The following discussion of our consolidated financial condition and results of operations should be read in conjunction with the financial statements and the related notes thereto included elsewhere in this Form 10-KSB. The matters discussed herein contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended, which involve risks and uncertainties. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing the words "believes", "anticipates", "plans", "expects" and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements include our degree of financial leverage, the factors described in Item 1 of this Form 10-KSB, risks associated with acquisitions and in the integration thereof, risks associated with supplier/OEM agreements, dependence upon the farm economy and the impact of competitive services and pricing, as well as other risks referenced from time to time in our filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.

Management's Discussion and Analysis of Financial Condition and Results of Operations

We have identified the following accounting policies as critical to our operations.

Revenue Recognition - Revenue is recognized when risk of ownership and title pass to the buyer, generally upon the shipment of the product. In very limited circumstances, and only upon a written customer agreement, we recognize revenue upon the production and invoicing of the products. Art's-Way Scientific, Inc. is in the construction industry and will have deposits and/or bench mark payment. Their revenue is recognized on a percentage completed basis.

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

Income Taxes - Current federal and state income taxes are based upon tax returns to be filed reporting the Company's taxable income computed under existing tax code and regulations. Deferred 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.

Twelve months ended November 30, 2006 compared to the twelve months ended November 30, 2005

Our consolidated revenue of $19,854,000 for 2006 represents a 36% increase when compared to $14,619,000 for 2005. Art's-Way Vessels had revenues of $3,797,000, compared to $358,000 in 2005, the year in which we acquired the assets. Art's-Way Scientific had revenues of $1,032,000, for the period from its acquisition in August 2006 through November 2006. Art's-Way Manufacturing had revenues totaling $15,025,000. Art's-Way Manufacturing's branded products increased by $992,000 while OEM sales increased by $228,000.

Gross profit as a percent of sales was 29% for 2006 compared to 30% for 2005. While we worked to retain and improve our profit margins with pricing, we have also experienced some disruption due to the acquisition and integration of Art's-Way Vessels and Art's-Way Scientific. Furthermore, we have made some significant changes to our manufacturing methods in our Armstrong facility that had caused inefficiencies during the transition from a batch build to a more lean continuous flow for the production of our grinder mixer line. We also had a number of products that went from the design stage into production; this seems to hurt our efficiencies for a certain amount of time. We do believe that we have instilled new disciplines and expect to regain our gross profit in 2007.

Consolidated operating expenses in 2006 increased $1,217,000 from 2005. Art's-Way Vessels represents $736,000 of that increase, Art's-Way Scientific represents $269,000 while Art's-Way Manufacturing represents $230,000 of the total. As a percent of sales, operating expenses were 20% and 19%, respectively, when comparing 2006 and 2005.

Consolidated engineering expenses for Art's-Way Manufacturing decreased by $56,000. This was due to a decrease in research and development from 2005 when we were developing an exportable beet harvester, defoliator and a new domestic defoliator. As we moved those new products from design into production our engineering department's focus shifted from research and development to production support. In early 2007 we updated our PM 25 grinder mixer. We believe that by investing in our engineering department and research and development we are investing in the future of our company. We believe that by developing new products and updating our current products we will secure and better our position in our markets and allow the company to grow sales.

Consolidated selling expenses for Art's-Way Manufacturing increased $141,000 from 2005 to 2006. The newly acquired Art's-Way Scientific, accounts for $71,000. Art's-Way Manufacturing selling costs increased $70,000 as this segment increased its marketing efforts to better penetrate our customers and markets.

Consolidated general and administrative expenses increased by $1,131,000. The addition of Art's-Way Scientific resulted in an increase of $198,000. Art's-Way Vessels resulted in an increase of $737,000. Art's-Way Manufacturing accounted for an increase of $215,000. In 2006 we accrued for bonuses paid out in 2007 based on the results of 2006. This was the first year that we accrued for bonuses, as in the past bonus amount were not known until after the reporting period was closed. This change in accounting resulted in an increase in general and administrative expenses of $133,000 compared to 2005. Other cost increases for Art's-Way Manufacturing included on-going expenses to implement a new Enterprise Resource Planning system, costs related to our 50th anniversary milestone and normal inflationary increases.

Art's-Way Manufacturing experienced a 65% increase in consolidated interest and other expenses in 2006 compared to 2005. Interest expense accounted for substantially all of the increase and was due to higher average loan balances, as we borrowed an additional $1,500,000 to finance acquisitions and equipment purchases, and increased interest rates.

Income before tax in 2006 was down slightly to $1,417,000 compared to $1,474,000 in 2005. Net income of $934,000 for 2006 compared to $977,000 in 2005.

We continue to strive to reduce costs, and continue our move to a lean manufacturing environment. We also continue to invest in our future through research and development as well as new equipment and acquisitions. We believe that as of the end of fiscal 2006, our overall company has strengthened through new product offerings and the acquisition of Art's-Way Scientific. As previously mentioned the backlog of orders booked in February 2007, totaled approximately $11,792,000 compared $7,158,000 in consolidated backlog a year ago. Overall, we are looking forward to another strong year in fiscal 2007.

