U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x
        
        QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2008

or

o
        
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from
        to




Commission File Number: 000-24684

ADUDDELL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Oklahoma(State or other jurisdiction ofincorporation or organization)
        
        73-1587867(I.R.S. EmployerIdentification No.)




14220 S MeridianOklahoma City, Oklahoma(Address of principal executive offices)
        
        73173(Zip Code)




(405) 692-2300

(Registrants telephone number, including area code)



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.



YesxNoo



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 definition of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.



Large Accelerated Filero
        Accelerated Filero
        Non-accelerated Filero
        Smaller Reporting Companyx




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



YesoNox



On November 14, 2008, we had outstanding 53,966,354 shares of our common stock, $.001 par value.










ADUDDELL INDUSTRIES, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

Table of Contents

PagePart I  Financial Information
        
        
        1Item 1. Financial Statements
        
        
        1Consolidated Balance Sheets
        
        
        1Consolidated Statements of Operations
        
        
        3Consolidated Statements of Cash Flows
        
        
        4Notes to Consolidated Financial Statements
        
        
        6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
        
        
        18Item 3. Quantitative and Qualitative Disclosures About Market Risk
        
        
        24Item 4. Controls and Procedures
        
        
        24Part II  Other Information
        
        
        25Item 1. Legal Proceedings
        
        
        25Item 1A. Risk Factors
        
        
        25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
        
        
        25Item 3. Defaults Upon Senior Securities
        
        
        25Item 4. Submission of Matters to a Vote of Security Holders
        
        
        25Item 5. Other Information
        
        
        26Item 6. Exhibits
        
        
        26











Cautionary Statement Regarding Forward-Looking Information





This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), which can be identified by the use of forward-looking terminology such as may, might, could, would, believe, expect, intend, plan, seek, anticipate, estimate, project or continue or the negative thereof or other variations thereon or comparable terminology.  All statements other than statements of historical fact included in this report on Form 10-Q, including without limitation, the statements under Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations and located elsewhere herein regarding our financial position and liquidity are forward-looking statements.  These forward-looking statements also include, but are not limited to:


        our ability to expand our markets and maintain or increase profit margins and continue as a going concern;
        actions of our competitors;
        statements regarding our anticipated revenues, expense levels, liquidity and capital resources and projections of positive operating cash flow.




Although we believe the expectations reflected in such forward-looking statements are reasonable, we can give no assurance such expectations will prove to be correct.



These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.  We assume no duty to update or revise our forward-looking statements based on changes in our internal estimates or expectations or otherwise.








ADUDDELL INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS _________________________________________________




PART I  FINANCIAL INFORMATION

******Item 1.**********
        ******Financial Statement****s**********




September 30,
        
        December 31,2008
        
        2007(Unaudited)AssetsCurrent AssetsCash
        
        
        
        
        $
        436,943
        $
        1,021,935Accounts and contract receivable, net of allowancefor doubtful accounts of $665,000
        
        
        
        14,738,722
        
        14,160,546Costs and estimated earnings in excess ofbillings on uncompleted contracts
        
        
        
        1,968,509
        
        2,190,585Inventory
        
        
        
        
        274,880
        
        274,880Prepaid expenses
        
        
        
        
        104,677
        
        48,952Income tax receivable
        
        
        
        
        3,147,623
        
        376,469Related party receivable
        
        
        
        15,513
        
        -Deposits
        
        
        
        
        
        3,490
        
        3,490Employee and other receivables, netof allowance for doubtful accounts
        
        
        
        977
        
        20,94120,691,334
        
        18,097,798Property and EquipmentLand
        
        
        
        
        
        130,289
        
        130,289Field and shop equipment
        
        
        
        4,422,821
        
        4,404,164Office furniture and equipment
        
        
        
        1,018,967
        
        994,165Transportation equipment
        
        
        
        2,798,677
        
        2,798,677Leasehold improvements
        
        
        
        268,970
        
        221,1368,639,724
        
        8,548,431Less:  Accumulated depreciation
        
        
        
        (3,891,952)
        
        (2,809,255)4,747,772
        
        5,739,176OtherInvestments
        
        
        
        
        2,870
        
        3,280Intangible asset (customer lists), net
        
        
        
        3,894,602
        
        4,839,442Deferred tax asset
        
        
        
        
        -
        
        4,226,9143,897,472
        
        9,069,636$
        29,336,578
        $
        32,906,610






1







ADUDDELL INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS _________________________________________________






September 30,
        
        December 31,2008
        
        2007(Unaudited)Liabilities and Shareholders' EquityCurrent LiabilitiesCurrent portion of long-term debt
        
        
        $
        275,256
        $
        280,936Current portion of acquisition payable
        
        
        978,833
        
        162,166Advances on line of credit
        
        
        
        10,642,978
        
        9,151,283Overdraft
        
        
        
        
        -
        
        -Accounts and subcontract payables
        
        
        
        15,223,306
        
        14,249,509Accrued liabilities
        
        
        
        
        1,250,271
        
        936,447Billings in excess of costs and estimatedearnings on uncompleted contracts
        
        
        
        3,712,500
        
        2,945,55432,083,144
        
        27,725,895Long-Term Debt (Net of Current Portion)
        
        
        178,370
        
        382,860Long-Term Stockholder Payable
        
        
        
        919,810
        
        -Long-Term Acquisition Payable (Net of Current Portion)
        
        -
        
        816,667Shareholders' EquityPreferred stock ($0.001 par value, 20,000,000shares authorized, 20,000 issued andoutstanding at September 30. 2008 andDecember 31, 2007)
        
        
        
        
        20
        
        20Common stock ($0.001  par value, 100,000,000shares authorized, 53,966,354  shares issuedand outstanding at September 30, 2008 and53,965,854 December 31, 2007)
        
        
        
        54,466
        
        53,966Paid-in capital
        
        
        
        
        7,546,090
        
        7,662,422Unrealized loss on available-for-sale securities
        
        
        (20,584)
        
        (20,174)Retained earnings (deficit)
        
        
        
        (11,424,738)
        
        (3,715,046)(3,844,746)
        
        3,981,188$
        29,336,578
        $
        32,906,610




2







ADUDDELL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS _________________________________________________






Three Months Ended
        
        Nine Months EndedSeptember 30,
        
        
        
        
        September 30,2008
        
        2007
        
        2006
        
        2008
        
        2007
        
        2006(Unaudited)
        
        (Unaudited)
        
        (Unaudited)
        
        (Unaudited)
        
        (Unaudited)
        
        (Unaudited)RevenuesContract revenue
        
        $
        16,499,773
        $
        12,472,735
        $
        11,574,763
        $
        40,459,253
        $
        36,859,353
        $
        23,947,068Other revenue
        
        
        (68,946)
        
        -
        
        -
        
        123,024
        
        -
        
        -16,430,827
        
        12,472,735
        
        11,574,763
        
        40,582,277
        
        36,859,353
        
        23,947,068Operating ExpensesCost of sales
        
        
        17,222,246
        
        15,479,328
        
        10,174,307
        
        39,692,982
        
        36,390,215
        
        20,924,829Selling, general and administrative
        
        1,216,389
        
        3,591,146
        
        1,344,290
        
        7,156,178
        
        11,036,417
        
        3,232,753Warranty expense
        
        
        41,230
        
        7,882
        
        349,699
        
        62,464
        
        198,284
        
        121,74918,479,865
        
        19,078,356
        
        11,868,296
        
        46,911,624
        
        47,624,916
        
        24,279,331Operating Income (Loss)
        
        
        (2,049,038)
        
        (6,605,621)
        
        (293,533)
        
        (6,329,347)
        
        (10,765,563)
        
        (332,263)Other Income (Expense)Interest and dividend income
        
        2,365
        
        4,626
        
        18,145
        
        8,548
        
        89,253
        
        300,102Gain on sale of equipment
        
        
        10,263
        
        -
        
        2,500
        
        (579)
        
        (5,340)
        
        28,739Other income
        
        
        75,194
        
        129,646
        
        32,498
        
        134,722
        
        189,319
        
        79,79887,822
        
        134,272
        
        53,143
        
        142,691
        
        273,232
        
        408,639Net Income (Loss)  from OperationsBefore Income Taxes
        
        
        (1,961,216)
        
        (6,471,349)
        
        (240,390)
        
        (6,186,656)
        
        (10,492,331)
        
        76,376Provision (Benefit) for income taxes:Current
        
        
        
        (765,000)
        
        (2,562,904)
        
        (46,800)
        
        (2,413,000)
        
        (4,130,000)
        
        (41,000)Deferred
        
        
        
        3,367,346
        
        473,108
        
        58,000
        
        3,868,760
        
        1,381,219
        
        36,0002,602,346
        
        (2,089,796)
        
        11,200
        
        1,455,760
        
        (2,748,781)
        
        (5,000)Net Income (Loss)
        
        
        (4,563,562)
        
        (4,381,553)
        
        (251,590)
        
        (7,642,416)
        
        (7,743,550)
        
        81,376Other Comprehensive IncomeUnrealized holding gains
        
        
        (410)
        
        (17,588)
        
        25,830
        
        (410)
        
