This discussion relates to Cycle Country Accessories Corp. and its consolidated subsidiaries (the "Company") and should be read in conjunction with our consolidated financial statements as of September 30, 2008, and the year then ended, and Management's Discussion and Analysis of Financial Condition and Results of Operations, both contained in our Annual Report on Form 10-KSB for the year ended September 30, 2008.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of the Company as a whole. To the extent that our analysis contains statements that are not of a historical nature, these statements are forward-looking statements, which involve risks and uncertainties. See "Special Note Regarding Forward-Looking Statements" included elsewhere in this filing.

Critical Accounting Policies and Estimates

The Company's discussion and analysis of its financial condition and results of operations are based upon its Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates the estimates including those related to bad debts and inventories. The Company bases its estimates on historical experiences and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The Company believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Consolidated Financial Statements:

Accounts Receivable - Trade credit is generally extended to customers on a short-term basis. These receivables do not bear interest, although a finance charge may be applied to balances more than 30 days past due. Trade accounts receivable are carried on the books at their estimated collectible value. Individual trade accounts receivable are periodically evaluated for collectability based on past credit history and their current financial condition. Trade accounts receivable are charged against the allowance for doubtful accounts when such receivables are deemed to be uncollectible.

Allowance for Doubtful Accounts - The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowance may be required.

Inventories - The Company values its inventory at the lower of cost or market. Cost is determined using the weighted average cost method.

Reserve for Inventory - The Company records valuation reserves on its inventory for estimated excess and obsolete inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future product demand and market conditions. If future product demand or market conditions are less favorable than those projected by management, additional inventory reserves may be required.

Depreciation of Long-Lived Assets - The Company assigns useful lives for long-lived assets based on periodic studies of actual asset lives and the intended use for those assets. Any change in those assets lives would be reported in the statement of operations as soon as any change in estimate is determined.

Goodwill and Other Intangibles - Goodwill represents the excess of the purchase price over the fair value of the assets acquired. The Company accounts for goodwill in accordance with Statement of Financial Accounting Standard (SFAS) no. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 requires the use of a non- amortization approach to account for purchased goodwill and certain intangibles. Under the non-amortization approach, goodwill and certain intangibles are not amortized into results of operations, but instead are reviewed for impairment at least annually and written down and charged to results of operations in the periods in which the recorded value is determined to be greater than the fair value. The Company has reviewed the goodwill recorded at September 30, 2008 and found no impairment.

Accrued Warranty Costs - The Company records a liability for the expected cost of warranty-related claims as its products are sold. The Company provides a one-year warranty on all of its products except the snowplow blade, which has a limited lifetime warranty. The amount of the warranty liability accrued reflects the Company's estimate of the expected future costs of honoring its obligations under the warranty plan. The estimate is based on historical experiences and known current events. If future estimates of expected costs were to be less favorable, an increase in the amount of the warranty liability accrued may be required.

Accounting for Income Taxes - The Company is required to estimate income taxes in each of the jurisdictions in which it operates. This process involves estimating actual current tax exposure for the Company together with assessing temporary differences resulting from differing treatment of items, such as property, plant and equipment depreciation, for tax and accounting purposes. Actual income taxes could vary from these estimates due to future changes in income tax law or results from final tax exam reviews. At December 31, 2008, the Company assessed the need for a valuation allowance on its deferred tax assets. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based upon the historical operating profits and the near certainty regarding sufficient near term taxable income, management believes that there is no need to establish a valuation allowance. Should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, a valuation allowance may be required.

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109." FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under FIN 48, tax positions are recognized in the Company's financial statements as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with tax authorities assuming full knowledge of the position and all relevant facts. These amounts are subsequently reevaluated and changes are recognized as adjustments to current period tax expense. FIN 48 also revised disclosure requirements to include an annual tabular roll forward of unrecognized tax benefits.

The Company adopted the provisions of FIN 48 on October 1, 2007. At December 31, 2008, no uncertain positions were identified. To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income taxes, such amounts would be accrued and classified as a component of income tax expense on the condensed consolidated statement
of income.