Twelve months ended November 30, 2006

Our main sources of funds were from our ability to generate cash from operations and an additional long-term loan. Cash provided from operations was $1,570,000 for fiscal year 2006. We were able to bring our consolidated inventories down $527,000. This decrease was offset by an increase in accounts receivable of $1,357,000. This increase is attributed to our increase in export sales. We give extended terms to our export customers that must wait to take delivery of product for approximately two months while the freight make its way overseas. We do, however, have letters of credit established with our export customers, so the receivables are guaranteed. Our new long-term loan through West Bank was for $1,500,000, and was used to purchase certain assets of Tech Space Inc. and certain new equipment.

Twelve months ended November 30, 2005

Our main sources of funds were from our ability to generate cash from operations. Cash provided from operations was $2,497,000 for fiscal year 2005. We will continue reinvesting in our company to strengthen its foundation and maximize long-term growth. In 2005 we paid a dividend to our stockholders for the first time in several years. This had a cash impact of $98,000.

The Company has long-term financing through West Bank. Credit facilities consist of a revolving line of credit and three loan agreements totaling $8,000,000.

Facility #1 is a revolving line of credit for $3,500,000 with advances funding the working capital, letter of credit and corporate credit card needs that mature on March 31, 2007. We are in the process of securing an extension for an additional year and expect to receive this extension. The interest rate is West Bank's prime interest rate plus 1%, 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 our assets owned including, but not limited to inventories, accounts receivable, machinery and equipment. As of November 30, 2006 and 2005, we had not borrowed against the line of credit.

Facility #2 is long-term financing for $2,000,000 that is supported by a guarantee issued by the United States Department of Agriculture (USDA) for 75% of the loan amount outstanding. The variable interest rate is West Bank's prime interest rate plus 1.5%, adjusted daily, monthly principle and interest payments are amortized over 20 years with final maturity date of May 31, 2023.

Facility #3 is long-term financing for $1,000,000 that is also supported by a guarantee issued by the USDA for 75% of the loan amount outstanding. The loan for $1,000,000 was used for new product development in 2005.

Facility #4 is long-term financing for $1,500,000 that is also supported by a guarantee issued by the USDA for 75% of the loan amount outstanding. The loan for $1,500,000 was used for acquisitions and new equipment in 2006.

Collateral for Facilities #2 and #3 is primarily real estate with a second position on assets, which are the primary assets securing Facility #1. The USDA subordinates collateral rights in all assets other than real estate in an amount equal to West Bank's other credit commitments. As of November 30, 2006 the outstanding balances on Facilities #2, #3 and #4 were $1,701,842, $943,034 and $1,428,054 respectively compared to $1,754,866, $974,356 and $0 at November 30, 2005.

J. Ward McConnell, Jr. was required to personally guarantee all four credit facilities on an unlimited and unconditional basis. The guarantees will be reduced after the first three years to a percentage representing his ownership of the Company. Mr. McConnell's guarantees shall be removed in the event that his ownership interest in the Company is reduced to a level less than 20% after the first three years of the loans. On Facilities #1 and #2 Mr. McConnell's guarantee portion has dropped to his percent ownership. The Company compensates Mr. McConnell at an annual percentage rate of 2% on 40% of the outstanding balance. On Facilities #3 and #4 the Company compensates Mr. McConnell for his personal guarantees at an annual percentage rate of 2% of the outstanding balances. Guarantee payments are made on a monthly basis. Guarantee fee payments to Mr. McConnell were approximately $60,000 and $56,000, for the years ended November 30, 2006, and 2005, respectively.

Other terms and conditions of all three facilities include providing monthly internally prepared financial reports including accounts receivable aging schedules and borrowing base certificates and year-end audited financial statements. The borrowing bases shall limit advances from Facility #1 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. Covenants include, but are not limited to, restrictions on debt service coverage ratio, debt/tangible net worth ratio, current ratio, capital expenditures, and tangible net worth. During the year ended November 30, 2006, we violated the restriction on capital expenditures, payment of dividends and loans to third parties. Under our loan agreement West Bank would have had the right to call the loan and/or increase the interest rate by three percentage points. As stated above, we provide West Bank with monthly financial statements, as well as a cash flow statement on a monthly basis. Therefore they were aware of the amount of capital expenditures we had incurred throughout the year. They were also aware of the decision to pay dividends, and the inter-company loan to Art's-Way Vessels in connection with the asset purchase from Vessels Systems, well in advance of the actual expenditures. The bank views this spending favorably, and waived the covenants.

   Contractual Obligations

   Contractual Obligation         Payments due by period
                               Total   < 1 yr    1-3 yrs    3-5 yrs    >5 yrs
   *Long-term debt          5,926,851  598,091  1,196,945  1,198,097  2,933,718
    including interest
   Capital lease obligation       0          0       0           0         0
   Operating lease obligation 125,000   125,000      0           0         0
   Purchase Obligations           0          0       0           0         0
   Other                          0          0       0           0         0
   Total                    6,051,851   723,091 1,196,945   1,198,097 2,933,718

* Based on current interest rates at November 30, 2006.

Our current ratio and its working capital are as shown in the following table:

                                     November 30, 2006      November 30, 2005
              Current Assets            $11,218,700             $9,481,557
              Current Liabilities         2,717,243              2,060,486
              Working Capital            $8,501,457             $7,421,071

              Current Ratio                  4.1                    4.6

At November 30, 2006 and 2005, we established a deferred tax asset valuation allowance of approximately $11,000 and $41,000, respectively. In assessing our deferred tax assets, management considers whether it is more likely than not that some portion of 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.

We have no off-balance sheet arrangements.