        (15,506)
        
        9,225Reclassification adjustment
        
        -
        
        -
        
        -
        
        -
        
        -
        
        -Comprehensive Income
        
        $
        (4,563,972)
        $
        (4,399,141)
        $
        (225,760)
        $
        (7,642,826)
        $
        (7,759,056)
        $
        90,601Basic Net Income (Loss)per Common Share
        
        $
        (0.08)
        $
        (0.08)
        $
        -
        $
        (0.14)
        $
        (0.14)
        $
        -Diluted  Net Income (Loss)per Common Share
        
        
        N/A
        $
        N/A
        $
        -
        $
        N/A
        $
        N/A
        $
        -Weighted Average CommonShares Basic
        
        
        53,966,354
        
        53,965,854
        
        50,187,921
        
        53,966,354
        
        53,965,854
        
        50,187,921Weighted Average CommonShares Assuming Dilution
        
        -
        
        -
        
        -
        
        -
        
        -
        
        83,666,739




3







ADUDDELL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS _________________________________________________






Nine Months EndedSeptember 30,2008
        
        2007
        
        2006Cash Flows from Operating ActivitiesNet  income (loss)
        
        
        $
        (7,642,416)
        $
        (7,743,550)
        $
        81,376Reconciliation of net income (loss) to net cashprovided by operating activities:Depreciation and amortization
        
        
        2,033,531
        
        2,256,191
        
        472,620Provision for bad debt write-off (recovery)
        
        340,000
        
        -
        
        119,215Issuance of stock for settlement
        
        
        30,000
        
        -
        
        -Gain (loss) on sale of property and equipment
        
        579
        
        5,340
        
        (28,739)(Increase) Decrease from changes in:Accounts receivable
        
        
        (918,176)
        
        (312,410)
        
        (2,118,648)Costs and estimated earnings in excess ofbillings on uncompleted contracts
        
        222,076
        
        (2,240,171)
        
        (3,559,579)Inventory
        
        
        
        -
        
        (9,546)
        
        -Income tax receivable
        
        
        (2,771,154)
        
        1,878,000
        
        (401,191)Related party receivable
        
        
        -
        
        44,899
        
        (40,787)Deposits
        
        
        
        -
        
        28,492
        
        -Deferred taxes
        
        
        
        4,226,914
        
        (2,748,815)
        
        36,000Prepaid expenses
        
        
        
        (55,725)
        
        120,502
        
        (172,347)Employee and other receivables
        
        4,451
        
        31,774
        
        (15,557)Intangible asset (customer lists)
        
        
        -
        
        -
        
        (392,537)Increase (Decrease) from changes in:Overdraft
        
        
        
        -
        
        (732,778)
        
        -Accounts payable
        
        
        
        973,797
        
        7,400,574
        
        (8,342,622)Accrued liabilities
        
        
        
        313,824
        
        1,387,451
        
        481,015Income tax payable
        
        
        -
        
        -
        
        (5,349,105)Billings in excess of costs and estimatedearnings on uncompleted contracts
        
        766,946
        
        820,612
        
        (2,892)Net adjustments to net income (loss)
        
        5,167,063
        
        7,930,115
        
        (19,315,154)Net cash provided (used) by operating activities
        
        (2,475,353)
        
        186,565
        
        (19,233,778)Cash Flows from Investing ActivitiesPurchase of investments
        
        
        -
        
        -
        
        (146,276)Proceeds from sale of property and equipment
        
        -
        
        7,000
        
        37,863Purchase of property and equipment
        
        (108,129)
        
        (567,210)
        
        (3,247,759)






4







ADUDDELL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS _________________________________________________






Net cash used by investing activities
        
        (108,129)
        
        (560,210)
        
        (3,356,172)Cash Flows from Financing ActivitiesProceeds from the issuance of stock
        
        -
        
        1,000,000
        
        120,000Preferred dividends paid
        
        
        (213,110)
        
        -
        
        -Proceeds from long-term debt
        
        
        -
        
        -
        
        -Proceeds from long-term stockholder debt
        
        919,810
        
        -
        
        -Net change in line of credit
        
        
        1,491,695
        
        327,661
        
        1,170,567Retirement of long-term debt
        
        
        (199,905)
        
        (167,990)
        
        (308,101)Net cash provided (used) by financing activities
        
        1,998,490
        
        1,159,671
        
        982,466Net Increase (Decrease) in Cash
        
        
        (584,992)
        
        786,026
        
        (21,607,484)Cash at Beginning of Period
        
        
        1,021,935
        
        -
        
        22,330,751Cash at End of Period
        
        
        $
        436,943
        $
        786,026
        $
        723,267Supplemental Disclosure of Cash Flow
InformationCash paid for:Interest
        
        
        $
        624,363
        $
        786,400
        $
        30,902Taxes
        
        
        
        -
        
        -
        
        252,450Supplemental Schedule of Non-CashInvesting and Financing ActivitiesFixed asset additions
        
        
        $
        -
        $
        146,440
        $
        135,220Liabilities assumed or incurred
        
        $
        -
        $
        146,440
        $
        135,220Common stock issued for acquisition payable
        $
        -
        $
        816,667
        $
        -Common stock issued for services
        
        $
        500,000
        $
        -
        $
        205,000






5







ADUDDELL INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS _________________________________________________




ADUDDELL INDUSTRIES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For The Nine Months Ended September 30, 2008

(UNAUDITED)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Business

Aduddell Industries, Inc. (the Company) is engaged in the commercial and industrial roofing and re-roofing, specialty-roofing metals, waterproofing and concrete restoration and consulting businesses through our subsidiaries, Aduddell Roofing, Inc., Aduddell Restoration and Waterproofing, Inc., and Global Specialty Group, Inc.  In addition, we provide pre-event planning, event management and post-event recovery services for disaster related activities through our subsidiary, Aduddell Enviro & Emergency Management Services, Inc (E2MS).  We provide marketing services through our EyeOpener Division. We were originally incorporated on March 4, 1991, in the state of Colorado.  On June 7, 2006, we changed our name from Zenex International, Inc. to Aduddell Industries, Inc. and our state of incorporation from Colorado to Oklahoma.

Our revenues are derived from comprehensive commercial roofing services, including re-roofing, restoration and repair, new roof construction, sheet metal fabrication, concrete restoration and waterproofing, and emergency pre- and post-event response services.  We also offer maintenance services, which provide recurring revenues and ongoing interaction with our customers, including a new online roof asset management service.

Cost of revenues consists primarily of compensation and benefits to field staff, materials, subcontracted services, parts and supplies, depreciation, fuel and other vehicle expenses and equipment rentals.  Our gross profit percentage, which is gross profit expressed as a percentage of revenues, depends primarily on the relative proportions of costs related to labor and materials.  On jobs in which a higher percentage of the cost of revenues consists of labor costs, we typically achieve higher gross margins than on jobs where materials represent more of the cost of revenues. Margins are also affected by the competitive bidding process and the technical difficulty of the project.  New roof construction work is more likely to be competitively bid than re-roofing, restoration and repair.



Basis of Presentation



The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Aduddell Roofing, Inc., Aduddell Restoration and Waterproofing, Inc., Global Specialty Group, E2MS and Aduddell Financial Services.  The accompanying consolidated financial statements of Aduddell Industries, Inc. have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  The Company believes that the disclosures made are adequate to make the information presented not misleading.  These consolidated financial statements should be read in
conjunction with the Companys year-end audited consolidated financial statements and related footnotes included in the previously filed 10K.  In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to present fairly the consolidated financial position of the Company as of September 30, 2008, and the consolidated statements of its operations for the three and nine months ended September 30, 2008, 2007, and 2006, and consolidated cash flows for the nine months ended September 30, 2008, 2007, and 2006, have been included.  All significant intercompany accounts and transactions have been eliminated.  The results of operations for interim periods may not be indicative of the results which may be realized for the full year.



6







Revenue Recognition

The Company recognizes fixed-price contract revenues on the percentage-of-completion method of accounting, measured by the percentage of cost incurred to date to the estimated total cost for each contract.  Management uses this method because total cost is considered to be the best available measure of progress on the contracts.  Revenues from cost-plus-fee contracts are recognized on the basis of costs incurred during the period plus the fee earned, measured by the cost-to-cost method.

Contract costs include all direct material and labor costs and an allocation of certain indirect costs related to contract performance, such as indirect labor, interest, depreciation, supplies, selling and general and administrative expenses.  General and administrative expenses not allocated to contract costs are charged to expense as incurred.  Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.  Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined.  The asset "Costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed.  The liability "Billings in excess of costs and estimated earnings on uncompleted contracts"
represents billings in excess of revenues recognized.

Cash and Cash Equivalents

For purposes of the Consolidated Statement of Cash Flows, short-term investments, which have maturities of ninety days or less, are considered cash equivalents.

Accounts Receivable and Allowance For Doubtful Accounts

Contracts and other accounts receivable are stated at the historical carrying amount net of write-offs and allowance for doubtful accounts.  The Company establishes an estimated allowance for doubtful contracts and accounts receivable based on various factors, including revenue, historical credit loss experience, current trends, and any specific customer collection issues that the Company has identified.  Uncollectible contracts and accounts receivable are written off when a settlement is reached for an amount that is less than the outstanding historical balance or when the Company has determined that the balance will not be collected.