OVERALL RESULTS OF OPERATIONS - Three Months Ended December 31, 2008

and 2007
                      Three Months    Three Months    Increase      Increase
                     Ended Dec. 31,   Ended Dec. 31,  (Decrease)   (Decrease)
                        2008             2007          $             %
                     --------------------------------------------------------
Revenue              $   4,333,614    $   5,001,559    $ -667,945    (13.4%)
Cost of goods sold   $   2,917,578    $   2,986,229    $   68,651       2.3%
Gross profit         $   1,416,036    $   2,015329    $   599,293    (29.7%)
Gross profit %              32.7%            40.3%                    (7.6%)

The decrease in revenues for the three months ended December 31, 2008 was mainly attributable to our ATV accessories business segment, which had a decrease in sales of approximately 13% this quarter compared to the same quarter last year, as well as a decline in our Plastic Wheel Cover segment. The decrease in gross profit as a percentage of revenue was mainly attributable to an increase in raw material costs. The company experienced significant increases in the costs of raw steel and metal purchased parts. While the company implemented a significant price increase of its own, the full increase was not able to be realized within our two business segments that utilize steel as a raw material, ATV accessories and Contract Manufacturing. To remain competitive and maintain, or grow market share, the company was not able to pass on the full price increase to its distributors and customers. As the company continues to implement its business plan, Cycle Country is starting to become known for more than just snowplow blades. Our business plan places major emphasis on aggressively developing new products, new markets, and product innovations to vigorously grow revenues and reduce our seasonality.

                      Three Months    Three Months    Increase      Increase
                     Ended Dec. 31,   Ended Dec. 31,  (Decrease)   (Decrease)
                        2008             2007          $             %
                     --------------------------------------------------------
Selling, general
and administrative
expenses             $   883,982    $  1,025,251     $ (141,269)      (13.8%)

As a percentage of revenue, selling, general, and administrative expenses were 20.4% for the three months ended December 31, 2008 compared to 20.5% for the three months ended December 31, 2007. The significant changes in operating expenses for the first quarter of fiscal 2009 as compared to the first quarter of fiscal 2008 were;

                                  Increase             Increase
                                 (Decrease)           (Decrease)
                                    $                     %

Salaries                         $   (11,264)             (4%)
Advertising                      $   (84,480)          (84.2%)
Commissions                      $   (27,249)          (66.2%)
Warranty                         $    (3,874)          (17.9%)
Other professional fees          $    22,308           265.9%
Lease expense                    $    21,239              88%

Salaries decreased for the three months ended December 31, 2008, as compared to the three months ended December 31, 2007. The decrease in commission expense was a result of the decrease in revenues during the first quarter of fiscal 2009 in the ATV Accessories business segment. Warranty expense increased for the three months ended December 31, 2008, as compared to the three months ended December 31, 2007. Other professional fees increased for the three months ended December 31, 2008, as compared to the three months ended December 31, 2007, due to additional consulting work related to the Company's Sarbanes-Oxley Act compliance initiatives. The increase in lease expense was due to the sale and subsequent leasing back of the Company's Milford facility, as described elsewhere in this filing.

                     Three Months    Three Months    Increase      Increase
                     Ended Dec. 31,   Ended Dec. 31, (Decrease)    (Decrease)
                        2008             2007          $             %
                     --------------------------------------------------------
Interest and
miscellaneous
income                 $     684      $    11,423     $   (10,793)   (94.0%)
Gain on sale of assets $  38,216      $   238,432     $  (200,216)   (83.9%)
Interest expense       $  85,560      $    89,283     $   (3,723)     (4.2%)

The decrease in interest and miscellaneous income was primarily due to a decrease in interest income of approximately $8,900. The gain on sale of assets decrease of approximately $200,000 for the three months ended December 31, 2008 as compared to the three months ended December 31, 2007 was due to the Company having sold its Milford facility and certain other assets in the prior year. Interest expense decreased as the principal balance on the bank notes continues to decrease. Interest expense will decrease in the second quarter of fiscal 2009 as the principal balances continue to decrease under fixed rate notes going forward.

