc. – incorporated by reference
      to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-QSB for the
      quarter ended May 31, 200410.1
              
              Purchase
      Agreement with Vessels Systems Inc. – incorporated by reference to Exhibit
      10.9 to the Company’s Annual Report on Form 10-KSB for the year ended
      November 30, 200510.2
              
              Asset
      Purchase Agreement with Miller-St. Nazianz, Inc. – incorporated by
      reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-KSB
      for the year ended November 30, 200710.3*
              
              Art's-Way
      Manufacturing Co., Inc. 2001 Director Stock Option Plan – incorporated by
      reference to Exhibit 10.3.1 of the Company’s Annual Report on Form 10-K
      for the year ended November 30, 200210.4*
              
              Art's-Way
      Manufacturing Co., Inc. 2007 Non-Employee Directors Stock Option Plan –
      incorporated by reference as Exhibit 10.1 of the Quarterly Report on Form
      10-K for the quarter ended February 28, 200710.5*
              
              Summary
      of Compensation Arrangements with Directors – filed
    herewith10.6*
              
              Summary
      of Compensation Arrangements with Executive Officer – filed
      herewith10.7
              
              Promissory
      Note to West Bank dated December 16, 2008 – filed
  herewith10.8
              
              Commitment
      Letter from West Bank dated April 8, 2008 – filed
  herewith10.9
              
              Commercial
      Security Agreement between Art’s-Way Manufacturing Co., Inc. and West Bank
      dated April 25, 2003 – filed herewith10.10
              
              Commercial
      Security Agreement between Art’s-Way Scientific Inc. and West Bank dated
      April 20, 2007 – filed herewith10.11
              
              Commercial
      Security Agreement between Art’s-Way Vessels, Inc. and West Bank dated
      December 16, 2008 – filed herewith10.12
              
              Form
      of Agreement to Provide Insurance for loan dated December 16, 2008 – filed
      herewith10.13
              
              Real
      Estate Mortgage to West Bank dated April 23, 2003 for property located in
      Armstrong, Iowa – filed herewith10.14
              
              Real
      Estate Mortgage to West Bank dated October 9, 2007 for property located in
      Monona, Iowa – filed herewith10.15
              
              Real
      Estate Mortgage to West Bank dated November 30, 2007 for property located
      in Dubuque, Iowa – filed herewith10.16
              
              Change
      in Terms Agreement between Art’s-Way Manufacturing Co., Inc. and West Bank
      dated May 1, 2008 for Loan No. 1260080536 – filed
  herewith10.17
              
              Business
      Loan Agreement between Art’s-Way Manufacturing Co., Inc. and West Bank
      dated May 1, 2008 for Loan No. 1260080536 – filed
  herewith10.18
              
              Change
      in Terms Agreement between Art’s-Way Manufacturing Co., Inc. and West Bank
      dated May 1, 2008 for Loan No. 81290 – filed herewith10.19
              
              Business
      Loan Agreement between Art’s-Way Manufacturing Co., Inc. and West Bank
      dated May 1, 2008 for Loan No. 81290 – filed herewith10.20
              
              Change
      in Terms Agreement between Art’s-Way Manufacturing Co., Inc. and West Bank
      dated May 1, 2008 for Loan No. 81289 – filed herewith10.21
              
              Business
      Loan Agreement between Art’s-Way Manufacturing Co., Inc. and West Bank
      dated May 1, 2008 for Loan No. 81289 – filed herewith10.22
              
              Letter
      Agreement from West Bank dated January 20, 2009 – filed
      herewith21.1
              
              List
      of Subsidiaries: Art’s-Way Scientific, Inc. (Iowa corporation); Art’s Way
      Vessels, Inc. (Iowa corporation)23.1
              
              Consent
      of independent registered public accounting firm – filed
      herewith24.1
              
              Power
      of Attorney (included on the “Signatures” page of this report on Form
      10-K)31.1
              
              Certificate
      pursuant to 17 CFR 240 13(a)-14(a) – filed herewith32.1
              
              Certificate
      pursuant to 18 U.S.C. Section 1350 – filed herewith99.1
              
              Corporate
      Information





(*)
            Indicates
      a management contract or compensatory plan or arrangement required to be
      filed as an exhibit to this Form
10-K.




39