Inventory

Inventories consist of construction materials and are stated at the lower of cost (first-in, first-out) or market (net realizable value).

Investments

The Company accounts for its investments in marketable securities usingStatement of Financial Accounting Standards No. 115 Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115).This standard requires that investments in equity securities that have a readily determinable fair value and all investments in debt securities be adjusted to market value at the end of each accounting period.  Unrealized market value gains and losses are charged to earnings if the securities are traded for short-term profit.  Otherwise, such unrealized gains and losses are charged or credited to a separate component of shareholders equity.

Management determines the proper classification of investments in obligations with fixed maturities and marketable equity securities at the time of purchase and reevaluates such designations as of each balance sheet date.  At September 30, 2008, and December 31, 2007, all securities covered bySFAS No. 115were designated as available-for-sale.  Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in a separate component of shareholders equity.  Any realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the Consolidated Statement of Operations.

Intangible Assets

The Company accounts for intangible assets underStatement of Financial Accounting Standards No. 142, Goodwill and OtherIntangible Assets, (SFAS No. 142), which primarily addresses accounting for goodwill and intangible assets subsequent to acquisition.  UnderSFAS No. 142, goodwill and separately identified intangible assets with indefinite lives are no longer amortized, but reviewed annually (or more frequently if impairment indicators arise) for impairment.  In accordance withSFAS No. 142, intangibles with finite useful lives, which include customer lists, continue to be amortized over their



7







estimated useful life.  The Company amortizes customer lists using the straight-line method with an estimated useful life of five years.  Impairment, if any, is calculated for all intangibles as the excess of the asset carrying value over its fair value and is charged to expense when discovered.  No impairment has been recorded.  Accumulated amortization at September 30, 2008, and December 31, 2007, totaled $2,276,431 and $1,399,304, respectively.  Amortization expense for nine months ended September 30, 2008, 2007, and 2006, was $944,840,  $987,227 and $59,574, respectively.  The estimated amortization of intangible assets is $1,259,787, $1,229,692, $1,199,815 and $205,308 for the years ended September 30, 2009 through 2012, respectively.



Fair Value of Financial Instruments

The Companys financial instruments include cash, receivables, notes receivable, marketable securities, short-term payables and notes payable.  The carrying amounts of cash, receivables, and short-term payables approximate fair value due to their short-term nature.  Marketable equity securities fair values are estimates based on quoted market prices or approximate fair values.  The carrying amounts of notes receivable and payable approximate fair value based on interest rates currently available.

Share-Based Compensation



The Company recognizes expense for its share-based compensation based on the fair value of awards that are granted in accordance withStatement of Financial Accounting Standards No. 123R, Share-Based Payments.  The fair value of common stock options  is estimated at the date of grant using the Black-Scholes-Merton option valuation model which was developed for use in estimating the fair value of exchange-traded stock options that have no vesting restrictions and are fully transferable, and takes into consideration several criteria, including volatility, expected term, dividend yield, and risk-free rate of return.  Option valuation methods require the input of highly subjective assumptions, including the expected stock price volatility.  The measured compensation cost is recognized ratably over the vesting period of the related share-based compensation award.



Depreciation

Depreciation for financial statement purposes is provided on the straight-line method over the estimated useful lives of the various assets.  Depreciation expense for the nine months ended September 30, 2008, 2007, and 2006 was $1,088,691, $1,268,964 and $412,866, respectively.   For income tax purposes, accelerated methods of depreciation are used with recognition of deferred income taxes for the resulting temporary differences.   Estimated useful lives for financial statement reporting purposes are as follows:



Classification
        Estimated Useful LifeField and shop equipment
        5  - 7
        YearsOffice furniture and equipment
        5  - 10
        YearsTransportation equipment
        3  - 7
        YearsLeasehold improvements
        15  39
        Years




8







Income Taxes

The Company accounts for income taxes in accordance withStatement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109).SFAS No. 109requires the recognition of deferred tax assets and liabilities for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  In addition,SFAS No. 109requires the recognition of future tax benefits, such as net operating loss carry forwards, to the extent that realization of such benefits is more likely than not.  The amount of deferred tax liabilities or assets is calculated using 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 rate is recognized in income in the period that includes the enactment date.  Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.

In determining the quarterly provision for income taxes, the Company uses an annual effective tax rate based on expected annual income and statutory tax rates.  Significant discreet items are separately recognized in the income tax provision in the quarter in which they occur.

The determination of the Companys provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws.  Significant judgment is required in assessing the timing and amounts of deductible and taxable items.

Net Income (Loss) Per Common Share

The Company computes net income (loss) per share in accordance withSFAS No. 128,Earnings per ShareandSEC Staff Accounting Bulletin No. 98 (SAB 98).Under the provisions ofSFAS No. 128andSAB 98,basic net income (loss) per share is calculated by dividing net income (loss) available to common shareholders for the period by the weighted average number of common shares outstanding during the period.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.



NOTE 2  GOING CONCERN UNCERTAINTY



The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.  As shown in the financial statements, the Company has incurred significant recurring operating losses.  In addition, at September 30, 2008, the Company was in default on its line of credit agreement with its primary lender, and was operating under a temporary forbearance agreement.  These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time.  The financial statements do not include any adjustments relating to the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

The Company continues to actively pursue alternative financing plans to meet the Companys requirements, and those plans include, but are not limited to, additional equity sales or debt financing under appropriate market conditions, allegiances or partnership agreements, or other business transactions which could generate adequate working capital.  In addition, the Company continues to explore opportunities to secure additional sources of debt or other financings as a means of more cost effectively conducting its roofing and concrete restoration businesses.  However, there is no guarantee that the Company will receive sufficient funding to sustain operations and/or implement any future business plans.



NOTE 3 - ACQUISITIONS

On April 1, 2006, Aduddell Roofing acquired certain operating assets of Merit Construction Services, a privately held concrete restoration company.  As a result of the acquisition, the Company established its restoration division, eliminated the need to outsource restoration projects, increased Merits market opportunity through our bonding capacity, and allowed us to cross sell services to customers.



9







The aggregate purchase price of $1,085,000 consisted of $880,000 in cash and 250,000 shares of Company common stock valued at $205,000.  The value of the common shares issued was determined based on the closing market price of the Companys common shares on the immediately preceding day of closing.  Based on the fair value of the acquired assets, the Company allocated $487,463 of the purchase price to tangible property and equipment and $597,537 to intangible assets.   The intangible asset represents the benefit the Company expects to realize from the existing customer relationships and was considered to have an estimated useful life of fiveyears.

In September 2006, we purchased the assets of EyeOpener Creative Communications, LLC, (EyeOpener) an integrated marketing company, to help develop and brand the Companys operating business units.  EyeOpener provides the Company with professional and targeted marketing and sales support through strategic advertising, branding, web-based communications, sales tools, and market research.  EyeOpener has in house media, photography and video capabilities that are beneficial to all of our operating units.  The aggregate purchase price of $212,550 consisted of $20,000 in cash, $103,800 in repayment of loans and 125,000 shares of Company common stock valued at $88,750.  The value of the common shares issued was determined based on the closing market price of the Companys common shares from the previous day.

On December 1, 2006, the Company purchased Brent Anderson Associates, Inc., a Minnesota-based restoration, roofing and waterproofing company, adding significant resources, including below grade waterproofing, to our service offerings.  The aggregate purchase price of $9,072,415 consisted of $1,850,000 in cash, $4,026,915 repayment of loans, and $2,000,000 of Company common stock with a minimum conversion value of $1.00 per share valued at $1,400,000 (Actual value of the common shares issued was determined based on the closing market price of the Companys common shares from the day previous to closing) and the right to earn an additional $2,565,000 of shares of the Companys common stock with a minimum conversion price of $1.00 per share (Valued at $1,795,500 based on the share price at the day previous to closing).  Based on the fair value of the acquired assets, the Company
allocated $3,618,268 of the purchase price to tangible property and equipment and $5,454,147 to intangible assets.  The intangible asset represents the benefit the Company expects to realize from the existing customer relationships and is considered to have an estimated useful life of five years.

NOTE 4 - CONTRACTS RECEIVABLE

Contracts receivable consist of the following:



September 30,
        
        December 31,2008
        
        2007Completed contracts
        
        $2,390,078
        
        $5,436,675Contracts in progress
        
        10,036,075
        
        6,963,029Retainage
        
        2,977,569
        
        2,085,84215,403,722
        
        14,485,546Less allowance for doubtful amounts
        
        (665,000)
        
        (325,000)$14,738,722
        
        $14,160,546




NOTE 5 - UNCOMPLETED CONTRACTS

Costs, estimated earnings, and billings on uncompleted contracts, are as follows:



September 30,
        
        December 31,2008
        
        2007Costs incurred on uncompleted contracts
        
        $49,829,981
        
        $24,775,827Estimated earnings (losses)
        
        (2,954,089)
        
        (278,653)46,875,892
        
        24,497,174Billings to date
        
        48,619,883
        
        25,252,143$(1,743,991)
        
        $(754,969)






Included in the accompanying balance sheets under the following captions:





10









September 30,
        
        December 31,2008
        
        2007Costs and estimated earnings in excess ofbillings on uncompleted contracts
        
        $1,968,509
        
        $2,190,585Billings in excess of costs and estimatedearnings on uncompleted contracts
        
        (3,712,500)
        
        (2,945,554)$(1,743,991)
        
        $(754,969)




NOTE 6 - LETTER OF CREDIT

At September 30, 2008, the Company had a $293,000 letter of credit issued to its insurance carrier that matures on March 13, 2009.