Looking ahead to the second quarter of fiscal 2009, we project growth in revenues as new products, new markets, and effective marketing initiatives continue to be the focus of management and the entire Company. The company anticipates gross profits will be within the range of 25% to 30% of revenue as profitability will continue to be impacted by raw steel and other metal parts. Management has, and will, continue to seek out and implement production efficiencies and cost reduction initiatives wherever possible and will pass as much of the net input costs increases on to its customers as possible. Remaining competitive in the markets we are in and maintaining our strong market shares within those markets may hinder management's ability to pass on the full amount of our net input costs increases. We project selling, general and administrative expenses during the remainder of fiscal 2009 to be 20-25% of total revenue as we continue our focus on cost reduction initiatives, launching new products and maximizing the efficiencies the recently implemented new accounting and manufacturing software provides us, all while maintaining a consistent level of administrative support.

BUSINESS SEGMENTS

As more fully described in Note 9 to the Condensed Consolidated Financial Statements included elsewhere in this filing, the Company operates four reportable business segments: ATV Accessories, Plastic Wheel Covers, Weekend Warrior, and Contract Manufacturing. ATV accessories is vertically integrated and utilizes a two-step distribution method, we are vertically integrated in our Plastic Wheel Cover segment and utilize both direct and two-step distribution methods, Weekend Warrior utilizes a single-step distribution method, and our Contract Manufacturing segment deals directly with other OE manufacturers and businesses in various industries.

ATV ACCESSORIES - Three Months Ended December 31, 2008 and 2007

                      Three Months    Three Months    Increase      Increase
                     Ended Dec 31,   Ended Dec 31,   (Decrease)    (Decrease)
                        2008             2007          $             %
                     --------------------------------------------------------
Revenue              $   4,094,462    $ 4,224,679     $ (130,217)    (3.08%)
Cost of goods sold   $   1,925,186    $ 1,751,875     $   173,311     9.89%
Gross profit         $   2,169,276    $ 2,472,804     $ (303,527)   (12.27%)
Gross profit %               53.0%          58.5%                     (5.5%)

The decrease in ATV Accessories revenue for the first quarter of fiscal 2009 reflects the continued growth of our blade sales but with some decline in sales of our parts categories compared to the prior year. There was a minor decrease in gross profit as a percentage of revenue, which was mainly attributable to an increase in raw material costs. The company experienced significant increases in the costs of raw steel and metal purchased parts. While the company implemented a significant price increase of its own, the full increase was not able to be realized within this business segment due to existing market conditions. To remain competitive and to maintain, or grow market share, the company was not able to pass on the full price increase to its distributors. Management has, and will, continue to seek out and implement production efficiencies and cost reduction initiatives wherever possible and will pass as much of the net input costs increases on to its customers as possible going forward. Remaining competitive in the ATV Accessory market and maintaining our strong market share within this market may hinder management's ability to pass on the full amount of our net input costs increases.

PLASTIC WHEEL COVERS - Three Months Ended Dec 31, 2008 and 2007

                      Three Months    Three Months    Increase      Increase
                     Ended Dec 31,   Ended Dec 31,   (Decrease)    (Decrease)
                        2008             2007          $             %
                     --------------------------------------------------------
Revenue              $   109,117      $   420,687      $ (311,570)    (74.0%)
Cost of goods sold   $    39,649      $   169,192      $ (129,543)    (76.5%)
Gross profit         $    69,468      $   251,495      $ (182,027)    (72.3%)
Gross profit %             63.7%            59.8%                       3.9%

The decrease in Wheel Cover revenues can be attributed to a decrease in sales to OEMs. Management is also pursuing and evaluating new markets that our plastics division can produce parts for to further broaden and grow this business segments revenue.

