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.

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 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.

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.

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.

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.

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.

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

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

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

          Current Ratio                        2.29                    3.88

Off Balance Sheet Arrangements

None.