NOTE 7 - LINE OF CREDIT

The Company has a $10,000,000 line of credit that matured on December 15, 2007.  The Company is in default on the loan and is operating under a temporary forbearance agreement through November 15, 2008.  The line bears interest at 3.375% over the published LIBOR Rate and is secured by all accounts, property and equipment.  The outstanding balance at September 30, 2008, and December 31, 2007, was $8,988,201 and $9,151,283, respectively.

Under the terms of the temporary forbearance agreement, the unpaid principal balance on the line of credit was capped at $8,988,201, with no additional borrowings allowed, and the Companys principal officer and stockholder was required to personally guarantee a portion of the loan balance, limited to a maximum of $2,000,000.  The agreement also requires that any income tax refunds received be utilized to reduce the outstanding loan principal.

The Company has a $1,004,702 revolving line of credit.  The line bears interest at 1% over Wall Street Journal prime (currently 6.00%) and is secured by real estate owned by Aduddell Holdings, Inc., a corporation wholly-owned by Tim Aduddell, a majority shareholder of the Company.  The line matures on   November 19, 2008, and the outstanding balance at September 30, 2008, was $1,004,702.

The Company has a $650,075 revolving line of credit.  The line bears interest at 5.59% and is secured by certificates of deposit owned by Tim Aduddell, a majority shareholder of the Company. The line matures on January 27, 2009, and the outstanding balance at September 30, 2008 was $650,075.

NOTE 8 - LONG-TERM DEBT

The Company has the following long-term debt as of:



September 20,
        
        December 31,2008
        
        20076.63% to 21% notes payable secured byequipment, due in varying monthlyinstallments through May 2010
        
        $19,189
        
        $44,6966% to 8.25% notes payable secured bytransportation equipment, due in varyingmonthly installments through January 2012
        
        434,437
        
        619,100453,626
        
        663,796Less: current portion of long-term debt
        
        275,256
        
        280,936$178,370
        
        $382,860






11









Estimated maturities of long-term debt as of September 30, 2008, are as follows:



Year2010
        
        $125,1182011
        
        42,3552012
        
        10,897$178,370




Interest expense was $624,363, $786,400, and $46,481 for the nine months ended  September 30, 2008, 2007, and 2006, respectively.

NOTE 9 - PENSION PLAN

The Company sponsors a defined contribution plan that covers all non-union employees.  Employees who are twenty-one years of age and have completed one year of service are eligible to participate.  Employees may contribute from one to eighty percent of eligible salary limited to the amount allowed under theInternal Revenue Code. Company profit sharing contributions are discretionary each year.  Currently the Company is not matching contributions. Employees are vested 100% in salary deferral contributions.  Company contributions vest immediately.  No contributions were made for the nine months ended September 30, 2008.  Company contributions for the nine months ended September 30, 2007, and 2006, totaled $94,401 and $45,396, respectively.

NOTE 10  STOCK OPTIONS

Common Stock Options and Other Warrants



The following table summarizes the Company's stock option activity for the quarters ended September 30, 2008, 2007, and 2006:



September
        
        Exercise
        
        September 30,
        
        Exercise
        
        September 30,
        
        Exercise2008
        
        Price
        
        2007
        
        Price
        
        2006
        
        PriceOptions outstanding,beginning of quarter
        
        31,178,818
        
        $0.12
        
        32,333,818
        
        $0.12
        
        33,403,818
        
        $0.12Options issuedduring the quarter
        
        -
        
        -
        
        -
        
        -
        
        25,000
        
        1.02Options exercisedduring the quarter
        
        -
        
        -
        
        -
        
        -
        
        -
        
        -Options cancelledduring the quarter
        
        (600,000)
        
        0.78
        
        -
        
        -
        
        -
        
        -Options expiredduring the quarter
        
        -
        
        -
        
        -
        
        -
        
        -
        
        -Options outstanding,end of quarter
        
        30,578,818
        
        $0.07
        
        32,333,818
        
        $0.12
        
        33,428,818
        
        $0.13




Options Issued Under 2005 Stock Incentive Plan

The Companys 2005 Stock Incentive Plan (the Plan) was adopted on October 17, 2005.  The Plan is administered by the Board of Directors.  All officers, employees, directors and individual consultants of the Company are allowed to



12







participate in the Plan.  The Plan has a term of ten years.  Accordingly, no grants may be made under the Plan after October 17, 2015, but the Plan will continue thereafter while previous grants remain subject to the Plan.  The aggregate number of shares of common stock available under the Plan is five million shares.  The Plan authorizes the Board of Directors to grant options that are incentive stock options within the meaning ofSection 422of theInternal Revenue Code of 1986, as amended, non statutory stock options, and restricted stock.  All grants under the Plan will be made at the discretion of the Board of Directors.

On October 17, 2005, the Company granted options exercisable for a total of 1,000,000 shares to Ron Carte in his role as President, and options exercisable for a total of 500,000 shares each to David Aduddell, Ron Carte, Tom Parrish and Jerry Whitlock in their roles as Directors at an exercise price of $0.78 per share which vest in 5 equal installments.  On April 1, 2006, the Company granted options exercisable for a total of 500,000 shares to Stan Genega in his role as a director, with an exercise price of $0.80 per share which were rescinded with his termination.  Of the 1,000,000 options issued to Ron Carte as President, 500,000 options have vested with 500,000 rescinded with his resignation as President.  Of the 500,000 options issued to Messrs. Aduddell and Whitlock, 200,000 have vested with 300,000 rescinded with their resignation as Directors.



In connection with a consulting agreement dated November 21, 2005, the Company granted options to purchase 100,000 shares of common stock for $0.70 per share, vesting in one year.

On January 1, 2006, the Company granted options to purchase 250,000 shares of common stock for $0.49 per share, vesting in 5 equal annual installments, to the Companys former Chief Financial Officer.  All options were vested and extended per the termination agreement with the officer.



In connection with a consulting agreement dated January 15, 2006, the Company granted options to purchase 200,000 shares of common stock for $0.66 per share. Options for 100,000 shares have vested with 100,000 options rescinded with the termination of the agreement.

In connection with an employment agreement dated May 1, 2006, the Company granted options to purchase 25,000 shares of common stock for $1.38 per share, which were rescinded upon termination of employment.

In connection with an employment agreement dated September 1, 2006, the Company granted options to purchase 25,000 shares of common stock for $1.02 per share, which were rescinded upon termination of employment.

In connection with an employment agreement dated October 16, 2006, the Company granted options to purchase 25,000 shares of common stock for $.74 per share, which were rescinded upon termination of employment.



Options Issued Prior to the 2005 Stock Incentive Plan



In connection with the terms of the Agreement and Plan of Split Off and Merger, signed September 27, 2002, Tim Aduddell was granted an option to purchase 30 million shares of common stock for $0.04 per share.  On June 7, 2006, 1,471,182 of these options were exercised, and the underlying shares were redeemed in payment of his note receivable, leaving 28,528,818 options outstanding.

In connection with a July 3, 2002, financing agreement for certain equipment, 200,000 options at $0.08 per share were granted.



Following is a summary of stock options outstanding and exercisable at September 30, 2008:



Options Outstanding
        
        Options ExercisableWeightedAverage
        
        Weighted-
        
        
        
        WeightedRange of
        
        Number
        
        Remaining
        
        Average
        
        Number
        
        AverageExercise
        
        Outstanding
        
        Contractual
        
        Exercise
        
        Exercisable
        
        ExercisePrices
        
        at 9/30/08
        
        Life
        
        price
        
        at 9/30/08
        
        Price0.04
        
        28,528,818
        
        No term
        
        0.04
        
        28,528,818
        
        0.040.08
        
        200,000
        
        No term
        
        0.08
        
        200,000
        
        0.08.49-.78
        
        1,850,000
        
        10 year
        
        0.6
        
        1,250,000
        
        0.78






13









30,578,818
        
        
        
        0.07
        
        29,978,818
        
        0.12






NOTE 11 - INCOME TAXES

The income tax provision consists of the following:



Three Months Ended
        
        Nine  Months EndedSeptember 30,
        
        
        
        
        
        September 30,2008
        
        2007
        
        2006
        
        2008
        
        2007
        
        2006Current tax provision
        $(765,000)
        
        $(2,562,904)
        
        $(46,800)
        
        $(2,413,000)
        
        $(4,130,000)
        
        $(41,000)Deferred tax provision
        3,367,346
        
        473,108
        
        58,000
        
        3,868,760
        
        1,381,219
        
        36,000Total provision for income taxes
        $2,602,346
        
        $(2,089,796)
        
        $11,200
        
        $1,455,760
        
        $(2,748,781)
        
        $(5,000)




A reconciliation of the Companys effective income tax rate to that determined by applying the statutory U.S. federal (34%) and state (5%) income tax rates to income before income taxes is as follows for the nine months ended:



September 30,2008
        
        2007
        
        2006Statutory federal income tax rate
        
        34.0%
        
        34.0%
        
        34.0%State tax effective rate
        
        
        5.0%
        
        5.0%
        
        5.0%Prior year assessments finalized
        
        -
        
        -
        
        -Difference in estimated and actual rate
        
        0.0%
        
        -
        
        -Change in valuation allowance
        
        -62.5%
        
        -
        
        -Temporary differences
        
        
        0.0%
        
        0.3%
        
        14.0%Other
        
        
        -
        
        -
        
        --23.5%
        
        39.3%
        
        53.0%




At September 30, 2008, the Company had net operating loss carry forwards of approximately $10.9 million available to reduce future federal and state taxable income.  Unless utilized, the carry forward amounts will begin to expire in 2012.  For federal and state tax purposes, approximately $800,000 of the Companys net operating loss carry forward amounts are subject to an annual limitation due to a greater than 50% change in stock ownership which occurred in 2002, as defined by federal and state tax law.