WEEKEND WARRIOR - Three Months Ended Dec 31, 2008 and 2007

                      Three Months    Three Months    Increase
Increase
                     Ended Dec 31,   Ended Dec 31,  (Decrease)    (Decrease)
                        2008             2007          $             %
                     --------------------------------------------------------
Revenue              $     73,829     $     80,068     $  (6,239)    (7.79%)
Cost of goods sold   $     60,388     $     41,797     $   18,591     44.5%
Gross profit         $     13,441    $      38,271     $ (24,830)    (64.9%)
Gross profit %              18.2%           47.8%                    (29.6%)

The decrease in revenues was attributable to a decrease in sales to national retail customers. The decrease in gross profit is due to manufacturing variances generated by increased input costs and inventory adjustments. Management, under the direction of the new President, has totally revamped and revised the Weekend Warrior business model. Looking forward, management anticipates revenue to once again grow quarter over quarter as the revised business model is implemented during the next few fiscal quarters.

CONTRACT MANUFACTURING - Three Months Ended Dec 31, 2008 and 2007

                      Three Months    Three Months    Increase      Increase
                     Ended Dec 31,   Ended Dec 31,   (Decrease)    (Decrease)
                        2008             2007          $             %
                     --------------------------------------------------------
Revenue              $   296,599      $   455,893      $(159,294)     (34.9%)
Cost of goods sold   $   192,613      $   192,980      $    (367)       (.2%)
Gross profit         $   103,986      $   262,913      $(158,927)     (60.4%)
Gross profit %             35.1%            57.7%                     (22.6%)

The decrease in revenue was due to a decrease in business with current customers. With ample production capacity and unique fabrication and painting capabilities, management believes that increasing the fabrication of parts and the manufacture of products to other OE manufacturers and businesses will provide the company with a significant source of revenue in quarters traditionally slow for our main ATV Accessories business segment. Gross margin decreased as a percentage of revenue as significant increases in the costs of raw steel impacted the cost of materials for the quarter ended December 31, 2008. Management chose to honor the prices quoted to its customers in the early part of the fiscal quarter and then moved to repricing parts as raw steel costs failed to plateau or fall. Adjusting pricing to pass on the steel cost increases will take time as management's long standing procedures provide for repricing parts to customers on 90 day cycles. During the second quarter, much of the repricing should occur to allow the company to improve the gross margins for this business segment. However, just as is the case for the ATV Accessories business segment, market conditions for the Contract Manufacturing segment may not allow the company to pass on the full input costs increases to its customers as maintaining market share and remaining competitive within the geographic region the company competes for work in is key to the long term success of this business segment.

GEOGRAPHIC REVENUE - Three Months Ended Dec 31, 2008 and 2007

For the three months ended December 31, 2008, the Company experienced decreased revenue in both the U.S. markets, as well as internationally. The decrease in revenue in the U.S. was discussed above, and the decrease in other countries was due to a decrease of sales in Europe.

Liquidity and Capital Resources

Overview

Cash flows provided by operating activities of continuing operations, built-up cash balances, and borrowings under our bank line of credit provided us with a significant source of liquidity during the first three months of Fiscal 2009.

Cash and cash equivalents were $206,510 as of December 31, 2008, compared to $194,577 as of September 30, 2008. Until required for operations, our policy is to invest any excess cash reserves in bank deposits, money market funds, and certificates of deposit after first repaying any built up balance on our bank line of credit.

In the three months ended December 31, 2008, we made approximately $59,343 in capital expenditures, received approximately $7,000 from the sale of capital equipment, and paid approximately $196,000 of long-term debt principal. By the end of fiscal 2009 management expects total capital expenditures to approximate $200,000.

Working Capital

Net working capital was $5,483,508 at December 31, 2008, compared to $5,531,103 at September 30, 2008. The decrease in working capital was primarily due to the net change in sales and gross margins.