Taxable temporary differences result principally from the excess of depreciation for tax purposes over the amount deducted for financial reporting purposes.  Deductible temporary differences from the operating loss carry forward, give rise to a deferred tax asset, which are reduced by a valuation allowance.   Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized. The Company has established a 100% valuation allowance for the excess of its net deferred tax assets over liabilities.  The valuation has been established due to the recurring significant operating losses the Company continues to incur.



The net deferred tax asset consisted of the following components:



September 30,
        
        December 31,2008
        
        2007Deferred tax liability on depreciation
        
        $(893,000)
        
        $(988,000)Deferred tax asset for loss carry forward
        
        3,720,000
        
        5,417,9142,827,000
        
        4,429,914Less: valuation allowance
        
        (2,827,000)
        
        (203,000)






14









Net deferred tax asset
        
        $-
        
        $4,226,914




NOTE 12 - RELATED PARTY TRANSACTIONS

The Company engaged in certain transactions with Tim Aduddell, the Companys President, Chief Executive Officer and board member, as well as the majority shareholder of the Company, and entities owned by Tim Aduddell.

In May 2008, the Company borrowed $919,810 from Tim Aduddell under a $1,000,000 unsecured long-term promissory note bearing interest at 7.5% per annum.  The note is payable interest only on a quarterly basis through maturity on May 10, 2018.  For the nine months ended September 30, 2008, interest expense amounted to $27,154.

The Company advanced money to Hickman Community Services which is owned 50% by Aduddell Roofing, Inc.  At September 30, 2008, the advances totaled $15,513.

The Company leases its Oklahoma office, warehouse and yard facilities from Aduddell Holdings, Inc., a corporation wholly-owned by Tim Aduddell.  The lease is on a month to month basis with monthly rentals of $16,250.  The Company is responsible for all taxes, insurance, maintenance and utilities on the leased premises.  Rental expense under this lease amounted to $146,250 for the nine months September 30, 2008, 2007, and 2006.

The Company leased its office, warehouse and yard facilities in Minnesota, through February 2008, from BDA Development, LLP an entity owned by Brent Anderson, who is a Company employee. The lease was on a month to month basis with monthly rentals of $29,442.  Rental expense under this lease amounted to $59,830 and $124,406 for the nine months ended September 30, 2008, and 2007.

NOTE 13 - BACKLOG

The amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress and from contractual agreements on which work had not yet begun at September 30, 2008, 2007, and 2006 was approximately $18,907,000, $15,004,000, and $8,038,000, respectively.

NOTE 14 - SHARE BASED COMPENSATION

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2005 and 2006: risk-free interest rates of 3%; no dividend yield or assumed forfeitures; expected lives of 10.0 years; and volatility of 104%. The assumptions above are not likely to be representative of future years because there is no assurance that additional awards will be made each year.



NOTE 15 - EARNINGS PER SHARE



2008
        
        2007
        
        2006Basic and dilutedearnings(loss)Common shares outstanding
        
        53,966,354
        
        53,965,854
        
        50,187,921Weighted average shares outstanding
        
        53,966,354
        
        53,965,854
        
        50,187,921Earnings (loss) per share
        
        
        $(0.14)
        
        $(0.14)
        
        $-Fully dilluted earnings per share:Common shares outstanding
        
        N/A
        
        N/A
        
        83,666,739Weighted average shares outstanding
        
        N/A
        
        N/A
        
        83,666,739Earnings(loss) per share
        
        
        $-
        
        $-
        
        $-






For the nine months ended September 30, 2008, and 2007, all options to purchase shares of common stock were omitted from the computation of loss per common share-assuming dilution because such options were anti-dilutive.



15







NOTE 16 - LEASES

As disclosed in Note 12, the Company leases its Corporate offices, warehouse and yard facilities under a month to month operating lease with monthly rentals of $16,250.  The Company is responsible for all taxes, insurance, maintenance and utilities on the leased premises.

The Company leases its former corporate office facilities under a four year operating lease with monthly rentals of $10,153 through April 30, 2010.  Under the terms of this lease, the Company is responsible for its share of common area maintenance and operating expenses.  The facility has been subleased through December 31, 2008, at monthly sublease rentals of $10,153.

In December 2007, the Company leased its Minnesota office, warehouse and yard facilities under an operating lease which expires on November 30, 2010.  Under the terms of the lease the Company is responsible for all taxes, insurance, maintenance and utilities on the leased premises.  Rent expense under the lease totaled $84,800 for the nine months ended. September 30, 2008.

The Company also leases office facilities for its Florida roofing division and its Eyeopener division under operating leases which expire during 2008.

The Company also routinely leases specialized construction equipment and storage facilities under short-term operating leases which are included in contract costs and not considered operating leases.

Rental expense under all operating leases, net of sublease rentals, amounted to approximately $566,243, $815,547, and $244,084 for the nine months ended September 30, 2008, 2007, and 2006, respectively.

As of   September 30, 2008, the future minimum lease commitments under all noncancellable operating leases, net of aggregate future minimum noncancellable sublease rentals, are as follows:



For the Year Ended September 30,2009
        
        $257,9772010
        
        270,4712011
        
        52,500$580,948




NOTE 17 - COMMITMENTS AND CONTINGENCIES

The Company warrants its work in the normal course of business.  In management's opinion, there were no outstanding claims which would have a material effect on the Company's operations or financial position at September 30, 2008.

The Company maintains cash balances at several financial institutions.  Accounts at each institution are insured by theFederal Deposit Insurance Corporationup to the legal maximum insured by the FDIC, and any amounts in excess of this would not be insured if the institution should fail.  At times, cash in the deposit accounts may exceed the federally insured limits. The Company has not experienced any losses in such accounts and believes that it is not exposed to any significant risk.

In regard to the sale of assets and liquidation of Zenex Communications in 2002, the Company was guarantor to the purchaser on notes with a remaining balance of $108,300 at September 30, 2008, with approximately $7,548 in monthly principal and interest payments.  The purchaser is currently in default on the required payment obligations.

Lawsuit



We were sued by First BankCentre (the "Bank") in the District Court of Tulsa County, Oklahoma, Case No. CJ-2006-3621 on June 7, 2006 (the "Lawsuit").  We denied the Bank's claims in the Lawsuit.  On April 8, 2008, the parties engaged in mediation in Tulsa, Oklahoma.  Following the mediation, the parties reached a settlement of the Lawsuit whereby we agreed to pay the Bank $5,000.00 and issue the Bank 500,000 shares of our common stock.  The settlement of the case was memorialized in a General Release and Settlement Agreement dated August 7, 2008.  A Dismissal with Prejudice was filed in the Lawsuit on October 1, 2008.  In exchange for the General Release and Settlement Agreement and the Dismissal, we paid the Bank



16







$5,000.00 by check dated July 18, 2008 and issued the Bank 500,000 shares of our common stock on September 23, 2008.  The Lawsuit is now completely resolved.



We have be a pending suit brought by former employee and director, Stanley Genega (Genega) in the United States District Court for the Western District of Oklahoma, Case No. CIV-08-1007-L.  The Complaint was filed on September 23, 2008.  Genega claims that his termination violated state and federal laws prohibiting age discrimination and constituted a breach of an actual or implied contract.  Genega also asserts claims for fraud, constructive fraud and negligent misrepresentation in connection with his termination from employment, and claims for wrongful removal and breach of fiduciary duty in connection with his removal from the Board of Directors.  We have filed an answer denying all of Genegas claims.  There has not yet been a scheduling conference in this matter and discovery has not yet begun.  We intend to vigorously defend this matter.



In addition, we are, from time to time, parties to various litigation matters arising in the normal course of our business, most of which involve employment claims or claims for personal injury and property damage incurred in connection with our operations. We are not currently involved in any litigation of this nature that we believe, based on our examination of such matters, and are likely to have a material adverse effect on our financial condition or results of operations.