Liquidity and Capital Resources


                         Balance        Balance     Increase/   Percent
                      Dec 31, 2008   Sep. 30, 2008  (Decrease)   Change
-----------------------------------------------------------------------------
Cash and cash
equivalents           $    206,510    $  194,576      $   11,934     6.1%
Accounts
receivable            $  2,524,378    $ 2,935,647     $ (411,269)  (14.0%)
Inventories           $  4,739,925    $ 5,110,499     $ (370,574)   (7.3%)
Prepaid expenses      $    106,679    $   209,617     $ (102,938)  (19.1%)
Deferred income tax   $    433,886    $   345,920     $   87,966    25.4%
Accounts payable      $    180,030    $   577,278     $ (397,249)  (68.8%)
Accrued expenses      $    626,053    $   725,082     $  (99,029)  (13.7%)
Bank line of credit   $    750,000    $ 1,000,000     $ (250,000)  (25.0%)
Current portion of
Bank notes payable    $    823,437    $   811,053     $   12,384     1.5%
Current portion of
deferred gain         $    166,524    $   166,524     $     -        0.0%

Long-Term Debt

On May 13, 2008, the Company and its commercial lender modified the original secured credit agreement dated August 21, 2001. Under the terms of the modification agreement to the secured credit agreement, Note One and Note Two were modified to change their fixed interest rates from 7.375% per annum to 6.125% per annum. Under the terms of the new amendment to the secured credit agreement, Note One and Note Two were amended. The Notes, going forward, are payable in monthly installments from August 2008 until April 2017, for Note One and until April 2011, for Note Two, which include principal and interest (6.125% as of December 31, 2008, and 7.375% as of December 31, 2007) for Note One and principal and interest (6.125% as of December 31, 2008, and 7.375% as of December 31, 2007) for Note Two, with a final payment upon maturity on April 25, 2017, for Note One and April 25, 2011 for Note Two. The interest rate is fixed for Note Two and is fixed for Note One until April 2011, after which the interest rate will be reset to prime + 0.50% every 60 months. However, the interest rate for Note One can never exceed 10.5% or be lower than 5.5%. The monthly payment is $33,449 and $42,049 for Note One and Note Two, respectively. At December 31, 2008 and 2007, $2,833,679 and $3,050,952, respectively, were outstanding for Note One and $1,089,800 and $1,517,447, respectively, were outstanding for Note Two. Additionally, any proceeds from the sale of stock received from the exercise of warrants are to be applied to any outstanding balance on the Notes or the Line of Credit described below.

On May 13, 2008, the Company and its commercial lender entered into a note payable agreement. Under the terms of the Note, the Note is payable in monthly installments from May 2008 until April 2013, which includes principal and interest (6.125% as of December 31, 2008), with a final payment upon maturity on April 25, 2013. The interest rate is fixed for the term of the Note. The monthly payment is $14,567. At December 31, 2008, $662,761 was outstanding. The Note is collateralized by the company's new 4000 watt laser cutting system asset.

Line of Credit

On April 28, 2006, the Company and its commercial lender amended the original secured credit agreement dated August 21, 2001. Under the terms of the amended secured credit agreement, the Company has a Line of Credit for the lesser of $1,000,000 or 80% of eligible accounts receivable and 35% of eligible inventory. The Line of Credit bears interest at prime plus 0.50% (5.5% at December 31, 2008) and is collateralized by all of the Company's assets. The variable interest rate can never exceed 10.5% or be lower than 5.5%. The Line of Credit matured on December 31, 2008. At December 31, 2008, $750,000 was outstanding on the Line of Credit and there was no balance outstanding on the Line of Credit as of December 31, 2007. The line was extended by agreement between the Company and the bank for a period of 60 days, which was subsequently extended to June 1, 2009.

The secured credit agreement contains conditions and covenants that prevent or restrict the Company from engaging in certain transactions without the consent of the commercial lender and require the Company to maintain certain financial ratios, including term debt coverage and maximum leverage. In addition, the Company is required to maintain a minimum working capital and shall not declare or pay any dividends or any other distributions.

Warrants

The Company has 40,000 previously issued warrants outstanding to purchase one share of the Company's common stock per warrant at $4.00 per share which do not expire until June 9, 2010. For the three . . .