NOTE 18 - CONCENTRATIONS

In connection with providing service to customers, Aduddell Industries, Inc. does not have contractual agreements with suppliers.  The material and supplies used in the business are readily available from several vendors.

Although Aduddell Industries, Inc. had a significant number of customers for the nine months ended September 30, 2008, and 2006, one customer accounted for 18% and 41% of the revenue. For the nine months ended September 30, 2007, no customer accounted for 10% or more of total revenue.

The Companys contract receivables are from a relatively small number of companies in various industries which could be subject to business cycle variations. As of September 30, 2008 and December 31, 2007, no customer accounted for 10% or more of contract receivables.

NOTE 19  PREFERRED STOCK

In October 2007, the Company closed a private placement of 20,000 shares of its Series A Preferred Stock, par value $.001 per share, for $100 per share, or total gross proceeds of $2,000,000.  The Series A Preferred Stock carries a cash dividend of 14% per annum payable monthly.  Each share of Series A Preferred Stock is convertible into the Companys common stock at any time after the tenth anniversary of the date of issuance.  The conversion price per share for the Series A Preferred Stock is the weighted (based on daily trading volume) average closing price per share of the Companys common stock as reported in the public trading markets for the twenty trading days immediately preceding the date of conversion.  The Company may redeem the Series A Preferred Stock at any time at a price equal to the per share liquidation value of $100 plus any accrued and unpaid dividends.



17









Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations.



The following discussion should be read in conjunction with our financial statements and notes thereto.



Introduction



Aduddell Industries, Inc. is engaged in the commercial and industrial roofing and re-roofing, specialty roofing metals, waterproofing and concrete restoration and consulting businesses through our subsidiaries Aduddell Roofing, Inc., Aduddell Restoration and Waterproofing, Inc., and Global Specialty Group, Inc.  In addition, we provide pre-event planning, event management and post-event recovery services for disaster related activities through our subsidiary Aduddell Enviro & Emergency Management Services, Inc. (E2MS), as well as marketing services through our EyeOpener Division.  We were originally incorporated on March 4, 1991, in the state of Colorado.  On June 7, 2006, we changed our name from Zenex International, Inc. to Aduddell Industries, Inc. and our state of incorporation from Colorado to Oklahoma.

Our revenues were historically derived from comprehensive commercial roofing services, including re-roofing, restoration and repair, new roof construction, sheet metal fabrication, waterproofing, and emergency post-event response services.  In 2008, we have continued to focus on integration of our acquisitions, cost control and operations.  We have also embarked on efforts to raise our sales volume through the cross-selling of services at our regional and divisional offices as well as the continual pursuit of sales through the award of contracts through US Communities.  We have had improved success this year with the sales efforts of this contract with the contract accounting for 17% of our sales volume; however, there is no guarantee that this will continue as the contract will be up for renewal in 2009.  Management is attempting to improve divisional margins by dedicating senior level
executives to actively working with divisional staff to make improvements to the divisional margins through intensive oversight.  Our ability to sell has been reduced due to limited bonding capacity and our ability to secure materials in a timely fashion.



In the second quarter of 2006, we increased our focus on providing services to the total exterior shell of a building through the asset purchase of Merit Construction, a concrete restoration company and expanded our roofing business to include standing seam and specialty metals.  In the third quarter of 2006, we focused on the organic growth of these business areas, increased our marketing capability with the purchase of EyeOpener Creative Communications, LLC. and continued to execute our business plan by searching for acquisitions in key markets.  On October 20, 2006, we signed a letter of intent to acquire Brent Anderson & Associates, Inc., a Minnesota based restoration, roofing and waterproofing company.  This transaction closed in December 2006 adding significant resources, including below grade waterproofing to our service offerings.



Cost of revenues consists primarily of compensation and benefits to field staff, materials, subcontracted services, parts and supplies, depreciation, fuel and other vehicle expenses and equipment rentals.  Our gross profit percentage, which is gross profit expressed as a percentage of revenues, depends primarily on the relative proportions of costs related to labor and materials.  On jobs in which a higher percentage of the cost of revenues consists of labor costs, we typically achieve higher gross margins than on jobs where materials represent more of the cost of revenues.  Margins are also affected by the competitive bidding process and the technical difficulty of the project.  New roof construction work is more likely to be competitively bid than re-roofing, restoration and repair. Typically, re-roofing, restoration and repair jobs are more labor intensive and have higher margins than new
roof construction.



The following table sets forth information used by management to assess our results of operations of the current period over the same period in the prior year in aggregate amounts:



Nine months
ended
        Nine months endedSeptember 30, 2008
        September 30, 2007Cash Flow from Operations
        $(2,475,353)
        $186,565EBITDA
        $(3,537,141)
        $(7,549,159)Net Income (Loss)
        $(7,642,826)
        $(7,759,056)Free Cash Flow
        $(2,583,482)
        $(380,645)






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The following table sets forth the reconciliation of our free cash flow to our cash flow from operations:



Cash Flow from Operations
        $(2,475,353)
        $186,565Capital Expenditures
        108,129
        567,210Free Cash Flow
        (2,583,482)
        (380,645)




The following table reconciles our EBITDA to our net income:



Net Income
        $(7,642,826)
        $(7,759,056)Interest (Income)
        615,815
        697,147(Gain) Loss on Sale of Equipment
        579
        5,340Provision (Benefit) for Income Taxes
        1,455,760
        (2,748,781)Depreciation
        2,033,531
        2,256,191EBITDA
        (3,537,141)
        (7,549,159)




We present EBITDA and free cash flow because we believe that each provides useful information regarding our continuing operating results.  We rely on EBITDA and free cash flow as primary measures to review and assess our operating performance and our management teams performance in connection with our executive compensation and bonus plans.  We also review EBITDA and free cash flow to compare our current operating results with corresponding periods and as an assessment of our overall liquidity and our ability to meet our debt service obligations.



We believe that EBITDA and free cash flow are useful to investors to provide disclosures of our operating results on the same basis as that used by our management.  We also believe that these measures can assist investors in comparing our performance to that of other companies on a consistent basis without regard to certain items, which do not directly affect our ongoing operating performance or cash flows.  EBITDA and free cash flow, which are non-GAAP financial measures, have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for net income, cash flows from operating activities and other consolidated income or cash flows statement data prepared in accordance with accounting principles generally accepted in the United States.  Because of these limitations, EBITDA and free cash flow should neither be considered as measures of discretionary cash
available to us to invest in the growth of our business, nor as replacements for net income.  We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and free cash flow as supplemental information.



Critical Accounting Policies and Estimates



Basis of Presentation



The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Aduddell Roofing, Inc., Aduddell Restoration and Waterproofing, Inc., Global Specialty Group, E2MS and Aduddell Financial Services.  The accompanying financial statements of the Company have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission (SEC).  Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.  The Company believes that the disclosures made are adequate to make the information presented not misleading.  These financial statements should be read in conjunction with the Company's year end audited
financial statements and related footnotes included in the annual 10-K filing.  In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company as of September 30, 2008, and the statements of its operations and accumulated deficit and cash flows for the nine month periods ended September 30, 2008, and 2007, have been included.  All significant inter-company accounts and transactions have been eliminated in the consolidation.  The results of operations for interim periods may not be indicative of the results which may be realized for the full year.



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Revenue Recognition

The Company recognizes fixed-price contract revenues on the percentage-of-completion method of accounting, measured by the percentage of cost incurred to date to the estimated total cost for each contract.  Management uses this method because total cost is considered to be the best available measure of progress on the contracts.  Revenues from cost-plus-fee contracts are recognized on the basis of costs incurred during the period plus the fee earned, measured by the cost-to-cost method.

Contract costs include all direct material and labor costs and those indirect costs related to contract performance such as indirect labor, interest, depreciation and supplies.  General and administrative costs are charged to expense as incurred.  Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.  Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined.  The asset "Costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed.  The liability "Billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenues recognized.

Cash and Cash Equivalents

For purposes of the Consolidated Statement of Cash Flows, short-term investments, which have maturities of ninety days or less, are considered cash equivalents.



Investments

The Company accounts for its investments in marketable securities usingStatement of Financial Accounting Standards No. 115 Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115).This standard requires that investments in equity securities that have a readily determinable fair value and all investments in debt securities be adjusted to market value at the end of each accounting period.  Unrealized market value gains and losses are charged to earnings if the securities are traded for short-term profit.  Otherwise, such unrealized gains and losses are charged or credited to a separate component of shareholders equity.

Management determines the proper classification of investments in obligations with fixed maturities and marketable equity securities at the time of purchase and reevaluates such designations as of each balance sheet date.  At September 30, 2008, and December 31, 2007, all securities covered bySFAS No. 115were designated as available-for-sale.  Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in a separate component of shareholders equity.  Any realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the Consolidated Statement of Operations.

Fair Value of Financial Instruments

The Companys financial instruments include cash, receivables, notes receivable, marketable securities, short-term payables and notes payable.  The carrying amounts of cash, receivables, and short-term payables approximate fair value due to their short-term nature.  Marketable equity securities fair values are estimates based on quoted market prices or approximate fair values.  The carrying amounts of notes receivable and payable approximate fair value based on interest rates currently available.

Share-Based Compensation



The Company recognizes expense for its share-based compensation based on the fair value of awards that are granted in accordance withStatement of Financial Accounting Standards No. 123R, Share-Based Payments.  The fair value of common stock options is estimated at the date of grant using the Black-Scholes-Merton option valuation model which was developed for use in estimating the fair value of exchange-traded stock options that have no vesting restrictions and are fully transferable, and takes into consideration several criteria, including volatility, expected term, dividend yield, and risk-free rate of return.  Option valuation methods require the input of highly subjective assumptions, including the expected stock price volatility.  The measured compensation cost is recognized ratably over the vesting period of the related share-based compensation award.

Income Taxes

The Company accounts for income taxes in accordance withStatement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109).SFAS No. 109requires the recognition of deferred tax assets and liabilities



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for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  In addition,SFAS No. 109requires the recognition of future tax benefits, such as net operating loss carry-forwards, to the extent that realization of such benefits is more likely than not.  The amount of deferred tax liabilities or assets is calculated using 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 rate is recognized in income in the period that includes the enactment date.  Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.

In determining the quarterly provision for income taxes, the Company uses an annual effective tax rate based on expected annual income and statutory tax rates.  Significant discreet items are separately recognized in the income tax provision in the quarter in which they occur.

The determination of the Companys provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws.  Significant judgment is required in assessing the timing and amounts of deductible and taxable items.

Net Income (Loss) Per Common Share



The Company computes net income (loss) per share in accordance withSFAS No. 128,Earnings per ShareandSEC Staff Accounting Bulletin No. 98 (SAB 98).Under the provisions ofSFAS No. 128andSAB 98,basic net income (loss) per share is calculated by dividing net income (loss) available to common shareholders for the period by the weighted average number of common shares outstanding during the period.

Property and Equipment



Property and equipment are stated at cost, net of accumulated depreciation and amortization.  Property and equipment are depreciated using straight-line and accelerated methods over the estimated useful lives of the assets, which range from five to thirty nine years.



Changes from the Prior Period



We have not made any material changes to our critical accounting estimates or assumptions or the judgments affecting the application of those estimates or assumptions.

Results of Operations



Comparison of 3rd Quarter 2008 and 2007



Revenues. Revenues increased from $12,472,735 for the three months ended September 30, 2007, to $16,430,827for the three months ended September 30, 2008, which represents and increase of 31.7%.    We had no revenues for emergency services in neither the third quarter of 2008 nor 2007.  Our emergency services revenues are significantly affected by the presence or absence of natural disaster related work such as tornados, hurricanes and other windstorms.  Revenues for the three months ended September 30, 2008, were higher as a result of the additional sales associated with our acquisition efforts and the increase in sales associated with the US Communities contract.  Our ability to continue to grow sales will be largely impacted by our ability to obtain additional financing and bonding.



Operating Expenses. Operating expenses for the three months ended September 30, 2008, were $18,479,865 or 112% of revenue, compared to $19,078,356 or 153% of revenue, for the three months ended September 30, 2007. Cost of Sales for the three months ended September 30, 2008 as a percentage of revenue decreased from 124% of revenues to 105% of revenues.  Selling, general, and administrative expenses decreased to $1,216,389in the third quarter of 2008 compared to $3,591,146 in the third quarter of 2007 primarily as a result of a decrease in corporate overhead, manpower, operating and travel expenses.



Income (Loss) before Provision for Income Taxes. Operating income (loss) before taxes for the quarter ended September 30, 2008, was $(1,961,216) compared to $(6,471,349) for the quarter ended September 30, 2007. The increase in our 2008 operating income was attributable to lower cost of sales as a percentage and selling, general, and administrative costs of $1,216,389 as well as our increased sales volume. We continue to pursue cost reduction initiatives and improve the margins on the jobs.



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Net Income (Loss).The net loss for the quarter ended September 30, 2008, was $(4,563,562), compared to a net loss of $(4,381,553) for the quarter ended September 30, 2007. These results were influenced by the factors identified above under Revenues and Operating Expenses as well as the establishment of a 100% valuation allowance for the excess of our net deferred tax assets over liabilities due to the significant recurring losses.



Comparison of nine months ended September 30, 2008 and 2007



Revenues. Revenues increased from $36,859,353 for the nine months ended September 30, 2007 to $40,582,277for the nine months ended September 30, 2008, which represents an increase of 10.1%.    We had no revenues for emergency services in either the first three quarters of 2008 or 2007.  Our emergency services revenues are significantly affected by the presence or absence of natural disaster related work such as tornados, hurricanes and other windstorms.  Revenues for the nine months ended September 30, 2008 were higher as a result of the additional sales associated with our acquisition efforts and the increase in sales associated with the US Communities contract.  Our ability to continue to grow sales will be largely impacted by our ability to obtain additional financing and bonding capacity.



Operating Expenses. Operating expenses for the nine months ended September 30, 2008 were $46,911,624, or 116% of revenue, compared to $47,624,916, or 129% of revenue, for the nine months ended September 30, 2007. Cost of Sales for the nine months ended September 30, 2008, as a percentage of revenue decreased from 99% of revenues to 98% of revenues.   Selling, general and administrative expenses decreased to $7,156,178in the first nine months of 2008 compared to $11,036,417 in the first nine months of 2007 primarily as a result of a decrease in corporate overhead, manpower, operating and travel expense.  We continue to pursue cost reduction initiatives.



Income (Loss) before Provision for Income Taxes. Operating income (loss) before taxes for the nine months ended September 30, 2008, was $(6,186,656)compared to $(10,492,331) for the nine months ended September 30, 2007.  The decrease in our 2008 operating loss was attributable to lower selling, general and administrative expenses of $7,156,178 and our increased sales volume.



Net Income (Loss).The net loss for the nine months ended September 30, 2008, was $(7,642,416), compared to $(7,743,550) for the nine months ended September 30, 2007. These results were influenced by the factors identified above under Revenues and Operating Expenses as well as the establishment of a 100% valuation allowance for the excess of our net deferred tax assets over liabilities due to the significant recurring losses.

Off-Balance Sheet Arrangements



We have operating leases and guaranties that are not accrued on the balance sheet.  The payments due under the leases are disclosed in footnote 16 of our consolidated financial statements, and the contingent loan guaranty is disclosed below and in footnote 17 of our consolidated financial statements.  Other than the lease and note guaranty, we have no contractual commitments that do not appear on the balance sheet as of September 30, 2008.

Seasonality

The construction industry, including the roofing industry, is influenced by seasonal factors, as construction activities are usually lower during winter months than other periods.  We attempt to increase winter productivity by concentrating our business in the southern half of the United States and by expanding our sales and marketing efforts to control project scheduling.  Nevertheless, our revenues and operating results potentially will be lower in the first and fourth quarters.



The roofing industry is also affected by natural disasters, such as tornadoes, hurricanes and other windstorms.  Because of the need for immediate repairs and since the costs of repair are typically covered by insurance, the margins are higher on disaster-related work than on discretionary work.  Since disaster-related work requires an immediate response, we maintain a capacity that is scalable to respond to these needs.  The absence of natural disasters will result in lower revenues and higher relative administrative expenses per revenue dollar.

Commitments and Contingencies



In regard to the sale of assets and liquidation of Zenex Communications in 2002, we are a guarantor on notes with an outstanding balance of $108,300 at September 30, 2008, with approximately $7,548 in monthly principal and interest payments.  The purchaser is currently in default on the required payment obligations.



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We warrant our work in the normal course of business.  In managements opinion, there were no outstanding claims which would have a material effect on our operations or financial position.



Information regarding our legal proceedings is discussed later in this document under, Part II, Item 1. Legal Proceedings.

Liquidity and Capital Resources



Total assets decreased from $32,906,610 to $29,336,578, liabilities increased from $28,925,422 to $33,181,324, and shareholders equity decreased from $3,981,188 to $(3,844,746) from December 31, 2007, to September 30, 2008.  The decrease in assets comes from less cash and lower fixed assets and with more contract receivables.  The increase in liabilities results primarily from an increase in our accounts and subcontract payables and advances on lines of credit.



Our net cash at September 30, 2008 was $436,943.  We are currently using cash from operations and working capital as well as some advances on lines of credit to finance operations.  For the nine months ended September, 2008, net cash used by operating activities was $2,475,353 compared to $186,565 provided for the quarter ended September 30, 2007.  Net cash used by investing activities during this period was $108,129 compared to $560,210 used by investing activities for the nine months ended September 30, 2007.  Net cash provided by financing activities during this period was $1,998,490 compared to $1,159,671 for the nine months ended September 30, 2007. At September 30, 2008, we had negative working capital of $11,391,810 compared to a negative working capital at December 31, 2007 of $9,628,097.



We have a $10,000,000 revolving line of credit that matured on December 15, 2007.  The Company is in default on this primary line of credit loan and is operating under a temporary forbearance agreement through November 15, 2008.  The line bears interest at 3.375% over the published LIBOR Rate and is secured by all accounts, property and equipment.  At September 30, 2008, the advance on the line of credit was $8,988,201 compared to an advance of $9,151,283 at December 31, 2007.

Under the terms of the temporary forbearance agreement, the unpaid principal balance on the line of credit was capped at $8,988,201, with no additional borrowings allowed, and the Companys principal officer and stockholder was required to personally guarantee a portion of the loan balance, limited to a maximum of $2,000,000.  The agreement also requires that any income tax refunds received be utilized to reduce the outstanding loan principal.



We have a $1,004,702 revolving line of credit.  The line bears interest at 1% over Wall Street Journal prime (currently 6.00%) and is secured by real estate owned by Aduddell Holdings, Inc., a corporation wholly-owned by Tim Aduddell, a majority shareholder.  The line matures on November 19, 2008, and the outstanding balance at September 30, 2008 was $1,004,701 compared to a balance of $0 at December 31, 2007.



We also have an additional $1,000,000 revolving line of credit.  The line bears interest at 5.59% and is secured by certificates of deposit owned by Tim Aduddell.  The line matures on January 27, 2009, and the outstanding balance at September 30, 2008 was $650,075 compared to no balance at December 31, 2007.



At September 30, 2008, we had $1,098,180 of long-term debt as compared to $1,199,527 of long-term debt at December 31, 2007.  The decrease in long-term debt results primarily from a decrease in long-term debt net of current portion as well as an increase in long-term stockholder payable offset partially by a decrease in long-term acquisition payable.



In October 2007, we closed a private placement of 20,000 shares of our Series A Preferred Stock, par value $.001 per share, for $100 per share, or total gross proceeds of $2,000,000.  The Series A Preferred Stock carries a cash dividend of 14% per annum payable monthly.  Each share of Series A Preferred Stock is convertible into our common stock at any time after the tenth anniversary of the date of issuance.  The conversion price per share for the Series A Preferred Stock is the weighted (based on daily trading volume) average closing price per share of our common stock as reported in the public trading markets for the twenty trading days immediately preceding the date of conversion.  We may redeem the Series A Preferred Stock at any time at a price equal to the per share liquidation value of $100 plus any accrued and unpaid dividends.



Adequacy of Current Liquidity



We presently meet all of our funding needs for ongoing operations with internally generated cash flows from operations, existing cash and short-term investment balances, lines of credit, and additional privately-placed term debt or equity.  We are unable to draw on our primary existing line of credit at the present time and are presently operating under a



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temporary forbearance agreement through November 15, 2008.  We continue to actively pursue alternative financing plans to meet our requirements that include, but are not limited to, additional equity sales or debt financing under appropriate market conditions, allegiances or partnership agreements, or other business transactions which could generate adequate working capital.  To date, the only sources of capital available to us have been loans made by Tim Aduddell, the Companys President and Chief Executive Officer.  There is no guarantee that we will receive sufficient funding in the near future to either (i) sustain operations and implement any future business plans, or (ii) have sufficient funds to pay off our primary line of credit when our forbearance agreement terminates on November 15, 2008, or any other line of credit at maturity.  If we cannot timely find alternative sources of financing, we may
be forced to seek protection under Federal bankruptcy laws.



Item 3.Quantitative and Qualitative Disclosures About Market Risk



Our primary market risk relates to changes in interest rates.  Market risk is the potential loss arising from adverse changes in market prices and rates, including interest rates.  We do not enter into derivatives or other financial instruments for trading or speculative purposes.



At September 30, 2008, we had $9.99 million drawn on our variable rate revolving lines of credit.  Interest on the revolving lines of credit is variable and is equal to LIBOR plus 3.375% and Wall Street prime plus 1%. Amounts drawn on the revolving lines of credit are the only variable rate debt we have outstanding.  A one-percentage point change in the interest rate for our revolving lines of credit would change our cash interest payments on an annual basis by approximately $100,000.



Item 4.Controls and Procedures



It is the responsibility of our chief executive officer and our chief financial officer to ensure that we maintain controls and other procedures designed to ensure that the information required to be disclosed by us in reports that we file with the Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified by in the Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuers management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.



Our chief executive officer, Tim Aduddell, assumed the role of principal financial officer on March 21, 2008.  Mr. Aduddell will continue in both principal officer roles as chief executive officer and interim chief financial officer until a replacement chief financial officer is named.



As of September 30, 2008, management, including the chief executive officer / interim chief financial officer, conducted an evaluation of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by this report.



Due to the small size of our financial reporting department and the dual role assumed by our chief executive officer / interim chief financial officer we are unable to properly segregate key processes within our control structure.  We believe this lack of proper segregation of duties is a material weakness in our disclosure controls and procedures.  Consequently, our chief executive officer / interim chief financial officer has concluded that our disclosure controls and procedures were not effective as of September 30, 2008.  Irrespective of this material weakness, we believe our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present in all material respects our financial position, results of operations and cash flows for the periods presented in accordance with United States generally accepted accounting principles.

There have been no significant changes in internal controls, or in factors that could significantly affect internal controls, subsequent to the date the chief executive officer / interim chief financial officer completed his evaluation.



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PART IIOTHER INFORMATION

Item 1.Legal Proceedings



We were sued by First BankCentre (the "Bank") in the District Court of Tulsa County, Oklahoma, Case No. CJ-2006-3621 on June 7, 2006 (the "Lawsuit").  We denied the Bank's claims in the Lawsuit.  On April 8, 2008, the parties engaged in mediation in Tulsa, Oklahoma.  Following the mediation, the parties reached a settlement of the Lawsuit whereby we agreed to pay the Bank $5,000.00 and issue the Bank 500,000 shares of our common stock. The settlement of the case was memorialized in a General Release and Settlement Agreement dated August 7, 2008. A Dismissal with Prejudice was filed in the Lawsuit on October 1, 2008.  In exchange for the General Release and Settlement Agreement and the Dismissal, we paid the Bank $5,000.00 by check dated July 18, 2008 and issued the Bank 500,000 shares of our common stock on September 23, 2008.  The Lawsuit is now completely resolved.



We have be a pending suit brought by former employee and director, Stanley Genega (Genega) in the United States District Court for the Western District of Oklahoma, Case No. CIV-08-1007-L.  The Complaint was filed on September 23, 2008.  Genega claims that his termination violated state and federal laws prohibiting age discrimination and constituted a breach of an actual or implied contract.  Genega also asserts claims for fraud, constructive fraud and negligent misrepresentation in connection with his termination from employment, and claims for wrongful removal and breach of fiduciary duty in connection with his removal from the Board of Directors.  We have filed an answer denying all of Genegas claims.  There has not yet been a scheduling conference in this matter and discovery has not yet begun.  We intend to vigorously defend this matter.



In addition, we are, from time to time, parties to various litigation matters arising in the normal course of our business, most of which involve claims for personal injury and property damage incurred in connection with our operations.  We are not currently involved in any litigation of this nature that we believe, based on our examination of such matters, is likely to have a material adverse effect on our financial condition or results of operations.



Item 1A.Risk Factors



Not Applicable.



Item 2.Unregistered Sales of Equity Securities and Use of Proceeds



On September 23, 2008, we issued 500,000 shares of our common stock to First BankCentre in connection with the settlement of a lawsuit (see Part II. Item 1. Legal Proceedings above for a description of the lawsuit).  The securities were issued in reliance of the exemption under Section 4(2) of the Securities Act for transactions by an issuer not involving any public offering.



Item 3.Defaults Upon Senior Securities



We have a $10,000,000 revolving line of credit that matured on December 15, 2007.  The Company is in default on this primary line of credit loan and is operating under a temporary forbearance agreement through November 15, 2008.  The line bears interest at 3.375% over the published LIBOR Rate and is secured by all accounts, property and equipment.  At September 30, 2008, the advance on the line of credit was $8,988,201 compared to an advance of $9,151,283 at December 31, 2007.

Under the terms of the temporary forbearance agreement, the unpaid principal balance on the line of credit was capped at $8,988,201, with no additional borrowings allowed, and the Companys principal officer and stockholder was required to personally guarantee a portion of the loan balance, limited to a maximum of $2,000,000.  The agreement also requires that any income tax refunds received be utilized to reduce the outstanding loan principal.



Item 4.Submission of Matters to a Vote of Security Holders



None.



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Item 5.Other Information



None.



Item 6.Exhibits



******Exhibit No.******
        ******Description of Exhibit******31.1
        Rule 13a-14 Certification of Chief Executive Officer and Interim Chief Financial Officer31.2
        Section 1350 Certification of Chief Executive Officer and Interim Chief Financial Officer






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.



ADUDDELL INDUSTRIES, INC.November 14, 2008
        By:/s/ Tim AduddellTim Aduddell, President, Chief Executive Officer,and Interim Chief Financial Officer








EXHIBIT INDEXEXHIBIT NO.
        DESCRIPTION
        METHOD OF FILING31.1
        Rule 13a-14 Certification of Chief Executive Officer and Interim Chief Financial Officer
        Filed herewith electronically32.1
        Section 1350 Certification of Chief Executive Officer and Interim Chief Financial Officer
        Filed herewith electronically






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